netrashetty
Netra Shetty
JetBlue Airways Corporation (NASDAQ: JBLU) is an American low-cost airline. The company is headquartered in the Forest Hills neighborhood of the New York City borough of Queens. Its main base is John F. Kennedy International Airport, also in Queens.
In 2001, JetBlue began a focus city operation at Long Beach Airport in Long Beach, California, and another at Boston's Logan International Airport, in 2004. It also has focus city operations at Fort Lauderdale – Hollywood International Airport, Orlando International Airport and at Luis Muñoz Marín International Airport in San Juan. The airline mainly serves destinations in the United States, along with flights to the Caribbean, The Bahamas, Bermuda, Colombia, Costa Rica, Dominican Republic, Jamaica, and Mexico. As of November 19, 2010 JetBlue serves 63 destinations in 22 states (including Puerto Rico), and eleven countries in the Caribbean and Latin America.[1]
JetBlue maintains a corporate office in Cottonwood Heights, Utah, a satellite office in Darien, Connecticut, and its Information Technology center in Garden City, New York.[1][6][7] JetBlue is a non-union airline.[1][8]
JetBlue Airways Co. (Nasdaq:JBLU) is the 7th largest passenger carrier in the United States based on revenue passenger miles as reported by those airlines.[1] JetBlue operates primarily on point-to-point routes with its fleet of 110 Airbus A320 aircraft and 41 EMBRAER 190 aircraft.[1] Thus, as of 2009, JetBlue has 151 aircrafts with a combined average age of 4.3 years — the youngest and most fuel-efficient fleet of any major U.S. airline.[2] [1] JetBlue operates mainly in the Newark International Airport and in New York's John F. Kennedy International Airport, botof which are one of the busiest domestic airports in the nation.[1] As of 2009, JetBlue commanded 40% of all domestic traffic in New York's JFK Airport.[1]
Due to the decrease in fuel between 4Q 2008 and 2Q 2009, JetBlue has abstained from hedging fuel since the end of 2008 and resumed hedging once prices stabilized in the second quarter of 2009.[1] At December 31, 2009, the company had hedged approximately 40% of its projected 2010 fuel requirements and 3% of its projected 2011 fuel requirements.[1] For 2010, JetBlue has hedged 45% of its full-year fuel needs. This is because JetBlue paid on average $2.08 per gallon of fuel in the 4th quarter due to decreasing fuel costs. Operating income improved by $15 million driven by a $56 million decrease in fuel costs. The decrease in fuel costs was the reason for a 4th quarter 2009 net income of $11 million, and a 2009 net income of $58 million. This is a $143 million improvement since 2008.[2] However, in 2009, JetBlue left its available seat miles (ASM) flat in comparison to 2008. JetBlue maintains a goal of 5%-7% increase in ASM for 2010.[2] This is in agreement with its expectation to increase cost per available seat mile by 5% to 7% compared to 2007 and 2008.[2]
Contents
1 Business Overview
1.1 Financial Analysis
1.1.1 2010 Fourth Quarter Overview
1.1.2 2010 Third Quarter Overview
1.1.3 2010 Second Quarter Overview
1.1.4 2010 First Quarter Overview
1.1.5 2009 Overview
1.1.6 2008 Highlights
2 Trends and Forces
2.1 Airline industries are more sensitive to the economy than other industries
2.2 Increases in Fuel Prices Hurt Financial Performance
2.3 Aging Fleet Leads to Rising Operating Expenses
2.4 Dependence on New York Metropolitan Market Jeopardizes Operations
3 Competition
4 Market Share
5 References
Business Overview
JetBlue Airways specializes in cheap point-to-point flights with high levels of customer service. As of December 31, 2009, the company provided service to 60 destinations in 20 states, Puerto Rico, and eleven countries in the Caribbean and Latin America.[1] JBLU is the 7th largest airline in the United States by revenue passenger miles, operating 600 flights daily.[1] The company is able to maintain its industry-low CASM of 9.24 cents through aircraft efficiency and distribution costs.[1] It has the youngest aircraft fleet in the industry with an average age of 4.3 years in 2010, which reduces maintenance expenses, and it operates its aircraft for 12.1 hours a day, which is the highest in the industry.[1] Also, in 2008, over 77% of sales were booked through its website, which reduces operating costs. Most of its flights originate from five main airports, including Boston, Fort Lauderdale, Long Beach (CA), New York City, and Washington D.C, with New York City's JFK airport as its primary operating airport. In 2009, JetBlue represented the largest domestic airline operating at JFK airport by passengers enplaned, commanding 40% of all domestic passenger traffic.[1] JBLU's average fare in 2009 was $130.41, second-best to Southwest's average $114.61.[3][4]
Like its competitor Southwest Airlines, JetBlue offers low fares while maintaining low operating expenses through low distribution costs, high employee productivity, and use of only two types of aircraft in its fleet.[5] For example - JetBlue employed approximately 99 employees per aircraft[6] significantly less than other major airlines, which employ an average of 127 employees per aircraft, but more than Southwest, which employees 89 people per aircraft.[6]
Financial Analysis
2010 Fourth Quarter Overview
JetBlue reported a total fourth quarter revenue of $940 million, a 13.1% increase in revenue since year-ago fourth quarter.[7] However, operating income decreased 8.9% due to a 14.9% increase in operating expenses, leaving the operating margin lower by 150 basis points for this quarter.[7] The largest percentage increase in operating costs came from sales and marketing, with a 31.4% increase.[7] However, the largest dollar value increase came from aircraft fuel, which increased 24.8% between 4th quarter 2010 and 4th quarter 2009.[7]
Net income for the fourth quarter was $9 million.[7] This compares to JetBlue's fourth quarter 2009 net income of $11 million.[7] Passenger revenues increased 14.7% despite the severe weather affecting the Northeast, which JetBlue estimates has reduced 4th quarter revenues by $30 million.[7] Yield per passenger mile in the fourth quarter was 12.11 cents, up 4.1%.[7] Passenger revenue per available seat mile (PRASM) for the fourth quarter 2010 increased 7.4% year-over-year to 9.91 cents and operating revenue per available seat mile (RASM) increased 5.9% year-over-year to 11.03 cents.[7]
To protect against increasing fuel prices, JetBlue has hedged 37% of its expected first quarter fuel requirements, and 31% of the expected full-year fuel requirements for 2011.[7]
2010 Third Quarter Overview
JetBlue 3rd quarter performance hit record levels in 2010. [8] Operating income for the quarter was $140 million, resulting in a 13.6% operating margin. This compares to operating income of $66 million and a 7.7% operating margin in the third quarter of 2009.et income for the third quarter was $59 million.[8] This compares to JetBlue's third quarter 2009 net income of $15 million.[8]
JetBlue reported third quarter revenue exceeded $1 billion for the first time, up 20.5 percent year-over-year.[8] Revenue passenger miles for the third quarter increased 9.6% to 7.7 billion on an 8.5% increase in capacity, resulting in a third quarter load factor of 84.6%, an increase of 0.9 points year over year.[8] Yield per passenger mile in the third quarter was 12.10 cents, up 11.4% compared to the third quarter of 2009.[8] Passenger revenue per available seat mile (PRASM) for the third quarter 2010 increased 12.5% year over year to 10.24 cents and operating revenue per available seat mile (RASM) increased 11.1% year-over-year to 11.32 cents.[8]
Despite a huge increase in revenue, costs increased substantially less percentage-wise. Operating expenses for the quarter increased 12.9%, or $102 million, over the prior year periodJetBlue's operating expense per available seat mile (CASM) for the third quarter increased 4.1% year-over-year to 9.78 cents, of which 70 basis points were attributed to fuel hedging. JetBlue continued to hedge fuel to help manage price volatility.[8] Specifically, JetBlue hedged approximately 49% of its fuel consumption during the third quarter, resulting in a realized fuel price of $2.26 per gallon, a 5.6% increase over third quarter 2009 realized fuel price of $2.14. JetBlue recorded $6 million in losses on fuel hedges that settled during the third quarter.[8]
JetBlue released optimistic fourth quarter and year-end guidance. Capacity is expected to increase between eight and ten percent in the fourth quarter and between six and eight percent for the full year.[8] Other measures of performance are also slated to continue to improve.[8]
2010 Second Quarter Overview
JetBlue reported second quarter revenues of $939 million, up 17.8%.[9] Revenue passenger miles for the second quarter increased 8.9% to 7.1 billion on a 5.5% increase in capacity, resulting in a second quarter load factor of 82.0%, an increase of 2.5 points year over year.[9] Much of the increase is due to the betterment of the economy, though JetBlue did attempt streamlining.
Operating expenses for the quarter increased 15.5%, or $114 million, over the prior year period. JetBlue's operating expense per available seat mile (CASM) for the second quarter increased 9.5% year-over-year to 9.72 cents.[9] Excluding fuel, CASM increased 8.2% to 6.51 cents.[9] This 8.2% increase is due to the necessity to increase maintenance of airlines from increasing travel demand, and a 6.6% increase in employment.[9]
Net income for the second quarter was $30 million.[9] This compares to JetBlue's second quarter 2009 net income of $20 million.[9] Among other things, the increase can be attributed to the 23% increase in operating margin, due to more demand in the travel industry. [9]
2010 First Quarter Overview
JetBlue reported record first quarter revenues of $870 million despite severe winter storms in the Northeast, which reduced revenue by an estimated $15 million.[10] Revenue passenger miles for the first quarter increased 7.1% to 6.5 billion on a 6.1% increase in capacity, resulting in a first quarter load factor of 76.8%, an increase of 0.8 points year over year.[10] Net loss for the first quarter was $1 million, compared to first quarter 2009 net income of $12 million.[10]
While fuel prices increased during the quarter, JetBlue continued to hedge fuel to help manage price volatility.[10] The company hedged approximately 65% of its fuel consumption during the first quarter, resulting in a realized fuel price of $2.19 per gallon, a 7.5% increase over first quarter 2009 realized fuel price of $2.03.[10] JetBlue recorded $2 million in gains on fuel hedges that settled during the first quarter due to increases in fuel prices with respect to hedged prices.[10] JetBlue has hedged approximately 42% of its second quarter projected fuel requirements and 38% of its remaining 2010 projected fuel requirements.[10] JetBlue expects an average price per gallon of fuel, including the impact of hedges and fuel taxes, of $2.43 in the second quarter and $2.44 for the full year 2010. [10]
2009 Overview
In 2009, JetBlue reported net income of $58 million and an operating margin of 8.5%, as compared to a net loss of $85 million and an operating margin of 3.2% in 2008.[11] The year-over-year improvement in the company's financial performance was primarily a result of a 33% decrease in its fuel price.[11]
Operating revenues decreased 3%, or $102 million, primarily due to a 4% decrease in passenger revenues, with a $128 million decrease in passenger revenues attributed to increasing passenger comfort by improving leg room.[11] Operating expenses decreased 8%, or $272 million, primarily due to lower fuel prices.[11] In 2009 operating expenses were offset by $1 million in gains on the sale of aircraft compared to $23 million in gains on the sale of aircraft in 2008.[11] While we had on average eight additional average aircraft in service in 2009, operating capacity increased less than 1% to 32.56 billion available seat miles in 2009 due to shorter stage lengths as a result of shifting capacity from transcontinental flying to shorter haul.[11] Operating expenses per available seat mile decreased 9% to 9.24 cents.[11] Excluding fuel, the company's cost per available seat mile increased 9% in 2009.[11]
Overall, the company operated at a 7.6% operating margin in 2009 and had a $58 million net income, up from a loss of $78 million in 2008.[12][2] The significant decline of crude oil prices during 4Q08 led to to JetBlue decreasing its exposure to hedges, and as a result, only 9% of its expected fuel consumption was hedged for 2009.[13] In 2010, JetBlue expects that the average cost of fuel will increase. As a result, JetBlue hedged 45% of its full-year fuel needs at a price of $2.08 in the 4th quarter of 2009. Due to adequate hedging, [[Revenue Passenger Miles|passenger revenue per seat mile (PRISM)], increased 11% since 2007.[2]
Like its chief competitor Southwest Airlines Company (LUV), JetBlue reported net income in 4Q09. Overall, the airline had net income of $11 million and had a $62 million increase in non-fuel costs, though JetBlue saved $450 million in fuel related costs since 2008. This operating expense decrease can mainly be attributed to a 30% fall in JBLU's average cost per gallon of fuel, from $2.98 to $2.08, a trend that can be seen throughout the airline industry.[2]
JetBlue remained one of the few profitable airlines in 4Q09, with an operating income increase of $15 million since 4Q 2008 and net income of $11 million.[2] While a 30% decline in fuel expense revenue decreased 3% as a result of slumping demand for air travel.[2] To illustrate, departures rose by 8.4%, to over 55,000, JetBlue cut its average fare by 10.9%, to $127.04, to remain competitive in light of the global economic recession in the 3rd quarter of 2009.[14]
2008 Highlights
JetBlue earned $3.388 billion in revenue in 2008, 19.2% more than in 2007.[15] JBLU's 2008 revenue represents a 239% growth in revenue since 2003, as the company has expanded by adding new routes and increasing the frequency of preexisting flights - in 2008, for example, Revenue per ASM (RASM) increased 17.2%.[15]
JetBlue's operating expenses grew faster than did its revenue in 2008, increasing 22.7% to $3.279 billion.[15] Increased fuel consumption as well as increases in fuel prices led to a 46% jump in JetBlue's fuel expenses.[16] JBLU's average cost of fuel per gallon increased 43% in 2008, reaching $2.98 per gallon, compared to $2.09 a year earlier. This increase in fuel expenses spurred an approximate 20.6% increase in the company's Cost per Available Seat Mile (CASM) in 2008, to 10.11 cents.
Trends and Forces
Airline industries are more sensitive to the economy than other industries
Typically, airline companies and aircraft manufacturers are more prone to swings in revenue and equity market prices due to the release of economic indicators.[17] Consumers tend to reduce travel if personal economic conditions are suboptimal, forcing airlines to cut capacity and production. Indicators such as unemployment indices, personal income, and even home sales affect airline industries in exaggerated fashion.
Since early July, the airline index has gained 13% as carriers reported monthly double-digit unit revenue after last year's slump.[17] But now the industry is facing a slower travel season while economic data seem to indicate a general slowdown in the recovery. For the last two weeks of August 2010, many economic indicators revealed that the U.S economy has erased all of its employment recovery since one year ago. Unemployment increased unexpectedly to November 2009 levels, and existing homesales decreased by more than 27%.[17] Even though such recessionary indications typically reduce fuel futures prices, this does not fully offset the reduction in travel demand that follows a recession, and will affect the bottom line of airline companies.
Increases in Fuel Prices Hurt Financial Performance
Like all other airlines, JetBlue is vulnerable to increases in fuel prices, as fuel represents a vast majority of airlines' operating expenses. In 2008, JBLU's average cost of fuel increased 43% from 2007, reaching $2.98 per gallon, from $2.18.[1] This increase in fuel costs contributed to an approximate 45.53% increase in the company's fuel expenses in 2008.[1] With oil price stabilization and proper management of fuel hedges, fuel costs reduced to $2.08 per gallon or 31.4% of all expenses for the year of 2009.[1] This resulted in a very beneficial result for the 2009-2010 year. Clearly, fuel prices have the ability to help or hurt JetBlue's and its competitors' performances.
To mitigate its vulnerability to increases in fuel prices, JetBlue entered into annual hedging contracts, securing about 40% of full-year 2010 projected fuel needs at a particular price.[1] This hedging strategy is higher than the average in the airline industry, where most airlines have between 20% and 30% of their fuel needs hedged. [18] At the beginning of 2008 however, JBLU had only secured 13% of its fuel needs through hedging agreements because of general price instability.[1]
Aging Fleet Leads to Rising Operating Expenses
One of JetBlue's main cost-saving advantages is its "young" fleet, which has an average age of 4.3 years[1] compared to an average age of 10.1 years for Southwest's fleet.[19] The average age of its fleet increased to 4.3 years as of December 31, 2009 compared to 3.6 years as of December 31, 2008. Maintenance expense is expected to increase significantly as the fleet ages, resulting in the need for additional repairs over time. Cost per available seat mile increased 17% primarily due to the gradual aging of the company's fleet fleet.[1]
Dependence on New York Metropolitan Market Jeopardizes Operations
JetBlue relies heavily on the New York area, with approximately 62% of its daily flights having an airport in the New York market as either an origin or a destination.[20] As a result, JBLU is vulnerable to delays or cancellations caused by airport congestion or inclement weather, which hurts the company's operating performance and customer satisfaction. Moreover, JBLU remains susceptible to regulation by the Federal Aviation Authority (FAA) and Department of Transportation (DOT). On October 10, 2008, the DOT announced the Congestion Management Rule for JFK and Newark International Airport, which limits the number of scheduled operations unless JBLU and other airlines obtain a slot. Also, 10% of slots already issued have been confiscated to be auctioned.[20]
In the past, weather in New York has had a significant impact on JBLU's operations as well. In Q1 2007, for example, an ice storm in the New York region caused the cancellation of 1,200 JetBlue flights over a 6 day period,[21]costing JetBlue $30 million in lost passenger revenue.[22] After its Q1 2007 debacle, however, JBLU implemented several new initiatives aimed at reducing its vulnerability to similar events in the future. For example, the company implemented preemptive cancellations for severe weather and instituted a compensation program for customers on canceled or disrupted flights.[21]
Competition
JetBlue competes against many low-cost carriers or low-cost subsidiaries of larger carriers. JetBlue's main low-cost carrier competitors are AirTran Holdings (AAI) and Southwest Airlines (LUV). Its other competitors include American Airlines (AMR) (in Chicago, Texas, Los Angeles, and Miami), Continental (CAL), United (UAUA), and US Air (LCC). JetBlue differentiates itself from other airline travel companies with its low fares, made possible by low distribution and operating costs - largely due to the fact that it has the youngest fleet in all domestic airlines.
AirTran Holdings (AAI): AirTran Holdings (Nasdaq:AAI) is one of America’s largest low-fare passenger airlines. The airline has managed to achieve low operating costs despite relying on a hub-and-spoke system, in which most of its flights originate and terminate at its hub in Atlanta, Georgia. Given AirTran's continued reliance on the hub and spoke system, airline management has cited other operational factors as cause for the airline having a cost structure that is among the lowest in the industry.[23]
American Airlines (AMR): AMR is the parent company of American Airlines, the second largest airline in the world based on available seat miles and revenue passenger miles On an average day, American Airlines flies approximately 3,400 flights between 250 countries. The company recorded a net loss of $1.5 billion in 2009 compared to a net loss of $2.1 billion in 2008. In 2009, AMR experienced very weak demand for air travel driven by the continuing severe downturn in the global economy. [24]
Continental Airlines (CAL): is the world's fifth largest airline by revenue passenger miles. CAL serves 242 destinations worldwide, offering 2000 daily flights. Continental's cost per available seat mile of 10.75 cents is among the lowest in the airline industry. The company recently announced that they were being acquired by United Airlines.[25]
Delta Air Lines Inc. (DAL): Delta Air Lines is the 2nd largest passenger airline in the world by available seat miles. In recent years, the company has faced financial difficulties due to price competition from discount airlines like JetBlue and Southwest. This has limited Delta's ability to raise prices to their natural supply/demand and cost reflective levels. As a result, Delta was forced into bankruptcy in September of 2005. Since exiting bankruptcy on April 30, 2007, the company has followed a revised operating strategy calling for a network shift towards more profitable international routings. [26]
Southwest Airlines Company (LUV): Southwest Airlines is the largest domestic carrier by total passengers, carrying over 101.3 million passengers in 2009 on over 1.18 million flights. Southwest thrives on maintaining low operating expenses, primarily through its extensive fuel hedging, which saved the company an estimated $1.1 billion in fuel costs in 2008. Because of its low costs, Southwest was able to remain profitable for 35 consecutive years, a feat unmatched in commercial aviation history. However, the percentage of fuel costs the company has hedged declines precipitously beyond 2009, and the drop in fuel prices caused by the global economic crisis renders Southwest's key advantage - its low fuel costs in comparison to its competitors - much less valuable.[27]
United Airlines (UAUA): With hubs in Los Angeles, San Francisco, Denver, Chicago and Washington D.C., United operates approximately 3,300 flights per day to over 230 destinations domestically and internationally. In 2009, United Airlines was the first in on-time performance for scheduled domestic flights, with 81% of all domestic flights arriving approximately on time. As of December 31, 2009, United Airlines has a 13.7% market share. As a result of high operating expenses and declining consumer demand for travel, United has significantly reduced its capacity or Available Seat Miles (ASM) recently. UAUA announced in April 2010 that it is acquiring Continental Airlines.[28]
US Airways Group (LCC) US Airways is a major domestic air carrier, which as of April 2008 operates 3,800 flights to 230 destinations across the U.S., Canada, the Caribbean, Latin America and Europe. The company’s finances suffered considerably due to reduced air travel following September 11th, forcing the airline to declare bankruptcy in 2002. However, unlike other carriers that improved and emerged stronger following Chapter 11 protection, US Airways never fully recovered. The combination of high fuel costs and tough labor negotiations forced the company into a merger with America West in 2005. While the US Airways name was maintained for brand purposes, the merger actually left America West executives and stockholders with more control over the new company.[29]
Market Share
2010 Top 10 U.S. Airlines Market Share based on Revenue Passenger Miles[30]
Rank Carrier Market Share
1 American 13.8%
2 Southwest 13.8%
3 Delta 11.8%
4 United 10.4%
5 US Airways 8.0%
6 Continental 7.6%
7 Northwest 4.8%
8 JetBlue 4.3%
9 AirTran 3.4%
10 Alaska 3.1%
11 Other 19%
In 2001, JetBlue began a focus city operation at Long Beach Airport in Long Beach, California, and another at Boston's Logan International Airport, in 2004. It also has focus city operations at Fort Lauderdale – Hollywood International Airport, Orlando International Airport and at Luis Muñoz Marín International Airport in San Juan. The airline mainly serves destinations in the United States, along with flights to the Caribbean, The Bahamas, Bermuda, Colombia, Costa Rica, Dominican Republic, Jamaica, and Mexico. As of November 19, 2010 JetBlue serves 63 destinations in 22 states (including Puerto Rico), and eleven countries in the Caribbean and Latin America.[1]
JetBlue maintains a corporate office in Cottonwood Heights, Utah, a satellite office in Darien, Connecticut, and its Information Technology center in Garden City, New York.[1][6][7] JetBlue is a non-union airline.[1][8]
JetBlue Airways Co. (Nasdaq:JBLU) is the 7th largest passenger carrier in the United States based on revenue passenger miles as reported by those airlines.[1] JetBlue operates primarily on point-to-point routes with its fleet of 110 Airbus A320 aircraft and 41 EMBRAER 190 aircraft.[1] Thus, as of 2009, JetBlue has 151 aircrafts with a combined average age of 4.3 years — the youngest and most fuel-efficient fleet of any major U.S. airline.[2] [1] JetBlue operates mainly in the Newark International Airport and in New York's John F. Kennedy International Airport, botof which are one of the busiest domestic airports in the nation.[1] As of 2009, JetBlue commanded 40% of all domestic traffic in New York's JFK Airport.[1]
Due to the decrease in fuel between 4Q 2008 and 2Q 2009, JetBlue has abstained from hedging fuel since the end of 2008 and resumed hedging once prices stabilized in the second quarter of 2009.[1] At December 31, 2009, the company had hedged approximately 40% of its projected 2010 fuel requirements and 3% of its projected 2011 fuel requirements.[1] For 2010, JetBlue has hedged 45% of its full-year fuel needs. This is because JetBlue paid on average $2.08 per gallon of fuel in the 4th quarter due to decreasing fuel costs. Operating income improved by $15 million driven by a $56 million decrease in fuel costs. The decrease in fuel costs was the reason for a 4th quarter 2009 net income of $11 million, and a 2009 net income of $58 million. This is a $143 million improvement since 2008.[2] However, in 2009, JetBlue left its available seat miles (ASM) flat in comparison to 2008. JetBlue maintains a goal of 5%-7% increase in ASM for 2010.[2] This is in agreement with its expectation to increase cost per available seat mile by 5% to 7% compared to 2007 and 2008.[2]
Contents
1 Business Overview
1.1 Financial Analysis
1.1.1 2010 Fourth Quarter Overview
1.1.2 2010 Third Quarter Overview
1.1.3 2010 Second Quarter Overview
1.1.4 2010 First Quarter Overview
1.1.5 2009 Overview
1.1.6 2008 Highlights
2 Trends and Forces
2.1 Airline industries are more sensitive to the economy than other industries
2.2 Increases in Fuel Prices Hurt Financial Performance
2.3 Aging Fleet Leads to Rising Operating Expenses
2.4 Dependence on New York Metropolitan Market Jeopardizes Operations
3 Competition
4 Market Share
5 References
Business Overview
JetBlue Airways specializes in cheap point-to-point flights with high levels of customer service. As of December 31, 2009, the company provided service to 60 destinations in 20 states, Puerto Rico, and eleven countries in the Caribbean and Latin America.[1] JBLU is the 7th largest airline in the United States by revenue passenger miles, operating 600 flights daily.[1] The company is able to maintain its industry-low CASM of 9.24 cents through aircraft efficiency and distribution costs.[1] It has the youngest aircraft fleet in the industry with an average age of 4.3 years in 2010, which reduces maintenance expenses, and it operates its aircraft for 12.1 hours a day, which is the highest in the industry.[1] Also, in 2008, over 77% of sales were booked through its website, which reduces operating costs. Most of its flights originate from five main airports, including Boston, Fort Lauderdale, Long Beach (CA), New York City, and Washington D.C, with New York City's JFK airport as its primary operating airport. In 2009, JetBlue represented the largest domestic airline operating at JFK airport by passengers enplaned, commanding 40% of all domestic passenger traffic.[1] JBLU's average fare in 2009 was $130.41, second-best to Southwest's average $114.61.[3][4]
Like its competitor Southwest Airlines, JetBlue offers low fares while maintaining low operating expenses through low distribution costs, high employee productivity, and use of only two types of aircraft in its fleet.[5] For example - JetBlue employed approximately 99 employees per aircraft[6] significantly less than other major airlines, which employ an average of 127 employees per aircraft, but more than Southwest, which employees 89 people per aircraft.[6]
Financial Analysis
2010 Fourth Quarter Overview
JetBlue reported a total fourth quarter revenue of $940 million, a 13.1% increase in revenue since year-ago fourth quarter.[7] However, operating income decreased 8.9% due to a 14.9% increase in operating expenses, leaving the operating margin lower by 150 basis points for this quarter.[7] The largest percentage increase in operating costs came from sales and marketing, with a 31.4% increase.[7] However, the largest dollar value increase came from aircraft fuel, which increased 24.8% between 4th quarter 2010 and 4th quarter 2009.[7]
Net income for the fourth quarter was $9 million.[7] This compares to JetBlue's fourth quarter 2009 net income of $11 million.[7] Passenger revenues increased 14.7% despite the severe weather affecting the Northeast, which JetBlue estimates has reduced 4th quarter revenues by $30 million.[7] Yield per passenger mile in the fourth quarter was 12.11 cents, up 4.1%.[7] Passenger revenue per available seat mile (PRASM) for the fourth quarter 2010 increased 7.4% year-over-year to 9.91 cents and operating revenue per available seat mile (RASM) increased 5.9% year-over-year to 11.03 cents.[7]
To protect against increasing fuel prices, JetBlue has hedged 37% of its expected first quarter fuel requirements, and 31% of the expected full-year fuel requirements for 2011.[7]
2010 Third Quarter Overview
JetBlue 3rd quarter performance hit record levels in 2010. [8] Operating income for the quarter was $140 million, resulting in a 13.6% operating margin. This compares to operating income of $66 million and a 7.7% operating margin in the third quarter of 2009.et income for the third quarter was $59 million.[8] This compares to JetBlue's third quarter 2009 net income of $15 million.[8]
JetBlue reported third quarter revenue exceeded $1 billion for the first time, up 20.5 percent year-over-year.[8] Revenue passenger miles for the third quarter increased 9.6% to 7.7 billion on an 8.5% increase in capacity, resulting in a third quarter load factor of 84.6%, an increase of 0.9 points year over year.[8] Yield per passenger mile in the third quarter was 12.10 cents, up 11.4% compared to the third quarter of 2009.[8] Passenger revenue per available seat mile (PRASM) for the third quarter 2010 increased 12.5% year over year to 10.24 cents and operating revenue per available seat mile (RASM) increased 11.1% year-over-year to 11.32 cents.[8]
Despite a huge increase in revenue, costs increased substantially less percentage-wise. Operating expenses for the quarter increased 12.9%, or $102 million, over the prior year periodJetBlue's operating expense per available seat mile (CASM) for the third quarter increased 4.1% year-over-year to 9.78 cents, of which 70 basis points were attributed to fuel hedging. JetBlue continued to hedge fuel to help manage price volatility.[8] Specifically, JetBlue hedged approximately 49% of its fuel consumption during the third quarter, resulting in a realized fuel price of $2.26 per gallon, a 5.6% increase over third quarter 2009 realized fuel price of $2.14. JetBlue recorded $6 million in losses on fuel hedges that settled during the third quarter.[8]
JetBlue released optimistic fourth quarter and year-end guidance. Capacity is expected to increase between eight and ten percent in the fourth quarter and between six and eight percent for the full year.[8] Other measures of performance are also slated to continue to improve.[8]
2010 Second Quarter Overview
JetBlue reported second quarter revenues of $939 million, up 17.8%.[9] Revenue passenger miles for the second quarter increased 8.9% to 7.1 billion on a 5.5% increase in capacity, resulting in a second quarter load factor of 82.0%, an increase of 2.5 points year over year.[9] Much of the increase is due to the betterment of the economy, though JetBlue did attempt streamlining.
Operating expenses for the quarter increased 15.5%, or $114 million, over the prior year period. JetBlue's operating expense per available seat mile (CASM) for the second quarter increased 9.5% year-over-year to 9.72 cents.[9] Excluding fuel, CASM increased 8.2% to 6.51 cents.[9] This 8.2% increase is due to the necessity to increase maintenance of airlines from increasing travel demand, and a 6.6% increase in employment.[9]
Net income for the second quarter was $30 million.[9] This compares to JetBlue's second quarter 2009 net income of $20 million.[9] Among other things, the increase can be attributed to the 23% increase in operating margin, due to more demand in the travel industry. [9]
2010 First Quarter Overview
JetBlue reported record first quarter revenues of $870 million despite severe winter storms in the Northeast, which reduced revenue by an estimated $15 million.[10] Revenue passenger miles for the first quarter increased 7.1% to 6.5 billion on a 6.1% increase in capacity, resulting in a first quarter load factor of 76.8%, an increase of 0.8 points year over year.[10] Net loss for the first quarter was $1 million, compared to first quarter 2009 net income of $12 million.[10]
While fuel prices increased during the quarter, JetBlue continued to hedge fuel to help manage price volatility.[10] The company hedged approximately 65% of its fuel consumption during the first quarter, resulting in a realized fuel price of $2.19 per gallon, a 7.5% increase over first quarter 2009 realized fuel price of $2.03.[10] JetBlue recorded $2 million in gains on fuel hedges that settled during the first quarter due to increases in fuel prices with respect to hedged prices.[10] JetBlue has hedged approximately 42% of its second quarter projected fuel requirements and 38% of its remaining 2010 projected fuel requirements.[10] JetBlue expects an average price per gallon of fuel, including the impact of hedges and fuel taxes, of $2.43 in the second quarter and $2.44 for the full year 2010. [10]
2009 Overview
In 2009, JetBlue reported net income of $58 million and an operating margin of 8.5%, as compared to a net loss of $85 million and an operating margin of 3.2% in 2008.[11] The year-over-year improvement in the company's financial performance was primarily a result of a 33% decrease in its fuel price.[11]
Operating revenues decreased 3%, or $102 million, primarily due to a 4% decrease in passenger revenues, with a $128 million decrease in passenger revenues attributed to increasing passenger comfort by improving leg room.[11] Operating expenses decreased 8%, or $272 million, primarily due to lower fuel prices.[11] In 2009 operating expenses were offset by $1 million in gains on the sale of aircraft compared to $23 million in gains on the sale of aircraft in 2008.[11] While we had on average eight additional average aircraft in service in 2009, operating capacity increased less than 1% to 32.56 billion available seat miles in 2009 due to shorter stage lengths as a result of shifting capacity from transcontinental flying to shorter haul.[11] Operating expenses per available seat mile decreased 9% to 9.24 cents.[11] Excluding fuel, the company's cost per available seat mile increased 9% in 2009.[11]
Overall, the company operated at a 7.6% operating margin in 2009 and had a $58 million net income, up from a loss of $78 million in 2008.[12][2] The significant decline of crude oil prices during 4Q08 led to to JetBlue decreasing its exposure to hedges, and as a result, only 9% of its expected fuel consumption was hedged for 2009.[13] In 2010, JetBlue expects that the average cost of fuel will increase. As a result, JetBlue hedged 45% of its full-year fuel needs at a price of $2.08 in the 4th quarter of 2009. Due to adequate hedging, [[Revenue Passenger Miles|passenger revenue per seat mile (PRISM)], increased 11% since 2007.[2]
Like its chief competitor Southwest Airlines Company (LUV), JetBlue reported net income in 4Q09. Overall, the airline had net income of $11 million and had a $62 million increase in non-fuel costs, though JetBlue saved $450 million in fuel related costs since 2008. This operating expense decrease can mainly be attributed to a 30% fall in JBLU's average cost per gallon of fuel, from $2.98 to $2.08, a trend that can be seen throughout the airline industry.[2]
JetBlue remained one of the few profitable airlines in 4Q09, with an operating income increase of $15 million since 4Q 2008 and net income of $11 million.[2] While a 30% decline in fuel expense revenue decreased 3% as a result of slumping demand for air travel.[2] To illustrate, departures rose by 8.4%, to over 55,000, JetBlue cut its average fare by 10.9%, to $127.04, to remain competitive in light of the global economic recession in the 3rd quarter of 2009.[14]
2008 Highlights
JetBlue earned $3.388 billion in revenue in 2008, 19.2% more than in 2007.[15] JBLU's 2008 revenue represents a 239% growth in revenue since 2003, as the company has expanded by adding new routes and increasing the frequency of preexisting flights - in 2008, for example, Revenue per ASM (RASM) increased 17.2%.[15]
JetBlue's operating expenses grew faster than did its revenue in 2008, increasing 22.7% to $3.279 billion.[15] Increased fuel consumption as well as increases in fuel prices led to a 46% jump in JetBlue's fuel expenses.[16] JBLU's average cost of fuel per gallon increased 43% in 2008, reaching $2.98 per gallon, compared to $2.09 a year earlier. This increase in fuel expenses spurred an approximate 20.6% increase in the company's Cost per Available Seat Mile (CASM) in 2008, to 10.11 cents.
Trends and Forces
Airline industries are more sensitive to the economy than other industries
Typically, airline companies and aircraft manufacturers are more prone to swings in revenue and equity market prices due to the release of economic indicators.[17] Consumers tend to reduce travel if personal economic conditions are suboptimal, forcing airlines to cut capacity and production. Indicators such as unemployment indices, personal income, and even home sales affect airline industries in exaggerated fashion.
Since early July, the airline index has gained 13% as carriers reported monthly double-digit unit revenue after last year's slump.[17] But now the industry is facing a slower travel season while economic data seem to indicate a general slowdown in the recovery. For the last two weeks of August 2010, many economic indicators revealed that the U.S economy has erased all of its employment recovery since one year ago. Unemployment increased unexpectedly to November 2009 levels, and existing homesales decreased by more than 27%.[17] Even though such recessionary indications typically reduce fuel futures prices, this does not fully offset the reduction in travel demand that follows a recession, and will affect the bottom line of airline companies.
Increases in Fuel Prices Hurt Financial Performance
Like all other airlines, JetBlue is vulnerable to increases in fuel prices, as fuel represents a vast majority of airlines' operating expenses. In 2008, JBLU's average cost of fuel increased 43% from 2007, reaching $2.98 per gallon, from $2.18.[1] This increase in fuel costs contributed to an approximate 45.53% increase in the company's fuel expenses in 2008.[1] With oil price stabilization and proper management of fuel hedges, fuel costs reduced to $2.08 per gallon or 31.4% of all expenses for the year of 2009.[1] This resulted in a very beneficial result for the 2009-2010 year. Clearly, fuel prices have the ability to help or hurt JetBlue's and its competitors' performances.
To mitigate its vulnerability to increases in fuel prices, JetBlue entered into annual hedging contracts, securing about 40% of full-year 2010 projected fuel needs at a particular price.[1] This hedging strategy is higher than the average in the airline industry, where most airlines have between 20% and 30% of their fuel needs hedged. [18] At the beginning of 2008 however, JBLU had only secured 13% of its fuel needs through hedging agreements because of general price instability.[1]
Aging Fleet Leads to Rising Operating Expenses
One of JetBlue's main cost-saving advantages is its "young" fleet, which has an average age of 4.3 years[1] compared to an average age of 10.1 years for Southwest's fleet.[19] The average age of its fleet increased to 4.3 years as of December 31, 2009 compared to 3.6 years as of December 31, 2008. Maintenance expense is expected to increase significantly as the fleet ages, resulting in the need for additional repairs over time. Cost per available seat mile increased 17% primarily due to the gradual aging of the company's fleet fleet.[1]
Dependence on New York Metropolitan Market Jeopardizes Operations
JetBlue relies heavily on the New York area, with approximately 62% of its daily flights having an airport in the New York market as either an origin or a destination.[20] As a result, JBLU is vulnerable to delays or cancellations caused by airport congestion or inclement weather, which hurts the company's operating performance and customer satisfaction. Moreover, JBLU remains susceptible to regulation by the Federal Aviation Authority (FAA) and Department of Transportation (DOT). On October 10, 2008, the DOT announced the Congestion Management Rule for JFK and Newark International Airport, which limits the number of scheduled operations unless JBLU and other airlines obtain a slot. Also, 10% of slots already issued have been confiscated to be auctioned.[20]
In the past, weather in New York has had a significant impact on JBLU's operations as well. In Q1 2007, for example, an ice storm in the New York region caused the cancellation of 1,200 JetBlue flights over a 6 day period,[21]costing JetBlue $30 million in lost passenger revenue.[22] After its Q1 2007 debacle, however, JBLU implemented several new initiatives aimed at reducing its vulnerability to similar events in the future. For example, the company implemented preemptive cancellations for severe weather and instituted a compensation program for customers on canceled or disrupted flights.[21]
Competition
JetBlue competes against many low-cost carriers or low-cost subsidiaries of larger carriers. JetBlue's main low-cost carrier competitors are AirTran Holdings (AAI) and Southwest Airlines (LUV). Its other competitors include American Airlines (AMR) (in Chicago, Texas, Los Angeles, and Miami), Continental (CAL), United (UAUA), and US Air (LCC). JetBlue differentiates itself from other airline travel companies with its low fares, made possible by low distribution and operating costs - largely due to the fact that it has the youngest fleet in all domestic airlines.
AirTran Holdings (AAI): AirTran Holdings (Nasdaq:AAI) is one of America’s largest low-fare passenger airlines. The airline has managed to achieve low operating costs despite relying on a hub-and-spoke system, in which most of its flights originate and terminate at its hub in Atlanta, Georgia. Given AirTran's continued reliance on the hub and spoke system, airline management has cited other operational factors as cause for the airline having a cost structure that is among the lowest in the industry.[23]
American Airlines (AMR): AMR is the parent company of American Airlines, the second largest airline in the world based on available seat miles and revenue passenger miles On an average day, American Airlines flies approximately 3,400 flights between 250 countries. The company recorded a net loss of $1.5 billion in 2009 compared to a net loss of $2.1 billion in 2008. In 2009, AMR experienced very weak demand for air travel driven by the continuing severe downturn in the global economy. [24]
Continental Airlines (CAL): is the world's fifth largest airline by revenue passenger miles. CAL serves 242 destinations worldwide, offering 2000 daily flights. Continental's cost per available seat mile of 10.75 cents is among the lowest in the airline industry. The company recently announced that they were being acquired by United Airlines.[25]
Delta Air Lines Inc. (DAL): Delta Air Lines is the 2nd largest passenger airline in the world by available seat miles. In recent years, the company has faced financial difficulties due to price competition from discount airlines like JetBlue and Southwest. This has limited Delta's ability to raise prices to their natural supply/demand and cost reflective levels. As a result, Delta was forced into bankruptcy in September of 2005. Since exiting bankruptcy on April 30, 2007, the company has followed a revised operating strategy calling for a network shift towards more profitable international routings. [26]
Southwest Airlines Company (LUV): Southwest Airlines is the largest domestic carrier by total passengers, carrying over 101.3 million passengers in 2009 on over 1.18 million flights. Southwest thrives on maintaining low operating expenses, primarily through its extensive fuel hedging, which saved the company an estimated $1.1 billion in fuel costs in 2008. Because of its low costs, Southwest was able to remain profitable for 35 consecutive years, a feat unmatched in commercial aviation history. However, the percentage of fuel costs the company has hedged declines precipitously beyond 2009, and the drop in fuel prices caused by the global economic crisis renders Southwest's key advantage - its low fuel costs in comparison to its competitors - much less valuable.[27]
United Airlines (UAUA): With hubs in Los Angeles, San Francisco, Denver, Chicago and Washington D.C., United operates approximately 3,300 flights per day to over 230 destinations domestically and internationally. In 2009, United Airlines was the first in on-time performance for scheduled domestic flights, with 81% of all domestic flights arriving approximately on time. As of December 31, 2009, United Airlines has a 13.7% market share. As a result of high operating expenses and declining consumer demand for travel, United has significantly reduced its capacity or Available Seat Miles (ASM) recently. UAUA announced in April 2010 that it is acquiring Continental Airlines.[28]
US Airways Group (LCC) US Airways is a major domestic air carrier, which as of April 2008 operates 3,800 flights to 230 destinations across the U.S., Canada, the Caribbean, Latin America and Europe. The company’s finances suffered considerably due to reduced air travel following September 11th, forcing the airline to declare bankruptcy in 2002. However, unlike other carriers that improved and emerged stronger following Chapter 11 protection, US Airways never fully recovered. The combination of high fuel costs and tough labor negotiations forced the company into a merger with America West in 2005. While the US Airways name was maintained for brand purposes, the merger actually left America West executives and stockholders with more control over the new company.[29]
Market Share
2010 Top 10 U.S. Airlines Market Share based on Revenue Passenger Miles[30]
Rank Carrier Market Share
1 American 13.8%
2 Southwest 13.8%
3 Delta 11.8%
4 United 10.4%
5 US Airways 8.0%
6 Continental 7.6%
7 Northwest 4.8%
8 JetBlue 4.3%
9 AirTran 3.4%
10 Alaska 3.1%
11 Other 19%
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