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, 2014
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 30, 2014 was approximately $2.6 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 30, 2015 was 310,856,091 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2015 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; 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; global economic conditions or an economic downturn leading to a continuing or accelerated decrease in demand for domestic and business air travel; the spread of infectious diseases; 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 2014, JetBlue carried over 32 million passengers with an average of 825 daily flights and served 87 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 2014 had grown to become the fifth largest passenger carrier in the U.S. based on available seat miles, or ASMs, as reported by these passenger airlines. We believe our differentiated product and culture combined with our competitive cost structure 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 15,500 dedicated employees, whom we refer to as Crewmembers. Going forward we believe we will continue to differentiate ourselves from the other airlines, enabling us to continue to attract a greater mix of customers and to allocate further profitable growth across our network. We are focused on driving to deliver solid results for our shareholders, our customers and our Crewmembers.
As used in this Form 10-K, the terms “JetBlue”, the "Company", “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 downturns in domestic and international economic conditions, weather-related disruptions, the spread of infectious diseases, the impact of airline restructurings or consolidations, U.S. military actions or acts of terrorism. We operate in a capital and energy intensive industry that 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 fees 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 a 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. Each factor has had a significant influence on the industry's improved profitability.
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2014 OPERATIONAL HIGHLIGHTS
We believe our differentiated product and culture, competitive costs and high-value geography relative to the other airlines contributed to our continued success in 2014. Our 2014 operational highlights include:
•Product enhancements - Throughout 2014 we continued to invest in industry-leading products which we believe will continue to differentiate our product offering from the other airlines. In June 2014, we launched our premium transcontinental product called Mint™. It includes 16 fully lie-flat seats, four of which are in suites with a privacy door, a first in the U.S. domestic market. We continued to install our Fly-Fi™ in-flight internet service across our Airbus fleet. At the end of December 2014, all of our Airbus A321 aircraft and approximately 60% of our Airbus A320 aircraft had Fly-Fi™ installed. We anticipate retrofitting our Embraer fleet shortly after the completion of the Airbus fleet installation. At our Investor Day in November 2014, we announced that in the first half of 2015 we are expecting to roll out our new pricing model, Fare Families. Through Fare Families, we plan to offer customers a choice from fare options that contain a suite of products or services they need or value most when traveling.
•Fleet - In November 2014, we deferred 13 Airbus A321 aircraft orders and eight Airbus A320 aircraft orders from 2016-2020 to 2020-2023. Of these deferrals, ten A321 aircraft orders were converted to Airbus A321 new engine option (A321neo) orders and five Airbus A320neo aircraft orders were converted to Airbus A321neo aircraft orders. We additionally converted three Airbus A320 aircraft orders in 2016 to Airbus A321 aircraft orders. In 2014, we took delivery of nine Airbus A321 aircraft, all equipped with our Mint™ cabin layout.
•Airport Infrastructure Investments - In November 2014, we opened T5i, an extension to our existing Terminal, or T5, at John F. Kennedy International Airport, or JFK, in New York City. This extension consists of six international arrivals gates, three of which are new and three of which are converted from the original terminal building. T5i further houses an international arrivals hall with U.S. Customs and Border Protection services for customers arriving on international flights. This addition to our terminal facilities at JFK allows our international customers to depart and arrive under the one roof and enhances the award-winning JetBlue Experience at all points along their journey. In September 2014, we announced the opening of a new USO Center in T5. The center was 100% donated by JetBlue, Gensler, Turner Construction Company and the Port Authority of New York & New Jersey, or PANYNJ, as well as over 28 contractors and individual donors. The center will be open seven days a week, 365 days per year for any troops and their families to relax before or after flights and during layovers.
•Network - We continued to expand and grow in our high-value geography in 2014. We are working with the local authorities of Broward County, Florida, who have commenced runway and terminal expansion plans at Fort Lauderdale-Hollywood Airport. These plans align with our future plans of growing to 100 flights per day at Fort Lauderdale-Hollywood. In March 2014, we completed the purchase of 24 High Density Slots, or Slots, at Ronald Reagan National Airport in Washington, D.C., or Reagan National. Slots limit the air traffic in and out of high volume traffic airports located in the northeast corridor airspace during specific times. We started using these Slots in the second half of 2014 and continue to announce new route pairings.
•TrueBlue and partnerships - We expanded our portfolio of commercial airline partnerships throughout the year and announced a code-sharing agreement with current partner El Al Airlines. In November 2014, South African Airways joined the TrueBlue loyalty program, with TrueBlue members now being able to earn points when they travel on any flight operated by South African Airways. In December 2014, we launched the TrueBlue points donation platform so members can now choose to donate points to a number of charities and non-profits. Each charity may then use the points for travel for their organization.
•Customer Service - We were recognized by J.D. Power and Associates for the tenth 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 for the second consecutive year.
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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 that focuses on the customer experience from booking their itinerary to arrival at their final destination. Typically, our customers are neither high-traffic business travelers nor ultra-price sensitive travelers. Rather, we believe we are the carrier of choice for the majority of travelers who have been underserved by other airlines as we offer differentiated product and award winning customer service.
Differentiated Product and Culture
Delivering the JetBlue Experience to our customers through our differentiated product and culture 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 by continuing to innovate our customer experience. We believe that we can adapt to the changing needs of our customers and 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 from one of our distribution channels such as www.jetblue.com, our mobile applications or our reservations centers. In the first half of 2015, we are anticipating the role out of our new pricing model, Fare Families. Customers will be presented with a choice of fare options, with all fares including our core offering of free in-flight entertainment, free brand name snacks and free non-alcoholic beverages. Customers can choose to “buy up” to an option with additional offerings. We believe this system will allow customers to select the products or services they need or value the most when they travel, without paying for the things they don’t need or value.
Upon arrival at the airport our customers are welcomed by our dedicated Crewmembers and are able choose to 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 our aircraft, customers enjoy seats in a comfortable layout and the most legroom in the main cabin of all U.S. airlines, based on average fleet-wide seat pitch. Our Even More™ Space seats are available for purchase across our fleet, giving customers the opportunity to enjoy additional legroom. Customers on certain transcontinental flights have the option to purchase our premium service, Mint™, which has 16 fully lie-flat seats, including four that are in suites with privacy doors.
Our in-flight entertainment system onboard our Airbus A320 and EMBRAER 190 aircraft includes 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. Customers on our Airbus A321 aircraft have access to 100 channels of DIRECTV® and 100+ channels of SiriusXM® radio. Our Mint™ customers enjoy 15-inch flat screen televisions to experience our in-flight entertainment offerings. In December 2013, we began to retrofit our Airbus fleet with Fly-Fi™, a broadband product, with connectivity that is significantly faster than competing KU-band satellites and older ground to air technology. We expect installations to be completed on our Airbus fleet in the first half of 2015, after which we plan to begin installations on our EMBRAER 190 fleet. In November 2014, we announced the introduction of Fly-Fi™ Hub, a content portal where customers can access a wide range of movies, television shows and additional content from their own personal devices. Current partners include Coursera, FOX, HarperCollins Publishers, National Geographic, Rouxbe and Time Inc. We expect to add PBS, Random House and The Wall Street Journal in the first quarter of 2015.
All customers may enjoy an assortment of free and unlimited brand name snacks and non-alcoholic beverages as well as having the option to purchase premium beverages and food selections. Our Mint™ customers have access to an assortment of complimentary food and beverages which include a small-plates menu, artisanal snacks and alcoholic beverages. All customers also have the option to purchase additional products such as a blanket or headphones.
Our Airbus A321 aircraft in a single cabin layout have 190 seats and those with our Mint™ offering have 159 seats. Our Airbus A320 aircraft have 150 seats while our EMBRAER 190 aircraft have 100 seats. At our Investor Day in November 2014, we announced a cabin refresh program across our fleet that we expect to commence in the second half of 2016. As part of this program we are expecting to increase the seat density on our Airbus A320 fleet.
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 major U.S. airline to have a Customer Bill of Rights. This program was 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 meet them. In 2014, we completed 97.7% of our scheduled flights. Unlike most other airlines, we have a policy of not overbooking flights.
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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 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 the 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 a predominately point-to-point system carrier, with the majority of our routes touching at least one of our six focus cities of New York, Boston, Fort Lauderdale-Hollywood, Orlando, Long Beach and San Juan, Puerto Rico. During 2014, over 86% 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, or 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. All six of our focus cities are in regions with a diverse mix of traffic and were profitable in 2014.
As of December 31, 2014, our network served 87 BlueCities in 27 states, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and 17 countries in the Caribbean and Latin America. In 2014, we commenced service to five new BlueCities including Curaçao, our 31st BlueCity in the Caribbean and Latin America. 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 on mileage or length of haul basis. The historic distribution for the past three years of available seat miles, or capacity, by region is:
Year Ended December 31, | |||||||||
Capacity Distribution | 2014 | 2013 | 2012 | ||||||
Caribbean & Latin America (1) | 31.4 | % | 28.1 | % | 27.2 | % | |||
Florida | 29.3 | 30.9 | 31.1 | ||||||
Transcontinental | 26.3 | 27.9 | 28.6 | ||||||
East | 5.7 | 5.0 | 4.9 | ||||||
Central | 4.7 | 5.2 | 5.0 | ||||||
West | 2.6 | 2.9 | 3.2 | ||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |||
(1) Domestic operations as defined by the Department of Transport, or 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 Caribbean and Latin America region.
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 region. Looking to the future we expect to focus on increasing our presence in Fort Lauderdale-Hollywood. We believe there is an opportunity at Fort Lauderdale-Hollywood to increase our operations to destinations throughout the Caribbean and Latin America. Our plan is supported by significant investment from the Broward County Aviation Department in the airport and surrounding facilities.
In 2015, we anticipate further expanding our network and have announced the following new destinations:
Destination | Service Scheduled to Commence | |
Cleveland, OH | April 30, 2015 | |
Reno, NV | May 28, 2015 | |
Grenada* | June 11, 2015 | |
* subject to receipt of government operating authority | ||
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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. As of December 31, 2014, we had 38 airline commercial partnerships. Our commercial partnerships typically begin as an interline agreement allowing a customer to book one itinerary with tickets on multiple airlines. During 2014, we entered into eight new interline agreements. We strengthened the relationship with one of our existing partners, El Al Airlines, to include code-sharing. Code-sharing is a practice in which one airline places its name and flight number on flights operated by another airline. In 2015, we expect to continue to seek additional strategic opportunities through new commercial partners as well as assess ways to deepen select current airline partnerships. We plan do this by expanding 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. In the first half of 2015, we expect to introduce a new merchandising platform for www.jetblue.com with our business partner Datalex in addition to merchandising capabilities on our kiosks and in our self-service channels with our business partner IBM.
Our participation in global distribution systems, or GDS's, 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 relies on a GDS platform. Although the cost of sales through this channel is higher than through our website, the average fare purchased through GDS's is generally higher and often covers the increased distribution costs. We currently participate in several major GDS's and online travel agents, or OTAs. Due to the majority of our customers booking travel on our website, we maintain relatively low distribution costs despite our increased participation in GDS's and OTA in recent years.
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, the program has no black-out dates or seat restrictions, and any JetBlue destination can be booked if the TrueBlue® member has enough points to exchange for the value of an open seat. Mosaic is an additional level for our most loyal customers who 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. There were over 1.1 million TrueBlue one-way redemption awards flown during 2014, representing approximately 3% of our total revenue passenger miles.
We currently 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 also have co-branded loyalty credit cards with Banco Santander Puerto Rico and MasterCard® in Puerto Rico as well as with Banco Popular Dominicano and MasterCard® in the Dominican Republic. These cards allow customers in Puerto Rico and the Dominican Republic to take full advantage of our TrueBlue® loyalty program.
We have a separate agreement with American Express® allowing any American Express® cardholder to convert Membership Rewards® points into TrueBlue® points. We have separate agreements with other loyalty partners including hotels and car rental companies, who allow their customers to earn TrueBlue® points through participation in the partners’ programs. We intend to continue to develop the footprint of our co-branded credit cards and pursue other loyalty partnerships in the future.
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OPERATIONS AND COST STRUCTURE
Historically our cost structure has allowed us to profitably price fares lower than many competitors and is a principal 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 competitive costs, operational excellence, efficiency improvements and in making investments that contribute and enhance the JetBlue Experience.
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. JFK is New York's largest airport. We are the second largest airline at JFK as measured by domestic capacity and our operations accounted for more than 36% of seats offered on domestic routes from JFK. As JFK is a Slot controlled airport we have been able to continue to grow our operations by adding more seats per departure via the delivery of 13 Airbus A321 aircraft in total as of December 31, 2014, as well as continuing to optimize routes based upon load factor and costs. We operate out of T5 and in November 2014 we opened T5i, an international arrivals facility that expands our current T5 footprint. We believe T5i will enable us to increase operational efficiencies, provide savings, streamline our operations and improve the overall travel experience for our customers arriving from international destinations. We also serve New Jersey's Newark Liberty International Airport, or Newark, New York's LaGuardia Airport, or LaGuardia, 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 capacity at Boston's Logan International Airport, or Boston. By the end of 2014 we flew to 54 non-stop destinations from Boston and served almost twice as many non-stop destinations than any other airline. Our operations accounted for more than 26% of all seats offered. We continue to capitalize on opportunities in the changing competitive landscape by adding routes, frequencies and increasing our relevance to local travelers. In 2014, we continued to see a boost in the Boston market with three airline partners starting international routes directly to Boston, bringing the total number of airline partners flying routes to Boston to 16 by the end of the year. Our plan is to grow Boston towards a target of 150 flights per day, which we expect to be strengthened with two airline partners already announcing international routes directly to Boston starting in 2015.
•Caribbean and Latin America - At the end of 2014 we had 31 BlueCities in this region and 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 the largest airline in Puerto Rico in terms of capacity with approximately 39% of all seats offered in 2014 flying to/from our three BlueCities. We are also the largest airline in terms of capacity serving the Dominican Republic with six BlueCities and approximately 21% of all seats offered in 2014. 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 21% of all seats offered in 2014. During 2014, we added seven new destinations and grew departures by approximately 13%. Flying out of Fort Lauderdale-Hollywood instead of nearby Miami International Airport helps preserve our competitive cost advantage through lower cost per enplanement. In 2012, Broward County authorities 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 as well as South Florida's high-value geography, we intend to focus on Fort Lauderdale-Hollywood growth going forward.
•Orlando - We are the second largest carrier in terms of capacity at Orlando International Airport, or Orlando, with more than 13% of all seats offered in 2014. Orlando was our most profitable focus city in 2014 with 24 non-stop destinations and a growing mix of traffic including leisure, VFR and business travelers. Our centralized training center, known as JetBlue University, is based in Orlando. In 2013, we started construction of a facility adjacent to our training center that is intended to be used for lodging our Crewmembers when they attend training. We expect this facility to open to our Crewmembers in early 2015.
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•Los Angeles area - We are the eighth largest carrier in the Los Angeles area, operating from Long Beach Airport, or Long Beach, Los Angeles International Airport, or LAX, and Burbank's Bob Hope Airport. We are the largest carrier in Long Beach, with almost 81% of all seats offered in 2014 being operated by JetBlue. We are currently working with the Long Beach community as well as Customs and Border Protection to explore the possibility of flying to international destinations from Long Beach in the future. In June 2014, we started operating our premium transcontinental service, Mint™, from LAX.
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 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 Airbus A321, Airbus A320 and EMBRAER 190 aircraft types. In 2014, our fleet had an average age of 7.8 years and operated an average of 11.8 hours per day. By 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 ensuring our operations run efficiently and we are continually working with our aircraft and engine manufacturers to enhance our performance. In 2015, we expect to start retrofitting our Airbus aircraft with Sharklets®, a blended wingtip device designed to improve the aircraft’s aerodynamics. We anticipate that the use of Sharklets® will result in improved range and flight performance in addition to fuel savings. We are working with the Federal Aviation Administration, or 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. 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.
Fleet Maintenance
Consistent with our core value of safety, our FAA-approved maintenance programs are 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, or "C" checks, consist of a series of more complex tasks taking from one to four weeks to accomplish and 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, and are subject to direct oversight by JetBlue personnel. We outsource heavy maintenance as the costs are lower than if we performed the tasks internally, including any 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, or MTU, for our Airbus fleet engines 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 fixed costs 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.
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Aircraft Fuel
Aircraft fuel continues to be 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:
2014 | 2013 | 2012 | ||||||||||
Gallons consumed (millions) | 639 | 604 | 563 | |||||||||
Total cost (millions) (a) | $ | 1,912 | $ | 1,899 | $ | 1,806 | ||||||
Average price per gallon (a) | $ | 2.99 | $ | 3.14 | $ | 3.21 | ||||||
Percent of operating expenses | 36.1 | % | 37.9 | % | 39.2 | % | ||||||
(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 derivative instruments. These include swaps, caps, collars, and basis swaps 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.
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 2010, while we have invested over $3.2 billion in capital assets, we have also generated approximately $3.5 billion in cash from operations, resulting in over $285 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 2010, we have also reduced our total debt balance by nearly $1.1 billion.
LiveTV
LiveTV, LLC, or LiveTV, was formerly a wholly owned subsidiary of JetBlue. It provides in-flight entertainment and connectivity solutions for various commercial airlines including JetBlue. In June 2014, we sold LiveTV and its subsidiaries LTV Global, Inc, and LiveTV International, Inc., to Thales Holding Corporation, or Thales. In September 2014, following the receipt of regulatory approval, we sold LiveTV Satellite Communications, LLC, a subsidiary of LiveTV, to Thales. Following the completion of these sales, these LiveTV operations ceased to be subsidiaries of JetBlue and are no longer presented in our consolidated financial statements. 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™. JetBlue expects to continue to be a significant customer of LiveTV through its in-flight entertainment and onboard connectivity products and services.
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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 our five key values of safety, caring, integrity, passion and fun. We believe a highly productive and engaged workforce enhances customer loyalty which in turn increases shareholder returns. 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, our customers and our shareholders. Except for our pilots, our Crewmembers do not have third-party representation. In April 2014, JetBlue pilots elected to be solely represented by the Air Line Pilots Association, or ALPA. The National Mediation Board, or NMB, has certified ALPA as the representative body for JetBlue pilots and we plan to work with ALPA to reach our first collective bargaining agreement. We have individual employment agreements with each of our non-unionized FAA licensed Crewmembers which consist of 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 employment 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. We believe that through these agreements we provide what we believe to be industry-leading job protection language. We believe these agreements provide JetBlue and Crewmembers flexibility and allow us to react to Crewmember needs more efficiently than collective bargaining agreements.
Another aspect of the direct relationship with our Crewmembers are our Values Committees. These Value Committees are made up of peer-elected frontline Crewmembers from each of our major work groups, except pilots. They represent the interests 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 JetBlue’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 as well as 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 makes our business decisions transparent. Additionally we believe cost and revenue improvements are best recognized by Crewmembers on the job.
Our average number of full-time equivalent employees, excluding employees of LiveTV, LLC, for the year ended December 31, 2014 consisted of 2,609 pilots, 2,769 flight attendants, 3,626 airport operations personnel, 540 technicians (whom other airlines may refer to as mechanics), 1,120 reservation agents, and 2,616 management and other personnel. For the year ended December 31, 2014, we employed an average of 11,352 full-time and 3,982 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. The groups serve as an avenue to embrace and encourage different perspectives, thoughts and ideas. At the end of 2014, we had three CRGs in place: JetPride, Women in Flight, and Vets in Blue. Starting in 2015, we will have a new CRG for anyone interested in Latin cultures.
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•JetBlue Crewmember Crisis Fund (JCCF) - This organization was formed in 2002 as a non-profit corporation and recognized by the IRS as of that date as a tax-exempt entity. 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.
• Lift Recognition Program - Formed in 2012, this Crewmember recognition program encourages Crewmembers to celebrate their peers for living JetBlue's values by sending e-thanks through an on-line platform. On a periodic basis our Executive Leadership Team, or ELT, hosts an event for the Crewmembers that received the highest Lift award recognitions in each quarter of the year. In 2014, we saw almost 84,000 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 BlueCities we serve. The team organizes and supports community service projects, charitable giving and non-profit partnerships such as KaBOOM! and Soar with Reading.
•JetBlue Foundation - Organized in 2013 as a non-profit 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 is recognized by the IRS as a tax-exempt entity.
•USO Center T5/JFK - Continuing our tradition of proudly supporting the men, women and families of the military, in September 2014 we opened a USO Center in T5 at JFK. The Center is open seven days a week, 365 days per year for military members and their families traveling on any airline at JFK, not just JetBlue. This brand new center is fully stocked with computers, televisions, gaming devices/stations, furniture, iPads, food and beverages and much more. In conjunction with leading airport design firm Gensler, Turner Construction Company, the PANYNJ and more than 28 contractors and individual donors, 100% of the space, services, labor and materials were donated to ensure the USO would be free of any financial burden. Crewmembers donate time to help run the center.
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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 cannot permit domestic flights to remain on the tarmac for more than three hours. The DOT also requires 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 a U.S. carrier's 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. 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 regulations.
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 which is passed to the customer. On July 21, 2014, the 9/11 Security Fee was increased from $2.50 per enplanement, with a maximum of $5 per one-way trip, to $5.60 per enplanement, regardless of the number of connecting flights. On December 19, 2014, the fee was amended and a round trip has been limited to a maximum of $11.20.
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 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 airspace. 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, including Westchester County Airport in White Plains, NY and Long Beach (California) Municipal Airport.
Airport Infrastructure - The northeast corridor of the U.S. contains 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. The Central Terminal refurbishment at LaGuardia has been delayed and is still to be scheduled. Once underway, it is expected to be refurbished in phases over six years.
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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, Curaçao, the Dominican Republic, Haiti, Jamaica, Mexico, Peru, Saint Lucia, St. Maarten, Trinidad and Tobago 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 San Diego and Long Beach airports in 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 JetBlue Sustainability program on www.jetblue.com/green/ 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 2013 is available on our website and addresses our environmental programs, including those aimed at curbing greenhouse emissions, our recycling efforts and our focus on corporate social responsibility.
Foreign Ownership - Under federal law and 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.
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 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 NMB. 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. This is known as war risk coverage. At the same time, these insurers significantly increased the premiums for aviation insurance in general. The U.S. government agreed to provide commercial war-risk insurance for U.S. based airlines, covering losses to employees, passengers, third parties and aircraft. This coverage ended in December 2014. As of July 2014, JetBlue obtained comparable coverage in the commercial market as part of our overall hull and liability insurance coverage.
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Iran Sanctions Disclosure
Pursuant to Section 13(r) of the Securities Exchange Act of 1934, or the Exchange Act, if during 2014, JetBlue or any of its affiliates 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 2014, 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 15% 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 American Airlines and US Airways, United Airlines and Continental Airlines, and Southwest Airlines and AirTran Airways. In the future, our industry composition may continue to change. 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 oil 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, 2014, our debt of $2.23 billion accounted for 47% 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, 2014, future minimum payments under noncancelable leases and other financing obligations were approximately $2.00 billion for 2015 through 2019 and an aggregate of $1.36 billion for the years thereafter. Terminal 5 at JFK is under a lease with the PANYNJ that ends on the 28th anniversary of the date of beneficial occupancy of T5i. 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, 2014, we had commitments of approximately $6.67 billion to purchase 127 additional aircraft and ten spare engines through 2023, 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, execution of our commercial initiatives 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 25% 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 global economic conditions 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 or financing or refinancing of existing 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 and many of these warranties have expired. If any maintenance provider with whom we have a flight hour 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 refresh our older Airbus aircraft and the addition of 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. As our overall workforce ages, we expect our medical and related benefits to increase, despite an increased corporate focus on Crewmember wellness.
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We may be subject to unionization, work stoppages, slowdowns or increased labor costs and the unionization of the Company’s pilots could result in increased labor costs.
Our business is labor intensive and 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 addition, we may be subject to disruptions by unions protesting the non-union status of our other employees. Any of these events would be disruptive to our operations and could harm our business.
In general, unionization has increased costs in the airline industry. On April 22, 2014, approximately 74% of our pilots voted to be represented by the Airlines Pilot Association, or ALPA. In the first quarter of 2015, we intend to begin negotiations with the union regarding a collective bargaining agreement. If we are unable to reach agreement on the terms of a collective bargaining agreement in the future, or we experience wide-spread employee dissatisfaction, we could be subject to adverse actions. Any of these events could result in increased labor costs or reduced efficiency, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
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 and regulatory 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 instability, 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, regulatory, 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 or third party service providers in such locations 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 both domestically and internationally, 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.
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 which is 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, health concerns, 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 centers 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, 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 providers 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 with 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 fails to operate as expected due to age, overuse or significant unexpected weather events.
Extended interruptions or disruptions in service at one of our focus cities could have a material adverse impact on our operations.
Our business is heavily dependent on our operations in the New York Metropolitan area, including at John F. Kennedy International Airport, or JFK, and at our other focus cities in Boston, Orlando, Fort Lauderdale, the Los Angeles basin and San Juan, Puerto Rico. Each of these operations includes flights that gather and distribute traffic to other major cities. A significant interruption or disruption in service at one of our focus cities could have a serious impact on our business, financial condition and results of operations.
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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 and those of service providers or business partners, that maintain and transmit customer information, 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.
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, may lead to regulatory enforcement actions against us, 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. The regulations in this area are developing and evolving. International regulation adds complexity as we expand our service and include more passengers from other countries.
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. 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.
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Our results of operations fluctuate due to seasonality, weather 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. In Q1 2014, for example, Winter Storm Hercules and other winter weather resulted in approximately 4,100 flight cancellations. Our Florida and Caribbean operations are subject to hurricanes. 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 analysis 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 our Fly-Fi™ product.
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.
Our Fly-Fi™ service uses technology and satellite access through our agreement with LiveTV, LLC. An integral component of the Fly-Fi™ system is the antenna, which is supplied to us by LiveTV. If LiveTV 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 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, 2014, we had approximately $446 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 limitations 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 2023. 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.
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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 possible that further airline reorganizations, consolidation, bankruptcies or liquidations may occur in the current global economic 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.
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 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.
In addition, the U.S. Environmental Protection Agency, or 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.
Federal budget constraints or federally imposed furloughs due to budget negotiations deadlocks may adversely affect our industry, business, results of operations and financial position.
Many of our airline operations are regulated by governmental agencies, including the FAA, the DOT, the CBP, the TSA and others. If the federal government were to experience issues in reaching budgetary consensus in the future resulting in mandatory furloughs and/or other budget constraints, 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 airlines. 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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Aircraft
As of December 31, 2014, we operated a fleet consisting of 13 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 | 9.3 | ||||||||||||
Airbus A321 | 190 / 159 | (1) | 11 | 2 | — | 13 | 0.6 | |||||||||||
EMBRAER 190 | 100 | 30 | — | 30 | 60 | 6.2 | ||||||||||||
137 | 6 | 60 | 203 | 7.8 | ||||||||||||||
(1) Our Airbus A321 with a single cabin layout has a seating capacity of 190 seats. Our Airbus A321 with our Mint™ premium service has a seating capacity of 159 seats.
As of December 31, 2014, our aircraft leases have an average remaining term of approximately 7 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 39 of our 137 owned aircraft are subject to secured debt financing and all of our 33 spare engines are owned.
In November 2014, we amended our purchase agreement with Airbus by deferring 13 Airbus A321 aircraft orders and eight Airbus A320 aircraft orders from 2016-2020 to 2020-2023. Of these deferrals, ten Airbus A321 aircraft orders were converted to Airbus A321 new engine option (A321neo) orders and five Airbus A320neo aircraft orders were converted to Airbus A321neo aircraft orders. We additionally converted three Airbus A320 aircraft orders in 2016 to Airbus A321 aircraft orders.
As of December 31, 2014, we had 127 aircraft on order, which are scheduled for delivery through 2023. Our future aircraft delivery schedule is as follows:
Year | Airbus A320neo | Airbus A321 | Airbus A321neo | EMBRAER 190 | Total | |||||
2015 | — | 12 | — | — | 12 | |||||
2016 | — | 10 | — | — | 10 | |||||
2017 | — | 10 | — | — | 10 | |||||
2018 | — | 1 | 6 | — | 7 | |||||
2019 | — | — | 15 | — | 15 | |||||
2020 | 6 | — | 9 | 10 | 25 | |||||
2021 | 16 | — | — | 7 | 23 | |||||
2022 | 3 | — | 13 | 7 | 23 | |||||
2023 | — | — | 2 | — | 2 | |||||
25 | 33 | 45 | 24 | 127 | ||||||
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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 or indirectly from the local airport authority on varying terms dependent on prevailing practice at each airport. 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 some of 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 facilities at Boston:
•JFK - We have a lease agreement with the PANYNJ for T5. We have the option to terminate the agreement in 2033, five years prior to the end of the original scheduled lease term of October 2038. 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, which afforded us the exclusive right to develop on the T6 property. In 2012, we commenced construction of T5i, an expansion to T5 that we use as an international arrival facility. Another supplement of the original T5 lease was executed in 2013. The lease, as amended, now incorporates a total of approximately 19 acres of space for our T5 facilities. The T5i section of T5 opened to customers in November 2014.
•Boston - We had an initial five year lease agreement with Massport for five gates in Terminal C that started on May 1, 2005, and allowed JetBlue to grow to 11 gates by 2008. We negotiated an extension clause as of May 1, 2010 whereby the lease had 20 successive one-year automatic renewals, each from May 1 through to April 30. With the continued growth of our operations in Boston, we increased the number of leased gates from Massport to 16 and signed an amendment with them in May 2014 to lease an additional eight gates and related support spaces in Terminal C that were previously occupied by United Airlines. As of December 31, 2014, we lease 20 gates in Terminal C. We plan to add the remaining four gates and related support spaces gradually to accommodate our operational needs.
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 an aircraft maintenance hangar, an adjacent office and warehouse facility, and an adjacent storage facility for aircraft parts. These facilities accommodate our technical support operations. We also occupy a building from the PANYNJ which is mainly used for ground equipment maintenance work.
•Boston - We have a ground lease agreement which expires in 2017 relating to a building which includes an aircraft maintenance hangar and support 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 hangar. Previously, the hangar was shared between LiveTV, our former subsidiary, and JetBlue. When LiveTV was sold in June 2014, JetBlue took over the entire hangar complex. 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 six full flight simulators, nine cabin trainers, a training pool, classrooms and support areas. In 2013, we began construction of a lodging facility adjacent to our training center. We anticipate that our Crewmembers will utilize this lodging facility for overnight accommodation when attending 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 contain a core team of Crewmembers 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 57, 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 to December 2013. He is also a member of our Board of Directors. As previously announced, effective February 15, 2015, he will step down from both his role as Chief Executive Officer and 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 47, 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 will succeed David Barger as Chief Executive Officer and will become a member of our Board of Directors effective February 16, 2015. 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 61, 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.
James Hnat, age 44, is our Executive Vice President Corporate Affairs, General Counsel and Secretary and has served in this capacity since April 2007. Previously, he served as our Senior Vice President, General Counsel and Assistant Secretary from March 2006, as General Counsel and Assistant Secretary from February 2003 to March 2006 and as Associate General Counsel from June 2001 to January 2003. Prior to joining JetBlue, Mr. Hnat worked as an attorney at Milbank, Tweed, Hadley & McCloy LLP, where he specialized in aircraft finance transactions and at Condon & Forsyth LLP where he specialized in airline defense litigation. Mr. Hnat is a member of the bar of New York and Massachusetts.
Alexander Chatkewitz, age 50, is our Vice President and Chief Accounting Officer, a position he has held since December 2014. Prior to joining JetBlue, Mr. Chatkewitz worked at Philip Morris International, where he served as Vice President & Controller - Financial Reporting & Accounting Research since 2008. Prior to Phillip Morris, he served for a decade as Altria Group’s Vice President Assistant Controller - Financial Reporting & Consolidations. Mr. Chatkewitz also held positions at Marsh & McLennan Companies as well as the audit practice of Deliotte & Touche.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Stockholder Matters
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 | |||||||
2014 Quarter Ended | ||||||||
March 31 | $ | 9.37 | $ | 8.32 | ||||
June 30 | 10.88 | 7.63 | ||||||
September 30 | 12.73 | 10.40 | ||||||
December 31 | 15.90 | 9.41 | ||||||
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 | ||||||
As of January 30, 2015, there were approximately 536 holders of record of our common stock.
We have not paid cash dividends on our common stock and have no current intention to do so. Any future determination to pay cash dividends would be at the discretion of our Board of Directors, subject to applicable limitations under Delaware law. This decision would 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, 2014, 13.3 million shares remain available for repurchase under the program. During 2014 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 | ||||||||||
April 2014 | 719,875 | $ | 8.43 | 719,875 | ||||||||||
May 2014 | 5,934,365 | (1 | ) | $ | 10.57 | 5,934,365 | ||||||||
September 2014 | 423,304 | (1 | ) | $ | 10.90 | 423,304 | ||||||||
Total | 7,077,544 | 7,077,544 | 13,314,886 | |||||||||||
(1) During May 2014, JetBlue repurchased 855,000 shares of its common stock pursuant to its share repurchase program in a series of open-market transactions at an average price of $8.65 per share. In addition, JetBlue received an initial delivery of 5,079,365 shares as a part of its $60 million ASR agreement. On September 9, 2014, the ASR was settled and JetBlue received an additional 423,304 shares. The total number of shares purchased under the ASR was 5,502,669 shares, with an average price paid per share of $10.90.
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
During the fourth quarter of 2014, all holders of our 6.75% Convertible Debentures due 2039 (Series A) elected to convert their holdings into shares of our common stock at a rate of 204.6036 shares per $1,000 debenture for a total of approximately 15.5 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, 2010 to December 31, 2014. 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.
12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | ||||||||||||||||
JetBlue Airways Corporation | $ | 100 | $ | 79 | $ | 87 | $ | 129 | $ | 240 | ||||||||||
S&P 500 Stock Index | 100 | 102 | 118 | 157 | 178 | |||||||||||||||
NYSE Arca Airline Index (1) | 100 | 69 | 94 | 148 | 222 | |||||||||||||||
(1) As of December 31, 2014, 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, Republic Airways Holding, Inc., Southwest Airlines Company, 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, 2014 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, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Statements of Operations Data (dollars in millions): | ||||||||||||||||||||
Operating revenues | $ | 5,817 | $ | 5,441 | $ | 4,982 | $ | 4,504 | $ | 3,779 | ||||||||||
Operating expenses: | ||||||||||||||||||||
Aircraft fuel and related taxes | 1,912 | 1,899 | 1,806 | 1,664 | 1,115 | |||||||||||||||
Salaries, wages and benefits (1) | 1,294 | 1,135 | 1,044 | 947 | 891 | |||||||||||||||
Landing fees and other rents | 321 | 305 | 277 | 245 | 228 | |||||||||||||||
Depreciation and amortization | 320 | 290 | 258 | 233 | 220 | |||||||||||||||
Aircraft rent | 124 | 128 | 130 | 135 | 126 | |||||||||||||||
Sales and marketing | 231 | 223 | 204 | 199 | 179 | |||||||||||||||
Maintenance materials and repairs | 418 | 432 | 338 | 227 | 172 | |||||||||||||||
Other operating expenses (2) | 682 | 601 | 549 | 532 | 515 | |||||||||||||||
Total operating expenses | 5,302 | 5,013 | 4,606 | 4,182 | 3,446 | |||||||||||||||
Operating income | 515 | 428 | 376 | 322 | 333 | |||||||||||||||
Other income (expense) (3) (4) | 108 | (149 | ) | (167 | ) | (177 | ) | (172 | ) | |||||||||||
Income before income taxes | 623 | 279 | 209 | 145 | 161 | |||||||||||||||
Income tax expense | 222 | 111 | 81 | 59 | 64 | |||||||||||||||
Net income | $ | 401 | $ | 168 | $ | 128 | $ | 86 | $ | 97 | ||||||||||
Earnings per common share: | ||||||||||||||||||||
Basic | $ | 1.36 | $ | 0.59 | $ | 0.45 | $ | 0.31 | $ | 0.36 | ||||||||||
Diluted | $ | 1.19 | $ | 0.52 | $ | 0.40 | $ | 0.28 | $ | 0.31 | ||||||||||
Other Financial Data: | ||||||||||||||||||||
Operating margin | 8.9 | % | 7.9 | % | 7.5 | % | 7.1 | % | 8.8 | % | ||||||||||
Pre-tax margin (4) | 10.7 | % | 5.1 | % | 4.2 | % | 3.2 | % | 4.3 | % | ||||||||||
Ratio of earnings to fixed charges | 3.59 | x | 2.05x | 1.75x | 1.52 | x | 1.59 | x | ||||||||||||
Net cash provided by operating activities | $ | 912 | $ | 758 | $ | 698 | $ | 614 | $ | 523 | ||||||||||
Net cash used in investing activities | (379 | ) | (476 | ) | (867 | ) | (502 | ) | (696 | ) | ||||||||||
Net cash provided by (used in) financing activities | (417 | ) | (239 | ) | (322 | ) | 96 | (258 | ) | |||||||||||
(1)In 2010, we incurred approximately $9 million in one-time implementation expenses related to our new customer service system.
(2)In 2014, we sold a spare engine for a gain of approximately $3 million. 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.
(3)We recorded $3 million, $3 million, $1 million and $6 million in losses on the early extinguishment of debt in 2014, 2013, 2012 and 2011 respectively.
(4)In 2014, we had a gain of $241 million from the sale of LiveTV. Pre-tax margin excluding the gain on the sale of LiveTV is 6.6%.
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As of December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Balance Sheet Data (in millions): | ||||||||||||||||||||
Cash and cash equivalents | $ | 341 | $ | 225 | $ | 182 | $ | 673 | $ | 465 | ||||||||||
Investment securities | 427 | 516 | 685 | 591 | 628 | |||||||||||||||
Total assets | 7,839 | 7,350 | 7,070 | 7,071 | 6,593 | |||||||||||||||
Total debt | 2,233 | 2,585 | 2,851 | 3,136 | 3,033 | |||||||||||||||
Common stockholders’ equity | 2,529 | 2,134 | 1,888 | 1,757 | 1,654 | |||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Operating Statistics (unaudited): | ||||||||||||||||||||
Revenue passengers (thousands) | 32,078 | 30,463 | 28,956 | 26,370 | 24,254 | |||||||||||||||
Revenue passenger miles (millions) | 37,813 | 35,836 | 33,563 | 30,698 | 28,279 | |||||||||||||||
Available seat miles (ASMs)(millions) | 44,994 | 42,824 | 40,075 | 37,232 | 34,744 | |||||||||||||||
Load factor | 84.0 | % | 83.7 | % | 83.8 | % | 82.4 | % | 81.4 | % | ||||||||||
Aircraft utilization (hours per day) | 11.8 | 11.9 | 11.8 | 11.7 | 11.6 | |||||||||||||||
Average fare | $ | 166.57 | $ | 163.19 | $ | 157.11 | $ | 154.74 | $ | 140.69 | ||||||||||
Yield per passenger mile (cents) | 14.13 | 13.87 | 13.55 | 13.29 | 12.07 | |||||||||||||||
Passenger revenue per ASM (cents) | 11.88 | 11.61 | 11.35 | 10.96 | 9.82 | |||||||||||||||
Operating revenue per ASM (cents) | 12.93 | 12.71 | 12.43 | 12.10 | 10.88 | |||||||||||||||
Operating expense per ASM (cents) | 11.78 | 11.71 | 11.49 | 11.23 | 9.92 | |||||||||||||||
Operating expense per ASM, excluding fuel (cents) | 7.53 | 7.28 | 6.99 | 6.76 | 6.71 | |||||||||||||||
Operating expense per ASM, excluding fuel and profit sharing (cents) | 7.48 | 7.25 | 6.98 | 6.76 | 6.71 | |||||||||||||||
Airline operating expense per ASM (cents) (5) | 11.70 | 11.56 | 11.34 | 11.06 | 9.71 | |||||||||||||||
Departures | 294,800 | 282,133 | 264,600 | 243,446 | 225,501 | |||||||||||||||
Average stage length (miles) | 1,088 | 1,090 | 1,085 | 1,091 | 1,100 | |||||||||||||||
Average number of operating aircraft during period | 196.2 | 185.2 | 173.9 | 164.9 | 153.5 | |||||||||||||||
Average fuel cost per gallon, including fuel taxes | $ | 2.99 | $ | 3.14 | $ | 3.21 | $ | 3.17 | $ | 2.29 | ||||||||||
Fuel gallons consumed (millions) | 639 | 604 | 563 | 525 | 486 | |||||||||||||||
Average number of full-time equivalent employees (5) | 13,280 | 12,447 | 12,035 | 11,532 | 10,959 | |||||||||||||||
(5)Excludes results of operations and employees of LiveTV, LLC, which are unrelated to our airline operations and are immaterial to our consolidated operating results. As of June 10, 2014, employees of LiveTV, LLC are no longer part of JetBlue.
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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.
•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 2014, we experienced the continuation of uncertain economic conditions, ongoing fuel price volatility, and the persistent competitiveness of the airline industry. Even with these external factors, 2014 was one of the most profitable years in our history. We generated operating revenue growth of almost 7% year over year and reported our highest ever net income, including the gain on the sale of our subsidiary, LiveTV. 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.
2014 Financial Highlights
•We reported our highest ever net income of $401 million, an increase of $233 million compared to 2013. This included the after tax gain on sale of our subsidiary, LiveTV, of $169 million for the year ended December 31, 2014.
•Net income excluding the after tax gain on sale of LiveTV totaled $232 million, an increase of $64 million compared to the net income in 2013.
•We generated over $5.8 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 1 point to 8.9% and we improved our return on invested capital, or ROIC, by 1 point to 6.3%.
•Our earnings per diluted share were $1.19 and includes $0.49 of impact from the after tax gain on the sale of LiveTV. Excluding the sale, our earnings per diluted share reached $0.70.
•We generated $912 million in cash from operations.
•Operating expenses per available seat mile increased 0.6% to 11.78 cents. Excluding fuel and profit sharing, our cost per available seat mile increased 3.2% in 2014.
Company Initiatives
Strengthening of our Balance Sheet
Throughout 2014, we continued to focus on strengthening our balance sheet. We ended the year with unrestricted cash, cash equivalents and short-term investments of $708 million and undrawn lines of credit of $600 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 $352 million, including a prepayment for approximately $299 million of outstanding principal that had been secured by 14 Airbus A320 aircraft. This prepayment used some of the proceeds from the sale of LiveTV in 2014. We have increased the number of unencumbered aircraft and spare engines in 2014 bringing total unencumbered aircraft to 39 and spare engines to 33 as of December 31, 2014. In 2014, the holders of our 6.75% Convertible Debentures due 2039 (Series A) converted their securities into approximately 15.5 million shares of our common stock. During 2014, we repurchased approximately 7.1 million shares of our common stock for approximately $73 million under our share repurchase program.
Aircraft
During 2014, we took delivery of nine Airbus A321 aircraft. In November 2014, we amended our purchase agreement with Airbus by deferring 13 Airbus A321 aircraft orders and eight Airbus A320 aircraft orders from 2016-2020 to 2020-2023. Of these deferrals, ten Airbus A321 aircraft orders were converted to Airbus A321 new engine option (A321neo) orders and five Airbus A320neo aircraft orders were converted to Airbus A321neo aircraft orders. We additionally converted three Airbus A320 aircraft orders in 2016 to Airbus A321 aircraft orders.
Airport Infrastructure Investments
During 2014, we completed our construction of T5i, the new international arrival extension to T5 at JFK. The creation of a new dedicated site to handle U.S. Customs and Border Protection checks at T5 will eliminate the need for our international customers to arrive at JFK's T4. We expect this will result in a more efficient process and a better JetBlue Experience for both our customers and Crewmembers. T5i opened to our customers in November 2014.
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Network
As part of our ongoing network initiatives and route optimization efforts we continued to make schedule and frequency adjustments throughout 2014. We added five new BlueCities to our network: Savannah, GA, Port of Spain, Trinidad and Tobago, Detroit, MI, Hyannis, MA (seasonal) and Willemstad, Curaçao. We also added new routes between existing BlueCities. In March 2014, we completed the purchase of 24 Slots at Reagan National for $75 million. We started using these Slots in the second half of 2014 and continue to announce new route pairings.
Outlook for 2015
We believe we will continue to improve our year over year margins and increase returns for our shareholders in 2015. 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 2015. 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 2015, we estimate our operating capacity will increase by approximately 7.0% to 9.0% over 2014 with the addition of 12 Airbus A321 aircraft to our operating fleet. We are expecting our cost per available seat mile, excluding fuel and profit sharing, for 2015 to increase approximately 0.0% to 2.0% over 2014.
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RESULTS OF OPERATIONS
Year 2014 compared to Year 2013
Overview
We reported net income of $401 million, an operating income of $515 million and an operating margin of 8.9% for the year ended December 31, 2014. This compares to net income of $168 million, an operating income of $428 million and an operating margin of 7.9% for the year ended December 31, 2013. Diluted earnings per share were $1.19 for 2014 compared to $0.52 for the same period in 2013. Net income for the year ended December 31, 2014 includes the after tax gain on the sale of LiveTV of approximately $169 million, or $0.49 per diluted share.
Approximately 80% 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. During the first three months of 2014, this area experienced one of the coldest winters in 20 years, with New York and Boston each experiencing over 57 inches of snow. These weather conditions led to the cancellation of approximately 4,100 flights, nearly double the amount we canceled in the whole of 2013. These cancellations resulted in a negative impact on our first quarter 2014 seat revenue as well as ancillary revenue such as change fees due to our policy of waiving these fees during severe weather events.
Operating Revenues
(Revenue in millions) | Year-over-Year Change | |||||||||||||||
2014 | 2013 | $ | % | |||||||||||||
Passenger Revenue | $ | 5,343 | $ | 4,971 | $ | 372 | 7.5 | |||||||||
Other Revenue | 474 | 470 | 4 | 0.7 | ||||||||||||
Operating Revenues | $ | 5,817 | $ | 5,441 | $ | 376 | 6.9 | |||||||||
Average Fare | $ | 166.57 | $ | 163.19 | $ | 3.38 | 2.1 | |||||||||
Yield per passenger mile (cents) | 14.13 | 13.87 | 0.26 | 1.9 | ||||||||||||
Passenger revenue per ASM (cents) | 11.88 | 11.61 | 0.27 | 2.3 | ||||||||||||
Operating revenue per ASM (cents) | 12.93 | 12.71 | 0.22 | 1.7 | ||||||||||||
Average stage length (miles) | 1,088 | 1,090 | (2 | ) | (0.2 | ) | ||||||||||
Revenue passengers (thousands) | 32,078 | 30,463 | 1,615 | 5.3 | ||||||||||||
Revenue passenger miles (millions) | 37,813 | 35,836 | 1,977 | 5.5 | ||||||||||||
Available Seat Miles (ASMs) (millions) | 44,994 | 42,824 | 2,170 | 5.1 | ||||||||||||
Load Factor | 84.0 | % | 83.7 | % | 0.3 | pts | ||||||||||
Passenger revenue is our primary source of revenue and accounted for over 92% of our total operating revenues for the year ended December 31, 2014. As well as seat revenue, passenger revenue includes revenue from our ancillary product offerings such as EvenMore™ Space. Revenues generated from international routes, including Puerto Rico, accounted for 30% of our passenger revenues in 2014. 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.
In 2014, the increase in passenger revenues was mainly attributable to a 5% increase in capacity and a 2% increase in yield. Our largest ancillary product remains the EvenMore™ Space seats, generating approximately $200 million in revenue, an increase of over 16% compared to 2013.
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 cargo, Charters, ground handling fees of other airlines and rental income. Our subsidiary, LiveTV was sold in June 2014 and any third party revenues earned for the sale of in-flight entertainment systems and on-going services provided for these systems before this date are included in Other Revenue.
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In 2014, Other Revenue increased by $4 million compared to 2013. While there was a $42 million increase in revenues mainly from fees, Getaways™ sales, the marketing component of TrueBlue point sales and on-board product sales, this was offset by a $38 million reduction in third party LiveTV revenue as a result of the sale of LiveTV in June 2014.
Operating Expenses
(in millions; per ASM data in cents) | Year-over-Year Change | per ASM | ||||||||||||||||||||||||
2014 | 2013 | $ | % | 2014 | 2013 | % Change | ||||||||||||||||||||
Aircraft fuel and related taxes | $ | 1,912 | $ | 1,899 | 13 | 0.7 | $ | 4.25 | $ | 4.43 | (4.1 | ) | ||||||||||||||
Salaries, wages and benefits | 1,294 | 1,135 | 159 | 14.1 | 2.88 | 2.65 | 8.7 | |||||||||||||||||||
Landing fees and other rents | 321 | 305 | 16 | 5.3 | 0.71 | 0.71 | — | |||||||||||||||||||
Depreciation and amortization | 320 | 290 | 30 | 10.2 | 0.71 | 0.68 | 4.4 | |||||||||||||||||||
Aircraft rent | 124 | 128 | (4 | ) | (3.4 | ) | 0.28 | 0.30 | (6.7 | ) | ||||||||||||||||
Sales and marketing | 231 | 223 | 8 | 3.4 | 0.51 | 0.52 | (1.9 | ) | ||||||||||||||||||
Maintenance, materials and repairs | 418 | 432 | (14 | ) | (3.4 | ) | 0.93 | 1.01 | (7.9 | ) | ||||||||||||||||
Other operating expenses | 682 | 601 | 81 | 13.5 | 1.51 | 1.41 | 7.1 | |||||||||||||||||||
Total operating expenses | $ | 5,302 | $ | 5,013 | $ | 289 | 5.7 | 11.78 | 11.71 | 0.6 | ||||||||||||||||
Aircraft Fuel and Related Taxes
Aircraft fuel and related taxes remains our largest expense category, representing 36% of our total operating expenses in 2014 compared to 38% in 2013. Even though the average fuel price decreased 5% in 2014 to $2.99 per gallon, our fuel expenses increased by $13 million as we consumed 35 million more gallons of aircraft fuel compared to 2013. This was mainly due to our increase in capacity and was offset slightly by our higher than anticipated flight cancellations during the first quarter of 2014 as a result of the harsh winter weather. Based on our expected fuel volume for 2015, a 10% per gallon increase in the cost of aircraft fuel would increase our annual fuel expense by approximately $175 million.
In 2014, we recorded fuel hedge losses of $30 million compared to $10 million in fuel hedge losses in 2013 which were recorded in the aircraft fuel and related taxes category. Fuel derivatives not qualifying as cash flow hedges in 2014 resulted in a gain of $2 million compared to losses of less than $1 million in 2013 which were recorded in interest income and other. Accounting ineffectiveness on fuel derivatives classified as cash flow hedges resulted in losses of less than $1 million in both 2014 and 2013 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.
Salaries, Wages and Benefits
Salaries, Wages and Benefits are our second largest expense, representing approximately 24% of our total operating expenses in 2014 compared to 23% in 2013. During 2014, the average number of full-time equivalent employees increased by 7% and the average tenure of our Crewmembers increased to 6.2 years, both of which contributed to a $159 million, or 14.1%, increase compared to 2013. 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 $3 million. Our profit sharing is calculated as 15% of adjusted pre-tax income, reduced by the Retirement Plus contributions and special items. This resulted in $25 million of profit sharing expense in 2014 compared to $12 million in 2013. The increasing tenure of our Crewmembers, rising healthcare costs and efforts to maintain competitiveness in our overall compensation packages present cost pressures.
We agreed to provide our pilots with a 20% pay increase in their base rate over three years starting 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.
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Depreciation and Amortization
Depreciation and amortization increased $30 million, or 10%, primarily due to having an average of 137 owned and capital leased aircraft in 2014 compared to 125 in 2013. We also had an additional $13 million in amortization expense during 2014 as a result of a change in the expected useful lives of certain software.
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 2014 was 7.8 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 11.0 additional total operating aircraft in 2014 compared to 2013.
In 2014, maintenance, materials and repairs decreased by $14 million, or 3% compared to 2013 as we had higher engine related costs for our EMBRAER 190 aircraft in 2013. In the latter half of 2013, we finalized a flight-hour based maintenance and repair agreement for these engines and in 2014 we amended our flight-hour based agreements to include other certain services. These amendments are 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 $81 million, or 14%, compared to 2013 mainly due to an increase in outside services. As our capacity and number of departures grew in 2014, our related variable handling costs also increased. Additionally, we had higher personnel expenses relating to the harsh winter weather in the first quarter of the year such as lodging and per diem. Non-recurring items in 2014 included the sale of an engine for a gain of $3 million and a gain of $4 million relating to a one-time legal settlement. In 2013, we had a gain of approximately $2 million relating to the sale of three spare engines as well as a gain of approximately $7 million relating to the sale of LiveTV's investment in the Airfone business.
Income Taxes
Our effective tax rate was 36% in 2014 and 40% in 2013. Our 2014 effective tax rate differs from the statutory income tax rate primarily due to the release of the $19 million tax benefit related to the utilization of a capital loss carryforward. This capital loss carryforward was able to be utilized due to the sale of our subsidiary, LiveTV. The rate is also affected by state income taxes and the non-deductibility of certain items for tax purposes. The relative size of these items compared to our 2014 pre-tax income of $623 million and our 2013 pre-tax income of $279 million also affect the rate.
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Year 2013 compared to Year 2012
Overview
We reported net income of $168 million, an operating income of $428 million and an operating margin of 7.9% for the year ended December 31, 2013. This compares to net income of $128 million, an operating income of $376 million and an operating margin of 7.5% for the year ended December 31, 2012. Diluted earnings per share were $0.52 for 2013 compared to $0.40 for the same period in 2012.
Operating Revenues
(Revenues 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 accounted for 91% of our total operating revenues in 2013 and was our primary source of revenue. Revenues generated from international routes, including Puerto Rico, accounted for 28% of our passenger revenues in 2013 compared to 27% in 2012. In 2013, the increase in passenger revenues of 9% was mainly attributable to the increased capacity and increase in yield. Our largest ancillary product remained the EvenMore™ Space seats, generating approximately $170 million in revenue. This was an increase of approximately 13% over 2012.
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 | ||||||||||||||
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Aircraft Fuel and Related Taxes
Aircraft fuel and related taxes remained 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.
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 losses of less than $1 million 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 losses of less than $1 million 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.
Salaries, Wages and Benefits
Salaries, Wages and Benefits were 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 9%, 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 in 2013 compared to $3 million in 2012.
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 and 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.
Other Operating Expenses
Other operating expenses increased by $52 million, or 9%, 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.
Non-GAAP Financial Measures
We sometimes use non-GAAP measures that are derived from the consolidated financial statements, but that are not presented in accordance with generally accepted accounting principles in the U.S., or U.S. GAAP. We believe these non-GAAP measures provide a meaningful comparison of our results to others in the airline industry and our prior year results. Investors should consider these non-GAAP financial measures in addition to, and not as a substitute for, our financial performance measures prepared in accordance with U.S. GAAP. Further, our non-GAAP information may be different from the non-GAAP information provided by other companies.
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Costs per Available Seat Mile (Non-GAAP)
Costs per available seat mile, or CASM, is a common metric used in the airline industry. Our CASM for 2014 and 2013 are summarized in the table below. We exclude aircraft fuel and related taxes and profit sharing from operating cost per available seat mile to determine CASM ex-fuel and profit sharing. We believe that CASM ex-fuel and profit sharing provides investors the ability to measure financial performance excluding items beyond our control, such as (i) fuel costs, which are subject to many economic and political factors beyond our control, and (ii) profit sharing, which is sensitive to volatility in earnings. We believe this measure is more indicative of our ability to manage costs and is more comparable to measures reported by other major airlines. We are unable to reconcile such projected CASM ex-fuel and profit sharing as the nature or amount of excluded items are only estimated at this time.
Reconciliation of Operating expense per ASM, excluding fuel and profit sharing | |||||||||||||||||
(in millions, per ASM data in cents) | 2014 | 2013 | Per ASM Year-over-Year Change | ||||||||||||||
$ | per ASM | $ | per ASM | % | |||||||||||||
Total operating expenses | $ | 5,302 | 11.78 | $ | 5,013 | 11.71 | 0.6 | ||||||||||
Less: Aircraft fuel and related taxes | 1,912 | 4.25 | 1,899 | 4.43 | (4.1 | ) | |||||||||||
Operating expenses, excluding fuel | 3,390 | 7.53 | 3,114 | 7.28 | 3.5 | ||||||||||||
Less: Profit sharing | 25 | 0.05 | 12 | 0.03 | 66.6 | ||||||||||||
Operating expense, excluding fuel & profit sharing | $ | 3,365 | 7.48 | $ | 3,102 | 7.25 | 3.2 | ||||||||||
Net Income and Pre-Tax Income, excluding special items (Non-GAAP)
We exclude special items from net income and pre-tax income as we believe the exclusion of these items is helpful to investors to evaluate JetBlue’s recurring core operational performance in the periods shown. Therefore, we adjust for these amounts. Special items excluded in the tables below showing the reconciliation of net income and pre-tax income include the gain on the sale of JetBlue’s wholly-owned subsidiary LiveTV due to the non-recurring nature of this item.
Reconciliation of Net Income, Income before Income Taxes and EPS excluding Special Items | ||||||||
Twelve Months Ended December 31, | ||||||||
(in millions, except per share amounts) | 2014 | 2013 | ||||||
Income before income taxes | $ | 623 | $ | 279 | ||||
Less: Gain on sale of subsidiary | 241 | — | ||||||
Income before income taxes excluding special items | 382 | 279 | ||||||
Less: Income tax expense | 222 | 111 | ||||||
Add back: Income tax relating to gain on sale of subsidiary (a) | 72 | — | ||||||
Net Income excluding special items | $ | 232 | $ | 168 | ||||
Basic: | ||||||||
Earnings per common share | $ | 1.36 | $ | 0.59 | ||||
Less: Special items, net of tax | $ | 0.57 | $ | — | ||||
Earnings per common share excluding special items | $ | 0.79 | $ | 0.59 | ||||
Diluted: | ||||||||
Earnings per common share | $ | 1.19 | $ | 0.52 | ||||
Less: Special items, net of tax | $ | 0.49 | $ | — | ||||
Earnings per common share excluding special items | $ | 0.70 | $ | 0.52 | ||||
(a) The capital gain generated from the sale of LiveTV allowed JetBlue to utilize a capital loss carryforward which resulted in the release of a valuation allowance related to the capital loss deferred tax asset of $19 million.
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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, 2014. 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, 2014 | June 30, 2014 | September 30, 2014 | December 31, 2014 | |||||||||||||
Statements of Operations Data (dollars in millions): | ||||||||||||||||
Operating revenues | $ | 1,349 | $ | 1,493 | $ | 1,529 | $ | 1,446 | ||||||||
Operating expenses: | ||||||||||||||||
Aircraft fuel and related taxes | 464 | 497 | 515 | 436 | ||||||||||||
Salaries, wages and benefits | 329 | 316 | 318 | 331 | ||||||||||||
Landing fees and other rents | 77 | 83 | 88 | 73 | ||||||||||||
Depreciation and amortization | 78 | 77 | 79 | 86 | ||||||||||||
Aircraft rent | 31 | 31 | 31 | 31 | ||||||||||||
Sales and marketing | 54 | 69 | 59 | 49 | ||||||||||||
Maintenance materials and repairs | 94 | 102 | 109 | 113 | ||||||||||||
Other operating expenses | 181 | 177 | 166 | 158 | ||||||||||||
Total operating expenses | 1,308 | 1,352 | 1,365 | 1,277 | ||||||||||||
Operating income | 41 | 141 | 164 | 169 | ||||||||||||
Other income (expense) (1) | (35 | ) | 204 | (32 | ) | (29 | ) | |||||||||
Income before income taxes | 6 | 345 | 132 | 140 | ||||||||||||
Income tax expense | 2 | 115 | 53 | 52 | ||||||||||||
Net income | $ | 4 | $ | 230 | $ | 79 | $ | 88 | ||||||||
Operating margin | 3.1 | % | 9.4 | % | 10.7 | % | 11.7 | % | ||||||||
Pre-tax margin | 0.5 | % | 23.1 | % | 8.6 | % | 9.7 | % | ||||||||
Operating Statistics (unaudited): | ||||||||||||||||
Revenue passengers (thousands) | 7,333 | 8,179 | 8,579 | 7,987 | ||||||||||||
Revenue passenger miles (millions) | 8,662 | 9,632 | 10,127 | 9,392 | ||||||||||||
Available seat miles ASM (millions) | 10,419 | 11,386 | 11,752 | 11,436 | ||||||||||||
Load factor | 83.1 | % | 84.6 | % | 86.2 | % | 82.1 | % | ||||||||
Aircraft utilization (hours per day) | 11.4 | 12.0 | 12.0 | 11.5 | ||||||||||||
Average fare | $ | 167.69 | $ | 167.80 | $ | 164.80 | $ | 166.17 | ||||||||
Yield per passenger mile (cents) | 14.20 | 14.25 | 13.96 | 14.13 | ||||||||||||
Passenger revenue per ASM (cents) | 11.80 | 12.05 | 12.03 | 11.61 | ||||||||||||
Operating revenue per ASM (cents) | 12.95 | 13.12 | 13.00 | 12.64 | ||||||||||||
Operating expense per ASM (cents) | 12.55 | 11.88 | 11.61 | 11.17 | ||||||||||||
Operating expense per ASM, excluding fuel (cents) | 8.10 | 7.51 | 7.22 | 7.35 | ||||||||||||
Operating expense per ASM, excluding fuel and profit sharing (cents) | 8.10 | 7.51 | 7.13 | 7.23 | ||||||||||||
Airline operating expense per ASM (cents) (2) | 12.36 | 11.73 | 11.61 | 11.17 | ||||||||||||
Departures | 68,152 | 74,917 | 77,205 | 74,526 | ||||||||||||
Average stage length (miles) | 1,095 | 1,088 | 1,082 | 1,088 | ||||||||||||
Average number of operating aircraft during period | 193.0 | 193.9 | 197.4 | 200.4 | ||||||||||||
Average fuel cost per gallon, including fuel taxes | $ | 3.14 | $ | 3.09 | $ | 3.05 | $ | 2.70 | ||||||||
Fuel gallons consumed (millions) | 148 | 161 | 169 | 162 | ||||||||||||
Average number of full-time equivalent employees (2) | 13,072 | 13,251 | 13,351 | 13,446 | ||||||||||||
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(1) | In the second quarter of 2014, we had a gain of approximately $242 million on the sale of LiveTV. |
(2) | Excludes results of operations and employees of LiveTV, LLC, which are unrelated to our airline operations and are immaterial to our consolidated operating results. As of June 10, 2014, employees of LiveTV, LLC are no longer part of JetBlue. |
Although we experienced revenue growth in 2014, 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 as well as 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, 2014, we had 39 unencumbered aircraft and 33 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. We expect these goals will lead to improved returns for our shareholders. As of December 31, 2014, our cash and cash equivalents balance increased by 52% to $341 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 $600 million in available lines 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 2014 in solidifying our strong balance sheet and overall liquidity position. Our highlights for 2014 included:
•Reduced our overall debt balance by $352 million.
•Prepaid approximately $308 million in debt resulting in 14 Airbus A320 aircraft and five spare engines becoming unencumbered. The majority of this prepayment was from the proceeds of the sale of LiveTV in June 2014. This will result in 2015 interest expense savings of $7 million and total interest expense savings of $28 million.
•Increased the number of unencumbered aircraft from 23 as of December 31, 2013, to 39 as of December 31, 2014.
•In March 2014, we completed a $226 million Enhanced Equipment Trust Certificate offering, or EETC, in pass-through certificates which was secured by 14 previously unencumbered Airbus A320 aircraft. This coincided with the final payment on the Series 2004-1 EETC of $188 million which resulted in 13 Airbus A320 aircraft becoming unencumbered.
•We took delivery of nine Airbus A321 aircraft, two of which were financed with capital leases.
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Return on Invested Capital (Non-GAAP)
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 2014, our ROIC improved to 6.3%. We are committed to taking appropriate actions which will allow us to continue to improve ROIC while adding capacity and continuing to grow. At our Investor day in November 2014, we forecast that we believe we will improve ROIC to at least 10% by the end of 2017.
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.
Reconciliation of Return on Invested Capital (Non-GAAP) | ||||||||
(in millions, except as otherwise noted) | Twelve Months Ended December 31, | |||||||
2014 | 2013 | |||||||
Numerator | ||||||||
Operating Income | $ | 515 | $ | 428 | ||||
Add: Interest income (expense) and other | 1 | (1 | ) | |||||
Add: Interest component of capitalized aircraft rent (a) | 65 | 67 | ||||||
Subtotal | 581 | 494 | ||||||
Less: Income tax expense impact | 226 | |||||||