JetBlue (NASDAQ:JBLU) will announce its third quarter earnings Thursday, October 25.  The airline posted strong numbers in the first half of 2012 with revenues at $2.3 billion, up 16% y-o-y, and operating income of $219 million, up 67% y-o-y.  The strong growth in performance was driven by higher passenger traffic aided by significant capacity expansion.
The airline continued to expand its capacity while maintaining the load factor in the third quarter. Hence passenger traffic continued to grow. In addition, passenger fares indicated by passenger revenue per available seat mile (PRASM) were higher in two out of the three months of the third quarter on a y-o-y basis. Hence, we expect to see strong y-o-y growth in overall passenger revenue. However, margins will continue to be impacted from rising maintenance costs due to the airline’s aging fleet. Fuel costs are not expected to vary much on a y-o-y basis. All in all, JetBlue will post good numbers in its Q3 earnings.
We currently have a stock price estimate of $5.80 for the airline, approximately 10% above its current market price.
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Higher passenger traffic to drive growth in third quarter earnings
JetBlue has been raising its capacity with an emphasis on Latin and Caribbean international routes. The carrier anticipates to increase its 2012 capacity between 6.5% and 8.5% over 2011. 
In the third quarter, available seat miles (ASM), an indicator of capacity, increased by 5.5%, 12.8% and 7.7% in July, August and September, respectively, on a y-o-y basis. Aided by significant capacity expansions, passenger traffic, indicated by revenue passenger miles (RPM), increased 7.1%, 13.1% and 6.1% in July, August and September, respectively, on a y-o-y basis. In addition, the airline in its monthly traffic reports indicated that its PRASM increased by 3% y-o-y each in July and August, and declined by 4% y-o-y in September.   
Overall we expect passenger revenue for the carrier will post good growth in the third quarter.
Increasing maintenance costs to continue to impact margins
However, margins for the airline will continue to be impacted by rising aircraft maintenance costs. As of June 30, 2012, the oldest aircraft in JetBlue’s fleet was 12.6 years old, and the average age of its entire fleet was 6.3 years.  This represents one of the youngest fleets among all of the major airlines in the U.S. However, with the increasing age, the fleet now requires costlier and heavier maintenance checks. The carrier forecasts a significant rise in its maintenance costs in 2012 compared to 2011. In the first half of 2012, maintenance costs increased 63% y-o-y to $173 million.  In the third quarter, we anticipate the rising costs to continue to impact margins.
Fuel costs not expected to vary much on a y-o-y basis
The carrier anticipates to incur an average fuel price of $3.13 per gallon in the third quarter.  This estimate was based on the price of crude oil in mid-July of around $102 per barrel (Brent). However, crude oil prices increased from these levels to remain above $110 per barrel for the most part of the third quarter.  Hence, we expect JetBlue to incur a higher average fuel price per gallon in the third quarter than it anticipates. In the third quarter of 2011, the airline had incurred an average fuel price of $3.25 per gallon. 
On the whole, JetBlue will post decent growth in its third quarter earnings driven by higher passenger traffic partially offset by higher maintenance costs.Notes:
- JetBlue Announces Webcast Of Third Quarter 2012 Earnings Conference Call, October 11 2012, www.jetblue.com [↩]
- JetBlue Announces Second Quarter Results, July 25 2012, www.jetblue.com [↩] [↩] [↩] [↩]
- JetBlue Airways Reports July Traffic, August 10 2012, www.jetblue.com [↩]
- JetBlue Airways Reports August Traffic, Sept 13 2012, www.jetblue.com [↩]
- JetBlue Airways Reports September Traffic, October 10 2012, www.jetblue.com [↩]
- 2012 Q2 10-Q, www.jetblue.com [↩]
- Oil price performance in the last 6 months, www.moneyweek.com [↩]
- JetBlue Announces 2011 Third Quarter Results, October 26 2011, www.jetblue.com [↩]