JetBlue’s Profits Double Driven By Revenue Growth And Fuel Cost Savings

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JetBlue Airways

JetBlue Airways Corporation (NASDAQ: JBLU), which released its second quarter operating results on Tuesday, 28th July 2015, posted an adjusted net income of $152 million, or $0.44 per share((JetBlue Announces Second Quarter Results, 28th July 2015, www.jetblue.com)), more than twice the profits earned a year ago. The low cost carrier delivered an 8% increase in its consolidated revenue driven by a solid capacity growth and higher passenger unit revenues during the quarter. Further, as expected, lower fuel prices continued to boost the airline’s earnings. With strong domestic demand and aggressive capacity expansion plans, coupled with sustained lower fuel prices, we expect JetBlue to deliver a notable increase in its earnings even in the next quarter. Here’s a quick look at the key highlights of JetBlue’s second quarter earnings.

Our price estimate for JetBlue stands at $22 per share, approximately 2% behind its current market price.

See Our Complete Analysis For JetBlue Airways Here

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Capacity Additions And Strong Unit Revenue Result In Revenue Growth

In its quest to capture a larger market share, JetBlue continued to grow its capacity at a high rate during the June quarter. Even as the fear of a surplus of seats in the domestic market shadowed the industry, the New York-based airline increased its system capacity by 7.5%, matching the higher end of its guidance for the quarter. This directed the airline’s passenger traffic to go up by 8.7% and its load factor (number of passengers flown per flight) to improve by 100 basis points to 85.6% in the last three months((JetBlue’s Second Quarter 2015 Results)). Unlike its competitors who have experienced a sharp decline in their unit revenues due to rising pricing pressure, JetBlue’s high exposure to the domestic market allowed the airline to surpass the foreign currency headwinds, resulting in a 1.4% rise in its unit revenue, in line with the airline’s previous guidance. All these factors enabled the low cost carrier to report a consolidated revenue of $1.61 billion, 8% higher than last year, matching the analyst estimate.

JBLU_price

Source: Google Finance

Fuel Costs Continue To Enhance Margins

During the second quarter, JetBlue had approximately 19% of its fuel costs hedged which helped the airline to realize an average fuel price of $2.13 per gallon for the quarter((JetBlue’s Second Quarter 2015 Results)), 31% lower compared to the second quarter of 2014. This resulted in cost savings of $126 million, which were partly offset by a 19% increase in the labor costs and a 0.6% rise in the unit costs (excluding fuel and special items). Despite this, the low cost carrier delivered an operating margin of 17.5%, 8.1% higher than last year. Consequently, JetBlue reported an adjusted net profit of $152 million, almost 1.5 times higher than its net profit in the same quarter of 2014. The airline’s earnings per share for the latest quarter was $0.44 per share, in line with the market expectations.

JBLU margin

Source: Bank of America Merrill Lynch 2015 Transportation Conference

Improving Balance Sheet

In the June quarter, JetBlue repaid $39 million((JetBlue’s Second Quarter 2015 Results)) in scheduled debt and capital lease obligations, and prepaid $84 million in additional debt. In the third quarter, the airline expects to repay debt of $54 million, while continuing to look for favorable opportunities to prepay its debt. In addition, the low cost carrier announced an Accelerated Share Repurchase program last month, under which it has already repurchased 6.1 million shares for $150 million. This indicates that the airline is working towards building a stronger balance sheet. However, the airline still does not declare any dividends to its shareholders, unlike the legacy carriers.

JBLU BS

Source: Bank of America Merrill Lynch 2015 Transportation Conference

Outlook

JetBlue expects to grow its third quarter capacity at 8.5%-10.5%((JetBlue’s Investor Update, 28th July 2015, www.jetblue.com)), while it aims to close the year with a full year capacity increase of 7%-9%. In order to benefit from the weak crude oil prices, the airline has reduced its hedging exposure to 14%-15% for the remaining half of 2015. The low cost carrier anticipates its fuel prices for the September quarter to average at $1.95 per gallon. However, the airline projects its unit costs (excluding fuel and special items) to increase between 1% and 3% in the next quarter. While JetBlue does not provide any guidance for its unit revenue for the third quarter, we forecast the metrics to remain flat or improve slightly, similar to the second quarter, driven by the airline’s dominance in the domestic markets.

In a nutshell, we expect JetBlue’s capacity expansions and strong domestic presence to drive its revenue growth in the third quarter, while the fuel cost advantage enjoyed by the airlines, in general, will bolster its earnings for the rest of 2015.

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