JetBlue Airways Corporation — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Financial statements are unaudited; comparisons are with the corresponding 2009 periods. Dollar amounts are in millions except per-share and operating statistics.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $1,030 | $854 | $2,839 | $2,454 |
| Operating income | $140 | $66 | $276 | $215 |
| Net income | $59 | $15 | $88 | $47 |
| Diluted EPS | $0.18 | $0.05 | $0.28 | $0.16 |
| Operating margin | 13.6% | 7.7% | 9.7% | 8.8% |
Q3 operating revenue rose 21%; passenger revenue increased 22%, reflecting 8% capacity growth and 11% higher yield. Average fare was $141.79, up 11.6%; load factor rose 0.9 percentage points to 84.6%. Operating expense increased 13%, less than revenue, but expense per available seat mile (ASM) rose 4.1% to 9.78 cents; excluding fuel, it rose 3.4%. Nine-month revenue grew 16% and operating expense 14%; expense per ASM rose 7.3%, or 6.7% excluding fuel.
Fuel remained the largest operating expense. Average fuel cost was $2.26 per gallon in Q3, up from $2.14; nine-month cost was $2.25 versus $2.08. Q3 fuel expense increased $37, while nine-month fuel expense increased $112. Nine-month effective fuel-hedge losses were $6 versus $121 in 2009.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $498, short-term investment securities $447, and working capital $186, down from $369 at year-end 2009. Cash plus short-term investments totaled $945; the filing separately reports restricted cash.
- Nine-month operating cash flow was $490, versus $357 in 2009. Investing cash use was $659 and financing cash use $229; cash declined $398 from $896 at year-end.
- Balance-sheet current maturities of debt and capital leases were $184 and long-term debt and capital lease obligations $2,880. The debt note reports $2,933 carrying value for long-term debt; aircraft and other equipment with a $3.51 billion net book value secured borrowings. Weighted-average long-term debt interest rate was 4.48%.
- The company repurchased $156 of 3.75% convertible debentures at par, terminated its UBS line of credit after auction-rate securities were redeemed, issued $93 of equipment notes, and made $353 of principal payments on debt and capital leases during the first nine months.
- Contractual obligations totaled $15.399 billion, including $4.405 billion for flight equipment, $3.852 billion for debt and capital leases, and $1.785 billion for leases. Management said available liquidity and internally generated funds should cover requirements for at least 12 months. It reported no financial covenants on debt.
Changes, outlook and management commentary
- Management attributed stronger results to improved demand and fares, higher yields, network maturation and increased GDS participation after implementation of a new customer-service system. System transition and technology costs, higher labor costs, fuel, maintenance and a severe winter storm season pressured costs.
- Full-year 2010 outlook: capacity growth of approximately 6%–8% versus 2009; RASM growth of 7%–10%; and CASM growth of 7%–9%, assuming fuel at $2.30 per gallon including taxes and net of effective hedges. The cost outlook includes system-transition costs, connectivity impairment and a $5 Airbus rescheduling fee incurred in Q4.
- Management anticipated the revenue environment would continue through the rest of 2010 and reiterated goals of positive free cash flow, adequate liquidity, cost control and sustainable growth. It planned to expand service in Boston, San Juan and other markets. Expected year-end operating fleet: 116 A320s and 45 E190s.
- Aircraft plans were adjusted: six A320 deliveries were deferred from 2011–12 to 2015, two E190 orders for 2012 were cancelled, and in October 10 more A320 deliveries were deferred to 2016 for a $5 fee. Six used A320s were to be leased, with three deliveries expected in Q4.
- As of September 30, fuel hedges covered about 43% of projected Q4 2010 consumption and 16% of 2011 consumption; the filing also describes full-year 2010 coverage of 50%. A hypothetical 10% fuel-price increase was estimated to raise annual fuel expense by about $112.
- JetBlue stopped developing its air-to-ground connectivity platform and announced a satellite broadband project with ViaSat. MD&A cites a $6 impairment charge; the financial-statement note describes a $5 spectrum-license impairment. This difference in presentation is not reconciled in the supplied filing text.
- Key risks include volatile fuel prices, intense competition, financing availability, significant fixed and aircraft obligations, aging-fleet maintenance, economic weakness, operational disruptions, technology-system failures, labor organizing and potential work stoppages. Ordinary-course legal proceedings were not expected to materially affect results.
Important facts for investors to verify
- Reconcile the reported $6 million connectivity impairment in MD&A with the $5 million spectrum impairment in the notes.
- Track whether revenue growth and improved fares persist while CASM, technology and labor costs rise.
- Review the full-year capacity, RASM and CASM assumptions against actual results, especially the $2.30-per-gallon fuel assumption and hedging coverage.
- Assess liquidity and financing for the substantial aircraft commitments, lease obligations and scheduled debt maturities.
- Monitor delivery deferrals, the Q4 rescheduling fee, used-aircraft leases and the execution and costs of the ViaSat broadband program.