JetBlue Airways Corporation Earnings: Profit Sinks in a Challenging Environment

Three months ago, JetBlue Airways (JBLU -1.13%) appeared to be turning the corner, having stabilized its profitability. Unfortunately, a pair of hurricanes that hit some of its most important markets derailed JetBlue's profits during the third quarter.

Even so, JetBlue managed to post stronger results than most of its competitors last quarter. While hurricane-related revenue headwinds will continue to pressure JetBlue's performance in the fourth quarter, the company's strong underlying results bode well for 2018.

JetBlue Airways results: The raw numbers

Data source: JetBlue Airways Q3 earnings release. Chart by author.

What happened with JetBlue Airways this quarter?

Entering the third quarter, JetBlue estimated that it would post solid unit revenue growth of about 1% despite increasing capacity 6.5% to 7.5% year over year. Meanwhile, it expected non-fuel unit costs to rise 1.5% to 3.5% year over year. Hurricanes Irma and Maria upended JetBlue's plans, though, forcing the carrier to cancel more than 2,500 flights.

The net result on unit revenue was fairly muted. Revenue per available seat mile (RASM) rose 0.9% year over year last quarter. By contrast, the flight cancellations drove up non-fuel unit costs by approximately 2.75 percentage points, more than offsetting a 2 percentage point tailwind related to the timing of various maintenance costs. Without the storm, non-fuel unit costs would have been roughly flat on a year-over-year basis.

Two big hurricanes negatively impacted JetBlue's results last quarter. Image source: JetBlue Airways.

Leaving aside the hurricanes, JetBlue fared much better than most of its competitors in the midst of an industry fare war. Net income declined just 10% year over year, all of which was hurricane-related.

With its stock price remaining somewhat depressed, JetBlue continued to aggressively return cash to shareholders last quarter. It completed a $130 million accelerated share repurchase in the third quarter and has now repurchased $380 million of stock in 2017, completing a $500 million buyback authorization that was supposed to run through 2019.

What management had to say

While acknowledging the storm-related headwinds, JetBlue's management encouraged investors to focus on the big picture. "Despite unprecedented ATC challenges, repeated hurricane events, and a competitive industry pricing environment, we've been able to sustain solid margins, make progress toward our long-term margin commitments and return capital to our shareholders," remarked CFO Steve Priest.

JetBlue CEO Robin Hayes echoed these comments regarding JetBlue's long-term focus. "We are confident that the adjustments we are making to our network will limit any ongoing financial impact in 2018. Despite the short-term challenges, we remain focused on our long-term margin commitments to our shareholders," he said.

Hayes also tried to quantify the impact of the hurricanes on JetBlue's earnings, noting, "Our third quarter results were impacted by two hurricanes that reduced our EPS by approximately 6 cents."

Looking forward

While Hurricane Irma and Hurricane Maria both struck during September, they are expected to have a bigger impact on JetBlue's profitability this quarter than they did in the third quarter. JetBlue has a big footprint in Florida and the Caribbean, and the destruction caused by Maria in particular will continue to depress demand for months, if not years.

JetBlue projects that hurricane-related impacts will reduce its fourth-quarter revenue by $70 million to $90 million. Most of this lost revenue will flow through to the bottom line, reducing operating income by $50 million to $70 million and EPS by $0.10 to $0.13. Maintenance events that were postponed from the third quarter will also push JetBlue's non-fuel unit costs higher.

In total, JetBlue expects RASM to fall 0% to 3% this quarter, while non-fuel unit costs will rise 5% to 7% and fuel prices will increase to roughly $1.83/gallon, from $1.56/gallon a year ago. This implies that JetBlue's pre-tax margin could fall by nearly half from the 16.7% result posted in the fourth quarter of 2016.

On the bright side, JetBlue believes that a combination of recovering demand in Florida and capacity adjustments in the Caribbean will lead to better results by the beginning of 2018. This puts the carrier in position to resume its comeback next year.