JetBlue Airways Corp. (JBLU): “Am I Blue? You’d be too ...” if your first quarter revenues increased by nearly 24% (to $608 million in 2007 from $490 million in 2006) and yet the company’s Chief Executive warned about lower profit margin expectation for the year ahead. The disturbing comment by JetBlue’s management regarding future margin pressures after this turbulent winter weather (... yes, a bad pun was intended...) is not reassuring to investors. Following a difficult winter, there might have been hope for somewhat encouraging comments by management regarding the full 2007 financial outlook. JetBlue is still spinning and the markets’ gloomy reaction seems premature or, at least, a bit over-done—but JetBlue is, after all, an airline and history has not been kind to investors in the sector.

SUMMARY FINANCIAL RESULTS
 

The first-quarter results were surprisingly good—there was no “single” expense item which would suggest a systemic pattern of weakening margins. In fact, 1Q loss in 2007 was $13 million, half when compared to the $25 million loss posted in the same period 2006. The public relations disaster during the winter of 2006/2007 should have had investors expecting far worse performance—and the most tangible cost of that was a rise in Sales & Marketing Expense (S&M) by $9 million to $29 million from $20 million in 2006, but what’s $9 million against a $608 million revenue figure. Less costly than I would have expected given the amount of public relations repair needed and cost to smoothover passenger anger.

So what’s the “real” problem? Not this past winter but the yellow caution sign is lit and it appears that interest expense was and will remain a critical profitability issue, which increased by $15 million, to $52 million from $37 million, quarter-to-quarter. That’s not great considering the higher $9 million S&M figure—yet it is considerably more worrisome. The interest rate outlook is tenuous at best—and the Fed’s posture to maintain the “status-quo,” leaves one with a feeling that there is only one way—and that’s up. Rising interest rates are not favorable for any capital-intensive industry.

With JetBlue’s commitment to new aircraft and facilities expansion, this might explain the CEO’s cautionary remarks (... the Executive Suite and Board Room may be becoming a comfortable environment ... and the reality of getting “big” may be starting to set in—but let’s not speculate as to the inner anxieties of JetBlue... they’ve already made them public...). This interest rate outlook could readily be contributing to that yellow caution light (... I know it even has me worried...).

Interest expense increased 39%, about $15 million, associated with the debt and capital lease financing of 12 additional aircraft and financing of previously unsecured property, pushing interest costs up by $11 million and at higher rates. Higher accretion in interest, about $3 million, is attributable to JetBlue’s construction obligation for their new terminal at JFK, which was capitalized.

Next area of neurosis, fuel. Fuel costs represented 31% of operating expenses in both the first-quarter of 2007 and 2006. Fuel expense and, excluding hedging, a 1% increase in average fuel cost per gallon, yielding an average fuel cost per gallon at $1.88 for the first quarter of 2007 compared to $1.86 for the first quarter of 2006. (... It falls under the same category as interest rate stability ... “not good,” that is...). JetBlue has an outstanding history of hedging fuels cost in a very successful manner. (... Not to be Zen, but nothing lasts forever...). JetBlue has based its 2007-cost picture based on fuel prices at $2.06 per gallon, “net” of effective hedges and, nevertheless, a 7% to 9% increase over 2006. This can’t give management a strong feeling of confidence when people thought the bottom was falling out of oil when it dipped below $50 per barrel—a year or two ago, those same forecasters were predicting oil hitting $200 per barrel.

Thus, fuel is an area of concern—and the international warning signs on that front are not good, especially when countries like Russia, Iran, China, to name just a few majors, are playing the: “I’ll stroke yours, if you stroke mine” game. (See Whitehall Financial Advisors LLC article EURO-Energy - Electric Utility Comment. Not all the news is bad (... just most of it...) fuel consumption per block hour was lowered by 6% due to utilization of the lighter, efficient EMBRAER 190 aircraft plus various fuel conservation initiatives. But (... yes, there a “but” coming...) the cost per available seat mile increased 6%, caused by the decrease in average stage length.

The bottom line, operating expenses per available seat mile increased 7.5% to 8.43 cents for the three months ended March 31, 2007 due primarily to a lower average stage length. Excluding fuel, the result for the same three months ended March 31, 2006 was an 8.2% increase in the cost per available seat mile.

Then there is the capacity neurosis—how much is too much and too old? (... I think this phrase has been used to characterize me, more than once...). In 2007, an average of 26 additional aircraft were placed in service—thereby increasing capacity to 12% from approximately 7.4%. Capacity was reduced due to the removal of a row of seats on JetBlue’s Airbus A320 aircraft (accounting for a 2% decline in available seat miles during the quarter). Unfortunately, with new capacity comes the expanding need for fuel and associated risks of attending to larger fleet. Maintenance materials and repair expenses will be other features to focus on as the existing aircraft gradually age—and maintenance expense should be expected to increase significantly with age (... odd, that’s exactly what my plastic surgeon said...).

KEY OPERATING STATISTICS

 

JetBlue cannot be neurotic about everything (... well, it can’t hurt to worry just a little...) cash flow and liquidity measures posted a respectable showing for the first quarter. Cash flows from operations were $147 million for the three months ended March 31, 2007 compared to $87 million for the three months ended March 31, 2006. JetBlue almost passed the acid-test ratio: depreciation & amortization (D&A)-to-interest expense—a key liquidity item. When the books were closed on March 31st this year, D&A rounded up to $45 million relative to approximately $48 million direct cash interest expense as reported on the Income Statement. To the compulsive (... not the neurotic...), the exact ratio is 93.75 but we’ll round it off to 94%. Ideally, consistently above 100% or better would help me sleep better at night (... however, there is medication for that...) but for an airline, it is a “close enough” number. JetBlue even managed to end the first quarter with Cash & Equivalents totaling $774 million, up from the $699 million at December 31, 2006—a respectable $75 million.

Liquidity and balance sheet indicators are impressive—considering it is “an airline.” Management is not neurotic (... at least not yet...) so their comments need to taken in context. JetBlue operates a complex business, where profit and loss can be well beyond any management’s control. Airlines have a history which includes a long and very distinguished list of failures—some, even multiple times. Airlines are “destined to fail,” my mentor said.

Has JetBlue faded, yes (... to only baby powder Blue...). Death does not appear to be knocking at their door—either they’re just having a middle-age crisis or traveling down the same path as some of their predecessors, which will as they say: “Be known in the fullness of time.”

(... If you have no clear idea on how I stand, regarding JetBlue, than this comment has been a success).