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Executives

David Barger – Chief Executive Officer

Edward Barnes – Chief Financial Officer

Analysts

Michael Linenberg - BAS-ML

William Greene - Morgan Stanley

Jamie Baker - J.P. Morgan

Duane Pfenningworth - Raymond James

[Unidentified Analyst] – Raymond James

Gary Chase - Barclays Capital

Bob McAdoo - Avondale Partners LLC

Helane Becker - Jesup & Lamont Securities Corporation

Kevin Crissey - UBS

Bill Mastoris - Broadpoint Capital

JetBlue Airways Corporation (JBLU) Q1 2009 Earnings Call April 23, 2009 10:00 AM ET

Operator

Welcome to JetBlue Airways Corporation’s first quarter 2009 earnings conference call. Today’s call is being recorded. We have on the call today Dave Barger, JetBlue’s CEO and Ed Barnes, JetBlue’s CFO.

As a reminder, this morning’s call includes forward-looking statements about future events. Actual results may differ materially from those expressed in the forward-looking statements due to many factors, and therefore investors should not place undue reliance on these statements. For additional information concerning factors that could cause results to differ from the forward-looking statements please refer to the company’s annual and periodic reports filed with the Securities and Exchange Commission.

This call also references non-GAAP results. You can find the reconciliation of those non-GAAP results in JetBlue’s earnings press release on the Investor Relations section of the company’s website at jetblue.com.

At this time I would now like to turn the call over to Dave Barger. Please go ahead sir.

David Barger

Thank you John. Good morning everyone and thank you all for joining us today. I’d like to start off by thanking our 11,500 crew members for rising to the challenge of a very difficult environment. Against the backdrop of a deepening recession our crew members delivered solid performance, resulting in our first profitable first quarter in four years.

We reported net income of $12 million or $0.05 per diluted share which included an $8 million non-cash charge associated with the valuation of our auction rate securities. These results represent an improvement of $22 million compared to the first quarter of 2008. Excluding the special charge our net income would have been $20 million or $0.08 per diluted share. We are especially pleased to earn a profit in the first quarter, historically a seasonal weak period, and to be one of only a few major airlines to do so.

In addition we reported a first quarter operating margin of 9.3% ahead of our guidance of 6 to 8%. While revenue was weaker than we had expected at the beginning of the quarter, we continued to outperform the industry in revenue growth. Lower fuel prices coupled with solid cost performance helped drive a 5% year-over-year decrease in our chasm. The actions we have taken over the past few years to build our brand, reduce capacity, bolster liquidity and strengthen our financial position have clearly helped us manage the challenges of a weak economy.

In addition to improved financial results, our crew members delivered solid operational performance. Despite weather and operating challenges at JFK Airport, we reported a 79.2% on time arrival rate, our best first quarter on time arrival performance since 2005, and a 6 point 3 point improvement compared to the first quarter of 2008.

On our last earnings call both Ed and I highlighted the importance of our focus on generating positive free cash flow. That focus remains and despite the difficult demand environment we are still on track to meet our free cash flow targets this year. In addition we have recently taken steps to reduce our capital expenditures in 2010, a critical component of achieving free cash flow.

During the first quarter we deferred the delivery of three EMBRAER 190s from 2010 to 2012. As a result we are currently committed to delivery of only three A320 aircraft in 2010, keeping our aircraft capital spending at modest levels.

With respect to the disciplined growth of our capacity and network, during the first quarter our capacity declined 5% year-over-year even though we took delivery of three A320s and two net E190s. This was accomplished through a combination of lower utilization, aircraft gauge and day of week adjustments.

Given the uncertainties about the economy we remain committed to maintaining a prudent approach to capacity. During the second quarter we expect our capacity to decline between 1 and 3% year-over-year. For the full year as we said on our last earnings call we expect to keep our growth rate flat. You will notice, however, that our 2009 full year capacity guidance is up modestly from the guidance we provided in January. This difference is simply the result of fine tuning our schedule in the fall and increasing utilization to take advantage of market opportunities.

We will continue to leverage our position in Boston where our operation has grown from 2 gates to 11 gates over the past five years. We are thrilled to be the official airline of the Boston Red Sox. Building on our strong presence in Boston we are pleased to announce the start of new service between Boston and Baltimore with four daily flights beginning September 9. Baltimore will be the 32nd city we serve from Logan Airport, further solidifying our position as the largest carrier in Boston in terms of destinations served.

During the first quarter we strengthened our Latin American presence with the launch of new service to Bogotá, Colombia and San Jose, Costa Rica. We continued to see strong unit revenue improvements in our Caribbean and Latin American markets even in this recessionary environment. In addition, our Caribbean international destinations generally require a minimal up front capital and despite limited daily frequencies are relatively low cost and consistent with our free cash flow goal.

We look forward to building on our success in the Caribbean. To that end we are pleased to announce that we have applied for government approval to begin new service from JFK to Barbados in October. By the end of 2009 we anticipate over 20% of our ASMs will be in the Caribbean-Latin American region, a significant increase compared to the end of 2007 when only about 10% of our capacity was in that region.

We believe we are well positioned to take advantage of other Caribbean market opportunities that may arise later this year. We plan to continue to optimize our network and add strategic grounds flight reallocating capacity, as well as adjusting our aircraft utilization. At the same time we are keeping a close eye on the revenue environment. Our high aircraft utilization rates provide us with the flexibility to reduce utilization should economic conditions worsen significantly.

Now moving on to revenue. Our PRASM was essentially flat in the first quarter which was below the guidance we provided in January, a reflection of the weakening airline revenue environment. Yield during the first quarter was up 2.5% and load factor was down 2 points on 5% less capacity. Looking at the quarter we saw disproportionate revenue weakness in March.

As discussed on our last earnings call we experienced solid improvements in unit revenues during January, driven primarily by return holiday traffic at the beginning of the month. We were encouraged by what we saw throughout the month of January but a shorter booking window and volatility in demand patterns made forecasting more difficult.

In February booking patterns began to suggest a decline in demand that was a bit more severe than we had seen. Our March revenue performance was impacted by the shift of the Easter holiday to April this year. We estimate the negative impact on March PRASM was approximately 8 to 9 percentage points or about 3 percentage points of our first quarter PRASM. Given our leisure focus and strong northeast Florida traffic, the Easter holiday seems to have a greater impact on us compared to many of our peers.

While there is a tremendous amount of uncertainty in the demand environment we are encouraged by what we see during the peak travel periods as yields have held up relatively well. For example, fares during the Presidents Day and Easter Passover travel periods were roughly at the same levels as last year. Our challenge has been in the off-peak periods when we’ve faced significant pressure on yields and traffic. Sale activity across the industry has become more aggressive in terms of breadth and depth. As a result of the relatively weak pricing environment, our average fare during the first quarter declined 2% year-over-year.

Regionally we continue to see strength in the Caribbean and our international markets where our PRASM improved during the first quarter even as we added capacity. Our transcon markets have been particularly weak due to more aggressive sale activity. While we have faced pressure on the pricing front we continue to be encouraged by the success of our ancillary revenue initiatives. Some of these initiatives like Even More Leg Room are recorded as passenger revenue and others are recorded as other revenue.

Our other revenues increased almost 30% to $87 million quarter due primarily to change fees and baggage fees. When we combine all of our ancillary revenue reported in the passenger revenue line with those in the other revenue line, our total ancillary revenue increased about 50% year-over-year in the first quarter to about $19 per passenger. This helped drive our 3% year-over-year increase in RASM.

Many of our ancillary revenue initiatives have shown less sensitivity to the weakening economic environment. While customers are generally paying less for their tickets they have continued to purchase products to enhance their experience such as Even More Leg Room. Thus, with relatively stable load factors, our ancillary revenue growth has helped to offset some of the fare weakness we’ve experienced.

During the quarter we continued to enhance our customer experience. We introduced free premium movies for our customers traveling to the Caribbean and we continued to test the sale of food onboard our aircraft. Our goal is to provide our customers with products and services they value, especially at a time when customers are carefully managing their budgets.

We believe the JetBlue brand is well positioned in the current environment and we continue to be innovative in attracting new customers. Our Promise Program for example provides reassurance to customers who book flights or vacations with JetBlue. We have also been successful in stimulating demand through fare sales. In March our One Day Sample Fare drove record web traffic on our website, jetblue.com. Building on this success this morning we launched another One Day Sample Sale to encourage product trial and awareness. We believe that once customers try JetBlue for the first time our product advantage creates a very high repurchase intent. Therefore, fare sales not only help drive revenue but also build customer loyalty.

In addition we recently launched our More Brand campaign, highlighting our unique value proposition which includes more comfort, more free entertainment and more friendly service than other carriers. We believe our unique value proposition differentiates us within the industry, and this is especially true in a recessionary environment when customers have more choice. In fact, in recent months our jetblue.com website traffic has increased relative to our peers.

Turning to the revenue outlook for the second quarter, forward bookings and revenue data continue to be significantly more volatile than in the past. Given the uncertainty about the economy and its impact on airline revenues, our visibility is once again very limited. The April comparisons will be helped by the Easter holiday shift and we expect positive unit revenue growth for the month.

When we combine our March revenue performance with our estimates for April to neutralize the effect of the holiday shift, we expect our PRASM will be down approximately 3 to 5% on a year-over-year basis. May is traditionally a trough period for us but we don’t expect our year-over-year PRASM performance to decline as much as it did in March. We currently expect our year-over-year PRASM growth for the second quarter to decline between 2 and 5%.

As an industry we are clearly seeing less demand for our service. Much attention has focused on whether industry demand has stabilized. We haven’t seen any signs of significant improvement on the demand side, nor have we seen signs of further deterioration.

Capacity reductions continue to help offset some of the weaknesses in the demand environment. In addition we are somewhat less exposed to declines in premium business traffic than some of our competitors. While we certainly face a challenging revenue environment moving forward, we believe we should perform better on a relative basis.

As we look ahead through the rest of the year, our visibility is more limited and we are cautiously optimistic about the summer. Loads for the peak summer travel period are holding up relatively well so far, but we continue to face downward pressure on yields due to extensive sale activity. As a result we have lowered our 2009 revenue projections. For the full year we expect our PRASM to decline between 1 and 4%.

Our continued focus on ancillary revenues, which we currently expect to increase by about 20% year-over-year in 2009, should help drive RASM improvements. We expect RASM to decrease on a year-over-year basis between 0 and 3% in the second quarter. For the full year we expect RASM to increase between positive 1 and negative 2%.

We continue to watch the revenue environment and economic conditions very closely. As we have done in the past, we intend to act quickly to make adjustments as appropriate. Despite the weak revenue environment we continue to benefit from lower fuel prices. During the first quarter we achieved solid financial performance as lower fuel costs provided significant savings. We paid $75 million less for fuel than we would have paid at last year’s first quarter prices. Combined with our capacity reductions, total fuel expense for the quarter declined by $94 million year-over-year.

Although our non-fuel costs for the quarter were better than we expected, our unit costs have been pressured by our slower growth rate. We continue, however, to look for ways to find additional cost savings. Cost control coupled with slower growth helps bolster liquidity, a top priority for the company. In addition, we believe its prudent to manage our liquidity by reducing our capital expenditures. As such we plan to reduce our full year capital expenditures by about $70 million. Ed will discuss these efforts in more detail but I am pleased with our company focus on preserving cash and building free cash flow in this uncertain economic environment.

Before closing I’d like to say a few words about the organizational change we recently announced. Rob Maruster will be assuming the rule of Chief Operating Officer on June 1 as Russ Chew transitions into a senior advisor role. Russ joined JetBlue in March of 2007 with the primary goal of restoring our operational stability and helping us build a foundation for sustainable growth. He accomplished more than he set out to achieve. I’d like to thank Russ for his valuable contributions to JetBlue and at the same time welcome Rob to his new role. Rob has been with JetBlue since 2005 and brings tremendous operational experience to this position. We look forward to Rob’s continued contributions to the success of JetBlue.

The first quarter certainly presented many challenges but we remained focused on running a safe, reliable operation and delivering excellent service to our customers. As we look ahead there is a tremendous amount of uncertainty about the strength of the economy and the impact the economy may have on the demand for air travel. We are focused on achieving free cash flow and maintaining a strong balance sheet to protect ourselves against some of that uncertainty, and to also provide ourselves with the flexibility to seize market opportunities.

While we are optimistic about the future, we are anticipating a tough environment. Through our efforts over the past year, however, we believe we have positioned ourselves to succeed in this challenging environment. Our strong brand, flexible fleet, solid liquidity position and unique culture continue to differentiate JetBlue from the competition. Despite the very difficult economic environment, we expect to earn a profit in every quarter of 2009.

With that, it’s my pleasure to turn it over to Ed Barnes for a more detailed review of our financial performance during the quarter.

Edward Barnes

Thanks Dave. Good morning and again thank you all for joining us. As Dave said we are very pleased to be one of the few major U.S. carriers to report a profit in the first quarter. These results reflect the hard work and commitment of our outstanding crew members who do a tremendous job delivering the JetBlue experience to our customers every day.

While we made significant progress during the quarter, major challenges lie ahead. Uncertainty regarding future economic conditions continued to impact the demand environment while the credit markets have tightened amid anxieties about the global financial system. Fortunately we believe our ongoing focus on maintaining financial strength and mitigating risk has positioned us well. Despite the economic outlook, we believe JetBlue will earn a profit in every quarter this year. At the same time, and perhaps even more significant we’re on track to meet our 2009 goal of generating positive free cash flow for the first time JetBlue’s history.

We ended the quarter with $634 million in cash and cash equivalents. In addition, we have about $221 million in student loan related auction rate securities, net of accounting losses, including an $8 million unrealized loss recorded during the first quarter. During the first quarter we sold 29 million of our auction rate securities at prices slightly higher than their 2008 year end valuation.

We also recently extended our line of credit with Citigroup, which is collateralized by a portion of our auction rate securities to April, 2010. While the total availability under the line is $84 million we have drawn only $74 million, the proceeds of which are included in our quarter end cash balance. In addition, the quarter end cash balance includes a $53 million loan from UBS which is secured by our remaining auction rate securities.

Fuel hedging appropriately receives a lot of industry attention. And as discussed on our last earnings call, we aggressively restructured our fuel hedge portfolio early in the fourth quarter of 2008 to take advantage of declining fuel prices, effectively unwinding all of our 2009 swap contracts. The losses related to these unwound 2009 fuel hedge contracts are heavily weighted towards the first half of the year. At the end of December we had $117 million in cash collateral posted with our fuel hedge counterparties related to these 2009 contracts. Almost half of these contracts settled in the first quarter, resulting in cash collateral balance of only $63 million as of March 31.

Assuming fuel prices remain at current levels, we expect to have approximately $25 million posted with our counterparties at the end of the second quarter. We view our hedge program essentially as a form of insurance that helps us manage the volatility risk of rising fuel prices with the flexibility of capturing the benefit of declining fuel prices. As such, oil has provided a natural hedge against the current demand environment. In addition, as the forward curve remains in contango, we do not believe entering into long dated hedge positions covering significant future consumption is prudent at this time.

Clearly, oil prices will eventually be pressured as economic conditions improve and we therefore actively monitor the situation on a continuous basis. While fuel hedge losses had a negative impact on our costs during the first quarter, that impact is clearly outweighed by fuel price declines. During the first quarter our fuel expense was $94 million lower than the first quarter of 2008. Due to our decreased hedge exposure we expect even greater benefit from lower fuel prices as we progress through the rest of the year.

Based on the forward curve as of the end of last week, we estimate our fuel expense for 2009 will be about $475 million lower than 2008. As an interesting perspective that’s equivalent to approximately 15% of our 2008 passenger revenue.

Additionally as a result of pre-funding $117 million of our hedging losses in 2008, we expect almost $600 million in year-over-year fuel savings on a cash basis. Approximately 8% of our remaining fuel consumption in 2009 is hedged with collars, which are more specifically described in our Investor Update filed later today.

We estimate our second quarter fuel price will be approximately $1.93 per gallon which is approximately $0.36 per gallon higher than our un-hedged price. For the full year we estimate our fuel price to be approximately $1.90 per gallon, including a negative hedge impact of $0.28 per gallon. The price for fuel has decreased substantially over the past year, a full $0.69 per gallon. Specifically, our average fuel price per gallon for the first quarter was $1.96 compared to $2.65 in the first quarter of 2008. Fuel nonetheless continues to be our single largest cost item. Fortunately, and to the credit of our great crew members, our company wide focus on fuel conservation initiatives continues to pay off. In the first quarter, gallons of fuel consumed per block hour declined roughly 2% compared to the same period last year.

Excluding fuel, our first quarter unit costs rose by about 9% year-over-year which was better than our guidance. The majority of this year-over-year increase is attributed to our 5% capacity reduction during the first quarter. In addition our transcon capacity reductions, which declined 27% year-over-year, drove shorter average stage length during the first quarter.

Adjusting for the 6% decrease in our stage length during the first quarter and keeping ASMs flat, our ex fuel chasm during the first quarter would have been approximately flat year-over-year. Let me highlight a few of the items. Salaries, wages and benefits increased roughly 10% per ASM on a year-over-year basis driven by pay increases we implemented during the fourth quarter of last year, overtime expenses associated with irregular operations during severe weather, and course inefficiencies in crew scheduling.

As expected, our maintenance expense increased about 19% on a unit cost basis during the first quarter, due mainly to the gradual aging of our fleet which results in additional repairs. The first of our E190 fleet are entering heavy maintenance checks, accounting for a large portion of the year-over-year increase.

Depreciation expense increased about 30% year-over-year during the first quarter on a unit cost basis. This increase was driven in part by our move into Terminal 5 at JFK. Since we are considered the owner of Terminal 5 for accounting purposes, a portion of the T5 facility rent is reflected in the depreciation line rather than landing fees and other rents. As a result we expect to continue to see significant year-over-year increases in depreciation expense this year. In addition, a large percentage of our fleet is owned which increased depreciation expense.

Moving below the line, interest expense decreased $10 million due primarily to a decrease in interest rates. Interest income and other decreased $18 million, due in part to the $8 million valuation adjustment related to our auction rate securities. Interest rates earned on our investments were also lower, as were average balances, reflecting market conditions and our more conservative approach to managing cash.

With regard to CapEx, during the first quarter we purchased three A320s and two E190 aircraft with cash and debt financing. We are scheduled to take delivery of four aircraft during the second quarter. No more aircraft deliveries are scheduled for the remainder of the year. While we have secured financing for all of our 2009 aircraft deliveries, the aircraft financing market presents challenges going forward.

As a result of the E190 deferral Dave mentioned, we are committed to take delivery of only three A320s in 2010, which aligns well with our efforts to better manage our capacity; preserve liquidity; and navigate credit markets during these turbulent times. We will continue to follow a conservative approach to fleet growth reflecting our focus on achieving positive free cash flow and our commitment to a sustainable growth rate.

While we continue to make important investments in our people, product, and infrastructure we are taking a disciplined approach to making investments in our business. Given the current economic environment we believe it is prudent to scale back our capital expenditures. As such we have reduced our full year CapEx by $70 million. During the first quarter we spent approximately $5 million in non-aircraft CapEx. We anticipate approximately $45 million in non-aircraft CapEx during the second quarter and $135 million for the full year.

Turning now to the balance sheet. Our scheduled principal payments from debt and capital leases are expected to be about $40 million for the second quarter and $160 million for the full year, significantly lower than our 2008 debt repayments of approximately $700 million. Additionally, lower fuel prices have helped bolster liquidity and cash flow. As discussed on our last call, we expect to end the year with cash as a percentage of trailing 12 months revenue in the same percentage range as we ended 2008.

While we are comfortable with our current cash position, we are committed to continued vigilance in driving additional balance sheet improvements going forward. Looking ahead at the second quarter and full year, we have a detailed guidance available on our Investor Update filed as an 8-K and posted on our website later today. Let me share a few of the highlights.

We expect our second quarter ASMs to decline between 1 and 3% year-over-year and to remain flat for the full year. As Dave said there remains tremendous amount of uncertainty in revenue environment. While April comparisons are being helped by the Easter holiday shift, we expect May and June PRASM to decline on a year-over-year basis. As a result, we currently expect a year-over-year PRASM decline of between 2 and 5% in the second quarter.

While limited visibility and uncertainty about demand trends our full year outlook remains cautious. We currently expect PRASM for the full year to decrease between 1 and 4%. Our ancillary revenue initiatives continue to help offset some of the fare weaknesses we are experiencing. We expect our full year-over-year RASM to decrease between 0 and 3% during the second quarter and to range between positive 1 and negative 2% for the full year.

We expect lower fuel expense will continue to drive significant year-over-year unit cost improvement. For the second quarter we expect our chasm to decline between 6 and 8% and for the full year we expect chasm to be down between 8 and 10%. We continue to look for ways to reduce costs and we have achieved some success on that front. As a result, we have revised our full year ex fuel cost guidance slightly downward to 9 to 11%. We anticipate a 15 to 17% year-over-year increase in ex fuel chasm during the second quarter. There are two significant items impacting this increase. First, we sold four aircraft during the second quarter of last year. The $13 million P&L gain we recognized from those sales benefited our other operating expenses last year and will therefore negatively impact our year-over-year cost comparisons. Secondly, we anticipate a 7% year-over-year decrease in stage length during the second quarter. Adjusting for these two items, stage length and aircraft gains, we expect our second quarter chasm excluding fuel to be up about 9 to 10% year-over-year.

In closing, let me again thank our crew members for all of their hard work. While the uncertainty in the economic environment is unprecedented, we believe we are well positioned. The near term revenue environment will certainly present a significant challenge. Lower fuel prices, however, have helped improve our operating margins and liquidity. We are projecting significant P&L improvements throughout 2009 even with negative year-over-year PRASM growth. We are taking a conservative approach to managing our business and remain focused on liquidity preservation. At the same time, we remain confident in this challenging environment and poised to take advantage of opportunities.

And with that, we’re happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Michael Linenberg - BAS-ML.

Michael Linenberg - BAS-ML

Two questions here and I guess this is for Ed. The cash on hand, the $634 million, just a clarification. Does that include the $63 million that you posted as collateral with your counterparties for the fuel hedges?

Edward Barnes

It does not include any of our fuel hedging collateral. No.

Michael Linenberg – BAS-ML

And then my second question, and this is probably a question to Dave, you know we saw this morning Alaska come out and announce that they’re going to now institute a first bag fee and you know now when I look across the industry I think it’s just you guys and Southwest, and you know Southwest has actually given – they have a couple reasons, they think it’s revenue dilutive and it’s disruptive to their service. And I think there may be some technological considerations, so at this point they’re not there but where are you guys on that front? What are your reasons or just your philosophy, etc., how you’re thinking about it?

David Barger

Yes and good morning Mike. First bag fee, clearly we know that technically we can do that. We’re doing that with the second bag fee today so, as we look at the landscape I think it’s probably – there’s a fine line between nickel-and-diming the customer and what’s the core product. It’s not a secret as well that we have a change to our reservation system or passenger service system that’s taking place over the course of the next year or two, which I think will also allow us to the extent that we do go forward with this, maybe do it in a very thoughtful manner.

I mean, right now I think customers and part of our core brand they truly value the fact that the first bag is part of the purchase price. And so I think we’re going to have much greater flexibility with the change to our PSS system and we’ll continue to take a look at the landscape as well.

Operator

Your next question comes from William Greene - Morgan Stanley.

William Greene - Morgan Stanley

You know it seems like there is some movement within the industry here now to add wireless connectivity to flights and I wonder if you think that’s going to put the value of live TV at risk? And I know you’ve looked at monetizing it, so can you talk a little about maybe should we monetize it now and perhaps try to do that faster, given this movement towards wireless?

David Barger

Good morning Bill. A comment on live TV and wireless and again we’ve made the determination that the narrow band enabling PDAs across our fleet to go forward with that. That will take place later this year. That was our test with Beta Blue. A very successful test and we’ll start on the 320 fleet later this year with the campaign continuing with the 190s in 2010. All that said, live TV and our team are keeping a very careful eye. The broadband and the different products that are out there on different carriers and observing behaviors such that if it makes sense to be a follower in this space, we can do that. And I think the jury’s still out on if somebody’s going to purchase really broadband for $9.95 or $12.95 on uncertain stage lengths. Longer haul, I think you know very, very appropriate if you start taking a look at transcon. So I think my headline with live TV, build the ability to do that to the extent that JetBlue or other customers want to do that.

We think the PDA application is outstanding. And then the company is also the implied entertainment in the inflight entertainment space as well. So we’ll take it – it’s still, it’s core to our brand and we’ll evaluate opportunities to as they may show on the horizon to the extent there’s opportunities to look at strategic options for live TV. So we’re certainly don’t think this is the right time to do that today in today’s economy.

William Greene - Morgan Stanley

Can I ask for some clarification on some of the RASM commentary? If I think back to some comments you made in the middle of the first quarter, I think you backed away from RASM guidance for the full year saying demand was sort of a bit cloudy. But now you’re sort of giving the 2009 outlook again. Does that suggest maybe that you feel more conviction that you have a better sense for the direction of RASM here now? Is it based on the economy? It’s not clear to me sort of what might have changed.

David Barger

Yes, I think even with the first quarter as we attempted to really provide transparency for the full year with our guidance, it – we now have the first quarter behind us, obviously into the second quarter. So I think just better transparency into what we’re seeing with the demand environment. So the shift in our numbers I think are just trying to be again more surgical and more realistic now that we have the first quarter and half of April under our belts, Bill. So that’s why we adjusted the RASM that was offered in today’s commentary.

William Greene - Morgan Stanley

Just one last question on the pilots. Since that unionization effort failed, have you taken a different approach to wages? Have you had to address some of those wage concerns for either them or any of the work groups? Thanks.

David Barger

Yes absolutely Bill. In fact if I may just a comment, the financials for the first quarter, if I may, this is again the first profitable first quarter in four years. I think it’s important that these numbers were appear – they were not built on the backs of labor or our workforce. We did not furlough crew members. We did not mandate pay cuts for those on the front line or within leadership. We are being prudent because we’re building the company and the culture for the long term.

I think clearly the pilot campaign, absolutely lessons learned. And I think as we look at leadership issues, comp, benefits, quality of life, they all play into how we look at what are the necessary actions with the pilot group on a go forward basis? Or any one of our large work groups or any of our crew members. And so I think I’ll probably leave it at that, Bill, but there were a lot of lessons learned. I mean, the value of a direct relationship and to collaborate on solutions with our workforce to me is a huge competitive advantage.

Operator

Your next question comes from Jamie Baker - J.P. Morgan.

Jamie Baker - J.P. Morgan

Quick question on fuel. The second quarter $1.96 all in seems a bit high given that so far in April Gulf Coast spot has averaged around $1.40 level. I didn’t see a reconciliation to fuel hedge for the quarter in the release. Can you walk us through what the quarterly assumption is there?

Edward Barnes

Jamie, we will have that in our guidance that’s coming our later today. That $1.96 does include the impact of our fuel hedges. It’s also based on the forward curve as of the end of last week. So it should be pretty easy for Lisa to walk you through that later.

Jamie Baker - J.P. Morgan

David, I recently flew JetBlue for the first time on my company’s dime. That may not mean anything but I’m curious whether arc data or any other tools that you might have at your disposal suggest that business travelers might be trading – well, I don’t want to say trading down, trading over to JetBlue?

David Barger

Yes, good morning Jamie. First of all we appreciate the travel and I think it’s a little bit early. It’s one of our key initiatives is to be more relevant to the corporate traveler, the business flyer, the non-discretionary traveler. We’re seeing anecdotal evidence of a trial, especially as consumers – mainly the small and medium sized unmanaged businesses are looking for better value. It’s really part of this more campaign and it’s why we’re adding additional frequencies into city pairs between for example Boston over to Chicago, Pittsburgh down into the Carolinas. So anecdotally we’re seeing it and we’re also seeing as a result of surveys onboard the airplanes. We do issue surveys to a percent of the customers on every flight, and we get some nice data back on the purpose of the trip. And of course we have pure information in terms of the booking paradigm when somebody’s booking for travel, too. So I think we’re pleased with the directionality of what we’re seeing with the smaller and the medium size business customer.

Jamie Baker - J.P. Morgan

Does Southwest’s entry into La Guardia, which I think is just really a re-branding of former ATA service, but nonetheless does that change your appetite or your willingness to bid for slots that might be coming available there?

David Barger

Jamie, I think that a strong balance sheet and being opportunistic for whether it’s slots gates at key airports that are important to us, that allows us to have that flexibility, whether it’s at a La Guardia which is part of our New York strategy or whether as we announced today with BWI out of Boston across metroplex down in Washington with access into a DCA. I don’t think the Southwest decision has changed our strategy. At some of these airports the ability to really gain access, I think, is the largest issue and probably DCA would be the airport with the most difficulty of gaining access. So that’s probably the way I would characterize how we’re looking at some of these key airports.

Operator

Your next question comes from Duane Pfenningworth - Raymond James.

Duane Pfenningworth - Raymond James

I wonder if you could talk about your transition on the reservation system side from Open Skies to Sabre? Why you’re making this change and what would this enable you to do with partners such as Lufthansa that you can’t currently do?

David Barger

Good morning Duane. I think it’s a natural evolution in this chapter of our company’s growth, and very, very pleased with Navitaire over the first Open Skies system over the first nine plus years of our history. And then we take a look at not just our growth but also where we’re growing. Later this year 20% of our ASMs will be into international or Caribbean markets. The ability to as we take a look at the booking flow through the website and the ability to monetize the booking flow. By the way, this is all prior to whether it’s opportunities with Aer Lingus or Lufthansa and the Lufthansa family of airlines that we plan to have connectivity with later this year. So we just think this is prudent for this time because it really, we think, optimizes our revenue opportunities. And for this chapter of our growth, it was prudent for us to make the move anyway.

And we do have a team of 30 leaders across the company dedicated to the PSS, Passenger Service System transition, and my hat’s off to Rick [Zetty] and team because this is a very, very key investment for this company, and I’m very pleased with their traction.

Duane Pfenningworth - Raymond James

Thanks and I think Jim may have a question.

[Unidentified Analyst] – Raymond James

Just quickly here, your transcon business down - capacities down 27% in the first quarter. What is it going to be, up or down, in the summer season?

David Barger

Transcon as we close the year and good morning, Jim, we’re still – transcon is still key to our airline. And we anticipate as we close the year about 30% of our ASMs will be in transcon markets. We’re opening LAX in the June timeframe as part of our LA base and strategy of note. So it’s still key and at the same time I think as we start to see the advance purchase gates collapse, such as one day events purchase with fares that just we don’t think are prudent even in this oil environment, we’ll reallocate ASMs appropriately, such as what we’re doing with north, south into the Caribbean, the announcement with Barbados today as an example. I think that transcon for the most part has gone north, south into the Caribbean Jim but it is still a core part of our network.

[Unidentified Analyst] – Raymond James

And is it up or down for the summer season?

David Barger

In the summer season, I think again on a year-over-year basis it will be down. The exact number I think that we’ll have to get to you off the call, Jim. But again 27% of our ASMs in the first quarter were dedicated to transcons and 30% we believe as we close the full year of 2009.

[Unidentified Analyst] – Raymond James

Okay, here’s where I’m going with that. I believe that on a – looking at JetBlue relative to other carriers, you’re removing far less capacity. And looking at transcon it appears that JetBlue’s been a leader in taking fares down. I believe you did $99 transcon fares and then you did a one day $14 sale. So I’m curious one, about transcon, and then about the total system why you’re not taking down more capacity?

David Barger

I appreciate where you’re trying to go with the question, Jim. Transcon not too long ago was north of 50% at our airline. So we think that we’re probably in the right range as it currently stands. And again it’s part of our network and it’s a network that we’re going to defend. And I think that when we look at pricing, a one day event such as we put forth with $14 fares and that’s less than a first bag fee for our competitors, that’s very much in key with the reverence of our brand. And you bet we’re going to take opportunities to challenge the competitive landscape. So clearly I don’t believe JetBlue has been leading the fare sales in the transcon markets. And it’s core to our network, Jim. We think we’re right placed right now and we’re going to defend it. It’s core to Boston. It’s core to New York. It’s core to Washington and also the transcons that we have in south Florida.

Operator

Your next question comes from Gary Chase - Barclays Capital.

Gary Chase - Barclays Capital

I was doing a little bit of math here on some of the things you said which is always a scary proposition, at least on my part, but everybody’s always so sensitive on the revenue stuff I want to make sure that I understand what you’re pointing to. If I look at what you’re suggesting for the combination between March and April, given what you showed in your March traffic release for PRASM, April looks like it’s going to be up about 5ish percent call it, and then the other two months of the quarter are going to be down somewhere between 6 and 8 in order to get to your PRASM guidance for the quarter. And the specifics don’t necessarily matter. I guess what I’m driving at is, it would seem that at least from where you’re going to be in May and June, if that’s right, that the full year guidance has some pick up in the second half. Is that what it is? Or is there some sort of network change towards shorter stage length year on year or something else that we ought to understand about how that progression works?

David Barger

Good morning Gary. I think the early look to the math as we take a look at the Easter holiday shift and then May and June, directionally accurate. How we’re looking at really what we’re seeing in the current environment. Less visibility that we’re seeing, closer end bookings, everything that that means as well. That usually means less change fees because people are booking closer in. We believe that GDP will be negative as we move through the first three quarters is the way that we’re modeling it. We think, again, we start to take a look at something that looks flat towards the end of the year. And so it’s I think directionally fair to say that we’re also modeling I think just responsibly, you know, revenue towards the second semester of the year that drives those numbers that we gave guidance to today.

All that said, we’ll be perfectly candid and transparent. This is a real difficult environment in which to model and we haven’t seen the increased degradation, but at the same time we haven’t seen the considerable strength that one would anticipate as well. So I think the key travel dates around what we saw with President’s weekend and Easter, the strength, basically the same average fares on a year-over-year basis, speaks well to the summer timeframe for our network, and also the peaks over the second half of the year.

Gary Chase - Barclays Capital

But when you say directionally accurate, you mean they are going to be down more than what you’re projecting as you move into like the third and fourth quarter, right?

David Barger

No, I think –

Gary Chase - Barclays Capital

In other words May and June are going to be down a good bit more than what the guidance implies for PRASM in the third and fourth quarter?

David Barger

Well I think it’s – you know, again, we’re looking at some level of strength continuing into the second semester, Gary, but it’s not a significant number at this point. I mean, all things considered, relative to where we’re sitting with our first quarter numbers.

Gary Chase - Barclays Capital

And then the chasm guidance for the quarter, you came in below that. There is a change to chasm ex fuel for the year but you also have more capacity growth, which was a little bit of tailwind. Was there something – and there have been a lot of calls this morning, so if you said this I do apologize, but was there something timing related in the first quarter that would lead us to believe either you’re going to sort of make it all back in the second, third and fourth?

Edward Barnes

Hi Gary. Good morning. No, I don’t think it was related to a timing difference. It’s just managing our costs appropriately.

Gary Chase - Barclays Capital

Did any part of the cost forecast rise in the second half, Ed?

Edward Barnes

Nothing that I could specifically point to.

Gary Chase – Barclays Capital

And then just quickly the fuel consumption also came in a little lower, possible that less congestion at JFK or is there another explanation for that?

Edward Barnes

I think it’s probably a whole host of things, you know, whether it be, you know, just runway time or using our aircraft a little bit more efficiently.

Operator

Your next question comes from Bob McAdoo - Avondale Partners LLC.

Bob McAdoo - Avondale Partners LLC

Can you just kind of go back over with all the ins and outs of airplanes and whatever, what your fleet composition was year end ’08, ’09 and ’10? What you’ve done with the deferrals and whatever else?

Edward Barnes

Sure Bob. Our aircraft composition at the end of ’08 was 107 A320s and 35 E190s. During the first quarter we added three A320s. So we ended the quarter with 110 A320s. We took delivery of two net E190s, four in total, but then we sold two of the E190s so we ended the quarter with 37 for a total of 147 aircraft.

For the remainder of the year we take four additional A320s in the second quarter, so we’ll end the year with 41 E190s and 109 A320s including the lease return that we have in November. So a total of 150 aircraft at the end of the year.

Bob McAdoo - Avondale Partners LLC

And what do you have coming in in 2010?

Edward Barnes

In 2010 we take delivery just the three A320s.

Bob McAdoo - Avondale Partners LLC

So that would be 53 net of anything that you might –

David Barger

We have another lease return in 2010 as well.

Bob McAdoo - Avondale Partners LLC

And then you had talked about this total ancillary which is some above the line, below the line or in passenger, not in passenger of $19. What would that have been a year ago? Since you’ve done your More Leg Room and that kind of stuff?

Edward Barnes

I don’t have that number at my fingertips but I’m sure that Lisa can give it to you later on, Bob.

Bob McAdoo - Avondale Partners LLC

I saw that one of the competitors had a $79 Boston-LA fare for awhile. Is that – I mean, I assume you match that. When you do that in these non-peak times, is the customer response as dramatic as you would hope? I mean, obviously the $14 fare you get a lot of excitement. Does the $79 fare generate a lot more business in these kind of non-peak times or how would you characterize that?

David Barger

Yes, good morning Bob. It’s of course when we do that it’s capacity controlled, but I think it’s fair to say that we’ve been pleased with the response especially when you start to take a look at a new market such as Boston-LAX. So I mean it’s an opportunity for brand awareness into LAX, but I’m pleased with the results. In fact, speaking of LAX we’re pleased with the bookings that we’re seeing with LAX, even though we’re roughly just under 60 days before start up.

Bob McAdoo - Avondale Partners LLC

Did you match the Boston to the LA basin like to Long Beach or whatever?

David Barger

Yes. We tend to take a look at LA with all three of the airports that we’ll be servicing, and again capacity controlling obviously into the airport. But we tend to look at the geography as one, as opposed to airport specific.

Operator

Your next question comes from Helane Becker - Jesup & Lamont Securities Corporation.

Helane Becker - Jesup & Lamont Securities Corporation

Two questions. One, Dave a lot has been made in the press and trade I guess publications lately about Long Beach and some of the issues there with the facilities. And I was just wondering if you could kind of address that in the context of outing capacity to LAX and how Long Beach longer term might fit into your plans?

David Barger

Sure. It’s a headline we remain committed to Long Beach but at the same time with the disappointments is the word that I’ll use with the upgrade of the facilities at Long Beach. And we respect the fact that it’s a capacity controlled airport, it’s a curfewed airport, but we just don’t think the customer experience warrants the current infrastructure especially with the commitments that we have been put in place by the city of Long Beach. So I think very encouraged by meetings that took place this week with the Long Beach airport leadership team here in New York as we talk about gates and parking and food and beverage opportunities.

And as we look at – and we’ll see exactly what plays along those lines with making really some of the improvements real at Long Beach. All that said, I think we look at the LA basin similar to who we look at New York or Washington that it’s a multiple airport area. And so Burbank and LAX and Long Beach can all work quite well together because customers have certain preferences to airports in that part of the world especially considering the congestion of the roads. So that’s how we’re currently looking at it. I’m very encouraged by the visit that took place this week, by the Long Beach Airport Authority and look forward to seeing some of these improvements in the near future.

Helane Becker - Jesup & Lamont Securities Corporation

I know you’ve said over the last year or so Internet sales have kind of leveled off in the like 76, 77 area. Do you think that the plateau that we should think about and as a result I guess maybe with more international flying you’re seeing a higher percentage of like as a percent of revenue your sales and marketing is going up just a little bit. And I was kind of wondering if you could talk about that? Is like the mid-70s what we should be thinking about?

David Barger

Yes, I think the jetblue.com in the mid-70s from the standpoint of distribution is a good number to be thinking about. As we start to obviously we’re in the OTAs, we’re in the GDSs as well to be relevant to the corporate customer. It’s important to have visibility to the small, medium size business customer that’s currently un-managed. And so that will be certainly part of our distribution strength on a go forward basis. And you’re right. As we’re migrating into markets such as Bogotá, the ability to or throughout the Dominican Republic or the Commonwealth of Puerto Rico, the ability to have multiple distribution pass is very important to us as well. So that mid-70s is a good number I think Helane.

Operator

Your next question comes from Kevin Crissey – UBS.

Kevin Crissey – UBS

I just wanted to talk – I think the number was 9 to 10% chasm ex fuel increase in Q2 if we adjust for the aircraft sales and basically last year’s comp and stage length. Is that the right number, 9 to 10% chasm ex fuel?

Edward Barnes

That’s correct.

Kevin Crissey – UBS

How should we be thinking about that relative to – that’s basically among the worst in the industry in terms of you have less capacity being cut, you don’t have the tension headwinds that some others have. Why should investors look at that as an okay number?

Edward Barnes

I think one of the things that we have to look at is our stage length is declining and so as a result of that, we are going to have some inefficiencies in our costs. I think the other thing that Dave alluded to before is that we believe that during these times of recession is not the appropriate time to make earnings on the back of our crew members. And so we haven’t done some of the things that our competitors have done such as furlough or institute wage decreases. And I think it’s important that as we move forward that we protect our brand, protect our culture. And continue to make investments in our infrastructure that are necessary for our growth into the future. And I think that what you’re seeing in that 9 to 10% is kind of the culmination of all those things, of not wanting to disappoint our customers, our crew members, and really wanting to invest into the future.

Kevin Crissey – UBS

And then on live TV, [Cal] is installing that here basically right now if I’m not mistaken and you guys have a revenue split on that. Is that right? And should we see that flow to other revenue and is it meaningful in ’09 or when does it become meaningful?

Edward Barnes

Well, we do have an arrangement with Continental. We haven’t really made the terms of that arrangement public but certainly any of the revenues derived out of that would go into other revenues in our financial statements.

Kevin Crissey – UBS

Is it something that we should give any real attention to in ’09 or is it really an ‘010 event from a magnitude perspective?

Edward Barnes

Probably from a magnitude perspective on a full year 2010 is probably when it’s going to be a more meaningful number. We will have quite a full installations on our aircraft through 2009 and continuing into 2010.

Kevin Crissey – UBS

And the cost of that is reflected in your chasm ex fuel as well or is it just hidden in the CapEx?

Edward Barnes

The cost of the installations themselves are in the CapEx guidance.

Operator

Your last question comes from Bill Mastoris - Broadpoint Capital.

Bill Mastoris - Broadpoint Capital

In the past you’ve talked about managing your capacity with some aircraft sales and in the past you’ve been very successful in doing so. Is that any part of your future plans as far as managing capacity? I know you’ve mentioned that you’re going to return a couple off lease, but would aircraft sales be a part of that should the opportunity arise?

Edward Barnes

Well I think last year you saw kind of a change in our philosophy in just seeing that there was potentially going to be some softness in the resale market that we really went to more of a deferral strategy. We will continue to consider aircraft sales as opportunities come about, but those would probably be offset by the optionality in our aircraft contracts as well to take future deliveries. I think we’re pretty okay with our current fleet size and composition.

Bill Mastoris - Broadpoint Capital

And Ed in the past you have actually purchased some of the convertibles, the 3 and three-quarters out in the open market. Did that activity continue in the first quarter? Are there any plans to do that at any time in the future?

Edward Barnes

We didn’t do any in the first quarter but it’s something that again we kind of keep focused on and as opportunities arise we would certainly consider doing that again.

Operator

This concludes our session with investors and analysts. With that I’ll turn the call back over to David Barger for any closing remarks.

David Barger

Thank you John. In closing thank you for those of you joining us via the webcast today. We very much appreciate it and again to our 11,500 plus crew members thank you very much for all of your support over the first quarter. Looking forward to a good year. Thank you.

Operator

Thank you ladies and gentlemen. That concludes today’s conference. Thank you for participating. You may all disconnect at this time.

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Source: JetBlue Airways Corporation Q1 2009 Earnings Call Transcript
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