JetBlue Creditors Hire Bankruptcy Advisers—As $2 Billion In Frequent Flyer Debt Hits 42 Cents On The Dollar

A group of JetBlue’s creditors has hired bankruptcy advisers after $2 billion in bonds backed by its TrueBlue frequent flyer program fell to 42 cents on the dollar. The airline’s shareholders have already lost most of their investment. Now lenders are organizing to protect theirs. The Wall Street Journal reports that the creditors are working with PJT Partners. JetBlue shares closed Friday at $2.63. I discussed this week whether a stock falling dropping below $2 is a bankruptcy warning. Having lenders hire restructuring specialists is.. a more concrete signal. The bonds had been trading near 80 cents only earlier this month. Even at 84 cents that was a concern and and they’d begun heading south earlier this month. These are secured creditors with a claim against JetBlue’s best, highest margin business – its frequent flyer program, and the revenue from its Barclays credit card. It suggests risk in $197.5 million annual interest that should be its most likely to pay out. JetBlue, for its part, says it’s confident in its strategy and progress toward profitability. Should JetBlue Have Considered Leaving The Airline Business? In July 2022, I wrote that JetBlue should consider exiting the airline business instead of buying Spirit. The argument being made for the acquisition was that JetBlue had to grow, couldn’t grow enough organically, and therefore had no choice but to buy another airline. That never made sense to me. A company doesn’t owe management a larger airline to run. It owes shareholders a sensible use of their money. Buying Spirit meant paying a large premium, raising its costs, removing seats from its planes, spending money on new interiors, and undertaking a complicated integration – all while increasing the costs on the Spirit side to build a JetBlue operation that wasn’t making money. It seemed like if there wasn’t a better way to earn a return by flying then returning the money to shareholders or investing it elsewhere would be better. After they lost the American Airlines partnership and the Spirit deal, I argued they needed to fix their operation, rebuild Boston, retreat from weak flying and find a new larger airline partnership. They actually did some of that, while costs increased. I recently included Robin Hayes among the worst airline leaders in history. He inherited a product customers liked and valuable positions in New York and Boston. He left poor reliability, a degraded passenger value proposition and wasted time and money on a failed acquisition that paid Spirit shareholders more than $500 million without buying the airline. (Actually succeeding in buying the airline – after the logic for it to support growth allowed by partnerin with American was lost – would have been even worse.) In 2023, Hayes acknowledged they’d neglected the potentially most profitable avenue for their business, TrueBlue, and they were playing catch-up – an extraordinary error for an airline whose strongest markets are in major financial and spend centers! Now Joanna Geraghty is trying to fix the business while financing the time necessary to make that happen. JetBlue Is Burning Cash Even Before Hitting Their Wall of Debt JetBlue’s June 30 balance sheet showed $2.2 billion in unrestricted cash and investments, an undrawn $600 million credit line, and $8.5 billion in debt and finance leases. Scheduled principal repayments were due: Period Amount Remainder of 2026 $236 million 2027 $478 million 2028 $582 million 2029 $1.835 billion 2030 $656 million Thereafter $4.691 billion That leaves out interest and the cash they need to run and improve the airline. About 67% of their assets at book value are mortgaged, and it’s not clear how much they can raise against the rest. They claim $6 billion in unencumbered assets but they surely can’t raise another $6 billion, and their financing costs are likely to only go up. And there are severe restrictions in their mortgage on the frequent flyer program including at least $750 million of quarter-end liquidity and a maximum senior debt to collateral ratio of 62.5%. Failing either test would divert credit card revenue to accelerate repayment of debt. Credit card processors could also hold back revenue from ticket sales as a hedge against continued operations, which only serves to accelerate any cash crunch. We’ll learn more with JetBlue’s third quarter earnings call on Tuesday. JetBlue’s Turnaround Is A Race Against Time JetBlue is concentrating on their East Coast leisure network, says they’re improving reliability, adding premium products to boost revenue (while further degrading standard coach) and trying to earn more their credit cards with lounges and updates to the frequent flyer program. Second quarter earnings showed higher revenue, though slightly lagging the industry, but real improved cash from Barclays with new premium card acquisitions up almost 40% (as you’d expect – it didn’t make sense to apply for the high annual fee credit card whose primary benefit was lounge access before there were any lounges to access). Fort Lauderdale revenue per available seat mile increased 11% despite nearly 40% more capacity. They still had a $141 million operating loss in the second quarter, so they wouldn’t have made money even if interest expense was zero. The cost of fuel is up, but JetBlue’s problems long predate that. United May Want JetBlue In Bankruptcy On United’s Wednesday earnings call, Jamie Baker asked Scott Kirby why United shouldn’t be a potential solution for JetBlue as it considers restructuring. Kirby replied: So I’m not going to create any new news. I just have nothing new to add on that. Kirby, who opines on almost anything – including wanting a national wealth tax and near-100% inheritance tax – simply moved on, refusing comment. I wrote in May that a United acquisition would make sense only in the context of a controlled bankruptcy. Kirby had said that JetBlue’s losses were too large and that they’d need an improvement of about 25 percentage points in its margins to make an acquisition work. JetBlue’s market cap is now less than $1 billion. There’d be an acquisition premium, but buying the shares cheap doesn’t remove the debt which approaches $9 billion. Combining the airlines also means integration costs and bringing employees onto United’s higher pay scales. United would value New York JFK, JetBlue’s position in Boston, and a South Florida hub. It already gets some benefit from its JetBlue partnership. And they’re well positioned to buy assets to provide liquidity. Most of JetBlue’s assets are pledged, but shedding some of those that United is less interested in or cramming down obligations against them, could make them a more attractive target. United doesn’t necessarily need the planes! Topics on this page