JetBlue Airways Corporation Earnings: Another Stumble

JetBlue Airways (JBLU -18.77%) posted solid results in the first quarter of 2018, as a shift in the timing of Easter drove strong unit revenue growth, offsetting a steep rise in fuel costs. By contrast, the company warned back in April that its profitability would plunge in the second quarter, with the timing of Easter becoming a headwind to unit revenue growth.

As expected, JetBlue's adjusted pre-tax profit plunged more than 50% year over year last quarter. Additionally, the company's forecast implies that it will continue to experience severe margin erosion in the third quarter of 2018.

JetBlue Airways results: The raw numbers

Data source: JetBlue Airways Q2 earnings release.

What happened with JetBlue Airways this quarter?

During the second quarter, JetBlue's unit revenue declined 1.2% year over year, due to a 3.75-percentage-point headwind from the timing of Easter and a credit card program bonus received in the year-earlier period. Meanwhile, its average fuel price rocketed higher from $1.61 per gallon to $2.28 per gallon.

On the bright side, adjusted nonfuel unit costs rose just 1.9% -- slightly better than the company's forecast of a 2% to 4% increase. Some expenses shifted from the second quarter to the third quarter, but JetBlue also benefited from a significant improvement in its underlying operational performance last quarter.

More recently, JetBlue announced that it will acquire 60 Airbus A220-300 jets to replace its entire E190 fleet by 2025. High fuel and maintenance costs for the aging E190s have pressured JetBlue's cost structure in recent years. JetBlue expects total unit costs for the A220 to be 29% lower than for its current E190 fleet. The carrier recorded a $319 million impairment charge last quarter as it wrote its E190s down to fair value, causing it to report a loss under official accounting rules. (The adjusted results reported above exclude this special charge.)

Finally, just last week, JetBlue implemented a reorganization in its New York headquarters. The company cut an unspecified number of jobs -- one source put the number at around 200 -- as part of a broader effort to reduce structural costs by up to $300 million by the end of 2020. Most of the job cuts came from buyouts and eliminating open positions, but there were also some layoffs.

What management had to say

JetBlue executives were relatively satisfied with the company's second-quarter performance in light of the rapid rise in jet fuel prices this year. Nevertheless, they recognize that the carrier needs to take further action to stabilize its margin performance. CEO Robin Hayes stated:

Our financial performance was impacted by the holiday calendar, but more importantly, by fuel prices that increased over 40% year over year. The team is focused on mitigating the impact of higher fuel in order to stabilize and improve our margins. We are planning a series of adjustments to both capacity and our ancillary revenue to take effect over the coming months.

While accelerating JetBlue's unit revenue growth is still a work in progress, management was happier about the company's cost performance. "By the end of the quarter we achieved $154 million in 2020 run rate savings as a result of our Structural Cost Program. We continue to expect an inflection in our unit cost trends in the second half as the benefits of the Structural Cost Program build," said CFO Steve Priest.

Looking forward

For the third quarter, JetBlue expects modest unit revenue growth of 0% to 3%. The midpoint of the range is lower than the 2.2% increase it achieved in the first half of 2018. Management noted that the switch to a new JetBlue Vacations platform had been bumpier than expected, which will likely reduce unit revenue growth by about 1 percentage point this quarter.

JetBlue hasn't been able to boost fares as much as some rivals. Image source: JetBlue Airways.

On the cost side, JetBlue expects adjusted nonfuel unit costs to rise 1% to 3% in the third quarter, while fuel costs could reach $2.33 per gallon, up from $1.69 per gallon a year earlier. This forecast suggests that JetBlue's adjusted pre-tax margin could slide from more than 16% a year ago to around 10% this quarter.

The good news is that JetBlue will cut capacity in its struggling Long Beach, California, focus city in September. It will also cut other underperforming flights in order to bolster unit revenue.

Meanwhile, nonfuel unit costs are set to decline significantly in the fourth quarter, reversing an 8.1% increase from the prior-year period. JetBlue's year-over-year fuel cost headwind should also start to dissipate then. That could drive a return to EPS growth before the end of the year.