After expanding rapidly during its first decade of operations, JetBlue Airways (NASDAQ:JBLU) found itself with an uncomfortably high debt load at the time of the Great Recession. In the decade since then, the popular low-fare airline has become far more disciplined about growth and capital allocation.
Indeed, between late 2009 and the end of 2017, JetBlue slashed its debt from $3.4 billion to just $1.2 billion. It did so by slowing its growth rate, paying for most new aircraft with cash, and using virtually all of its excess cash flow for debt reduction.
As a result, JetBlue now has one of the best balance sheets in the airline industry. The company is capitalizing on that position of strength by pivoting its capital allocation strategy to focus more on share buybacks. Recent debt offerings indicate that JetBlue plans to continue buying back stock at a steady pace.
Share repurchases on the menu
JetBlue began returning cash to shareholders in a meaningful way via share repurchases in 2017. (Prior to that point, the company had bought back some stock, but only enough to offset the shares it was issuing as part of its employee stock ownership plan or as stock-based compensation.)
In the first nine months of 2017, JetBlue repurchased $380 million of stock, exhausting its share repurchase authorization. Just before the end of that year, the company's board approved a new two-year $750 million share repurchase authorization. JetBlue is set to complete that program this quarter. In September, JetBlue's board authorized a new $800 million buyback program that will run from Oct. 1, 2019 until the end of 2021.
Just in the past three years, share buybacks have driven a significant reduction in JetBlue's share count. Last quarter, the company reported a diluted share count of 295.9 million, down from 341.6 million in the final quarter of 2016. The new share repurchase authorization announced in September would allow the company to buy back another 14% of its shares, based on the current stock price, although it's important to note that stock compensation and employee stock purchases will offset some of those potential buybacks.
More debt means more buybacks are coming
While JetBlue's board approved this new repurchase program in September, it wasn't initially clear whether JetBlue would have enough cash to complete it. Over the past 12 months, JetBlue has generated a little less than $1.5 billion of operating cash flow. It used nearly 80% of this cash flow for capital expenditures. Virtually all the rest went to cover scheduled debt maturities. As a result, JetBlue had to raise new debt to free up cash for share repurchases during this period.
Looking ahead, operating cash flow may rise, as JetBlue benefits from its numerous profit improvement initiatives. On the flip side, the carrier expects to spend between $490 million and $610 million on capex just this quarter, with capex rising to between $1.25 billion and $1.45 billion next year. Meanwhile, it has $64 million of debt and capital leases maturing in Q4 2019 and another $313 million in 2020.
In other words, JetBlue may generate enough free cash flow to pay its scheduled debt maturities over the next year or two, but even that's not guaranteed. It certainly won't have a meaningful amount left over to pay for buybacks. However, the company just took advantage of the low interest rate environment to issue a substantial amount of debt.
In September, JetBlue issued $218 million of new debt, secured by 12 aircraft. It ended the third quarter with $2.5 billion of debt and lease liabilities. Last week, JetBlue moved to raise an additional $772 million of debt through an enhanced equipment trust certificates (EETC) offering, secured by 25 Airbus A321s delivered in 2017 and 2018. This transaction alone would increase JetBlue's adjusted debt by more than 30% initially.
A great move for shareholders
Having raised roughly $1 billion through debt offerings since the beginning of September, JetBlue will have ample cash on hand to start its new share buyback program before the end of 2019. This will allow it to continue repurchasing stock at a high rate at a time when JetBlue shares still trade for less than 10 times forward earnings.
Importantly, JetBlue got a great credit rating for its big EETC transaction and achieved a blended interest rate of less than 3%. The net result of a low stock valuation and an extremely low interest rate is that debt-funded buybacks will have a strong positive impact on earnings per share.
Of course, it wouldn't be good for JetBlue to take on too much debt to fund its share buybacks. However, the company is starting with a very conservative balance sheet. Issuing additional debt at a rock-bottom interest rate in order to buy back more stock at a low valuation seems like a very reasonable -- and shareholder-friendly -- move by JetBlue.