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JetBlue Airways Corporation Earnings: Ready for Takeoff?

By Adam Levine-Weinberg – Apr 24, 2018 at 1:10PM

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The popular airline managed to post a double-digit EPS gain despite facing a big increase in its fuel costs last quarter.

Airlines are facing stiff profit headwinds in 2018, as oil prices have surged higher over the past year, driving up the cost of jet fuel. For JetBlue Airways (JBLU 8.28%), the average fuel price per gallon rose 24% year over year last quarter, creating a roughly 4.5 percentage point pre-tax margin headwind.

Fortunately, JetBlue was able to offset the impact of higher fuel costs -- and most of its other cost increases -- with strong unit revenue growth. Meanwhile, its tax rate plunged due to the impact of corporate tax reform. This drove JetBlue's first-quarter earnings per share up from $0.24 to $0.27.

JetBlue Airways results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$1.75 billion

$1.60 billion

9.6%

Total unit revenue

$0.125

$0.1179

6.1%

Cost per available seat mile excluding fuel

$0.0855

$0.083

3.1%

Net income

$88 million

$82 million

7%

Pre-tax margin

6.3%

7.6%

N/A

Adjusted EPS

$0.27

$0.24

13%

Data source: JetBlue Airways Q1 earnings release. Note that some Q1 2017 metrics were recalculated based on new accounting standards for 2018.

What happened with JetBlue Airways this quarter?

During the first quarter, JetBlue faced significant operational disruptions from severe winter weather in New York and Boston, its two biggest focus cities. This led to numerous flight cancellations, causing capacity growth to undershoot JetBlue's target of 3.5% to 5.5%.

The rash of cancellations put pressure on JetBlue's non-fuel unit costs. Nevertheless, JetBlue was able to limit its non-fuel unit cost growth to 3.1% -- near the middle of its guidance range -- due to solid cost control and a shift in the timing of some maintenance expenses.

On the revenue side, JetBlue outperformed its initial expectations by a wide margin. In January, management projected that revenue per available seat mile (RASM) would rise 2.5% to 5.5% in the first quarter. The company increased that forecast in March and again earlier this month.

Ultimately, RASM surged 6.1% year over year in the first quarter, including a roughly 2 percentage point lift due to holiday timing and a 1 percentage point positive impact from operating fewer flights than planned. This was probably the best unit revenue result in the entire U.S. airline industry.

What management had to say

Not surprisingly, JetBlue executives were very pleased that the company beat its forecast last quarter. CEO Robin Hayes explained JetBlue's quarterly performance as follows:

Our strong RASM performance was driven by our revenue management initiatives, ongoing ancillary growth, and strong demand across our network. In addition, CASM ex-fuel growth was within our quarterly guidance, despite pressures from lower completion factor.

CFO Steve Priest added that unit cost trends are running in line with JetBlue's plans and will likely turn even more favorable later this year.

We are delighted with having closed a 15-year deal for the purchase and maintenance of NEO engines. ... Our continued focus on costs and our recent accomplishment give us confidence that we will achieve our CASM ex-fuel commitments from 2018 to 2020.

Looking forward

Looking to the second quarter, JetBlue will face extremely tough year-over-year revenue comparisons, as RASM rose 7% in the prior-year period. JetBlue will face a RASM headwind of approximately 3.75 percentage points due to the timing of Easter and some one-time factors that boosted unit revenue a year ago.

A JetBlue Airways plane preparing to land.

JetBlue will face stiff earnings headwinds in the second quarter. Image source: JetBlue Airways.

As a result, JetBlue expects RASM to decline 0% to 3% in the upcoming quarter. Meanwhile, the fuel cost headwind is expected to increase. JetBlue currently expects that its average fuel cost will reach $2.23 per gallon in the second quarter, up from $1.61 per gallon a year earlier -- a nearly 40% jump. Non-fuel unit costs are also set to rise 2% to 4% this quarter, driven in part by maintenance costs that were pushed out from the first quarter.

This means that JetBlue's pre-tax margin could plunge by about 10 percentage points year over year this quarter. That would still leave JetBlue solidly profitable, though, as it achieved an 18% pre-tax margin in the second quarter of 2017.

The outlook for the second half of 2018 is better. Most notably, non-fuel unit costs are expected to decline by 2% to 4% in the back half of the year, due to easy comparisons and growing momentum from JetBlue's cost savings initiatives. Strong peak demand and easier year-over-year revenue comparisons (compared to the second quarter) should support RASM growth, as well. This will provide a solid foundation for EPS growth -- as long as fuel prices don't go too much higher.

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

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