After posting much better unit revenue growth than other U.S. airlines throughout 2015, JetBlue Airways (JBLU +4.40%) faced some revenue troubles of its own last year. Revenue per available seat mile (RASM) fell for most of the year, highlighted by an 8.2% plunge in Q2.
Fortunately, JetBlue's unit revenue trajectory has improved dramatically since then. Last quarter, RASM fell just 1.5% year over year, allowing the company to post a strong profit margin despite growing cost headwinds. This solid revenue performance also positions JetBlue well to return to unit revenue growth in 2017.
JetBlue Airways results: The raw numbers
|
Metric |
Q4 2016 |
Q4 2015 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$1.64 billion |
$1.59 billion |
2.9% |
|
Total unit revenue |
12.43 cents |
12.62 cents |
(1.5%) |
|
Cost per available seat mile excluding fuel |
7.98 cents |
7.64 cents |
4.6% |
|
Adjusted net income |
$172 million |
$190 million |
(9.5%) |
|
Adjusted pre-tax margin |
16.7% |
19% |
N/A |
|
Adjusted EPS |
$0.50 |
$0.56 |
(11%) |
Data source: JetBlue Airways Q4 earnings release.
What happened with JetBlue Airways this quarter?
During the fourth quarter, JetBlue slowed its capacity growth rate to 4.5%. By contrast, it had boosted capacity by 12.6% in the first half of the year. The slower growth rate allowed JetBlue to increase its load factor -- the percentage of seats filled with paying customers -- by 1.1 percentage points in Q4, to 84.7%.
Slower growth also contributed to JetBlue's relatively solid unit revenue performance, with RASM down just 1.5% year over year. On the other hand, it put pressure on unit costs. JetBlue reported that its cost per available seat mile (excluding fuel) increased 4.6% year over year last quarter.
The slight decline in unit revenue and the increase in non-fuel unit costs more than offset JetBlue's modest savings from lower fuel prices in the fourth quarter. As a result, the company's pre-tax margin fell to 16.7% from 19% a year earlier, while adjusted EPS slipped from $0.56 to $0.50. Still, these are very strong results by airline industry standards.
JetBlue Airways posted solid earnings in Q4. Image source: JetBlue Airways.
What management had to say
JetBlue's management was fairly pleased with the company's performance in Q4 and throughout the year. Furthermore, JetBlue's strong earnings over the past two years have allowed it to reduce its debt dramatically, putting it in a much better financial position going forward. According to interim CFO Jim Leddy:
We ended 2016 with a debt to adjusted capitalization ratio of 35%, in the middle of our target range of 30% to 40%. Our efforts to de-risk the balance sheet in recent years allows JetBlue to evolve toward a more balanced approach to capital allocation, starting with our $120 million in share repurchases in fourth quarter 2016.
JetBlue still plans to reinvest most of its cash flow to drive long-term revenue and earnings growth. However, if its growth plans pan out, JetBlue will have plenty of excess cash flow over the next few years that it could use to start paying dividends or to increase its share buyback activity.
Looking forward
For the first quarter of 2017, JetBlue plans to grow its capacity 4.5%-6.5% year over year. This remains slower than JetBlue's typical growth rate in recent years, which will continue to put pressure on unit costs. JetBlue expects its non-fuel unit costs to rise 3%-5% this quarter.
It expects to accelerate its growth later in the year, though, with full-year capacity up 6.5%-8.5%. As a result, non-fuel unit costs should only increase 1%-3% for the full year. On the other hand, jet fuel costs are likely to be a good deal higher than the $1.41/gallon JetBlue paid on average during 2016.
The big question is when JetBlue will return to sustainable unit revenue growth. Based on the company's recent revenue trajectory, that is likely to happen at some point in 2017: perhaps in the first quarter.
However, JetBlue's management doesn't like to give revenue guidance until the last month of the quarter, recognizing that a lot of factors can change in a few months. Thus, investors will have to be patient to see if JetBlue's long-awaited unit revenue recovery is already beginning.
