Fitch Ratings-Chicago-02 March 2017: Fitch Ratings has affirmed the Long-Term Issuer-Default Rating (IDR) for JetBlue Airways Corp. (JBLU) at ‘BB-’. The Rating Outlook has been revised to Positive from Stable. Fitch has also affirmed JBLU’s senior secured credit facility at ‘BB+/RR1’. Fitch has withdrawn the company’s unsecured rating following the conversion of all of its outstanding convertible notes in 2016.

KEY RATING DRIVERS
The rating encompasses JBLU’s strong credit metrics, consistent profitability, growing domestic presence and its solid financial flexibility. The rating is also supported by the company’s meaningful debt reduction over the past few years and its continued commitment to a healthy balance sheet.

JBLU’s Positive Outlook reflects credit metrics that are in-line with or stronger than other airlines rated in the ‘BB’ category. Fitch may upgrade the rating within the next year should the company maintain its financial performance and credit metrics in the face of moderately higher fuel prices, the current competitive environment, or in the case of an economic downturn.

Fitch’s primary ratings concerns revolve around JBLU’s growth strategy which is more aggressive than its peer group, and requires heavy spending on aircraft deliveries over the next few years. The increased aircraft related capex is a critical part of JBLU’s capacity plans but it will put pressure on FCF over the intermediate term and will most likely lead to incremental borrowing. These risks are offset by the company’s sizable liquidity balance and its successful track record of growth. Fitch will also monitor JBLU’s recent increased focus on returning cash to shareholders but, at this time, considers it a minimal concern due to the strength of the company’s balance sheet. Longer-term concerns also include the strengthened competitive position coming from the major network carriers as their financial performance has improved and the rapid growth of ultra-low cost competitors. Other risks include cyclicality and the high degree of operating leverage that is typical for the airline industry

STABLE EXPECTED FINANCIAL PEFORMANCE DESPITE HEADWINDS
After expanding EBIT Margins by more than 10 percentage points in 2015, JBLU increased margins again in 2016 by 80bps to 20.1%. The company’s cumulative margin improvement has outpaced its competitors over the last two years. These improvements were driven by the introduction of Mint on transcon routes, Fare Options, cabin restyling, and low fuel prices. Fitch expects operating margins to decrease by 2 to 6 percentage points in 2017 primarily due to higher fuel prices and our forecasts for a 1.5% to 3.5% increase in non-fuel unit costs related to shorter stage length and wage increases. Fitch expects these types of cost pressures to be felt across the industry. Fitch’s current forecast for 2017 incorporates a jet fuel price of $1.80/gallon, representing a roughly 28% increase from JBLU’s average price paid in 2016 of $1.41. In addition to high fuel prices, JBLU may face a soft yield environment in key focus cities. The company competes with major legacy carriers in Boston and will face heavy upcoming growth from both low-cost and and legacy carriers in South Florida.

Despite higher fuel prices, wage increases and the revenue environment remaining relatively soft, JBLU’s operating margins will continue to be higher than pre-2015 margins and in the upper echelon of its North American peers over the next few years. Fitch believes pressures on margins will be partially offset by the continued expansion of JBLU’s Mint product, aircraft densification, increasing ancillary revenues, and recent cost initiatives. JBLU is scheduled to take delivery of 15 A321-200s in 2017, 14 of which will have the Mint configuration. The Mint A321s tend to produce higher margins due to the revenue premiums this aircraft receives on transcon routes. JBLU will be adding more transcon routes from JFK and BOS and new transcon routes from Fort Lauderdale-Hollywood (FLL) in the next two years.

JBLU’s cabin restyling will increase capacity by adding 12 seats to its current A320s. By densifying its average seating configuration, JBLU will add the equivalent of roughly 10 to 11 new A320s at a much lower total capital investment to its A320 fleet. Additionally, Fitch expects JBLU’s higher margin ancillary revenue base to grow by mid-single digits in over the next few years.

Fitch expects JBLU’s CASM-ex fuel from 2018-2020 to slightly increase year over year as JBLU’s structural cost initiatives, which begin in 2017, should partially offset cost pressures from maintenance and wage increases. Initiatives will focus on IT investments to improve the efficiency of the operations and maintenance groups. The investments will also drive airport costs down, while improving self-service technology for customers. JBLU expects to reach a run-rate of $250 million to $300 million in cost savings by 2020. Fitch views this goal as achievable given that the scale of the projected savings is reasonable as it relates to JBLU’s overall cost structure and given the success of cost initiatives at competing airlines in recent years.

HEALTHY BALANCE SHEET
As of Dec. 31, 2016, Fitch calculates JBLU’s total adjusted debt/EBITDAR at 2.1x, down from 2.5x at year end 2015. Fitch expects the company’s leverage to slightly increase over the next three years driven both by lower EBITDAR expectations (higher fuel prices, increased wages) and some debt funded aircraft deliveries. JBLU’s leverage is now below several peers that Fitch rates in the ‘BB’ category. Leverage improvement in 2016 was largely driven by lower fuel costs, increased capacity, and amortization of debt. The company used cash flow to fund $377 million in debt repayments for the year. The company continues to buy aircraft off of leases, which represents its most expensive form of financing. JBLU’s unencumbered asset base as of year-end 2016 stands at 97 aircraft and 32 spare engines. Fitch considers high quality unencumbered aircraft to be a good additional source of financial flexibility. The company is unlikely to further delever as it focuses on capital investments and returning cash to shareholders. Fitch estimates that adjusted debt/EBITDAR will remain between 2.3x and 2.7x over the intermediate term.

HEAVY AIRCRAFT DELIVERIES PRESSURE FCF

The company’s growth strategy drove the decision to take on significant aircraft deliveries over the next few years. In July of 2016, JBLU announced that it will take delivery of five additional A321s in the second half of 2017, raising total aircraft deliveries to 15 and capex to $1.2 billion-$1.4 billion for the year. Aircraft deliveries will range from 11 to 21 during 2017 to 2019 compared with a range of 9 to 12 aircraft deliveries from 2014 to 2016. Capex will average $1.3 billion per year over the next few years compared with an average of $940 million over the last three years. FCF will be pressured over the intermediate-term due to the uptick in capex. Fitch projects FCF to be in the range of $50 million and ($100) million for 2017. The company will use a mix of debt and cash to finance its aircraft deliveries for 2017. Fitch expects JBLU to generate a sizable amount of positive free cash flow in 2018 due to a lull in aircraft related capex.

LIQUIDITY
JBLU’s liquidity is supportive of the ratings. As of Dec. 31, 2016, JetBlue had a cash and cash equivalents balance of $433 million, short-term investment securities of $538 million and an undrawn balance of $400 million on its revolving credit facility. Fitch considers total liquidity to be more than adequate to address near-term needs. Upcoming debt maturities are manageable over the next three years. Fitch forecasts that JBLU’s cash on hand and operating cash flow generation would cover its capital expenditures in the near term, however the company will borrow to fund aircraft deliveries.

KEY ASSUMPTIONS

—Mid-to-high single digit capacity growth throughout the forecast period;
—Continued stable/slow growth in demand for U.S. domestic travel;
—RASM is slightly negative to flat y-o-y in 2017 followed by a slight increase in RASM thereafter;
—Jet Fuel prices equating to roughly $58/barrel on average for 2017, increasing to approximately $70/barrel by the end of the forecast period;
-CASM ex. fuel increases by about 3.3% in 2017.

RATING SENSITIVITIES

Positive: The ratings could be upgraded in the next year as Fitch gains more comfort that JBLU’s credit profile is sustainable through a downturn. Future developments that may, individually or collectively, lead to a positive rating action include:

—Adjusted debt/EBITDAR maintained below 2.5-3.0x;
—FFO fixed charge coverage remaining above 3.5x;
—Continued positive or neutral FCF generation. Intermediate-term FCF may be below Fitch’s previous forecasts, in part due to higher than expected capex. The agency does not view this as an impediment to a potential future ratings upgrade unless FCF were to turn more sharply negative.

Future developments that may, individually or collectively, lead to a negative rating action include:

—Sustained negative free cash flow;
—A change in management strategy to direct cash to dividends/share repurchases at the expense of a healthy balance sheet;
—Adjusted leverage increasing to the mid to high 3x range;
—FFO fixed charge coverage dropping to below 2.5×.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions:

JetBlue Airways, Corp.
-IDR affirmed at ’BB‘;
—Senior secured credit facility affirmed at ’BB+/RR1’;
—Senior unsecured debt withdrawn.

The Rating Outlook is revised to Positive from Stable