Fitch Ratings has upgraded JetBlue Airways Corporation's (JBLU) Long-Term Issuer Default Rating to 'BB+' from 'BB'. The Rating Outlook is Stable. Fitch has also affirmed its ratings on JetBlue's 2013-1 and 2019-1 series of EETCs.
The upgrade reflects JetBlue's strong credit metrics, consistent profitability, successful cost containment efforts, and its solid financial flexibility. The rating is also supported by JBLU's continued commitment to a healthy balance sheet.
Fitch's primary ratings concerns revolve around heavy capital spending required to fund JBLU's growth strategy and the replacement of its E190 fleet. Higher aircraft related capex is a critical part of JBLU's capacity plans but it will put pressure on FCF through 2024 and will most likely lead to incremental borrowing. These risks are offset by the company's adequate liquidity balance, its growing pool of unencumbered aircraft and its successful track record of growth.
Fitch is also monitoring JBLU's increased focus on returning cash to shareholders. Simultaneous pursuit of share repurchases and material investment in aircraft is likely to drive higher leverage over the next several years, though Fitch expects metrics to remain appropriate for the 'BB+' rating. Longer term concerns also include a tough competitive environment in the U.S. caused by rapidly growing ULCCs and financially healthy network carriers. Other risks include cyclicality and the high degree of operating leverage that is typical for the airline industry.
RATING ACTIONSENTITY/DEBTRATINGPRIORHIDE RATING ACTIONSJetBlue Airways CorporationLT IDRBB+ UpgradeBB senior securedLTBBB- UpgradeBB+ JetBlue Airways Pass Through Trust Series 2019-1 senior securedLTAA- AffirmedAA- senior securedLTA AffirmedA JetBlue Airways Pass Through Trust Series 2013-1 senior securedLTA+ AffirmedA+ VIEW ADDITIONAL RATING DETAILS
KEY RATING DRIVERS
Successful Cost Control Efforts: JetBlue has completed the structural cost reduction program that it laid out in 2016, leading to more manageable unit cost increases over the past two years and company forecasts for modestly declining cost per available seat mile excluding fuel (casm-ex) in 2020. Casm-ex was up by 0.8% in 2019, which Fitch considers a solid result given that JBLU had to absorb higher labor costs from the 2018 ratification of a new pilot contract. Fitch expects to see manageable unit cost over the next one to two years as the company sees run-rate benefits from its structural cost program and operates an increasingly efficient fleet as A321 NEOs and eventually A220s play a more prominent role. Cost inflation had been a concern as unit costs had outpaced the industry through much of the past decade. By YE 2019, the company had achieved run-rate cost savings of $314 million through its structural cost program, above its initial target of $250 million-$300 million. The program covered a range of initiatives including integrating technology into a number of areas, driving down airport costs, improving productivity tools surrounding maintenance, and improving contracts with suppliers.
Stable Profitability Forecasted: Fitch expects the company to generate flatt-ish operating margins throughout our base case forecast. Fitch's projections include only modestly positive unit revenues over the next several years as a strong demand environment in the U.S. is partly offset by stiff competition among airlines, keeping a lid on more material unit revenue growth. Top-line growth should be supported by the roll-out of JBLU's Fare Options 2.0 (basic economy product to compete with current offerings from network carriers and the ULCC's). Revenue expectations combined with manageable unit costs should keep margins roughly in line with 2018 and 2019 results, which Fitch considers healthy, but below peak levels generated between 2015-2018 after fuel prices collapsed. Fitch's current forecast for 2020 incorporates a jet fuel price of $2.20/gallon, which is conservative to current market prices, potentially creating room for actual results to outperform our expectations.
Projected Top Line Growth: Fitch projects top line revenue growth in the mid-to-high single digits annually throughout the forecast based on continuing capacity expansion, a supportive demand environment, and growing non-ticket revenues. Timing around projected growth is made less certain by A321 deliveries that are being delayed due to production issues at Airbus. The upgauging potential and fuel efficiency offered by the A321 should be margin accretive for JetBlue and delivery delays represent a headwind, but they do not materially impact Fitch's forecast or our expectations that JBLU will operate with metrics that are healthy for the 'BB+' rating over time. JBLU received only six of the 13 A321 NEOs that were expected to be delivered in 2019 and it expects to receive a maximum of 11 in 2020, down from 14 that were previously scheduled.
Capital Spending and Tariffs: The company's growth and fleet replacement plans will drive significant aircraft deliveries over the next four to five years. JBLU expects to take delivery of nearly 150 aircraft by the end of 2025, consisting of 79 A321 NEOs and 70 A220-300s, representing a sizeable commitment compared to the company's current fleet of 259 planes. However, the timing around deliveries will ultimately slip somewhat due to rolling delays from Airbus.
Capex may come in above prior expectations due to the imposition of tariffs on Airbus products. The A220s are not subject to the tariffs and at least some of JBLU's A321s will likely be built in Airbus' Mobile, AL facility, which is exempt from tariffs. Nevertheless, the tariffs could lead to a cumulative impact north of $175 million over the next four years depending on the distribution of where the aircraft are manufactured, and assuming that no deal is struck to reduce or eliminate the tariffs in the meantime. Fitch believes that Airbus is likely to absorb a portion of the cost, though the outcome of any negotiated settlements are uncertain at this time.
Higher capital spending is likely to limit or potentially drive negative FCF over the next several years. FCF pressures do not inhibit an upgrade because capital spending in the airline industry tends to be lumpy and uneven due the timing of aircraft deliveries. Fitch notes JetBlue does have some ability to defer future aircraft deliveries if it so choses like the company did in early 2017. Fitch expects FCF to be negative by around $200 million in 2020, down from $293 million in 2019. Fitch's forecast includes conservative assumptions including fuel prices of $2.15/gallon in 2020, flat unit revenue growth, and unit costs at the high end of JetBlue's guidance.
Leverage to Rise; Remain Manageable: As of Dec. 31, 2019, Fitch calculates JetBlue's total adjusted debt/EBITDAR at 2.4x, down from 2.8x at YE 2018. Lower leverage was driven primarily by changes to lease accounting rather than a fundamental improvement in the metric. Fitch expects JBLU's leverage to incrementally rise over the next three years driven primarily by debt funded aircraft deliveries. Fitch doesn't view this as a material ratings concern since JBLU's current leverage is modest and we believe that management will continue to prioritize a healthy balance sheet overall. Fitch estimates that adjusted debt/EBITDAR will remain between 2.5x and 2.9x over the intermediate term.
Solid Financial Flexibility: Financial flexibility is supported by manageable near-term maturities, solid liquidity and by JBLU's growing base of unencumbered assets. Fitch considers JBLU's unencumbered Airbus A320s and A321s to be high quality assets which should support capital market access in the case of a liquidity crunch. Fitch expects JBLU to further expand its base of unencumbered assets over the coming years as existing aircraft secured debt amortizes. Unencumbered aircraft also provide JBLU with strategic flexibility to reduce capacity if needed. JetBlue's unencumbered asset base as of 2018 stood at 107 aircraft and 44 spare engines. Fitch considers high quality unencumbered aircraft to be a good additional source of financial flexibility.
The 'AA-' rating on the class AA certificates is supported by a high level of overcollateralization (OC) and high-quality collateral supporting Fitch's expectations that senior tranche holders should receive full principal recovery prior to default even in a severe stress scenario. The rating is one notch below several comparable issuances that Fitch rates at 'AA' primarily due to a higher initial loan to value (LTV). The initial AA tranche LTV, as cited in the prospectus, is 46.5%. Fitch calculates the initial base LTV at 48.6% using appraisal values from independent appraisal firms. Fitch's maximum stress case LTV under our 'AA' stress scenario is 92.1% when stresses are applied two years in the future. Comparable transactions rated at 'AA' typically have initial LTVs of around 40%, and maximum stress scenario LTVs in the mid-to-upper 80% range.
Similarly, the 'A' rating on the subordinated certificates is supported by OC sufficient for the tranche to pass Fitch's 'A' level stress scenario. This level of OC provides a sufficient amount of protection for the senior tranche holders. The initial A tranche LTV, as cited in the prospectus, is 61%. Fitch calculates the initial base LTV at 63.7%. Fitch's maximum stress case LTV using our 'A' stress scenario is 89.5% when stresses are applied two years in the future.
The 'A+' rating is primarily based on an increasing level of overcollateralization due to the relatively rapid amortization profile of this transaction compared to other EETCs. Fitch calculates the current 'A' tranche LTV at 52.7% using appraisal values from independent appraisal firms. Fitch's maximum stress case LTV (the primary driver for the 'A' tranche rating) through the life of the transaction is 68.9% (when stresses are applied two years in the future). This level of OC provides a more sizeable amount of protection than many EETCs issued by other US airlines that Fitch rates at 'A'. The transaction is backed by 14 Airbus A320-200s delivered between 2002 and 2012. Fitch considers the A320-200 to be a Tier 1 aircraft, though we assume that the planes migrate to Tier 2 status as they reach 15 years of age (which leads to higher depreciation and values stresses in Fitch's modelling). The oldest aircraft are scheduled to fall out of the collateral pool prior to the transaction's maturity. Two aircraft drop out in March 2021 and four more drop out in March 2022, leaving eight aircraft in the pool for the final year prior to maturity.
JetBlue has shown significant improvement in its credit profile over the last five years. Despite the upgrade to 'BB+', the company's leverage metrics remain strong for the rating and mirror those of Delta Airlines (BBB-), and Alaska Air (BBB-).
Profitability is in line with similarly rated peers. However, profit margins have come down from above industry-average levels seen in 2015-2018 due to rising costs and tough competition. For 2019, the carrier generated EBIT margins of 10.4% compared to margins of 7.4% for Air Canada and 10.3% for United.
JetBlue's network and route diversification still lags behind the big four U.S. carriers, but has strengthened as the carrier has continued to grow. The company has built a more defensible network with a leading market share in each of its three main focus cities (BOS, JFK and FLL) JBLU also offers a compelling product compared to competitors with its relatively generous leg room and in-flight offerings.
The 'AA-' ratings on the 2019-1 class AA certificates are in line with the British Airways 2018-1 transaction and one notch below several recent transactions issued by American, United and Air Canada. The one-notch differential is primarily driven by modestly higher starting LTV ratios for JetBlue compared to most recent precedents.
The 'A' rating on the class A certificates is in line with several other class A certificates issued by United Airlines, American Airlines, and others (i.e. UAL 2018-1, 2016-1 and 2016-2, Air Canada 2017-1, American 2017-2). Stress scenario LTVs for the JBLU 2019-1 class A certificates are comparable to its peer group.
The 'A+' rating on the JBLU 2013-1 class A certificates one notch above the ratings on several class A certificates issued by other 'BB' category airlines. The rating differential is primarily driven high levels of OC that causes the JBLU 2013-1 transaction to pass Fitch's 'A' level stress scenario with a material amount of headroom compared to peers. JBLU 2013-1 also benefits from a fast principal paydown period, low tail risk, and the improving strength of JetBlue's credit profile.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
--Capacity growth in the mid to high-single digits over the forecast period North American Air traffic demand remains steady;
--Some incremental borrowing to fund aircraft deliveries throughout the base case.
--The company continues to return cash to shareholders;
--Jet Fuel ranges from $2.15 per gallon to $2.30 per gallon during the base case.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
--FCF margins remaining in the low-to-mid-single-digits as a percentage of revenue.
--EBIT margins remaining in the low to mid-teens.
--Sustained commitment to conservative financial policies.
--Adjusted debt/EBITDAR sustained below 2.75x.
--FFO fixed charge coverage remaining above 4x.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
--An exogenous shock that causes demand for air travel to drop significantly or a fuel shock that is not adequately offset by rising fares.
--Change in management strategy that favors shareholder returns at the expense of a healthy balance sheet.
--Sustained adjusted debt/EBITDAR above 3.5x.
--FCF margins declining to neutral on a sustained basis or FFO fixed charge coverage falling below 3.5x on a sustained basis.
LIQUIDITY AND DEBT STRUCTURE
Healthy Liquidity: As of Dec. 31, 2019, JetBlue had cash and cash equivalents balance of $959 million, and short-term investment securities of $369 million. In August 2019, the company upsized its revolving credit facility from $425 million to $550 million, along with extending the maturity out to August 2023. Total liquidity, including the undrawn revolver, is equivalent to 23.2% of LTM revenue, which is near but slightly below the industry average. Debt maturities are well structured and range between $298 million and $341 million annually through 2023, which should be addressable through cash flow from operations and debt financing on future aircraft deliveries.
Revolver: The $550 million revolving credit facility is secured by take-off and landing slots at JFK, Newark Liberty, LaGuardia, and Washington Reagan, and is set to mature in August of 2023. JBLU's other facility, which was entered into during 2012, is a $200 million revolving line of credit. The credit facility is renewed annually and secured by investment securities held at Morgan Stanley. Fitch does not include this revolving credit facility in its total liquidity calculation to avoid "double counting" since the facility is secured by the investment securities on the balance sheet that we consider a part of readily available cash.
Other: JetBlue's debt primarily consists of secured fixed and floating rate notes backed by aircraft and related assets. Most recently JBLU accessed the EETC market, issuing a $772 million transaction across two tranches in November 2019. The EETC was secured by 25 A321s. .
2019-1 EETC Rating:
Fitch's EETC criteria state that in order for a transaction to achieve ratings in the 'AA' category all aircraft in the transaction must remain under 15 years of age throughout the life of the transaction.
In the 2019-1 transaction, three out of the 25 aircraft in the pool just exceed 15 years old by the final distribution date. All other aircraft in the pool remain under 15 years old throughout the transaction. Due to the attractive nature of the overall collateral pool, the small portion of the total pool that exceeds 15 years, and high levels of overcollateralization expected at the time the transaction matures, the age of the collateral does not impact the credit quality of the transaction.
SUMMARY OF FINANCIAL ADJUSTMENTS
A multiple of 7.5x was used when capitalizing lease expenses to approximate a 7.0x multiple on aircraft rent and 8.0x on other rents.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.