JetBlue‘s (NASDAQ:JBLU) revenues increased by 8% year-over-year to $1.2 billion in the first quarter on higher passenger traffic. However, the carrier’s profits declined by 53% y-o-y to $14 million due to higher aircraft maintenance expenses.  The carrier also said in its earnings release that Superstorm Sandy impacted the demand from Northeast United States during the Presidents’ Day travel period, which weighed on its revenues and profits in the first quarter.
Looking ahead, JetBlue anticipates to continue to drive growth in its top line by raising its flying capacity. Its profits in the second quarter are also expected to benefit from softness in crude oil prices. However, the rising maintenance costs will likely continue to weigh on its profits.
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We currently have a stock price estimate of $7.50 for JetBlue, around 10% ahead of its current market price.
Capacity Increases Drive Growth
In the first quarter, JetBlue unlike some its larger rivals including United (NYSE:UAL) and Delta (NYSE:DAL) hiked its flying capacity by over 6% y-o-y focusing on routes connecting Boston and the Caribbean markets. This growth in the carrier’s flying capacity raised its passenger traffic by nearly 8% y-o-y.  JetBlue also realized higher average fares in the first quarter compared to the year ago period. Together, the higher passenger traffic and fares ensured strong growth in the carrier’s top line.
Further, this revenue growth would have been even higher had it not been for the lingering impact from Superstorm on the demand environment from the Northeast. JetBlue, which gets a large portion of its passenger traffic from this region estimated that it incurred an impact of around $25 million on its top line in the first quarter due to this Superstorm-related demand weakness. 
Steep Growth In Maintenance Costs Impacts Margins
Additionally, in the first quarter, JetBlue’s maintenance and repair costs continued to grow at high rates driven by its Embraer 190 aircraft fleet. JetBlue currently operates one of the youngest aircraft fleet in the U.S. airline industry. The average age of its aircraft was 6.7 years at the end of 2012; however, with increasing age its aircraft require heavier and more frequent maintenance checks. Last year, JetBlue’s maintenance and aircraft repair costs had increased by nearly 50% on a year-over-year basis.  In the first quarter, these costs increased at a more measured pace of around 30% on a y-o-y basis, but still outpaced the 8% revenue growth to weigh on profits. As a result, the carrier’s operating margin declined to 4.5% in the first quarter, from 7.4% in the prior year period. 
Second Quarter Outlook
Looking ahead, we anticipate JetBlue’s maintenance costs to grow at more measured rates. The carrier forecasts its cost (excluding fuel) per unit flying capacity to grow by 3%-5% y-o-y in the second quarter.  On the bright side, JetBlue will continue to benefit from its aggressive stance on capacity growth. The carrier anticipates to raise its flying capacity between 6.5% and 8.5% in the second quarter on a y-o-y basis. This will likely continue to drive growth in its passenger traffic. Notes: