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JetBlue Airlines posts modest USD39 million profit and grows capacity as competitors scale back

27-Oct-2011

In what has become the theme for 2011, JetBlue reported falling profits on rising revenues with USD35 million in profits down from the USD59 million posted last year. It came in just shy of analyst expectations that projected earnings of USD36.9 million. The company generated record revenues, which jumped 16% to USD1.1 billion.

After the industry took losses in the first quarter, second and third quarter results showed promising trends with rising revenues, although they could not completely offset rising fuel. While most airlines are expected to post profits this year, including JetBlue, those profits will likely be down from 2010. Still, the trend is in a positive direction given the fact that a decade ago, before the restructuring of the industry, these companies would likely have been awash in red ink.

Demand remaining strong

The second theme now being played out at the midpoint in the earnings season is strong demand, reported by JetBlue along with its peers. The positive trend defies the economic news that is more doom and gloom that has sparked increased caution on growth plans across the industry. Even so, JetBlue executives reported they see no pricing irrationality creeping into the market.

JetBlue specifically reported that bookings for both upcoming US holidays, Thanksgiving and Christmas, are strong. It also said December comparisons will be more robust, a 14% capacity increase, than a normal December considering the number of cancellations owing to weather in Dec-2010. The airline did say passenger revenue per available seat mile (PRASM) performance in Dec-2011 is expected to be better.

Even so, JetBlue and a handful of other carriers, such as star-player Alaska, continue to grow, taking advantage of capacity cuts by competitors that guarantee a mature market upon launching service.

No discussions on Lufthansa spinning out its stake

CEO David Barger was asked if there has been any dialogue with Lufthansa, which holds a stake in the New York-based airline and has announced it will likely be moving out of that stake. No discussions have been held. Mr Barger indicated that, although he had to confirm, JetBlue has the right of first refusal on the acquisition of Lufthansa’s share.

Expansion of 'Even More Space'

When asked to compare its growth plans and product to that of another growing company, Spirit Airlines in Florida, JetBlue indicated the two airlines have different strategies as well as different traveller mixes now that JetBlue has been successful in courting business traffic. Chief commercial officer Robin Hayes pointed out that Spirit’s higher density would not attract JetBlue’s traveller mix. Indeed, the strength of its 'Even More Space' (EMS) product has prompted customers in competitive markets to choose JetBlue.

Mr Hayes also reported that the EMS product has been so successful, is it being doubled on the ERJ 190 jets from four rows to eight with expectations to add another two rows in 2012. EMS on the A320s will grow about 15% going from 36 to 42 seats per aircraft this year. The changes do not change the normal seating capacity of the aircraft. He pointed out that EMS is too often sold out for last-minute business travellers in Boston.

Granularity on 2012 must await investor’s day

During the call, JetBlue executives left analysts hanging on next year’s expectations, pointing out more clarity will come during the company’s 15-Feb-2012 investor day in New York. Such information includes its growth strategy in relation to is return on invested capital performance and goals, the business to leisure mix of passengers, more specific cost guidance for the year (as it is now in the middle of budgeting) and the impact of its many codesharing and interline deals over New York’s Kennedy, Boston, Washington Dulles and Orlando airports.

However, it did note the addition of its 12th interline partner in TAM, with plans to add another this year and more in 2012. JetBlue targeted six to eight new partners for 2011. It also expects growth to slow next year to mid-single-digit capacity increases. Executives refuse to say whether 2012 would mirror 2011 in costs being up in the first half and flat to down in the second half.

Newly installed CFO Mark Powers indicated the company is just now getting into granular analysis of the open-architecture, while CEO Dave Barger indicated it was very powerful, allowing JetBlue to be sold on six continents.

He shed no new light on the sudden departure of former CFO Ed Barnes except to say that he joined the company in 2006, was named to his post in 2009 and was key in slowing growth to a sustainable rate.

Guidance

Cost per available seat mile (CASM) guidance for the fourth quarter shows an increase between 11-13% year-on-year but excluding fuel. CASM in the fourth quarter is expected to range from -1-1% year on year and growth 13-15% for the full year. CASM ex fuel is expected to range from 0-2%, unchanged from the guidance issued in Jan-2011. For the fourth quarter, capacity will increase between 8-10% over 4Q2010 and 6-8% for the year.

In addition to a 25% increase in maintenance costs, the company is facing higher wage/salary/benefits as pilots obtain more seniority. The company will continue to experience increasing maintenance headwinds next year as its aircraft come off warranty but executives were unable to say the percentage of expected growth or the point at which it will level out.

JetBlue posted an operating margin of 9% nearing its goal of 10%, despite falling operating income which dropped to USD108 million from USD140 million in 3Q2010 when it had a 13.6% operating margin. Its pre-tax margin fell 4.8 points to 4.6%. Headwinds include an additional USD162 million in fuel costs year-on-year along with an USD8 million cost of Hurricane Irene. Hurricane Irene cost the airline USD18 million in lost revenue, partially offset by USD10 million in cost savings.

Margin pressure

Analysts expressed concerns about JetBlue’s margin strength given the fact other carriers are dropping capacity to improve margins while JetBlue is continuing to grow resulting in increased margin pressure.

Mr Barger said JetBlue’s strategy significantly differed from the rest of the industry, adding that its moves at Boston and the Caribbean and Latin America are impacting the competitive landscape, reiterating the scarceness of such opportunities. CCO Robin Hayes pointed out the strategy has been a solid one and is expected to continue.

Mr Barger cited the growing relevance of the airline in both regions as reason to increase capacity at 15% and 25%, respectively. Indeed, that is increasing the diversity of revenue to include more business traffic and, in Boston, will continue as the markets mature.

“When we take a look at our returns they have been additive to the network and that is fueling our growth while the rest of the network is flat,” he told analysts, adding that growth is expected to moderate in 2012. “We are contrarian,” said Mr Barger. “We know we are contrarian and the margin is very important to us, but these opportunities don’t come along often.”

Improving metrics

Yield rose 7.7% to USD 13.04 cents while PRASM yield also increased 7.7% to USD 11.03 cents and revenue per available seat mile (RASM) rose 7.1% to USD 12.12 cents. Operating revenues were up 16% to USD1.2 billion on an 8.2% jump in revenue passenger miles to 8.33 million and a 8.3% capacity increase to 9.8 billion, resulting in a 3Q2011 load factor of 84.5%, down 0.1 points year-on-year.

Mr Hayes indicated the company is experiencing very strong growth in its Getaway Vacations division, which is contributing to growth in ancillary revenues and improving performance during such shoulder periods at May and September when PRASM was up 13% in what is traditionally an off-peak period.

Other revenues rose 10.2% to USD106 million during the third quarter while per-passenger revenues jumped 19%, driven by its EMS product. The company is on track to generate USD100 million in ancillaries in 2011. The average fare rose 9.2% to USD154.88.

The robust results, however, included a 22.1%, or USD197 million, to USD1 billion increase in operating expenses, the vast majority of which was fuel which rose 43% to USD3.25 per gallon. But for the impact of Hurricane Irene when it was forced to cancel 1400 flights, its CASM would have been down in the 4% range, according to Mr Powers, adding there is no magic bullet to lowering costs.

The 2.2% increase in CASM ex fuel to USD 6.43 cents for the quarter was in line with guidance and was better than expectations considering Hurricane Irene. Other operating expenses declined 7% per ASM reflecting its continual digging to cut costs.

Third quarter fuel headwinds are not expected to change in the fourth quarter when it expects fuel costs to come in at USD3.23 per gallon and USD3.19 for the full year. In the third quarter, fuel represented 40% of costs and it paid USD137 million more for fuel than it would have if fuel had remained at 3Q2010 levels. The airline experienced a USD4 million fuel hedging loss settled during the third quarter. CASM rose 12.8% year-on-year to USD 11.03 cents, exactly matching yield.

The company ended the quarter with USD1.2 billion in unrestricted cash and short-term investments. As with other carriers, it is paying down its more expensive debt, having pre-paid about USD32 million par value of its 6.75% convertible notes putable in 2014, causing a USD5 million loss. Mr Powers indicated that, with the interest saved, the action will be immediately accretive.

Mr Barger indicated, in response to a question, that the airline’s liquidity goal is to be north of 20% trailing 12-months revenue (TTM) with the third quarter at 28%, excluding the Amex facility, with the year end expected to be north of 25%.

Seizing long-term opportunities

He indicated that its philosophy goes beyond the economy or fuel volatility to encompass a flexibility to take advantage of opportunities such as the upcoming slot auctions at both LaGuardia and Washington National for which it expects to be a very active bidder. Indeed, it was for that reason that it arranged the USD125 million unsecured debt facility with American Express. In the past, strong liquidity has allowed it to take advantage of competitive capacity declines at Boston and in the Caribbean-Latin markets.

“Those types of opportunities do not happen a lot,” said Mr Powers, “and we need to be able to take advantage of them. In addition, we will be purchasing the A320 delivery in November with cash and are considering cash for some of our 2012 deliveries.”

The availability of slots comes from the divestiture by US Airways and Delta in their slot swap. The bidding for the 16 Washington National and 32 LaGuardia slots closes 22-Nov-2011, meaning the slot reassignment should be completed by the end of the month.


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