During the past few years, JetBlue Airways (NASDAQ: JBLU) has repeatedly modified its Airbus (NASDAQOTH: EADSY) order plans as the company's fortunes have changed. Airbus has been very accommodating all this time, as JetBlue is a very important customer for its A320 aircraft family.
In conjunction with its recent Q1 earnings report, JetBlue announced several more changes to its Airbus order book. Most notably, it will defer the delivery of 13 aircraft by about four years. This looks like a good move for JetBlue. It will reduce capex over the next several years and probably also improve JetBlue's return on invested capital.
JetBlue's shifting plans
The recent volatility in JetBlue's fleet plan began in late 2013. At that time, the company ordered 35 A321 and A321neo planes from Airbus as part of a shift toward larger aircraft. Under this fleet plan, JetBlue was due to ramp up its growth significantly, taking 15 new planes from Airbus annually between 2016 and 2020, up from just nine in 2014.
A year later, JetBlue decided that its growth plans had been too ambitious. Furthermore, by then, it had decided to retrofit its A320 fleet with extra seats. This provided a capital-efficient means of growing. As a result, JetBlue deferred 18 aircraft from 2016-2018 to 2022 and beyond. That meant it would take no more than 10 aircraft in any year from 2016-2018.
But in 2015, JetBlue's profitability soared, powered by falling fuel prices and the immense popularity of its new premium transcontinental service, Mint. Mint was so successful that by mid-2016, JetBlue was eager to accelerate its rollout. It therefore ordered 30 more A321s and A321neos from Airbus.
This restored JetBlue's original plan to add 15 aircraft to its fleet in 2017. It also put JetBlue on track to buy an average of about 20 Airbus planes annually between 2019 and 2022.
What JetBlue is doing now
In the past couple of quarters, JetBlue's profitability has declined precipitously, as costs started to rise while unit revenue has continued falling. JetBlue does expect that its performance will improve significantly beginning in the second quarter. Nevertheless, it has cut its 2017 capacity plan to better match supply with demand.
Based on its revised growth plans, JetBlue decided to modify its aircraft order book again. It has deferred eight A321neos from 2019 to 2023 and deferred another five A321neos from 2020 to 2024.
JetBlue has also delayed the delivery of three A321neos from 2018 to 2019 while accelerating an equal number of current-generation A321s from 2019 to 2018. This will give engine supplier Pratt & Whitney more time to resolve some "teething" issues with its new engines for the A320neo family.
Cutting capex is the right move
These order deferrals will reduce JetBlue's capex budget by as much as $800 million between now and the end of 2020. This will free up more cash for share buybacks -- and perhaps an eventual dividend.
Most importantly, these order deferrals won't hamstring JetBlue's growth. After all of these changes, JetBlue has 11 Airbus planes on order for 2018, followed by 13 orders each in 2019 and 2020. Additionally, six of the A321s arriving in 2017 will come in the fourth quarter, so most of the growth associated with those aircraft will fall in 2018. JetBlue's project to add 12 seats to each of its A320s is also about to kick off. That will contribute some additional capacity growth over the next three years.
The net result is that JetBlue is well positioned to grow capacity at an average annual rate of about 6%-8% through 2020 even with its reduced order book.
These order deferrals do mean that JetBlue is unlikely to retire any of its existing A320s in the next few years -- something the company had been contemplating recently. Fortunately, that's also good news for shareholders. Even JetBlue's oldest A320s are only about 17 years old, whereas the typical useful life of an A320 is 25 years. Retiring A320s early and replacing them with new planes would have been an inefficient use of capital.
JetBlue's new fleet plan seems to strike a healthy balance between enabling growth and keeping capital spending under control. As a result, JetBlue is likely to have more and more cash available to distribute to its shareholders in the coming years.
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