Weather Impact Outweighs Gains From Capacity Expansion To Clip JetBlue’s Profit

JetBlue (NYSE:JBLU) posted moderate growth in its first quarter revenues as gains from capacity expansion and solid demand environment were tempered by severe winter weather. As nearly 80% of JetBlue’s flights are concentrated in the northeast U.S. it was significantly impacted by winter storms. ^[1] During the quarter, the carrier cancelled approximately 4,100 flights due to inclement weather conditions. To provide perspective, this is twice the number of flights that the carrier cancelled in all of 2013. As a result, JetBlue’s first quarter revenues rose at a relatively slow rate of 4% annually to 1.35 billion, but its profits fell to $4 million in the quarter, from $14 million in the same period last year. ^[2]

See our complete analysis of JetBlue here. We are in the process of incorporating first quarter earnings and shall update our analysis shortly.

Weather Impact Tones Down Growth In JetBlue’s Flying Capacity

JetBlue’s first quarter revenues were driven by its capacity expansion. The carrier raised its flying capacity by 2.7% annually in the first quarter. This capacity growth rate was well below what JetBlue had hoped for, but the inclement weather conditions forced the carrier to expand its capacity at a slower rate. Flight cancellations also weighed on the first quarter capacity growth. Nonetheless, the moderate growth in capacity raised JetBlue’s first quarter passenger traffic by nearly 2% annually. Coupled with higher unit revenues – the amount collected from passengers for a seat per mile of flight – the carrier’s passenger revenues rose by nearly 4% annually in the first quarter. ^[2]

Cost Pressure From Rising Pilot Salaries

JetBlue’s first quarter profits dipped as its operating costs grew at a higher rate of nearly 6% per year. The growth in the carrier’s operating costs was led by employee salaries, which increased by 18% year-over-year to $329 million in the first quarter. ^[2] The carrier’s first quarter salary costs faced pressure from rising pilot compensations. And, we figure this pressure could increase in the coming years as JetBlue’s pilots recently voted to be represented by a union, Air Line Pilots Association.

On the bright side, the carrier in the coming months will benefit from higher cost efficiency of its fleet, as it continues to add more cost efficient Airbus A321s. During the first quarter presentation, the company said that the newly added Airbus A321s are 10-15% more cost efficient than its current fleet of Airbus A320s. The carrier also said that installation of sharklets (curved extensions on wing tips) on its Airbus A320s is providing 3-4% improvement in fuel efficiency on long haul transcontinental routes. ^[1]

Seprately, JetBlue also said that in the coming months it will lower its debt load from the proceeds of its LiveTV sale. Last week, the carrier announced the sale of its LiveTV subsidiary, which provides in-flight entertainment systems and WiFi technology, to Thales Group for $400 million. The carrier said that it will use proceeds from this sale to prepay around $200-300 million of its debt in 2014. ^[1] We figure this will lower the carrier’s interest costs in 2014 and also help in propping up its profits.

Outlook

In the second quarter, JetBlue plans to add capacity at a higher rate of around 5.5-7.5%, on a year-over-year basis. For full year 2014, the carrier anticipates its flying capacity to be up by 4-6%, compared to its capacity in 2013. ^[2] We figure this higher rate of capacity addition will likely grow JetBlue’s profits in the remaining quarters of 2014 as the demand for air travel is likely to remain solid through the year.

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1. JetBlue’s 2014 Q1 earnings transcript, April 24 2014, www.jetblue.com [↩] [↩] [↩]
2. JetBlue’s 2014 Q1 earnings form 8-K, April 24 2014, www.jetblue.com [↩] [↩] [↩] [↩]