Rising Costs Hit JetBlue


Zacks Equity Research, On Friday January 28, 2011, 6:30 pm EST




JetBlue Airways Corporation (NasdaqGS: JBLU - News), a top discount airline, reported its fourth quarter earnings of 3 cents per share missing the Zacks Consensus Estimate by 2 cents and falling below the year-ago quarter’s earnings by a penny.


Lower-than-expected earnings can be credited to increasing operating costs for the airlines that substantially offset better air traffic and higher airfares. For full-year 2010, earnings shot up 47.6% to 31 cents per share.


Despite severe weather conditions in the Northeast, operating revenues increased 13.1% year over year to $940 million in the reported quarter. Operating revenues of the quarter is estimated to have lost approximately $30 million due to severe snowfall. Operating revenues for 2010 grew 14.8% year over year $3,779 million.


In the fourth quarter, revenue passenger miles (RPM) climbed 10.1% year over year to $7.0 billion owing to capacity measured in available seat miles (ASM) that increased 6.8% year over year. For fiscal 2010, revenue passenger miles rose 9% to $28.3 billion with a 6.7% increase in ASM.


In the fourth quarter, yield per passenger mile grew 4.1% from the year-ago quarter. Passenger revenue per available seat mile (PRASM) and operating revenue per available seat mile (RASM) improved 7.4% and 5.9%, respectively.

Total operating expenses in the fourth quarter increased 14.9% year over year to $883 million primarily due to steep rises in fuel cost, maintenance cost of the airlines and labor and promotional expenses. JetBlue’s operating unit cost or cost per available seat mile (CASM) upped 7.6% year over year.


Excluding fuel, CASM rose 3.6% from the year-ago quarter. Total operating expenses for 2010 climbed 14.6% to $3,446 million.
Operating income in the reported quarter was $57million compared with $65 million in the year-ago quarter. Operating margin improved 150 bps year over year to 6.2%. For fiscal 2010, operating income grew 17.4% and operating margin improved a modest 20 bps to 8.8%.

Liquidity
JetBlue ended the fourth quarter with cash and cash equivalents of $465 million compared to $896 million in the year-ago period.

Guidance


For the first quarter of 2011, the company expects CASM to increase 11% to 13% over the year-ago quarter. CASM (excluding fuel) and ASM are estimated to increase in bands of 3% to 5% and 1% to 3%, respectively.


For fiscal 2011, CASM is expected to increase 8% to 10% over 2010. Excluding fuel, CASM is projected to range from -1% to +2%, while ASM is expected to be around 7% to 9%.

JetBlue expects an average fuel price per gallon of $2.84 in the first quarter of 2011 and $2.89 for the full year.


Our Analysis


We believe JetBlue will continue to benefit from new infrastructural developments, improved pricing, higher traffic, and additional ancillary revenue opportunities through commercial partnerships with company like AMR Corporation (NYSE: AMR - News), a subsidiary of American Airlines.

JetBlue has maintained healthy liquidity positions in the U.S. airline industry and is focused on strategic investments in developing infrastructure and network.


Additionally, the company’s growing presence in the Caribbean and Latin America, leading position in the Boston market, and unique position as the largest domestic carrier at John F. Kennedy International Airport auger well for future growth and top-line improvement.


However, fuel price volatility, higher dependence on the New York metropolitan market, competitive pressures and automated technology keeps us on the sidelines. Further, the company does not pay any dividend to its shareholders.


We are currently maintaining our long-term Neutral rating on JetBlue. For the short term (1–3 months), the company has a Zacks #4 Rank (Sell).