(JBLU) JetBlue Airways Posts In Line Earnings Report

Discount U.S. airline JetBlue Airways Corporation (JBLU) third quarter adjusted earnings per share of 12 cents matched the Zacks Consensus Estimate but was below the year-ago earnings of 18 cents.

Total revenue climbed 16% year over year to $1.195 billion but missed the Zacks Consensus Estimate of $1.210 billion. However, JetBlue made record revenue in the quarter despite the financial turmoil, higher fuel prices, weak demand and challenging weather conditions.

Airline traffic, measured in revenue passenger miles, increased 8.2% year over year on 8.3% growth in capacity. Load factor (percentage of seats filled with passengers) fell 10 basis points year over year to 84.5%.

Yield per passenger mile grew 7.7% compared with the year-ago quarter. On an annualized basis, improvements of 7.7% in passenger revenue per available seat mile and 7.1% in operating revenue per available seat mile were recorded in the quarter.

Total operating expenses climbed 22.1% year over year to $1.1 billion, primarily due to higher fuel (up 55.3%) and maintenance (up 34.8%) expenses. JetBlue’s operating unit cost or cost per available seat mile (CASM) grew 12.8% year over year. Excluding fuel, CASM slid 2.2% from the year-ago quarter.

Operating income dropped 23.1% from the year-ago quarter to $108 million. Operating margin contracted 460 bps year over year to 9%. Hurricane Irene in August hit operating income by $8 million in the third quarter due to the cancellation of 1400 flights.

Liquidity

JetBlue ended the quarter with unrestricted cash and short-term investments of $1.2 billion.

Guidance

For the fourth quarter, the company expects CASM to increase 11–13% and CASM, excluding fuel, to range between negative 1% to positive 1%. Capacity is expected to increase 8–10% year over year.

For fiscal 2011, CASM and CASM excluding fuel, are expected to increase 13–15% and 0%–2%, respectively year over year. Capacity is expected to increase 6–8% year over year.

JetBlue expects an average fuel price per gallon, including hedges and fuel taxes, of $3.23 for the fourth quarter and $3.19 for 2011.

Our Analysis

We believe JetBlue is poised to grow from strong revenue growth, higher fares, cost control measures, additional ancillary revenue opportunities, a strong balance sheet and future commercial partnerships, even in a rising fuel price environment.

With a low cost structure and the youngest fleet among major U.S. airlines such as Delta Air Lines (DAL), United Continental Holdings Inc. (UAL) and Southwest Airlines Co. (LUV), JetBlue is combating rising fuel prices with increased fares and fuel-hedging strategies. The company has hedged approximately 45% of projected fuel requirements for fourth quarter 2011 and 21% for fiscal 2012, with a combination of crude call options and collars, jet fuel swaps and heating oil collars.

However, large exposure to the New York metropolitan area, competitive threats, and unfavorable weather conditions may limit the upside potential of the stock.

We are currently maintaining our long-term Neutral recommendation on JetBlue. For the short term, the stock retains a Zacks #3 (Hold) Rank.

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