OREANDA-NEWS. Fitch Ratings has upgraded JetBlue Airways Corp.'s (JBLU) Issuer Default Rating (IDR) to 'B+' from 'B'. The Rating Outlook is Stable. Fitch has also upgraded JBLU's unsecured rating to 'B+/RR4' from 'B-/RR5' and the senior secured credit facility to 'BB+/RR1' from 'BB/RR1'. A full rating list is shown below.

The upgrade is supported by JetBlue's consistent profitability, solid financial flexibility and the improving health of its balance sheet. The rating action also incorporates JBLU's recent announcement of revenue enhancing initiatives that Fitch believes should drive higher margins over the intermediate term, and by Fitch's expectation that JBLU will produce meaningful free cash flow (FCF) over the next several years. The ratings also benefit from the significant cash savings expected to come from the recent drop in fuel prices. Fitch expects JBLU to utilize the increased cash from lower fuel prices to further improve its credit profile by paying down debt or paying for aircraft with cash.

Primary ratings concerns include the cyclicality and high degree of operating leverage that is typical for the airline industry. Other concerns include the risks around implementing JBLU's recent changes in strategy (i.e. bag fees, fare families, and seat densification), and any negative feedback that those changes could generate from the company's customer base. Fitch also notes, that JetBlue will continue to pursue a growth strategy that is more aggressive than its peer group, though that risk is offset by the company's successful track record. Financial leverage also remains a concern though JetBlue's balance sheet is much stronger than it has been in recent years.

Improving Balance Sheet Health: Fitch calculates JetBlue's total adjusted debt/EBITDAR at 4.5x, down from 5.3x at year-end 2013. Fitch expects JBLU's leverage to continue declining at least through 2015 driven both by higher expected EBITDAR (lower fuel prices, revenue enhancing initiatives) and through incremental debt reduction. Leverage improvement in 2014 was largely driven by JetBlue's sale of its LiveTV subsidiary. JBLU used a portion of the sale proceeds to prepay \$299 million of floating rate notes. The note prepayment also caused 13 aircraft to become unencumbered. JetBlue's unencumbered asset base now stands at 39 aircraft and 33 spare engines. Fitch considers high quality unencumbered aircraft to be a good additional source of financial flexibility.

Revenue Initiatives Expected to Boost Margins: Fitch expects the various initiatives announced at JBLU's 2014 investor day to lift operating margins over the intermediate term. The company's Fare Families initiative is scheduled for implementation in 2015. Once implemented, the cheapest available ticket option on JetBlue flights will no longer include a free checked bag, leaving Southwest alone as the only major North American airline to include checked baggage in the ticket price. While this initiative may create some negative consumer sentiment, Fitch believes the incremental revenue will outweigh any negative effects, particularly now that paying for checked baggage has largely become accepted practice for travellers. JetBlue forecasts that Fare Families will generate an incremental \$65 million in revenue in 2015 with an annual run rate of \$200 million by 2018. Fitch views these forecasts as achievable and potentially conservative based on industry averages for checked bag fees.

The other major initiative announced at Investor Day was the plan to add 15 extra seats to JetBlue's fleet of A320s, increasing their capacity to 165 seats. The additional seats will be beneficial from a unit cost perspective, with the fixed costs of flying the aircraft to be spread out over a greater number of seats. Seat densification also allows JBLU to add incremental capacity without the need for as many new aircraft, reducing capital expenditures in the 2016-2018 timeframe, and supporting Fitch's expectations for higher FCF. Like the introduction of bag fees, the decision to reduce legroom could receive negative feedback from customers. This risk is partially mitigated by the fact that JBLU will maintain a better than industry average pitch despite the additional seats. In addition, the retrofitted A320 cabins will roughly match the cabin experience on JBLU's A321s, which, according to the company, tend to generate positive customer feedback. JBLU plans to start retrofitting aircraft interiors by the second quarter of 2016.

Areas of Pressure on Operating Costs: Although Fitch expects non fuel unit costs to continue to rise in the near term, Fitch expects the rate of increase to slow. Rising salaries and maintenance expenses have caused JBLU's ex-fuel CASM to rise in recent years, pressuring operating margins. JetBlue still faces pressures from higher maintenance costs in 2015 primarily due to a higher number of heavy aircraft checks, and from rising pilot wages. Pilot wages are a potential risk area since JBLU's pilots decided in 2014 to unionize for the first time. Negotiations with the pilots union are still in their early stages, and Fitch does not expect a near-term impact, but at this point the potential impact of a newly negotiated union contract represents an unknown.

Solid Financial Flexibility for the Rating: FCF was better than expected in 2014 as the solid operating environment and modest margin improvement pushed operating cash above Fitch's prior forecast. Fitch now expects JBLU to generate substantial positive FCF over the next few years driven by lower fuel costs and decreased capex stemming from the company's decision to defer some aircraft deliveries during the 2016-2018 time frame. Using a conservative assumption for fuel prices, Fitch believes that FCF in 2015 could exceed \$300 million.

JBLU produced \$55 million of FCF for full year 2014, which is down from from \$121 million in 2013 but better than Fitch's original expectation for FCF to potentially turn negative. JetBlue has now produced positive FCF in four out of the last five years despite sluggish economic growth and persistently high fuel prices.

Liquidity is supportive of the ratings. As of Dec. 31, 2014 JetBlue had a cash and equivalents balance of \$341 million, short term investment securities of \$367 million and an undrawn revolver balance of \$400 million. JBLU's revolver matures in April of 2018. Total liquidity including the undrawn revolver is equivalent to 19% of latest 12 months (LTM) revenue, which Fitch considers to be more than adquate to address near-term needs. Upcoming debt maturities are quite manageable, with no significant maturities in the near term aside from two classes of floating rate notes due in 2016. Fitch expects JBLU to generate sufficient operating cash in the near term to cover its capital expenditures and debt maturities without the need for further borrowing.

Financial flexibility is also supported by JBLU's growing base of unencumbered assets. Fitch considers JBLU's unencumbered Airbus A320s to be high quality assets which should ensure capital market access in the case of a liquidity crunch. Fitch expects JBLU to further expand its base of unencumbered assets over the coming years as it opportunistically pays for some aircraft with cash.

Credit Metrics: Leverage has improved in the past year, and should fall further as EBITDAR continues to expand. As of year end, total adjusted leverage/EBITDAR stood at roughly 4.5x compared to 5.3x at year-end 2013. Fitch notes that leverage has improved since the recession when debt/EBITDAR peaked at 9x. The company will continue to strategically reduce debt in the coming years as opportunities arise. Funds from operations (FFO) fixed charge coverage has increased to 2.55x at year-end 2014 from 2.35x a year ago. Fitch expects fixed charge coverage to exceed 3x in 2015.

Recovery Ratings: Fitch has also upgraded the ratings for JetBlue's senior unsecured debentures to 'B+/RR4' from 'B-/RR5'. Fitch's recovery analysis reflects a scenario in which a distressed enterprise value is allocated to the various debt classes. The upgrade is based on a higher estimated distressed enterprise value based on JBLU's growing EBITDA generation and general improvements in the airline industry. Unsecured recovery ratings also benefit from the lower amount of secured debt outstanding at year-end 2014.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for JBLU include:

--Stable demand environment for air travel in the U.S. in the near term.
--JetBlue continues to grow capacity in the mid-to-high single digits annually. Yields are assumed to grow in the low single digits through Fitch's forecast period.
--Fitch's base forecast incorporates a conservative assumption for jet fuel of roughly \$2.20/gallon in 2015, implying that crude oil quickly rebounds from recent lows. This is not a forecast but rather a conservative assumption for Fitch's rating case.
--JBLU is able to fund upcoming debt maturities and capex with internally generated funds.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--Continued positive FCF generation with FCF margin rising to the mid-single digits.
--Further reduction in leverage with adjusted debt/EBITDAR to be maintained below 4x.
--FFO fixed charge coverage expanding to more than 3.0x.
--Evidence that Fare Families and cabin refresh strategies are margin accretive.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Sustained negative FCF.
--Liquidity weakens to below management targets.
--A change in management strategy to direct cash to dividends/share repurchases at the expense of a healthy balance sheet.
--Adjusted leverage increasing towards 5x.

Fitch has upgraded JetBlue's ratings as follows:

--IDR to 'B+' from 'B';
--Senior secured credit facility to 'BB+/RR1' from 'BB/RR1';
--Senior unsecured debt to 'B+/RR4' from 'B-/RR5'.