JetBlue Airways Corporation — Q2 2015 Form 10-Q
Business context and reporting period. JetBlue primarily provides air transportation across the United States, the Caribbean and Latin America. This unaudited filing covers the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $1,612 | $1,493 | $3,135 | $2,842 |
| Operating income | $282 | $141 | $535 | $182 |
| Operating margin | 17.5% | 9.4% | 17.1% | 6.4% |
| Net income | $152 | $230 | $289 | $234 |
| Diluted EPS | $0.44 | $0.68 | $0.84 | $0.69 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $890 | $541 |
- Revenue and operations: Q2 passenger revenue rose 9.0% to $1,496, reflecting 8.3% more revenue passengers and a 0.6% higher average fare. Load factor increased 1.0 percentage point to 85.6%. For the first half, passenger revenue increased 11.6%; load factor rose 1.0 point to 84.9%.
- Costs and margins: Q2 operating expenses fell 1.7% to $1,330, while operating expense per available seat mile (ASM) declined 8.6% to 10.86 cents. Fuel expense decreased 25.3%, mainly as average fuel cost per gallon fell 30.9% to $2.13; this was partly offset by higher consumption and $30 of settled fuel-hedge losses. Salaries, wages and benefits rose 18.7%, and maintenance expense rose 23.0%. For the first half, operating expense per ASM fell 9.9%; CASM excluding fuel and profit sharing decreased 0.6% to 7.75 cents.
- Cash and liquidity: At June 30, cash and cash equivalents were $422 and current investment securities were $493. Management reported $915 of unrestricted cash, cash equivalents and short-term investments, about 15% of trailing-12-month revenue, plus approximately $600 of undrawn credit lines. First-half investing and financing cash flows were uses of $530 and $279, respectively; cash increased $81 to $422.
- Debt and obligations: Current maturities of long-term debt and capital leases were $229; long-term debt and capital lease obligations were $1,803. The debt note reports $1,869 of long-term debt carrying value, excluding $163 of capital leases. Weighted-average interest on long-term debt and capital lease obligations was 4.6%. Scheduled principal maturities were $455 in 2016, the peak over the next five years. Total contractual obligations were $14,620, including $6,420 of aircraft purchase commitments and $1,385 of lease commitments.
Material changes versus the prior comparable period
- Operating income improved substantially in Q2 and the first half, principally on higher passenger revenue and lower fuel costs. First-half operating income increased from $182 to $535.
- Reported Q2 2014 net income included a $242 pretax gain on the LiveTV sale; reported first-half 2014 results included a $241 gain. Excluding the sale-related item, JetBlue reported Q2 2014 net income of $61 and diluted EPS of $0.19, versus $152 and $0.44 in Q2 2015. First-half 2014 adjusted net income and diluted EPS were $66 and $0.21, versus $289 and $0.84 in 2015. The 2015 Q2 reported net income was therefore lower year over year despite higher operating income, largely because of the prior-year gain.
- Capacity grew: ASMs increased 7.5% in Q2 and 8.5% in the first half. First-half average operating aircraft increased 6.0%, and full-time equivalent employees increased 8.1%.
- JetBlue used $150 in an accelerated share repurchase during June, initially receiving approximately 6.1 million shares. Holders also converted approximately $26 of 5.5% convertible debentures into 5.8 million shares. The ASR’s final share count was subject to adjustment.
Outlook, management commentary and risks
- For Q3 2015, management expected capacity growth of 8.5%–10.5% and CASM excluding fuel and profit sharing growth of 1.0%–3.0% year over year. For full-year 2015, it expected capacity growth of 7.0%–9.0% and CASM excluding fuel and profit sharing growth of 0%–1.5%; management considered the upper end of the capacity range more likely.
- JetBlue introduced Blue, Blue Plus and Blue Flex fare options on June 30, 2015, and expected them to generate incremental operating income in future periods. Planned network additions included Florida–Mexico City service from October 2015 and additional Boston–San Francisco Mint service from March 2016.
- Management said it expected liquidity to meet obligations for at least the next 12 months and reported compliance with debt and lease covenants. It also cautioned that results may fluctuate and that future costs may rise with fleet growth, fleet age and network expansion. Aircraft deliveries require substantial capital; financing for deliveries after 2015 was not assured on attractive terms.
- Fuel is a key exposure: a hypothetical 10% increase in fuel price was estimated to raise expense by approximately $155 over the next 12 months, after hedging. Approximately 14% of projected 2015 fuel requirements was hedged; outstanding contracts settled by year-end. A 100-basis-point increase in interest rates was estimated to add about $5 to annual interest expense.
- On July 24, 2015, JetBlue received a Department of Transportation information request concerning airline pricing on the Northeast Corridor during Amtrak service disruption. The investigation was at an early stage; management did not expect a material financial impact. JFK subsurface contamination had an estimated remediation range of $1–$3, with $1 accrued; the filing said the matter was not expected to materially affect results, subject to uncertainty about remediation scope.
- Other identified risks include intense competition, fuel-price volatility, weather and congestion in the Northeast, labor costs and union negotiations, financing availability, maintenance costs, and operational, technology and regulatory risks. Management reported effective disclosure controls and no significant change in risk factors from its 2014 Form 10-K.
Important facts for investors to verify
- Whether passenger demand, fares and load factors support the stated capacity-growth plans, and whether actual CASM excluding fuel and profit sharing tracks guidance.
- How fuel prices and hedge settlements affect margins and cash flows; the filing records $65 of settled fuel-hedge losses in the first half.
- Whether operating cash generation and available liquidity are sufficient alongside aircraft commitments, debt maturities and share repurchases.
- The final share count and cost under the accelerated repurchase, and the effects of convertible-debt conversions and equity compensation on diluted shares.
- Developments in the DOT pricing inquiry, the JFK environmental remediation estimate and the pilot labor agreement process.