JetBlue Airways Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Unless otherwise noted, financial amounts are in millions of dollars.
Business context and performance
JetBlue reported stronger second-quarter demand and fares amid an improving economic environment. The company expanded service, including to Punta Cana, and continued to focus growth on Boston, New York, the Caribbean and Latin America.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $939 | $807 | $1,809 | $1,600 |
| Operating income | $94 | $76 | $136 | $149 |
| Net income | $30 | $20 | $29 | $32 |
| Diluted EPS | $0.10 | $0.07 | $0.10 | $0.11 |
| Operating margin | 10.0% | 9.4% | 7.5% | 9.3% |
- Revenue and operations: Q2 passenger revenue rose 18% to $850, on 5% capacity growth and an 8% increase in yield. Average fare increased 9.7% to $139.02; load factor improved 2.5 percentage points to 82.0%. For the first half, passenger revenue rose 15%, with capacity up 6% and yield up 6%.
- Costs and margins: Q2 operating expenses rose 16% to $845; expense per available seat mile (ASM) increased 9.5% to 9.72 cents, and excluding fuel rose 8.2% to 6.51 cents. First-half operating expenses rose 15% to $1,673; expense per ASM increased 9.0%, while excluding fuel rose 8.6%. First-half operating income and net income declined despite higher revenue.
- Cash flow: First-half operating cash flow was $356, versus $225 in 2009. Investing cash flow was negative $596, including net investment-security purchases; financing cash flow was negative $179. Cash and cash equivalents fell $419 to $477 at June 30.
- Liquidity: Current investment securities were $513; working capital was $169, down from $369 at year-end 2009. Management said available working capital should meet cash requirements for at least 12 months. Restricted cash and other restricted assets are not freely available.
- Debt: Balance-sheet current maturities of long-term debt and capital leases were $220, with $2,896 of long-term debt and capital lease obligations. The debt note reports $2,943 carrying value for long-term debt. Principal payments reduced debt and capital lease obligations by $274 during the first half; weighted-average long-term debt interest rate was 4.43%. Aircraft and other assets with a $3.60 billion net book value were pledged as security.
Material changes and unusual items
- Q2 net income rose to $30 from $20, but first-half net income fell to $29 from $32. First-half operating income declined to $136 from $149 as expense growth exceeded revenue growth.
- Fuel expense increased 18% in Q2 and 16% for the first half, reflecting higher fuel prices and consumption. Average fuel cost was $2.30 per gallon in Q2 and $2.25 for the first half.
- First-half other operating expenses included approximately $13 of one-time customer-service-system implementation costs, alongside higher technology costs. Management also cited severe winter weather and higher staffing, maintenance and distribution expenses.
- In March, holders required repurchase of approximately $155 of 3.75% convertible debentures. In July, UBS repurchased the remaining $49 par value of auction-rate securities at par; proceeds repaid and closed the $40 UBS credit line outstanding at June 30. The filing says this resulted in a net cash increase of approximately $9.
- The company deferred six Airbus A320 deliveries from 2011–2012 to 2015. June 30 firm orders included 55 A320s, 58 EMBRAER 190s and 17 spare engines; six used A320s were also expected to be leased later in 2010, with lease terms still under negotiation.
Guidance, management commentary and risks
- For full-year 2010, management expected capacity growth of approximately 6%–8% and RASM improvement of 8%–11% versus 2009. It forecast cost per ASM growth of 6%–8%, assuming fuel at $2.28 per gallon, including taxes and net of effective hedges.
- At June 30, hedges covered approximately 47% of forecast Q3 fuel use, 50% of full-year 2010 use and 14% of full-year 2011 use. A hypothetical 10% fuel-price increase was estimated to raise annual fuel expense by approximately $107.
- Management emphasized positive free cash flow, adequate liquidity and cost control, while noting volatility in fuel prices, technology spending, and expected maintenance increases as the fleet ages. Fleet average age was 4.8 years.
- Key risks include intense competition; fuel-price and credit-market volatility; financing availability for aircraft commitments; substantial fixed obligations; dependence on the New York market and automated systems; labor-cost and unionization risks; and weather, regulatory and travel-demand disruptions. New DOT passenger-protection rules took effect in April 2010.
- Management reported disclosure controls were effective as of June 30, 2010, and no material change in internal control over financial reporting was identified. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether revenue growth and fare/yield improvements can continue while operating costs, especially fuel, technology and maintenance, rise.
- Progress against the 2010 capacity, RASM and cost-per-ASM outlook, including the assumed fuel price and hedge effectiveness.
- Liquidity after the July ARS redemption and credit-line payoff, and the company’s ability to finance substantial aircraft orders and contractual commitments.
- The size, timing and remaining impact of customer-service-system costs, and whether operating reliability and distribution benefits meet management’s expectations.
- Debt and lease maturities, aircraft collateral, and the distinction between balance-sheet obligations and the debt-note carrying value.