JetBlue’s Earnings May Hit Some Turbulence In Q3

Earnings at JetBlue Airways (JBLU.O) were flying high in the second quarter, but may face a bumpy return to earth in Q3, thanks to the soaring cost of jet fuel.

At first glance, JetBlue Airways Corp. (JBLU.O) seems to be flying high. The discount airline has continued to expand its capacity while other carriers cut back, and it has been rewarded by higher traffic levels, load factor, and – so far this year – revenue per seat mile. True, its operating expenses are higher, but Jet Blue still managed to post healthy revenue gains and strong second-quarter earnings.

But the headwinds that JetBlue is already experiencing may become troublesome enough to affect the company’s ability to meet analysts’ forecasts when it comes time for it to report its third-quarter earnings in the second half of October, as reflected in the large negative Predicted Surprise of -16%. Fuel prices – always a major expense for airlines – have soared during the third quarter, putting an end to the brief respite that carriers like JetBlue experienced during the second quarter. The advent of a third round of quantitative easing means that jet fuel, like many other commodities, is likely to remain pricey for months to come, and that’s bad news for JetBlue. Despite the fact that oil prices have fallen almost 7% within the last week amidst fears of oversupply (crude oil futures fell below $93 today), they remain at higher levels than was the case for most of the summer months, from May onward. The price of jet kerosene closely tracks that of crude oi; similarly, while that price has fallen in the last week (as seen in the chart below) it remains toward the high end of its recent range, above the levels around which it hovered for much of the late spring and summer.

That isn’t all that is generating some turbulence for JetBlue. Hurricane Irene forced the airline – which has extensive operations in the Caribbean – to cancel some 1,400 flights recently – another potential big hit to the company’s third-quarter earnings. That is one of the factors cited by Mark Powers, the chief financial officer of JetBlue, when he discussed the company’s outlook at the Deutsche Bank 2012 Aviation and Transport conference earlier this month. “The comps are going to be really, really difficult,” Powers said, citing both Hurricane Irene and the impact of the reinstatement of the FAA tax. Last year, the FAA tax was suspended during a period when Congress dithered over whether to impose a new round of these surcharges. Most travelers probably didn’t notice this, since airlines boosted their fares in order to pocket the equivalent of the FAA tax themselves – a nice windfall that won’t be available this year now that Congress has finally reinstated that tax.

Analysts have been taking notice of these trends and reacting accordingly. Of the 16 analysts who have published quarterly earnings estimates for JetBlue, a dozen have revised them since August 1, and each one of those analysts cut their forecast for third-quarter profits. (In the wake of the Deutsche Bank conference, five analysts changed their outlook, lowering their Q3 earnings estimates by an average of 3 cents per share.)

The I/B/E/S consensus estimate for JetBlue’s third-quarter earnings has been falling since early August, when it stood at 21 cents a share, to only 15 cents a share most recently. The SmartEstimate is even lower, at 13 cents a share. That has taken a toll on estimates for the full year, as well; recently, analysts had been expecting JetBlue to post earnings of 61 cents a share for its full year, but today that figure is only 50 cents a share. (Since fuel prices affect profit margins and earnings more than revenue, the surge in energy prices hasn’t really affected the outlook for JetBlue’s revenues; nonetheless, these, too, are lower for the quarter.) The company’s large negative PS of -16% signals that further reductions in analysts’ estimates may be in the offing, or that the company will report earnings that fall short of those expectations when it announces its third-quarter results on Oct. 22. JetBlue scores only 12 out of a possible 100 on the StarMine Analyst Revisions Model, confirming that further downward earnings revisions are likely.

JetBlue traditionally has done better at managing its costs than many of its peers; its operating expense is 7.2 cents per available seat kilometer, compared to an industry median of 8.5 cents. But as the airline’s operations have expanded – it acquired new take off and landing slots in New York and Washington D.C. last year, and in 2011 operated an average of 700 daily flights – its costs have risen, and that key measure of operating expenses is significantly above the 5 cents a share it reported as of 2008. Keeping costs down – especially in light of the fact that JetBlue has said it expects passenger revenue per seat mile to decline 3% to 4% during September after rising 3% in August – is vital to an airline that relies on its ability to offer ultra-competitive prices on the routes it flies to woo travelers. For now, however, it seems as if it’s time to buckle your seatbelts and prepare for a bumpy journey as the company battles the renewed headwinds.

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