February 26, 2013 / 10:00 PM / 5 years ago

TEXT-Fitch raises JetBlue's IDR to 'B'; outlook is stable

Feb 26 - Fitch Ratings upgrades JetBlue Airways Corp.'s (JBLU)
Issuer Default Rating (IDR) to 'B' from 'B-', and affirms the senior unsecured
rating at 'CCC+', while revising the recovery rating to 'RR6' from 'RR5', which
applies to approximately $285 million of convertible notes. The Rating Outlook
for JBLU is Stable.


The upgrade reflects JBLU's industry leading unit costs and operating margin,
track record of being consistently profitable (even during downturns), improving
cash flow and healthy liquidity (including a growing unencumbered aircraft pool)
in context of a significantly improved operating environment in the US airline
industry. The 'B' rating also incorporates JBLU's lease-adjusted leverage which
has improved in recent years, but remains high at approximately 6x on
lease-adjusted debt/EBITDAR basis and a growth strategy that is more aggressive
than peers.

Despite JBLU's expansion and the devastating impact of Sandy, the company was
able to produce a PRASM gain of 3.6% in 2012. This is impressive in context of a
7.6% increase in capacity, and reflects 1.4 point increase in load factor and a
1.5% increase in average fares. Non-fuel costs have also been on the rise, with
non-fuel CASM up 3.3% reflecting a sharp increase (+38% y/y) in maintenance
costs. Nonetheless, JBLU remained profitable in 2012, with an operating margin
of 7.5% up a modest 40 basis points (bps) year-over-year and at the high-end of
its peers.

JBLU recorded its highest cash from operations in the tune of $700 million last
year, but higher capex including an opportunistic $200 million prefunding of
2013 deliveries led to negative free cash flow (FCF) in 2012, as expected. FCF,
along with ROIC, remains a management focus as evidenced in the three
consecutive years of solid FCF from 2009-2011. JBLU's higher capex budget for
both new A320 deliveries and strategic investments in non-aircraft is expected
to pressure FCF this year. The company is budgeting $450 million for aircraft
(aircraft deliveries, sharklets etc.) and $245 million non-aircraft strategic
investments including $80 million earmarked for building out an international
terminal at Terminal 5 at JFK.

JBLU also faces looming debt maturities of ~$1.2 billion during 2013-2015,
mainly aircraft backed debt. Fitch expects JBLU to use Brazilian export
financing for its EMB 190 deliveries, and fund its other capital commitments
through a combination of existing cash, operating cash flow and external

Accordingly, total liquidity, which includes cash, marketable securities and a
$125 million line of credit with American Express (for jet-fuel purchase) as a
percentage of trailing 12 month revenues, is expected to decline to the
mid-to-high teens from levels above 20% seen over the past several years. During
the fourth quarter, JBLU upsized its line of credit with Morgan Stanley to $200
million from $100 million. This facility is secured by a portion of its
marketable securities, hence, not included in our total liquidity calculation.
Furthermore, JBLU is growing its unencumbered pool which now includes 11
unencumbered A320s, considered Tier 1 collateral, up from just one aircraft at
year-end 2011.

Fitch's liquidity analysis also incorporates only modest improvement in cash
flow, given Fitch's conservative operating assumptions. Management expects
year-over-year PRASM to rebound in March based on current booking trends and the
Easter/Passover holiday shift into March from April this year. Even with PRASM
ramping up after the first quarter, Fitch expects only a modest improvement in
operating margin reflecting our expectations for slower PRASM growth for the
year and continued maintenance cost inflation. Management's guidance calls for a
1%-3% increase in CASM, excluding fuel and profit-sharing. That said, an
increase in fare activity and corporate share (in Boston), higher connecting
traffic from its domestic and international partners, and growth in high-margin
ancillary revenues should boost total RASM higher than our expectations, and
also drive an increase in operating margins, FCF and liquidity.

Near-term operating risks include a spike in jet-fuel prices and a slowdown in
the U.S. economy. Fuel risk is partially mitigated by JBLU's conservative
hedging initiatives, and more importantly, the much improved operating
environment in the domestic airline industry which enables U.S. carriers to
raise fares to mitigate rising fuel costs. Especially, in context of a strong
economy which should also boost demand for air travel, making it easier for JBLU
and its peers to raise fares to alleviate rising fuel costs. Conversely, a
weaker macro environment makes JBLU's growth plans more risky when compared to
its rated peers who are all keeping capacity constrained. That said, the silver
lining in a slowing economy for JBLU and the airline industry is the low energy
prices that usually accompany a macro slowdown.

Longer-term operating risks include possible labor inflation. JBLU continues to
benefit from lower costs than its peers including a significant labor cost
advantage. JBLU currently has some of the youngest pilots and crew members in
the country and aims to be peer competitive with wage rates. Therefore, the new
pilot rates recently established at its legacy peers could potentially put
upward pressure on labor costs. That said, JBLU's employees are not unionized
giving the carrier more flexibility with schedule and network changes and
without a pension burden, Fitch expects JBLU to maintain its cost advantage over
the near term.

Other long-term risks include possible restructuring of the new American network
which could shift some of JBLU's current connecting traffic from American at JFK
to Philadelphia where US Airways maintains a hub. That said, the new American
has not yet announced any network changes and Fitch expects it will be a while
before it potentially becomes a material threat to JBLU. Importantly, JBLU's
growing list of other domestic and international partners should mitigate some
of this risk.

Fitch's recovery analysis is based on a going concern valuation with assumptions
that are conservative compared to current market multiples, as well as exit
multiples in prior airline bankruptcies. The issue rating for JBLU's converts
are affirmed at 'CCC+' reflecting the one-notch upgrade of the IDR as well as
downward revision of the recovery rating from 'RR5' to 'RR6'. The recovery
rating is lower due to the inclusion the new $200 million secured line of credit
and a $514 million construction obligation that was previously not included in
Fitch's analysis, which has now lowered recovery prospects for the convertible


The recommended Outlook is Stable. Fitch could revise the Outlook to Positive if
JBLU generates margins and cash flow higher than our expectations and improves
its liquidity profile by enhancing its revolver capacity and/or grow its
unencumbered base. Conversely, the Outlook would be revised to Negative if
JBLU's FCF or liquidity position weakens, especially in a fuel spike or falling
demand scenario.

Fitch upgrades JBLU's ratings as follows:
--Issuer Default Rating (IDR) upgraded to 'B' from 'B-';

Fitch revises JBLU's ratings as follows:
--Senior unsecured debt to 'CCC+/RR6' from 'CCC+/RR5'.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Aug 14, 2012).

Applicable Criteria and Related Research
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology
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