JetBlue Airways (JBLU +6.53%) faced significant challenges last quarter. Jet fuel prices were up $0.33 a gallon year over year. Further, Hurricanes Irma and Maria devastated large swathes of Florida and the Caribbean in mid-late September, causing a downturn in leisure travel to those key markets for the airline.
As a result, JetBlue's fourth-quarter adjusted earnings declined significantly. Nevertheless, it outperformed its guidance, and is taking steps to maintain its profitability despite an ongoing rise in jet fuel prices.
JetBlue Airways results: The raw numbers
|
Metric |
Q4 2017 |
Q4 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$1.76 billion |
$1.64 billion |
7% |
|
Total unit revenue |
12.66 cents |
12.43 cents |
1.8% |
|
Adjusted cost per available seat mile excluding fuel |
8.63 cents |
7.98 cents |
8.1% |
|
Adjusted net income |
$103 million |
$172 million |
(40%) |
|
Pre-tax margin |
9.7% |
16.7% |
N/A |
|
Adjusted EPS |
$0.32 |
$0.50 |
(36%) |
Data source: JetBlue Airways Q4 earnings release. Chart by author.
What happened with JetBlue Airways this quarter?
The key highlight of JetBlue's Q4 was the recovery from the two big September hurricanes. Hurricane Irma, which hit Florida, didn't have much of a lingering impact on demand. By contrast, Puerto Rico still has not recovered from Hurricane Maria.
The two storms reduced JetBlue's unit revenue and drove up its unit costs last quarter. It estimates that the storms reduced its pre-tax margin by 2.2 percentage points and its EPS by $0.09 in Q4. This would imply that the storms caused half of the company's year-over-year decline in EPS.
That said, demand has been recovering faster than expected in Puerto Rico. Meanwhile, both pricing and demand improved in the domestic market. As a result, JetBlue raised its unit revenue guidance in December and raised it again earlier this month. Revenue per available seat mile (RASM) ultimately rose 1.8%, whereas JetBlue had initially forecast a 0% to 3% decline.
JetBlue's cost performance was less impressive last quarter. Adjusted non-fuel unit costs surged 8.1% year over year. Still, more than half of that increase was driven by hurricane-related disruption and JetBlue's decision to follow some of its competitors and give employees a $1,000 year-end bonus as a way of sharing some its corporate tax cut windfall.
What management had to say
Despite the steep year-over-year decline in JetBlue's earnings, management said it was pleased with the company's revenue performance. "Our fourth quarter results were driven by solid demand across our network, our successful ancillary platform and recovery in the Caribbean that exceeded our expectations, following a historic hurricane season," declared CEO Robin Hayes.
Hayes also noted that JetBlue's pre-tax margin remained slightly above the average of its peers during the fourth quarter. However, the company's long-term target is more ambitious. It wants to be consistently near the top of its industry in terms of profitability.
JetBlue wants to be one of the most profitable airlines in the U.S. Image source: JetBlue Airways.
CFO Steve Priest alluded to this goal in his comments. "In the fourth quarter and 2017 we took actions to navigate a complex external environment, while striving to protect and enhance our margins. ... We continue to demonstrate our ability to make progress in our commitments to all our stakeholders and to lay the foundation that will ultimately achieve superior margins," he said.
Looking forward
For the first quarter, JetBlue expects unit revenue growth to accelerate further. RASM is likely to rise by 2.5% to 5.5%, including a 2 percentage point net benefit from the timing of holidays.
On the other hand, JetBlue projects that non-fuel unit costs will increase by about 2% to 4% this quarter. Additionally, it anticipates a 28% year-over-year surge in the price of jet fuel. This will lead to another pre-tax margin decline.
However, by the second half of the year, JetBlue expects non-fuel unit costs to start declining, due to easier year-over-year comparisons and savings from its structural cost program. Depending on where fuel prices are and the strength of demand, this could pave the way for a return to pre-tax profit growth.
Lastly, JetBlue will reap big tax savings in 2018 due to Washington's corporate tax cuts. The company estimates that its effective tax rate will be between 24% and 26%, compared to the 37% to 39% range it has paid in previous years. This will provide a year-over-year earnings tailwind of at least 20%, helping it get EPS growing again in 2018.
