How Has JetBlue’s Financial Position Improved Over The Last Few Years?
The U.S. airline industry, plagued by a host of problems, is considered a laggard by most investors. From 1977 to 2009, the sector suffered combined losses of over $52 billion. The economic slowdown in 2009-2010 further worsened matters for the airlines, forcing carriers to cut their capacity to match the lower demand for air travel. Although a slight improvement began to be seen in air travel demand in 2010, carriers remained cautious with heavy losses on their balance sheet to cope with. The continued capacity discipline, despite enabling the airlines to raise their air fares and reduce losses, were hardly sufficient to pull the industry out of losses. The massive debt build-up during the period was too much for the industry, causing many to go bankrupt, and ultimately be acquired.
However, the crash of oil prices in 2014 flipped the picture, leading to a windfall of profits for most airlines, which had been under immense pressure to generate revenues under a slowing world economy. Taking advantage of this, airlines, specifically JetBlue, started upgrading their existing fleet, deleveraging the debt built-up on their balance sheets, and providing returns to their shareholders. In this note, we talk about JetBlue’s efforts at deleveraging the debt built-up on its balance sheet, and the consequent change in the company’s financial condition since the start of the oil slump in 2014.
We start with the debt-to-capital ratio, which indicates a company’s debt proportion in its total capital structure. Historically, JetBlue has had a debt-to-total capital ratio of close to 50%, which implies that roughly one-half of its capital structure constituted of long-term debt. However, with the onset of the decline in crude oil prices, the company’s cash flows began to increase significantly, allowing it to repay some of the debt it had built up over the years. The pay-down of debt is a positive for investors who have seen their equity diluted year over year, as JetBlue issued a greater number of shares to fuel growth. In its latest earnings call, the company’s management stated that it will continue paying for new aircraft in all-cash transactions to avoid further dilution of equity, at least in the near future. Furthermore, it seems more than likely that the low-cost carrier will soon be able to achieve its intended debt to capital ratio target.
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Secondly, we analyze JetBlue’s Net Debt-to-EBITDA ratio. This metric shows the number of years that a company would require to repay its long-term debt (excluding cash and cash equivalents) at the current rate of profits. Since 2013, JetBlue’s Net Debt-to-EBITDA ratio has been seen decreasing, implying that the company’s ability to meet its long-term debt obligations has improved significantly over time.
Finally, we discuss the company’s interest coverage ratio, which shows a company’s ability to fulfill its interest obligations. As discussed above, JetBlue’s long-term debt obligations have decreased notably over the last few years, as oil prices crashed in 2014. Correspondingly, the carrier’s interest obligations also came down consequently. With higher operating profits and lower interest expense, JetBlue saw its interest coverage ratio declining. This indicates an improvement in its ability to meet its interest requirements.
The company’s efforts are expected to help it execute the share-buyback its board of directors approved in September 2015. Further, while some recovery is being seen in oil prices, they are still much lower than the highs of $100 per barrel touched in 2012. This should enable the low-cost carrier to keep ahead, by returning a significant part of its profits to shareholders from the increased cash flows from its operations.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for JetBlue Corporation
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