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JetBlue Airways Corporation (NASDAQ:JBLU)

Q1 2010 Earnings Call

April 28, 2010 10:00 am ET

Executives

David Barger – Chief Executive Officer

Edward Barnes – Chief Financial Officer

Analysts

William Greene - Morgan Stanley

Will Randow - Citigroup

Gary Chase - Barclays Capital

Jamie Baker - J.P. Morgan

Kevin Crissey - UBS

Daniel Mckenzie - Hudson Securities

Justine Fisher – Goldman Sachs

Hunter Keay - Stifel Nicolaus & Co. Inc.

Helane Becker - Jesup & Lamont Securities Corportation

Duane Pfenningworth - Raymond James

Jim Parker for Duane Pfenningworth – Raymond James

Stephen O'Hara - Sidoti & Company LLC

Bill Masters - Broadpoint

Operator

Good morning ladies and gentlemen, and welcome to the JetBlue Airways first quarter 2010 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.

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

David Barger

Thank you John and good morning everyone. Thank you all for joining us today. The first quarter presented many challenges including rising fuel prices and several winter storms in the Northeast, which severely limited operations at JFK, our home base, for extended periods of time.

In addition, we successfully implemented significant phases of Sabre, our new customer service and reservations system. Despite record first quarter revenues, these factors contributed to a net loss of $1 million or $0.01 per diluted share.

Throughout the quarter, JetBlue’s 12,500 crew members continued to run a great airline and deliver exceptional service to our customers. While we’re disappointed to report a loss, after four consecutive quarters of profitability, we remain focused on long-term sustainable growth, which drives a focus on controlling costs, maximizing revenues and managing capital expenditures.

We continue to focus on building and maintaining our financial strength. Even after paying down $155 million of convertible debt, we ended the quarter with over $1 billion in unrestricted cash and short term investments or 30% of trailing 12 months revenue, among the best liquidity positions in the industry.

The revenue environment has certainly been improving and we are encouraged by recent trends. Passenger unit revenues for the quarter were up approximately 5% versus last year, driven by a 4% increase in yield. We had an average one way fare of $142, our second highest quarterly average fare ever, reflecting the progress of several key initiatives aimed at attracting higher yielding customers in addition to the effects of an improving economic environment.

During the quarter as I mentioned, we successfully transitioned to a new customer service and reservations system, Sabre, a company wide effort that we began working on in early 2009. In conjunction with this change, we also integrated new revenue management, revenue accounting, and customer loyalty systems. As many of you are aware, these large scale transitions typically don’t go smoothly. The extensive preparation and investment we made up front to support customers and crew members during this cutover, including a Verizon back up call center to assist with customer calls, cap load factors and a reduced flight schedule during the cutover period, were key drivers of our success. Using many of the practices we learned during the successful opening of our JFK terminal in New York, our team worked hard to make the transition as seamless as possible for our customers with the understanding that a limited level of disruption was unavoidable.

While customers have experienced a longer than usual call hold times for certain transactions, we’re working diligently to complete the key remaining customer touching phases of Sabre, including the enhancements to our website made last week. We’re excited about the revenue opportunities Sabre presents, both in the near and long-term. In fact, we’ve already seen some of the benefits of this more robust system. Using our prior system for example, we restricted filing fare increases and a launch in sales during our regular operations. With Sabre, we recently were able to match an industry wide fare increase during a severe weather event, a seemingly modest accomplishment but a sharp contrast to prior capabilities.

We’re also starting to see the benefits of real time, GDS connectivity, resulting in higher yielding traffic. We plan to add more functionality to the Sabre platform as we move into the second half of this year. When fully implemented, the Sabre system will provide an important engine for JetBlue’s future revenue growth. It will provide pricing flexibility that we believe will enable us to attract more business customers and broaden ancillary revenue and partnership opportunities, all core JetBlue initiatives.

With respect to airline partnerships, Sabre’s e-ticketing platform will help us to better leverage our growing presence in Boston, and our unique position as JFK’s largest domestic carrier and New York’s true hometown airline. JFK is arguably the most important gateway in the world, served by more than 70 international carriers. With the Sabre platform, our new terminal, strong network, superior product, low cost and valuable JFK slot portfolio, we believe we are very well positioned to serve global carriers. To that end, we recently announced an exciting partnership with American Airlines, to essentially feed their key international routes at JFK and Boston. Specifically, JetBlue customers will have new access to 12 international routes on American, while American customers will have new access to 18 of JetBlue’s domestic routes. We believe this partnership is an innovative and cost effective way of generating additional revenue by leveraging the network strengths of both carriers, and bolstering each airline’s New York and Boston’s presence.

We also continue to benefit from our partnerships with Aer Lingus and Lufthansa. As discussed on prior earning calls, we intend to continue to develop opportunities to monetize our valuable presence in New York and Boston by linking our network with other airlines. We expect to make additional partnership announcements in the months to come.

Boston continues to be an attractive growth market, given our position as Logan Airport’s leading carrier particularly as we expect competitive capacity in Boston to decline significantly during the second and third quarters on a year-over-year basis. In addition, Logan effectively tracks a favorable mix of business, leisure and international traffic. As a result, we plan to increase our Boston departures by approximately 30% year-over-year this summer, accounting for 4.5 points of our expected 2010 ASM growth.

We believe our competitive position in Boston will continue to improve as, after years of effort, we have an agreement to acquire eight coveted, round trip slot pairs at Ronald Reagan, Washington’s National Airport. In addition as previously announced, we are awaiting approval from the DOT of our bid to acquire five additional slot pairs at this airport from U.S. Airways. We plan to begin service between Boston and Washington National in November with seven daily round trip flights. We have long desired to offer our customers this service as Washington National is the fourth largest domestic market from Boston as measured by revenues. We expect this new service will generate returns relatively quickly and strengthen our leadership position in Boston.

We also plan to connect Washington National to our other focused cities including Orlando and Fort Lauderdale, with one daily round trip flight each.

Our Caribbean and Latin American markets continue to produce strong results. In addition, these destinations generally require a minimal upfront capital and despite limited daily frequencies, are relatively low cost and consistent with our sustainable growth and free cash flow goals. Our visiting friends and relatives or VFR markets continue to complement our leisure driven markets very nicely from both the seasonal and day of week perspective.

As previously announced, we plan to begin service next month to Punta Cana, which will be our fourth destination in the Dominican Republic. We now offer more flights to the Dominican Republic from the continental United States than any carrier. In the second quarter, we expect our Caribbean, Latin America capacity will be up approximately 20% year-over-year, accounting for 3.5 points of our expected 2010 ASM growth.

Turning to the fleet. We did not take delivery of any new aircraft during the first quarter, keeping total capital expenditures at modest levels. As a result we remain on track to generate positive free cash flow in 2010. We continue to work with our aircraft manufacturers to reduce our capital expenditures, a critical component of the past positive free cash flow.

In early February as part of our ongoing discussions with Airbus regarding our fleet plan, we deferred six A320 aircrafts scheduled for delivery in 2011 and 2012 to 2015. Our financial strength affords us the flexibility to take advantage of new opportunities. To that end we plan to lease on a six year basis seven used A320s from G-CAS later this year. These aircraft were previously owned by JetBlue and will be overhauled and returned to JetBlue’s original configuration prior to lease commencement. Subject to meeting these delivery conditions, three of these A320s are currently scheduled to be delivered in June, two in the third quarter and two in the fourth quarter. With these deliveries we expect to end 2010 with a fleet of 162 aircraft.

We expect the favorable lease terms of these aircraft will support important and profitable growth opportunities in our network, including the launch of new service to Washington National Airport and new service from Hartford, Connecticut to Fort Lauderdale and Orlando, building on our successful Northeast to Florida network which is core to JetBlue’s franchise.

As we discussed on our last earnings call, the bulk of our 2010 growth is being driven by higher aircraft utilization and the annual run rate of new cities and aircraft added to the fleet in 2009. While we believe our existing aircraft are either producing returns or are invested in markets with significant strategic potential, we continue to identify opportunities to further increase utilization where demand exists. For example, we have successfully utilized overnight aircraft time on flights to Puerto Rico and the Dominican Republic, driving revenues with minimal costs.

In contrast, success in key markets such as Washington National will require incremental aircraft for optimal scheduling with primetime departures. We expect the seven A320s will drive modest additional capacity growth for the full year or about half a percentage point. As a result, we expect our 2010 ASMs to increase between 6 and 8%. For the second quarter, we expect our ASM growth to be up between 4 and 6% year-over-year, again largely driven by more efficient asset utilization.

Before closing I’d like to provide a brief update on the closure and rehabilitation of JFK’s principal runway known as 13 Right, 31 Left. The Port Authority of New York and New Jersey is about halfway through the project, which began on March 1. As previously discussed, the major carriers operating at JFK have reduced flights, helping to mitigate the impact of this closure. We also continue to work with the FAA and the Port Authority on various operational initiatives to reduce delays during this period. As a result of extensive planning, we have experienced minimal operational impact thus far. While we faced challenging weather conditions at JFK during March, we have experienced only brief delays as a result of runway closure.

Favorable weather conditions during the month of April have certainly helped to minimize the impact. The project is currently on schedule, with the runway expected to reopen on July 1, ahead of the summer peak travel schedule. We look forward to this completion as we believe it will alleviate some of the challenges of operating at JFK.

In closing I’d like to thank our 12,500 crew members for all their hard work and dedication. All airlines, by the nature of this business, are particularly susceptible to changes in fuel, GDP and a host of other external forces. I believe JetBlue is well positioned with a strong network, solid liquidity and the best crew members in the industry.

And with that, I’d like to turn the call over to Ed for a more detailed review of our financial results.

Edward Barnes

Thank you Dave. Good morning everyone and thanks again for joining us today. I’d also like to join Dave in thanking our 12,500 crew members for all of their hard work during a challenging quarter.

Transitioning to a new reservation system has been an enormous undertaking, impacting all of our crew members who have risen to the challenge by running a solid operation during this transition, despite unusually severe weather in the Northeast, including several multi day weather events. To put this in context, during the quarter we canceled over 1,300 flights due to weather compared to only 550 weather related flight cancellations in the first quarter of 2009. As a result of the severe weather, we estimate first quarter results were negatively impacted by a net $10 million, including $15 million in lost revenue which was offset in part by $5 million in fuel savings and landing fee reductions.

One time Sabre related expenses during the quarter were approximately $15 million. Further, we estimate approximately $8 million in lost revenue related to flight load caps, fee waivers and schedule adjustments made to insure a successful cutover. These factors, along with rising fuel prices, drove a $31 million year-over-year decline in operating income. Total revenue for the quarter increased 9.7% year-over-year to a record $870 million. Unit revenues for the quarter increased 3.4% compared to a year ago. This is a significant improvement from the 3.6% year-over-year decline we experienced in the fourth quarter.

Yield during the first quarter was up 3.8% and load factor was up about 1% on 6% more capacity. We benefited from positive pricing traction across all markets and participated in the federal industry wide fare increases during the quarter. Monthly PRASM improved throughout the quarter, with PRASM down 3% in January and up by 2% in February and 16% in March. March results significantly exceeded our expectations due to close in strength during the latter part of the month, as demand for travel was particularly strong leading into the Easter and Passover holidays, driving higher than expected yield. We estimate the positive impact of Easter and Passover on March PRASM was approximately 7 percentage points or about 2.5 percentage points of first quarter PRASM.

Given our VFR and leisure focus, along with strong Northeast, Florida traffic, the Easter and Passover holiday tend to have a greater impact on us compared to many of our peers. While positive pricing traction during peak travel periods has been encouraging, we still see considerable difference in demand during peak and off peak periods. We believe the Sabre platform, when fully implemented, will help us better manage these trough periods by improving our overall business, leisure mix. In fact, we have already seen some nice yield traction in short haul business oriented markets since the transition to Sabre only three months ago.

We believe Sabre will also help us maximize ancillary revenues. For example, we recently began testing our variable pricing approach to even more leg room offering. Prior to Sabre, we were restricted to pricing EMLs only by segment length of haul. The new Sabre functionality allows us to set unique EML prices for different markets, regardless of length of haul, to better match price with demand, similar to the way we set fares. We are currently testing various pricing changes in select markets, and while it’s still early we believe this change to EML pricing could increase revenue by nearly $20 million on an annual basis.

Turning to our ancillary revenue performance for the quarter, as a result of extraordinary weather in the Northeast and the cutover to Sabre, we voluntarily waived change fees for our customers during more events than we had anticipated, resulting in lower change fee ancillary revenue. When ancillary revenues reported in the passenger revenue line are combined with those in the other revenue line, total ancillary revenue for the first quarter was about $18 per passenger.

Shifting to costs, fuel remains our most significant cost, representing over 30% of our total operating expenses in the first quarter. While the price of crude oil increased by about 80% compared to last year, we continue to actively manage our fuel hedge portfolio to help manage price volatility. Including the impact of fuel hedging, JetBlue paid $32 million more for jet fuel in the first quarter. For the second quarter of 2010, we have hedged approximately 42% of our anticipated jet fuel requirements, using swap arrangements, [collars] and caps. For the rest of the year, approximately 38% of our projected fuel consumption is hedged, and we have crude oil caps in place for the first three quarters of 2011. The underlying detail of our hedge positions are more specifically described in our Investor update which we file later today.

The cost of jet fuel has increased since last quarter and remains volatile, particularly in prompt periods. We are planning on a price of $2.43 per gallon in the second quarter, and $2.44 for the full year, including the impact of hedging and taxes. As indicated in the Investor update, these prices are based on the forward curve as of April 23 and exclude transportation and plane fees.

Excluding fuel, first quarter unit costs rose 8.9% year-over-year. This was slightly worse than our guidance as flight cancellations resulting from the storms reduced our planned year-over-year ASM growth by about 1 percentage point. Excluding the impact of these flight cancellations, ex fuel costs, increased 6.7% in line with our guidance. Salaries, wages and benefits increased roughly 11% per ASM on a year-over-year basis, driven primarily by the pilot pay increases implemented in June of last year and additional staffing levels related to the implementation of Sabre. We estimate we incurred one time costs of approximately $6 million in connection with Sabre related staffing during the first quarter. Other operating expenses increased 25% per ASM, due primarily to costs related to the implementation of Sabre. We incurred one time other operating expenses of approximately $10 million during the quarter, including the Verizon back up call center.

Moving below the line, interest expense decreased 6% year-over-year or $2 million, due primarily to lower interest rates. At the same time, interest income and other increased by $8 million, primarily due to the unrealized holding losses recorded in the first quarter of 2009, related to the valuation of auction rate securities held at that time, impacting year-over-year comparisons.

Turning to the balance sheet, we ended the quarter with unrestricted cash and short term investments of $1.1 billion. During the first quarter, we made $205 million in debt and capital lease payments, including $155 million of our 3.75% convertible bonds, having an original balance of $250 million that as expected were put to us in March. Our scheduled principal payments for debt and capital leases are expected to be a very manageable $110 million for the second quarter, and $200 million for the remainder of the year. This includes repayment in full of the $63 million loan from UBS, which is collateralized by $72 million par value of auction rate securities. As you may recall, UBS is required to repurchase these securities at par value beginning in June of this year. We intend to repay the UBS loan from these proceeds.

Turning to the fleet, JetBlue ended the quarter with 151 aircraft. With regard to CapEx, we spent approximately $30 million in non-aircraft CapEx during the first quarter, $7 million of which related to the implementation of Sabre. We estimate capital expenditures of about $130 million in the second quarter and $365 million for the full year, $220 million of which relates to aircraft.

With minimal debt maturities and capital commitments for the rest of the year, we believe JetBlue is positioned to generate positive free cash flow and maintain strong liquidity in 2010. We expect to end the year with cash as a percentage of trailing 12 months revenue of at least 25%.

Turning to the revenue outlook, we are encouraged by signs of an improving economy. In April we face a more difficult year-over-year PRASM comparison than we did in March. We currently expect April PRASM to be up about 3% year-over-year. When we combine our March revenue performance with estimates for April to neutralize the effect of the holiday shift, we expect total PRASM for these months will be approximately 8% on a year-over-year basis. Although May is historically a trough month due to the large leisure customer base, we expect to benefit from easier year-over-year comparisons. For the second quarter, we expect PRASM and RASM to increase between 6% and 9%.

While it is still early, preliminary bookings for the summer travel period looks strong. As we move through the second half of the year, PRASM comparisons become sequentially easier as we expect to benefit from the continued growth and maturation of new markets opened in and before 2009. In addition, we expect to see continued revenue benefits from Sabre. While ancillary revenues lag a bit in the first quarter as a result of change fee waivers associated with the severe weather and our transition to Sabre, we expect ancillary revenues for the full year to increase approximately 10% year-over-year. We currently expect full year RASM and PRASM to increase between 6% and 9% year-over-year.

We continue to work hard on the cost side, while at the same time making prudent investments in our infrastructure, product and network. In the second quarter we expect continued cost pressures on salaries, wages and benefits as a result of the impact of pilot wage increases implemented in June of last year. As we discussed on our last call, we expect these cost pressures to be heavily weighted in the first half of the year, as we anticipate realizing the benefit from modifications the work rules towards the end of the second quarter. While we don’t expect any material additional one time expenses associated with our transition to Sabre, we do expect to face continued pressures on salaries, wages and benefits due to longer talk times for our reservation agents required by the increased Sabre functionality and recent changes made to our loyalty program, TrueBlue.

Also as a reminder, we recognized approximately $11 million in tax incentives during the second quarter of 2009, which were credited to other operating expenses. This will impact our year-over-year ex fuel chasm comparisons in the second quarter by about 2 percentage points. We expect ex fuel chasm in the second quarter to be up between 9 and 11, and chasm all end to increase 12 to 14. For the full year, we project chasm will increase 8 to 10% and ex fuel chasm will be consistent with our January guidance of up 3 to 5%.

In closing, while it is disappointing to report a $1 million loss for the quarter, particularly against the backdrop of four consecutive quarters of profitability, we believe we are on the right track to return to sustained profitability. We are making prudent investments designed to generate additional revenue over the long-term, while maintaining our financial strength. We thank our customers for their business and our shareholders for their continued support.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Greene - Morgan Stanley.

William Greene - Morgan Stanley

I’m wondering can I just talk a little bit more on the Sabre one time items. If I heard you correctly it was about $15 million in costs and $8 million in lost revenue. Is that right?

Edward Barnes

That’s correct.

William Greene - Morgan Stanley

Does any of this roll forward into your second quarter guidance or are those truly one time that just don’t repeat?

Edward Barnes

There’s a few one time items that will roll into the second quarter, but they’re not of any significance, so the majority of it really hit in the first quarter.

William Greene - Morgan Stanley

And going forward there’s not a higher expense number we need to bake in for Sabre just for running it, just being a more expensive system or something?

Edward Barnes

Well, there’s a couple things you probably need to take into consideration. First is, I don’t think we’re ever going to get back to where we were at from a reservation center perspective. This is a system with additional functionality, so there’s probably some built in inefficiencies there. Also, we have a little bit of a shift in distribution channels with higher GDS bookings. And as the revenues increase also higher credit card fees. So there are some kind of ongoing, but more than offset by the revenue that will be generated.

William Greene - Morgan Stanley

If I listened to RASM guidance, I just want to make sure I understand this. You said that plus 3 is your expectation I think for April. If I remember correctly last year you had plus 5 on the RASM number, so that’s actually a pretty good starting point for the comps to get a lot easier, down double digit last year in May and June. Wouldn’t that suggest something much better for RASM or what do you see that’s giving you the decision that you want to be sort of conservative here?

David Barger

Good morning Bill. When we look at the second quarter and you’re right, the year-over-year comps May and June do become easier, this is still when you get outside the Passover, Easter, spring break travel period for our company as it stands today, even though we’re looking to further diversify our customer base, this is a period of time where we’ve traditionally been weaker than other quarters. So this is how the math is running right now. It was really interesting to watch the March build but so much of what we thought was transpiring was really tied into the holiday peak. And you know the peaks are strong as before, but the troughs are still the troughs. And this is what we’re looking to minimize across our company.

William Greene - Morgan Stanley

But you had a number of negative, one time events that won’t repeat as well. That should make it easier, no?

David Barger

That’s true. I think when you look at things like the number of winter events that we had and that type thing, but it’s still, when I look at our customer base and the strength of again seasonally Florida, the Caribbean, as we’re looking to smooth in more of a business phase, you know this is where the math is taking us. And I think we’ve always attempted to be very transparent when it comes to our guidance.

Operator

Your next question comes from Will Randow – Citigroup.

Will Randow - Citigroup

Can you talk about when you thought about these seven aircraft, can you talk about the incremental return on capital? How you thought about that, assuming that you’re capitalizing leases when you’re running their math. And just how we should think about that.

Edward Barnes

Well I think there’s a couple of things to take into account on these aircraft. One was the ability to defer some of the A320s going forward. So if you look at kind of our commitment to take A320s it really hasn’t shifted much for the next three years, as we deferred six and kind of moved seven forward. Second thing is we previously owned these aircraft, so we’re pretty familiar with the aircraft. They’re in our configuration. They’re going to be coming off of C checks and engine overhauls and landing gear change outs, so they should be in pretty good condition.

And we really got some pretty favorable lease conditions on these as well. So kind of all in, I think it was a kind of a win win. You couple that with really, as we’ve said before, we’re not going to let the order book dictate what the network looks like. And the network really had a need for these aircraft. They more or less pulled them through and really the timing just worked out well, I think, for us.

Will Randow – Citigroup

Just as a follow up, did these aircraft give you a return on invest to capital target or is it more you’re trying to control business schedules in Boston? How should we think about that piece of it?

Edward Barnes

Well, I think they really fit in well with kind of our free cash flow. So from a not having to put down pre-delivery deposits on these aircraft, from having favorable lease payments on the aircraft, as well as maybe a maintenance holiday on them as well, I think they fit well in with free cash flow and the markets that we’re going to put them in immediately I think are accretive free cash flow for 2010.

Will Randow – Citigroup

Just lastly, Dave, you hit some of the potentials that could have ancillary initiatives we should be thinking about given the Sabre implementation. I believe you were testing a number of initiatives recently.

David Barger

Yes. Good morning Will. I think we’re managing expectations with the ancillary revenue initiatives. And what I mean by that is the conversion of Sabre is still pretty fresh and our technology team likes to remind us, and they’re accurate, that the tail on the implementation of Sabre is several months as we move throughout and really into the second semester of the year. So things like even more legroom as Ed mentioned in his comments, and the ability to really price into the LA basin but differentiate what we’re doing into a Burbank versus Long Beach. That’s a real positive.

Last quarter, really not tied into Sabre, Ed talked about the ability to buy onboard product, which is really not into the second semester this year. So I think its probably the headline really, Will, is even though Sabre gives us a great deal of capability, we still need to further digest the system before we really roll out further ancillary revenue initiatives. And I think this is where we’re being tempered in terms of how we’re taking a look at the rest of 2010 versus the first half.

Operator

Your next question comes from Gary Chase - Barclays Capital.

Gary Chase - Barclays Capital

Just wanted to get a little bit more color if I could on your thoughts about how the back half of the year plays out. I know you’ve got accelerating capacity growth and by the way, as somebody who has Hartford as the hometown airport, I appreciate it so I’m not complaining about that part of it, but we generally think of incremental costs on that incremental capacity. And I think I understand where the chasm guidance goes as you move through the year. What’s a little harder for me to get my arms around is the RASM guidance. And it would kind of seem if I’m thinking about it like the incremental profitability you’re talking about, as you add these flights, is going to be significantly better than I would naturally get. So I’m trying to drive that, what’s in the assumptions? Do you have sort of industry improvement modeled in? Do you think some of these partnerships kick in? Is there a meaningful contribution from the GDS mix? What is it that makes this accelerating capacity so compelling?

David Barger

Good morning, Gary. I think again just to highlight the four Embraers that we are taking this year as well as the seven A320s announced today, aggregated is approximately 1% of our ASMs over the course of the year. So think of these aircraft really as more running into 2011 and beyond, if you will. When we take a look at the first quarter from the standpoint of revenue, and again the strength really into March tied into the holidays, a little bit early to try to dissect what are we seeing through the GDS channels? What are we seeing as a result of Sabre? And then the seasonality, what we’re seeing into the second half the year, it’s really the maturation of markets. I think I would probably manage expectations, it’s less about Hartford and Reagan and even Punta Cana because Hartford and Reagan are really into the November timeframe.

So it’s the overall economy, it’s the industry strength that we’re seeing. I think again it’s the commitment to building strength in Boston and building strength in Latin America. And really the rest of the system is still flat, so this is truly an investment in two targeted areas. And again, these markets, several of which we opened last year, there’s maturation on a year-over-year basis.

Edward Barnes

And I think I would add to that, Dave, the impact of Sabre towards back half of the year as well.

David Barger

Definitely. So whether it’s GDS or changing business mix or otherwise, I think it’s going to be additive.

Gary Chase - Barclays Capital

It’s a little hard to tell. It just feels like not necessary for JetBlue, but you’re certainly going against some tougher industry comps as we get into the third and fourth quarter. And it seems like you’re suggesting that your own performance is going to accelerate against that backdrop. Is there a way to think about how much of it is maturation? Is that basically the story? Or do you have a material contribution from partnerships and a different business mix with Sabre?

David Barger

Yes, and thanks Gary for highlighting the partnerships because I didn’t cover that in my first set of comments. I think again managing expectations, the Sabre conversion is so close in so things like [La Panza] not overly meaningful at this point, especially as we take a look at how we’re being sold as a non-star carrier. Things like American really aren’t into the second later into the second semester. So what’s really in play has been the historic presence of Aer Lingus. So I would ask you to take a look at the second half of the year as less about partnerships, although we’re building the partnerships, we’ve made the investments; Sabre; Terminal Five; the focus up in Boston as well. I would think of it really as Boston investment, year-over-year we’re up 30%; six years ago we weren’t in Boston. This summer we’ll be at close to 80 departures a day. And this investment in Latin America as well.

In the industry as you know we don’t fly the long haul, international first class, business class. We’re not a 70% corporate based kind of company, so I think when you look at our network, during difficult times, we tend to do very well. And when the economy is raising all [shifts], maybe we’re not as hot as some of the other carriers as well. The cyclicality if you will of their business model. That’s how we’re looking at our revenue environment.

Gary Chase - Barclays Capital

The Sabre cost impact in Q2, did you quantify that in dollars?

Edward Barnes

We did not.

Gary Chase - Barclays Capital

Is there a meaningful?

Edward Barnes

It’s not a meaningful one time cost. There is some stuff that kind of dribbles over a little bit, but there are ongoing costs. And we did cover that kind of in the res center and increase in GDS bookings is the way I think you should think about it.

Operator

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

Jamie Baker - J.P. Morgan

A question on the cost guidance and tarmac delays. I’m wondering if you specifically budgeted for any violations in the new three hour rule. The reason I ask is that obviously when a single event could be as much as a $4 million hit, so in the event that you had a violation I’m trying to decide whether that automatically brings earnings down or if you’ve already baked something in relative to storms, then maybe it doesn’t. Obviously the goal is to avoid any of those delays, but if it happens I’m wondering how we should treat our models.

David Barger

Yes, as I look at the three hour tarmac delay rule, into effect this past Monday, we look at zero as the right number. And so that’s how we’re building our model, whether operationally or financially. By the way, I think internally at JetBlue we’re calling it a two hour model. And that’s going to start to trigger decisions at two hours. We’ll see how the rest of the industry treats it. We have to be sensitive because of our geography up here in New York. We’re up in the Northeast. So that’s how we’re looking at it, zero is the right number.

Operator

Your next question comes from Kevin Crissey – UBS.

Kevin Crissey - UBS

Did my math not work or was it the adjustments from Sabre and the other effects? With the monthly RASMs kind of not totaling to your quarterly RASM or did I do something wrong on that?

Edward Barnes

Yes, Kevin, I don’t think there was anything wrong there. You know the monthly traffic that we release are really preliminary numbers and as we go through kind of the quarter close its certainly subject to adjustment and sometimes those just round down.

Kevin Crissey – UBS

Are you seeing for the Caribbean in May we have some data there that looks a little bit soft in the Caribbean in May. Is it something you’re seeing as well or not so much?

David Barger

Kevin, we’re seeing strength in the Caribbean. Now that said, our RASMs are up on a year-over-year basis. And the industry, when we look at our landscape, is also up on a year-over-year basis. But I think anything that we’re seeing in the Caribbean as opposed to a one month look, and three weeks ago as we spent two days in the Dominican Republic, as an example, Latin America, the Caribbean, very strong.

Kevin Crissey – UBS

Dave, you mentioned looking at how Lufthansa’s selling your tickets as a non-star carrier. I took that to be not as well as you’d like. And if that’s the case, I kind of want to understand their thoughts on your AMR relationship and their seats on the board and their share ownership.

David Barger

Sure. I think headline with the Lufthansa team, incredible strength that it has provided to JetBlue and respect the investments the board seats global expertise. I think we always knew though, Kevin, that as a result of not being part of star and then you add continental into star, that when you look at biased from a standpoint of connecting opportunities, there would be less of it. Now with all that said, Lufthansa’s one airline. There are several airlines within the star alliance. I think I would, you know as you look at the American partnership that we’ve announced at this point, its inter line slot trades, it’s the ability to really use our architecture at JFK and Boston, and I think we’re starting to see this affirmation of our investments. It’s Aer Lingus. It’s Lufthansa. It’s American. And as I mentioned in my prepared comments, additional announcements in the weeks and months to come.

So I think that’s the way I would ask you to look at it, and that’s pretty much the way that our commercial team has been looking at it over the last several months, not knowing exactly what would transpire until we had made the conversion over into Sabre.

Operator

Your next question comes from Daniel Mckenzie - Hudson Securities.

Daniel Mckenzie - Hudson Securities

One quick follow up question here on the tarmac rule, you know potentially a problem here with canceling flights at JFK is the lack of gates to return to, so I’m wondering if you could elaborate a little bit on your contingency plans, you know such as gate or hard stand space availability?

David Barger

Sure. Good morning, Dan. By the way, the Port Authority conducts a, and the FAA, a fabulous tour of the runway construction project and even though we’re talking about the early July timeframe, I wouldn’t be surprised if the project comes in not just on time but early. I think the way that we’re looking at Kennedy and as we’re looking at our entire network this way, always be ready for the unexpected. By the way, that could be a diversion. You know, Atlantic City, think Hartford, it could be a [Stuart], Newburgh, or whatever the case might be up here.

How we’re looking at Kennedy, our investment, 26 gates, plus our hard stand, 14 acres adjacent to Terminal 4 and Terminal 5, as well as acreage over at Terminal 6, our former home, I think really sets us in very good shape at Kennedy. But the spirit of Kennedy we’re taking to every other station across our network. If I may, too, Dan I think what’s really interesting about what’s happening at Kennedy today and applaud it to the FAA and the Port Authority, some of the procedural changes; departure sequencing; and the ability to sequence through a centralized command center, access to the runway. We would really like to think this will stay in place, even after the runway construction process. This is a real positive for Kennedy Airport and the attributes of being environmentally friendly, etc., are significant.

And we’re also doing things such as 31 Right departures. And you’re very familiar with JFK and the ability to see flights heading to the West Coast over Robinsonville but departing on 31 Right, and de-coupling La Guardia. Real positive Dan. So I think there’s some really good lessons learned, but we’re not taking the three hour tarmac delay lightly. That’s a statute that is very meaningful to this company.

Daniel Mckenzie - Hudson Securities

Secondly, you know costs that are up 12 to 14% versus revenues only up 6 and 9%, obviously are not sustainable. But it looks like these trends are moderated with respect to the full year. And it looks like a lot of the relative mis-match in 2010 seems to be capacity left JFK and went to Boston, perhaps other markets, which may be pressuring overall RASM trends, given the increased overlap with Southwest. I guess my question is whether the network strategy is reset once again the runway at JFK is fixed or I guess more specifically, wonder if you could help us understand the balance, the commitment to markets that you’re in today versus sort of the competitive headwinds.

David Barger

Sure Dan. It’s JFK, home base, new terminal, working with the Port Authority on other investments, decision to relocate to Long Island City in Queens, New York’s hometown carrier, so no movement at all away from our commitment to New York and the five airports that we serve. By the way in comment, the slot trade with American Airlines for as we’ll call them off peak slots for us relative to American’s network in exchange for very valuable commodity at Reagan National, very positive. And this year, by the way, the use it or lose it rule of the slots is waived because of the construction. But even with the trade, JetBlue, largest carrier at JFK and that’s very meaningful to us and other global carriers, that define New York as arguably the most significant gateway in the world.

When I look at Boston, this commitment to Boston, there’s a significant year-over-year build. I wouldn’t think of this as a drag on RASM at all. I would think of this as a longer term commitment to build relevance in Boston or in Latin America. Let me just go back to Boston for a moment. Frequencies for the business fliers, Sabre, a new TrueBlue program, so as we look at commitment to the rest of our network but very significant commitment to Boston and Latin America.

Operator

Your next question comes from Justine Fisher - Goldman Sachs.

Justine Fisher - Goldman Sachs

Speaking of targeting more of the corporate market in Boston, with the new relationship with AMR given that they don’t have a shuttle, would you guys consider creating a shuttle type more corporate focused operation with them between New York and Boston now to compete with the other shuttle?

David Barger

You know, Justine, considering that as we take a look at Boston our focus into New York is really through Kennedy, and if I read your question, challenge, is there something we can do with American into La Guardia, with what Eagle and I can honestly tell you we’ve had discussions on interline and slot trade and we’ll see where the teams go with further discussions regarding partnership with American Airlines. But today the only focus is really on the 18 JetBlue routes and the 12 American routes and we’re not talking about Boston or La Guardia specifically.

Justine Fisher - Goldman Sachs

Just on the A320s, I guess you guys chose to defer the newer aircraft to 2015 and it seems as though whatever capacity was going to be added that you would use those where you’re now using these new lease aircraft. Why the decision not to take the new deliveries? Was it PDP financing or you’re just getting attractive lease rates? Or was the timing of the decision just different such that you had made the decision to defer before you got the deal from G-CAS?

David Barger

I think it’s kind of all the above, although there was the need to move some aircraft forward. The leases are very favorable and they do defer PDPs at the same time as we defer those aircraft. So as I said, very accretive to free cash flow but I think it fits in well with our business plan.

Operator

Your next question comes from Hunter Keay - Stifel Nicolaus & Co. Inc.

Hunter Keay - Stifel Nicolaus & Co. Inc.

Question for you on your slots at JFK. I mean, how many more of these do you think you’re willing or able to monetize? And is there a bit of a concern from maybe a political blow back and the way you obviously received the slots in the first place? If you try to let’s say swap any more slots going forward, do you think you have kind of a cap on that as much as you’d be willing to go?

David Barger

Hunter, I think as we look at Kennedy, it’s a significant investment. That’s our home. And so this is a perfect opportunity because of under utilized slots because of time of day and then access into Reagan National. So I would never say never in terms of the ability to take advantage of another opportunity that might be on the landscape, but we built Terminal 5 for close to 200 departures a day. And we need our slot portfolio to support what we’re looking to do with our investment over at Terminal 5, so hopefully that gives you a little color there.

Hunter Keay - Stifel Nicolaus & Co. Inc.

Just to piggy back a little bit on Justine’s question, I’d like a little more color if you would on the lease decision because the way I look at it, it looks like you’re running your fleet. You’re clearly running less than 12 hours a day. I think utilization is down from something like 14% from peak levels. Do you think there might have been an opportunity there to fund some of this growth in new markets from under performing? You mentioned yourself that the trough periods are not performing as well as you hoped. Maybe some sort of Southwest like schedule optimization initiatives to fund that new growth rather than pulling forward new aircraft and leasing new ones from G-CAS? Any color there would be helpful.

David Barger

Hunter, I think it has more to do with kind of the overall business plan. And the way we achieved a lot of utilization in past years was really kind of back of the clock flying, so a lot of redeye type flights. What we have a need for specifically with Boston and D.C.A. was more business type flights, so they needed to be more peak period flying, so that was the need for the additional aircraft. As the economy comes back, I think there still will be the ability to add back of the clock flying and maybe push that utilization up a little bit.

Operator

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

Helane Becker - Jesup & Lamont Securities Corportation

I do have one on the revenue that was affected in the first quarter, did that number you gave us include the impact of the waived fees? And if not, do you have an estimate for what waiving fees would have cost you in the quarter?

Edward Barnes

Yes, the lost revenue in the first quarter associated with the weather event did include the lost fees. We haven’t specifically indicated what the exact amount of the waiver was, but it did impact the other ancillary revenue line so I think it’s probably something that you can kind of figure out.

Helane Becker - Jesup & Lamont Securities Corportation

Just with respect to the tarmac rule, if you have to cancel a flight and then your goal obviously would be to rebook the passengers, do you have to refund the money if they’re not able to rebook?

David Barger

Well I think that when we look at it, in essence that would be a weather cancellation, whether I’m surmising how you answer that question. So you know we’re certainly going to take care of the customer. We have our own bill of rights that been put into place since 2007, so including when we can’t make good on a trip due to weather, we’re certainly going to give you the opportunity to rebook. But if you can’t, Helane, and that’s pretty rare, I’m sure we would take care of the customer.

Helane Becker - Jesup & Lamont Securities Corportation

So from an industry point of view, that’s going to be a company by company decision?

David Barger

Yes, I would think so. The statute itself is very specific in terms of the statute, but I think every airline is probably going to take their own position on what they’re doing with customer service. And again I believe we’re the only airline out there on the landscape with our own passenger bill of rights. So again, my comments earlier on the call, we take the tarmac delay statute very seriously.

Operator

Your next question comes from Duane Pfenningworth - Raymond James.

Duane Pfenningworth - Raymond James

Just on the aircraft that you’re pulling forward, I guess I missed the justification on that. Was it that you couldn’t grow fast enough in Boston without them?

David Barger

Well I think, Duane, it was really more the alignment of opportunities, so it was the opportunity to grow in Boston; it was the opportunity to grow in DCA; along with and well aligned with the need for G-CAS to lease these seven aircraft that came back to them. Getting favorable leases on these aircraft that are well aligned with opportunity I think was kind of a win, win.

Duane Pfenningworth - Raymond James

What was your capacity growth in Boston for the second half, ex these aircraft?

David Barger

Overall the set of aircraft, the way they’re layered in Duane, it’s like 0.55% of our ASMs for the year, so it’s not material. And what we’re doing with Boston and down to DCA really isn’t until the November timeframe, so I think as Ed mentioned, this is an opportunity. These aircraft, we have a maintenance program on these aircraft since we took delivery on them, so it’s not too often the aircraft that we’ve sold that come back into the portfolio that we’re familiar with, that fit quite well with our free cash flow model, and works quite well with what we’re looking to do with the network as well. So that’s what really drove that decision.

Edward Barnes

And I do think, Dave, a lot of the growth is very targeted as we said before into the Caribbean and into Boston. And a lot of it was funded as you would suggest by the remainder of the network. So if you looked at the rest of our network absent Boston and the Caribbean, it would actually be down.

So it was either through increased utilization of existing aircraft or pulling down other routes, and then you had the addition of these aircraft as well.

Duane Pfenningworth - Raymond James

On your ex fuel chasm growth this year, I’ll call it 4 points, can you quantify how much of that is non-recurring Sabre and JFK and looking forward, how much of that do you think you can get back next year? What are you thinking, given these aircraft that you’re pulling forward, how are you thinking about growth beyond 2010? I mean, should we be thinking about 10% growth next year? And in that context, should we be thinking about continued pressure on ex fuel chasm next year? Any help there, please.

Edward Barnes

Well I do think that we have probably moving forward an easier time with ex fuel chasm. If you look at the increase in pilot pay that we implemented in June of 2009 and the expected efficiencies from work rules will be roughly in the balance of this year. You look at the one time costs of $15 million for the Sabre implementation that impact the first quarter of this year compared to the following years, where we’ll get some of the efficiencies from actually implementing that. So I do think they get easier. You know we will have increasing maintenance probably over the next couple of years as the fleet continues to age. But I don’t see any other big drivers of ex fuel chasm moving forward.

Duane Pfenningworth - Raymond James

Any thoughts on a limit on growth at this point?

Edward Barnes

No, we really haven’t guided to that. I mean you can go look at what our commitments are for aircraft. We have four A320s and five E190s committed in 2011.

Jim Parker for Duane Pfenningworth - Raymond James

Bringing these six 319s forward just reminds me that the industry most, well a lot of people in the industry are saying we’ve learned our lesson about growing capacity, but you are bringing six aircraft forward, the industry has deferred a lot of aircraft. Perhaps they as certain parties begin to bring aircraft, the others will want to protect their market share, so Dave my question is you know and I think you’ve been an advocate of suggesting that big problem with the industry is there’s too much capacity. So is the industry going forward, is the revenue environment that good that hey, maybe its time to think about adding capacity? And has the industry learned this lesson?

David Barger

Thanks Jim, and I think just clarification we’re seven A320s right into the fleet and we also in February announced the deferral of six A320s from ’11 and ’12 and the 2015 timeframe, just clarity there. But what we’re doing with our growth, even before these aircraft and so as you look at our ASM guidance that was issued on the last call, ASM guidance that’s issued today which is fairly, I mean it’s not a large number of change because of the way the aircraft are hitting the fleet. But our growth, Jim, is very targeted in Boston. I mean Boston is, again, we weren’t there six years ago. We’ll be close to 80 departures a day this summer and then Latin America. And when I think about our targeted growth because the rest of our system is basically flat or down just a little bit, you’re right. And I have been challenged with that about the growth of the industry.

But my comments would be that we’re driving our business based on free cash flow on a sustainable basis. Every investor conference I go to is the return on investing capital metric and without declaring what that range is, you bet, that’s how we’re running our company. And I think that when I look at the rest of the industry who had tended to benefit from either some kind of reset in their business plan called bankruptcy or a merger or acquisition, they’ve run their models differently. And I continue to believe that the way that they look at North America or across, relative to our route network, is differently. They look globally and I think the way we look is certainly our focus, it’s been New York; obviously it’s Boston; it’s Latin America; it’s other focused cities as well. And I think that’s why we’re different, Jim.

Operator

Your next question comes from Stephen O'Hara - Sidoti & Company LLC.

Stephen O'Hara - Sidoti & Company LLC

Can you just talk about the unionization pressures and if you guys think there’s going to be any added pressure given the environment and the administration going forward?

David Barger

Sure, and thanks for the question Steve. The answer is yes. And I think as we take a look at, what I mean by that is a change within the NMB. And there’s been quite a bit of discussion regarding changing the landscape in terms of employees electing to unionize, which obviously they have the right to do so. And so it’s quite a bit of change that’s taking place from Washington. Now all that said, I’d like to think that we are running our company regardless of changes taking place in Washington underneath the NMB rules. And that is that if we want to collaborate with our crew members as opposed to negotiate with our crew members. And so I think that yes, there’s changes taking place within Washington; the landscape is shifting a little bit differently; and I would like to think our 12,500 crew members including leadership we’re looking at our vision and our goals through the same lens.

Operator

Your next question comes from Bill Masters – Broadpoint.

Bill Masters - Broadpoint

Ed, if I could ask you to briefly review your long-term debt payments, that would be appreciated.

Edward Barnes

Bill, maybe instead of doing it on the call here we can just hook up a little bit later.

Bill Masters – Broadpoint

Okay. Sounds great.

Operator

At this time we have no further questions. And with that we’ll turn it back to you, Dave, for closing remarks.

David Barger

Thanks John and to those of you on the call today we certainly appreciate you joining us and those listening in on the webcast as well. I think most importantly to our 12,500 crew members, certainly appreciate your dedication to delivering the JetBlue experience. Until our next quarter, thank you for joining us today on behalf of our crew and New York’s hometown airline. We’ll talk to you in 90 days. Thanks.

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Source: JetBlue Airways Corporation Q1 2010 Earnings Call Transcript
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