JetBlue Airways was always going to lose some revenue by ending its alliance with American Airlines in the northeastern U.S. The hit, disclosed Tuesday, is big and will cut the carrier’s full-year profit per share outlook down by at least a fifth.
The New York-based airline expects ending the alliance, known as the “NEA,” will reduce full-year earnings per share, a measure of profits, by $0.20-25 in 2023. To put that in perspective, JetBlue in April forecast full-year earnings per share with the alliance to be $0.70-1.00. Now, it expects the profit metric to be a measly $0.05-0.40 in 2023 after ending the alliance. The air traffic control staffing-related cancellations in New York and the shift in travel patterns to international trips this summer also weigh on the airline’s full-year outlook.
“Our decision to terminate the NEA will result in a near-term drag on margins as we lose key codeshare revenue,” JetBlue CEO Robin Hayes said Tuesday. And, in addition to lost revenue, costs related to the alliance will “linger” due to the slow wind-down of the pact, he added.
JetBlue and American began unwinding their alliance on July 21 when both carriers stopped taking new bookings under the pact. Many expect a so-called “drain down” end to the partnership where all existing bookings drain out of the system as no new ones are taken. The decision to end the alliance followed a federal judge’s ruling in May that found it to be in violation of U.S. antitrust law and ordered the pact terminated.
American, for its part, plans to appeal the ruling. The Fort Worth, Texas-based carrier has said the end of the JetBlue alliance is not “material” on its full-year financial outlook.
“As we head into 2024, we will be able to mitigate the impact as we are increasingly able to redeploy capacity currently underperforming in NEA markets to high-margin leisure opportunities throughout our network,” Hayes said on the longer-term outlook. He and other executives were not more specific on where that Boston and New York capacity could go, however, the airline is strong in large leisure markets like Florida and the Caribbean.
The Boston flight reductions have already begun, JetBlue Head of Revenue and Planning Dave Clark said. New York reductions, particularly at LaGuardia airport where the airline leased 36 slot pairs from American, will occur slowly with a “handful” of flights coming out this winter, and about half of the added flights ending next March. JetBlue has just 16 slot pairs of its own at LaGuardia.
The news came after a reasonably strong second quarter for JetBlue. The airline posted a $235 million operating profit, and a 9% operating margin. Revenues increased nearly 7% year-over-year to $2.6 billion, and unit revenue, measured in RASM, was up nearly 1%. Recall, similarly U.S. domestic-exposed Alaska Airlines and Southwest Airlines both saw unit revenue declines in the June quarter. And on the other side of the ledger, unit costs, measured in CASM, excluding fuel increased 3.5% year-over-year in line with JetBlue’s guidance.
New York Schedules May Need to be Cut More to Avoid Delays
“Our 10% schedule reduction in the New York area airports, it was still not enough to overcome the combined weather and more restrictive [air traffic control] programs,” Geraghty said. In June and July, the airline faced 30 straight days of some form of air traffic control or weather-related capacity restriction at its New York JFK hub. And while United Airlines grabbed headlines for its challenges across the Hudson River at Newark, JetBlue’s large concentration of capacity in New York meant it as a whole was more affected by the situation.
Looking ahead, Hayes expects air traffic control and weather disruptions to continue in New York through August. And, he told analysts that the U.S. Federal Aviation Administration may need to waive slot usage rules in New York for more than just 10% of slots next summer. But the truth remains the same: there’s a shortage of air traffic controllers, particularly in New York, and that will persist for at least several years until the FAA can staff back up.
Europe Demand Is Great
JetBlue is seeing green to Europe. Its flights to London, Paris, and Amsterdam beginning August 29 are driving the “strongest” revenue growth across the airline’s network, Geraghty said. The problem is JetBlue just doesn’t have much capacity to Europe. Only 3% of its system capacity, measured in ASMs, will be on transatlantic routes in the third quarter, according to Cirium Diio schedules. The airline plans to grow more on the water jump next year to “diversify geographically,” as Geraghty put it, but that is limited by how many new, long range A321LR and XLR planes Airbus can deliver. JetBlue already expects only around 30 new aircraft — including both Airbus A220s and A321neos, LRs, and XLRs — in 2024 compared to contracted deliveries of more than 40 planes.
Domestic Yields Are Falling
As Alaska and Southwest already highlighted, U.S. domestic airfares have peaked. But JetBlue took it one step further: “While load factors remain very strong, we’ve seen fares normalizing back towards 2019 levels,” Geraghty said. Alaska and Southwest, mind you, have only said fares are declining from last year’s peaks and not that they are returning to pre-pandemic levels. Lower airfares can be good for travelers as they make trips more affordable but not necessarily for airlines. JetBlue’s unit costs excluding fuel were 18% higher in the second quarter than in 2019. While the airline expects the metric to stabilize, and maybe decline slightly, it — and no one in the industry — anticipates a return to 2019 cost levels. For one, labor expenses have shot up at every airline during the past year or so. Unit revenues will be something to watch at JetBlue, especially as it reorients its schedule away from former northeast alliance flying.
New York Is a Revenue Opportunity
New York, despite JetBlue’s plans to reduce flying, remains a big opportunity for the airline. As on the West Coast, the recovery in travel demand in the Big Apple — particularly corporate demand — has lagged elsewhere in the country. For JetBlue, this means there is significant revenue recovery yet to go in New York with Hayes expecting the market to eventually return to pre-pandemic margins that exceed the airline’s system average. “Our large footprint in the slot-constrained New York market is a substantial long-term asset for JetBlue,” he said.
Pratt Engine Issues May Affect JetBlue
JetBlue has not yet included any impact from the recall of certain Pratt & Whitney geared-turbofan engines on A320neo family aircraft in its financial outlook, Chief Financial Officer Ursula Hurley said. However, a “handful” of engines on its A321neo fleet are affected by the recall and do need to be inspected by the middle of September, she added. JetBlue currently anticipates having around four aircraft parked this fall as a result of the engine issues.
And The Outlook
JetBlue expects revenue to fall 4-8% year-over-year in the third quarter, largely due to the end of the American alliance and difficult comparisons to 2022. That is expected to push the airline to a loss with earnings per share forecast at negative $0.20 to flat. Capacity will be up 5.5-8.5% compared to 2022.
“We lost the [NEA] case. And as such, we’re moving on,” Hayes said with the airline’s focus now squarely on securing approval of its proposed merger with Spirit Airlines.
