JetBlue’s 2Q2010 net rises to USD30 million - but expanding too rapidly?

"Rogue" capacity?

Its 8% growth rate this year - the largest at any carrier - immediately prompted speculation that JetBlue was an airline that has gone "rogue" on capacity. ASMs for the third quarter are expected to increase 6-8% and, in the fourth quarter between 9-11% for a full year capacity increase of 6-8% consistent with its previous guidance. During US Airways' call when an analyst asked CEO Doug Parker about whether, with growing cash piles, airlines would be tempted to break the disciplined capacity approach and "go rogue", Parker's answer was decidedly "no" when it comes to his airline.

Despite JetBlue's high growth rate in a volatile economic environment, its growth is strategic and based on the necessity to diversify the mix of passengers from leisure to both leisure and business, something all low-cost carriers have been doing in the past few years in an effort to sustain their growth. Indeed, that is why Milwaukee has become so valuable to AirTran.

It is also why the two new markets set to be added from Boston this year make sense - Phoenix and Sarasota. It is all about listening to the business community there and providing what they want, according to Barger, who described Boston as a true business market and reported that competitive capacity there is flat in the third quarter and the city is producing solid year-on-year RASM. RASM is already exceeding expectations in the market.

"The headline is our commitment in Boston is very significant," said CFO Ed Barnes. "When you look at ASMs up 30% it means we are becoming more relevant to the business flyer and the financial [and] college community there. That is, in large part, what is driving what is happening there. We are the largest carrier excluding our partners Aer Lingus, American, Lufthansa and Cape Air. We couldn't be more pleased. We will be adding Washington National in November and when you look at the prices there and the type of aircraft being used our experience is these markets mature very quickly."

CEO Dave Barger agreed. "What is nice about Boston is it has diversified our network," he said. "Before, we were viewed as just a New York airline."

One might say JetBlue is expanding at a questionable time - in the teeth of the storm - but its results and its balance sheet are highly respectable in this environment, despite its transition to Sabre and the Kennedy Bay Runway closing. It is right in there with the rest of the carriers reporting this week.

Rather than "going rogue," the carrier is expanding opportunistically to take advantage of the cutbacks made by legacies such as the US Airways departure from Boston and the falling legacy capacity in the Caribbean, which, with Latin America, is expected to be 20% of capacity this year. No one would question the value of going into Washington National, a very high fare market.

Eyes on international

It is even dipping a toe in the international market, which can only be described as the next logical step in the low-cost carrier development in the United States. Most LCCs are contemplating international and JetBlue is already there. The rest will follow before the decade is over and more probably before 2015.

The value of these markets - especially Boston - will bear more than enough fruit not only in capturing the loyalty of Bostonians, but in what the airline can offer its growing list of partners, which was expanded to six yesterday with the addition of El Al. Barger pointed out there are 70 international carriers serving Kennedy making the upside extremely bright. In addition, it is retaining flat capacity in all other markets.

Key to its strategy is its open architecture affording the numerous agreements with international carriers. "We are the largest carrier at Kennedy and the largest domestic airline now in New York and Boston and we are offering the kind of connectivity that is valuable," said Barger. "We are dedicating significant time and attention to the open architecture and we think it will be quite lucrative and grow in the future. This is really positive for the brand."

Its new deal with American to interline at Kennedy is illustrative of the fact it sits in a very valuable position at Kennedy. Despite that, Barger indicated that it was still a very aggressive competitor against its new partner when it comes to the Caribbean.

The airline reported that improving economic conditions are having a positive impact on demand, with total revenues up 16.4% and unit revenues 10.4% higher in the second quarter, exceeding the company's expectations even as capacity increased 5.5%. Average fares were at USD139, a 10% improvement from 2Q2009. Clearly, JetBlue is doing something right.

Sabre rattlin'

JetBlue is already yielding benefits from its Sabre transition which were seen as early as February. With the improved functionality, JetBlue was able to add several classes to the fare structure on its Even More Legroom (EML) product which now has 11 price points based on customer demand and a particular route rather than length of haul. That is expected to add USD10 million to the airline in the second half.

It is also adding a feature to EML to begin 1-Sept-2010 when EML passengers can also opt for early boarding. Mr Barnes reported such functionality is driving its PRASM performance, which was up 5% in April, 13% in May and 18% in June for a second quarter PRASM that was 5.3% over 2Q2008. Passenger unit revenues were up 11.7% in the second quarter, an improvement, he said, over the 4.9% year on year improvement posted in the first quarter.

He added that recent booking trends are encouraging and the carrier is continuing to experience strong yields and load factor. From the data so far, July PRASM was up 15% year on year. While it has limited visibility beyond August, said Barger, JetBlue is expected to benefit from an improving demand environment, rising yields, Sabre's functionality and a better mix of business/leisure traffic, especially out of Boston.

Barnes pointed out that the carrier is now benefiting from the maturation of the markets it added last year. In the fourth quarter only 3% of ASMs will come from markets opened less than 12 months, compared to 8% in the 4Q2009.

Ancillary revenues lagged as it continued to waive change fees on the transition to Sabre. But passenger revenues, combined with other revenues, combined to yield USD18 per person in ancillary revenues, said Barnes. In addition, the waivers are going away. JetBlue is also enhancing its sales capability through Sabre, rolling out ShopTrue, the airline's new online earn mall. Powered by Points International Ltd, passengers can now accrue points for everyday purchases with more than 800 participating retailers including K-Mart, Nordstrom, eBay, the Apple Store and Dell. The next phase will be developing its vacation packaging which should start to produce an impact by the second half of 2011.

2Q results

"We are pleased to report a return to profitability in the second quarter with our highest-ever quarterly operating income," said Mr Barger. "During the quarter, we reported record revenues, reflecting an improved demand environment. Our second quarter results demonstrate the progress we are making to strengthen our network in Boston and New York, maximise revenues, control costs and maintain a long-term sustainable growth rate."

It reported the highest ever quarterly operating income of USD94 million up USD18 million from the year-go period. This was driven by a USD132 million increase in revenue offset by a USD114 million increase in operating expense, including USD43 million higher fuel expense. JetBlue reported a 10.1% operating margin up from 9.4% in the year-ago period.

Revenue passenger miles for the second quarter increased 8.9% to 7.1 billion on a 5.5% increase in capacity, resulting in a second quarter load factor of 82.0%, an increase of 2.5 points year over year.

Yield per passenger mile in the second quarter was 11.93 cents, up 8.2% compared to the second quarter of 2009. Passenger revenue per available seat mile (PRASM) for the second quarter 2010 increased 11.7% year on year to 9.78 cents and operating revenue per available seat mile (RASM) increased 10.4% year on year to 10.81 cents.

Operating expenses for the quarter increased 15.5%, or $114 million, over the prior-year period. JetBlue's operating expense per available seat mile (CASM) for the second quarter increased 9.5% year on year to 9.72 cents. Excluding fuel, CASM increased 8.2% to 6.51 cents. Unit operating expenses for the third quarter are expected to be up between 2-5% and between 6-8% for the full year.

JetBlue ended the second quarter with approximately USD1 billion in unrestricted cash and short term investments, essentially unchanged from the end of the first quarter. "Our operating cash flow allowed us to make prudent investments in the business while maintaining a strong liquidity balance," said Barnes, adding the carrier expects to end the year with cash as a percentage of 12 months trailing revenue at 25%.

In July, UBS repurchased USD49 million in par value of JetBlue's auction rate securities. JetBlue used the proceeds from this sale to repay a USD40 million loan from UBS, which was secured by the repurchased auction rate securities. As a result of this sale, JetBlue no longer holds any auction rate securities.

Guidance

"We are encouraged by the strengthening revenue environment as we continue to develop additional revenue streams with Sabre, our new customer service and reservations system," said Barnes. "With some of our biggest challenges behind us - including the closure of JFK Airport's principal runway and the implementation of Sabre - we are optimistic about the rest of the year."

For the third quarter of 2010, PRASM is expected to increase between 12-15% year-on-year. RASM is expected to increase between 11-14% year-on-year. CASM is expected to increase between 3-5% over the year-ago period. Excluding fuel, CASM in the third quarter is expected to increase between 3-4% year-on-year.

PRASM for the full year is expected to increase between 9-12% year-on-year. RASM is expected to increase between 8-11%. CASM for the full year is expected to increase between 6-8% over full year 2009. Excluding fuel, CASM in 2010 is expected to increase between 4-6%.

JetBlue is projecting third quarter net income between zero and USD15 million and for the full year between zero and USD57 million