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Analysis: JetBlue Announces Fourth Quarter and Full Year 2013 Profit

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Analysis: JetBlue Announces Fourth Quarter and Full Year 2013 Profit

Analysis: JetBlue Announces Fourth Quarter and Full Year 2013 Profit
January 29
16:42 2014

MIAMI — JetBlue Airways (NASDAQ: JBLU) reported a fourth quarter net profit of $47 million on Wednesday, or $0.14 per diluted share; a 97% year-over-year (YOY) increase. The New York City based carrier also announced a 2013 full-year profit of $168 million, or $0.52 per diluted share, a 31.25% YOY increase. A strong uptick in operating revenues thanks to rising ticket prices and consistent demand ultimately outpaced troubling increases in operational expenses.

Operating income for the fourth quarter was $115 million, resulting in an excellent operating margin of 8.4%, more than double last year’s total of 3.7%. Because JetBlue has such a strong leisure network to Florida and Caribbean from the Northeast, its fourth quarter is much stronger relative to the other network carriers (as this is the period of peak demand). For the full year, JetBlue recorded an operating profit of $428 million, or 7.9%.

The carrier’s operating revenues grew 9.2% YOY to $5.44 billion, led primarily by a corresponding 9.3% YOY increase in passenger-specific revenue to $4.97 billion. Passenger revenue per available seat mile (PRASM) grew 2.3% YOY to 11.61 cents, while yields correspondingly increased 2.4% YOY to 13.87 cents.

In similar fashion the carrier reported average fares increasing 3.9% YOY to $163.19 due to a shift in capacity mix toward long haul routes, with an 83.7% load factor (flat YOY), and a 6.9% YOY increase in capacity as measured by available seat miles (ASM). From a product differentiation perspective, the Even More offering (which includes streamlined security and boarding processes, as well as seating with additional leg room) drove $170 million in revenue, up from $115 million in 2012. Total ancillary revenue grew nearly 15% YOY to $670 million, rising to $24 per customer in the fourth quarter.

Operating expenses also rose, increasing 8.8% YOY to $5.01 billion, up from $4.60 billion in 2012. Every line item except aircraft rent—which decreased 1.5%–saw an uptick of anywhere between 5 and 28%. In particular maintenance and repair costs rose 28% YOY to $432 million. Landing fees rose 10.1% YOY, while employee-driven costs—salaries, wages, benefits—rose 8.7% YOY to $1.135 billion. Fuel remained the largest single line item at $1.89 billion, up 5.1% YOY but down 1.7% on a per-ASM basis thanks to a 2.1% YOY decrease in cost per gallon to $3.14. Operating expenses per ASM (CASM) increased 1.9% YOY to 11.71 cents, though CASM excluding fuel jumped 4.2% YOY to 7.28 cents.

The rise in labor costs and maintenance costs are reflections of the cost of JetBlue’s aging workforce and fleet. As employees age, they consume more of their benefits (health care, dental, et. al) and require higher pension contributions (higher wages require higher 401K contributions by the employer). And of course for an airline such as JetBlue, which actively uses the Southwest Airlines model of labor management in attempting to avoid labor challenges, wages will naturally rise over time as the airline attempts to take care of its employees.

But it’s not just the labor force that’s aging – JetBlue’s fleet is growing older day by day. Once the airline used up the so-called “low hanging fruit” for domestic expansion, its rate of aircraft deliveries (and overall growth) slowed. Today the carrier has a rapidly aging fleet of 130 Airbus A320s, which have skewed the overall average fleet age to 8.1 years for an airline that is less than 14 years old.

So the airline has something of a cost problem. But instead of just allowing its costs to steadily rise, JetBlue is taking a page out of the Southwest Airlines playbook and aggressively attempting to grow its revenues to compensate for rising costs. Only unlike Southwest, who mainly moved to make its existing product more appealing to business travelers, JetBlue is trying to take its brand up-market, and repeat the success it has found amongst high yield business travelers at its second hub in Boston.

As legacy carriers cut back their product offering in the latter part of the previous decade, JetBlue suddenly found itself positioned as the US carrier with the best inflight service and overall domestic product, helped by their excellent Terminal 5 at New York JFK and an unwillingness to charge for first checked bags.

Today JetBlue has embraced the positioning as an upmarket brand with Mint, the new premium cabin offering between New York JFK and San Francisco/Los Angeles. Mint is absolutely critical to JetBlue’s future, because if it can make a go of Mint on one of the most competitive premium routes in the US, it could be a precursor to true dual-class long haul service to South America and across the Atlantic (especially from Boston) using the versatile Airbus A321neo, of which the carrier has 30 on order.

The other prong of the strategy is of course the international expansion from Fort Lauderdale and San Juan, which will happen regardless of Mint’s success or failure, and will position JetBlue as a secondary competitor to the world’s largest airline, American Airlines Group, in South Florida and the Caribbean. Competition in Fort Lauderdale is set to be extremely fierce, as rival LCC-network hybrid Southwest Airlines is also planning to launch international operations there from 2015 onwards.

Pairing with these network initiatives is the expansion of the larger Airbus A321 and the addition of sharklets to the A320 fleet. The larger A321s in particular (JetBlue has 4 in service with 49 on order) offer lower CASM for JetBlue’s trunk routes, and should moderate overall unit costs in 2014 and 2015.

Turning to the balance sheet, JetBlue made significant improvements to its balance sheet, using cash from operations to prepay $94 million of aircraft debt and purchase 2 Embraer E190s. The carrier reduced its debt by $266 million in calendar 2013 to $2.59 billion, and ended the year with $627 million in unrestricted cash and short term investments.

On the cash flow side, JetBlue recorded operating cash flow of $758 million against capital expenditures of $637 million ($453 million on aircraft) yielding free cash flow of $121 million, for a free cash flow yield of 4.11%. Return on invested capital (ROIC) for 2013 rose from 4.8% to 5.3%, but still lagged behind company targets set at the Analyst’s Day in 2012.

Looking forward to 2014, the first quarter’s financial results will be materially affected by the operational shutdown earlier this month, which is expected to have a net adverse impact of $30 million ($45 million in lost revenue, $15 million in expenses not incurred).

Operational complexity will only rise due to the (hopeful) addition of service from Washington Reagan, and the addition of Mint. However, investors will have no choice but to stomach the financial challenges in the early part of the year if they want JetBlue to evolve into a company that hits its long term target of a 1% ROIC expansion each year.

 

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A Global Review of Commercial Flight since 1994: the leading Commercial Aviation publication in North America and 35 nations worldwide. Based in Miami, Florida.

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