JetBlue Airways Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. JetBlue provides air transportation across the United States, the Caribbean, and Latin America. Financial statements are unaudited; amounts below are in millions except per-share and operating statistics.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $2,008 | $1,818 | $5,690 | $5,254 |
| Operating income | $83 | $314 | $67 | $803 |
| Net income | $50 | $181 | $19 | $470 |
| Diluted EPS | $0.16 | $0.55 | $0.06 | $1.41 |
| Operating margin | 4.1% | 17.3% | 1.2% | 15.3% |
| Operating cash flow | Not stated for the quarter | $936 | $1,066 |
- Q3 revenue rose 10.5%; passenger revenue increased 10.8%, reflecting 8.0% more revenue passengers and a 2.5% increase in average fare. Capacity (ASMs) increased 8.7%, and load factor improved 0.8 percentage points to 85.9%.
- Fuel and related taxes were $515 in Q3, up 48.4%; average fuel cost rose 36.6% to $2.32 per gallon. Operating expense per ASM increased 17.8% to 12.38 cents. Excluding fuel, special items, and non-airline expenses, cost per ASM rose 3.2%.
- Q3 special items totaled $112: $69 for the pilots’ agreement and $43 for the E190 fleet transition. Excluding special items, management reported Q3 operating income of $195, net income of $134, and diluted EPS of $0.43. For nine months, the corresponding adjusted figures were $498, $343, and $1.08. These are non-GAAP measures.
- Nine-month operating cash flow was $936; investing cash use was $775 and financing cash use was $7. The company reported $275 of free cash flow. Cash, cash equivalents, and restricted cash ended at $513.
- At September 30, unrestricted cash and cash equivalents were $454 and short-term investments were $483, totaling $937. JetBlue also reported approximately $625 of undrawn credit lines. Working capital deficit was approximately $1.0 billion, which management said is customary in the airline industry in part because of current air traffic liabilities.
- Balance-sheet current and long-term debt and capital lease obligations totaled approximately $1.57 billion. JetBlue issued $540 of equipment debt during the nine months and repaid $178 of debt and capital leases. The debt note reports $1.458 billion of long-term debt, excluding $110 of capital leases.
Material changes and notable items
- Profitability fell sharply year over year, mainly due to higher fuel expense and $431 of nine-month special items, including a $319 impairment charge associated with the E190 fleet exit.
- JetBlue reached its first pilots’ collective bargaining agreement, effective August 1, 2018, and recorded a one-time $50 ratification bonus within union contract costs. Inflight crewmembers elected TWU representation; negotiations on their agreement were ongoing.
- The company plans to transition its 60 Embraer E190 aircraft out of the fleet by approximately 2025, with phase-out beginning in 2020. It signed an MOU for 60 Airbus A220-300 aircraft, with options for 60 more, and adjusted its Airbus order book, including converting 25 A320neo orders to A321neo.
- Share repurchases totaled $382 during the first nine months, including $375 through accelerated repurchase transactions. The Board’s authorization permits up to $750 of repurchases over two years beginning January 2018.
- Adoption of revenue standard ASC 606 changed loyalty-program accounting and the classification/timing of certain ancillary revenue; management said adoption did not significantly affect earnings. It increased the reported loyalty air-traffic liability under the new accounting approach.
Outlook, risks, and contingencies
- For Q4 2018, management forecast revenue per ASM growth of 1.0%–4.0%, capacity growth of 7.5%–9.5%, and cost per ASM excluding fuel down 1.5%–3.5% year over year. For full-year 2018, it expected capacity growth of 6.5%–7.0% and cost per ASM excluding fuel up 0.75%–1.75%. No full-year earnings guidance was provided in the supplied filing text.
- Aircraft purchase commitments totaled $8.6 billion, including estimated price escalations and deposits. Total contractual obligations were $14.5 billion. JetBlue said future aircraft financing may not be available on attractive terms; absent suitable financing, it could need to use cash, alter aircraft plans, or incur higher costs.
- A hypothetical 10% increase in fuel prices was estimated to raise fuel expense by approximately $212 over the next 12 months. Only about 7% of projected fuel use for the remainder of 2018 was hedged as of September 30; hedge contracts settled by June 30, 2019.
- Management cited risks including fuel-price volatility, competition, labor costs or disruption, reliance on the New York and Boston markets and congested airspace, weather and infrastructure disruptions, economic conditions, financing availability, and operational or technology risks. The company said it expected available liquidity and operating cash generation to meet requirements for at least 12 months.
- Management reported that disclosure controls were effective as of September 30, 2018. It noted that internal-control processes were changed for ASC 606 and that operating effectiveness of related controls would be assessed in the annual review.
Important facts for investors to verify
- Whether fuel prices, capacity growth, and fare/revenue trends develop in line with management’s Q4 and full-year 2018 outlook.
- The cash and earnings impact of the E190 exit, including whether additional transition costs or impairment charges arise.
- Financing plans and terms for the $8.6 billion aircraft commitments, and the effect of new aircraft deliveries on debt, liquidity, and fixed costs.
- Progress and cost implications of labor agreements, particularly negotiations with inflight crewmembers.
- Liquidity availability, working-capital needs, and continued share repurchases relative to capital spending and debt obligations.