The airline industry has a long history of carriers going belly up and excessive liabilities have been a key cause of many airline failures. Here I'll look what liabilities JetBlue Airways (NASDAQ: JBLU) faces, how these compare to assets, and how strong the airline is financially.
As of the end of 2014, JetBlue said it had $2.23 billion in total debt, $1.97 billion of which was long-term debt. That may seem like a lot, accounting for nearly half of the airline's capitalization, but airlines are best looked at for their net debt. This is because it is common industry practice to carry large amounts of cash while simultaneously carrying large amounts of debt since much of the debt matures years into the future but the cash may be needed in the event of an industry downturn. Using the total debt rather than net debt fails to account for the large amounts of cash carried by airlines that could be directed to pay down debt but are instead maintained as a short-term safety net.
It's also important to put net debt in context since a company's ability to pay its debts depends largely on how much cash flow it can generate. Here, a net debt to operating cash flow ratio compares how much net debt a company has to how much cash flow it's generating from operations. For airlines in particular, operating cash flow is more useful here than earnings since earnings include many non-cash and one-time charges such as depreciation and debt extinguishment costs.
|Airline||Net Debt||Cash Flow from Operations||Net Debt/Operating Cash Flow|
|JetBlue Airways||$1.5 billion||$912 million||1.6x|
|Southwest Airlines (NYSE: LUV)||N/A ($100 million net cash)||$2.9 billion||N/A (net cash)|
|Delta Air Lines (NYSE: DAL)||$6.5 billion||$4.9 billion||1.3x|
|American Airlines Group (NASDAQ: AAL)||$10.9 billion||$3.1 billion||3.5x|
|United Continental Holdings (NYSE: UAL)||$7.7 billion||$2.6 billion||3.0xe|
Compared with other major airlines, JetBlue has an edge in carrying a net debt-to-operating cash flow ratio at the low end of the industry range. However, with net cash and strong operating cash flow, Southwest Airlines is the industry standout even outperforming JetBlue on this metric. With a net cash balance of $100 million, Southwest could conceivably pay off it debt right now but, as previously mentioned, the airline wants to retain cash in case of tough industry times.
Like Southwest Airlines, but unlike some of its other legacy rivals, JetBlue doesn't sponsor a defined benefit pension plan of any significant size. Both carriers thus escape the problems of underfunded pensions, which are a $4.2 billion liability for United Continental, $7.6 billion for American Airlines, and $15.1 billion for Delta.
While the underfunded plans don't need to be fully funded immediately, contributions to them will be a drain on the bottom line for years to come. By opting for defined contribution plans instead of defined benefit plans, JetBlue and Southwest have managed to avoid the pension liabilities that follow the legacy carriers.
By avoiding these pension issues, JetBlue and Southwest avoid having to periodically contribute large sums of cash to pensions plans. Last year, Delta Air Lines contributed $250 million to its pension plan and American Airlines Group contributed $810 million to its own plan. While the pension plans are unlikely to cause insolvency since contributions can be periodically delayed and they will not come due all at once, contributions which vary by year will consume extra cash that could otherwise be redirected toward reinvestment in the airline or returned to shareholders through dividends and buybacks.
In effect, the pension plan contributions can reduce cash flow potentially negatively impacting a number investors look upon for valuing a company. Lacking defined benefit pension plans, JetBlue and Southwest can keep this cash for themselves giving them an edge in cash flow and EBIT margins over legacy competitors.
As an airline, JetBlue has to pay for the leasing of facilities and aircraft, and many of those leases can't be cancelled. In its most 2014 10-K form, the airline said it has $2 billion in non-cancellable lease and financing obligations for 2015 to 2019 and $1.36 billion in the years following.
Based on the ranking below, JetBlue is about average in percentage of aircraft leased.
|Airline||Percentage of Aircraft Leased|
|American Airlines Group||48%|
|United Continental Holdings||35%|
|Delta Air Lines||21%|
In the current environment, aircraft lease costs are easily covered, but they could cause problems in a sharp industry downturn. However, JetBlue is about average in this area so it's risks in this area are close to those of other carriers. JetBlue and other airlines are also under obligation to pay facility leases, since it's highly unusual for an airline to own part of an airport.
Also worth looking at is aircraft on order. Since orders for aircraft are placed years in advance of delivery, airlines typically have years' worth of commitments ahead of them. JetBlue notes that it has about $6.67 billion worth of commitments to purchase 127 additional aircraft and ten spare engines through 2023. At an average of 7.8 years of age, which is well below the average fleet ages of larger rivals, JetBlue's fleet does not require too much updating and many of these aircraft are poised to operate JetBlue's growth plans. However, JetBlue has not revealed the size of its fleet for 2023 so we don't know exactly how many aircraft will be used to grow the fleet and how many will replace existing planes.
|Airline||Number of Aircraft in Fleet||Average Aircraft Age|
|American Airlines Group||983||12.0 years|
|Delta Air Lines||772||16.9 years|
|United Continental Holdings||691||13.4 years|
|Southwest Airlines||665||11.1 years|
|JetBlue Airways||203||7.8 years|
But as the table above shows, even if JetBlue were to add 127 aircraft without replacing any existing planes, its fleet would still be less than half the size of the next largest competitor's. The ratio of planes added to planes removed may be adjusted by economic conditions or if the airline's growth strategy changes. But with a low average fleet age and growth ambitions, it's highly likely that many of these planes will be added without replacing an existing aircraft.
Like other airlines that are expanding or modernizing their fleets, JetBlue is likely to tap the debt markets to finance purchases of these aircraft. How successful the airline is in accomplishing this goal will depend on the health of the airline industry, interest rates, and investor appetite to purchase airline debt. Here, JetBlue may choose to use equipment-backed financing, whereby the aircraft itself is pledged as collateral. This method is common in the airline industry, as it typically results in a lower interest rate than unsecured debt offers since creditors have a direct claim on an asset in the event of default.
While having so many aircraft on order does present greater risk going forward, these orders are necessary for JetBlue to continue its expansion and improve the size of its network for the future. Considering all of the other major airlines also have significant aircraft orders lined up as they look to replace older aircraft and modernize their fleets, commitments to future orders should be seen as a necessary part of any airline and not just a risk for JetBlue.
The bottom line
JetBlue is one of the better positioned carriers using a net debt to operating cash flow metric but Southwest Airlines is the best positioned due to its net cash balance and strong operating cash flow to back it up. But JetBlue and Southwest both have an edge over legacy carriers in the area of pensions allowing JetBlue and Southwest to reinvest or give cash to shareholders rather than use it to fund pensions.
Over the next several years, JetBlue also has large number of aircraft on order as it both expands and modernizes its fleet as well as facility costs to pay. However, both of these are inescapable costs for airlines that want to keep their fleet modern and use airport facilities.
With healthy cash flow and a reasonable amount of liabilities, I do not see JetBlue as being at risk of insolvency in the current environment. However, it still has the risks inherent to an airline including cyclical volatility and high ongoing costs.