29-Apr-2010 6:05 PM

JetBlue's surprise first quarter loss. Focusing on strengthening network for new partnerships

Analysis

Despite its surprise first quarter net loss after four consecutive profitable quarters, President, Director and CEO Dave Barger, was very optimistic during yesterday’s analyst call as he briefed participants on the company’s strategy to gain new partners.

Well positioned to serve global carriers - Barger

JetBlue is strengthening its network in Boston and New York with new service to Washington DC, to position itself for additional partnerships beyond current deals with Lufthansa, Aer Lingus and American. Barger said he expects to make announcements on these new partnerships in the coming months.

The strategy includes not only the acquisition of the eight Washington National slots from American, part of its new interline partnership with the Dallas-based carrier, but also the five slot pairs from US Airways, part of its slot swap deal with Delta, which is awaiting DOT approval.

Yesterday, JetBlue announced the launch of Washington National service on 01-Nov-2010 with seven daily roundtrips from Boston and single daily roundtrips from Washington to Orlando and Fort Lauderdale. Barger indicated the Boston-National service will not only strengthen its presence in Boston but offer expanded opportunities for new partnerships.

DCA will be JetBlue's 62nd destination. The carrier also serves the region with six daily flights to Washington Dulles International Airport (IAD) and five daily flights to Baltimore/Washington International Thurgood Marshall Airport (BWI). With the addition of DCA's seven daily shuttle flights to Boston, JetBlue will become the largest carrier for flights with 18 departures between Boston and the Washington DC, the fourth largest market in the US in terms of revenues.

Despite the fact it deferred new A320 deliveries from 2011/2012 to 2015 (as part of an effort to reduce costs by deferring pre-delivery deposits), the new Washington service, as well as its new Hartford service to Orlando and Fort Lauderdale require additional aircraft. To that end, it is leasing, on "very favourable terms", seven used A320s it formerly owned in a deal with GECAS which is overhauling the aircraft before returning them to the JetBlue fleet.

Barger does not expect the additional aircraft to add more than a half a percentage point to capacity with the bulk of capacity increases coming from increased aircraft utilisation and the annual run rate for new services added in 2009. Three of the GECAS aircraft are expected in June followed by two in the third quarter and two in 4Q2010. It is also expecting to benefit from a maintenance holiday with these aircraft, which CFO Ed Barnes indicated fit will with its free-cash flow strategy for the year. He expects them to be accretive to free cash flow.

Its on-going conversion to Sabre is also part of its 'gain-new-partners' strategy, offering more functionality, but also increased opportunities for increasing ancillary revenue.

“We will use Sabre’s E-ticketing platform to leverage our growing presence in Boston and JFK,” said Barger. “Sabre, our new terminal at JFK, strong network, superior product, low costs and our valuable JFK slot portfolio means we are well positioned to serve the global carriers. The new partnership with American is an innovative and cost-effective way to general new revenue by leveraging the network strengths of both carriers while bolstering each airline’s New York and Boston presence. We will continue to develop opportunities to monetize our valuable presence in New York and Boston by linking our network with other airlines.”

Barger indicated its position in Boston will be further strengthened this summer as competing capacity declines during the second and third quarters on a year-on-year basis. “We are increasing Boston departures by 30% year on year this summer, accounting for about 4.5 percentage points of our 2010 ASM growth,” he said.

Unusual quarterly loss, but solid liquidity

Barger cited rising fuel costs which produced USD32 million in additional fuel costs, the Sabre conversion, the JFK runway closure and the winter storms for the company’s first quarter net loss of USD1 million on record revenues of USD870 million.

JetBlue revenue, operating profit and net loss in 1Q2008 vs 1Q2010

The loss represented a USD13 million swing from its 2009 first quarter when it posted a net income of USD12 million. Operating revenues for the quarter were USD42 million for a 4.8% operating margin. This compares with operating income of USD73 million and a 9.3% operating margin for the year-ago period.

JetBlue operating margin: 1Q2007 to 1Q2010

He reported that the company ended the quarter with over USD1 billion in unrestricted cash and short-term investments or 30% of trailing 12 months revenue, which, he claimed, was the best liquidity in the industry. Its average fare of USD142 one way was the second highest quarterly average fare in its history, driven by an increase in higher yield passengers and the improving revenue environment.

Barger also reported increasing strength in the company’s Caribbean and Latin American operations, adding that its VFR – visiting friends and relatives – program paid dividends in the March quarter because JetBlue benefits more than its peers from the Easter/Passover/Spring break travel bump. For the second quarter, Caribbean and Latin America capacity will rise 20% year on year, accounting for 3.5 points of expected 2010 ASM growth.

Turning to the closed Bay runway at JFK, Barger said repairs will be completed by 01-Jul-2010 and will alleviate many of the challenges of operating at the airport. He reported minimal impact so far, with the project half completed.

Barnes reported that the airline was forced to cancel 1,300 flights during the quarter, up from the 550 cancelled in the year-ago quarter, the vast majority on the February storms. It took a USD15 million hit in lost revenues which were offset by USD5 million in reductions for fuel and landing fees, for a net impact of USD10 million.

The airline also incurred a one-time expense of USD15 million on the Sabre conversion compounded by a USD8 million in lost revenue resulting from flight load caps, fee waivers and schedule adjustment made to ensure a successful cutover. Coupled with fuel increases, these additional costs drove a USD31 million year-on-year decline in operating income.

Monthly PRASM improved 3% for the quarter after being down in January, up 2% in February and 15% in March on higher yield passengers as well as the holiday period, which accounted for 2.5% percentage points of the first quarter PRASM. Barnes also reported yield traction for short-haul business traffic since the Sabre cutover. The company is now testing variable pricing on its Even More Legroom offering. Previously, he said, JetBlue was restricted to pricing by segment length of haul whereas, now, it is setting unique EML prices for different markets to match price with demand. The company expects the EML changes to drive USD20 million in additional ancillary revenue on an annual basis.

JetBlue PRASM growth: Mar-2008 to Mar-2010

That would make up for the ancillary revenue losses incurred from the weather cancellations and Sabre conversion as the airline waived or lowered change fees. Even so, it reported that ancillary revenues, reported in the passenger revenue column, combined with other revenue totaled USD18 per passenger in the quarter. Full year ancillary revenues are expected to increase 10% year on year. It expects to roll out buy-on-board initiatives in the second half.

April PRASM was up about 3% year on year while JetBlue expects total PRASM for the second quarter to be up 8% on a year on year basis, despite the fact that May is an historically weak month owing to easier year on year comps. For the second quarter, the company expects both PRASM and RASM to increase between 6-9%.

"While we are disappointed to report a loss for the quarter, we are confident that we are taking the right steps to return to sustained profitability," said Barger. "During the quarter, we successfully implemented a new customer service and reservations system - a significant accomplishment given the complexity of such a transition - reflecting meticulous preparation and execution by our outstanding crewmembers. We believe this new system, along with our growing presence in Boston and our unique position as the largest domestic carrier at JFK Airport, allows us to continue to grow and develop revenue streams in the future."

Operational Performance

Revenue passenger miles for the first quarter increased 7.1% to 6.5 billion on a 6.1% increase in capacity, resulting in a first quarter load factor of 76.8%, an increase of 0.8 points year over year.

Yield per passenger mile in the first quarter was 12.13 cents, up 3.8% compared to the first quarter of 2009. Passenger revenue per available seat mile (PRASM) for the first quarter 2010 increased 4.9% year over year to 9.32 cents and operating revenue per available seat mile (RASM) increased 3.4% year-over-year to 10.32 cents.

Operating expenses for the quarter increased 15.1%, or USD108 million, over the prior year period, including approximately USD15 million in one-time expenses related to the transition to Sabre. JetBlue's operating expense per available seat mile (CASM) for the first quarter increased 8.5% year-over-year to 9.83 cents. Excluding fuel, CASM increased 8.9% to 6.81 cents. These non-fuel unit costs were negatively impacted by storm related flight cancellations that occurred in February and March.

On a year-on-two basis, RASM, PRASM and yield also showed significant improvements.

JetBlue RASM, PRASM, yield, CASM and CASM excl fuel in 1Q2008 vs 1Q2010

Fuel Expense and Hedging

While fuel prices increased during the quarter, JetBlue continued to hedge fuel to help manage price volatility. Specifically, JetBlue hedged approximately 65% of its fuel consumption during the first quarter, resulting in a realised fuel price of USD2.19 per gallon, a 7.5% increase over first quarter 2009 realised fuel price of USD2.03. JetBlue recorded USD2 million in gains on fuel hedges that settled during the first quarter.

JetBlue has hedged approximately 42% of its second quarter projected fuel requirements and 38% of its remaining 2010 projected fuel requirements with a combination of crude call options, jet fuel swaps and heating oil collars. JetBlue expects an average price per gallon of fuel, including the impact of hedges and fuel taxes, of USD2.43 in the second quarter and USD2.44 for the full year 2010.

Guidance

"We are encouraged by recent revenue trends as the economic environment appears to be improving and we derive additional revenue benefits from our new customer service system," said Barnes.

For the second quarter of 2010, PRASM and RASM are expected to increase between 6-9% year on year. CASM is expected to increase between 12-14% over the year-ago period. Excluding fuel, CASM in the second quarter is expected to increase between 9-11% year over year.

PRASM and RASM for the full year are expected to increase between 6-9% six year-on-year. CASM for the full year is expected to increase between 8-10% over full year 2009. Excluding fuel, CASM in 2010 is expected to increase between 3-5% year over year.

Capacity is expected to increase between 4-6% in the second quarter and to increase between 6-8% for the full year.