The COVID-19 pandemic disrupted business for virtually all airlines last quarter, but JetBlue Airways (JBLU) was particularly hard hit. Given that the majority of its capacity touches the New York and Boston metro areas -- two early epicenters of the pandemic in the U.S. -- it should be no surprise that the carrier experienced particularly weak demand conditions.
JetBlue may continue to underperform peers in the near term, due to its heavy focus on the Northeast. That said, management is working aggressively to rein in costs, shore up the balance sheet, and capitalize on the pockets of demand that do exist. These efforts should enable the low-cost airline to recover over time.
A big loss and rapid cash burn
JetBlue's revenue fell 90% year over year to just $215 million last quarter on an 85% reduction in capacity. Revenue plunged 94% in April and 93% in May before improving sequentially to an 83% decline in June.
Meanwhile, JetBlue was able to reduce its adjusted operating expenses by 50% year over year, excluding special items. Including the benefit of payroll grants provided under the CARES Act, operating expenses were down 66%.
The net result was that JetBlue posted an adjusted pre-tax loss of $754 million. This was higher than the $589 million adjusted pre-tax loss reported last week by Alaska Air (ALK 0.86%), despite the fact that Alaska is slightly larger than JetBlue. JetBlue's adjusted net loss totaled $548 million, or $2.02 per share.
Similarly, while JetBlue's Q2 average daily cash burn of $9.5 million beat the company's initial estimate of $11 million, it was significantly higher than Alaska's average daily cash burn of roughly $6 million. The difference in performance can largely be traced to better revenue trends at Alaska Airlines, which in turn reflects stronger demand along the West Coast than in the East Coast markets where JetBlue is strongest.
How JetBlue is responding
The COVID-19 pandemic has eased significantly in JetBlue's core New York and Boston markets. However, that hasn't brought much relief to the business. Due to rising case numbers across much of the U.S., many states in the Northeast (including New York, New Jersey, Connecticut, and Massachusetts) are now requiring people coming from most other states to self-isolate for 14 days after arrival. While these measures are hard to enforce, they are still severely restricting air travel demand.
JetBlue has adopted a flexible approach to capacity management for the summer, seizing on short-term opportunities to add cash-positive flights to its schedule. Nevertheless, in the short term, the main things the airline can control are its balance sheet and its cost structure.
During the second quarter, the receipt of government payroll support funds and various financing transactions more than offset JetBlue's cash burn. As a result, the company expanded its cash and investments from $1.8 billion at the beginning of the quarter to $3.4 billion by the end of June. It also plans to raise at least $200 million in Q3 through aircraft sale-leasebacks and is eligible for a secured government loan of up to $1.14 billion.
JetBlue expects to burn nearly $250 million a month this quarter, based on the midpoint of management's guidance. However, its balance sheet moves have given it plenty of liquidity to withstand this short-term cash burn. JetBlue is also implementing additional cost cuts, such as renegotiating contracts, shifting to an outsourcing model at airports where it doesn't operate many flights, offering various buyout and voluntary leave options to employees, and retiring some aircraft earlier than previously planned.
A waiting game
While JetBlue's balance sheet was quite solid entering 2020, the airline clearly can't sustain its recent pace of cash burn for very long. The good news is that JetBlue focuses on leisure and "visiting friends and relatives" traffic: two segments of the market that should recover relatively quickly as the pandemic eases. Indeed, JetBlue reported strong sequential improvement in June, prior to the recent uptick in COVID-19 cases.
If key markets like Florida and California can get their case numbers under control over the next few months, JetBlue could potentially capitalize on a wave of pent-up demand later this year. Moreover, a substantial portion of normal demand in JetBlue's markets will likely return quickly once a vaccine becomes widely available.
If the COVID-19 pandemic stretches on with no end in sight, JetBlue will need to get much more aggressive with respect to cost cutting by next spring, including large-scale furloughs and layoffs. Conversely, if the U.S. manages to bring the pandemic under control within the next few quarters, JetBlue is well positioned to make a fast recovery.