JetBlue bulks up on liquidity to ride out COVID-19 travel downturn

JetBlue Airways is one of the better-positioned airlines to withstand the pandemic-driven travel downturn after making a series of moves to boost liquidity, culminating in a new CARES Act loan agreement last week, according to five sources following the company. 

And while the new government loan should help to provide a liquidity cushion for roughly two years at depressed travel levels, JetBlue’s medium-term outlook nevertheless hinges on a less-certain recovery in air traffic, since the borrower is still burning cash at a steady clip, even after implementing cost control programs, the sources added. 

A meaningful recovery in air travel, in turn, could depend on travelers – and businesses – getting comfortable with the risks of travel while taking precautions, with the widespread availability of a COVID-19 vaccine still viewed as providing a potential inflection point for the industry.

For JetBlue, its exposure to leisure travel in the US better positions it for a quicker turnaround compared to airlines with more international and business-travel exposure, since companies in particular are expected to cut business-related travel in order to reduce exposure to potential liabilities.

In that vein, JetBlue operations should recover throughout 2021 and return to normalized operations by the end of 2022, sources said.

In the meantime, however, the company is burning roughly USD 7m of cash per day through 3Q20, which amounts to an annual burn of USD 2.5bn. This compares to a daily cash burn of USD 18m during the second half of March and USD 8m by the end of June. 

JetBlue has already implemented cost cutting measures such as suspending non-critical capex projects, discontinuing share repurchases, and reducing flying capacity. And while some labor costs could come down more, a further reduction of the company’s cash burn now largely depends on a demand uptick, the sources said.

Liquidity stockpile

As of 30 June, the company’s cash balance stood at USD 3.1bn and had zero available on borrowing facilities. Since June, the company has raised more than USD 2bn in additional liquidity, including EETCs, a USD 750m senior secured term loan and sale leaseback transactions. 

And earlier in the year, the company received USD 935m for payroll support from the government and a USD 1bn 364-day delayed draw term loan. Roughly USD 800m of the USD 1bn 364-day term loan has been repaid. 

By the end of 2020, JetBlue’s liquidity will shake out to roughly USD 4.5bn through USD 3.5bn of cash and USD 1bn of availability across its facilities at the end of 2020.

In a normal operating environment, the company should generate around USD 140m of free cash flow (3.7% of total debt) through USD 1.5bn of normalized EBITDAR, USD 1.2bn of capex and roughly USD 160m of interest expense.

Notwithstanding the thin free cash flow margins, JetBlue’s longer-dated maturity schedule allows for additional balance sheet flexibility, sources noted.

Flying above a safety net

On 29 September, JetBlue, along with fellow airliners Alaska AirlinesAmerican AirlinesFrontier AirlinesHawaiian AirlinesSkyWest Airlines and United Airlines, entered into CARES Act loan agreements with the US Treasury. 

JetBlue’s allocation is a USD 1.14bn Libor+ 275bps loan due 2025. The company has drawn USD 115m under the loan and is eligible to draw the remainder until March 2021. 

The loan is secured by a mix of aircraft collateral, loyalty program assets, intellectual property and certain accounts. The company may also pledge additional spare parts, slots, gates and routes, additional aircraft, property, ground support equipment flight simulators and equity interests. 

On 30 September, JetBlue also received USD 27.1m in additional payroll support from the government. 

Some investors were surprised that JetBlue tapped the CARES Act loan but noted the comparative terms of the deal were highly attractive, given the company’s mounting net debt balance and thin free cash flow margins even in normal times. “Their access to liquidity is much better through this government loan as far as terms go because they won’t be able to get these terms in the high yield market,” one of the sources said.

Should JetBlue require additional cash in the near term, however, the CARES Act loan restricts its capacity to issue pari passu debt, the sources said. That could push JetBlue into the high yield or leveraged loan market to pay back the government loan or raise liquidity.

On a relative value basis, sources placed JetBlue (Ba2/B+) as a safer bet than American (B2/B-) and United (Ba1/B+), but still below Delta Air Lines (Baa3/BB) and Southwest Airlines (Baa1/BBB) because of the size and reach of both airlines. Sources said JetBlue was slightly above Spirit Airlines (B1/B) because of its size and focus on leisure flying. 

JetBlue’s USD 581m 2.75% EETC notes due 2032 traded at 97.75 to yield 2.95% on 1 October from trades at 95.6 to yield 3.151% on 14 August, according to MarketAxess. The USD 172m 7.75% EETC notes due 2028 last traded yesterday (7 October) at 104.75 to yield 7%, in line with recent trades. 

The USD 750m Libor+525bps term loan due 2024 is quoted in the 99.583/100.125 context today, up slightly from quotes at 99.146/99.729 on 29 September, but down slightly from quotes in early September at 100/100.667, according to Markit. 

Spirit’s USD 850m 8% senior secured notes due 2025 last traded today at 107.082 to yield 5.966%, up from trades last week at 105 to yield 6.557%, according to MarketAxess. 

JetBlue did not respond to a request for comment. 

2020 Debtwire

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