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Ney York based airline JetBlue Airways Corporation (JBLU - Analyst Report) reported first-quarter 2014 adjusted earnings of 1 cent, widely missing the Zacks Consensus Estimate of 7 cents and deteriorating from the year-ago reported earnings of 5 cents.

Total operating revenue climbed 3.8% year over year to $1.35 billion but was lower than the Zacks Consensus Estimate of $1.39 billion. JetBlue cancelled 4,100 flights owing to harsh winter weather in Northeast, which affected the revenue to the tune of $50 million and operating income by $35 million.

Operating Statistics

Airline traffic, measured in revenue passenger miles, increased 1.8% year over year in the reported quarter along with 2.8% growth in capacity leading to a  load factor (percentage of seats filled with passengers) decline of 80 basis points (bps) year over year to 83.1%.

Yield per passenger mile moved up 1.8% year over year in the first quarter. Passenger revenue per available seat mile moved up 0.9% while operating revenue per available seat mile increased 1.1%.

Operating Income and Expenses

In the quarter under review, total operating expenses increased 5.5% year over year to $1.31 billion, primarily due to higher salaries and wages (up 17.7%). Other operating expenses rose 14.7%, depreciation and amortization was up 13.8% and sales and marketing expenses moved up 8.8%. JetBlue’s operating unit cost or cost per available seat mile (CASM) grew 2.6% year over year while excluding fuel and profit sharing, CASM increased 6.3% from the year-ago quarter.

Operating income came in at $41.0 million, up 30.5% year over year. Operating margin decreased 140 bps year over year to 3.1%.

Balance Sheet

JetBlue ended the first quarter with unrestricted cash and short-term investments of $771.0 million. Total debt at the end of the quarter was $2,639 million compared with $2,585 million at the end of 2013.

Guidance

Owing to solid demand and continued focus on ancillary revenue initiatives the carrier expects unit revenue growth to accelerate in the second quarter.

The company expects CASM to increase 3.5–5.5% and CASM, excluding fuel and profit sharing, to range between 4.5% and 6.5% in the second quarter.

CASM for full-year 2014 is expected to increase 2.0–4.0%. Excluding fuel and profit sharing, CASM is expected to increase in the range of 3.5–5.5%. Increase in full-year unit cost will be due to reallocation of fleet from longer haul routes to support new services in Reagan National Airport and weather-related disruptions in the first quarter.

Capacity is expected to increase in the range of 5.5–7.5% in the second quarter and for 2014 it is expected to increase 4.0–6.0%.

JetBlue plans to repay debt and capital lease obligations to the tune of $48 million in the second quarter and $481 million in 2014.

JetBlue expects average fuel price per gallon, including hedges and fuel taxes, of $3.11 in the second quarter. The company has hedged approximately 22% of its projected fuel requirements for the ongoing quarter.

Peer Releases

Delta Air Lines Inc. (DAL - Analyst Report) reported first-quarter 2014 adjusted earnings of 33 cents, beating the Zacks Consensus Estimate of 29 cents, while Southwest Airline Co.’s (LUV - Analyst Report) earnings of 18 cents were also ahead of our estimate of 16 cents.

However, United Continental Holdings Inc.’s (UAL - Analyst Report) posted a loss of $1.33 narrower than the Zacks Consensus Estimate of a loss of $1.38.

Our Analysis

We believe JetBlue will continue to benefit from increasing travel demand, network expansion, fleet re-designing, optimization of unit revenues, capital expenditure management and disciplined growth. Additionally, emphasis on expanding in major growth regions like Boston and Fort Lauderdale along with various Caribbean and Latin American markets will support future growth. Winning of slot pairs at Washington’s Reagan Airport, is also expected to boost its performance. However, increase in pilot compensation, depreciation cost and stiff competition from ultra-low fare carriers could pull the margins down going forward.

JetBlue currently carries a Zacks Rank #3 (Hold).

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