JetBlue Airways Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparative periods are the corresponding 2013 periods. Amounts are in millions of dollars unless otherwise noted. The filing is unaudited.
Business context and key results
JetBlue primarily provides air transportation in the United States, the Caribbean and Latin America. It completed the sale of LiveTV to Thales on June 10, 2014; the sale materially affected reported net income. JetBlue reported its 17th consecutive profitable quarter.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $1,493 | $1,335 | $2,842 | $2,634 |
| Operating income | $141 | $102 | $182 | $161 |
| Operating margin | 9.4% | 7.6% | 6.4% | 6.1% |
| Net income | $230 | $36 | $234 | $50 |
| Diluted EPS | $0.68 | $0.11 | $0.69 | $0.16 |
| Operating cash flow | Not stated by quarter | $541 | $402 |
Revenue, costs and operating performance
- Q2 passenger revenue rose 12.4% to $1,372, driven by a 6.5% increase in average fare and 5.5% more revenue passengers. Capacity, measured by available seat miles (ASMs), rose 6.0%; load factor declined 0.3 percentage points to 84.6%.
- For the first half, revenue increased 7.9%. Passenger revenue rose 8.1%, while ASMs increased 4.4%; load factor fell 0.5 points to 83.9%.
- Q2 operating expenses increased 9.8% to $1,352. Cost per ASM rose 3.5% to 11.88 cents; excluding fuel and profit sharing, it increased 5.1% to 7.51 cents. First-half operating expenses rose 7.6%; cost per ASM increased 3.0% to 12.20 cents, and excluding fuel and profit sharing rose 5.6% to 7.79 cents.
- Fuel was about 37% of Q2 operating expenses. Q2 fuel expense rose 6.9%; average fuel cost was $3.09 per gallon versus $3.06. For the first half, fuel expense rose 3.1%, while average cost per gallon declined to $3.11 from $3.17.
- Management attributed higher labor costs to wage increases, additional staffing for capacity growth and FAA duty-time rules; first-half costs were also affected by severe winter weather. Higher depreciation reflected more owned and capital-leased aircraft. Maintenance expense declined year over year, partly because of a flight-hour-based engine maintenance agreement.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $454; current investment securities were $343, giving unrestricted cash, cash equivalents and short-term investments of $797. JetBlue also reported $550 of undrawn credit lines and 34 unencumbered aircraft plus 35 unencumbered spare engines.
- Total assets were $7,657, compared with $7,350 at December 31, 2013. Working capital was negative $669, improved from a deficit of $818, partly reflecting increased cash and lower current debt maturities; air traffic liability increased seasonally.
- Current maturities of long-term debt and capital leases were $278, and long-term debt and capital lease obligations were $2,108. Their combined balance-sheet amount was $2,386. Weighted-average interest rate on long-term debt and capital leases was 4.8%; scheduled maturities peak at $462 in 2016. JetBlue stated it was in compliance with debt and lease covenants.
- For the first half, operating cash flow was $541 versus $402. Investing activities provided $49, including $391 in LiveTV sale proceeds, while financing used $361, including $587 in repayments of long-term debt and capital leases and $82 for treasury stock. Cash increased $229 to $454.
- Noncancelable contractual obligations totaled $15,495, including $6,685 of flight-equipment purchase commitments and $3,105 of debt and capital-lease obligations, as presented in the filing’s contractual-obligations table.
Material changes and unusual items
- The LiveTV sale generated $391 of cash proceeds, a pre-tax gain of approximately $241 and an after-tax gain of approximately $168. The Q2 statement of operations reports a $242 gain; the six-month statement reports $241. The transaction’s post-closing price adjustments remained pending. JetBlue retained LiveTV Satellite Communications pending regulatory approval for a planned $1 sale.
- JetBlue used sale proceeds in part to prepay $299 of floating-rate debt secured by 14 A320 aircraft, which became unencumbered. It also completed scheduled debt and lease principal payments, including a final $188 payment on an equipment trust certificate.
- JetBlue repurchased shares during the period, including a $60 accelerated share repurchase agreement; the final number of shares under that agreement depended on the average share price and was expected to be determined by the end of Q3.
Outlook, risks and contingencies
- Management projected full-year 2014 capacity growth of approximately 4%–6% versus 2013 and CASM excluding fuel and profit sharing growth of 2.5%–4.5%. Planned growth included six A321 aircraft during the remainder of 2014. Management cited compensation, depreciation and landing fees as cost pressures.
- Management said it expected available liquidity and internally generated funds, supplemented as needed by financing, to meet obligations for at least the next 12 months. It cautioned that financing for later aircraft deliveries may not be available on attractive terms; if unavailable, JetBlue might pay cash, change acquisition plans or incur higher financing costs.
- Fuel-price sensitivity: a hypothetical 10% fuel-price increase, including hedges, was estimated to increase 2014 fuel expense by approximately $206. JetBlue had hedged about 25% of projected 2014 fuel requirements as of June 30. A 100-basis-point increase in interest rates was estimated to add about $7 of annual interest expense.
- Severe winter weather in the Northeast led to approximately 4,100 flight cancellations in Q1 and reduced revenue. Q2 on-time performance was 78.9%, up from 73.9%; completion factor was 98.3%, down from 99.4%. Management noted its Northeast concentration and congestion as continuing operational challenges.
- Risks include fuel volatility, competition, substantial fixed obligations and indebtedness, aircraft financing and capital needs, weather, labor costs and potential work disruptions, reliance on the New York metropolitan market, and operational or technology disruptions. Management warned that quarterly results may fluctuate and that recent revenue growth may not continue.
- Environmental matter: remediation at JFK was preliminarily estimated at $1–$3; $2 was accrued. JetBlue said the contamination could be more extensive than currently estimated and that insurance may mitigate some exposure.
- A pilot employment dispute resulted in a July 2014 arbitration award of approximately $4.4 to 318 pilots; claimants sought to vacate the award. JetBlue had accrued an amount it considered probable. A WestJet complaint against LiveTV alleged $15 of damages plus unspecified damages; related damages were assigned to JetBlue in the LiveTV sale, and the filing said the matter was too early to assess the likelihood of loss.
- JetBlue pilots elected ALPA representation; the company planned to negotiate its first collective bargaining agreement. Management did not expect the election to materially affect the financial statements.
Investor verification points
- Separate recurring airline operating performance from the LiveTV sale gain when evaluating Q2 and first-half net income and EPS.
- Review the final LiveTV purchase-price adjustment, the retained satellite subsidiary’s regulatory status and continuing seven-year service arrangements.
- Track CASM excluding fuel and profit sharing against management’s 2.5%–4.5% full-year outlook, alongside labor, fuel, capacity and maintenance trends.
- Assess liquidity and debt maturities against aircraft purchase commitments, financing availability, share repurchases and the working-capital deficit.
- Monitor fuel prices and hedge coverage, weather and Northeast operating reliability, and developments in the environmental and legal matters.