Embraer maintenance costs cut into JetBlue's profits

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JetBlue Airways attributes the decline in its first quarter earnings to weakened travel demand, caused by the lingering effects of Hurricane Sandy and unplanned maintenance costs on the engines of its Embraer 190 aircraft.

In an earnings call Thursday, the New York-based carrier reports operating income of $59 million for the first quarter, down 33% from the first quarter of 2012.

Operating revenue during the period increased 8% to $1.3 billion, but operating expenses climbed 11% to $1.24 billion.

The carrier reports a 4.6% increase in operating expenses per available seat mile, to 12.23 cents.

Expenses were pushed higher by maintenance costs, which climbed 30% to $114 million during the quarter, and salaries, benefits and wages, which increased 10% to $280 million. Fuel expenses climbed 8% to $467 million, JetBlue reports.

JetBlue chief executive David Barger says maintenance costs increased because the carrier performed more than expected overhauls on the General Electric CF34-10E engines that power its 54 Embraer 190 aircraft.

The extra overhauls, which cost the airline $20 million, are aimed at increasing reliability and service life, Barger says.

JetBlue had planned to perform 20 of the restorations this year, but now expects to complete 30, including 12 completed in the first quarter, the airline says.

Barger calls the accelerated maintenance "teething pains," noting that JetBlue was the launch customer of the Embraer 190.

"As a young airline there was a lot of burden on us to be the worldwide launch customer for this airframe," he says. "I would have loved to have been a follower."

Despite higher maintenance expenses, Barger adds that the Embraer 190 has been critical to the airline's business, particularly its success in the Boston market.

He says business-focused routes from Boston to cities like Philadelphia and Houston will generate high-yield revenue. The Philadelphia and Houston flights are scheduled to begin in the coming months.

The carrier is also moving forward with international expansion at Fort Lauderdale, with Barger announcing Thursday that the airline plans to begin flights from Fort Lauderdale to Lima, Peru later this year pending government approvals.

JetBlue's results also reflect the effects of Hurricane Sandy, which made landfall on the New York and New Jersey coast in October 2012.

Damage from the storm and related flooding caused passengers to cancel or postpone trips, executives say, and led area schools to cut short the week-long winter break, which falls during the typically heavy President's Day travel period in mid-February.

As a result, JetBlue's revenue took a $25 million hit, the airline says.

JetBlue says it has recently seen strong growth of ancillary revenue, particularly from the sale high-margin extra-legroom seats at the front its aircraft and an expedited security screening option.

Chief financial officer Mark Powers says ancillary revenue should increase 10% to 15% in 2013.

Powers adds that JetBlue expects costs to continue rising this year, with CASM predicted to climb 3% to 5% in the second quarter and rise up to 4% for all of 2013.

The airline is also optimistic about revenue, and executives say yield softness seen in April has ended.

"In May and June we feel good about the revenue environment," says executive vice president and chief commercial officer Robin Hayes. "We feel more positive about what we are seeing going forward."

JetBlue expects to take delivery this year of an addition three A320s, four A321s and six Embraer 190s.

The new A320s will have sharklets, which Powers says reduce fuel costs by 3%.

Unlike other airlines that have added extra seats to aircraft in recent months, JetBlue plans to stick with its 150-seat configuration on the A320s, says Hayes.

That's because the airline would need to add an extra flight attendant with more than 150 seats. Three flight attendants work the A320 flights.

"We feel we have optimized the revenue around the 150-seat [platform]," Hayes says.

Executives also discussed industry issues.

Barger expressed frustration with the FAA's decision to furlough air traffic controllers, a move the agency made in response to congressionally-mandated budget cuts.

The furloughs left major airports like those in New York understaffed, and caused thousands of delays nationwide in each of the last few days.

The furloughs began on 21 April and the FAA says they will continue through September, but President Barack Obama has expressed interest in recent days in signing legislation that would end the furloughs.

Barger says it's too early to assess the financial impact of the furloughs.

The carrier is working with lawmakers, the Obama administration and trade group Airlines for America to "help forge a political solution to this most regrettable, but wholly political, situation," Barger says.