UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-49728
JETBLUE AIRWAYS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 87-0617894 (I.R.S. Employer Identification No.) |
27-01 Queens Plaza North, Long Island City, New York 11101
(Address, including zip code, of registrant's principal executive offices)
(718) 286-7900
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 par value The NASDAQ Global Select Market
Participating Preferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes o No ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ''large accelerated filer,” “accelerated filer'' and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý Accelerated filer o
Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of June 28, 2013 was approximately $1.5 billion (based on the last reported sale price on the NASDAQ Global Select Market on that date). The number of shares outstanding of the registrant's common stock as of January 31, 2014 was 295,632,350 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2014 Annual Meeting of Stockholders, which is to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K.
Table of Contents | ||
PART I. | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III. | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV. | ||
Item 15. | ||
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FORWARD-LOOKING INFORMATION
Statements in this Form 10-K (or otherwise made by JetBlue or on JetBlue’s behalf) contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which represent our management’s beliefs and assumptions concerning future events. When used in this document and in documents incorporated herein by reference, the words “expects,” “plans,” “anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “outlook,” “may,” “will,” “should,” “seeks,” “targets” and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks, uncertainties and assumptions, and are based on information currently available to us. Actual results may differ materially from those expressed in the forward-looking statements due to many factors, including, without limitation, our extremely competitive industry; volatility in financial and credit markets which could affect our ability to obtain debt and/or lease financing or to raise funds through debt or equity issuances; increases and volatility in fuel prices, maintenance costs and interest rates; our ability to implement our growth strategy; our significant fixed obligations and substantial indebtedness; our ability to attract and retain qualified personnel and maintain our culture as we grow; our reliance on high daily aircraft utilization; our dependence on the New York metropolitan market and the effect of increased congestion in this market; our reliance on automated systems and technology; our being subject to potential unionization, work stoppages, slowdowns or increased labor costs; our reliance on a limited number of suppliers; our presence in some international emerging markets that may experience political or economic instability or may subject us to legal risk; reputational and business risk from information security breaches; changes in or additional government regulation; changes in our industry due to other airlines' financial condition; a continuance of the economic recessionary conditions in the U.S. or a further economic downturn leading to a continuing or accelerated decrease in demand for domestic and business air travel; and external geopolitical events and conditions. It is routine for our internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections, beliefs and assumptions upon which we base our expectations may change prior to the end of each quarter or year. Although these expectations may change, we may not inform you if they do.
You should understand that many important factors, in addition to those discussed or incorporated by reference in this report, could cause our results to differ materially from those expressed in the forward-looking statements. Potential factors that could affect our results include, in addition to others not described in this report, those described in Item 1A of this report under “Risks Related to JetBlue” and “Risks Associated with the Airline Industry.” In light of these risks and uncertainties, the forward-looking events discussed in this report might not occur.
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ITEM 1. BUSINESS
OVERVIEW
General
JetBlue Airways Corporation, or JetBlue, is New York's Hometown Airline™. In 2013 JetBlue carried over 30 million passengers with an average of 800 daily flights and served 82 destinations in the United States, the Caribbean and Latin America.
JetBlue was incorporated in Delaware in August 1998, commenced service on February 11, 2000 and by the end of 2013 had grown to become the 5th largest passenger carrier in the U.S. based on revenue passenger miles as reported by these passenger airlines. We believe our differentiated product and service offering combined with our competitive cost advantage enables us to compete fiercely in the high-value geography we serve. Looking to the future we plan to continue to grow in our high-value geography, invest in industry-leading products and provide award winning service by our 15,000 dedicated employees, whom we refer to as Crewmembers. We believe in the future we will continue to differentiate ourselves from the other airlines, enable us to continue to attract a higher mix of business travelers and allocate further profitable growth to the Caribbean and Latin America. We are focused on driving to deliver solid results for our shareholders, our Crewmembers and our customers.
As used in this Form 10-K, the terms “JetBlue”, “we”, “us”, “our” and similar terms refer to JetBlue Airways Corporation and its subsidiaries, unless the context indicates otherwise. Our principal executive offices are located at 27-01 Queens Plaza North, Long Island City, New York 11101 and our telephone number is (718) 286-7900.
Our Industry and Competition
The U.S. airline industry is extremely competitive, challenging and often volatile. It is uniquely susceptible to external factors such as domestic and international economic downturns, inclement weather, natural disasters and acts of terrorism. We operate in a capital and energy intensive industry which has high fixed costs as well as heavy taxation and fees. Airline returns are sensitive to slight changes in fuel prices, average fare levels and passenger demand. The principal competitive factors in the airline industry include fares, brand and customer service, route networks, flight schedules, aircraft types, safety records, code-sharing and interline relationships, in-flight entertainment and connectivity systems and frequent flyer programs.
Price competition is strong in our industry and occurs through price discounting, fare matching, targeted sale promotions, ancillary fee additions and frequent flyer travel initiatives. All of these measures are usually matched by other airlines in order to maintain their competitive position. Our ability to meet this price competition depends on, among other things, our ability to operate at costs equal to or lower than our competitors.
Since 2001, the majority of traditional network airlines have undergone significant financial restructuring including bankruptcies, mergers and consolidations. These processes typically result in a lower cost structure through reduction of labor costs, restructuring of commitments (including debt terms, leases and fleet), modification or termination of pension plans, increased workforce flexibility and innovative offerings. These actions also have provided significant opportunities for realignment of route networks, alliances and frequent flyer programs. These factors have had a significant influence on the industry's improved profitability.
2013 OPERATIONAL HIGHLIGHTS
We believe our differentiated product, high-value geography and competitive cost advantage relative to the other airlines have contributed to our continued success in 2013. Our 2013 operational highlights include:
•Fleet - We restructured our long-term order book so as to better match our capacity with network demand at a lower unit cost in the future. Specifically, we deferred 24 EMBRAER 190 aircraft from 2014-2018 to 2020-2022, converted 18 Airbus A320 positions to larger A321s and added an incremental order for 35 A321 aircraft. All Airbus aircraft delivered going forward are to be equipped with Sharklets® which are expected to reduce fuel consumption. Most of the aircraft currently in our fleet are expected to be retrofitted with Sharklets® starting in 2015. Finally, we took delivery of the Airbus A321, a variant of the A320. With up to 190 seats we expect it will help us better serve our high-value geography more effectively.
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•Product enhancements - Throughout 2013 we continued to invest in industry-leading products which we believe will continue to differentiate our product offering from the other airlines. We launched Fly-Fi™ in-flight internet service with connectivity speed significantly faster than those offered by other U.S. airlines. We expect to complete the retrofit of our Airbus fleet with Fly-Fi™ by the end of 2014 and anticipate retrofitting the Embraer fleet shortly thereafter. We announced our premium transcontinental service, Mint™, which is scheduled to commence June 2014. Mint™ is designed to include 16 fully lie-flat beds, four of which will be in suites with privacy door a first in the U.S. domestic market.
•Network - We continued to expand and grow in our high-value geography. Specifically, we grew our Boston network with nearly 80,000 flights in 2013. We are now the largest carrier in Boston and account for more than 30% of all flights by U.S. carriers from this airport. We expanded operations in San Juan, Puerto Rico and built relationships with smaller airlines throughout the Caribbean to help feed these operations. We are working with the local authorities of Broward County, Florida, who have committed to runway and terminal expansion plans at Fort Lauderdale-Hollywood Airport. These plans align with our future plans at Fort Lauderdale-Hollywood of growing to 100 flights per day.
•TrueBlue and partnerships - In June we announced members of our TrueBlue frequent flyer program could earn and keep points without expiration. In October we became the first U.S. airline to offer family pooling where families and small groups can now elect to earn and share TrueBlue points, free of charge. Our customers determine their own "family". Additionally, we expanded our portfolio of commercial airline partnerships throughout the year and began codeshare agreements with current partners Emirates in October and South African Airways in December.
•Customer Service - We were recognized by J.D. Power and Associates for the ninth consecutive year as the “Highest in Airline Customer Satisfaction among Low-Cost Carriers.” We were additionally recognized by Airline Ratings as the "Best Low Cost Airline – The Americas" receiving 7/7 stars for safety, and 5/5 stars for our product offering.
THE JETBLUE EXPERIENCE AND STRATEGY
We offer our customers a distinctive flying experience which we refer to as the “JetBlue Experience”. We believe we deliver award winning service which focuses on the customer experience from booking their itinerary to arrival at their final destination. Typically our customers are neither the high-traffic business travelers nor the ultra-price sensitive travelers. Rather, we believe we are the carrier of choice for delivering a differentiated product, brand and award winning customer service to the majority of travelers who have been underserved by the other airlines.
Differentiated Product and Service
Delivering the JetBlue Experience to our customers through our differentiated product and service is core to our mission to inspire humanity. We look to attract new customers to our brand and provide current customers reasons to come back to us. A key element of our success is the belief that competitive fares and quality air travel need not be mutually exclusive.
Our award winning service begins from the moment our customers purchase a ticket across a variety of our distribution channels such as www.jetblue.com, our mobile applications or our reservations centers. Upon arrival at the airport they are welcomed by our dedicated Crewmembers and can experience a variety of products including having their first checked bag for free. They can also purchase one of our ancillary options, such as Even More™ Speed, which allows them to enjoy an expedited security experience in most domestic JetBlue locations.
Once onboard, customers enjoy leather seats in a comfortable single class layout and the most legroom in the main cabin of all U.S. airlines (based on average fleet-wide seat pitch). Customers who have purchased our Even More™ Space seats enjoy additional legroom; these seats are available on all of our aircraft. Our in-flight entertainment system include 36 channels of free DIRECTV®, 100 channels of free SiriusXM® satellite radio and premium movie channel offerings from JetBlue Features®, our source of first run films. All customers can enjoy an assortment of free and unlimited brand name snacks and beverages as well as having the option to purchase premium beverages and food selections. They also have the option to purchase specially-tailored products such as our "blanket & pillow" set. In December 2013 we began to retrofit our fleet with Fly-Fi™. This connectivity is significantly faster than the in-flight connections offered by other U.S. airlines and allows for high-quality video streaming for all customers onboard. We expect installations to be completed on our Airbus fleet in 2014, after which we plan to begin installations on our EMBRAER 190 fleet.
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Our Airbus A320 aircraft have 150 seats and a wider cabin than both the Boeing 737 and 757 aircraft operated by many of our competitors on their domestic routes. Our EMBRAER 190 aircraft have 100 seats arranged in a two-by-two seating configuration. In October 2013 we received delivery of the first Airbus A321 aircraft in our fleet, which was placed into service in December 2013 with 190 seats. Beginning in June 2014 we plan to introduce a number of Airbus A321 aircraft which include our premium transcontinental service, Mint™. We anticipate this service will include 16 fully lie-flat beds, four of which will be in suites with privacy doors, a first in the U.S. domestic market. We intend that Mint™ customers will have access to a 15-inch flat screen with up to 100 channels of DIRECTV®, 100+ channels of SiriusXM® radio and access to an assortment of complimentary food and beverages.
In addition to our core products we also sell vacation packages through JetBlue Getaways™, a one-stop, value-priced vacation service for self-directed packaged travel planning. These packages offer competitive fares for air travel on JetBlue, along with a selection of JetBlue-recommended hotels and resorts, car rentals and attractions.
We work to provide a superior air travel experience, including communicating openly and honestly with customers about delays and service disruptions. We are the only U.S. major airline to have a Customer Bill of Rights, a program introduced in 2007 to provide for compensation to customers who experience avoidable inconveniences as well as some unavoidable circumstances. It also commits us to high service standards and holds us accountable if we do not. In 2013, we completed 99.2% of our scheduled flights. Unlike most other airlines, we have a policy of not overbooking flights.
Our customers have repeatedly indicated the distinctive JetBlue Experience is an important reason why they choose to fly us over other carriers. We measure and monitor our customer feedback regularly which helps us to continuously improve customer satisfaction. One way we do so is by measuring our net promoter score, or NPS. This metric is used by companies in many industries to measure and monitor customer experience. Many of the leading consumer brands that are recognized for great customer service receive high NPS scores. We believe a higher NPS score has positive effects on customer loyalty and leads to increased revenue.
Network/ High-Value Geography
We are predominately a point-to-point system carrier, with the majority of our routes touching at least one of our six focus cities. During 2013 approximately 90% of our customers flew on non-stop itineraries.
Airlines with a strong leisure traveler focus are often faced with high seasonality. As a result we are continually working to manage our mix of customers to include business travelers as well as travelers visiting friends and relatives (VFR). VFR travelers tend to be slightly less seasonal and less susceptible to economic downturns than traditional leisure destination travelers. Understanding the purpose of our customers' travel helps us optimize destinations, strengthen our network and increase unit revenues.
As of December 31, 2013, our network served 82 BlueCities in 25 states, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and 15 countries in the Caribbean and Latin America. In 2013, we commenced service to seven new BlueCities including Lima, Peru, our southernmost BlueCity. We also made tactical changes across our network by announcing new routes between existing BlueCities. We group our capacity distribution based upon geographical regions rather than a mileage or length of haul. The historic distribution for the past three years of available seat miles, or capacity, by region is:
Year Ended December 31, | |||||||||
Capacity Distribution | 2013 | 2012 | 2011 | ||||||
Florida | 30.9 | % | 31.1 | % | 32.7 | % | |||
Latin, including Puerto Rico (1) | 28.1 | 27.2 | 24.7 | ||||||
Transcontinental | 27.9 | 28.6 | 29.1 | ||||||
Central | 5.2 | 5.0 | 5.0 | ||||||
East | 5.0 | 4.9 | 5.1 | ||||||
West | 2.9 | 3.2 | 3.4 | ||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |||
(1) Domestic operations as defined by the DOT include Puerto Rico and the U.S. Virgin Islands but for the purposes of the capacity distribution table above we have included these locations in the Latin region.
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Our network growth over the past few years has been focused on the business traveler in Boston as well as travelers to the Caribbean and Latin America. Looking to the future we expect to focus on increasing our presence in Fort Lauderdale-Hollywood which is a destination we currently serve primarily from the Northeast. We believe there is an opportunity at Fort Lauderdale-Hollywood to increase our presence to destinations throughout the Caribbean and Latin America. In 2014 we anticipate further expanding our network and have announced the following new destinations:
Destination | Service Scheduled to Commence | |
Savannah, Georgia (SAV) | February 13, 2014 | |
Port of Spain, Trinidad and Tobago (POS)* | February 24, 2014 | |
Detroit, Michigan (DTW) | March 10, 2014 | |
* subject to receipt of government operating authority | ||
Airline Commercial Partnerships
Airlines frequently participate in commercial partnerships with other carriers in order to provide inter-connectivity, code-sharing, coordinated flight schedules, frequent flyer program reciprocity and other joint marketing activities. At December 31, 2013 we had 31 airline commercial partnerships. Our commercial partnerships typically begin as an interline agreement allowing a customer to book one itinerary with tickets on multiple airlines. We have strengthened the relationship with two of our existing partners in 2013 to include code-sharing, a practice in which one airline places its name and flight number on flights operated by another airline. In 2014, we will continue to seek additional strategic opportunities through new commercial partners as well as assess ways to deepen select current airline partnerships. We will do this by expanding one-way code share to, two-way code-share relationships and other areas of cooperation such as frequent flyer programs. We believe these commercial partnerships allow us to leverage our strong network and drive incremental traffic and revenue while improving off-peak travel.
Marketing
JetBlue is a widely recognized and respected global brand. This brand has evolved into an important and valuable asset which identifies us as a safe, reliable, high value airline. Similarly, we believe customer awareness of our brand has contributed to the success of our marketing efforts. It enables us to promote ourselves as a preferred marketing partner with companies across many different industries.
We market our services through advertising and promotions in various media forms including popular social media outlets. We engage in large multi-market programs, local events and sponsorships as well as mobile marketing programs. Our targeted public and community relations efforts reflect our commitment to the communities we serve, as well as promoting brand awareness and complementing our strong reputation.
Distribution
Our primary and preferred distribution channel to customers is through our website, www.jetblue.com, our lowest cost channel. We additionally have mobile applications for both Apple and Android devices which have robust features including real-time flight information updates and mobile check-in for certain routes. Both of these channels are designed to enhance our customers' travel experience and are in keeping with the JetBlue Experience. Our participation in global distribution systems (GDSs) supports our profitable growth, particularly in the business market. We find business customers are more likely to book through a travel agency or a booking product which rely on a GDS platform. Although the cost of sales through this channel is higher than through our website, the average fare purchased through the GDSs is generally higher and often covers the increased distribution costs. We currently participate in several major GDSs and online travel agents (OTAs). Because the majority of our customers book travel on our website, we maintain relatively low distribution costs despite our increased participation in GDS and OTA in recent years.
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Customer Loyalty Program
TrueBlue is our customer loyalty program designed to reward and recognize loyal customers. Members earn points based upon the amount paid for JetBlue flights and services from certain commercial partners. Our points do not expire and for as little as 5,000 points and related taxes/fees can be redeemed for a one-way flight. The program has no black-out dates or seat restrictions and any JetBlue destination can be booked if the member has enough points to exchange for the value of an open seat. In addition to points, members can earn badges and rewards for JetBlue-related activities like flying, interacting with partners and social media use. Since 2012 we have had an additional level for our most loyal customers called Mosaic. In order to qualify for Mosaic status, TrueBlue members must either (1) fly a minimum of 30 times with JetBlue and acquire at least 12,000 base flight points within a calendar year, or (2) accumulate 15,000 base flight points within a calendar year. Mosaic customers enjoy benefits including free Even MoreTM Speed expedited security, no change/cancel fees, early boarding, access to a dedicated Customer service line available 24 hours a day/7days a week, a free second checked bag and the exclusive ability to use TrueBlue points for Even MoreTM Space seat upgrades. There were over 931,000 TrueBlue award miles travel segments flown during 2013, representing approximately 3% of our total revenue passenger miles.
We have an agreement with American Express under which they issue JetBlue co-branded American Express credit cards to U.S. residents that allow cardmembers to earn TrueBlue points. We have a separate agreement with American Express allowing any American Express cardholder to convert Membership Rewards points into TrueBlue points. We also have a co-branded loyalty credit card jointly with Banco Santander Puerto Rico and Mastercard which allows customers in Puerto Rico to take full advantage of our TrueBlue loyalty program.
We have separate agreements with other loyalty partners, including hotels and car rental companies, allowing their customers to earn TrueBlue points through participation in the partners’ programs. We intend to develop the footprint of our co-branded credit cards and pursue other loyalty partnerships in the future.
OPERATIONS AND COST STRUCTURE
Historically, our cost structure has allowed us to profitably price fares lower than many competitors and is a principle reason for our success. Our current cost advantage relative to some of our competitors is due to high aircraft utilization, new and efficient aircraft, relatively low distribution costs, and a productive workforce among other factors. Because our network initiatives and growth plans necessitate a low cost platform, we are continually focused on our cost advantage and maintaining it. In making investments, we believe not just in the ones that contribute and enhance the JetBlue Experience, but also ones that drive efficiencies and contribute to the preservation of our long-term cost advantage.
Route Structure
Our point-to-point system is the foundation of our operational structure. This structure allows us to optimize costs as well as accommodate customers' preference for non-stop itineraries. Further, a vast majority of our operations are centered in and around the heavily populated northeast corridor of the U.S., which includes the New York and Boston metropolitan areas. This airspace is some of the world's most congested and drives certain operational constraints.
•New York metropolitan area. We are New York's Hometown AirlineTM. The majority of our flights originate in the New York metropolitan area, the nation's largest travel market. New York's John F. Kennedy International Airport, (JFK) is New York's largest airport. We are the largest airline at JFK as measured by domestic capacity and by the end of 2013 our domestic operations accounted for nearly 31% of all domestic passengers at JFK. We operate predominately out of Terminal 5, or T5, and in 2014 we expect to complete the construction of T5i, an international arrivals facility that will expand our current T5 footprint. We believe T5i will enable us to increase operational efficiencies, provide savings and streamline our operations as well as improve the overall travel experience for our customers arriving from international destinations. We also serve New Jersey's Newark Liberty International Airport, New York's LaGuardia Airport, Newburgh, NY's Stewart International Airport and White Plains, NY's Westchester County Airport. We are the leading carrier in number of flights flown per day between the New York metropolitan area and Florida.
•Boston. We are the largest carrier in terms of flights and seats offered at Boston's Logan International Airport, or Boston. By the end of 2013 we flew to 49 destinations from Boston and served twice as many non-stop destinations than any other airline. Our operations accounted for more than 30% of all Boston passengers. We continue to capitalize on opportunities in the changing competitive landscape by adding routes, frequencies and increasing our relevance to local travelers, including business travelers. Our plan is to grow Boston towards a target of 150 flights per day.
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•Caribbean and Latin America. Since 2008 we have added 20 BlueCities in this region. We expect this number to continue to grow in the future. Our only focus city outside of the Continental U.S. is San Juan, Puerto Rico. We are now the largest airline in Puerto Rico in terms of capacity with approximately 36% of all passengers in 2013 from our three BlueCities. We are also the largest airline in terms of capacity serving the Dominican Republic with six BlueCities and approximately 13% of all passengers in 2013. We continue to invest in our Caribbean operations including intra-Caribbean services out of Puerto Rico. While the Caribbean and Latin American region is a growing part of our network, operating in these developing countries can present operational challenges, including working with less developed airport infrastructure, political instability and vulnerability to corruption.
•Fort Lauderdale-Hollywood. We are the largest carrier in terms of capacity at Fort Lauderdale-Hollywood International Airport, with approximately 20% of all passengers in 2013 served by JetBlue. Flying out of Fort Lauderdale-Hollywood instead of nearby Miami International Airport helps preserve our competitive cost advantage through lower cost per enplanement. Broward County authorities have commenced a multi-year, $2.3 billion, refurbishment effort at the airport and surrounding facilities including the construction of a new airfield. We operate out of Terminal 3 which is scheduled to be refurbished and connected to the upgraded and expanded international terminal by 2018. We expect the connection of these terminals will streamline operations for both Crewmembers and customers. Due to these factors, its ideal location between the U.S. and Latin America, and South Florida's high-value geography, Fort Lauderdale-Hollywood is expected to be one of our key areas of focused growth going forward.
•Orlando. We are the second largest carrier in Orlando International Airport, or Orlando, with more than 15% of all flights in 2013 being operated by JetBlue. Our centralized training center, known as JetBlue University, is based in Orlando and in 2013 we broke ground on the construction of a facility at the airport, adjacent to our training center, for lodging our Crewmembers when they attend training at JetBlue University.
•Los Angeles area. We are the seventh largest carrier in the Los Angeles area, operating from Long Beach Airport, Los Angeles International Airport and Burbank's Bob Hope Airport. We are the largest carrier in Long Beach, with almost 68% of all flights in 2013 being operated by JetBlue. In mid-2014 we are scheduled to start operating our premium transcontinental service, Mint™, from Los Angeles.
Our peak levels of traffic over the course of the year depend upon the route, with the East Coast to Florida/Caribbean peak from October through April and the East Coast to West Coast peak in the summer months. Many of our areas of operations in the Northeast experience poor winter weather conditions, resulting in increased costs associated with de-icing aircraft, canceled flights and accommodating displaced customers. Many of our Florida and Caribbean routes experience bad weather conditions in the summer and fall due to thunderstorms and hurricanes. As we enter new markets we could be subject to additional seasonal variations along with competitive responses by other airlines.
Fleet Structure
We currently operate the Airbus A321, the Airbus A320 and the EMBRAER 190 aircraft types. In 2013 our fleet had an average age of 7.1 years and operated an average of 11.9 hours per day. By operating a younger fleet as well as scheduling and operating our aircraft more efficiently we are able to spread related fixed costs over a greater number of available seat miles.
The reliability of our fleet is essential to our operations running smoothly. We are continually working with our aircraft and engine manufacturers to enhance our efficiency performance. In 2015 we expect to start retrofitting our Airbus aircraft with Sharklets®, a blended wingtip devices designed to improve the aircraft’s aerodynamics, which we anticipate will result in improved range and flight performance in addition to fuel savings. We are working with the FAA in efforts towards implementing the Next Generation Air Transportation System, or NextGen by 2020. In 2012 we equipped 35 of our Airbus A320 aircraft to test ADS-B Out, a satellite based technology aimed to facilitate the communication between pilots and air traffic controllers. Even though it is still in the testing phase we have already seen benefits from the ADS-B Out equipment. This includes being able to reroute flights over the Gulf of Mexico to avoid bad weather, an area where the current FAA radar coverage is not complete. This NextGen technology is expected to improve operational efficiency in the congested airspaces in which we operate. In 2012 we also became the first FAA certified Airbus A320 carrier in the U.S. to use satellite-based Special Required Navigation Performance Authorization Required, or RNP AR, approaches at two of JFK's prime and most used runways, 13L and 13R.
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Fleet Maintenance
Consistent with our core value of safety, our FAA-approved maintenance program is administered by our technical operations department. We use qualified maintenance personnel and ensure they have comprehensive training. We maintain our aircraft and associated maintenance records in accordance with, if not exceeding, FAA regulations. Fleet maintenance work is divided into three categories: line maintenance, heavy maintenance and component maintenance.
The bulk of our line maintenance is handled by JetBlue technicians and inspectors. It consists of daily checks, overnight and weekly checks, “A” checks, diagnostics and routine repairs. Heavy maintenance checks consist of a series of more complex tasks taking from one to four weeks to accomplish; these items are typically performed once every 15 months. All of our aircraft heavy maintenance work is performed by FAA-approved facilities such as Embraer, Pemco and Timco, subject to direct oversight by JetBlue personnel. We outsource heavy maintenance as the costs are lower than if we performed the tasks internally (including inventory related costs). Component maintenance on equipment such as engines, auxiliary power units, landing gears, pumps and avionic computers are all performed by a number of different FAA-approved repair stations. We have maintenance agreements with MTU Maintenance Hannover GmbH, MTU, for the engines that power our Airbus fleet and with GE (OEM) for our EMBRAER 190 aircraft engines. We also have an agreement with Lufthansa Technik AG for the repair, overhaul, modification and logistics of certain Airbus components. Many of our maintenance service agreements are based on a fixed cost per flying hour; these vary based upon the age of the aircraft and other operating factors impacting the related component. Required maintenance not otherwise covered by these agreements is performed on a time and materials basis. All other maintenance activities are sub-contracted to qualified maintenance, repair and overhaul organizations.
Aircraft Fuel
Aircraft fuel is our largest expense; its price and availability has been extremely volatile in the past due to global economic and geopolitical factors which we can neither control nor accurately predict. We use a third party fuel management service to procure most of our fuel. Our historical fuel consumption and costs for the years ended December 31 were:
2013 | 2012 | 2011 | ||||||||||
Gallons consumed (millions) | 604 | 563 | 525 | |||||||||
Total cost (millions) (a) | 1,899 | 1,806 | 1,664 | |||||||||
Average price per gallon (a) | $ | 3.14 | $ | 3.21 | $ | 3.17 | ||||||
Percent of operating expenses | 37.9 | % | 39.2 | % | 39.8 | % | ||||||
(a) Total cost and average price per gallon each include related fuel taxes as well as effective fuel hedging gains and losses.
We attempt to protect ourselves against the volatility of fuel prices by entering into a variety of hedging instruments. These include swaps and options with underlyings of jet fuel, crude and heating oil. We also use fixed forward price agreements, or FFPs, which allow us to lock in the price of fuel for specified quantities and at specified locations in future periods.
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Financial Health
We strive to maintain financial strength and a cost structure that enables us to grow profitably and sustainably. In the first years of our history, we relied upon financing activities to fund much of our growth. Starting in 2007, as our airline matured, growth has largely been funded through internally generated cash from operations. Since 2009, while we have invested over $2.7 billion in capital assets, we have also generated nearly $3.1 billion in cash from operations resulting in over $300 million in free cash flow. Our improving financial results have resulted in better credit ratings, which have in-turn resulted in more attractive financing terms when we do not purchase assets for cash. Since 2009, we have also reduced our total debt balance by $570 million.
LiveTV
LiveTV, LLC is a wholly-owned subsidiary of JetBlue, provides in-flight entertainment, voice communication and data connectivity services and solutions for commercial and general aviation aircraft. LiveTV's largest customer for its core products and services is JetBlue with a further six agreements with other domestic and international commercial airlines. It also has general aviation customers to which it supplies voice and data communication services. LiveTV continues to pursue additional customers and related product enhancements. JetBlue, ViaSat Inc. and LiveTV have worked together to develop and support in-flight broadband connectivity for JetBlue which is being marketed as Fly-Fi™. LiveTV is also working with ViaSat Inc. to support in-flight connectivity for other airlines in the near future.
LiveTV's major competitors in the in-flight entertainment systems market include Rockwell Collins, Thales Avionics and Panasonic Avionics; however, only Panasonic is currently providing in-seat live television. In the voice and data communication services market, LiveTV's primary competitors are GoGo, Row 44 and Panasonic.
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CULTURE
Our People
Our success depends on our Crewmembers delivering the best customer service experience in the sky and on the ground. One of our competitive strengths is a service-orientated culture grounded in five key values of safety, caring, integrity, fun and passion. We believe a highly productive, engaged workforce enhances customer satisfaction and loyalty. Our goal is to hire, train and retain a diverse workforce of caring, passionate, fun and friendly people who share our mission to inspire humanity.
Our culture is first introduced to new Crewmembers during the screening process and then at an extensive new hire orientation program. The orientation focuses on the JetBlue strategy and emphasizes the importance of customer service, productivity and cost control. We provide continuous training for our Crewmembers including technical training; a specialized captain leadership training program unique in the industry; a leadership program for current company managers; an emerging managers program; regular training focused on the safety value and front line training for our customer service teams. Our growth plans necessitate and facilitate opportunities for talent development.
We believe a direct relationship between Crewmembers and our leadership is in the best interest of our Crewmembers, customers and shareholders. Currently, none of our Crewmembers have third-party representation, we have individual employment agreements with each of our FAA licensed Crewmembers which consist of pilots, dispatchers, technicians, inspectors and air traffic controllers. Each employment agreement is for a term of five years and renews for an additional five-year term unless the Crewmember is terminated for cause or the Crewmember elects not to renew. Pursuant to these agreements, Crewmembers can only be terminated for cause. In the event of a downturn in our business, resulting in a reduction of flying and related work hours, we are obligated to pay these Crewmembers a guaranteed level of income and to continue their benefits. In addition, through these agreements we provide what we believe to be industry-leading job protection language. We believe these agreements provide the Company and Crewmembers flexibility and allow us to react to Crewmember needs more efficiently than collective bargaining agreements.
Another aspect of the direct relationship are our Values Committees which are made up of peer-elected frontline Crewmembers from each of our major work groups. These Values Committees represent the interest of our workgroups and help us run our business in a productive and efficient way. We believe this direct relationship drives higher levels of engagement and alignment with the Company’s strategy, culture and overall goals.
We believe the efficiency and engagement of our Crewmembers is a result of our flexible and productive work rules. We are cognizant of the competition for productive labor in key industry positions and new government rules requiring higher qualifications and more restricted hours that may result in potential labor shortages in the upcoming years.
Our leadership team communicates on a regular basis with all Crewmembers in order to maintain this direct relationship with our people and to keep them informed about news, strategy updates and challenges affecting the airline. Effective and frequent communication throughout the organization is fostered through various means including email messages from our CEO and other senior leaders at least weekly, weekday news updates to all Crewmembers, employee engagement surveys, a quarterly Crewmember magazine and active leadership participation in new hire orientations. Leadership is also heavily involved in periodic open forum meetings across our network, called “pocket sessions” which are often videotaped and posted on our intranet. By soliciting feedback for ways to improve our service, teamwork and work environment, our leadership team works to keep Crewmembers engaged and make our business decisions transparent. Additionally we believe cost and revenue improvements are best recognized by Crewmembers on the job.
Our full-time equivalent employees at December 31, 2013 consisted of 2,407 pilots, 2,598 flight attendants, 3,586 airport operations personnel, 581 technicians (whom other airlines may refer to as mechanics), 1,025 reservation agents, and 2,833 management and other personnel. At December 31, 2013, we employed 11,021 full-time and 3,862 part-time employees.
Crewmember Programs
We are committed to supporting our Crewmembers through a number of programs including:
•Crewmember Resource Groups (CRGs). These are groups of Crewmembers formed to act as a resource for both the group members as well as JetBlue. These groups serve as an avenue to embrace and encourage different perspectives, thoughts and ideas. At the end of 2013 we had three CRGs in place: JetPride, Women in Flight, and Vets in Blue.
•JetBlue Crewmember Crisis Fund (JCCF). Formed in 2002 as a nonprofit corporation and recognized by the IRS as of that date as a tax-exempt entity described in Section 501(c)(3) of the Internal Revenue Code, JCCF was created to assist JetBlue Crewmembers and their immediate family members (IRS Dependents) in times of crisis. Funds for JCCF grants come directly from Crewmembers via a tax-deductible payroll deduction. The assistance process is confidential with only the fund administrator and coordinator knowing the identity of the Crewmembers in need.
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• Lift Recognition Program. Formed in 2012, this Crewmember recognition program encourages Crewmembers to celebrate their peers for living the values by sending e-thanks through an on-line platform. In 2013, we saw over 47,000 Lift nominations.
Community Programs
JetBlue is strongly committed to supporting the communities and BlueCities we serve through a variety of community programs including:
•Corporate Social Responsibility (CSR). The CSR team was established to support not-for-profit organizations focusing on youth and education, environment, and community in the cities we serve. They organize and support community service projects, charitable giving and non-profit partnerships such as KaBOOM! and Soar with Reading.
•JetBlue Foundation. Incorporated in 2013 as a nonprofit corporation, this foundation is a JetBlue-sponsored organization to advance aviation-related education and to continue our efforts to put aviation on the map as a top career choice for students. We intend to do this by igniting interest in science, technology, engineering and mathematics. The foundation is legally independent from JetBlue and has a Board of Directors as well as an Advisory Committee, both of which are made up of Crewmembers. The foundation has applied to the IRS for recognition as a tax-exempt entity described in Section 501(c)(3) of the Internal Revenue Code.
REGULATION
Airlines are heavily regulated, with rules and regulations set by various federal, state and local agencies. We also operate under specific regulations due to our operations within the high density airspace of the northeast U.S. Most of our airline operations are regulated by U.S. governmental agencies including;
DOT: The DOT primarily regulates economic issues affecting air service including but not limited to certification and fitness, insurance, consumer protection and competitive practices. They set the requirement that carriers do not permit domestic flights to remain on the tarmac for more than three hours. They also require that the advertised price for an airfare or a tour package including airfare (e.g., a hotel/air vacation package) has to be the total price to be paid by the customer, including all government taxes and fees. It has the authority to investigate and institute proceedings to enforce its economic regulations and may assess civil penalties, revoke operating authority and seek criminal sanctions.
FAA: The FAA primarily regulates flight operations, in particular, matters affecting air safety. This includes but is not limited to airworthiness requirements for aircraft, the licensing of pilots, mechanics and dispatchers, and the certification of flight attendants. It requires each airline to obtain an operating certificate authorizing the airline to operate at specific airports using specified equipment. Like all U.S. certified carriers, we cannot fly to new destinations without the prior authorization of the FAA. After providing notice and a hearing it has the authority to modify, suspend temporarily or revoke permanently our authority to provide air transportation or that of our licensed personnel for failure to comply with FAA regulations. It can additionally assess civil penalties for such failures as well as institute proceedings for the imposition and collection of monetary fines for the violation of certain FAA regulations. When significant safety issues are involved, it can revoke our authority to provide air transportation on an emergency basis, without providing notice and a hearing. It monitors our compliance with maintenance as well as flight operations and safety regulations. It maintains on-site representatives and performs frequent spot inspections of our aircraft, employees and records. It also has the authority to issue airworthiness directives and other mandatory orders. This includes the inspection of aircraft and engines, fire retardant and smoke detection devices, collision and windshear avoidance systems, noise abatement and the mandatory removal and replacement of aircraft parts that have failed or may fail in the future. We have and maintain FAA certificates of airworthiness for all of our aircraft and have the necessary FAA authority to fly to all of the destinations we currently serve.
TSA: The TSA operates under the Department of Homeland Security and is responsible for all civil aviation security. This includes passenger and baggage screening, cargo security measures, airport security, assessment and distribution of intelligence, and security research and development. It also has law enforcement powers and the authority to issue regulations, including in cases of national emergency, without a notice or comment period.
Taxes & Fees: The airline industry is one of the most heavily taxed in the U.S., with taxes and fees accounting for approximately 16% of the total fare charged to a customer. Airlines are obligated to fund all of these taxes and fees regardless of their ability to pass these charges on to the customer. The TSA sets the September 11, or 9/11, Security Fee as well as the Aviation Security Infrastructure Fee, or ASIF. The 9/11 Security Fee is passed to the customer while the ASIF directly impacts our costs. The federal budget expected to be ratified in 2014 has removed the ASIF fee but has increased the 9/11 Security Fee from $2.50 per enplanement, with a maximum of $5 per one-way trip, to $5.60 per one-way trip regardless of connecting flights. This higher tax will be effective from July 1, 2014.
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State and Local: We are subject to state and local laws and regulations in a number of states in which we operate and the regulations of various local authorities operating the airports we serve.
Airport Access: JFK, LaGuardia, Newark and Ronald Reagan Washington National Airport in Washington D.C., or Reagan National, are slot-controlled airports subject to the "High Density Rule" and successor rules issued by the FAA. These rules were implemented due to the high volume of traffic at these popular airports located in the northeast corridor airpsace. The rules limit the air traffic in and out of these airports during specific times; however even with the rules in place, delays remain among the highest in the nation due to continuing airspace congestion. We additionally have slots at other slot-controlled airports governed by unique local ordinances not subject to the High Density Rule, Westchester County Airport in White Plains, NY and Long Beach (California) Municipal Airport. In January 2014, we were notified of our successful bid to acquire a certain number of takeoff and landing slots at Reagan National. The acquisition of these slots is subject to final approval by the Department of Justice and customary written agreements.
Airport Infrastructure: The northeast corridor of the U.S. is some of the most congested airspaces in the world. The airports in this region are some of the busiest in the country, the majority of which are more than 60 years old. Due to high usage and aging infrastructure, issues arise at these airports that are not necessarily seen in other parts of the country. Starting in 2015, a heavily utilized runway at JFK is scheduled to be refurbished and the Central Terminal at LaGuardia is scheduled to be refurbished in phases over the next six years.
Foreign Operations: International air transportation is subject to extensive government regulation. The availability of international routes to U.S. airlines is regulated by treaties and related agreements between the U.S. and foreign governments. We currently operate international service to Aruba, the Bahamas, Barbados, Bermuda, the Cayman Islands, Colombia, Costa Rica, the Dominican Republic, Haiti, Jamaica, Mexico, Peru, Saint Lucia, St. Maarten and the Turks and Caicos Islands. To the extent we seek to provide air transportation to additional international markets in the future, we would be required to obtain necessary authority from the DOT and the applicable foreign government.
We believe we are operating in material compliance with DOT, FAA, TSA and applicable international regulations as well as hold all necessary operating and airworthiness authorizations and certificates. Should any of these authorizations or certificates be modified, suspended or revoked, our business could be materially adversely affected.
Other
Environmental: We are subject to various federal, state and local laws relating to the protection of the environment. This includes the discharge or disposal of materials and chemicals as well as the regulation of aircraft noise administered by numerous state and federal agencies.
The Airport Noise and Capacity Act of 1990 recognizes the right of airport operators with special noise problems to implement local noise abatement procedures as long as those procedures do not interfere unreasonably with the interstate and foreign commerce of the national air transportation system. Certain airports, including those in San Diego and Long Beach, California, have established restrictions to limit noise which can include limits on the number of hourly or daily operations and the time of such operations. These limitations are intended to protect the local noise-sensitive communities surrounding the airport. Our scheduled flights at Long Beach and San Diego are in compliance with the noise curfew limits but on occasion when we experience irregular operations we may violate these curfews. We have agreed to a payment structure with the Long Beach City Prosecutor for any violations which we pay quarterly to the Long Beach Public Library Foundation. The payment is based on the number of infractions in the preceding quarter. This local ordinance has not had, and we believe it will not have, a negative effect on our operations.
We use our “Jetting to Green” program on www.jetblue.com to educate our customers and Crewmembers about environmental issues and to inform the public about our environmental protection initiatives. Our most recent corporate sustainability report for 2012 is available on our website and addresses our environmental programs, including those aimed at curbing greenhouse emissions, our conservation efforts and our social responsibility efforts.
Foreign Ownership: Under federal law and the DOT regulations, we must be controlled by U.S. citizens. In this regard, our president and at least two-thirds of our board of directors must be U.S. citizens. Further, no more than 24.99% of our outstanding common stock may be voted by non-U.S. citizens. We believe we are currently in compliance with these ownership provisions.
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Other Regulations: All airlines are subject to certain provisions of the Communications Act of 1934 due of their extensive use of radio and other communication facilities. They are also required to obtain an aeronautical radio license from the FCC. To the extent we are subject to FCC requirements, we will take all necessary steps to comply with those requirements. Our labor relations are covered under Title II of the Railway Labor Act of 1926 and are subject to the jurisdiction of the National Mediation Board. In addition, during periods of fuel scarcity, access to aircraft fuel may be subject to federal allocation regulations.
Civil Reserve Air Fleet: We are a participant in the Civil Reserve Air Fleet Program, which permits the U.S. Department of Defense to utilize our aircraft during national emergencies when the need for military airlift exceeds the capability of military aircraft. By participating in this program, we are eligible to bid on and be awarded peacetime airlift contracts with the military.
Insurance
We carry insurance of types customary in the airline industry and at amounts deemed adequate to protect us and our property as well as comply with both federal regulations and certain credit and lease agreements. As a result of the terrorist attacks of September 11, 2001, aviation insurers significantly reduced the amount of insurance coverage available to commercial airlines for liability to persons other than employees or passengers for claims resulting from acts of terrorism, war or similar events (war risk coverage). At the same time, these insurers significantly increased the premiums for aviation insurance in general. The U.S. government has agreed to provide commercial war-risk insurance for U.S. based airlines, currently through September 30, 2014, covering losses to employees, passengers, third parties and aircraft. We currently have such coverage in addition to our overall hull and liability insurance coverage. If the U.S. government were to cease providing such insurance in whole or in part, it is likely we would be able to obtain comparable coverage in the commercial market, the premiums will likely be lower but with some more restrictive terms.
Iran Sanctions Disclosure
Pursuant to Section 13(r) of the Securities Exchange Act of 1934, or the Exchange Act, if during 2013, JetBlue or any of its affiliates have engaged in certain transactions with Iran or with persons or entities designated under certain executive orders, JetBlue would be required to disclose information regarding such transactions in our Annual Report as required under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, or ITRA. During 2013, JetBlue did not engage in any reportable transactions with Iran or with persons or entities related to Iran.
Deutsche Lufthansa AG, or Lufthansa, is a stockholder of approximately 16% of JetBlue's outstanding shares of common stock and has two representatives on our Board of Directors. Accordingly, it may be deemed an “affiliate” of JetBlue, as the term is defined in Exchange Act Rule 12b-2. In response to our inquiries, Lufthansa informed us it does not engage in transactions that would be disclosable under ITRA Section 219. However, Lufthansa informed us it does provide air transportation services from Frankfurt, Germany to Tehran, Iran pursuant to Air Transport Agreements between the respective governments. Accordingly, Lufthansa may have agreements in place to support such air transportation services with the appropriate agencies or entities, such as landing or overflight fees, handling fees or technical/refueling fees. In addition, there may be additional civil aviation related dealings with Iran Air as part of typical airline to airline interactions. In response to our inquiry, Lufthansa did not specify the total revenue it receives in connection with the foregoing transactions, but confirmed the transactions are not prohibited under any applicable laws.
WHERE YOU CAN FIND OTHER INFORMATION
Our website is www.jetblue.com. Information contained on our website is not part of this report. Information we furnish or file with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to or exhibits included in these reports are available for download, free of charge, on our website soon after such reports are filed with or furnished to the SEC. Our SEC filings, including exhibits filed therewith, are also available at the SEC’s website at www.sec.gov. You may obtain and copy any document we furnish or file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549.
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ITEM 1A. RISK FACTORS
Risks Related to JetBlue
We operate in an extremely competitive industry.
The domestic airline industry is characterized by low profit margins, high fixed costs and significant price competition in an increasingly concentrated competitive field. We currently compete with other airlines on all of our routes. Most of our competitors are larger and have greater financial resources and name recognition than we do. Following our entry into new markets or expansion of existing markets, some of our competitors have chosen to add service or engage in extensive price competition. Unanticipated shortfalls in expected revenues as a result of price competition or in the number of passengers carried would negatively impact our financial results and harm our business. The extremely competitive nature of the airline industry could prevent us from attaining the level of passenger traffic or maintaining the level of fares required to maintain profitable operations in new and existing markets and could impede our profitable growth strategy, which would harm our business. Furthermore, there have been numerous mergers and acquisitions within the airline industry including, for example, the recent combinations of Delta Air Lines and Northwest Airlines, United Airlines and Continental Airlines, and Southwest Airlines and AirTran Airways. In the future, there may be additional mergers and acquisitions in our industry. Any business combination could significantly alter industry conditions and competition within the airline industry and could cause fares of our competitors to be reduced. Additionally, if a traditional network airline were to fully develop a low cost structure, or if we were to experience increased competition from low cost carriers, our business could be materially adversely affected.
Our business is highly dependent on the availability of fuel and fuel is subject to price volatility.
Our results of operations are heavily impacted by the price and availability of fuel. Fuel costs comprise a substantial portion of our total operating expenses and are our single largest operating expense. Historically, fuel costs have been subject to wide price fluctuations based on geopolitical factors as well as supply and demand. The availability of fuel is not only dependent on crude oil but also on refining capacity. When even a small amount of the domestic or global oil refining capacity becomes unavailable, supply shortages can result for extended periods of time. The availability of fuel is also affected by demand for home heating oil, gasoline and other petroleum products, as well as crude oil reserves, dependence on foreign imports of crude oil and potential hostilities in oil producing areas of the world. Because of the effects of these factors on the price and availability of fuel, the cost and future availability of fuel cannot be predicted with any degree of certainty.
Our aircraft fuel purchase agreements do not protect us against price increases or guarantee the availability of fuel. Additionally, some of our competitors may have more leverage than we do in obtaining fuel. We have and may continue to enter into a variety of option contracts and swap agreements for crude oil, heating oil, and jet fuel to partially protect against significant increases in fuel prices; however, such contracts and agreements do not completely protect us against price volatility, are limited in volume and duration, and can be less effective during volatile market conditions and may carry counterparty risk. Under the fuel hedge contracts we may enter from time to time, counterparties to those contracts may require us to fund the margin associated with any loss position on the contracts if the price of crude oils falls below specified benchmarks. Meeting our obligations to fund these margin calls could adversely affect our liquidity.
Due to the competitive nature of the domestic airline industry, at times we have not been able to adequately increase our fares to offset the increases in fuel prices nor may we be able to do so in the future. Future fuel price increases, continued high fuel price volatility or fuel supply shortages may result in a curtailment of scheduled services and could have a material adverse effect on our financial condition and results of operations.
We have a significant amount of fixed obligations and we will incur significantly more fixed obligations, which could harm our ability to service our current or satisfy future fixed obligations.
As of December 31, 2013, our debt of $2.59 billion accounted for 55% of our total capitalization. In addition to long-term debt, we have a significant amount of other fixed obligations under operating leases related to our aircraft, airport terminal space, other airport facilities and office space. As of December 31, 2013, future minimum payments under noncancelable leases and other financing obligations were approximately $2.11 billion for 2014 through 2018 and an aggregate of $1.62 billion for the years thereafter. Terminal 5 at JFK is under a 30-year lease with the Port Authority of New York and New Jersey, or PANYNJ. The minimum payments under this lease are being accounted for as a financing obligation and have been included in the future minimum payment totals above.
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As of December 31, 2013, we had commitments of approximately $6.87 billion to purchase 146 additional aircraft and other flight equipment through 2022, including estimated amounts for contractual price escalations. We may incur additional debt and other fixed obligations as we take delivery of new aircraft and other equipment and continue to expand into new markets. In an effort to limit the incurrence of significant additional debt, we may seek to defer some of our scheduled deliveries, sell or lease aircraft to others, or pay cash for new aircraft, to the extent necessary or possible. The amount of our existing debt, and other fixed obligations, and potential increases in the amount of our debt and other fixed obligations could have important consequences to investors and could require a substantial portion of cash flows from operations for debt service payments, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes.
Our high level of debt and other fixed obligations could:
•impact our ability to obtain additional financing to support capital expansion plans and for working capital and other purposes on acceptable terms or at all;
•divert substantial cash flow from our operations and expansion plans in order to service our fixed obligations;
•require us to incur significantly more interest expense than we currently do if rates were to increase, since approximately 43% of our debt has floating interest rates; and
•place us at a possible competitive disadvantage compared to less leveraged competitors and competitors with better access to capital resources or more favorable terms.
Our ability to make scheduled payments on our debt and other fixed obligations will depend on our future operating performance and cash flows, which in turn will depend on prevailing economic and political conditions and financial, competitive, regulatory, business and other factors, many of which are beyond our control. We are principally dependent upon our operating cash flows and access to the capital markets to fund our operations and to make scheduled payments on debt and other fixed obligations. We cannot assure you we will be able to generate sufficient cash flows from our operations or from capital market activities to pay our debt and other fixed obligations as they become due; if we fail to do so our business could be harmed. If we are unable to make payments on our debt and other fixed obligations, we could be forced to renegotiate those obligations or seek to obtain additional equity or other forms of additional financing.
Our substantial indebtedness may limit our ability to incur additional debt to obtain future financing needs.
We typically finance our aircraft through either secured debt or lease financing. The impact on financial institutions from the continuing economic malaise may adversely affect the availability and cost of credit to JetBlue as well as to prospective purchasers of our aircraft we undertake to sell in the future, including financing commitments we have already obtained for purchases of new aircraft. To the extent we finance our activities with additional debt, we may become subject to financial and other covenants that may restrict our ability to pursue our strategy or otherwise constrain our operations.
Our maintenance costs will increase as our fleet ages.
Our maintenance costs will increase as our fleet ages. In the past, we have incurred lower maintenance expenses because most of the parts on our aircraft were under multi-year warranties; many of these warranties have expired. If any maintenance provider with whom we have a flight hours agreement fails to perform or honor such agreements, we will incur higher interim maintenance costs until we negotiate new agreements.
Furthermore, as our fleet ages, we expect to implement various fleet modifications over the next several years to ensure our aircrafts’ continued efficiency, modernization, brand consistency and safety. Our plans to equip our Airbus A320 aircraft with Sharklets®, for example, may require significant modification time. These fleet modifications may require significant investment over several years, including taking aircraft out of service for several weeks at a time.
Our salaries, wages and benefits costs will increase as our workforce ages.
As our employees' tenure with JetBlue matures, our salaries, wages and benefits costs increase. Our pilot pay structure, for example, is based on an industry derived average and to the extent our competitors continue consolidating and/or begin raising their pilot salaries in the face of a possible pilot shortage, or if overall pilot wages increase across the industry due to regulatory changes, we may have to address increased salary cost pressure to retain our pilots in an environment where our capacity is also forecast to continue to grow. As our work force ages, we expect our medical and related benefits to increase as well, despite an increased corporate focus on Crewmember wellness.
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There are risks associated with our presence in some of our international emerging markets, including political or economic instability and failure to adequately comply with existing legal requirements.
Expansion to new international emerging markets may have risks due to factors specific to those markets. Emerging markets are countries which have less developed economies and are vulnerable to economic and political problems, such as significant fluctuations in gross domestic product, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets, trafficking and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by us and the resulting instability may adversely affect our business.
We have expanded and expect to continue to expand our service to countries in the Caribbean and Latin America, some of which have less developed legal systems, financial markets, and business and political environments than the United States, and therefore present greater political, legal, economic and operational risks. We emphasize legal compliance and have implemented and continue to implement and refresh policies, procedures and certain ongoing training of employees with regard to business ethics, anti-corruption policies and many key legal requirements; however, there can be no assurance our employees will adhere to our code of business ethics, anti-corruption policies, other Company policies, or other legal requirements. If we fail to enforce our policies and procedures properly or maintain adequate record-keeping and internal accounting practices to accurately record our transactions, we may be subject to sanctions. In the event we believe or have reason to believe our employees have or may have violated applicable laws or regulations, we may be subject to investigation costs, potential penalties and other related costs which in turn could negatively affect our reputation, and our results of operations and cash flow.
In addition, to the extent we continue to grow our business, opening new markets requires us to commit a substantial amount of resources even before the new services commence. Expansion is also dependent upon our ability to maintain a safe and secure operation and requires additional personnel, equipment and facilities.
We may be subject to risks through the commitments and business of LiveTV, our wholly-owned subsidiary.
LiveTV has agreements to provide in-flight entertainment products and services with JetBlue and six other airlines. At December 31, 2013, LiveTV services were available on 461 aircraft under these agreements, with firm commitments for 196 additional aircraft through 2015 and with options for 9 additional installations through 2016. Performance under these agreements requires LiveTV to hire, train and retain qualified employees, obtain component parts unique to its systems and services from their suppliers and secure facilities necessary to perform installations and maintenance on those systems. Should LiveTV be unable to satisfy its commitments under these third party contracts, our business could be harmed.
We may be subject to unionization, work stoppages, slowdowns or increased labor costs; recent changes to the labor laws may make unionization easier to achieve.
Our business is labor intensive and, unlike most other airlines, we have a non-union workforce. The unionization of any of our employees could result in demands that may increase our operating expenses and adversely affect our financial condition and results of operations. Any of the different crafts or classes of our employees could unionize at any time, which would require us to negotiate in good faith with the employee group’s certified representative concerning a collective bargaining agreement. In February 2014, the Airline Pilots Association filed a petition with the National Mediation Board, or NMB, seeking to become the collective bargaining representative of our pilots. The NMB will hold an election from March through April, 2014. In 2010, the NMB changed its election procedures to permit a majority of those voting to elect to unionize (from a majority of those in the craft or class). These rule changes fundamentally alter the manner in which labor groups have been able to organize in our industry since the inception of the Railway Labor Act. Ultimately, if we and a newly elected representative were unable to reach agreement on the terms of a collective bargaining agreement and all of the dispute resolution processes of the Railway Labor Act were exhausted, we could be subject to work stoppages. In addition, we may be subject to other disruptions by organized labor groups protesting our non-union status. Any of these events would be disruptive to our operations and could harm our business.
Our high aircraft utilization rate helps us keep our costs low, but also makes us vulnerable to delays and cancellations in our operating regions; such delays and cancellations could reduce our profitability.
We maintain a high daily aircraft utilization rate (the amount of time our aircraft spend in the air carrying passengers). High daily aircraft utilization allows us to generate more revenue from our aircraft and is achieved in part by reducing turnaround times at airports so we can fly more hours on average in a day. Aircraft utilization is reduced by delays and cancellations from various factors, many of which are beyond our control, including adverse weather conditions, security requirements, air traffic congestion and unscheduled maintenance. The majority of our operations are concentrated in the Northeast and Florida, which are particularly vulnerable to weather and congestion delays. Reduced aircraft utilization may limit our ability to achieve and maintain profitability as well as lead to customer dissatisfaction.
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Our business is highly dependent on the New York metropolitan market and increases in competition or congestion or a reduction in demand for air travel in this market, or governmental reduction of our operating capacity at JFK, would harm our business.
We are highly dependent on the New York metropolitan market where we maintain a large presence with approximately one-half of our daily flights having JFK, LaGuardia, Newark, Westchester County Airport or Newburgh’s Stewart International Airport as either their origin or destination. We have experienced an increase in flight delays and cancellations at these airports due to airport congestion which has adversely affected our operating performance and results of operations. Our business could be further harmed by an increase in the amount of direct competition we face in the New York metropolitan market or by continued or increased congestion, delays or cancellations. Our business would also be harmed by any circumstances causing a reduction in demand for air transportation in the New York metropolitan area, such as adverse changes in local economic conditions, negative public perception of New York City, terrorist attacks or significant price or tax increases linked to increases in airport access costs and fees imposed on passengers.
We rely heavily on automated systems to operate our business; any failure of these systems could harm our business.
We are dependent on automated systems and technology to operate our business, enhance customer service and achieve low operating costs. The performance and reliability of our automated systems and data center is critical to our ability to operate our business and compete effectively. These systems include our computerized airline reservation system, flight operations system, telecommunications systems, website, maintenance systems, check-in kiosks, in-flight entertainment systems and our primary and redundant data centers. Our website and reservation system must be able to accommodate a high volume of traffic and deliver important flight information. These systems require upgrades or replacement periodically, which involve implementation and other operational risks. Our business may be harmed if we fail to operate, replace or upgrade our systems or data center infrastructure successfully.
We rely on the third party providers of our current automated systems and data center infrastructure for technical support. If the current provider were to fail to adequately provide technical support for any one of our key existing systems or if new or updated components were not integrated smoothly, we could experience service disruptions, which, if they were to occur, could result in the loss of important data, increase our expenses, decrease our revenues and generally harm our business and reputation. Furthermore, our automated systems cannot be completely protected against events beyond our control, including natural disasters, computer viruses, other security breaches, or telecommunications failures. Substantial or sustained system failures could impact customer service and result in our customers purchasing tickets from other airlines. We have implemented security measures and change control procedures and have disaster recovery plans as well as requiring our third party providers to have disaster recovery plans; however, we cannot assure you these measures are adequate to prevent disruptions, which, if they were to occur, could result in the loss of important data, increase our expenses, decrease our revenues and generally harm our business and reputation.
We may be impacted by increases in airport expenses relating to infrastructure and facilities.
In order to operate within our current markets as well as continue to grow in new markets, we must be able to obtain adequate infrastructure and facilities within the relevant airports. This includes gates, check-in facilities, operations facilities and landing slots (where applicable). The costs associated to these airports are often negotiated on a short-term basis with the relevant airport authority and we could be subject to increases in costs on a regular basis with or without our approval.
In addition, our operations concentrated in older airports may be harmed if the infrastructure at those airports fail to operate as expected due to age, overuse or significant unexpected weather events.
Our reputation and business may be harmed and we may be subject to legal claims if there is loss, unlawful disclosure or misappropriation of, or unsanctioned access to, our customers’, employees’, business partners’ or our own information or other breaches of our information security.
We make extensive use of online services and centralized data processing, including through third party service providers. The secure maintenance and transmission of customer and employee information is a critical element of our operations. Our information technology and other systems maintain and transmit customer information, or those of service providers or business partners, may be compromised by a malicious third party penetration of our network security, or of a third party service provider or business partner, or impacted by deliberate or inadvertent actions or inactions by our employees, or those of a third party service provider or business partner. As a result, personal information may be lost, disclosed, accessed or taken without consent.
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We transmit confidential credit card information by way of secure private retail networks and rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure transmission and storage of confidential information, such as customer credit card information. The Company has made significant efforts to secure its computer network. If any compromise of our security or computer network were to occur, it could have a material adverse effect on the reputation, business, operating results and financial condition of the Company, and could result in a loss of customers. Additionally, any material failure by the Company to achieve or maintain compliance with the Payment Card Industry, or PCI, security requirements or rectify a security issue may result in fines and the imposition of restrictions on the Company's ability to accept credit cards as a form of payment.
Any such loss, disclosure or misappropriation of, or access to, customers’, employees’ or business partners’ information or other breach of our information security can result in legal claims or legal proceedings, including regulatory investigations and actions, may have a negative impact on our reputation and may materially adversely affect our business, operating results and financial condition. Furthermore, the loss, disclosure or misappropriation of our business information may materially adversely affect our business, operating results and financial condition.
Our liquidity could be adversely impacted in the event one or more of our credit card processors were to impose material reserve requirements for payments due to us from credit card transactions.
We currently have agreements with organizations that process credit card transactions arising from purchases of air travel tickets by our customers. Credit card processors have financial risk associated with tickets purchased for travel which can occur several weeks after the purchase. Our credit card processing agreements provide for reserves to be deposited with the processor in certain circumstances. We do not currently have reserves posted for our credit card processors. If circumstances were to occur requiring us to deposit reserves, the negative impact on our liquidity could be significant which could materially adversely affect our business.
If we are unable to attract and retain qualified personnel or fail to maintain our company culture, our business could be harmed.
We compete against the other major U.S. airlines for pilots, mechanics and other skilled labor; some of them offer wage and benefit packages exceeding ours. As more pilots in the industry approach mandatory retirement age, the U.S. airline industry may be affected by a pilot shortage, to some extent. We may be required to increase wages and/or benefits in order to attract and retain qualified personnel or risk considerable employee turnover. If we are unable to hire, train and retain qualified employees, our business could be harmed and we may be unable to implement our growth plans.
In addition, as we hire more people and grow, we believe it may be increasingly challenging to continue to hire people who will maintain our company culture. One of our competitive strengths is our service-oriented company culture which emphasizes friendly, helpful, team-oriented and customer-focused employees. Our company culture is important to providing high quality customer service and having a productive workforce in order to help keep our costs low. As we continue to grow, we may be unable to identify, hire or retain enough people who meet the above criteria, including those in management or other key positions. Our company culture could otherwise be adversely affected by our growing operations and geographic diversity. If we fail to maintain the strength of our company culture, our competitive ability and our business may be harmed.
Our results of operations fluctuate due to seasonality and other factors.
We expect our quarterly operating results to fluctuate due to seasonality including high vacation and leisure demand occurring on the Florida routes between October and April and on our western routes during the summer. Actions of our competitors may also contribute to fluctuations in our results. We are more susceptible to adverse weather conditions, including snow storms and hurricanes, as a result of our operations being concentrated on the East Coast, than some of our competitors. As we enter new markets we could be subject to additional seasonal variations along with any competitive responses to our entry by other airlines. Price changes in aircraft fuel as well as the timing and amount of maintenance and advertising expenditures also impact our operations. As a result of these factors, quarter-to-quarter comparisons of our operating results may not be a good indicator of our future performance. In addition, it is possible in any future period our operating results could be below the expectations of investors and any published reports or analyses regarding JetBlue. In such an event, the price of our common stock could decline, perhaps substantially.
We are subject to the risks of having a limited number of suppliers for our aircraft, engines and a key component of our in-flight entertainment system.
Our current dependence on three types of aircraft and engines for all of our flights makes us vulnerable to significant problems associated with the International Aero Engines, or IAE V2533-A5 engine on our Airbus A321 fleet, the International Aero Engines, or IAE V2527-A5 engine on our Airbus A320 fleet and the General Electric Engines CF-34-10 engine on our EMBRAER 190 fleet. This could include design defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public which would result in customer avoidance or in actions by the FAA resulting in an inability to operate our aircraft. Carriers operating a more diversified fleet are better positioned than we are to manage such events.
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One of the unique features of our fleet is every seat in each of our aircraft is equipped with free in-flight entertainment including DIRECTV®. An integral component of the system is the antenna, which is supplied to us by KVH Industries Inc, or KVH. If KVH were to stop supplying us with its antennas for any reason, we would have to incur significant costs to procure an alternate supplier.
In addition, our Fly-Fi service uses technology and satellite access through our partnership with ViaSat, Inc. Similarly an integral component of the Fly-Fi system is the antenna, which is supplied to us by ViaSat. If ViaSat were to stop supplying us with its antennas for any reason, we would have to incur significant costs to procure an alternate supplier. Additionally, if the satellites Fly-Fi uses were to become inoperable for any reason, we would have to incur significant costs to replace the service.
Our reputation and financial results could be harmed in the event of an accident or incident involving our aircraft.
An accident or incident involving one of our aircraft, or an aircraft containing LiveTV equipment, could involve significant potential claims of injured passengers or others in addition to repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. We are required by the DOT to carry liability insurance. Although we believe we currently maintain liability insurance in amounts and of the type generally consistent with industry practice, the amount of such coverage may not be adequate and we may be forced to bear substantial losses from an accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception we are less safe or reliable than other airlines which would harm our business.
An ownership change could limit our ability to use our net operating loss carryforwards for U.S. income tax purposes.
As of December 31, 2013, we had approximately $456 million of federal net operating loss carryforwards for U.S. income tax purposes that begin to expire in 2025. Section 382 of the Internal Revenue Code imposes limitation on a corporation’s ability to use its net operating loss carryforwards if it experiences an “ownership change”. Similar rules and limitations may apply for state income tax purposes. In the event an “ownership change” were to occur in the future, our ability to utilize our net operating losses could be limited.
Our business depends on our strong reputation and the value of the JetBlue brand.
The JetBlue brand name symbolizes high-quality friendly customer service, innovation, fun, and a pleasant travel experience. JetBlue is a widely recognized and respected global brand; the JetBlue brand is one of our most important and valuable assets. The JetBlue brand name and our corporate reputation are powerful sales and marketing tools and we devote significant resources to promoting and protecting them. Adverse publicity (whether or not justified) relating to activities by our employees, contractors or agents could tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand equity could reduce demand for our services and thus have an adverse effect on our financial condition, liquidity and results of operations, as well as require additional resources to rebuild our reputation and restore the value of our brand.
We may be subject to competitive risks due to the long term nature of our fleet order book.
At present, we have existing aircraft commitments through 2022. As technological evolution occurs in our industry, through the use of composites and other innovations, we may be competitively disadvantaged because we have existing extensive fleet commitments that would prohibit us from adopting new technologies on an expedited basis.
Risks Associated with the Airline Industry
The airline industry is particularly sensitive to changes in economic condition.
Fundamental and permanent changes in the domestic airline industry have been ongoing over the past several years as a result of several years of repeated losses, among other reasons. These losses resulted in airlines renegotiating or attempting to renegotiate labor contracts, reconfiguring flight schedules, furloughing or terminating employees, as well as considering other efficiency and cost-cutting measures. Despite these actions, several airlines have reorganized under Chapter 11 of the U.S. Bankruptcy Code to permit them to reduce labor rates, restructure debt, terminate pension plans and generally reduce their cost structure. Since 2005, the U.S. airline industry has experienced significant consolidation and liquidations. The global economic recession and related unfavorable general economic conditions, such as higher unemployment rates, a constrained credit market, housing-related pressures, and increased business operating costs can reduce spending for both leisure and business travel. Unfavorable economic conditions could also impact an airline’s ability to raise fares to counteract increased fuel, labor, and other costs. It is foreseeable further airline reorganizations, consolidation, bankruptcies or liquidations may occur in the current global recessionary environment, the effects of which we are unable to predict. We cannot assure you the occurrence of these events, or potential changes resulting from these events, will not harm our business or the industry.
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A future act of terrorism, the threat of such acts or escalation of U.S. military involvement overseas could adversely affect our industry.
Acts of terrorism, the threat of such acts or escalation of U.S. military involvement overseas could have an adverse effect on the airline industry. In the event of a terrorist attack, whether or not successful, the industry would likely experience increased security requirements and significantly reduced demand. We cannot assure you these actions, or consequences resulting from these actions, will not harm our business or the industry.
Changes in government regulations imposing additional requirements and restrictions on our operations or the U.S. Government ceasing to provide adequate war risk insurance could increase our operating costs and result in service delays and disruptions.
Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, involving significant compliance costs. In the last several years, Congress has passed laws, and the agencies of the federal government, including, but not limited to, the DOT, FAA, CBP and the TSA have issued regulations relating to the operation of airlines that have required significant expenditures. We expect to continue to incur expenses in connection with complying with government regulations. Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel. If adopted or materially amended, these measures could have the effect of raising ticket prices, reducing air travel demand and/or revenue and increasing costs. We cannot assure you these and other laws or regulations enacted in the future will not harm our business.
The U.S. Government currently provides insurance coverage for certain claims resulting from acts of terrorism, war or similar events. Should this coverage no longer be offered, the coverage that would be available to us through commercial aviation insurers may have substantially less desirable terms, result in higher costs and not be adequate to protect our risk, any of which could harm our business. In addition, the U.S. Environmental Protection Agency (“EPA”) has proposed changes to underground storage tank regulations that could affect certain airport fuel hydrant systems. In addition to the proposed EPA and state regulations, several U.S. airport authorities are actively engaged in efforts to limit discharges of de-icing fluid to local groundwater, often by requiring airlines to participate in the building or reconfiguring of airport de-icing facilities.
Amended FAA regulations relating to flight, duty and rest regulations and the additional operational requirements will impact our business
In January 2014, the FAA’s rule amending the FAA’s flight, duty, and rest regulations became effective. Among other things, the new rule requires a ten hour minimum rest period prior to a pilot’s flight duty period; mandates a pilot must have an opportunity for eight hours of uninterrupted sleep within the rest period; and imposes new pilot “flight time” and “duty time” limitations based upon report times, the number of scheduled flight segments, and other operational factors. We have hired additional pilots to address the requirements of the new rule. The new rule may reduce our staffing flexibility, which could impact our operational performance, costs, and delivery of the JetBlue Experience, any of which could harm our business.
The impact of federal sequester budget cuts mandated by the Budget Control Act of 2011 or other federal budgetary constraints may adversely affect our industry, business, results of operations and financial position.
On April 16, 2013, the FAA imposed furloughs mandated by the Budget Control Act of 2011, which included reduced staffing of air traffic controllers. This action resulted in increased delays, reduced arrival rates and flight cancellations across the airline industry and impacting the flying public for approximately one week until Congress passed legislation allowing the FAA to redirect other funds to cover staffing for air traffic controllers. On October 1, 2013, after Congress failed to pass a 2014 budget, portions of the federal government deemed nonessential were shut down. After extending the federal debt ceiling limit, the partial government shutdown ended on October 17, 2013, but not before delaying the delivery of two aircraft from their manufacturers. Much of our airline operations are regulated by governmental agencies, including the FAA, the DOT, CBP, The TSA and others. Should mandatory furloughs and/or other budget constraints continue or resume for an extended period of time, our operations and results of operations could be materially negatively impacted. The travel behaviors of the flying public could also be affected, which may materially adversely impact our industry and our business.
Compliance with future environmental regulations may harm our business.
Many aspects of airlines’ operations are subject to increasingly stringent environmental regulations, and growing concerns about climate change may result in the imposition of additional regulation. Since the domestic airline industry is increasingly price sensitive, we may not be able to recover the cost of compliance with new or more stringent environmental laws and regulations from our passengers, which could adversely affect our business. Although it is not expected the costs of complying with current environmental regulations will have a material adverse effect on our financial position, results of operations or cash flows, no assurance can be made the costs of complying with environmental regulations in the future will not have such an effect.
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We could be adversely affected by an outbreak of a disease or an environmental disaster that significantly affects travel behavior.
Any outbreak of a disease affecting travel behavior could have a material adverse impact on us. In addition, outbreaks of disease could result in quarantines of our personnel or an inability to access facilities or our aircraft, which could adversely affect our operations. Similarly, if an environmental disaster were to occur and adversely impact any of our destination cities, travel behavior could be affected and in turn, could materially adversely impact our business.
The unknown impact from the Dodd-Frank Act as well as the rules to be promulgated under it could require the implementation of additional policies and require us to incur administrative compliance costs.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, contains a variety of provisions designed to regulate financial markets. Many aspects of the Dodd-Frank Act remain subject to rulemaking that will take effect over several years, thus making it difficult to assess its impact on us at this time. We expect to successfully implement any new applicable legislative and regulatory requirements and may incur additional costs associated with our compliance with the new regulations and anticipated additional reporting and disclosure obligations; however, at this time we do not expect such costs to be material to us.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Aircraft
As of December 31, 2013, we operated a fleet consisting of four Airbus A321 aircraft, 130 Airbus A320 aircraft and 60 EMBRAER 190 aircraft as summarized in the table below:
Aircraft | Seating Capacity | Owned | Capital Leased | Operating Leased | Total | Average Age in Years | ||||||||||||
Airbus A320 | 150 | 96 | 4 | 30 | 130 | 8.3 | ||||||||||||
Airbus A321 | 190 | 4 | — | — | 4 | 0.1 | ||||||||||||
EMBRAER 190 | 100 | 30 | — | 30 | 60 | 5.2 | ||||||||||||
130 | 4 | 60 | 194 | 7.1 | ||||||||||||||
As of December 31, 2013 our aircraft leases have an average remaining term of approximately 9.2 years, with expiration dates between 2016 and 2026. We have the option to extend most of these leases for additional periods or to purchase the aircraft at the end of the related lease term. All but 23 of our 134 owned aircraft and all but 30 of our 35 owned spare engines are subject to secured debt financing.
In October 2013, we amended our purchase agreement with Embraer by deferring previously scheduled deliveries of 24 EMBRAER 190 aircraft from 2014-2018 to 2020-2022. We converted eight existing A320 orders to A321 orders and 10 A320 new engine option (A320neo) orders to A321 new engine option (A321neo) orders. We ordered an additional 15 A321 aircraft for delivery between 2015 and 2017 and 20 A321neo for delivery between 2018 and 2020.
As of December 31, 2013, we had on order 136 aircraft, which are scheduled for delivery through 2022. Our future aircraft delivery schedule is as follows:
Year | Airbus A320 | Airbus A320neo | Airbus A321 | Airbus A321neo | EMBRAER 190 | Total | ||||||
2014 | — | — | 9 | — | — | 9 | ||||||
2015 | — | — | 12 | — | — | 12 | ||||||
2016 | 3 | — | 12 | — | — | 15 | ||||||
2017 | — | — | 15 | — | — | 15 | ||||||
2018 | — | 5 | 1 | 9 | — | 15 | ||||||
2019 | — | — | — | 15 | — | 15 | ||||||
2020 | — | 9 | — | 6 | 10 | 25 | ||||||
2021 | — | 16 | — | — | 7 | 23 | ||||||
2022 | — | — | — | — | 7 | 7 | ||||||
3 | 30 | 49 | 30 | 24 | 136 | |||||||
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Ground Facilities
Airports
All of our facilities at the airports we serve are under leases or other occupancy agreements. This space is leased directly from the local airport authority on varying terms dependent on prevailing practice at each airport. It is customary in the airline industry to have agreements that automatically renew. Our terminal passenger service facilities of ticket counters, gate space, operations support area and baggage service offices generally have agreement terms ranging from less than one year to five years. They can contain provisions for periodic adjustments of rental rates, landing fees and other charges applicable under the type of lease. Under these agreements we are responsible for the maintenance, insurance, utilities and certain other facility-related expenses and services.
Our most significant lease agreements relate to our airport facilities at JFK, followed by our agreement at Boston:
•JFK. We have a lease agreement with the Port Authority of New York and New Jersey, or PANYNJ, for T5 which ends on October 22, 2038. We have the option to terminate the agreement five years prior to the end of the scheduled lease term. In December 2010 we executed a supplement to this lease agreement for the T6 property, our original base of operations at JFK, for a term of five years. In 2012, we commenced construction on T5i, an expansion to T5 that we intend to use as an international arrival facility. An amendment of the original T5 lease was executed in 2013 which incorporates approximately 19 acres of the former T6 property and space for the T5i facilities. We expect T5i will be open to customers in late 2014.
•Boston. We have a lease agreement with Massport for 17 gates and 42 ticket counter positions in Terminal C. This lease started on May 1, 2005, with an initial term of five years. An extension clause came into effective on May 1, 2010 whereby the lease has 20 successive one-year automatic renewals, each from May 1 through to April 30.
We have entered into use arrangements at each of the airports we serve providing for the non-exclusive use of runways, taxiways and other airport facilities. Landing fees under these agreements are typically based on the number of aircraft landings and the weight of the aircraft.
Other
We lease the following hangars and airport support facilities at our focus cities:
•New York. At JFK we have a ground lease agreement which expires in 2030 relating to a 70,000 square foot aircraft maintenance hangar and an adjacent 32,000 square foot office and warehouse facility. These facilities accommodate our technical support operations and passenger provisioning personnel. We also occupy a building where we store aircraft spare parts and perform ground equipment maintenance.
•Boston. We have a ground lease agreement which expires in 2017 relating to an 80,000 square feet building which includes an aircraft maintenance hangar and office space. We also have a lease for a facility to accommodate our ground support equipment maintenance.
•Orlando. We have a ground lease agreement which expires in 2035 relating to a 70,000 square foot hangar. This hangar is used both by Live TV for the installation and maintenance of in-flight satellite television systems as well as JetBlue for aircraft maintenance. We also occupy a training center with a lease agreement that expires in 2035 which we use for the initial and recurrent training of our pilots and in-flight crew, as well as support training for our technical operations and airport crew. This facility is equipped with seven full flight simulators, three cabin trainers, a training pool, classrooms and support areas. In 2013 we began construction on a temporary lodging facility adjacent to our training center. We anticipate that our Crewmembers will utilize this lodging facility when attending training at the training center. It is expected that the facility will be opened in 2015, with the lease agreement expiring in 2035.
Our primary corporate offices are located in Long Island City, New York, with our lease expiring in 2023. Our offices in Salt Lake City, Utah contains a core team of employees who are responsible for group sales, customer service, at-home reservation agent supervision, disbursements and certain other finance functions. The lease for Salt Lake City expires in 2022. We also maintain other facilities that are necessary to support our operations in the cities we serve.
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ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of our business, we are party to various legal proceedings and claims which we believe are incidental to the operation of our business. Other than as described under Note 12-Contingencies to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, we believe the ultimate outcome of these proceedings to which we are currently a party will not have a material adverse effect on our business, financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information concerning JetBlue’s executive officers as of the date of this report follows. There are no family relationships between any of our executive officers.
David Barger, age 56, is our Chief Executive Officer. He has served in this capacity since May 2007 and was our President from August 1998 to September 2007 and June 2009 until December 2013. He is also a member of our Board of Directors. He previously served as our Chief Operating Officer from August 1998 to March 2007. From 1992 to 1998, Mr. Barger served in various management positions with Continental Airlines, including Vice President, Newark hub. He held various director level positions at Continental Airlines from 1988 to 1995. From 1982 to 1988, Mr. Barger served in various positions with New York Air, including Director of Stations.
Robin Hayes, age 46, is our President. He was promoted to this role on January 1, 2014, having previously served as our Executive Vice President and Chief Commercial Officer since he joined us in August 2008. He joined JetBlue after nineteen years at British Airways. In his last role at British Airways, Mr. Hayes served as Executive Vice President for The Americas and before that he served in a number of operational and commercial positions in the UK and Germany.
Mark D. Powers, age 60, is our Chief Financial Officer, a position he has held since April 2012. Mr. Powers joined us in July 2006 as Treasurer and Vice President, Corporate Finance. He was promoted to Senior Vice President, Treasurer in 2007. Prior to joining JetBlue, Mr. Powers was an independent advisor to several aviation-related companies and has held a number of positions in both the finance and legal departments of Continental Airlines, Northwest Airlines and General Electric's jet engine unit.
Rob Maruster, age 42, is our Executive Vice President and Chief Operating Officer, having served in this capacity since June 2009. Mr. Maruster joined JetBlue in 2005 as Vice President, Operations Planning and in 2006 he was promoted to Senior Vice President, Airports and Operational Planning. In 2008, Mr. Maruster’s responsibilities were expanded to include the Customer Services group which included Airports, Inflight Services, Reservations, and System Operations. Mr Maruster joined JetBlue after a 12-year career with Delta Air Lines in a variety of leadership positions with increasing responsibilities in the carrier’s Marketing and Customer Service departments. This culminated in him being responsible for all operations at Delta’s largest hub as Vice President, Airport Customer Service at Hartsfield-Jackson Atlanta International Airport.
James Hnat, age 43, is our Executive Vice President Corporate Affairs, General Counsel and Secretary and has served in this capacity since April 2007. He served as our Senior Vice President, General Counsel and Assistant Secretary since March 2006 and as our General Counsel and Assistant Secretary from February 2003 to March 2006. Mr. Hnat is a member of the bar of New York and Massachusetts.
Don Daniels, age 46, is our Vice President and Chief Accounting Officer, a position he has held since May 2009. He served as our Vice President and Corporate Controller since October 2007. He previously served as our Assistant Controller since July 2006 and Director of Financial Reporting since October 2002.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ Global Select Market under the symbol JBLU. The table below shows the high and low sales prices for our common stock.
High | Low | |||||||
2013 Quarter Ended | ||||||||
March 31 | $ | 7.01 | $ | 5.70 | ||||
June 30 | 7.28 | 5.95 | ||||||
September 30 | 6.93 | 6.04 | ||||||
December 31 | 9.20 | 6.57 | ||||||
2012 Quarter Ended | ||||||||
March 31 | 6.32 | 4.73 | ||||||
June 30 | 5.44 | 4.06 | ||||||
September 30 | 5.94 | 4.76 | ||||||
December 31 | 5.99 | 4.77 | ||||||
As of January 31, 2014, there were approximately 754 holders of record of our common stock.
We have not paid cash dividends on our common stock and have no current intention of doing so. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, subject to applicable limitations under Delaware law. This decision will be dependent upon our results of operations, financial condition and other factors deemed relevant by our Board of Directors.
Purchases of Equity Securities by the Issuer and Affiliated Purchases
In September 2012, the Board authorized a five year share repurchase program of up to 25 million shares. As of December 31, 2013, 20.4 million shares remain available for repurchase under the program. During 2013 the following shares were repurchased under the program:
Period | Total Number of Shares Purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Maximum number of shares that may yet to be purchased under the program | |||||||||
January 2013 | 257,725 | $ | 5.90 | 257,725 | |||||||||
February 2013 | 261,200 | $ | 5.89 | 261,200 | |||||||||
June 2013 | 11,000 | $ | 6.00 | 11,000 | |||||||||
Total | 529,925 | $ | 5.90 | 529,925 | 20,392,430 | ||||||||
The program may be commenced or suspended from time to time without prior notice. Shares repurchased under our share repurchase program are purchased in open market transactions and are held as treasury stock.
Convertible Debt Redemption
In October 2013 we notified the holders of our 5.5% Convertible Debentures due 2038 (Series A) that we planned to redeem their holding on December 3, 2013. These holders could elect to convert their holding into shares of our common stock up until the business day prior to the redemption date at a rate of 220.6288 shares per $1,000 debenture. All holders converted the debt into shares of our common stock before December 3, 2013 for a total of approximately 12.2 million shares.
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Stock Performance Graph
This performance graph shall not be deemed “filed” with the SEC or subject to Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the Securities Act of 1933, as amended.
The following line graph compares the cumulative total stockholder return on our common stock with the cumulative total return of the Standard & Poor’s 500 Stock Index and the NYSE Arca Airline Index from December 31, 2009 to December 31, 2013. The comparison assumes the investment of $100 in our common stock and in each of the foregoing indices and reinvestment of all dividends. The stock performance shown represents historical performance and is not representative of future stock performance.
12/31/2009 | 12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | ||||||||||||||||
JetBlue Airways Corporation | $ | 100 | $ | 121 | $ | 95 | $ | 105 | $ | 157 | ||||||||||
S&P 500 Stock Index | 100 | 115 | 117 | 136 | 180 | |||||||||||||||
NYSE Arca Airline Index (1) | 100 | 139 | 96 | 131 | 206 | |||||||||||||||
(1) As of December 31, 2013, the NYSE Arca Airline Index consisted of Air Canada, Alaska Air Group Inc., Allegiant Travel Company, American Airlines Group, Inc., Delta Air Lines, Inc., JetBlue Airways Corporation, Southwest Airlines Company, Republic Airways Holding, Inc., Transat A.T. Inc. (Cl B), United Continental Holdings Inc. and WestJet Airlines Ltd.
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ITEM 6. SELECTED FINANCIAL DATA
The following financial information for the five years ended December 31, 2013 has been derived from our consolidated financial statements. This information should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this report.
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Statements of Operations Data: | ||||||||||||||||||||
Operating revenues | $ | 5,441 | $ | 4,982 | $ | 4,504 | $ | 3,779 | $ | 3,292 | ||||||||||
Operating expenses: | ||||||||||||||||||||
Aircraft fuel and related taxes | 1,899 | 1,806 | 1,664 | 1,115 | 945 | |||||||||||||||
Salaries, wages and benefits (1) | 1,135 | 1,044 | 947 | 891 | 776 | |||||||||||||||
Landing fees and other rents | 305 | 277 | 245 | 228 | 213 | |||||||||||||||
Depreciation and amortization | 290 | 258 | 233 | 220 | 228 | |||||||||||||||
Aircraft rent | 128 | 130 | 135 | 126 | 126 | |||||||||||||||
Sales and marketing | 223 | 204 | 199 | 179 | 151 | |||||||||||||||
Maintenance materials and repairs | 432 | 338 | 227 | 172 | 149 | |||||||||||||||
Other operating expenses (2) | 601 | 549 | 532 | 515 | 419 | |||||||||||||||
Total operating expenses | 5,013 | 4,606 | 4,182 | 3,446 | 3,007 | |||||||||||||||
Operating income | 428 | 376 | 322 | 333 | 285 | |||||||||||||||
Other income (expense) (3) | (149 | ) | (167 | ) | (177 | ) | (172 | ) | (181 | ) | ||||||||||
Income before income taxes | 279 | 209 | 145 | 161 | 104 | |||||||||||||||
Income tax expense | 111 | 81 | 59 | 64 | 43 | |||||||||||||||
Net income | $ | 168 | $ | 128 | $ | 86 | $ | 97 | $ | 61 | ||||||||||
Earnings per common share: | ||||||||||||||||||||
Basic | $ | 0.59 | $ | 0.45 | $ | 0.31 | $ | 0.36 | $ | 0.24 | ||||||||||
Diluted | $ | 0.52 | $ | 0.40 | $ | 0.28 | $ | 0.31 | $ | 0.21 | ||||||||||
Other Financial Data: | ||||||||||||||||||||
Operating margin | 7.9 | % | 7.5 | % | 7.1 | % | 8.8 | % | 8.6 | % | ||||||||||
Pre-tax margin | 5.1 | % | 4.2 | % | 3.2 | % | 4.3 | % | 3.2 | % | ||||||||||
Ratio of earnings to fixed charges | 2.05 | x | 1.75 | x | 1.52 | x | 1.59 | x | 1.33 | x | ||||||||||
Net cash provided by operating activities | $ | 758 | $ | 698 | $ | 614 | $ | 523 | $ | 486 | ||||||||||
Net cash used in investing activities | (476 | ) | (867 | ) | (502 | ) | (696 | ) | (457 | ) | ||||||||||
Net cash provided by (used in) financing activities | (239 | ) | (322 | ) | 96 | (258 | ) | 306 | ||||||||||||
(1)In 2010 we incurred approximately $9 million in one-time implementation expenses related to our new customer service system.
(2)In 2013, we had a gain of $7 million on the sale of the Airfone business by LiveTV and sold three spare engines resulting in gains of approximately $2 million. In 2012 we sold six spare engines and two aircraft resulting in gains of approximately $10 million and LiveTV terminated a customer contract resulting in a gain of approximately $8 million. In 2010 we recorded an impairment loss of $6 million related to the spectrum license held by our LiveTV subsidiary. In 2010 we also incurred approximately $13 million in one-time implementation expenses related to our new customer service system. In 2009 we sold two aircraft which resulted in gains of approximately $1 million.
(3)We recorded $3 million, $1 million and $6 million in losses on the early extinguishment of debt in 2013, 2012 and 2011 respectively.
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As of December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 225 | $ | 182 | $ | 673 | $ | 465 | $ | 896 | ||||||||||
Investment securities | 516 | 685 | 591 | 628 | 246 | |||||||||||||||
Total assets | 7,350 | 7,070 | 7,071 | 6,593 | 6,549 | |||||||||||||||
Total debt | 2,585 | 2,851 | 3,136 | 3,033 | 3,304 | |||||||||||||||
Common stockholders’ equity | 2,134 | 1,888 | 1,757 | 1,654 | 1,546 | |||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Operating Statistics (unaudited): | ||||||||||||||||||||
Revenue passengers (thousands) | 30,463 | 28,956 | 26,370 | 24,254 | 22,450 | |||||||||||||||
Revenue passenger miles (millions) | 35,836 | 33,563 | 30,698 | 28,279 | 25,955 | |||||||||||||||
Available seat miles (ASMs)(millions) | 42,824 | 40,075 | 37,232 | 34,744 | 32,558 | |||||||||||||||
Load factor | 83.7 | % | 83.8 | % | 82.4 | % | 81.4 | % | 79.7 | % | ||||||||||
Aircraft utilization (hours per day) | 11.9 | 11.8 | 11.7 | 11.6 | 11.5 | |||||||||||||||
Average fare | $ | 163.19 | $ | 157.11 | $ | 154.74 | $ | 140.69 | $ | 130.67 | ||||||||||
Yield per passenger mile (cents) | 13.87 | 13.55 | 13.29 | 12.07 | 11.30 | |||||||||||||||
Passenger revenue per ASM (cents) | 11.61 | 11.35 | 10.96 | 9.82 | 9.01 | |||||||||||||||
Operating revenue per ASM (cents) | 12.71 | 12.43 | 12.10 | 10.88 | 10.11 | |||||||||||||||
Operating expense per ASM (cents) | 11.71 | 11.49 | 11.23 | 9.92 | 9.24 | |||||||||||||||
Operating expense per ASM, excluding fuel (cents) | 7.28 | 6.99 | 6.76 | 6.71 | 6.33 | |||||||||||||||
Operating expense per ASM, excluding fuel and profit sharing (cents) | 7.25 | 6.98 | 6.76 | 6.71 | 6.33 | |||||||||||||||
Airline operating expense per ASM (cents) (4) | 11.56 | 11.34 | 11.06 | 9.71 | 8.99 | |||||||||||||||
Departures | 282,133 | 264,600 | 243,446 | 225,501 | 215,526 | |||||||||||||||
Average stage length (miles) | 1,090 | 1,085 | 1,091 | 1,100 | 1,076 | |||||||||||||||
Average number of operating aircraft during period | 185.2 | 173.9 | 164.9 | 153.5 | 148.0 | |||||||||||||||
Average fuel cost per gallon, including fuel taxes | $ | 3.14 | $ | 3.21 | $ | 3.17 | $ | 2.29 | $ | 2.08 | ||||||||||
Fuel gallons consumed (millions) | 604 | 563 | 525 | 486 | 455 | |||||||||||||||
Full-time equivalent employees at period end (4) | 12,647 | 12,070 | 11,733 | 11,121 | 10,704 | |||||||||||||||
(4)Excludes results of operations and employees of LiveTV, LLC, which are unrelated to our airline operations and are immaterial to our consolidated operating results.
Glossary of Airline terminology
Airline terminology used in this section and elsewhere in this report:
•Aircraft utilization. The average number of block hours operated per day per aircraft for the total fleet of aircraft.
•Available seat miles. The number of seats available for passengers multiplied by the number of miles the seats are flown.
•Average fare. The average one-way fare paid per flight segment by a revenue passenger.
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•Average fuel cost per gallon. Total aircraft fuel costs, including fuel taxes and effective portion of fuel hedging, divided by the total number of fuel gallons consumed.
•Average stage length. The average number of miles flown per flight.
•Load factor. The percentage of aircraft seating capacity actually utilized, calculated by dividing revenue passenger miles by available seat miles.
•Operating expense per available seat mile. Operating expenses divided by available seat miles.
•Operating expense per available seat mile, excluding fuel. Operating expenses, less aircraft fuel, divided by available seat miles.
•Operating expense per available seat mile, excluding fuel and profit sharing. Operating expenses, less aircraft fuel and profit sharing, divided by available seat miles.
•Operating revenue per available seat mile. Operating revenues divided by available seat miles.
•Passenger revenue per available seat mile. Passenger revenue divided by available seat miles.
•Revenue passengers. The total number of paying passengers flown on all flight segments.
•Revenue passenger miles. The number of miles flown by revenue passengers.
•Yield per passenger mile. The average amount one passenger pays to fly one mile.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In 2013 we experienced the continuation of uncertain economic conditions, ongoing fuel price constraints, and the persistent competitiveness of the airline industry. Even with these external factors 2013 was one of the most profitable years in our history. We generated operating revenue growth of over 9% year over year and reported our highest ever net income. We are committed to delivering a safe and reliable JetBlue Experience for our customers as well as increasing returns for our shareholders. We believe our continued focus on cost discipline, product innovation and network enhancements, combined with our service excellence, will drive our future success.
2013 Financial Highlights
•We reported our highest ever net income of $168 million, an increase of $40 million compared to 2012.
•We generated over $5.4 billion in operating revenue. Our ancillary revenue continues to be a source of significant revenue growth, primarily driven by customer demand for our Even More products as well as changes to our fee structure.
•Operating margin increased by 0.4 points to 7.9% and we improved our return on invested capital, or ROIC, to 5.3%.
•Our earnings per diluted share reached $0.52, the highest since 2003.
•We generated $758 million in cash from operations and $121 million in free cash flow.
•Operating expenses per available seat mile increased 1.9% to 11.71 cents. Excluding fuel and profit sharing, our cost per available seat mile increased 3.8% in 2013.
•We entered into a Credit and Guaranty Agreement consisting of a $350 million revolving credit and a letter of credit facility with Citibank.
Company Initiatives
Strengthening of our Balance Sheet
Throughout 2013 we continued to focus on strengthening our balance sheet. We ended the year with unrestricted cash, cash equivalents and short-term investments of $627 million and undrawn lines of credit of $550 million. Our unrestricted cash, cash equivalents and short-term investments is at approximately 12% of trailing twelve months revenue. We reduced our overall debt balance by $266 million, including a prepayment for approximately $94 million related to four A320 aircraft in the fourth quarter of 2013. We have increased the number of unencumbered aircraft and spare engines in 2013 bringing total unencumbered aircraft to 23 and spare engines to 30 as of December 31, 2013. In 2013 the holders of our 5.5% Convertible Debentures due 2038 (Series A) converted their securities into approximately 12.2 million shares of our common stock. During 2013 we repurchased approximately 0.5 million shares of our common stock for approximately $3 million.
Aircraft
During 2013 we took delivery of 14 aircraft, including four of our new aircraft type, the Airbus A321. In October 2013 we restructured our fleet order book. We deferred 24 EMBRAER 190 aircraft deliveries from 2014-2018 to 2020-2022, converted 18 Airbus A320 positions to A321's and added an incremental order for 35 A321 aircraft. We entered into a flight-hour based maintenance and repair agreement relating to our EMBRAER 190 engines to better provide for more predictable maintenance expenses.
Airport Infrastructure Investments
During 2013 we continued our construction of T5i, the new international arrival extension to T5 at JFK. We expect the creation of a new dedicated site to handle U.S. Customs and Border Protection checks at T5 to eliminate the need for our international customers to arrive at T4, resulting in a more efficient process and a better JetBlue Experience for both our customers and Crewmembers.
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Network
As part of our ongoing network initiatives and route optimization efforts we have continued to make schedule and frequency adjustments throughout 2013. We added seven new BlueCities to our network: Charleston, SC, Albuquerque, NM, Philadelphia, PA, Medellin, Colombia, Worcester, MA, Lima, Peru and Port-au-Prince, Haiti. We also added new routes between existing BlueCities.
Outlook for 2014
We ended 2013 with record revenues and our highest ever net income. We believe we will be able to build on this momentum in 2014 by continuing to improve our year over year margins and increase returns for our shareholders. We plan to do this by introducing our new product, Mint™ in June as well as continuing to retrofit our Airbus fleet with Fly-Fi™. We further plan to add new destinations and route pairings based upon market demand, having previously announced three new BlueCities for the first half of 2014. We are continuously looking to expand our other ancillary revenue opportunities, improve our TrueBlue loyalty program and deepen our portfolio of commercial partnerships. We also remain committed to investing in infrastructure and product enhancements which will enable us to reap future benefits. We intend to continue to opportunistically pre-purchase outstanding debt when market conditions and terms are favorable.
For the full year 2014, we estimate our operating capacity to increase approximately 5% to 7% over 2013 with the addition of nine Airbus A321 aircraft to our operating fleet. Assuming fuel prices of $3.06 per gallon, net of our fuel hedging activity, our cost per available seat mile for 2014 is expected to increase by 1% to 3% over 2013, primarily due to increases to salaries, wages and benefits.
RESULTS OF OPERATIONS
Year 2013 Compared to Year 2012
Operating Revenues
(Revenue in millions) | Year-over-Year Change | |||||||||||||||
2013 | 2012 | $ | % | |||||||||||||
Passenger Revenue | $ | 4,971 | $ | 4,550 | $ | 421 | 9.3 | |||||||||
Other Revenue | 470 | 432 | 38 | 8.8 | ||||||||||||
Operating Revenues | 5,441 | 4,982 | 459 | 9.2 | ||||||||||||
Average Fare | $ | 163.19 | $ | 157.11 | $ | 6.08 | 3.9 | |||||||||
Yield per passenger mile (cents) | 13.87 | 13.55 | 0.32 | 2.4 | ||||||||||||
Passenger revenue per ASM (cents) | 11.61 | 11.35 | 0.26 | 2.3 | ||||||||||||
Operating revenue per ASM (cents) | 12.71 | 12.43 | 0.28 | 2.2 | ||||||||||||
Average stage length (miles) | 1,090 | 1,085 | 5 | 0.5 | ||||||||||||
Revenue passengers (thousands) | 30,463 | 28,956 | 1,507 | 5.2 | ||||||||||||
Revenue passenger miles (millions) | 35,836 | 33,563 | 2,273 | 6.8 | ||||||||||||
Available Seat Miles (ASMs) (millions) | 42,824 | 40,075 | 2,749 | 6.9 | ||||||||||||
Load Factor | 83.7 | % | 83.8 | % | (0.1 | ) | pts | |||||||||
Passenger revenue is our primary source of revenue and accounted for over 91% of our total operating revenues for the year ended December 31, 2013. As well as seat revenue it includes revenue from our ancillary product offerings such as EvenMore™ Space. Revenues generated from international routes, including Puerto Rico, accounted for 28% of our passenger revenues in 2013. Revenue is recognized either when transportation is provided or after the ticket or customer credit expires. We measure capacity in terms of available seat miles, which represents the number of seats available for passengers multiplied by the number of miles the seats are flown. Yield, or the average amount one passenger pays to fly one mile, is calculated by dividing passenger revenue by revenue passenger miles. We attempt to increase passenger revenue primarily by increasing our yield per flight which produces higher revenue per available seat mile, or RASM. Our objective is to optimize our fare mix to increase our overall average fare while continuing to provide our customers with competitive fares.
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In 2013, the increase in passenger revenues was mainly attributable to the increased capacity and increase in yield. Our largest ancillary product remains the EvenMore™ Space seats, generating approximately $170 million in revenue, an increase of over 13% compared to 2012.
The primary component of other revenue is the fees from reservation changes and excess baggage charged to customers in accordance with our published policies. We also include the marketing component of TrueBlue point sales, on-board product sales, transportation of mail and cargo, Charters, ground handling fees of other airlines and rental income. We additionally include the revenues earned by our subsidiary, LiveTV, LLC, for the sale of in-flight entertainment systems and on-going services provided for these systems on other airlines in Other Revenue.
In 2013, other revenue increased by $38 million compared to 2012. This was primarily due an increase in fees revenue, a factor of which was a change in our fee structure policy over the summer period. Further increases were seen in the marketing component of TrueBlue. These increases were offset slightly by a decrease in LiveTV revenue.
Operating Expenses
(in millions; per ASM data in cents) | Year-over-Year Change | per ASM | ||||||||||||||||||||||
2013 | 2012 | $ | % | 2013 | 2012 | % Change | ||||||||||||||||||
Aircraft fuel and related taxes | $ | 1,899 | $ | 1,806 | $ | 93 | 5.1 | 4.43 | 4.50 | (1.6 | ) | |||||||||||||
Salaries, wages and benefits | 1,135 | 1,044 | 91 | 8.7 | 2.65 | 2.60 | 1.9 | |||||||||||||||||
Landing fees and other rents | 305 | 277 | 28 | 10.1 | 0.71 | 0.69 | 2.9 | |||||||||||||||||
Depreciation and amortization | 290 | 258 | 32 | 12.5 | 0.68 | 0.65 | 4.6 | |||||||||||||||||
Aircraft rent | 128 | 130 | (2 | ) | (1.5 | ) | 0.30 | 0.33 | (9.1 | ) | ||||||||||||||
Sales and marketing | 223 | 204 | 19 | 9.2 | 0.52 | 0.51 | 2.0 | |||||||||||||||||
Maintenance materials and repairs | 432 | 338 | 94 | 28.0 | 1.01 | 0.84 | 20.2 | |||||||||||||||||
Other operating expenses | 601 | 549 | 52 | 9.5 | 1.41 | 1.37 | 2.9 | |||||||||||||||||
Total operating expenses | $ | 5,013 | $ | 4,606 | $ | 407 | 8.8 | 11.71 | 11.49 | 1.9 | ||||||||||||||
Aircraft Fuel and Hedging
Aircraft fuel and related taxes remains our largest expense category, representing 38% of our total operating expenses in 2013 compared to 39% in 2012. Even though the average fuel price decreased 2% in 2013 to $3.14 per gallon, our fuel expenses increased by $93 million as we consumed 41 million more gallons of aircraft fuel compared to 2012, mainly due to our increased capacity. Based on our expected fuel volume for 2014, a 10% per gallon increase in the cost of aircraft fuel would increase our annual fuel expense by approximately $202 million.
We maintain a diversified fuel hedge portfolio by entering into a variety of fuel hedge contracts in order to provide some protection against sharp and sudden volatility as well as further increases in fuel prices. In total, we hedged 21% of our total 2013 fuel consumption. We also use fixed forward price agreements, or FFPs, which allow us to lock in a price for fixed quantities of fuel to be delivered at a specified date in the future, to manage fuel price volatility. As of December 31, 2013, we had outstanding fuel hedge contracts covering approximately 16% of our forecasted consumption for the first quarter of 2014 and 9% for the full year 2014. We also had 7% of our 2014 fuel consumption requirements covered under FFPs. In January 2014, we entered into jet fuel swap and cap agreements covering an additional 3% of our 2014 forecasted consumption. We will continue to monitor fuel prices closely and intend to take advantage of reasonable fuel hedging opportunities as they become available.
In 2013 we recorded $10 million in fuel hedge losses compared to 2012 when we recorded $10 million in effective fuel hedge gains. Fuel derivatives not qualifying as cash flow hedges in 2013 resulted in immaterial losses compared to $3 million in losses in 2012 which were recorded in interest income and other. Accounting ineffectiveness on fuel derivatives classified as cash flow hedges resulted in immaterial losses in 2013 and 2012 and were recorded in interest income and other. We are unable to predict what the amount of ineffectiveness will be related to these instruments, or the potential loss of hedge accounting which is determined on a derivative-by-derivative basis, due to the volatility in the forward markets for these commodities.
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Salaries, Wages and Benefits
Salaries, Wages and Benefits is our second largest expense, representing approximately 23% of our total operating expenses in 2013 and 2012. During 2013 the average number of full-time equivalent employees increased by 5% and the average tenure of our Crewmembers increased to 6.1 years, both of which contributed to a $91 million, or 8.7%, increase compared to 2012. Retirement Plus contributions, which equate to 5% of all of our eligible Crewmembers wages, increased by $4 million and our 3% retirement contribution for a certain portion of our FAA-licensed Crewmembers, which we refer to as Retirement Advantage, increased by $6 million. Our increased profitability resulted in $12 million of profit sharing expense compared to $3 million in 2012. The increasing tenure of our Crewmembers, rising healthcare costs and efforts to maintain competitiveness in our overall compensation packages are presenting cost pressures.
We have agreed to provide our pilots with a 20% pay increase in their base rate over the next three years which we expect will equate to approximately $30 million in 2014. In January 2014, the FAA’s rule amending the FAA’s flight, duty, and rest regulations became effective. Among other things, the new rule requires a ten hour minimum rest period prior to a pilot’s flight duty period; mandates a pilot must have an opportunity for eight hours of uninterrupted sleep within the rest period; and imposes new pilot “flight time” and “duty time” limitations based upon report times, the number of scheduled flight segments, and other operational factors. We have hired additional pilots to address the requirements of the new rule.
Maintenance Materials and Repairs
Maintenance materials and repairs are generally expensed when incurred unless covered by a long-term flight hour services contract. The average age of our aircraft in 2013 was 7.1 years which is relatively young compared to our competitors. However, as our fleet ages our maintenance costs will increase significantly, both on an absolute basis and as a percentage of our unit costs, as older aircraft require additional, more expensive repairs over time. We had an average of 11.3 additional operating aircraft in 2013 compared to 2012.
In 2013 maintenance materials and repairs increased by $94 million as we had higher engine related costs for our EMBRAER 190 aircraft. In the latter half of 2013 we finalized a flight-hour based maintenance and repair agreement for these engines, which is expected to result in better planning of maintenance activities. While our maintenance costs will increase as our fleet ages, we expect we will benefit from these new maintenance agreements for our fleet.
Other Operating Expenses
Other operating expenses consist of the following categories: outside services (including expenses related to fueling, ground handling, skycap, security and janitorial services), insurance, personnel expenses, cost of goods sold to other airlines by LiveTV, professional fees, on-board supplies, shop and office supplies, bad debts, communication costs and taxes other than payroll and fuel taxes. Other operating expenses increased by $52 million, or 9.5%, compared to 2012 due to an increase in outside services. As our capacity and number of departures grew in 2013, our related variable handling costs also increased. Additionally we had higher information technology related costs due to increases in volume and usage. Non-recurring items in 2013 included a gain of approximately $2 million relating to the sale of three spare aircraft engines as well as a gain of approximately $7 million relating to the sale of LiveTV's investment in the Airfone business. In 2012 we sold six spare engines and two EMBRAER 190 aircraft resulting in gains of approximately $10 million as well as the termination of a customer by LiveTV resulting in a gain of approximately $8 million.
Income Taxes
Our effective tax rate was 40% in 2013 and 39% in 2012. Our effective tax rate differs from the statutory income tax rate primarily due to state income taxes and the non-deductibility of certain items for tax purposes. It is also affected by the relative size of these items to our 2013 pre-tax income of $279 million and our 2012 pre-tax income of $209 million.
Year 2012 Compared to Year 2011
Overview
We reported net income of $128 million in 2012 compared to $86 million in 2011. We had an operating income of $376 million in 2012, an increase of $54 million over 2011 and an operating margin of 7.5%, up 0.4 points from 2011. Diluted earnings per share were $0.40 for 2012 compared to diluted earnings per share of $0.28 for 2011.
During 2012, despite the continuing uncertain economic conditions and a severe hurricane hitting the core of our operations we managed to produce solid financial results. We generated unit revenue growth throughout the year by continuing to manage the structure and mix of our network. Our efforts to grow key regions were primarily focused in Boston and the Caribbean, which resulted in increased capacity during 2012.
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Operating Revenues
(Revenues in millions) | Year-over-Year Change | |||||||||||||||
2012 | 2011 | $ | % | |||||||||||||
Passenger Revenue | $ | 4,550 | $ | 4,080 | $ | 470 | 11.5 | % | ||||||||
Other Revenue | 432 | 424 | 8 | 2.0 | ||||||||||||
Operating Revenues | 4,982 | 4,504 | 478 | 10.6 | ||||||||||||
Average Fare | $ | 157.11 | $ | 154.74 | $ | 2.37 | 1.5 | % | ||||||||
Yield per passenger mile (cents) | 13.55 | 13.29 | 0.26 | 2.0 | ||||||||||||
Passenger revenue per ASM (cents) | 11.35 | 10.96 | 0.39 | 3.6 | ||||||||||||
Operating revenue per ASM (cents) | 12.43 | 12.10 | 0.33 | 2.8 | ||||||||||||
Average stage length (miles) | 1,085 | 1,091 | (6 | ) | (0.5 | ) | ||||||||||
Revenue passengers (thousands) | 28,956 | 26,370 | 2,586 | 9.8 | ||||||||||||
Revenue passenger miles (millions) | 33,563 | 30,698 | 2,865 | 9.3 | ||||||||||||
Available Seat Miles (ASMs) (millions) | 40,075 | 37,232 | 2,843 | 7.6 | ||||||||||||
Load Factor | 83.8 | % | 82.4 | % | 1.4 | pts | ||||||||||
Passenger revenue accounted for 91% of our total operating revenues in 2012 and was our primary source of revenue. Revenues generated from international routes, including Puerto Rico, accounted for 27% of our passenger revenues in 2012. In 2012, the increase in passenger revenues of 11.5% was mainly attributable to the increased capacity and increase in yield. Our largest ancillary product remained the EvenMore™ Space seats, generating approximately $150 million in revenue. This was an increase of approximately 19% over 2011.
Operating Expenses
(in millions; per ASM data in cents) | Year-over-Year Change | per ASM | ||||||||||||||||||||||
2012 | 2011 | $ | % | 2012 | 2011 | % Change | ||||||||||||||||||
Aircraft fuel and related taxes | $ | 1,806 | $ | 1,664 | $ | 142 | 8.6 | 4.50 | 4.47 | 0.9 | ||||||||||||||
Salaries, wages and benefits | 1,044 | 947 | 97 | 10.3 | 2.60 | 2.54 | 2.4 | |||||||||||||||||
Landing fees and other rents | 277 | 245 | 32 | 12.8 | 0.69 | 0.66 | 4.8 | |||||||||||||||||
Depreciation and amortization | 258 | 233 | 25 | 10.5 | 0.65 | 0.63 | 2.7 | |||||||||||||||||
Aircraft rent | 130 | 135 | (5 | ) | (3.6 | ) | 0.33 | 0.36 | (10.4 | ) | ||||||||||||||
Sales and marketing | 204 | 199 | 5 | 3.0 | 0.51 | 0.53 | (4.3 | ) | ||||||||||||||||
Maintenance materials and repairs | 338 | 227 | 111 | 48.4 | 0.84 | 0.61 | 37.9 | |||||||||||||||||
Other operating expenses | 549 | 532 | 17 | 3.2 | 1.37 | 1.43 | (4.1 | ) | ||||||||||||||||
Total operating expenses | $ | 4,606 | $ | 4,182 | $ | 424 | 10.1 | 11.49 | 11.23 | 2.3 | ||||||||||||||
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Aircraft Fuel and Hedging
The expenses relating to aircraft fuel and related taxes represented 39% of our total operating expenses in 2012. During 2012 the average fuel price increased 1% compared to 2011; we consumed 38 million more gallons of aircraft fuel and saw an increase in fuel expenses of $142 million. In 2012 we hedged 30% of our total fuel consumption. We also recorded $10 million in effective fuel hedge gains which offset fuel expenses compared to $3 million in 2011. Fuel derivatives not qualifying as cash flow hedges in 2012 resulted in losses of approximately $3 million compared to an immaterial amount in 2011. Accounting ineffectiveness on fuel derivatives classified as cash flow hedges resulted in an immaterial loss in 2012 and $2 million in 2011, recorded in interest income and other. We are unable to predict what the amount of ineffectiveness will be related to these instruments, or the potential loss of hedge accounting which is determined on a derivative-by-derivative basis, due to the volatility in the forward markets for these commodities.
Salaries, Wages and Benefits
The increase in salaries, wages and benefits was primarily due to a 4% increase in the number of average number of full-time equivalent employees needed to support our growth plans. The increasing seniority levels of our Crewmembers combined with pay and benefit increases also contributed to higher expenses. The average tenure of our Crewmembers increased to 5.6 years as of December 31, 2012 resulting in an increase to average wages and benefits per full-time equivalent employees. As a result of increased wages, Retirement Plus contributions increased by $3 million. Our increased profitability resulted in $3 million of profit sharing expense to be paid to our Crewmembers in March 2013. During 2012, Retirement Advantage contributions totaled $4 million.
Maintenance Materials and Repairs
Maintenance expense represented a significant cost challenge in 2012, increasing $111 million from 2011. In addition to the additional operating aircraft and the aging of our fleet, several aircraft came off of warranty to contribute to higher maintenance costs. Additionally, one of our key engine and component repair maintenance providers liquidated during the first quarter of 2012 resulting in approximately $10 million in additional costs while we found alternative providers.
Income Taxes
Our effective tax rate was 39% in 2012 compared to 41% in 2011. Our effective tax rate differs from the statutory income tax rate primarily due to state income taxes, the change in valuation allowance and the non-deductibility of certain items for tax purposes. The rate decrease was attributable to reductions in certain non-deductible items and the relative size of these items to our pre-tax income.
Costs per Available Seat Mile (Non-GAAP)
Costs per available seat mile, or CASM, is a commonly used metric in the airline industry. Our CASM for 2013 and 2012 are summarized in the table below. We have listed separately our fuel costs and profit sharing expense. While these amounts are included in CASM, we believe excluding fuel costs, which are subject to many economic and political factors beyond our control, as well as profit sharing, which is sensitive to volatility in earnings, is useful to management and investors. We believe this non-GAAP measure is more indicative of our ability to manage our costs and provides a meaningful comparison of our results to the airline industry and our prior year results. Investors should consider this non-GAAP financial measure in addition to, and not as a substitute for, our financial performance measures prepared in accordance with GAAP.
Reconciliation of Operating expense per ASM, excluding fuel and profit sharing | |||||||||||||||||
(in millions, per ASM data in cents) | |||||||||||||||||
2013 | 2012 | Per ASM Year-over-Year Change | |||||||||||||||
$ | per ASM | $ | per ASM | % | |||||||||||||
Total operating expenses | $ | 5,013 | 11.71 | $ | 4,606 | 11.49 | 1.9 | % | |||||||||
Less: Aircraft fuel and related taxes | 1,899 | 4.43 | 1,806 | 4.50 | (1.6 | ) | |||||||||||
Operating expenses, excluding fuel | 3,114 | 7.28 | 2,800 | 6.99 | 4.2 | ||||||||||||
Less: Profit sharing | 12 | 0.03 | 3 | 0.01 | 200.0 | ||||||||||||
Operating expense, excluding fuel & profit sharing | $ | 3,102 | 7.25 | $ | 2,797 | 6.98 | 3.8 | ||||||||||
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Quarterly Results of Operations
The following table sets forth selected financial data and operating statistics for the four quarters ended December 31, 2013. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Form 10-K.
Three Months Ended | ||||||||||||||||
March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | |||||||||||||
Statements of Operations Data (dollars in millions) | ||||||||||||||||
Operating revenues | $ | 1,299 | $ | 1,335 | $ | 1,442 | $ | 1,365 | ||||||||
Operating expenses: | ||||||||||||||||
Aircraft fuel and related taxes | 467 | 465 | 501 | 466 | ||||||||||||
Salaries, wages and benefits | 280 | 279 | 283 | 293 | ||||||||||||
Landing fees and other rents | 70 | 80 | 81 | 74 | ||||||||||||
Depreciation and amortization | 68 | 71 | 73 | 78 | ||||||||||||
Aircraft rent | 32 | 33 | 32 | 31 | ||||||||||||
Sales and marketing | 50 | 53 | 60 | 60 | ||||||||||||
Maintenance materials and repairs | 114 | 111 | 109 | 98 | ||||||||||||
Other operating expenses (1) | 159 | 141 | 151 | 150 | ||||||||||||
Total operating expenses | 1,240 | 1,233 | 1,290 | 1,250 | ||||||||||||
Operating income | 59 | 102 | 152 | 115 | ||||||||||||
Other income (expense) (2) | (36 | ) | (42 | ) | (33 | ) | (38 | ) | ||||||||
Income before income taxes | 23 | 60 | 119 | 77 | ||||||||||||
Income tax expense | 9 | 24 | 48 | 30 | ||||||||||||
Net income | $ | 14 | $ | 36 | $ | 71 | $ | 47 | ||||||||
Operating margin | 4.5 | % | 7.6 | % | 10.5 | % | 8.4 | % | ||||||||
Pre-tax margin | 1.8 | % | 4.5 | % | 8.2 | % | 5.7 | % | ||||||||
Operating Statistics: | ||||||||||||||||
Revenue passengers (thousands) | 7,300 | 7,753 | 8,059 | 7,351 | ||||||||||||
Revenue passenger miles (millions) | 8,506 | 9,115 | 9,561 | 8,654 | ||||||||||||
Available seat miles ASM (millions) | 10,140 | 10,741 | 11,252 | 10,691 | ||||||||||||
Load factor | 83.9 | % | 84.9 | % | 85.0 | % | 80.9 | % | ||||||||
Aircraft utilization (hours per day) | 11.9 | 12.2 | 12.2 | 11.5 | ||||||||||||
Average fare | $ | 162.53 | $ | 157.51 | $ | 164.02 | $ | 168.94 | ||||||||
Yield per passenger mile (cents) | 13.95 | 13.40 | 13.83 | 14.35 | ||||||||||||
Passenger revenue per ASM (cents) | 11.70 | 11.37 | 11.75 | 11.62 | ||||||||||||
Operating revenue per ASM (cents) | 12.81 | 12.42 | 12.82 | 12.77 | ||||||||||||
Operating expense per ASM (cents) | 12.23 | 11.48 | 11.47 | 11.70 | ||||||||||||
Operating expense per ASM, excluding fuel (cents) | 7.62 | 7.15 | 7.02 | 7.34 | ||||||||||||
Operating expense per ASM, excluding fuel and profit sharing (cents) | 7.62 | 7.15 | 6.95 | 7.30 | ||||||||||||
Airline operating expense per ASM (cents) (3) | 12.06 | 11.36 | 11.33 | 11.52 | ||||||||||||
Departures | 66,773 | 70,722 | 74,206 | 70,432 | ||||||||||||
Average stage length (miles) | 1,092 | 1,088 | 1,085 | 1,095 | ||||||||||||
Average number of operating aircraft during period | 180.3 | 183.1 | 187.1 | 189.9 | ||||||||||||
Average fuel cost per gallon, including fuel taxes | $ | 3.29 | $ | 3.06 | $ | 3.14 | $ | 3.10 | ||||||||
Fuel gallons consumed (millions) | 142 | 152 | 160 | 150 | ||||||||||||
Full-time equivalent employees at period end (3) | 12,385 | 12,743 | 12,124 | 12,647 | ||||||||||||
(1) | During the second quarter of 2013, LiveTV recorded a gain of approximately $7 million relating to the sale of the Airfone business. During the fourth quarter of 2013, we recorded net gains of approximately $2 million related to the sale of three spare aircraft engines. |
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(2) | During the fourth quarter of 2013 we recorded $3 million in losses related to the early extinguishment of a portion of our long-term debt. |
(3) | Excludes results of operations and employees of LiveTV, LLC, which are unrelated to our airline operations and are immaterial to our consolidated operating results. |
Although we experienced significant revenue growth in 2013, this trend may not continue. We expect our expenses to continue to increase significantly as we acquire additional aircraft, as our fleet ages and as we expand the frequency of flights in existing markets and enter into new markets. Accordingly, the comparison of the financial data for the quarterly periods presented may not be meaningful. In addition, we expect our operating results to fluctuate significantly from quarter-to-quarter in the future as a result of various factors, many of which are outside our control. Consequently, we believe quarter-to-quarter comparisons of our operating results may not necessarily be meaningful and you should not rely on our results for any one quarter as an indication of our future performance.
LIQUIDITY AND CAPITAL RESOURCES
The airline business is capital intensive. Our ability to successfully execute our profitable growth plans is largely dependent on the continued availability of capital on attractive terms. In addition, our ability to successfully operate our business depends on maintaining sufficient liquidity. We believe we have adequate resources from a combination of cash and cash equivalents, investment securities on hand and two available lines of credit. Additionally, as of December 31, 2013, we had 23 unencumbered aircraft and 30 unencumbered spare engines which we believe could be an additional source of liquidity, if necessary.
We believe a healthy cash balance is crucial to our ability to weather any part of the economic cycle while continuing to execute on our plans for profitable growth and increased returns. Our goal is to continue to be diligent with our liquidity, maintaining financial flexibility and allowing for prudent capital spending, which in turn we expect to lead to improved returns for our shareholders. As of December 31, 2013 our cash and cash equivalents balance increased by 24% to $225 million. We believe our current level of unrestricted cash, cash equivalents and short-term investments of approximately 12% of trailing twelve months revenue, combined with our other available line of credit and portfolio of unencumbered assets provides us with a strong liquidity position and the potential for higher returns on cash deployment. We believe we have taken several important actions during 2013 in solidifying our strong balance sheet and overall liquidity position. Our highlights for 2013 included:
•Reduced our overall debt balance by $266 million.
•Prepaid approximately $94 million in debt resulting in four Airbus A320 aircraft becoming unencumbered. This will result in 2014 interest savings of $5 million and total interest expense savings of $25 million.
•Increased the number of unencumbered aircraft from 11 as of December 31, 2012 to 23 as of December 31, 2013 and extended the operating leases on eight aircraft.
•We entered into a $350 million revolving credit and letter of credit facility with Citibank.
•We signed a $226 million Enhanced Equipment Trust Certificate, or EETC, offering, in pass-through certificates which will be secured by 14 unencumbered Airbus A320 aircraft. Funding for the pass-through certificates is scheduled for March 2014.
•The Greater Orlando Aviation Authority, or GOAA, issued $42 million in special purpose airport facility revenue bonds to refund bonds issued to us in 2005, interest savings will be approximately $1 million per year.
Return on Invested Capital
Return on invested capital, or ROIC, is an important financial metric which we believe provides meaningful information as to how well we generate returns relative to the capital invested in our business. During 2013 our ROIC improved to 5.3%. We are committed to taking appropriate actions which will allow us to continue to improve ROIC while adding capacity and continuing to grow. We believe this non-GAAP measure provides a meaningful comparison of our results to the airline industry and our prior year results. Investors should consider this non-GAAP financial measure in addition to, and not as a substitute for, our financial performance measures prepared in accordance with GAAP.
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Reconciliation of Return on Invested Capital (Non-GAAP) | ||||||||
(in millions, except as otherwise noted) | ||||||||
Twelve Months Ended December 31, | ||||||||
2013 | 2012 | |||||||
Numerator | ||||||||
Operating Income | $ | 428 | $ | 376 | ||||
Add: Interest income (expense) and other | (1 | ) | 1 | |||||
Add: Interest component of capitalized aircraft rent (a) | 67 | 68 | ||||||
Subtotal | 494 | 445 | ||||||
Less: Income tax expense impact | 194 | 172 | ||||||
Operating Income After Tax, Adjusted | $ | 300 | $ | 273 | ||||
Denominator | ||||||||
Average Stockholders' equity | $ | 2,011 | $ | 1,822 | ||||
Average total debt | 2,718 | 2,994 | ||||||
Capitalized aircraft rent (a) | 899 | 913 | ||||||
Invested Capital | $ | 5,628 | $ | 5,729 | ||||
Return on Invested Capital | 5.3 | % | 4.8 | % | ||||
(a) Capitalized Aircraft Rent | ||||||||
Aircraft rent, as reported | $ | 128 | $ | 130 | ||||
Capitalized aircraft rent (7 * Aircraft rent) (b) | 899 | 913 | ||||||
Interest component of capitalized aircraft rent (Imputed interest at 7.5%) | 67 | 68 | ||||||
(b) In determining the Invested Capital component of ROIC, we include a non-GAAP adjustment for aircraft operating leases, as operating lease obligations are not reflected on our balance sheets, but do represent a significant financing obligation. In making the adjustment, we used a multiple of 7 times our aircraft rent as this is the multiple which is routinely used with in the airline community to represent the financing component of aircraft operating lease obligations.
Analysis of Cash Flows
We had cash and cash equivalents of $225 million as of December 31, 2013. This compares to $182 million and $673 million as of December 31, 2012 and 2011 respectively. We held both short and long term investments in 2013, 2012 and 2011. Our short-term investments totaled $402 million as of December 31, 2013 compared to $549 million and $553 million as of December 31, 2012 and 2011 respectively. Our long-term investments totaled $114 million as of December 31, 2013 compared to $136 million and $38 million as of December 31, 2012 and 2011 respectively.
Operating Activities
Cash flows provided by operating activities totaled $758 million in 2013 compared to $698 million in 2012 and $614 million in 2011. There was a $60 million increase in cash flows from operating activities in 2013 compared to 2012. During 2013 we saw a 7% increase in capacity, a 4% increase in average fares and a 2% decrease in the price of fuel which all helped to improve operating cash flows. The $84 million increase in cash flows from operations in 2012 compared to 2011 was primarily as a result of the 2% increase in average fares and 8% increase in capacity but was offset by an increase of 1% in fuel prices. As of December 31, 2013, our unrestricted cash, cash equivalents and short-term investments as a percentage of trailing twelve months revenue was approximately 12%. We rely primarily on cash flows from operations to provide working capital for current and future operations.
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Investing Activities
The capital expenditure for seven new EMBRAER 190 aircraft, three new Airbus A320 aircraft and four new Airbus A321 aircraft during 2013 was $365 million. We additionally paid $22 million for flight equipment deposits and $54 million for spare parts. Capital expenditures for other property and equipment, including ground equipment purchases, facilities improvements and LiveTV inflight-entertainment equipment inventory were $196 million. During 2013 LiveTV sold its investment in the Airfone business for $8 million in proceeds. Investing activities also include the net purchase of $161 million in investment securities.
During 2012, capital expenditures related to our purchase of flight equipment included $344 million for seven Airbus A320 aircraft, four EMBRAER 190 aircraft and five spare engines. It also included $283 million for flight equipment deposits, including a $200 million prepayment in exchange for favorable pricing terms, and $32 million for spare part purchases. Capital expenditures for other property and equipment, including ground equipment purchases, facilities improvements and LiveTV inflight-entertainment equipment inventory were $166 million, which includes the final $32 million for the 16 slots we purchased at LaGuardia and Reagan National in 2011 and $17 million for T5i, which was paid for using cash from operations. The receipt of $46 million in proceeds from the sale of two EMBRAER 190 aircraft and six spare engines is included in investing activities. Investing activities also include the net purchase of $104 million in investment securities.
During 2011, capital expenditures related to our purchase of flight equipment included $318 million for four Airbus A320 aircraft, five EMBRAER 190 aircraft and nine spare engines, $44 million for flight equipment deposits and $27 million for spare part purchases. Capital expenditures for other property and equipment, including ground equipment purchases, facilities improvements and LiveTV inventory, were $135 million, which includes $40 million for the 16 slots we purchased at LaGuardia and Reagan National. Investing activities in 2011 also included the net proceeds from the sale and maturities of $24 million in investment securities.
We currently anticipate 2014 capital expenditures to be approximately $935 million, including approximately $595 million for aircraft and predelivery deposits. The remaining capital expenditures of approximately $340 million relate to non-aircraft projects such as the completion of our investment at T5i, our purchase of the Slots at DCA, LiveTV's continued investment in Fly-Fi™ and the new facility near Orlando airport for Crewmember lodging.
Financing Activities
Financing activities during 2013 consisted of (1) scheduled maturities of $392 million of debt and capital lease obligations, (2) our issuance of $350 million in fixed rate equipment notes secured by 12 aircraft, (3) the prepayment of $94 million in high-interest debt secured by four Airbus A320 aircraft and $119 million relating to our Spare Parts EETC, (4) the refunding of our Series 2005 GOAA bonds with proceeds of $43 million from the issuance of new 2013 GOAA bonds (5) the repayment of $13 million in principal related to our construction obligation for T5 and (6) the acquisition of $8 million in treasury shares primarily related to our share repurchase program and the withholding of taxes upon the vesting of restricted stock units.
Financing activities during 2012 consisted of (1) scheduled maturities of $198 million of debt and capital lease obligations, (2) the pre-payment of $185 million in high-cost debt secured by seven Airbus A320 aircraft, (3) the repayment of $35 million of debt related to two EMBRAER 190 aircraft which were sold in 2012, (4) proceeds of $215 million in non-public floating rate aircraft-related financing secured by four Airbus A320 aircraft and four EMBRAER 190 aircraft, (5) the net repayment of $88 million under our available lines of credit, (6) the repayment of $12 million in principal related to our construction obligation for Terminal 5 and (7) the acquisition of 4.8 million treasury shares for $26 million primarily related to our share repurchase program and the withholding of taxes upon the vesting of restricted stock units.
Financing activities during 2011 consisted primarily of (1) the early extinguishment of $39 million principal of our 6.75% Series A convertible debentures due 2039 for $45 million, (2) scheduled maturities of $188 million of debt and capital lease obligations, (3) the early payment of $3 million on our spare parts pass-through certificates, (4) proceeds of $121 million in fixed rate and $124 million in non-public floating rate aircraft-related financing secured by four Airbus A320 aircraft and five EMBRAER 190 aircraft, (5) the net borrowings of $88 million under our available line of credit, (6) the repayment of $10 million in principal related to our construction obligation for Terminal 5 and (7) the acquisition of $4 million in treasury shares related to the withholding of taxes, upon the vesting of restricted stock units.
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In November 2012, we filed an automatic shelf registration statement with the SEC. Under this universal shelf registration statement, we have the capacity to offer and sell from time to time debt securities, pass-through certificates, common stock, preferred stock and/or other securities. The net proceeds of any securities we sell under this registration statement may be used to fund working capital and capital expenditures, including the purchase of aircraft and construction of facilities on or near airports. Through December 31, 2013 we had not issued any securities under this registration statement and at this time we have no plans to sell any such securities under this registration statement. We may utilize this universal shelf registration statement in the future to raise capital to fund the continued development of our products and services, the commercialization of our products and services or for other general corporate purposes.
None of our lenders or lessors are affiliated with us.
Capital Resources
We have been able to generate sufficient funds from operations to meet our working capital requirements and we have historically financed our aircraft through either secured debt or lease financing. As of December 31, 2013 we operated a fleet of 194 aircraft including 21 Airbus A320 and two EMBRAER 190 unencumbered aircraft. Of the remaining aircraft, 60 were financed under operating leases, four were financed under capital leases and 107 were financed by private and public secured debt. We additionally have 30 unencumbered spare engines and a five spare engines that are secured by financings. Approximately 63%% of our property and equipment is pledged as security under various loan arrangements.
We have committed financing for four out of the nine Airbus A321 aircraft scheduled for delivery in 2014. We plan to purchase the remaining 2014 scheduled deliveries with cash. To the extent we cannot pay in cash we may be required to secure financing or further modify our aircraft acquisition plans. Although we believe debt and/or lease financing should be available to us if needed, we cannot give assurance we will be able to secure financing on terms attractive to us, if at all.
Working Capital
We had working capital deficit of $818 million at December 31, 2013 compared to a deficit of $508 million at December 31, 2012 and a working capital of $216 million at December 31, 2011. Working capital deficits can be customary in the airline industry since air traffic liability is classified as a current liability. Our working capital deficit increased in 2013 mainly due to a $132 million increase in air traffic liability and an increase of $75 million relating to the current maturity of long-term debt. Also contributing to our working capital deficit as of December 31, 2013 is $114 million in marketable investment securities classified as long-term assets, including $52 million related to a deposit made to lower the interest rate on the debt secured by two aircraft. These funds on deposit are readily available to us; however, if we were to draw upon this deposit, the interest rates on the debt would revert to the higher rates in effect prior to the re-financing.
In 2012, we entered into a revolving line of credit with Morgan Stanley for up to $100 million, and increased the line of credit for up to $200 million in December 2012. This line of credit is secured by a portion of our investment securities held by Morgan Stanley and the borrowing amount may vary accordingly. This line of credit bears interest at a floating rate of interest based upon LIBOR, plus a margin. During the year we borrowed $190 million on this line of credit, which was fully repaid, leaving the line undrawn as of December 31, 2013.
In April 2013 we entered into a Credit and Guaranty Agreement which consists of a revolving credit up to $350 million and letter of credit facility with Citibank, N.A. as the administrative agent. Borrowing under the Credit Facility bear interest at a variable rate equal to LIBOR, plus a margin and the facility terminates in 2016. The Credit Facility is secured by take-off and landing slots at JFK, Newark, LaGuardia, Reagan National and certain other assets. The Credit Facility includes covenants that require us to maintain certain minimum balances in unrestricted cash, cash equivalents, and unused commitments available under all revolving credit facilities. In addition the covenants restrict our ability to incur additional indebtedness, issue preferred stock or pay dividends. During 2013, we did not borrow on this facility and the line was undrawn as of December 31, 2013.
Concurrent with entering into the above agreement with Citibank, N.A. for the revolving credit and letter of credit facility, we terminated our unsecured revolving credit facility with American Express which had allowed us to borrow up to a maximum of $125 million.
We expect to meet our obligations as they become due through available cash, investment securities and internally generated funds, supplemented as necessary by financing activities, as they may be available to us. We expect to generate positive working capital through our operations. However, we cannot predict what the effect on our business might be from the extremely competitive environment we are operating in or from events beyond our control, such as volatile fuel prices, economic conditions, weather-related disruptions, the impact of airline bankruptcies, restructurings or consolidations, U.S. military actions or acts of terrorism. We believe the working capital available to us will be sufficient to meet our cash requirements for at least the next 12 months.
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Debt and Capital Leases
Our scheduled debt maturities are expected to increase over the next five years, with a scheduled peak in 2016 of approximately $474 million. As part of our efforts to effectively manage our balance sheet and improve ROIC, we expect to continue to actively manage our debt balances. Our approach to debt management includes managing the mix of fixed vs. floating rate debt, managing the annual maturities of debt, and managing the weighted average cost of debt. Further, we intend to continue to opportunistically pre-purchase outstanding debt when market conditions and terms are favorable. Additionally, our unencumbered assets, including 21 Airbus A320 aircraft, two EMBRAER 190 aircraft and 30 engines, allow some flexibility in managing our cost of debt and capital requirements.
In September 2013 as part of a private placement Enhanced Equipment Trust Certificate ("EETC") offering we priced $226 million in pass-through certificates to be secured by 14 of our unencumbered Airbus A320 aircraft. Funding for the pass-through certificates is scheduled for March 2014 to coincide with the final scheduled principal payments of $188 million associated with our March 2004 EETC Class G-2 certificates.
Free Cash Flow
The table below reconciles cash provided by operations determined in accordance with U.S. GAAP to Free Cash Flow, a non-GAAP measure. Management believes that Free Cash Flow is a relevant measure of liquidity and is useful in assessing our ability to fund capital commitments and other obligations. Investors should consider this non-GAAP financial measure in addition to, and not as a substitute for, our financial measures prepared in accordance with U.S. GAAP.
Reconciliation of Free Cash Flow (Non-GAAP) | ||||||||||||||||||||
(in millions) | ||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Net cash provided by operating activities | $ | 758 | $ | 698 | ||||||||||||||||