Investing.com -- Fitch Ratings has revised its Rating Outlook for JetBlue Airways Corp. (NASDAQ: JBLU ) from Stable to Negative, while affirming its Long-Term Issuer Default Rating (IDR) at ’B’. The change in outlook reflects the expected impact of a decrease in domestic leisure travel demand, influenced by a weaker macroeconomic environment, which is projected to put more pressure on JetBlue’s margins than initially anticipated.
The credit profile of JetBlue is considered weak for the ’B’ rating due to strained operating margins and debt accrued since the pandemic. These pressures are likely to delay JetBlue’s path to profitability, keeping leverage metrics outside negative sensitivities for an extended period.
Fitch may take negative rating actions if JetBlue fails to show near-term profitability and cash flow improvements that preserve and generate liquidity, and achieve coverage metrics above 1.5x. The current rating is supported by JetBlue’s strong liquidity balance, available financing options, and progress in strategic initiatives to improve profitability and cash flow.
Fitch has affirmed the subordinated tranche ratings of the 2019-1 and 2020-1 transactions at ’BB+’. Both class B certificate ratings are notched up from the JetBlue’s IDR (’B’/Negative). The subordinated tranche ratings remain supported by a strong affirmation factor and presence of a liquidity facility, which is reflected in the four-notch uplift.
Fitch has also affirmed JetBlue’s 2019-1 class AA certificates at ’A+’ and affirmed its class A certificates at ’BBB’. The class AA certificates remain well overcollateralized, while the rating of the class A reflects limited loan-to-value (LTV) headroom under the ’BBB’ stress scenario and the slow rate of amortization in the transaction, making the rating susceptible to marginal value declines. Fitch has also affirmed JetBlue’s 2020-1 class A certificates at ’A’. These ratings are supported by sufficient overcollateralization and high collateral quality.
Fitch expects low-cost carriers like JetBlue to be at a disadvantage compared to full-service airlines amid weaker domestic travel demand. Larger airlines are now better equipped to attract price-sensitive travelers through basic economy options and benefit from competitive advantages due to their extensive route networks and appealing loyalty programs. The current demand uncertainty comes at a difficult time for JetBlue, as the airline is amid a turnaround program, and needs to drive improved unit revenues to offset higher operating costs and reverse recent operating losses.
Fitch expects unit cost pressure to remain a headwind in 2025, partly due to capacity limitations caused by Pratt & Whitney engine availability. The company is projecting flat total capacity in 2025 and a 5%-7% increase in non-fuel costs. Fitch believes JetBlue might reduce capacity plans based on softening demand, pressuring unit costs further. In fiscal 2024, JetBlue’s unit costs were 25% higher than pre-pandemic levels while unit revenues were up by 10.7% over the same period, resulting in operating losses every year since 2019.
Fitch believes JetBlue’s cash balance and remaining unencumbered assets provide some flexibility to manage through near-term demand weakness. Capital raised in 2024 allows JetBlue to fund upcoming aircraft deliveries with cash, which would add to its asset base, or finance deliveries to maintain cash. Required debt payments will rise to $705 million in 2026, which Fitch views as manageable given current cash balances. Aside from $325 million in convertible bonds due in 2026, JetBlue has limited major upcoming maturities. JetBlue ended 2024 with cash and short-term investments of $3.6 billion and full revolver availability.
Fitch considers the main aspects of JetBlue’s "JetForward" plan—such as exiting underperforming routes, improving operational execution, concentrating on core leisure markets, boosting ancillary revenues, and increasing focus on premium products—as sensible strategies likely to enhance margins over time. However, competition introduces uncertainty, especially with multiple U.S. leisure carriers adopting similar strategies. Fitch believes JetBlue’s plans have a higher likelihood of success compared to some competitors’ due to its strong market presence in high-value geographies and its brand strength relative to ultra-low-cost carriers.
Fitch projects JetBlue’s FCF will be significantly negative in the near term, at -$1 billion or more in 2025 and at least several hundred million dollars in 2026. FCF could approach break-even or turn slightly positive by 2027, driven by reduced capex and expanding margins. Capital spending is expected to be manageable, particularly beyond 2026, due to JetBlue’s 2024 decision to defer future aircraft deliveries. Despite the anticipated negative FCF, risks are mitigated by JetBlue’s liquidity and the potential to finance or manage forthcoming aircraft deliveries.
JetBlue’s capital raises in 2024 improved liquidity but exacerbated the company’s already high leverage. Fitch had previously expected improved profitability to reduce leverage to within negative sensitivities in 2026 or 2027. Fitch believes these targets will be more challenging in the current economic environment. Additionally, substantial planned capital spending and a higher interest burden, is likely to pressure cash flow, limiting the company’s ability to reduce debt in the near term. JetBlue’s total debt and lease liabilities were up by over 60% in 2024.
Margin headwinds stemming from Pratt & Whitney-related aircraft groundings are anticipated to continue through 2026. The airline estimates that a mid-teens number of aircraft will be grounded this year, peaking in the next one to two years. These groundings challenge JetBlue as the affected aircraft are the most efficient in its fleet, resulting in increased maintenance costs for other planes kept in service longer. JetBlue projects a three-point margin headwind in 2025 due to the groundings.
JetBlue’s ’B’ rating is above domestic peer Spirit Airlines (OTC: SAVEQ ), Inc. (NYSE:SAVE) (CCC+). While both JetBlue and Spirit demonstrate highly leveraged balance sheets, JetBlue has greater financial flexibility. JetBlue also benefits from a stronger market presence than Spirit in key markets such as New York and Boston, along with a more customer-friendly reputation. JetBlue’s leverage metrics are notably weaker than network peers such as American Airlines, Inc. (NASDAQ: AAL ) (B+/Stable) or United Airlines, Inc. (NASDAQ: UAL ) (BB/Positive), due to strained near-term profitability.
JetBlue’s operating margins remain well below pre-pandemic levels, and Fitch expects them to remain pressured in 2025, whereas larger network carriers have shown improvement in recent years. JetBlue is also more geographically concentrated than large network peers and generates less robust loyalty program revenues.
The certificates rated ’A+’ are one notch higher than ratings for several class A certificates issued by other carriers. Stress scenario LTVs for the 2019-1 transaction remain low and continue to support the ’A+’ rating. The 2020-1 class A certificates that are rated ’A’ compare well with issuances from American, Air Canada (TSX: AC ) and British Airways that are also rated ’A’. Rating similarities are driven by similar levels of overcollateralization and high-quality pools of collateral.
The ’BB+’ ratings on the class B certificates are derived through a four-notch uplift from JetBlue’s IDR. The four-notch uplift reflects a high affirmation factor and benefit of a liquidity facility.
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