KEY RATING DRIVERS
JetBlue's ratings are supported by operating margins at the high end of its North American peer group, consistent profitability, solid liquidity, and a growing presence in key markets. Fitch views JetBlue's credit profile as improving and may consider a positive revision to the outlook or ratings in the near term if trends continue. The ratings remain constrained by high leverage, heavy upcoming capital requirements, a growth strategy that is more aggressive than its peers, and a certain amount geographic concentration in the
Operating Performance Trending Positive: Fitch expects the generally positive operating trends seen in 2013 to continue over the near term. Further revenue growth will be driven by capacity additions in JetBlue's key growth markets such as
DCA is an important airport given its proximity to downtown
Results in 2014 should also be supported by a healthy operating environment. Fitch expects modest GDP growth in the U.S. and limited capacity additions by most North American carriers to keep load factors high and be supportive of increasing yields.
For 2013 passenger revenue per available seat mile (PRASM) was up 2.3%. Unit revenue growth was below average compared to the legacy U.S. carriers but remained positive despite a 6.9% increase in available seat miles (ASMs). JetBlue plans to continue adding capacity for the foreseeable future with ASMs expcted to be up by 5%-7% in 2014. Future capacity additions may limit unit revenue growth. However, seats will largely be added on key markets that are underserved by legacy U.S. carriers and where JBLU can build and maintain a meaningful presence. In this way JBLU has managed to post positive unit revenue results each year coming out of the recession despite its notable capacity additions and Fitch expects that trend to continue going forward.
Positive revenue expectations are partly offset by non-fuel cost pressures, which Fitch expects to continue in 2014. Cost pressures will largely be driven by rising wages. JetBlue recently agreed to a pay increase for its pilots of 20% over the next three years as a part of the company's goal to offer peer competitive wages. Increased pilots salaries will equate to roughly
Despite rising wages, Fitch expects some margin expansion in the near term. Wage rate increases will be partially offset by heightened maintenance costs experienced in 2013 that are expected to ease. The addition of more A321s to JetBlue's fleet in the coming years should also provide some CASM benefit, as those aircraft add incremental seats to existing routes with little related incremental cost.
Solid Financial Flexibility for the Rating: Free cash flow (FCF) was better than expected in 2013 primarily due to lower capital spending. JBLU produced
Going forward, FCF will come under pressure from heavy capital requirements related new aircraft deliveries. JetBlue is scheduled to receive more A321s in coming years (nine in 2014 and 12 in 2015), a larger aircraft than the A320s and E190s that JBlU has historically operated. As a result, capital expenditures in 2014 could approach
Liquidity is supportive of the ratings. As of
JBLU entered a new
Upcoming debt maturities are manageable. The
Financial flexibility is also supported by JBLU's growing base of unencumbered assets. As of year end 2013, the company had a total of 23 unencumbered aircraft consisting of 21 A320s and two E-190s, as well as 30 unencumbered engines. Fitch considers these to be high quality assets which should ease capital market access in the case of a liquidity crunch. JetBlue expects to further expand its base of unencumbered assets over the coming years as it opportunistically pays for some aircraft with cash.
Credit Metrics: Leverage has improved in the past year, and should fall further as EBITDAR continues to expand. As of year end, total adjusted leverage/EBITDAR stood at roughly 5.3x compared to 6.0x at year end 2012. Fitch notes that leverage has improved since the recession when debt/EBITDAR peaked at 9x. The company will continue to strategically reduce debt in the coming years as opportunities arise. However, available cash for debt repayment may be constrained by heavy upcoming capital expenditures.
Fitch has also upgraded the ratings for JetBlue's senior unsecured debentures to 'B-/RR5' from 'CCC+/RR6'. Fitch's recovery analysis reflects a scenario in which a distressed enterprise value is allocated to the various debt classes. The upgrade is based on a higher estimated distressed enterprise value based on JBLU's growing EBITDA generation and general improvements in the airline industry.
Fitch views JetBlue's credit profile as improving and could consider a positive revision to the outlook or rating in the near-to-intermediate term. Future developments that may, individually or collectively, lead to a positive rating action include:
--Effective management of cost pressures allowing the company to maintain an EBITDA margin in the low to mid double digits.
--Positive FCF generation despite heavy capital spending requirements.
--Further reduction in leverage with adjusted debt/EBITDAR to be maintained below 5x
--Continued expansion of the company's unencumbered asset base.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Cost pressures, either fuel or non-fuel related, that cause EBITDAR margins to fall and remain below 16% or EBITDA below 10%.
--Sustained negative FCF.
--Liquidity weakens to below management targets.
Fitch has taken the following rating actions:
JetBlue Airways, Corp.
--Issuer Default Rating affirmed at 'B';
--Senior unsecured debt upgraded to 'B-/RR5' from 'CCC+/RR6'.
Fitch has also assigned the following rating:
JetBlue Airways, Corp.
--Senior secured credit facility, 'BB/RR1'.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (
--'Rating Aircraft Enhanced Equipment Trust Certificates' (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Rating Aircraft Enhanced Equipment Trust Certificates
Source: Fitch Ratings
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