JetBlue Airways Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 6, 2013. Amounts are in U.S. dollars. The company reported its thirteenth consecutive quarter of net income.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $1.335 billion | $1.277 billion | $2.634 billion | $2.480 billion |
| Operating income | $102 million | $130 million | $161 million | $219 million |
| Net income | $36 million | $52 million | $50 million | $82 million |
| Diluted EPS | $0.11 | $0.16 | $0.16 | $0.25 |
| Operating margin | 7.6% | 10.2% | 6.1% | 8.8% |
| Operating cash flow | Not separately stated for Q2 | $402 million | $490 million |
Q2 revenue increased 4.5%, while operating income declined 22% and net income declined 31%. For the first half, revenue rose 6.2%, but operating income and net income fell 26% and 39%, respectively. Six-month operating cash flow decreased 18%; cash and cash equivalents were $333 million at June 30, versus $182 million at year-end 2012.
Operations, costs, and liquidity
- Q2 capacity (ASMs) grew 7.8%; passengers increased 5.7%, while load factor slipped to 84.9% from 85.3%. Revenue per ASM fell 3.1%. Management said the Easter and Passover calendar shift reduced year-over-year unit revenue comparisons by an estimated 3%.
- Q2 operating expenses rose 7.5% to $1.233 billion. Maintenance materials and repairs increased 31% to $111 million, attributed to fleet age, more heavy checks, and EMBRAER 190 engine costs. Salaries and benefits rose 5.5%. Fuel expense rose 3.3% despite a 4.8% lower average fuel price per gallon, as consumption increased.
- Q2 operating expense per ASM was 11.48 cents, slightly below 11.51 cents a year earlier; excluding fuel and profit sharing, it increased 3.3%. On a six-month basis, the comparable measure increased 4.9%.
- At June 30, unrestricted cash, cash equivalents, and short-term investments totaled approximately $867 million; management said this equaled about 17% of trailing-twelve-month revenue. Working capital deficit was $797 million, including air traffic liability and $310 million of debt due in Q1 2014. Management believed available liquidity would cover requirements for at least 12 months.
- Balance-sheet current maturities of long-term debt and capital leases were $647 million; long-term debt and capital lease obligations were $2.173 billion. The company reported a 4.5% weighted-average rate on long-term debt and scheduled debt maturities peaking near $575 million in 2014. It had no outstanding borrowings under its credit facilities.
Outlook, risks, and unusual items
- For 2013, management expected capacity growth of approximately 5.5%–7.5% and CASM excluding fuel and profit sharing growth of 2.5%–4.5%, assuming fuel at $3.13 per gallon net of hedging. Cost pressures cited included aging-fleet maintenance, EMBRAER 190 engine restorations, and employee compensation. This projected non-GAAP measure was not reconciled to GAAP.
- JetBlue had 109 firm aircraft orders and 10 spare-engine orders, with approximately $4.83 billion of flight-equipment purchase obligations. It expected to self-fund the estimated $175 million JFK T5i arrivals facility, targeted for completion in early 2015; $42 million had been incurred by quarter-end.
- Fuel-price exposure remains significant: a hypothetical 10% increase in fuel cost was estimated to increase 2013 fuel expense by approximately $190 million after hedging. About 29% of remaining 2013 fuel requirements were hedged as of June 30. A 100-basis-point increase in interest rates was estimated to add approximately $15 million to annual interest expense.
- The company reduced estimated TrueBlue points breakage after ending point expirations, recording a $5 million reduction in revenue and corresponding increase in air traffic liability. It also recorded $4 million of maintenance expense and $2 million of other operating expense for prior-year items during the first half.
- Contingencies include a DOT investigation of five 2011 tarmac delays, with potential penalties of approximately $15 million and no determinable outcome; a pilot employment arbitration with $3 million accrued but no estimable additional loss range; and JFK subsurface contamination, with remediation preliminarily estimated at less than $1 million to approximately $3 million and $2 million accrued.
- Management cited competition, fuel-price volatility, maintenance costs, debt and fixed obligations, Northeast congestion, weather and economic conditions, and execution of growth plans as significant risks. Q2 on-time performance declined to 73.9% from 82.4%; completion factor was 99.4%.
Most important facts for investors to verify
- Whether revenue and capacity growth can recover unit revenue and margins, particularly after the calendar-related comparison effect.
- Whether maintenance and EMBRAER 190 engine costs stabilize and the full-year CASM outlook remains achievable.
- Liquidity and refinancing capacity around the 2014 debt maturity peak, alongside aircraft and facility commitments.
- Actual exposure from the DOT investigation, pilot arbitration, and JFK environmental matter.
- Fuel and interest-rate sensitivity, and the effectiveness and accounting impact of hedging arrangements.