JetBlue Airways Corporation — 2014 Form 10-K Summary
Business context and reporting period. This is JetBlue’s annual report for the fiscal year ended December 31, 2014; it also reports unaudited fourth-quarter results. JetBlue carried 32.1 million passengers, operated an average of 825 daily flights, and served 87 destinations. Its network and operations are concentrated in the New York and Boston areas, Florida, and the Caribbean and Latin America.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenue | $5.817 billion | $5.441 billion |
| Operating income / margin | $515 million / 8.9% | $428 million / 7.9% |
| Net income | $401 million | $168 million |
| Net income excluding LiveTV sale gain | $232 million | $168 million |
| Diluted EPS | $1.19; $0.70 excluding LiveTV gain | $0.52 |
| Cash from operating activities | $912 million | $758 million |
| Free cash flow (company-defined, non-GAAP) | $(21) million | $121 million |
| Total debt and capital lease obligations at year-end | $2.233 billion | $2.585 billion |
- Revenue rose 6.9%, led by passenger revenue, up 7.5%; passengers increased 5.3%, average fare rose 2.1% to $166.57, and load factor edged up to 84.0% from 83.7%.
- Operating expenses increased 5.7% to $5.302 billion. Fuel remained the largest expense at $1.912 billion, or 36.1% of operating expenses. Ex-fuel, ex-profit-sharing CASM increased 3.2% to 7.48 cents.
- Fuel averaged $2.99 per gallon versus $3.14 in 2013, but consumption grew by 35 million gallons. Salaries, wages and benefits increased 14.1% to $1.294 billion, reflecting workforce growth, rising tenure and compensation costs.
- Year-end cash and cash equivalents were $341 million; investment securities totaled $427 million, including $367 million current. The company reported about $708 million of unrestricted cash, cash equivalents and short-term investments, plus $600 million of undrawn credit facilities. Working capital deficit was $736 million.
- Capital spending and flight-equipment deposits totaled $933 million; operating cash flow less these amounts produced the company-reported negative free cash flow of $21 million.
- Fourth-quarter 2014 revenue was $1.446 billion, operating income $169 million, net income $88 million, and diluted EPS $0.26. Fourth-quarter 2013 comparatives were $1.365 billion, $115 million, $47 million, and $0.14, respectively.
Material changes versus the prior comparable period
- Reported 2014 net income included a $241 million pre-tax, $169 million after-tax gain from selling LiveTV. Without the after-tax gain, net income was $232 million, up $64 million from 2013. Reported pre-tax margin was 10.7%; excluding the sale gain it was 6.6%.
- JetBlue sold LiveTV to Thales in 2014 for net cash proceeds of $393 million and continued as a customer under seven-year service agreements. Proceeds helped fund debt reduction.
- Debt and capital lease obligations declined by $352 million during 2014. JetBlue prepaid approximately $299 million of secured debt and ended the year with 39 unencumbered aircraft and 33 unencumbered spare engines.
- Severe winter weather led to about 4,100 first-quarter flight cancellations, reducing estimated revenue by $50 million and operating income by about $35 million. Full-year completion of scheduled flights was 97.7%.
- JetBlue repurchased about 7.1 million shares for approximately $73 million under its buyback program. Holders converted the remaining Series A 6.75% debentures into approximately 15.5 million common shares.
Outlook, commentary, risks and contingencies
- For 2015, management forecast capacity growth of approximately 7%–9%, ex-fuel and ex-profit-sharing CASM growth of 0%–2%, and capital expenditures of $810–$860 million. It expected 12 Airbus A321 deliveries and said it expected year-over-year margin improvement.
- Management targeted ROIC of at least 10% by the end of 2017, compared with 6.3% in 2014. This is a company-defined non-GAAP target, not a guarantee.
- Planned initiatives included expansion in Fort Lauderdale, new routes, Fare Families pricing, completion of Airbus Fly-Fi installations, and continued product and infrastructure investment. Mint premium service launched in June 2014; T5i, JFK’s international arrivals extension, opened in November.
- Key exposures include intense fare competition; fuel-price and fuel-availability volatility; substantial debt, leases and aircraft purchase commitments; congestion and weather disruption in the Northeast; rising labor and maintenance costs; and reliance on a limited set of aircraft, engine and technology suppliers.
- A 10% increase in fuel cost was estimated to raise 2015 fuel expense by approximately $175 million. JetBlue had hedged about 17% of projected 2015 fuel use at year-end; hedge collateral and margin calls could affect liquidity.
- Contractual obligations totaled $15.260 billion, including $6.675 billion of flight-equipment obligations, $2.895 billion of debt and capital lease payments (including estimated interest), and $1.495 billion of operating lease commitments. The company also disclosed a $736 million working capital deficit, which it described as customary in the airline industry in part because of air traffic liability.
- Pilots voted for ALPA representation in 2014; negotiations for a first collective bargaining agreement were expected to begin in 2015. CEO David Barger was scheduled to leave in February 2015, with President Robin Hayes succeeding him.
- JetBlue accrued $2 million for estimated JFK subsurface contamination remediation, with estimated costs ranging from $1 million to $3 million; it expected insurance to mitigate most exposure. A pilot employment dispute award of approximately $4.4 million was confirmed by a court in January 2015. The filing said the potential loss in the WestJet dispute could not then be assessed.
- The company said it was in compliance with debt and lease covenants and believed available liquidity was sufficient for at least the next 12 months. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of the 2014 earnings improvement is sustainable after excluding the nonrecurring LiveTV gain, and whether core margins continue to improve.
- Whether 2015 capacity, CASM, capital-spending and ROIC targets are achieved, particularly as labor, maintenance and fleet costs rise.
- Liquidity and financing capacity relative to negative 2014 free cash flow, the working capital deficit, aircraft deliveries and debt maturities.
- Exposure to fuel prices, hedge positions, collateral requirements and the sensitivity of earnings and cash flow to fuel-cost changes.
- Progress and financial implications of pilot labor negotiations, CEO transition, aircraft commitments, and disclosed legal and environmental matters.