JetBlue Airways Corporation — Q2 2011 Form 10-Q
Business context and period: Quarterly report for the three and six months ended June 30, 2011, compared with the same 2010 periods. Amounts are in millions unless stated otherwise. JetBlue is a U.S. airline expanding capacity, particularly in Boston and the Caribbean and Latin America.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $1,151 | $940 | $2,163 | $1,811 |
| Operating income | $86 | $95 | $131 | $138 |
| Net income | $25 | $31 | $28 | $30 |
| Diluted EPS | $0.08 | $0.10 | $0.10 | $0.11 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $406 | $356 |
- Q2 operating margin was approximately 7.5%, down from 10.1%; management reported pretax margin of 3.8%, down 1.8 percentage points. First-half pretax margin was 2.3%, down 0.5 points.
- At June 30, cash and cash equivalents were $575 and current investment securities were $598; working capital was $252, versus $275 at year-end 2010. The company reported total assets of $6,908 and stockholders’ equity of $1,690.
- Balance-sheet current maturities of long-term debt and capital leases were $190, with $2,893 of long-term debt and capital lease obligations. Weighted-average long-term debt interest rate was 4.53%. Aircraft, engines, equipment and facilities with a $3.67 billion net book value secured various loans.
- Capital expenditures were $204 in the first half. Cash increased $110 to $575. Contractual obligations totaled $12.885 billion, including $4.155 billion for flight equipment, $1.673 billion of lease commitments, and $3.837 billion of debt and capital lease obligations.
Material changes versus prior period
- Q2 revenue grew 22%, while operating expenses rose 26%; first-half revenue grew 19% and expenses rose 21%. Revenue gains were mainly from higher passenger revenue, fares and capacity.
- Fuel was the largest cost pressure: Q2 average fuel cost increased 44% to $3.31 per gallon and fuel expense rose 58% to $439. First-half average fuel cost increased 40% to $3.14 per gallon; fuel expense rose 49% to $792.
- Q2 capacity increased 9%; average fare rose 14% to $158, while load factor declined 0.5 points to 81.5%. On-time performance fell to 72.7% from 83.2%; completion factor held at 99.2%.
- Maintenance expense increased 29% in Q2 and 32% in the first half. JetBlue attributed the increase to fleet growth, aircraft aging and aircraft coming off warranty; average fleet age rose to 5.7 years from 4.8.
- Operating cash flow improved to $406 from $356, while investing cash outflow narrowed to $339 from $596, partly reflecting lower net purchases of investment securities. Financing cash flow was positive $43 versus negative $179 in the first half of 2010.
Outlook, commentary and risks
- Management expected full-year 2011 capacity growth of approximately 6%–8% versus 2010. At assumed fuel prices of $3.24 per gallon, including taxes and net of effective hedges, it forecast 2011 cost per available seat mile growth of 14%–16%.
- Management did not expect unit-revenue growth for the remainder of 2011 to match the strong first-half pace, citing economic uncertainty. It said liquidity provided flexibility amid fuel and demand challenges and believed available working capital would cover cash requirements for at least 12 months.
- At June 30, fuel hedges covered approximately 48% of forecast Q3 2011 consumption, 42% of full-year 2011 and 15% of full-year 2012. A hypothetical 10% fuel-price increase was estimated to raise annual fuel expense by about $176.
- JetBlue deferred eight Airbus deliveries from 2014–2015 to 2017 and cancelled eight options; it also cancelled two Embraer orders. A memorandum with Airbus proposed converting 30 remaining A320 deliveries to A321s and ordering 40 A320neo aircraft, subject to a later purchase agreement. Aircraft financing availability and resulting fixed costs remain risks.
- Other risks include volatile fuel prices, competition, economic weakness, maintenance-cost increases, labor costs and possible pilot unionization. ALPA had petitioned to represent pilots; an election was scheduled for July 26–August 16, 2011. The filing also identifies information-security, regulatory, operational and financing risks.
- Management reported disclosure controls were effective as of June 30, 2011, and no material change in internal control over financial reporting. Ordinary-course legal matters were not expected to have a material adverse effect.
Investor verification priorities
- Check whether fare and unit-revenue trends held up after the first half, given management’s more cautious second-half outlook and a Q2 load-factor decline.
- Track fuel prices, hedge coverage and hedge effectiveness against the $3.24-per-gallon planning assumption and the estimated $176 million impact of a 10% price increase.
- Assess whether capacity growth, weaker on-time performance and rising maintenance costs affected margins and service reliability.
- Verify aircraft-order changes, financing availability and cash demands against the $12.885 billion of contractual obligations.
- Monitor the pilot representation election and any resulting labor-cost or disruption risk.