JetBlue Airways Corporation Earnings: Are Better Days Ahead?

By Adam Levine-Weinberg Markets Fool.com

Three months ago, JetBlue Airways (NASDAQ: JBLU) reported solid results for the final quarter of 2016, raising hopes that it would return to sustainable margin expansion in early 2017. Unfortunately, the company quickly dashed investors' hopes by providing weak unit revenue guidance during its Q4 earnings call.

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Sure enough, JetBlue's first-quarter earnings report on Tuesday morning showed a steep drop in its profit margin and earnings per share. However, JetBlue has made some tactical adjustments in the last few months. As a result, the company's profitability may start to stabilize in the second quarter.

JetBlue Airways results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$1.60 billion

$1.62 billion

(0.8%)

Total unit revenue

11.81 cents

12.41 cents

(4.8%)

Cost per available seat mile excluding fuel

8.35 cents

8.08 cents

3.3%

Net income

$85 million

$199 million

(59%)

Pre-tax margin

7.9%

20%

N/A

Adjusted EPS

$0.25

$0.59

(59%)

Data source: JetBlue Airways Q1 earnings release.

What happened with JetBlue Airways this quarter?

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A year ago, JetBlue produced a record profit in the first quarter, helped by an early Easter. Easter shifted back into April this year, creating tough revenue comparisons for JetBlue.

Additionally, JetBlue faced a huge influx of competition in the New York-Florida travel market, led by Spirit Airlines (NASDAQ: SAVE). Historically, these markets have been a key profit driver during the winter months. Spirit Airlines took advantage of the end of slot restrictions at Newark Airport last fall to begin four daily flights from Newark to Fort Lauderdale and two daily flights from Newark to Orlando.

JetBlue faces rising competition in some of its most profitable markets. Image source: JetBlue Airways.

Meanwhile, on the cost side, JetBlue is coping with a significant year-over-year increase in its fuel costs, as oil prices have started to rebound. Non-fuel costs are also rising, due to recent wage increases and rising maintenance costs for JetBlue's aging fleet.

The result was that JetBlue's pre-tax margin plunged to 7.9% from 20% a year earlier, while net income and EPS fell by more than half.

What management had to say

JetBlue executives were not satisfied with the company's Q1 performance. They have responded by cutting capacity growth in order to get unit revenue growing again. According to CEO Robin Hayes:

We remain focused on executing the many initiatives we have underway to improve returns and drive shareholder value. In the near-term, we took quick actions in the first quarter to address RASM trends that were below our expectations. We have been encouraged by the initial results of those actions and expect to see further improvement in the second quarter.

The company also recognizes that it needs to tame its cost growth in order to produce strong profits on a consistent basis. It promoted Steve Priest to the CFO post during the first quarter, with a mandate to reduce the company's structural costs. Priest stated:

JetBlue has a strong foundation and I'm excited by the opportunities in front of us to build an even stronger company for our customers, crewmembers and owners. My priority is helping to achieve a cost structure that leverages the full benefit of our scale and strong balance sheet.

Looking forward

JetBlue's revenue initiatives are already taking hold. For example, the carrier has tweaked its capacity at Newark Airport in response to Spirit's entry into that market. Earlier this month, JetBlue provided encouraging (albeit informal) RASM guidance for the month of April.

In the company's earnings presentation, management confirmed this strong outlook. RASM is likely to rise 3% to 6% this quarter, powered by a double-digit gain in April.

Cost pressures will remain high in Q2. Non-fuel unit costs are expected to rise 4.5% to 6.5% before cost growth moderates in the second half of the year. Additionally, JetBlue expects to pay $1.73/gallon for jet fuel, up from $1.43/gallon a year earlier. As a result, JetBlue's profit margin is on pace to contract again on a year-over-year basis this quarter, but it will be a much more modest decline than in the first quarter.

Looking even further ahead, JetBlue is paving the way for future success by deferring some of its Airbus aircraft orders. This will reduce its capital spending in the 2018-2020 period, boosting free cash flow while allowing it to continue expanding in line with its planned 2017 growth rate of 5.5% to 7.5%.

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Adam Levine-Weinberg owns shares of JetBlue Airways and Spirit Airlines and is long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends JetBlue Airways and Spirit Airlines. The Motley Fool has a disclosure policy.