Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Dave Barger - CEO, President & Director

Ed Barnes - EVP & CFO

Analysts

Bill Green - Morgan Stanley

Michael Linenberg - Deutsche Bank

Will Randow - Citigroup

Duane Pfennigwerth - Raymond James

Gary Chase - Barclays Capital

Hunter Keay - Stifel Nicolaus

Glenn Engel - Bank of America – Merrill Lynch

Bob McAdoo - Avondale Partners

Dan McKenzie - Hudson Securities

Helane Becker - Dahlman Rose

JetBlue Airways Corporation (JBLU) Q2 2010 Earnings Call July 22, 2010 9:30 AM ET

Operator

Good morning ladies and gentlemen, and welcome to the JetBlue Airways, second quarter 2010 earnings conference call. Today’s call is being record. We have on the call today Dave Barger, JetBlue CEO and Ed Barnes JetBlue CFO. As a reminder, this morning’s call includes forward-looking statements about future events. Actual results make differ materially from those expressed in the forward-looking statement due to many factors and therefore, investors should not place undue reliance on those 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 report filed with the Securities and Exchange Commission.

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

Dave Barger

Thank you Hilda, good morning everyone and thank you for joining us. We’re pleased to return to profitability in the second quarter and report an operating margin of 10.1%, our highest operating margin since the third quarter of 2007. We reported net income of $30 million or earnings of $0.10 per diluted share. That’s $10 million better than a year ago. Our second quarter results show meaningful improvement over last year and represent our best performance in the last eleven quarters underscoring the progress we have made to strengthen our network, maximize revenues, control costs and maintain a long-term sustainable growth rate.

We also continue to focus on building and maintaining our financial strength, ending the quarter with roughly $1 billion in unrestricted cash and short-term investments or 28% of trailing 12-months revenue, among the best liquidity positions in the industry.

All 12,500 JetBlue crew members should be extremely proud of what they accomplished during the quarter especially in light of the challenges of acclimating to our new customer service and reservation systems, Sabre which we began implementing in the first quarter.

As the testament to these efforts and the strength of our product and brand, we were recently awarded the highest customer service ranking among low cost carriers by J.D. Power and Associates for the sixth year in a row.

Of note, we have the highest score of any North American Airline ranked in the survey. I'd like to take this opportunity to thank our crew members for their tremendous hardwork and dedication. We believe that running a safe, reliable and productive, high quality operation with a strong customer focus is the backbone of our success. Our increasingly loyal customer base helps maximize profitability of our network which we believe in turn enables sustainable growth.

To sustain growth, we must make prudent investments in our future. The Sabre platform is allowing us to better scale our business including more seamless integration with airline partners and better connectivity to global distribution systems. While we began to realize some benefits of this more robust system back in February, we continue to see even more revenue growth as we add functionality to the Sabre platform.

For example, we recently added several classes to our fare structure, enhancing our pricing and revenue management capabilities. In addition to improved revenue management capabilities, Sabre has enabled us to expand our ancillary revenue initiatives as well.

I mentioned last quarter that we had begun adjusting the pricing structure of our Even More Legroom or EML product and now we’re able to offer eleven price points for EML based on customer demand on a particular route rather than length of haul.

This initiative is on track to generate an incremental $10 million in the second half of this year. Improving economic conditions are clearly having a positive impact on demand for air travel, its total revenues were up 16.4% versus last year and unit revenues for the quarter were up 10.4%. Second quarter revenue performance exceeded our expectations as a stronger fare environment contributed to significant year-over-year revenue gains even as capacity increased 5.5% during the quarter.

We had an average one-way fare of $139, a 10% improvement over last year reflecting the improving demand environment as well as our ability to attract and retain higher yielding customers. Revenue results demonstrate that our network strategy is working. With a low-cost structure we have continued to successfully expand our network footprint in two important growth regions, Boston and the Caribbean, Latin America.

Since 2005, we have increased available seats in Boston by over 300%. We are now the largest carrier in Boston in terms of seats offering 77 daily flights to 33 destinations. As we expand in Boston with new cities and increased frequencies, we’ve become more relevant to business as well as leisure customers. As part of this effort, we plan to begin service from Boston to Sarasota and to Phoenix in the fall further solidifying our position as the largest carrier in Boston.

Schedule optimization along with a revamped, more meaningful TrueBlue program have helped us build and grow a loyal base of Boston business customers. We believe we are well positioned as Logan airport’s leading carrier and we expect to continue to benefit from competitive capacity trends. We expect competitive capacity in our Boston markets to be relatively flat year-over-year in the third quarter of 2010.

Our Caribbean and Latin America markets also continue to perform well. We continue to see a solid year-over-year RASM improvement even as we grow in this key region. By the end of this year, we expect roughly 20% of our capacity will be in the Caribbean and Latin America.

While our growth this year is targeted in Boston and Caribbean, we continue to leverage our unique position as New York’s true hometown airline and monetize our our highly valuable slot portfolio at JFK airport through airline partnerships.

During the second quarter we began connecting customers on South African Airways and today we are pleased to announce a new partnership with EL AL Israel Airlines, our sixth interline partner. Customers will be able to purchase a single itinerary for travel on flights of both carriers in one simple transaction, enjoying seamless connections at JFK between over 50 JetBlue cities and 38 cities in the EL AL network. With 70 international flight carriers operating at JFK we continue to pursue additional partnerships to flow incremental passengers and revenue through our network.

Earlier this week, we launched our commercial agreement with American Airlines. Customers can now purchase flights in non-overlapping markets from JFK and Boston through travel agencies, American Airlines ticket counters or by calling American Airlines reservations. In addition, we announced plans for frequent flier reciprocity with the American Airlines Advantage program later this year.

This element of our partnership with American renders our agreement an even more valuable product offering for customers of both airlines.

Turning to the fleet. We are committed to modest aircraft capital expenditures in 2010 and we remain on track to generate positive free cash flow in 2010 as well. We took delivery of two Embraer 190 aircraft during the second quarter and we plan to take delivery of two more E-190s in the second half of the year, all of which were or will be financed with Brazil Export Financing.

Last quarter we announced plans to lease seven previously owned A320 aircraft this year, that number is now 6. We expect to take delivery of 3 A320s in the third quarter and 3 A320s in the fourth quarter. With these deliveries, we expect to end 2010 with a fleet of 161 aircrafts.

As discussed on prior calls, the bulk of our 2010 ASM growth is being driven by our expansion in Boston and the Caribbean. The rest of the network is shrinking in 2010 on a year-over-year basis. For the third quarter, we expect our ASM growth to be up between 6% and 8% and we expect our fourth quarter capacity to be up between 9% and 11%. For the full year, we expect our capacity to increase between 6% and 8% unchanged from previous guidance.

Before closing, I would like to provide an update on the rehabilitation of JFK’s principal runway 13 Right/31 Left which was successfully completed last month. Service on the newly repaved Bay runway began on June 29, two days ahead of schedule.

Thanks to diligent construction management by The Port Authority of New York and New Jersey and excellent cooperation between the FAA and the largest airlines operating at JFK. The project did not significantly impact our operations in any way during the fourth month closure. We are pleased the project is behind us and we continue to work with all stakeholders to ensure that traffic flow procedures used during the construction period continue into the future. Most notably, the departure of metering process has proven to reduce taxi times and fuel burn.

In closing, I would like to once again thank our 12,500 crew members for all their hard work. We faced significant challenges in the first half of the year, with the transition to Sabre substantially complete and the JFK runway closure behind us, we are pleased to report a return to profitability in the second quarter. We expect to sustain this momentum for the rest of the year as the revenue environment continues to improve, cost pressures ease and we execute on our network strategy.

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

Ed Barnes

Thank you, Dave, good morning everyone and thanks again for joining us today. I join Dave and the entire management team in thanking our crew members for their hard work and taking care of the 65,000 customers that fly with us every day. We are pleased to report a return to profitability, with our highest ever quarterly operating income of $94 million, representing a year-over-year improvement of $18 million. These results were driven by $132 million increase in revenue offset by a $114 million increase in operating expense, including $43 million of higher fuel expense.

Passenger unit revenues for the quarter increased 11.7% compared to a year ago, a significant improvement from the 4.9% increase in the first quarter. Yield during the second quarter was up 8.2% and load factor was up 2.5 points and 5.5% more capacity.

These results were better than the guidance that we provided in April, as demand gained momentum throughout the quarter pushing fares higher, particularly with transcon markets which accounted for approximately 30% of our capacity. We also saw a significant improvement in both yield and load factor on our East Coast short-haul markets such as Boston-Raleigh and Bothell-Chicago reflecting the scheduled adjustments we made to better accommodate business traffic in those routes as well as better access to our inventory through the GDS channel.

Throughout the quarter, we benefited from revenue initiative enabled by Sabre including higher-yielding business traffic through the GDS channels and enhanced pricing capabilities. Monthly, year-over-year PRASM growth accelerated throughout quarter with PRASM up by 5% in April, 13% in May and 18% in June.

We were specially encouraged by our revenue performance during the quarter, given JetBlue’s limited exposure to the rapidly rebounding premium and international traffic. To put this in perspective, our second quarter PRASM was up 5.3% compared to 2008 when the demand environment was still relatively strong.

Turning to ancillary revenue performance for the quarter, we continue to voluntarily wave certain change fees for our customers in connection with the transition to Sabre, resulting in lower change fee revenue. When ancillary revenue reported in the passenger revenue line are combined with those in the other revenue line, total ancillary revenue for the second quarter was about $18 per passenger.

Shifting to cost, fuel remains the most significant cost comprising one third of total operating expenses in the second quarter. Including the impact of fuel hedging, JetBlue paid 12.3% more for jet fuel in the second quarter than last year. The good news is that we have one of most fuel-efficient fleets among the major US carriers. In addition, we continue to actively manage our fuel-hedge portfolio to help manage price volatility.

For the third quarter of 2010, we’ve hedged approximately 47% of our anticipated jet fuel requirements using swap arrangements, costless collars and caps.

For the fourth quarter, approximately 46% of our projected fuel consumption is hedged and we have crude oil caps in place through the end of 2011. The underlying detail of our hedge positions are more specifically described in our investor update which will be filed later today.

We’re planning on a price of $2.27 per gallon in the third quarter and $2.28 for the full year including the impact of hedges and taxes. As indicated in the investor update, these prices are based on the forward curve as of July 16th and exclude transportation and the plane fees.

Excluding fuel, second quarter unit cost rose 8.2% year-over-year. These results were significantly better than our expectations as outlined and the guidance we provided last quarter. Sales and marketing expense increased about 7% per ASM year-over-year due to more bookings through the GDS channel. These bookings however come at a significant yield premium.

Other operating expenses increased 29% for ASM due in part to $11 million in tax incentives which were credited to other operating expenses during the second quarter of last year, negatively impacting year-over-year comparisons.

In addition other operating expenses increased as a result of ongoing IT infrastructure projects. We also incurred about 2 million in one-time expenses related to Sabre. Moving below the line, interest expense decreased 11.2% year-over-year or $6 million, due to lower interest rates and lowered principal balances.

At the same time interest income and other decreased by $8 million primarily due to $6 million gain recorded in 2009, related to the valuation of our auction rate securities.

Turning to the balance sheet, we ended the quarter with unrestricted cash and investments of approximately $1.1 billion. During the second quarter, we made approximately $70 million in debt and capital lease payments. I am pleased to report that earlier this month, UBS repurchased $49 million of auction rate securities at par. We used the proceeds from the sale to repay the remaining balance of the $40 million loan from UBS which was secured by the repurchase of auction rate securities resulting in $89 million net cash gain. As a result of this transaction which is not yet reflecting on our balance sheet, we no longer hold any auction rate securities.

Our scheduled principal payments from debt and capital leases are expected to be very manageable, $75 million in the third quarter and $130 million for the remainder of the year.

Turning to fleet, JetBlue ended the quarter with 153 aircrafts. With regard to CapEx, we spent approximately $25 million in non-aircraft CapEx during the second quarter, $3 million of which was related to the implementation of Sabre. We estimate capital expenditures of about $100 million in the third quarter and $360 million for the full year, $215 million of which relates to aircraft.

With minimal debt maturities and capital commitments for the rest of the year, we remain on track 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 revenue outlook. We are encouraged by the improving revenue environment and the success of our initiatives to track higher-yielding customers, including schedule optimization, enhanced pricing capabilities and better connectivity with GDS.

We expect recent booking trends to continue through July and August with strong yields and load factor. Keep in mind however that we are facing more difficult year-over-year pricing comparison in July and August than we did in June as we begin to lap the economic recovery.

Based on the data collected thus far, we currently expect July PRASM to be up about 15% year-over-year. We have limited visibility beyond August and September is historically a seasonally weak month for JetBlue as schools reopen and the summer travel period ends.

That said, we expect to continue to benefit from an improving demand environment, the yield improvements related to Sabre and an increasing mix of business customers particularly in Boston.

While ancillary revenues have lagged a bit in the first half of this year as we transit to the Sabre, we plan to announce some exciting improvements to the JetBlue experience in the coming months. The first of which is designed to make our EML program even more attractive to business customers. Beginning September 1st, we plan to offer free boarding to all EML customers.

In addition, we continue to make further enhancements to our TrueBlue loyalty program including our recently announced ShopTrue program enabling TrueBlue members to earn points with over 800 retailers. We expect total ancillary revenues to increase 10% year-over-year in 2010.

For the third quarter, we expect PRASM to increase between 12% and 15% and RASM to increase between 11% and 14%. We expect the strong revenue momentum to continue into the fourth quarter. We also expect to benefit from the maturation of new markets as they become a smaller percentage of our overall network.

In the fourth quarter, we expect about 3% of our ASMs will be in markets opened less than 12 months, compared to about 8% of our ASMs in the fourth quarter of 2009.

We currently expect full-year PRASM to increase between 9% and 12% year-over-year and RASM to increase between 8% and 11% year-over-year. We continue to work hard at running an efficient operation and maintaining our low cost culture. We worked diligently to prudently invest in our future and to mitigate risk while doing so, with our conversion to an improved reservation system almost complete and as modification to pilot work rules begin to increase labor efficiencies.

I am pleased to report that most of the cost pressure for 2010 is behind us. We expect (inaudible) fuel CASM trends to improve significantly as we move to the second half of this year. However, we do expect some cost pressure from higher revenue related costs and additional profit sharing expense. Due to stronger than expected second quarter results and an improved outlook for the full year, we now expect an additional $15 million in profit sharing expense for the full year, negatively impacting our full year Ex-Fuel CASM by about 8 percentage point.

For the third quarter, we expect Ex-Fuel CASM to be up between 2% and 4% and for the fourth quarter, we expect Ex-Fuel CASM to be relatively flat on a year-over-year basis.

As result we expect an Ex-Fuel CASM increase of 4% to 6% for the full year. Excluding the increased profit sharing expense, our expected full-year Ex-Fuel CASM increase would be 3% to 5% consistent without previous guidance.

Fuel prices have come down since last quarter, as a result our CASM outlook for the third quarter and full year has improved. We currently expect CASM to increase 3% to 5% in the third quarter and 6% to 8% for the full year.

In closing, we’re optimistic about the future. We continue to make prudent investments in our business and we believe that we are well positioned to drive profitable growth and returns for our shareholders with a strong financial foundation and award-winning product and brand and most important outstanding crew members.

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

Question-and-Answer Session

Operator

Thank you, we will know begin the 30-minute question-and answer session for investors and analysts. We would like to ask everyone to please limit themselves to one or two question with a brief follow up, so that we can accommodate as many as possible.

(Operator Instructions). Our first question comes from Bill Green from Morgan Stanley.

Bill Green - Morgan Stanley

I wonder if we could talk a little about the codeshare with American and how you sort of reconcile that with your brand because they are obviously a bit of different brand and there are even things like the ancillaries, right they charge first bag, you don’t. So how does that all come together.

Dave Barger

Bill just a clarification, what we have right now with American airlines is a interline agreement and so that’s not unlike really what we announced this morning our most recent interline agreement with EL AL. So, this just kicked into sales this week and we’ll start to see how it matures over the course of the year. So just a clarification on it, we know that there’s two separate products, JetBlue and American Airlines.

Bill Green - Morgan Stanley

Even though, it’s just sort of an interline when you do I guess people will be able to fly JetBlue and earn American miles, advantage miles that is. Certainly, does that create any sort of expectation on the part of either your customers or their customers that the products will be more closely aligned and more similar or you think it’s really just that if you book on them, you can get some miles on JetBlue or vice versa?

Dave Barger

What I see is the affirmation of what we’re doing in New York and also Boston. It’s also I think an affirmation of the investments that we’ve made in the new terminal Sabre. And so, really interline, two distinct products and even as reciprocity, it takes place with TrueBlue and with American’s advantage program later this year, it’s still going to be pretty distinct and what it allows us to do though is really start to identify behavior. And what’s happening with JetBlue customers and American customers, not unlike what we’ve seen with Aer Lingus, our first interline customer.

So, at this point in time, I think we’re being very clear, very distinct products. We haven’t made decisions to further that. I mean you mention codeshare, people talk about alliances. At this point in time, interline relationship.

Bill Green - Morgan Stanley

I sort of asked this before, but I am just curious of your thoughts now, on LiveTV, we got wireless rolling out across the fleets of various airlines. It would seem to me that a spinout or a sale of that subsidiary would loose value as these wireless opportunities or offerings progress through the industry because it would just seem to me that that would be sort of an alternative form of in-flight entertainment for a lot of folks. How do you think about kind of the timing there and do you sort of see it the same way or do you think now it’s sort of the core part and maybe we don’t need to spin it out?

Dave Barger

I appreciate the question because it’s been a while since we have had questions on LiveTV and I think just to be transparent, we look at LiveTV, wholly-owned subsidiary, something that is very, very important to JetBlue and core to us as we go forward. I think when we were open about opportunities, what makes sense in the market place with LiveTV keep in mind that the times were a little bit different two years ago as oil was running and the economy was on its heels et cetera.

So I think that wholly-owned subsidiary that we want to maximize, if you will to JetBlue’s benefit at this point in time, and not in the market place in the terms of looking for opportunities to sell a subsidiary. I think with regard to wireless as well Bill, we were pretty pleased that we are a follower if you will with wireless.

Now the brand heritage of JetBlue has been in-flight entertainment since day one and I think we are second to none with 140 channels of in-flight entertainment TV as well as satellites as well as first-run movies and I am saying that mainly because we believe that this small amount of customers who are willing to purchase the products that are available in the market place today.

And also with the identity of those products as separate from the airline is distinctly different than something that we want to pursue and by the way our route network is pretty significantly offshore these days into the Caribbean and Latin America as well. So the ability to touch that route system with new technology, that’s really how we are looking at Wi-Fi and how we can utilize LiveTV’s expertise to our benefit into the future.

Operator

Our next question comes from Michael Linenberg from Deutsche Bank.

Michael Linenberg - Deutsche Bank

Just maybe this actually does follow-on some of the stuff that Bill brought up, but sort of looking at the relationship with American from a different perspective, I know American at least publicly have said that they would like to extend the partnership with you and maybe even alternatively invite you into one world. How do you manage that given your relationship with Lufthansa and of course Lufthansa sits on your board. At what point does that become a challenge or maybe at present it’s starting to become a challenge. Can you give us your thoughts on that?

Dave Barger

I think the headline that I would share is really one, our business plan is one of open architecture. And so this open architecture and there are other carriers in the world who also move through open architecture as opposed to becoming aligned. Yes, I think what’s so different is, granted I have a point of view from New York, but I think that as a largest carrier, Kennedy is the largest domestic airline in New York and now Boston.

What we are offering other airlines is an opportunity from a connectivity standpoint or a network standpoint is better than any other network in the world, if you will because of the New York market place.

And so with American, as we look at again interline relationship at this point, I think as we start to see some of the numbers, some of the behaviors, who is connecting over Kennedy to go to, pick a city, Buenos Aires or Tokyo or London or Madrid. We will see what that portends into the future. With regards to Lufthansa, again Lufthansa, just under 17% share ownership.

Let’s face it, a large player within the Star Alliance and do we have good debate, you bet we do. As a team in terms of what’s best for our shareholders and again this affirmation of open architecture across Kennedy has been supported by our board, Michael. So we are really excited about what the second half of the year is really looking like with these relationships and I would imagine more as well for example EL AL been announced today.

Michael Linenberg - Deutsche Bank

Do you have an estimate of the potential contribution, I think American on their call yesterday said that the relationship with you is worth maybe a few million dollars, but they could see it grow. When you think about American and what you are doing with Lufthansa, Aer Lingus, EL AL, South African, are we looking at tens of millions of dollars of incremental revenue here. I mean how should we think about that?

Dave Barger

Yes I won’t place color in terms of numbers on any of the relationships really for competitive reasons Mike. It is fair to say that we are dedicating significant time and attention to this product offering, open architecture across our management team because we think that it’s quite lucrative and so these numbers from what they could mean today and then grow it into the future.

I mean the ability to start to see trial for customers who are making these trips today, but they are not thinking about connecting over JFK, what that means for things like short-haul markets across New York for us as an example. You know coming in from upstate New York or the Carolinas or Virginia or this is real positive for our brand. So I won’t put a size to it Mike, but it’s something that we have been working in years, Terminal 5, additional real estate in Kennedy that we’ve worked with the Port Authority underneath Terminal 6 and the Sabre investment that we’ve been working years to start to harvest and we’re real excited about it.

Michael Linenberg - Deutsche Bank

Your predecessor was quoted and this now goes back a few years that you know if unions ended up at the property at JetBlue that he maybe personally or even the company would have viewed that as a failure in its relationship with employees. What’s the company’s current view, do you share that and with the recent changes in allowing, I guess, making it a bit easier for unions to organize at rail, roads and airlines for the NMB change. Are you hearing anything or what can you do? What can you tell your employees to manage through this?

Dave Barger

Well, our communication to our crew members, our word for employees is no different them what has been for ten years and that is we believe a direct relationship is best for our company from the standpoint of long-term sustainable growth.

So that hasn’t changed despite what transpired with the NMB, The Railway Labor Act and all the noise in Washington earlier this year and that which is now statute as of June 30th.

We did joint the ETA’s litigation contesting the NMB rule change and we have been very open about that historically. I think Mike that, this is something that’s very near and dear to me. I do think that crew members, employees at other organizations seek representation and if that’s the case, that’s as a result of the management team’s failures.

I have believed that for 10 years and at the same time, I believe that it’s incumbent upon the collaboration across the company, 12,500 strong to continue to educate our frontline crew members on what representation means to them, in terms of our growth plan, in terms of the ability to move with alacrity in an industry that moves rather slow.

And really educate yourself in terms of what collective bargaining means, when you start talking about quality of life, compensation, benefit increases, traditionally how long it takes to affect those type of changes as well. And companies can say that they have a no furlough clause as an example and I think that we’ve been pretty good delivering on our word when the economy was pretty tough last year or oil was very tough two years ago. So, Mike, nothing has changed, but I’ll be real honest. This is very near and dear to not just me but to the leadership team at JetBlue.

And we think in the best interest of our crew members, a direct relationship.

Operator

Our next question comes from the Will Randow from Citigroup.

Will Randow - Citigroup

On your guidance, it looks like in terms of the fourth quarter, you’re padding it a little bit of conservatism. How should we think about that considering that you have drawn away your RASM guidance for the first half? You’ve come in at the low end in terms of unit cost and skill? Can you just give me some color on that?

Dave Barger

It’s probably just a comment on second quarter. Not only did we have the shift of Easter into Q1 plus Sabre and then really, it was nice to see the robust demand into Q2. So, our math in terms of how we provide guidance and I’d like to think that we’re a company that is very transparent when it comes to guidance is no different in the second quarter and that granted we were below our guidance expectations.

And then the math is no different than how we run the formula into Q4. Now all that said, it’s interesting that your commentaries are maybe conservatism because we are growing 68% this year, that guidance is unchanged, but literally significant amount of growth is taking place into the third quarter, into the fourth quarter as well. So as we take a look at our number, we actually, we feel good about that number, but it’s not one that we think is conservative by any stretch. Follow up, Will?

Will Randow - Citigroup

Yes, in terms of how should we think about your unit cost growth that fuel is moderating, how should we think about capacity growth as unit cost as we annualize our models going into 2011?

Dave Barger

Yes, I don’t think we are quite prepared to give guidance on 2011 yet, but I think directionally you could think about it from the growth in third quarter and then in the fourth quarter. So what we’ve guided to is 2% or 4% increase in the third quarter and relatively flat for the fourth quarter. That’s what I will be thanking about.

Operator

Our next question comes from Duane Pfennigwerth from Raymond James.

Duane Pfennigwerth - Raymond James

So September schedules indicate a bit of acceleration in capacity growth, both on a one-year and a two-year basis. Just wanted to check with you, does that makes sense to you as well and could you help us understand where that capacity growth is occurring and how you manage that in a month like September?

Dave Barger

I think the headline that I would really share with you is our commitment in Boston is very significant. We look at ASM is up on a year-over-year basis of 30% becoming more relevant to the business flyer and that’s a large part of what’s really driving, what’s happening in September. To a lesser extent across the rest of the system, but we used to be into what’s considered business markets, but ex-frequencies on day two of the week, day three of the week, as we are adding not just the frequencies back in by day a week, but also the frequencies into markets like Chicago, into places like Raleigh, into places like Charlotte.

And what we are seeing is, again the core business time of the year will kick in after Labor Day. We are feeling real good about our investment in Boston. But you are right, September has traditionally been more of a trough period for the airline, but we are starting to see some visibility into the fall. And actually, we are starting to see some pretty good traction as we are going into fall. So, we would like to think that our investments, not just frequency, the TrueBlue program, the GDS displays from the business customer as well in Boston and in other locations is really helping some of these trough periods.

Duane Pfennigwerth - Raymond James

Then just as a follow-up with respect to Sabre, when do you think that would be stable enough to stop refunding the change fees and when can we actually think about new products or new ancillary opportunities and just along those lines, you’ve had some time to measure the impact in some competitive markets with respect to a bag fee, are you closer to that or further from that based on the data that you see?

Ed Barnes

Yes, Duane, I think what we have seen regarding kind of the waiver of fees is, that’s already started to moderate to some extent and just to be clear it’s not we are waiving off fees. We want to make sure that our customers are treated well and if they are not, they are compensated accordingly and so some of that waiver is just from a customer commitment standpoint.

The system is stable, I think that some of the issues that we’ve had have dealt more with hold times, handle times, that kind of thing which as crew members become more familiar with the system, those will moderate as well.

Regarding ancillary opportunities, we continue to be focused currently on making sure that the existing experience is the best experience. I think we kind of foreshadowed maybe some changes to our EML program which we think will attract more EML customers and pry additional ancillary revenues there.

I would be looking at maybe our next phase as being, maybe working a little bit more on our getaways program, on our vacation packaging. Nothing that’s going to significantly impact this year or even the first half of next year, from that regard but probably later into 2011.

Operator

Our next question comes from Gary Chase from Barclays Capital.

Gary Chase - Barclays Capital

Wanted to ask two questions on the revenue side if I could, first, wondered if the guidance included some anticipated build in terms of contribution from Sabre and some of the commercial agreements that you are talking about or whether we would view that as upside against this outlook that you’ve provided.

Dave Barger

I think that clearly as we’re looking at our growth into our present growth into the second half of the year. There’s several things that are in play. The build of Sabre absolutely and what we’re starting to see from Sabre, GDS penetration et cetera. Our partnerships, now six of the partnerships that are in place, so that’s part of the assumptions as we go forward.

I think as well if the maturing markets that we’re seeing, Ed his comments mentioned on a year-over-year basis, that we’re down in terms of the percent of ASMs dedicated into the new markets as well. I think it’s significant to highlight that regionally, we’re seen nice traction across the route network, but specifically in the transcons and when you start to take a look at Q3 and Q4 and the percent of ASMs is tied into the transcons, that’s the flavor on what’s really adding the assumptions if you will that are driving our guidance, our PRASM guidance for the full year.

Gary Chase - Barclays Capital

Yes and then I wanted to ask you David or Ed, about this performance in Boston, I mean obviously when you’ve got new capacity like that, it takes a little bit of time to spool up, I am wondering as you adjust for that best you can, how Boston is looking and give us a sense of when that’s more full up and more mature, what kind of level that can be contributing on relative to the rest of the system?

Dave Barger

Gary, couldn’t be more pleased with what’s happening in Boston, just over six years ago we went in Boston and we’re now the largest carrier based on seats, in and out of Boston. By the way that’s excluding partnerships such as with Cape Air, such as with Aer Lingus, such as with Lufthansa, now American and so very, very pleased with what we’re seen in Boston.

By the way, from the standpoint of our ground infrastructure, partnering and working with Mass port, with enhancements on the ground, additional gates, infrastructure supporting us, I think what we’re seeing to is the brand and the relevance of the brand, not just a leisure customer, but to the business flyer as well. I mean the financial community is up in Boston. The college student is up in Boston and everything in between. I mean it’s been very, very positive and we start to take a look at adding markets later this year such as (inaudible) with seven frequencies a day into Boston. You start to take a look at those prices today, the type of aircraft that’s plying the skies on that route today and those are markets that we think are going to mature very, very quickly.

I think just another comment and Ed see, if you want add anything to it, what’s nice about Boston too, in a year prior, I think there was commentary that JetBlue was so much focused on New York and it’s not just New York, it’s New York, it’s Boston. It’s now Washington, it’s Orlando, its Fort Lauderdale, it’s the Caribbean, it’s the West Coast as well. So diversity as well. Ed, thoughts on Boston?

Ed Barnes

The only thing I want to add is that Boston really gives us an opportunity to work in a true business market and offering business products. So very excited about the growth in just the business travel up there.

Gary Chase - Barclays Capital

Are the RASM results there though as I guess what I was driving at just as much, I mean are you seeing the kind of revenue generation that is consistent with what you can generate say in JFK?

Dave Barger

I will tell you Gary, the RASM results are there and exceeding expectations. And I’ll be real candid, when other airlines are closing their crew bases up in Boston, you bet we are going to take advantage of that and I think there was some commentary regarding our growth several months ago as we’re looking at the year, but so much of it was tied. It’s very specific, it’s Boston and it’s the Caribbean and Latin America for good reason because of what we’re seeing.

Operator

Our next question comes from Hunter Keay from Stifel Nicolaus.

Hunter Keay - Stifel Nicolaus

Dave, you mentioned in you prepared comments something about an increasingly loyal customer base which kind of intrigued me, what metric are you using when you refer to that and maybe is that one that you care to share with us?

Dave Barger

What we see is the relevance of the TrueBlue program, the growth of TrueBlue and our membership, we’ve talked in the past that this number is now 7 million and growing, but I think it’s the repeat business that we are seeing with these customers as well, Hunter and we maybe the only airline, we may not. I am not sure that survey is, customer is after every flight and we have some pretty good intelligence if you will regarding what our customers are telling us, the repeat flyer, why they are flying us. So I think that really at the end of the day, that’s what drives the commentary behind loyalty, but it is that repeat business.

Hunter Keay - Stifel Nicolaus

AMR yesterday reported some fairly soft results in the Caribbean, it’s probably fair to assume, correct me if I am wrong that you are probably taking a little bit of market share from them down there and if that’s the case, I am kind of curious to know how that might play in with the ramping interline agreement, is there going to be a little more incentive for guys maybe not to compete with them directly at the head so much anymore, how should we think about that?

Dave Barger

I think it’s fair to say, again we have an interline relationship and the day of the announcement, we were staunch competitors and so that’s how we look at the world, that’s how we are making our business decisions and so specific to the Caribbean, there is an awful lot of complexity that’s taking place down there, also with the flag airline or airlines of countries that are home based down in the Caribbean as well.

So, take Jamaica as an example Hunter, I mean this is an airline, flag airline of Jamaica now with Caribbean airlines and not too long ago was 15 aircraft, it’s now 6 aircraft. Flying the skies in routes that they have been flying for years previously. So, there is an awful lot of opportunity that’s taking place down the Caribbean, not just what’s happening with American-based flag carriers.

And, as we take a look at our products, our fare, frequency, just a commentary on frequency, Jamaica has been opened right about at sixteen months now in Jamaica. It started with one frequency, we are now six.

The Commonwealth of Puerto Rico is 30 frequencies, over the cause of the summer timeframe in three locations. The Dominican Republic, four locations in over 20 frequencies in the summer time frame. So, we are not just doing it from like a focus, it’s core to our network.

Operator

Our next question comes from Glenn Engel from Bank of America – Merrill Lynch

Glenn Engel - Bank of America – Merrill Lynch

You talked little bit about the transcon, but can you give any numbers on how much eh transcon outperformed and I have assumed that given the strength of business versus leisure that go through some of the other operations like Caribbean and Florida, whether they outperformed or underperformed the system and finally the non-New York flying, how is that doing in terms of rate of improvement versus the New York flying?

Ed Barnes

I won’t go into specific numbers for obvious reasons from a competitor prospective, but to add color, now granted when we go into the second quarter and Easter was in the first quarter, so traditionally very strong north south traffic is somewhat embedded in the first quarter. We are very pleased with the transcon, I think that there is a rationality with pricing when you look at a year-over-year basis by our competitors and I think that we have right-sized our product as well. So we are seeing strength in all transcon markets, but we are also seeing strength in some of our shorter haul markets and on the east coast and the west coast and I think that that’s real positive as well and it’s not to say that we are not pleased with Florida and/or the Caribbean and Latin America. It is just that the seasonality in Q2 is a little bit different than I think that what we’ve have seen with the other major aspects of our route network.

The non-New York flying again as the question earlier from Gary, very, very favorable results that we are seeing in Boston. We are very excited about adding it into the Washington area, not just the Dallas and BWI, but what we believe will be a quick maturation process down at DCA.

Orlando, Florida and the Caribbean has been very strong traditionally for us and we believe that that will do nothing, but get stronger, that’s why we announced the opening of Hartford, Connecticut, November 17 down to locations in Florida.

Operator

Our next question comes from Bob McAdoo from Avondale Partners.

Bob McAdoo - Avondale Partners

Just to come back on the American airlines relationship, just trying to make sure I understand what’s going on? Can we think about that as being the same kind of an interline relationship that all kinds of carriers used to have 15, 20 years ago and where you file a joint fare and the relationship and the bag switching and all that is no different than American has with United or anybody else with exception of this additional piece on frequent flyer. Is that the way we should think about what this relationship really is as compared to other relationships that other people have.

Dave Barger

I think it is fair to characterize the relationship as that. I think you mentioned that what’s different is really the frequent flyer aspects or reciprocity that was announced earlier this week as well. And I think that’s the commercial side of the agreement today, now granted we also announced a slot swaps between both companies with DCA and with JFK, actually into the first quarter itself, but to think about this is traditional interline at this point in time?

Bob McAdoo - Avondale Partners

As part of that piece, I didn’t actually understand, there was an earlier question about what happens, since you don’t charge for bags and American does, what happens to a customer, who is making that transition? Do they or don’t they pay for paper bags?

Dave Barger

Again, very distinct products and so as you are purchasing an itinerary and keep in mind that what we are seeing is 12 international markets with American Airlines and they have a different protocol on international markets will charge you bags and then their domestic protocol, so this is 18 JetBlue cities and 12 international American markets. And they don’t charge for their international bags in those markets, Bob.

Operator

Our next question come Dan McKenzie from Hudson Securities.

Dan McKenzie - Hudson Securities

In the past, you have gone on your way to characterize JetBlue as a leisure airline, but it’s really as much a business product. However what I can tell, JetBlue really hasn’t marketed its product in a meaningful way to major corporate institutions, either in New York or Boston. So I guess I'm hoping, first you can clarify my understanding with initiatives under way and then talk about how material incremental business wins could be to your revenue outlook?

Dave Barger

It’s fair to say that we want to diversify the customer base and traditionally, we’ve talked about 15% to 20% of our customers traveling on business, usually small business customers as opposed to the corporate guy or gal through a corporate agreement and investments such as Sabre, penetration of the GDSs into corporations, adding frequency, locations like Boston, Logan airport. And again, take New York. I mean Kennedy, I think New York’s Kennedy airport is a great experience, but there’s other business travelers who prefer LaGuardia or prefer New York and I get that.

So, I think of what we’re doing is very conscious effort to be more relevant to business customers, but not at the expense of our leisure traffic, not at the expense of our VFR traffic. In last year, in the midst of this recession, what we saw was tremendous trial by corporations, by a large and small corporations who were looking for better travel value.

And we saw a lot of trial and I think the last year was very positive for JetBlue because once we see a customer fly on us, they realize that it’s a quiet aircraft, it’s a new aircraft that you can watch CNN as well as the cartoon channel. I mean so it’s a very nice business proposition.

And so, think of this as diversifying our customer base because we really weren’t relevant to the business wire.

Dan McKenzie - Hudson Securities

Yes, okay. But no real initiatives underway at this point, so potential upside down the road if I kind of interpret your market share?

Dave Barger

Dan, it’s more directional we are looking at premium cabins, we are now looking at stratifying our True Blue program, it’s all open to what happens in future based on customer behaviors, but that’s not where we are putting our efforts.

Dan McKenzie - Hudson Securities

If I am not mistaken JFK ranks number one in the country for delays and so I am wondering that to what extent the delays are impacting costs in the third quarter and then what initiatives JetBlue is undertaking with the FAA to fix the issue and I guess whether the FAA is even interested in fixing the issue?

Dave Barger

A couple of thoughts, one is statistics are pretty interesting. In the second quarter across our airline even with the bay runaway under construction, we actually saw an improvement in arrival 14 performance across our airline which by definition was 50% of our ASMs roughly in and out of Kennedy has to include Kennedy Day and so April, May and June were up significantly across their airline anywhere from 7% to 10% on a system wide basis so positive. I think the protocol, the lessons learned and by the way you are right I mean the New York airports including LaGuardia, including New York tend to end up at the bottom of the lesser terms of the DOT results and we are really excited about some of the protocol, lessons learned with procedures that took place during the construction process.

I think most recently down in Atlanta or possibly Washington you and I were sharing some thoughts about things like departure metering, using winter operations protocol to move airplanes from the gate to the runaway, all carriers, but certainly the large carriers at JFK, that was very, very positive. In terms of out to off times, predictability for arrival gate, fuel burn. So I think things like that, things like really taking a look at the New York airspace has independent airports with LaGuardia, with Peterborough, with New York, with JFK.

So the uncoupling and the support that we are seeing with the FAA of that as well and of course this is in advance of things such the tools that are available really today, but shortly with nextgen as well, Dan.

So, I think we are real excited about what we saw, I mean, this project with The Port Authority, with the FAA, with the large carriers operating in the JFK. It was a non-event in terms to the traveling public. There were couple of tough days. It was incredible how well that happened. My closing thoughts too, that administrator (inaudible) is committed to, hey listen, let’s start to rollout these initiatives that will make sense in New York, right because we’ve demonstrated the fact that people will co-operate and collaborate up here as well.

Operator

Our next question comes from Helane Becker from Dahlman Rose.

Helane Becker - Dahlman Rose

Is it to early to tell, have you looked at the overlap between your TrueBlue frequent flyers and American Airlines Advantage members to determine, what your potential benefit is there?

Dave Barger

Probably to say, it’s a little bit early, mainly because we are just rolling this out. Now all that said, we know that our frequent flyer base is pretty significant, herein obviously our numbers are much smaller than American Airlines, but significant here in New York and historically, American very significant too with the New York presence with the Advantage program and their history.

So, that again I think is part of the reason why we wanted to announce a reciprocity or the start of the reciprocity later this year because it’s going to be another reason why somebody is going to look to connect over Kennedy as opposed to maybe connect over New York or over a Dallas or some other locations, some other gateway. So we think that that’s going to be pretty positive. Can’t give you a number just yet though.

Helane Becker - Dahlman Rose

My other question is for Ed actually, with respect to the 16% increase in salaries, what percent of that is related to the profit sharing?

Ed Barnes

The actual increase for this quarter, it’s fairly flat on profit sharing. The profit sharing will show up more, the $15 million increase will show up more in the third and the fourth quarter.

Operator

We have next question from Jim (inaudible).

Unidentified Analyst

Did you receive an aviation security infrastructure fee refund in the quarter?

Dave Barger

No we didn’t.

Operator

And with this we conclude the session, the question with investors and analysts. We will like to turn it over to Dave Barger for closing remarks.

Dave Barger

Great thank you very much, Hilda. I would like to thank everybody for joining us for our second quarter call. We will look forward to talking to you in approximately 90 days. Have a great day.

Operator

Thank you ladies and gentlemen, this concludes your conference call, you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: JetBlue Airways Corporation Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts