Jetblue Airbus A320 Photo: JetBlue

MIAMI — JetBlue Airways reported a net profit of $61 million excluding special items (19 cents per diluted share), for the second quarter of 2014, up 69.4% year-over-year (YOY) from $36 million for the same period in 2013. On a GAAP basis, JetBlue recorded a net profit of $230 million, including a one-time $242 million benefit from the sale of its LiveTV subsidiary.

Total operating revenues rose 11.9% YOY to $1.49 billion. Passenger revenues grew 12.4% to $1.37 billion, while other operating revenues grew a more modest 7.0% YOY to $121 million.  Yields rose 6.3% YOY to 14.25 cents, translating into a 6.0% YOY increase in passenger revenue per available seat mile to 12.05 cents despite a 6.0% increase in capacity as measured by available seat miles (ASMs).

JetBue’s expanded focus on ancillary revenue paid off, with ancillary revenue up 6% YOY per passenger and13% overall to $185 million. Dynamic pricing of the Even More semi-premium product line also boosted sales, and the Even More product is on track to generate $190 million by the end of 2014. All of JetBlue’s focus cities saw improving performance in the second quarter, and trailing twelve month profit margins expanded in Fort Lauderdale, helping Florida lead the system in YOY PRASM growth (amongst various geographic segments).

Operating expenses rose 9.8% YOY to $1.35 billion, driven primarily by a 13.2% rise in labor costs YOY to $316 million. The steady maturing of JetBlue’s workforce and the compound effect of years of raises continues to take its toll on JetBlue’s labor expenses; a challenge similar to that faced by network peer Southwest. Fuel expenses grew 6.9% YOY to $497 million on a 6.0% rise in consumption and 0.9% rise in per-gallon price to $3.09. Other operating expenses also rose 25.2% to $177 million. However on the plus side, the steady rise in JetBlue’s maintenance expenses temporarily subsided, as maintenance expenses fell 7.7% YOY to $102 million. Operating cost per ASM (CASM) rose 3.5% to 11.88 cents, while CASM excluding fuel grew 5.1% to 7.51 cents. While the CASM outlook for the year is unclear, the sale of LiveTV is expected reduce 2014 CASM by one [percentage] point.

JetBlue ended the quarter with $797 million in cash and short term investments. During the quarter, JetBlue spent $300 million (primarily sourced from the cash generated from LiveTV sale) on aircraft debt pre-payments, creating 14 additional unencumbered aircraft and increasing total unencumbered aircraft to 37 airframes. JetBlue also used proceeds from the LiveTV sale to re-purchase 75 million shares that are destined for JetBlue employees due to equity-based compensation.

For the quarter, JetBlue recorded an operating profit of $141 million, which translates to an operating margin of 9.4%, up 1.8 percentage points YOY. JetBlue’s investments in a premium product paid particular dividends near the end of the quarter, and are a major reason for JetBlue’s positive outlook for the peak third quarter. Bookings for JetBlue’s new premium Mint product remain strong, and executives speaking on the conference call were particularly jubilant over the number of first time JetBlue customers (mostly business travelers) being attracted by the Mint product. By mid-August all flights between New York JFK and Los Angeles will be operated by Mint A321s, and in October, the Mint product will make its debut between New York JFK and San Francisco. Beyond the flatbed premium product, investments in wireless internet have also enhanced JetBlue’s core product. To date, 60 Airbus A320 and A321 aircraft have had Fly-Fi installed, and installations on the Airbus fleet will be completed by the first half of 2015.

Once again, JetBlue delivered solid financial results, even as its performance was overshadowed by better than expected (Hawaiian, Virgin America [TBD?]) or record (Southwest, Alaska) financial performance amongst its network and niche airline peers. Operationally, after a disastrous first quarter marred by inadequate planning for FAR Part 117, JetBlue delivered strong performance. Moreover, for JetBlue, the most important figures to evaluate are not necessarily profit or ROIC oriented, but rather revenue initiatives. JetBlue’s cost challenges, and the driving factors behind them are well known to investors, perhaps even priced into the stock. So it’s the revenue programs; ancillary revenue and the long haul international opportunities tied to Mint’s success that should be the focus of analysis.

And in that sense, signs for JetBlue are positive. Thanks to the success of its ancillary revenue initiatives, JetBlue has bought time for Mint to develop slowly (it doesn’t have to be an enormous revenue generator from day one – allowing the product to gain momentum). For example, on the earnings call, CEO Dave Barger and other JetBlue executives were noncommittal on the launch of Mint in Boston, and they can afford to wait before taking that step thanks to product enhancements like Even More and Fare Families (which introduce on some level, checked baggage fees through fare bundling). And ultimately, if JetBlue can deliver on those revenue growth pathways in a meaningful manner (as Southwest has), then the cost problems of the past three to four years will be all but forgotten.