JetBlue retracts aircraft deliveries, best quarterly operating margin since 2004

In last week’s conference call, President Dave Barger said net income reached USD59 million for the third quarter, a dramatic swing of USD44 million over the previous corresponding period. Operating income resulted in an operating margin of 13.6%, the best margin since 2004.

“We believe we are on track to report one of our most profitable years ever, reflecting the progress we have made to strengthen our network, maximise revenues and control costs,” Barger told analysts. “Quarterly revenues exceeded USD1 billion for the first time in our company's history, up 20.5% versus last year. Unit revenues for the quarter were up 11.1% on an 8.5% increase of capacity. Typically an increase in capacity comes at the expense of yield but our third quarter yield increased 11.4% year over year even as average stage length increased 2%. We had an average one-way fare of USD142 and 11.6% improvement over last year, this reflects the improving demand environment as well as our ability to attract and retain higher yielding customers.”

He noted third quarter pricing was up 4% compared with 2008 and demand remained strong. He also said October pricing will be up about 11% year on year.

Barnes added that load factor for the quarter was up 0.9% and passenger unit revenues rose 12.5% against the previous corresponding period. He noted that the third quarter weather was better than expected resulting in fewer cancellations. During July and August, weather-related cancellations reached 139 flights, compared with almost 500 in July and August of last year. As a result of a higher completion factor, ASMs were about one percentage point higher than forecast, which in turn affected unit revenues.

The third quarter saw the contribution of many of the expensive initiatives the airline has undertaken in the past few years. “I think it's really the steady growth that we have in Boston,” said Barger, also pointing to the changing mix of travellers. “It’s Boston, it’s the Caribbean. It’s the contributions of Sabre in many different ways, whether its pricing, yield management, whether its the ability to move much quicker in terms of our fare price system in terms of pricing models. It’s the fare environment, its the maturation, fewer ASMs on a year-over-year basis that are in new markets that are less than 12 months. It’s the partnership traffic kicking in. We will be announcing our seventh interline by the end of the month. So it's a combination of all of the above, plus we go into the strong holiday period.”

JetBlue has grown its business traffic to a consistent 15-20% of traffic in its core business, and, in Boston it is more than 20% and still growing. The higher business mix as it increases frequencies and caters to business schedules, will only grow with its introduction into the Boston-Washington National market next month.

Barger noted that the Aer Lingus partnership – its most mature – yields 100-plus passengers daily across both Kennedy and Boston. Other partnerships, however, remain too new to calculate their impact but it is expected to be the same.

Codesharing beyond Lufthansa, is still something JetBlue wants to do. “Lets face it, we are still talking about codesharing but we have all kinds of work force issues as well that are very important to work,” he said. “I think we feel real good about where we are at with the value of our network at Kennedy, largest domestic airline in New York and then Boston as well. And it is nice because as we take a look at the selling and interline, it's really the summing sectors as opposed to the traditional pro rate. I think we are really pleased with what we are seeing. We are delighted that we can connect customers to Tokyo, to Buenos Aires, to Heathrow. We'll start to see frequent flyer traffic as well. The American brand in New York, in Boston, it's significant and its been here for decades.”

Sharing the wealth

Just as other carriers are reporting increases in profit sharing, so too did JetBlue. Based on year-to-date profit, the profit sharing plan accrued USD12 million during the third quarter and in the year to date has reached USD26 million. “We tend to look at our frontline crew member pay as something where we want to have fair pay relative to the peer set,” said Barger. “So, we tend to look at that on an annual basis is to whether people are appropriately compensated relative to their peers.”

Strong liquidity

For now, the carrier is focused squarely on maintaining a strong liquidity position, which Barger called one of the best in the industry.  “We ended the quarter with roughly USD1 billion of unrestricted cash and short investments, or 25% of trailing, 12-months revenue,” he said. “Given the volatility and the price of fuel, and the airline industry's vulnerability to unpredictable events, we believe maintaining a strong liquidity position remains of paramount importance.”

He cited the strong revenue environment for the quarterly results as well as the continuing of its network strategy, especially in the Boston and Caribbean markets where the company continues to add capacity. In a bid to increase its relevancy to business travellers, it is opening six new destinations from Boston this year and increasing capacity by 30% against last year. The move is paying off with a significant improvement in both yield and load factor on the east coast short-haul markets such as Boston and Chicago. It is also expecting a drop in competitive capacity at Boston during the fourth quarter, down 2.5%.

Indeed, Barger is expecting the Southwest/AirTran merger to result in less competitive capacity in many markets including Florida.

“We are particularly pleased with our September year-over-year passenger unit revenue performance which increased 10% on 10% more capacity,” he said. “Our domestic PRASM for September outperformed the industry reflecting our focus on improving revenue performance during shoulder periods."

Barger reported that unit revenue growth in the Caribbean has outpaced the system average. During September, the Caribbean and Latin America was the best performing region in year-over-year revenue growth despite significant capacity increases. He said 23% of capacity will be in the Caribbean and Latin America by the end of next year.

“Throughout the quarter we saw our strength in both yields and load factor across our network as we continue to benefit from an improving demand environment, an increasing mix of business customers and revenue improvement enabled by Sabre, including higher yielding business traffic through the GDS channel and enhanced pricing capabilities,” he said.

Turning to ancillary revenue performance for the quarter, total ancillary revenue reached about USD18 per passenger, a 3% year-on-year increase. Total revenue, however, did not grow as quickly as passenger revenue, largely owing to a drop in income from change fees, which, Barger said, reflects customer behavioural changes.

Fleet retrenching

In an effort to gain a slower and smoother growth, the company revised its fleet plan, opting out of two Embraer 190s scheduled for 2012 delivery. It also revised its purchase agreement with Airbus, deferring four aircraft from 2012 and six aircraft from 2013, all to 2016, reducing its Airbus deliveries by more than 40% for 2012 and 2013 to seven in each of those years. The moves reduced aircraft purchase obligations by over USD500 million through 2013.  New aircraft deliveries now total nine in 2011, 11 in 2012 and 14 in 2013. However, four A320 leases are scheduled to terminate in 2012 along with another three in 2013.

“Lowering CapEx is a key component of our goal to grow on a sustainable basis and consistently generate positive free cash flow,” Barger explained, adding that the action with Airbus prompted at USD5 million fee paid to the aircraft manufacturer. “We believe this additional expense is more than offset by the accretive impact the deferral will have on long term free cash flow, liquidity and profitability.”

Expenses

Excluding fuel, third quarter unit cost rose 3.4% year-over-year, said Barnes, noting it was in line with expectations. Other operating expenses increased 12% per ASM, a primary driver behind the year-on-year increase.

JetBlue also announced it is partnering with ViaSat for inflight broadband services. Consequently it has stopped further development of such services through its subsidiary LiveTV. In doing so, it recognised a non-cash impairment charge of approximately USD6 million and other operating expenses related to the value of LiveTVs, air-to-ground spectrum license.

JetBlue ended the quarter with unrestricted cash and short term investment of roughly USD1 billion. “During the third quarter we made approximately USD80 million in debt and capital lease payments,” said Barnes. “Our scheduled principal payments from debt and capital leases are expected to be above USD55 million in the fourth quarter. Looking ahead to 2011 we expect a very manageable USD185 million in debt maturities for the full year."

Outlook

PRASM is expected to increase 12-15% in the fourth quarter, while RASM will be up between 10-13% year on year. It also expects a USD10 million revenue boost related to exploration of TrueBlue points before the launch of its new loyalty program last year.

For the fourth quarter ex fuel CASM will rise between 2-4% and for the full year up 5-7%, slightly higher than projections last quarter. Barnes cited the USD5 million fee to Airbus and the USD6 million impairment from LiveTV. Fuel price is expected to be USD2.42 for the fourth quarter and USD2.30 for the full year.

Excluding these two items expected full-year ex-fuel CASM increase would be 4-6%, consistent with previous guidance. With the increase in fuel prices over the past few weeks it expects CASM to increase 7-9% in the fourth quarter and for the full year.

As for capacity, JetBlue noted the bulk of its 2010 capacity growth has been driven by expansion in Boston and the Caribbean. The rest of the network actually shrank in 2010 on a year-over-year basis. For the fourth quarter, its expects capacity to increase between 8% and 10% year-over-year. Looking to 2011, it is adding five E-190 and four A320s which will likely be deployed in Boston and Caribbean.

Consolidation

Barger reiterated his expectation that JetBlue will remain independent. “We are focused on organic or natural growth,” he said. “We think, and this most recent quarter and the trend that we have seen, speaks nicely to the success that we're seeing with that.”

He noted the business model was quite different from Southwest and AirTran, especially with its interline agreement with international carriers.

“I think natural growth, organic growth plus enhancing our partnership traffic and taking advantage of that is the way to go,” he said, adding the diversity of traffic is a big plus. “We feel very, very strong about how we're positioned in terms of what's happening and at the end of the day. Consolidation at a high level is something we support. It is stripping out some of this unnecessary capacity. Candidly, I don't see anything that has transpired that has surprised us but has not be something that would jolt us to be doing something differently. Are we through the M&A period? I think probably not, don't know what that means in terms of those who are unaligned, who maybe interested in that.”

He also questioned the impact a merger would have on employees. “That is really an important lens we look through,” he said. “When you start to even take a look at those kinds of scenarios, this is really part of the heritage in terms of organic growth, natural growth, the right partnerships. We’re certainly not afraid to do something right in our backyard with a quality airline like American Airlines, or up in Boston as well. It's just we're flying those same customers from New Orleans to Heathrow. We're doing it a little bit differently as opposed to maybe what the global alliances are doing, or what those carriers are doing through the M&A activity.”

Barger also said the despite the M&A activity impact on Florida, the market would remain important to JetBlue, suggesting it will probably mean a reduction in capacity as others merge.

“Florida has been an engine for this company since we started the airline back in 2000,” he said. “That continues to be the case. I think as we look at our ASMs and how we redeploy ASMs, north-south especially, in the snowbird time that will be the similar philosophy that we've had on a year-over-year basis. Southwest, AirTran and Spirit have large operations down in Florida, but so do we. We are performing well, and it works real nice for not just the ability to add traffic north of Florida but also south Florida where it ties nicely into the Caribbean.”

International expansion

Barger was asked about a third fleet type for international operations, considering the returns being seen on the trans-Atlantic market.

“Candidly, I think we're now at a point where a big change is taking place in our company, whereby the network is driving the fleet as opposed to the other way around,” he said by way of keeping his options open. "Specifically, it sure would be nice to have an airplane that had the capability to fly off the West Coast from the Caribbean nonstop. It would sure be nice to see an A320 with winglets because the engineering is out there as well, which I think allows us to continue to look at what makes sense from a fleet perspective. But we don't see a need to take the pitch from an OEM to try and fix something. And that's what a lot of airlines tend to do. They're trying to fix their current order book by taking airplanes they don't need. I think we are in a good position, and as soon as the commercial team comes up with the idea, we'll be all yours.”

Transcript courtesy of Seeking Alpha