JetBlue’s Capacity Discipline To Result In Improvement In Top Line In Q4’16, Costs To Remain A Drag

JetBlue Corporation (NYSE:JBLU) is slated to release its quarterly and full year earnings on the 26th of January, 2017. The company having missed the consensus estimate for earnings slightly in Q3’16, was seen to be trading almost 3% lower. However, since then the carrier’s stock price has recovered, probably on the back of improvement in unit revenues and continued success of its premium seating Mint program. In the upcoming quarterly results, we expect the company to grow its revenues at a moderate pace due to disciplined capacity growth and jump in yields. However, the bottom line may continue to suffer due to higher unit costs. In the following article we discuss some of the trends which are expected to be seen in the upcoming quarterly results.

Key Trends:

• JetBlue revised its capacity guidance for the full year to 8% – 9%, and for the fourth quarter to 3% – 5%. This was done to manage its declining unit revenues and increasing fuel cost. Yet, its capacity growth still remains fairly high as compared to its peers. However, the relative reduction in capacity is likely to arrest the free fall seen in the unit revenues for most of the year.

• The carrier’s unit revenues declined in the 8%-10% range in the first two quarters of FY 2016. The decline was seen decreasing in Q3’16, attributable to capacity reduction, and improvement in yields in Latin America, Colombia, and the Dominican Republic. The fourth quarter PRASM numbers are expected to be much better than those seen in the year so far, mainly due the strong booking seen during the holiday season (November and December).

• We have recently seen some recovery in oil prices, owing to the OPEC countries’ decision to restrict their combined oil output to 1.2 million barrels of oil per day (Mbpd) over the coming months. In addition to this, the Non-OPEC members, such as Russia, also supported the OPEC’s move by offering to bring down their production by roughly 600,000 barrels of oil per day. In response to the news, crude oil prices shot up by around 10% over the last one month of the year, reinforcing to investors that the commodity markets are on the path of recovery. The increase is likely to impact the airline’s fuel expenditure, but not by much, as the prices continue to be much lower than the historical $100 per barrel.

• The company is concentrating on cutting its non-fuel expenditure by promoting operational expertise, to offset higher fuel costs. However, after falling for the first two quarters, JetBlue’s unit costs began increasing in the third quarter. The increase in unit costs is mainly attributable to higher salaries and maintenance expenses incurred in the quarter. The trend is expected to be sticky in the fourth quarter. Unit costs, excluding fuel, are expected to grow at 4.5% – 6.5% y-o-y in the fourth quarter. Consequently, we can expect the operating margins to decline slightly.

• Furthermore, the company’s operations in the quarter will be impacted by the Hurricane Matthew, which hit Central Florida in October. The hurricane led to 585 cancellations. As the timings of the Hurricane coincided with a major holiday in October, we may expect to see pre-tax profit being negatively affected by about $13 million.

Have more questions about JetBlue Corporation (NYSE:JBLU)? See the links below:

• How Has JetBlue Performed In Comparison To Its Peers?
• How Will The Mint Program Contribute Towards JetBlue’s Long Term Growth?
• The Increasing Significance Of Ancillary Services In The Aviation Industry
• What Are The Initiatives Undertaken By JetBlue To Ensure Sustained Growth?
• JetBlue’s Operations In Boston And Its Struggle To Maintain Dominance
• Millennials And Their Increasing Contribution Toward Air Travel
• How Did JetBlue Perform Operationally In October?
• Higher Expenses Weigh On JetBlue’s Q3’16 Results, Even As Unit Revenues Improve
• JetBlue’s Q3’16 Earnings Preview: Reduction In Capacity Expansion To Arrest The Decline In Unit Revenues
• How Did JetBlue Perform Operationally In September?
• How Has The State Of Air Travel In The U.S. Changed Over The Years?
• How Has JetBlue’s Financial Position Improved Over The Last Few Years?
• Is Renewable Diesel The Way Forward For The U.S. Aviation Industry?
• How Did JetBlue Perform Operationally In August?
• Can Passenger Airlines Revive The Growth In The Air Cargo Industry?
• How Are The U.S. Carriers Taking Advantage Of The Restoration Of Diplomatic Ties Between U.S. And Mexico/Cuba?
• How Are US Air Fares Correlated To Crude Oil Prices?

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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