JBLU

JetBlue Airways Corp. 10-Q Summary: Period Ended September 30, 2005

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, for JetBlue Airways Corporation. The filing includes unaudited condensed consolidated financial statements and management's discussion and analysis. The company operates as a low-cost carrier primarily in the U.S. domestic market, facing a highly competitive environment exacerbated by record-high fuel prices and industry bankruptcies (Northwest, Delta, US Airways).

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income for the three months ended September 30, 2005, decreased to $2.7 million from $8.1 million in the same period in 2004. For the nine-month period, net income fell to $22.2 million from $44.7 million.
• Revenue Growth: Operating revenues increased 40.2% ($129.8 million) for the quarter and 34.7% ($323.5 million) for the nine months, driven by a 22.8% increase in departures and higher yields.
• Fuel Cost Surge: Aircraft fuel expense increased 102% ($69.5 million) for the quarter and 91.8% ($160.8 million) for the nine months. The average fuel cost per gallon rose 57.9% to $1.70 for the quarter and 52.7% to $1.52 for the nine months.
• Operating Expenses: Total operating expenses increased 46.1% for the quarter and 41.4% for the nine months, largely due to fleet expansion (17.4 additional aircraft on average) and fuel costs.
• Interest Expense: Interest expense doubled (100% increase) for the quarter and rose 104% for the nine months due to debt financing for new aircraft and convertible debentures.

Guidance, Outlook, and Risks

• Full-Year 2005 Outlook: Management expects full-year operating capacity to increase 24-26% over 2004. However, due to high fuel costs, the company anticipates an operating margin of 2-4% for the full year, with an anticipated operating and net loss for the fourth quarter and a net loss for the full year.
• Fuel Hedging: The company assumed a net fuel cost of $2.00 per gallon for Q4 2005. As of September 30, 2005, approximately 44% of remaining 2005 fuel requirements were hedged.
• Stock-Based Compensation Charge: A one-time non-cash stock-based compensation charge of up to $9.0 million is expected in Q4 2005 due to the acceleration of unvested stock options to avoid future costs under SFAS No. 123(R).
• Stock Split: A three-for-two stock split was declared, with shares to be distributed on December 23, 2005.
• Restatement of Prior Filings: The company identified material weaknesses in internal controls regarding rent expense, depreciation of leasehold improvements, and recognition of revenue for unpaid ticket reservations. Financial statements for Q1 and Q2 2005 were restated.
• Liquidity: The company had a working capital deficit of $5.2 million, which is customary for airlines. Management believes available cash, investment securities, and financing options are sufficient to meet requirements for the next 12 months, though financing is still needed for some 2005 and 2006 aircraft deliveries.

Key Facts for Investor Verification

• Verify the impact of the $9 million non-cash stock compensation charge on Q4 2005 results and the full-year net loss projection.
• Monitor the company's ability to secure financing for remaining 2005 and 2006 aircraft deliveries, as cash flows from operations are insufficient to cover these costs.
• Assess the effectiveness of remediated internal controls following the restatement of Q1 and Q2 2005 financial statements.
• Track fuel price volatility and the effectiveness of the company's hedging strategy (currently covering 44% of remaining 2005 needs) given the high sensitivity of operating margins to fuel costs.
• Review the integration and performance of the new EMBRAER 190 aircraft entering service in late 2005.