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JBLU > SEC Filings for JBLU > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for JETBLUE AIRWAYS CORP

Form 10-Q for JETBLUE AIRWAYS CORP


1-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Second Quarter 2014 Highlights
•We reported our 17th consecutive quarter of net income.
•We had a 12.4% increase in passenger revenue due to a 6.5% increase in the average fare as well as a 5.5% increase in revenue passengers.
•Operating expenses per available seat mile increased by 3.5% to 11.88 cents. Excluding fuel and profit sharing, our cost per available seat mile increased 5.1%.
•We generated $541 million in cash from operations.
•We sold our subsidiary, LiveTV, resulting in a pre-tax gain on the sale of $241 million for the six-months ended June 30, 2014.

Balance Sheet
We ended the quarter with unrestricted cash, cash equivalents and short-term investments of $797 million and undrawn lines of credit of $550 million. Our unrestricted cash, cash equivalents and short-term investments is at approximately 14% of trailing twelve months revenue. We increased the number of unencumbered aircraft by 13 over the quarter, bringing the total to 34 as of June 30, 2014.
Network
As part of our ongoing network initiatives and route optimization efforts, we continued to make schedule and frequency adjustments throughout the second quarter of 2014, including the announcement of our first intra-Florida route from Fort Lauderdale-Hollywood to Jacksonville scheduled to start in the fourth quarter.
Sale of LiveTV
On June 10, 2014, we completed the sale of our wholly owned subsidiary, LiveTV, LLC to Thales Holding Corporation which resulted in a pre-tax gain on the sale of $241 million and a post-tax gain on the sale of $168 million. The capital gain generated from the sale of LiveTV resulted in the release of a valuation allowance related to the capital loss deferred tax asset of $19 million. The agreement between JetBlue and Thales is subject to post-closing purchase price adjustments, which we expect to be finalized later this year. We used sale proceeds to reduce our invested capital base, including prepayment of debt, releasing 14 previously encumbered aircraft. Outlook for 2014
For the full year, we estimate our operating capacity will increase approximately 4.0% to 6.0% over 2013. This growth will be funded by the addition of six Airbus A321 aircraft to our operating fleet through the remainder of the year as well as the addition of new destinations and route pairings based upon market demand. Our cost per available seat mile, CASM, excluding fuel and profit sharing (1) for the full year is expected to increase by 2.5% to 4.5% over 2013 as a result of =increases relating to salaries, wages and benefits, primarily due to pilot compensation as well as increases in depreciation and landing fees.

(1) Refer to our "Regulation G Reconciliation" note below for more information on this non-GAAP measure


Table of Contents

RESULTS OF OPERATIONS
Second Quarter 2014 vs. 2013
Overview
We reported net income of $230 million, an operating income of $141 million and an operating margin of 9.4% for the three months ended June 30, 2014. This compares to net income of $36 million, operating income of $102 million and an operating margin of 7.6% for the three months ended June 30, 2013. Diluted earnings per share was $0.68 for the second quarter quarter of 2014 compares to $0.11 for the same period in 2013.
Our on-time performance, defined by the Department of Transportation, DOT, as arrival within 14 minutes of scheduled arrival, was 78.9% in the second quarter of 2014 compared to 73.9% for the same period in 2013; our completion factor was 98.3% in the second quarter of 2014 and 99.4% in the same period in 2013. Our on-time performance remains challenged by our concentration of operations in the northeast of the U.S., one of the world's most congested airspaces.

Operating Revenues
                                                                                         Year-over-Year
                                                   Three Months Ended June 30,               Change
(Revenues in millions; percent changes based
on unrounded numbers)                                2014               2013              $           %
Passenger Revenue                              $       1,372       $       1,222     $     150       12.4
Other Revenue                                            121                 113             8        7.0
Operating Revenues                             $       1,493       $       1,335     $     158       11.9

Average Fare                                   $      167.80       $      157.51     $   10.29        6.5
Yield per passenger mile (cents)                       14.25               13.40          0.85        6.3
Passenger revenue per ASM (cents)                      12.05               11.37          0.68        6.0
Operating revenue per ASM (cents)                      13.12               12.42          0.70        5.6
Average stage length (miles)                           1,088               1,088             -          -
Revenue passengers (thousands)                         8,179               7,753           426        5.5
Revenue passenger miles (millions)                     9,632               9,115           517        5.7
Available Seat Miles (ASMs) (millions)                11,386              10,741           645        6.0
Load Factor                                             84.6 %              84.9 %                   (0.3 ) pts.

Passenger revenue is our primary source of revenue, which includes seat revenue as well as revenue from our ancillary product offerings such as EvenMore™ Space. The increase in passenger revenues of $150 million, or 12.4%, for the three months ended June 30, 2014 compared to the same period in 2013 was mainly attributable to the 6.0% increase in capacity and 6.3% increase in the yield per passenger mile.


Table of Contents

Operating Expenses
In detail, operating costs per available seat mile were as follows:
                                                          Year-over-Year
                     Three Months Ended June 30,              Change                      Cents per ASM
(in millions; per
ASM data in cents;
percent changes
based on unrounded
numbers)                  2014             2013           $            %          2014        2013       % Change
Aircraft fuel and
related taxes       $           497     $    465     $      32         6.9         4.37        4.33         0.9
Salaries, wages and
benefits                        316          279            37        13.2         2.78        2.60         6.9
Landing fees and
other rents                      83           80             3         5.0         0.73        0.74        (1.4 )
Depreciation and
amortization                     77           71             6         9.8         0.68        0.66         3.0
Aircraft rent                    31           33            (2 )      (4.8 )       0.27        0.30       (10.0 )
Sales and marketing              69           53            16        27.3         0.61        0.50        22.0
Maintenance
materials and
repairs                         102          111            (9 )      (7.7 )       0.90        1.03       (12.6 )
Other operating
expenses                        177          141            36        25.2         1.54        1.32        16.7
Total operating
expenses            $         1,352     $  1,233     $     119         9.8  %     11.88       11.48         3.5  %

Our operating expenses contain variable costs that increased due to a 5.9% increase in departures and a 6.0% increase in operating capacity. Aircraft Fuel and Hedging
Aircraft fuel and related taxes increased by $32 million, or 6.9% during the second quarter of 2014 compared to the same period in 2013 and remains our largest expense category, representing approximately 37% of our total operating expenses. The average number of aircraft operating during the second quarter of 2014, compared to the same period in 2013, increased by 5.9%, our fuel consumption increased by 6.0%, or 9 million gallons, and the average fuel price per gallon for the second quarter of 2014 increased by 0.9% to $3.09. Losses upon settlement of effective fuel hedges during the second quarter 2014 were $2 million versus losses of $4 million during the same period in 2013. Salaries, Wages and Benefits
Salaries, wages and benefits increased $37 million, or 13.2% for the three months ended June 30, 2014 compared to the same period in 2013. The primary driver was wage rate increases in 2014 as well as additional headcount due to increased ASMs and to address the new FAA flight, duty and rest regulations. Depreciation and Amortization
Depreciation and amortization increased $6 million, or 9.8%, primarily due to primarily due to having an average of 135 owned and capital leased aircraft in service in 2014 compared to 123 in 2013. Sales and Marketing
Sales and marketing increased $16 million, or 27.3%, for the three months ended June 30, 2014 compared to the same period in 2013. In 2014 we launched a large scale advertising campaign across the northeast of the U.S. during spring to help boost our summer revenue. The 2013 campaign was on a smaller scale. Maintenance Materials and Repairs
Maintenance materials and repairs decreased $9 million, or 7.7%, for the three months ended June 30, 2014 compared to the same period in 2013. For the three months ended June 30, 2013, maintenance expense was higher as a result of unplanned EMBRAER 190 aircraft engine removals and performance restorations. In the latter half of 2013 we finalized a flight-hour based maintenance and repair agreement for these engines, improving the predictability of these expenses.


Table of Contents

Six Months Ended June 30, 2014 vs. 2013
Overview
We reported net income of $234 million, an operating income of $182 million and an operating margin of 6.4% for the six months ended June 30, 2014. This compares to net income of $50 million, operating income of $161 million and an operating margin of 6.1% for the six months ended June 30, 2013. Diluted earnings per share was $0.69 for the six months ended June 30, 2014 compares to $0.16 for the same period in 2013.
Approximately 80% of our operations are centered in and around the heavily populated northeast corridor of the U.S., which includes the New York and Boston metropolitan areas. During the first three months of 2014 this area experienced one of the coldest winters in 20 years, with New York City and Boston each experiencing over 57 inches of snow. These weather conditions lead to the cancellation of approximately 4,100 flights, nearly double the amount we canceled in the whole of 2013. These cancellations resulted in a negative impact on of our first quarter seat revenue as well as ancillary revenue such as change fees due to our policy of waiving these fees during more severe weather events.

Operating Revenues
                                                                               Year-over-Year
                                         Six Months Ended June 30,                 Change
(Revenues in millions; percent
changes based on unrounded numbers)       2014               2013              $             %
Passenger Revenue                    $      2,602       $      2,408     $       194          8.1
Other Revenue                                 240                226              14          6.5
Operating Revenues                   $      2,842       $      2,634     $       208          7.9

Average Fare                         $     167.75       $     159.95     $      7.80          4.9
Yield per passenger mile (cents)            14.22              13.66            0.56          4.1
Passenger revenue per ASM (cents)           11.93              11.53            0.40          3.5
Operating revenue per ASM (cents)           13.04              12.61            0.43          3.4
Average stage length (miles)                1,091              1,090               1          0.1
Revenue passengers (thousands)             15,512             15,053             459          3.1
Revenue passenger miles (millions)         18,294             17,621             673          3.8
Available Seat Miles (ASMs)
(millions)                                 21,805             20,881             924          4.4

Load Factor 83.9 % 84.4 % (0.5 ) pts.

The increase in passenger revenues of $194 million, or 8.1%, for the six months ended June 30, 2014 compared to the same period in 2013 was mainly attributable to the 4.4% increase in capacity and 4.1% increase in the yield per passenger mile.


Table of Contents

Operating Expenses
In detail, operating costs per available seat mile were as follows (percent
changes are based on unrounded numbers):
                                                           Year-over-Year
                          Six Months Ended June 30,            Change                    Cents per ASM
(in millions; per ASM
data in cents; percent
changes based on
unrounded numbers)            2014           2013          $            %         2014       2013     % Change
Aircraft fuel and
related taxes            $         961     $   932     $     29        3.1        4.41       4.46       (1.1 )
Salaries, wages and
benefits                           645         559           86       15.4        2.96       2.68       10.4
Landing fees and other
rents                              160         150           10        6.7        0.73       0.72        1.4
Depreciation and
amortization                       155         139           16       11.8        0.71       0.66        7.6
Aircraft rent                       62          65           (3 )     (4.0 )      0.28       0.31       (9.7 )
Sales and marketing                123         103           20       18.5        0.56       0.50       12.0
Maintenance materials
and repairs                        196         225          (29 )    (12.8 )      0.90       1.08      (16.7 )
Other operating expenses           358         300           58       19.7        1.65       1.43       15.4
Total operating expenses $       2,660     $ 2,473     $    187        7.6  %    12.20      11.84        3.0  %

Our operating expenses contain variable costs that increased due to a 4.1% increase in departures and a 4.4% increase in operating capacity. Aircraft Fuel and Hedging
Aircraft fuel expense increased $29 million, or 3.1%, and represented approximately 36% of our total operating expenses. Fuel consumption increased by 15 million gallons or 5.0% mainly due to a 6.5% increase in the average number of operating aircraft in 2014 compared to 2013 as well as a 4.1% increase in departures. This was offset slightly by a decrease in the average fuel cost per gallon from $3.17 in 2013 to $3.11 in 2014. Losses upon settlement of effective fuel hedges during 2014 were $3 million versus losses upon settlement of effective fuel hedges during the same period in 2013 of $4 million. Salaries, Wages and Benefits
Salaries, wages and benefits increased $86 million or 15.4%. The primary driver was wage rate increases in 2014 as well as additional headcount due to increased ASMs and to address the new FAA flight, duty and rest regulations. The prolonged harsh winter weather throughout the first quarter of 2014 resulted in higher than expected salaries for our front-line employees, the majority of whom are paid on an hourly basis. Finally, our average number of full-time equivalent employees in the six months ended June 30, 2014 increased by 3.3% compared to the same period in 2013.
Depreciation and Amortization
Depreciation and amortization increased approximately $16 million, or 11.8%, primarily due to primarily due to having an average of 134 owned and capital leased aircraft in service in 2014 compared to 122 in 2013. Sales and Marketing
Sales and marketing increased $20 million, or 18.5%, for the six months ended June 30, 2014 compared to the same period in 2013. In 2014 we launched a large scale advertising campaign across the Northeast during spring to help boost our summer revenue. The 2013 campaign was on a smaller scale. Maintenance Materials and Repairs
Maintenance materials and repairs decreased approximately $29 million, or 12.8%, for the six months ended June 30, 2014 compared to 2013. For the six months ended June 30, 2013, maintenance expense increased was higher as a result of unplanned EMBRAER 190 aircraft engine removals and performance restorations. In the latter half of 2013 we finalized a flight-hour based maintenance and repair agreement for these engines, improving the predictability of these expenses.


Table of Contents

The following table sets forth our operating statistics for the three and six months ended June 30, 2014 and 2013:

                                                                    Year-over-Year                                            Year-over-Year
                                 Three Months Ended June 30,            Change               Six Months Ended June 30,            Change
                                   2014               2013                %                   2014               2013               %
Operating Statistics:
Revenue passengers
(thousands)                          8,179               7,753              5.5                15,512             15,053              3.1
Revenue passenger miles
(millions)                           9,632               9,115              5.7                18,294             17,621              3.8
Available seat miles
(ASMs) (millions)                   11,386              10,741              6.0                21,805             20,881              4.4
Load factor                           84.6 %              84.9 %           (0.3 )   pts.         83.9 %             84.4 %           (0.5 )   pts.
Aircraft utilization
(hours per day)                       12.0                12.2             (1.9 )                11.8               12.0             (1.9 )

Average fare                 $      167.80       $      157.51              6.5          $     167.75       $     159.95              4.9
Yield per passenger mile
(cents)                              14.25               13.40              6.3                 14.22              13.66              4.1
Passenger revenue per ASM
(cents)                              12.05               11.37              6.0                 11.93              11.53              3.5
Operating revenue per ASM
(cents)                              13.12               12.42              5.6                 13.04              12.61              3.4
Operating expense per ASM
(cents)                              11.88               11.48              3.5                 12.20              11.84              3.0
Operating expense per ASM,
excluding fuel (cents)                7.51                7.15              5.1                  7.79               7.38              5.6
Operating expense per ASM,
excluding fuel & profit
sharing (cents) (1)                   7.51                7.15              5.1                  7.79               7.38              5.6
Airline operating expense
per ASM (cents) (2)                  11.73               11.36              3.3                 12.03              11.70              2.8

Departures                          74,917              70,722              5.9               143,069            137,495              4.1
Average stage length
(miles)                              1,088               1,088                -                 1,091              1,090              0.1
Average number of
operating aircraft during
period                               193.9               183.1              5.9                 193.4              181.7              6.5
Average fuel cost per
gallon, including fuel
taxes                        $        3.09       $        3.06              0.9          $       3.11       $       3.17             (1.8 )
Fuel gallons consumed
(millions)                             161                 152              6.0                   309                294              5.0
Full-time equivalent
employees at period end
(2)                                                                                            13,162             12,743              3.3


__________________________


(1) Refer to our "Regulation G Reconciliation" note below for more information on this non-GAAP measure.

(2) Excludes operating expenses and employees of LiveTV, LLC, which are unrelated to our airline operations and no longer part of JetBlue as at June 30, 2014.

Although we experienced revenue growth throughout 2013 as well as in the first two quarters of 2014, this trend may not continue. We expect our expenses to continue to increase as we acquire additional aircraft, as our fleet ages and as we expand the frequency of flights in existing markets and enter into new markets. Accordingly, the comparison of the financial data for the quarterly periods presented may not be meaningful. In addition, we expect our operating results to fluctuate significantly from quarter-to-quarter in the future as a result of various factors, many of which are outside of our control. Consequently, we believe quarter-to-quarter comparisons of our operating results may not necessarily be meaningful; you should not rely on our results for any one quarter as an indication of our future performance.


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES
The airline business is capital intensive. Our ability to successfully execute our growth plans is largely dependent on the continued availability of capital on attractive terms. In addition, our ability to successfully operate our business depends on maintaining sufficient liquidity. We believe we have adequate resources from a combination of cash and cash equivalents, investment securities on hand and two available lines of credit. Additionally, as of June 30, 2014, we had 34 unencumbered aircraft and 35 unencumbered spare engines that we believe could be an additional source of liquidity, if necessary. We believe a healthy liquidity position is crucial to our ability to weather any part of the economic cycle while continuing to execute on our plans for profitable growth and increased returns. Our goal is to continue to be diligent with our liquidity, maintaining financial flexibility and allowing for prudent capital spending.
At June 30, 2014, we had unrestricted cash and cash equivalents of $454 million and short-term investments of $343 million compared to unrestricted cash and cash equivalents of $225 million and short-term investments of $402 million at December 31, 2013. We believe our current level of unrestricted cash, cash equivalents and short-term investments of approximately 14% of trailing twelve months revenue, combined with our available line of credits and portfolio of unencumbered assets provides us with a strong liquidity position and the potential for higher returns on cash deployment. Analysis of Cash Flows
Operating Activities
We rely primarily on operating cash flows to provide working capital for current and future operations. Cash flows from operating activities were $541 million and $402 million for the six months ended June 30, 2014 and 2013, respectively. Investing Activities
During the six months ended June 30, 2014, capital expenditures related to our purchase of flight equipment included $70 million for flight equipment deposits, $50 million related to the purchase of one Airbus A321 aircraft, $19 million for spare part purchases, $29 million in work-in-progress relating to flight equipment and $2 million relating to other activities. Capital expenditures also include the purchase of the Slots at Reagan National Airport for $75 million, other property and equipment including ground equipment purchases and facilities improvements for $115 million and LiveTV inflight entertainment equipment inventory for $20 million. Investing activities also include the proceeds from the sale of LiveTV for $391 million and the net proceeds of $41 million from investment securities.
During the six months ended June 30, 2013, capital expenditures related to our purchase of flight equipment included $173 million for six aircraft, $10 million for flight equipment deposits and $18 million for spare part purchases. Capital expenditures for other property and equipment, including ground equipment purchases, facilities improvements and LiveTV inflight-entertainment equipment inventory were $76 million, including $25 million in T5i project related costs. Investing activities also include the net purchase of $71 million in investment securities.
Financing Activities
Financing activities for the six months ended June 30, 2014 consisted of scheduled repayment of $281 million of debt and capital lease obligations, $306 million of debt prepayment, our issuance of $307 million in fixed rate equipment notes secured by 18 aircraft, the acquisition of $82 million in treasury shares related to our share repurchase program and the repayment of $7 million in principal related to our construction obligation for T5. We may in the future issue, in one or more offerings, debt securities, pass-through certificates, common stock, preferred stock and/or other securities.
Financing activities for the six months ended June 30, 2013 consisted of scheduled maturities of $152 million of debt and capital lease obligations, our issuance of $120 million in fixed rate equipment notes secured by five aircraft, the refunding of our Series 2005 GOAA bonds with proceeds of $43 million from the issuance of new 2013 GOAA bonds, the repayment of $6 million in principal related to our construction obligation for Terminal 5 and the acquisition of $8 million in treasury shares related to our share repurchase program and the withholding of taxes upon the vesting of restricted stock units. Working Capital
We had a working capital deficit of $669 million and $818 million at June 30, 2014 and December 31, 2013, respectively. Working capital deficits can be customary in the airline industry since air traffic liability is classified as a current liability. Our working capital deficit decreased by $149 million due to several factors including a decrease in the balance of current debt maturities as well as an overall increase in our cash balances. These were slightly offset by an increase in air traffic liability as a result of seasonal travel trends.


Table of Contents

We expect to meet our obligations as they become due through available cash, investment securities and internally generated funds, supplemented as necessary by financing activities, as they may be available to us. We expect to generate positive working capital through our operations. However, we cannot predict what the effect on our business might be from the extremely competitive environment we are operating in or from events beyond our control, such as volatile fuel prices, economic conditions, weather-related disruptions, the impact of airline bankruptcies, restructurings or consolidations, U.S. military actions or acts of terrorism. We believe the working capital available to us will be sufficient to meet our cash requirements for at least the next 12 months. . . .

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