In an effort to reduce its purchase obligations by more than USD800 million through 2015, JetBlue is cutting its original 100-aircraft order for Embraer 190s by 25 while re-adjusting its Airbus deliveries and switching to the Airbus neo. It is also working with Airbus to become the launch customer for a sharklet retrofit for its A320 fleet. The idea is to reduce annual capital commitments over the next five years while increasing positive free cash flow.
Having only signed an MOU, the complex changes include a new order for 40 A320neos to gain greater fuel efficiency. It is also deferring eight A320s set for delivery between 2014 and 2015 out to 2017 citing a need to smooth aircraft deliveries and reduce capital commitments in the near term. It is currently evaluating the GE LEAP-X engine against the Pratt & Whitney PurePower GTF engine and should have a decision by year’s end. Of the 52 remaining A320 positions it has, 30 are being converted to A321s, powered by IAE engines. The airline cited greater network flexibility afforded by the larger aircraft, which for the present are sized at 185-195 seats, although it has not decided on the final configuration.
All A320 deliveries starting in 2013 will come with winglets, which Airbus calls sharklets, as part of a deal that makes JetBlue the launch customer for an A320 sharklet retrofit programme. It expects the retrofit costs for its current fleet to be paid back in two years although the final details as to costs have yet to be worked out with the airframer.
The executive team was careful to continually make two points -- that this decision was driven by network needs and it still thought the E190 played a critical role in its fleet. CEO David Barger described the moves optimising the fleet to significantly reduce costs and better position the carrier to succeed in an increasingly competitive environment. Even so, its repetition of the network argument was always followed by an economic argument.
“While our commercial team was a driving force behind the fleet changes, it is critical that any fleet investment build on the progress we are making to grow the company on a sustainable basis – that is growth supported by cash from operations,” he told analysts during Tuesday’s conference call announcing the deal. “This will help us in the near term and smooth future debt requirements to help us generate positive free cash flow. The sharklets will help maintain our cost advantage while reducing operating costs and lowering fuel burn, an important priority. Our network strategy is driving our fleet plans and we are moderating our growth rate to better match capacity to demand.”
The addition of the A321, sharklets, retrofitting its current fleet and the reduction in the 190s, he added, gives the airline more flexibility. The A321 will be more cost-effective despite its greater fuel burn requirement. Mr Barger noted that its higher seat count will offset that for a net reduction in fuel consumption.
“The sharklet technology will enable the airline to reach other markets, including trans-continental and deeper into South America,” he added. “The E190 has played an important role in the success of our network strategy, particularly in Boston and the Caribbean.”
CFO Ed Barnes said the sharklet deliveries will improve fuel efficiency by 3% while also increasing range. If its current fleet had the sharklets, the carrier would save USD45 million in fuel costs this year alone. He added that as fuel costs rise the economic cast for the new aircraft grows stronger.
CCO Robin Hayes noted that the sharklets will make its West Coast missions with strong headwinds the majority of the time after experiencing range problems during the winter with strong headwinds. Airbus COO John Leahy said at Paris that JetBlue has been one of the biggest proponents of sharklet retrofits.
For the A320 NEO, set for delivery in 2017, the combination of the advanced technology engine and the sharklets will yield a 15% fuel efficiency while the A321 allows the airline to upgauge high density markets for more efficient use of its slot portfolio at JFK, LaGuardia and Newark. It sees a 20-25% greater seat capacity with the A321 which will reduce its CASM. Mr Barnes noted that despite higher fuel consumption its fuel consumption per seat is 12% lower than the A320. Integration costs such as crew training and airport costs are expected to be minimal.
“During the negotiation is was essential any investment not detract from our efforts to maintain a strong liquidity position and strengthen our balance sheet,” said Mr. Barnes. “We expect a cash payment of USD7 million upon executives and we have been able to secure excellent pricing. This extends our order book out to 2021.”
Estimated Airbus Delivery Schedule
A320s coming off lease include three in 2013, two in 2014, three in 2015, six in 2016, one in 2017 and two in 2018.
During the Paris Air Show Leahy noted JetBlue was now the company’s largest A320 operator with 119. “Moving up to the A321 we think will be a natural step,” he said, citing the same upgauging needs in slot constrained airports as JetBlue did.
He also said a decision has yet to be made as to whether Airbus would do the retrofits themselves or with a third party. JetBlue hasn’t decided on a configuration for the A321s but said it aims to maintain the current level of comfort it has on the A320.
During an analysts/media call, executives expressed continuing confidence in the 190 calling it a critical part of its fleet, especially for continuing to build its presence at Boston and for the short-haul route expansions in the Caribbean. CCO Robin Hayes called the aircraft crucial to its continuing Boston build up, especially in business markets. It will also be playing a large role in its build up of the San Juan-intra Caribbean market. It is now the biggest player at SJU.
JetBlue has a range of possibilities for re-marketing the 25 100-seat aircraft it no longer needs including selling some of its used 190s and taking new deliveries. It could also sell its delivery positions or take delivery in someone else’s livery and sell it to the new owner the same day. It could also opt out of its delivery positions and pay Embraer a fee. It has the flexibility to switch to E195s -- at 118 seats -- which could help in re-marketing the aircraft.
Interestingly, Embraer CEO Fredrico Curado said the the beginning of the Paris Air Show that he expected some of JetBlue E190 orders to be cancelled but all the comments from JetBlue centred on re-marketing.
"The E190 is performing very well as our new, shorter-haul market aircraft, often serving to build the demand in the market for eventual up-gauge to our A320," Mr. Barger said. "We are now at the point where the balance between frequency and capacity is tipping in favor of capacity, and we are exercising our most strategic asset - our order book - to better match capacity with growing network demand."
JetBlue currently has 46 E190s in its fleet and said the optimal fleet size for the type would be about 75. An additional three are scheduled for delivery this year and will take one more of the 26 that remain in the pipeline.
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