B6 to Sell FIVE A-320s

[clickclickboom]

Capital Depreciation

Disclaimer: I don't profess to be an expert at airline finance, and this reply is not meant to be part of a Jetblue bashfest.

Unless the C-check costs over $40 million, I would say your logic is faulty; especially over the long term. It seems to me you are taking on over $200 million in long term debt to get rid of the C-checks on five aircraft. Is that an incorrect assumption? Please explain.

As for the example set forth by ClickClickBoom regarding selling debt (i.e. boats, motorcycles, airplanes, etc.). That only works when you don't turn around and buy a new "toy" to replace the old "toy". If you do, you haven't gotten rid of debt but increased it.

http://taxguide.completetax.com/text/Q14_2900.asp


Here is a great link explaining capital depreciation. When an asset is purchased it is depreciated over lets say 5 years. At the end of the 5 years if the asset is sold it is considered profit and must be treated as a gain.

Lets say that the management at jb is evaluating their needs over the 18-24 months.

They look at their new aircraft delivery schedule and see that there are 12 new planes coming in. In almost all cases the majority of those deliveries already have a sizable deposit paid down that is non refundable.

Lets also say that they have five aircraft that are paid for and depreciated that are perfectly fine aircraft but will be needing approximately 2 million each in heavy mx as well as 2-4 months of downtime.

These new birds are coming down the assembly line with their warranties, prime financing, etc etc etc...

It is not rocket science to realize that the better position for the company is to produce the revenue from the 5 used aircraft and refresh the fleet with a net gain of aircraft that are new.

I think it is a very smart move and this is not a new concept.. AA is dumping 19 older frames and the other legacies have parked hundreds of planes in the desert.. I can't image what the jb haters would be saying on this thread if jb was parking 5 planes in the desert now that would truly be interesting.

 

[Bavarian Chef]

Word on the street is that we are getting a lot of money for them. If we pull back to profitability because of cost cutting, smart deployment of 190s, money making short haul routes and increased fares -- without the benefit of selling those airbii, then who cares.

I move we postpone the rest of this thread until Jan 2007, when the 2006 report comes out. Any seconds?

 

[active_herk]

They look at their new aircraft delivery schedule and see that there are 12 new planes coming in. In almost all cases the majority of those deliveries already have a sizable deposit paid down that is non refundable.

Lets also say that they have five aircraft that are paid for and depreciated that are perfectly fine aircraft but will be needing approximately 2 million each in heavy mx as well as 2-4 months of downtime.

Ah..... the missing piece of the puzzle. It makes more sense to me now. I guess I should have realized that they would have some pretty big deposits down on the new aircraft, and they definitely wouldn't want to walk away from those deposits. I have to believe, however, that if you take away those deposits, they wouldn't have bought the five new aircraft to replace five older aircraft. It wouldn't have made much financial sense.

Regarding depreciation, it is a dual edged sword. It is true that they are able to "write off" some of the costs of the new airplanes creating a tax advantage. On the other hand, depending on the depreciation schedule, they can lose some of that tax benefit when it comes time to sell. If they have depreciated their assets (planes) below the level at which they are able to sell them, they will have to pay tax on the difference. If not, they should be able to deduct the difference as a capital loss. Not sure how Jetblue does it, but I would imagine an airplane has a useful life in terms of depreciation of greater than five years. With that being the case, in terms of taxable assets, they probably have some worth left to them and may not cause an additional tax burden on Jetblue.

Anyway, thanks for the explanation, it makes a little more sense than before.

 

[JP4user]

Denial is not a river in Egypt

Let's get rid of the older airplanes because they are to expensive to do routine maintainance and replace them with newer more expensive ones. Amazing what the mind can conjure up when fear takes hold. Anyone consider JB doesn't have the liquidity or available cash to do the checks?

Is this the plan for the entire fleet? Dump them all when the heavy checks come due? LMAO.

 

[metrodriver]

A new A320 has a list price of $62 mil. That is for a single plane ordered today. JB didn't order these planes today, rather several years ago (2003). they didn't buy one, they bought 65, with 50 options. The deal was worth 6.6 billion.

source: Airline Industry Information, 4-25-2003:
quote:

JetBlue Airways has placed an order with European aircraft manufacturer Airbus for 65 aircraft.
The New York-based airline has placed a firm order for 65 Airbus A320 aircraft, with an option to purchase 50 additional aircraft over the next eight years. Delivery of the new aircraft - worth an estimated USD6.6bn - will begin in 2004 and run through to 2011.
The airline has also placed a further order with IAE International Aero Engines AG to power up to 115 Airbus A320s with V2500 engines. end quote

I assume the options are for the same price and if all 115 planes are taken it would cost 6.6 bill. So each new plane is less than $50 million. 50-20=30million/5 years=6 million/year. A C-check a $3 mil + loss of revenue = 1 year payment

 

[Bavarian Chef]

Let's get rid of the older airplanes because they are to expensive to do routine maintainance and replace them with newer more expensive ones. Amazing what the mind can conjure up when fear takes hold. Anyone consider JB doesn't have the liquidity or available cash to do the checks?

Is this the plan for the entire fleet? Dump them all when the heavy checks come due? LMAO.

Jb has 400 million in cash (approximate, anyone with more time can look it up though). JP4? Do they still make that stuff?

 

[active_herk]

I assume the options are for the same price and if all 115 planes are taken it would cost 6.6 bill. So each new plane is less than $50 million. 50-20=30million/5 years=6 million/year. A C-check a $3 mil + loss of revenue = 1 year payment

The math is a little fuzzy here. You divided it out to 6 million/year, and I'll accept that. You are assuming I believe that by having the aircraft out of service you are losing around $3 million in revenue. I don't have the numbers, but I'll believe you. If you are going to look at it that way though, you have to subtract out the costs created in order to generate that revenue. Unless you have a 100% profit margin, I am assuming it will cost $2 million to $2.5 million (using an 18% to 33% profit margin... I think I am being generous here) to generate that $3 million in revenue. Therefore, you should only be adding 1/2 to 1 million to the $3 million C-check cost which works out to 2/3 of a year payment. But then again, that is only for one year. So you are losing $2 million the first year and then $6 million a year for the next 4 years per aircraft replaced. That works out to $130 million lost over 5 years for 5 aircraft. You do, however, have the benefit of depreciation.

 

[Andy]

I assume the options are for the same price and if all 115 planes are taken it would cost 6.6 bill. So each new plane is less than $50 million. 50-20=30million/5 years=6 million/year. A C-check a $3 mil + loss of revenue = 1 year payment

Dude, if you're going to do math in public, use a calculator. $6.6 bil divided by 115 aircraft = just north of $57 mil/aircraft. That err negates the rest of your math. BTW, how are you calculating loss of revenue on an aircraft undergoing C checks? Foolishly, I thought that C checks were a part of doing business and were accounted for by management.

The decision to sell 5 aircraft while continuing to take delivery on new aircraft is, to say the least, an odd strategy. IIRC, JBLU built an expensive mx hanger ... and now they're selling aircraft to avoid C checks?
I haven't taken a look at what JBLU owes on their owned aircraft, but I'd be willing to bet that JBLU owes more on those 5 aircraft than they will receive for them. This is looking like JBLU will reduce cash on hand when they complete this transaction. The only reason why I think that JBLU has chosen this route is due to high nonrefundable deposits on aircraft orders, which airbus was unwilling to allow JBLU to delay delivery without a significant penalty.

This can be spun in either direction, depending on where you stand on the future of JBLU. I think that deferring this until early 2007 (as suggested earlier) is probably the wisest call. OTOH, where there's smoke, there's fire ...

 

[Andy]

The math is a little fuzzy here. You divided it out to 6 million/year, and I'll accept that. You are assuming I believe that by having the aircraft out of service you are losing around $3 million in revenue. I don't have the numbers, but I'll believe you. If you are going to look at it that way though, you have to subtract out the costs created in order to generate that revenue. Unless you have a 100% profit margin, I am assuming it will cost $2 million to $2.5 million (using an 18% to 33% profit margin... I think I am being generous here) to generate that $3 million in revenue. Therefore, you should only be adding 1/2 to 1 million to the $3 million C-check cost which works out to 2/3 of a year payment. But then again, that is only for one year. So you are losing $2 million the first year and then $6 million a year for the next 4 years per aircraft replaced. That works out to $130 million lost over 5 years for 5 aircraft. You do, however, have the benefit of depreciation.

I'd be surprised if the estimated $3 mil cost of a C check doesn't account for the time that an aircraft is out of service.

 

[Snoopy Mendoza]

David N. said during the Merrill Lynch 2006 Global Transportation Conference that jetBlue sold (soon to be sold) the aircraft for what we paid for them. The added benefit is that we flew them for 5 + years.

He also reiterated that we are deferring A320 deliveries in 2007 and 2008. I think that the number translates to one new A320 every 4 weeks instead of one every 3 weeks.

Does it suck that we are selling the aircraft? Yes and No.

Later…:beer: