JetBlue’s 2023 is taking a drastic turn for the worse, with the US airline guiding significantly lower earnings per share (EPS) compared to earlier this year. While Q2 and HY1 produced strong results, the dark clouds hung over HY2. They are called changing demand, ATC and weather restrictions, and the winding down of the Northeast Alliance (NEA) with American Airlines. JetBlue pushes the reset button as HY2 headwinds mount.
First, let’s have a look at the positive results. Despite serious disruptions from bad weather and air traffic control labor shortages, JetBlue produced a $138 million net profit in Q2 compared to a $-188 million net loss in 2022. The Adjusted net profit was even $152 million.
Thanks to overall strong demand for leisure, visiting friends and relatives (VFR), and transatlantic travel, total operating revenues reached a record-high $2.610 billion compared to $2.445 billion in the same quarter last year. Of this, $2.460 was from tickets versus $2.302 billion last year and $150 million from other revenues versus $143 million. Each month during Q2 delivered a record result. And while margins in most regions exceed those of 2019, in the New York area they are behind by high single-digits.
Transatlantic the strongest region
Transatlantic travel performed “extremely well and (have) driven the strongest year-over-year revenues of all geographies in our network,” said Chief Operating Officer Joanna Geraghty. Paris was added to the network in late June and Amsterdam will follow by the end of this month.
Capacity was up 5.8 percent so within the 4.5 to 7.5 percent guidance. At +6.7 percent, revenue growth was within the 4.5 to 8.5 percent guidance. Revenues per available seat mile (RASM) were up by 0.9 percent year on year to $15.04 cents. Costs per available seat mile (CASM) excluding fuel were up 3.2 percent to $10 cents, with one percentage point each coming from proactive operational investments and severe ATC challenges, and another 0.5 percentage point from flooding at Fort Lauderdale Airport.
Q2 expenses were down by 7.2 percent to $2.375 billion from $2.558 billion. The fuel bill was down 34.2 percent to $510 million, offset by 11.2 percent higher salary costs to $772 million and 25.6 percent higher costs for aircraft rent to $34 million. Chief Financial Officer Ursula Hurley said that the carrier is well on track for its $70 million cost reduction target this year and that of $150 to $200 million in 2024. The operating profit was $235 million compared to $-113 million last year.
For HY1, JetBlue reports a $-54 million net loss compared to $-443 million in the same period of 2022. Total revenues grew to $4.937 billion from $4.181 billion, of which $4.631 was from tickets (2022: $3.904 billion). Including Q1, expenses were 6.1 percent higher than last year to $4.944 billion ($4.661 billion), with aircraft rent up 25 percent to $66 million, salaries by 9.5 percent to $1.514 billion but fuel down by 7.9 percent to $1.365 billion. The airline ended the period with a $-7 million operating loss versus $-480 million last year.
JetBlue ended June with $2.4 billion in liquidity, including a $600 million revolving credit facility. It repaid $200 million in debt and finance lease obligations and has $3.5 billion in long-term debt.
EPS headwinds
So far the good news. While most other US carriers remain bullish about Q3 and their full-year outlook, JetBlue has drastically revised its guidance. Instead of earnings per share of $0.70 to $1.00 this year, the carrier now guides a low $0.05 to $0.40 EPS and offers three main reasons for this.
The first is the termination of the Northeast Alliance with American that follows the Court ruling in May. JetBlue said on July 5 that it had taken the difficult decision not to appeal and instead proceed with winding down the alliance, which should have generated significant revenue growth during the year. Losing key codeshare routes and winding down NEA affects EPS by $0.25 to $0.20 cents per share, with the biggest impact expected in Q4.
To mitigate the effects, JetBlue will reallocate capacity from underperforming NEA routes to what it calls “higher value leisure opportunities” and “pockets of future demand”, but this will only have an effect on results from Q1 2024.
CEO Robin Hayes said that JetBlue will turn “our full focus” to the proposed acquisition with Spirit Airlines, “which we believe is the best and most effective to increase competition in the industry and bring the JetBlue effect (of lower fares) to more customers across the country.” Even without the NEA, New York will remain a key area for JetBlue, with over 200 departures per day.
As the Department of Justice is also trying to block this combination in Court, the outcome is far from certain. Hayes wasn’t willing to say if JetBlue has a Plan B if the merger doesn’t close, other than saying that his network team is always looking for opportunities to find growth in other regions.
ATC capacity restrictions in the New York area already forced JetBlue to reduce summer capacity by ten percent this summer. But the situation appears to be “much, much worse”. The area was also frequently confronted with severe thunderstorms in late June and early July, which reduced the completion factor by four points. Consequently, the airline is assuming similar effects in August and takes more disruptions, additional costs, and lost revenues into account. Hence, the impact on EPS of another $0.25 to $0.20.
Changing travel demand
A third factor affecting EPS is a shift from strong post-Covid domestic demand to international long-haul travel. This was also blamed by Alaska Airlines last week for a drop in demand and fares during the current summer period. JetBlue quantifies this to have an impact of $0.20 to $0.15 on EPS, although Hayes said the situation is expected to improve going into Q4 and winter holidays with VFR travel. “As we head into 2024, we will be more aggressive in redeploying capacity to pockets of future demand, areas where our leisure and VFR orientation give us an advantage in the marketplace.”
“Let me be clear: we are not satisfied with this change and we are taking action on all of these issues,” Robin Hayes added. The full-year cost outlook will remain intact as the airline is offsetting the incremental costs.
For Q3, JetBlue now guides capacity (available seat miles) to grow 5.5 to 8.5 year on year as well as for the full year. Q3 revenues will be down eight to four percent year on year and six to nine percent for FY23. Costs per available seat mile (CASM) excluding fuel should be up 2.5 to 5.5 percent in the third quarter and by 1.5 to 4.5 percent for the full year.
“We consider the coming quarter a reset, as we adjust for the loss of the NEA and for the overall shift we and others are seeing in post-Covid demand,” said Hayes. “Over the longer term, we continue to believe we have the right building blocks in place and we remain laser-focused on rebuilding our earnings power and adding incremental value to our shareholders.”
Not yet included in the revised EPS guidance is the effect of engine removal of its Pratt & Whitney Geared Turbofan fleet for inspections and repairs following the powder metal contamination problem that was disclosed last week. Ursula Hurley said that JetBlue has been notified by P&W that “we have a handful of engines that need to come off wing by mid-September.” This will double the number of aircraft on ground to around four, as the airline already has two A321neo’s on the ground since a few months due to other GTF issues. Currently, there is no impact on the A220s in the fleet which also suffer from GTF durability issues.
Nineteen aircraft deliveries assumed
In a fleet update, JetBlue is assuming deliveries of nineteen aircraft this year, including eleven Airbus A220-300s, four A321neo’s, and four A321LRs (see main picture). Of these, seven have been delivered through July. Aircraft financing worth $300 million has been secured year to date with a commitment to another $250 million.
The airline has included contractual returns of four A320ceo’s and six Embraer E190s this year, plus eight A320ceo’s and sixteen Embraers next year as it transitions to an all-Airbus fleet. Twelve E190s have been phased out, including seven that are parked and five that have been sold. Earlier this week, JetBlue retired its first-ever aircraft after 23 years. Supply chain issues have stretched the fleet transition much longer than was anticipated.
Stocks responded sharply to JetBlue’s revised guidance, with shares down by 8.43 percent and briefly reaching an intraday low of $6.32.
