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JetBlue Airways Corporation (NASDAQ:JBLU)

Q3 2010 Earnings Call

October 21, 2010 09:30 am ET

Executives

Dave Barger - CEO

Ed Barnes - CFO

Analysts

Michael Linenberg - Deutsche Bank

Bill Green - Morgan Stanley

Jamie Baker - JPMorgan

Duane Pfennigwerth - Raymond James

Will Randow - Citigroup

Glenn Engel - Bank of America-Merrill Lynch

Hunter Keay - Stifel Nicolaus

Gary Chase - Barclays Capital

Kevin Crissey - UBS

Helane Becker - Dahlman Rose & Co.

Dan Mckenzie - Hudson Securities

Steve O'Hara - Sidoti & Company

Operator

Good morning ladies and gentlemen and welcome to the JetBlue Airways third quarter 2010 earnings conference call. Today's call is being recorded. We have on call today Dave Barger, JetBlue's Chief Executive Officer and Ed Barnes, JetBlue's CFO.

As a reminder, this 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.

Dave Barger

Thank you Sandra and good morning everyone and thank you for joining us. This morning we announced record net income of $59 million for the third quarter or $0.18 per diluted share, an improvement of $44 million year-over-year. We reported operating income of $140 million resulting in an operating margin of 13.6%, the best margin we posted since 2004. We believe we are on track to report one of our most profitable years ever, reflecting the progress we have made to strengthen our network, maximize revenues and control costs.

I'd like to take this opportunity to thank our crew members for the remarkable job they are doing when in a safe, reliable and productive, high quality operation. Our crew members should be extremely proud of their performance, and we are pleased to reward them for their contribution to our financial success.

Based on our year-to-date profit, we accrued $12 million in profit sharing during the third quarter, and $26 million year-to-date. We also continue to focus on maintaining a strong liquidity position, one of the best in the industry. We ended the quarter with roughly $1 billion of unrestricted cash and short investments, or 25% of trailing 12 months revenue. Given the volatility and the price of fuel, and the airline industry's vulnerability to unpredictable events, we believe maintaining a strong liquidity position remains of paramount importance.

Out third quarter results were driven by a strong revenue environment in the ongoing development of our network strategy and revenue initiatives. Quarterly revenues exceeded $1 billion for the first time in our company's history, up 20.5% versus last year. Unit revenues for the quarter were up 11.1% on an 8.5% increase of capacity. Typically an increase in capacity comes at the expense of yield but our third quarter yield increased 11.4% year-over-year even as average stage length increased 2%. We had an average one-way fare of $142 and 11.6% improvement over last year, this reflects the improving demand environment as well as our ability to attract and retain higher yielding customers.

We are particularly pleased with our September year-over-year passenger unit revenue performance which increased 10% on 10% more capacity. Our domestic PRASM for September outperform the industry reflecting our focus on improving revenue performance during shoulder periods.

A key part of this focus has been the expansion of our network in Boston. As we expand the Boston with new destinations and increased frequencies we have become increasingly relevant to its business travelers. In 2010 we will open six new destinations from Boston and increase capacity by 30% versus last year.

During the third quarter we saw a significant improvement in both yield and load factor on our east coast short-haul market such as Boston to Chicago reflecting schedule adjustments we made to better accommodate business traffic on those routes as well as better access to our inventory through the GDS channel. These actions coupled with our low cost structure and strong brand have enabled us to increase market share in Boston. We expect competitive capacity in our Boston markets to be down about 2.5% year-over-year in the fourth quarter of 2010.

We continue to see tremendous additional potential in Boston, we currently offer over 75 daily flights to 34 destinations and we plan to grow to over 100 flights per day in Boston by next summer. As part of this effort we plan to begin service from Boston to Washington National next month and to New York in May of next year for solidifying our position as Boston's leading carrier.

Our Caribbean and Latin America markets also continue to perform well in fact unit revenue growth in the Caribbean has outpaced our system average. During September the Caribbean and Latin America was the best performing regions in our network in terms of year-over-year revenue growth even as we added significant capacity. By the end of next year we expect roughly 23% of our capacity will be in the Caribbean and Latin America.

Our balance mix up leisure driven markets such as Punta Cana and visiting friends and relatives or the VFR market such Santa Domingo has helped us better manage the seasonality of our business and approve overall revenue performance.

We continue to be opportunistic as competitors reduce capacity in this key region. To that end we recently announced this service from San Juan to Tampa and Jacksonville and we plan to begin service to Turks & Caicos island from New York and Boston in February.

Another key element of our focus on improving revenue performance during off peak periods has been to enhance our product offering for business travelers. Last month for example we began offering pre-boarding for even more legroom customers. We also continue to benefit from real time connectivity in the GDS channel as result of our transition to Sabre earlier this year which has help increased corporate travel penetration.

Complementing growth in Boston and the Caribbean is our focus on leveraging our highly valuable slot portfolio at JFK airport in a unique position in New York, the world's largest travel market. We plan to add our seventh interline partner at the end of this month. With 70 international flight carriers operating at JFK, we believe we have tremendous opportunities to expand our network and provide our customers with even more choices. Additionally given the capacity constraints of JFK, partnerships provide an effective way for us to flow incremental passengers and revenue through our network.

A critical element of our strategic planning is a well managed capital plan, which directly impacts our ability to generate positive free cash flow, an important driver of shareholder value. In this regard, I'm pleased to announce further changes to our fleet plan, providing for a slower and smoother future aircraft delivery schedule.

Earlier this month, we revised the terms of our aircraft purchase agreement with Airbus, deferring four aircraft from 2012 and six aircraft from 2013, all to 2016. As a result, we have reduced our Airbus deliveries by over 40% for 2012 and 2013, and now have seven A320 deliveries scheduled for each of 2012 and 2013.

In addition, we have elected to opt out of two EMBRAER 190's previously scheduled for delivery in 2012. These actions reduced our aircraft purchase obligations by over $500 million through 2013.

Lowering CapEx is a key component of our goal to grow on a sustainable basis and consistently generate positive free cash flow. In connection with this recent deferral of 10 A320's, we have agreed to pay Airbus a $5 million fee, which will be recognized in other operating expenses during the fourth quarter of this year. We believe this additional expense is more than offset by the accretive impact the deferral will have on long term free cash flow, liquidity and profitability.

New aircraft deliveries now total nine in 2011, 11 in 2012 and 14 in 2013. Additionally, four of our A320 leases are scheduled to terminate in 2012, and three A320 leases are scheduled to terminate in 2013.

In closing, I'd like to once again thank our 12,700 crew members for all their hard work. Our strong financial results indicate that we continue to be headed in the right direction. We believe our unique culture of brand coupled with our low cost structure and strong network position us for continued success as we end 2010 and move into 2011.

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

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 in taking care of the JetBlue customers day in and day out.

We are pleased to report our highest every quarterly operating income of $140 million. These results reflect a $74 million improvement versus last year, and a $45 million improvement versus last quarter, despite having paid $15 million more for fuel in the third quarter than we would have paid at last years prices.

As Dave mentioned, revenue growth was the key driver of our earnings growth during the third quarter. Passenger unit revenues for the quarter increased 12.5% compared to a year ago. Yield during the third quarter was up 11.4% and load factor was up 0.9 points on 8.5% more capacity.

Although our revenue performance was generally in line with our projections, the summer thunder storm season in the North East was less severe than usual and we cancelled fewer flights. During July and August we cancelled 139 flights due weather, compared to nearly 500 weather related flight cancellations in July and August of last year. As a result of a higher completion factor, ASMs were about 1 percentage point higher than forecast, which in turn negatively impacted unit revenues.

Throughout the quarter we saw our strength in both yields and load factor across our network as we continue to benefit from an improving demand environment, an increasing mix of business customers and revenue improvement enabled by Sabre, including higher yielding business traffic through the GDS channel and enhanced pricing capabilities. Our third quarter pricing was up about 4% compared to 2008, when the demand environment was still relatively strong.

Turning to ancillary revenue performance for the quarter which we measure as the combination of ancillary revenue reported in passenger revenue and those in other revenue. Total ancillary revenue in the third quarter was about $18 per passenger, a 3% year-over-year increase. On a unit basis, our total revenue did not grow as quickly as our passenger revenue. The majority of the shortfall was in change fees, which we believe reflects the impact of some customer behavioral changes.

We are pleased to continue to see strong demand in our Even More Legroom or EML product which is on track to generate $85 million in additional revenues this year. In the coming months we plan to further enhance our EML product as we remain focused on growing our revenues by increasing the variety of customized product options offered to our customers.

Fuel of course remains the most significant cost comprising one third of total operating expenses in the third quarter. In the third quarter we hedged 49% of our fuel consumption, including the impact of fuel hedging and taxes, our fuel price for the third quarter was $2.26 per gallon up from $2.14 per gallon last year. We continue to add to our fuel hedge portfolio during the third quarter.

For the fourth quarter of 2010 we have hedged approximately 43% of our anticipated jet fuel requirements using swap agreements in costless collars. For 2011 we are hedged about 16% using primarily crude call options. The underlined details or hedge positions are more specifically described in our investor update which will be filed later today.

We are planning on our fuel price of $2.42 per gallon on the fourth quarter and $2.30 for the full year, including the impact of hedges and taxes. As will be indicated in the investor update, these prices are based on the forward curve as of October 15th and exclude transportation and the planed fees. Excluding fuel, third quarter unit cost rose 3.4% year-over-year, this results were in line with our expectations outlined in the guidance provided last quarter.

Other operating expenses increased 12% per ASM were the primary drivers of the year-over-year increase. During the quarter we announced plans to partner with ViaSat for the provision of in flight broadband access on our aircraft using ViaSat's Ka-Band satellites as an alternative to slower less robust connectivity options. As a result we have elected to discontinue further development of in-flight connectivity by LiveTV. In connection with this decision we recognize a non cash impairment charge of approximately 6 million and other operating expenses related to the value of LiveTVs, air-to-ground spectrum license.

Sales and marketing expenses increased about 13% per ASM year-over-year due to the higher revenue related cost such as commissions and sales expense as more bookings flow through the GDS channel. Interest expense decreased 10.9% year-over-year or $5 million due to the lower interest rates and lower principal balances. At the same time interest income and other decreased by $4 million year-over-year primarily due to the $3 million gain reported in 2009 related to the valuation of auction rate securities that we owned at that time.

We ended the quarter with unrestricted cash and short term investment of roughly $1 billion. During the third quarter we made approximately $80 million in debt and capital lease payments. Our scheduled principal payments from debt and capital leases are expected to be above $55 million in the fourth quarter. Looking ahead to 2011 we expect a very manageable $185 million in debt maturities for the full year.

JetBlue ended the quarter with 157 aircraft. We took delivery of one Embraer 190 aircraft during the third quarter and plan to take delivery of one E-190 in the fourth quarter, both of which are financed using Brazil Export Financing. We also took delivery through leases of three previously owned A320s in the third quarter and expect to take delivery also through leases of three previously owned A320s in the fourth quarter. With these deliveries, we expect to end 2010 with a fleet of 161 aircraft comprised of 116 A320s and 45 E-190s. We spent approximately $20 million in non-aircraft CapEx during the third quarter, $3 million of which was related to implementation of Sabre.

We estimate capital expenditures of about $85 million in the fourth quarter, $45 million of which relates to aircraft. For 2010, we expect total CapEx of $320 million, $205 million of which relate to aircraft. With minimal capital commitments for the rest of the year, we remain on track to generate positive free cash flow and maintain strong liquidity. We expect to end the year with cash as a percentage of trailing 12 months revenue in excess of 25%.

As discussed on prior calls, the bulk of our 2010 capacity growth has been driven by our expansion in Boston and the Caribbean. The rest of the network actually shrinks in 2010 on a year-over-year basis. For the fourth quarter, we expect capacity to increase between 8% and 10% year-over-year.

Looking ahead to 2011, we plan to take delivery of five E-190 and four A320s. We have financing in place for all of these aircraft deliveries. We are still working through details of our capacity plans for 2011 but we expect the continuation of growth driven by Boston and the Caribbean. At present, we're not seeing any of hints of a slowdown in demand in our markets.

Further, we continue to be encouraged by the success of our initiatives to improve revenue performance during shoulder period by attracting higher yielding customers including scheduled optimization, enhanced pricing capabilities and better connectivity to the GDS. We expect the success we had in Boston and the Caribbean to continue even as we add significant capacity. Based on the data collected thus far, we currently expect October pricing to be up about 11% year-over-year.

Prior year comparisons become more difficult in November as we began to lap the economic recovery. Nevertheless bookings for the Thanksgiving holiday look solid and the early indications for the December holiday are encouraging. In addition we expect to continue to benefit from the maturation of the new markets is to become a smaller percentage of our overall network. In the fourth quarter we expect about 4% of our ASM will be in market open less than 12 months compared to about 8% of our ASM in the fourth quarter of 2009. For the fourth quarter we expect PRASM to increase between 12% and 15% and RASM increased between 10% and 13% year-over-year

Our fourth quarter and full year revenue guidance includes approximately $10 million and passenger revenue we expect to recognize related to the exploration of TrueBlue points are in prior to the launch of our new customer royalty program last November.

For the fourth quarter we expect ex fuel CASM to be between 2% and 4%, up between 2% and 4%. And for the full year we expect ex fuel CASM to be up by 5% to 7% which is slightly higher than our projections last quarter. This increase is due primarily to the $5 million fee we paid to Airbus in connection with the recent aircraft deferrals and the 6$ million impairment charge related to the spectrum licensee owned by LiveTV. Excluding these two items our expected full year ex fuel CASM increase would be 4% to 6%, consistent with previous guidance. With the increase in fuel prices over the past few weeks we currently expect CASM to increase 7% to 9% in the fourth quarter and for the full year.

In closing we are pleased to report all time record quarterly revenue and income during the third quarter, reflecting the progress we are making towards our goal to achieving sustainable growth which we believe will ultimately drive shareholder returns.

With that, we are happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Michael Linenberg from Deutsche Bank. Please go ahead.

Michael Linenberg - Deutsche Bank

I have two questions here. One, on your forecast for RASM for the quarter or PRASM up 12% to 15%, and Ed you indicated that October is running up 11% and yet we know the costs get more difficult so can you give us some color, what are you seeing? I realize that you get the benefit of maybe a stronger holiday period where the loads are up and you are getting better fares, but are you also implicitly assuming that you are going to get pretty good uptake on that last minute business traveler? What you have seen in September that trend maybe continuing through the fourth quarter. How much of that is a function of sort of putting some [paint] that that's going to materialize as we move through the quarter?

Dave Barger

I think it's really the steady growth that we have been marching on in Boston, and we weren't there seven years ago, where forecasts going to be 100 trips a day next summer. So the relevance in Boston, by the way the diversity of the customer base, including the business traveler which we are seeing a higher percentage of business travelers to and from Boston with our network, I think really as a result of the 190 complimenting the 320 nicely, and in the Caribbean also. And now these are markets that right now we are forecasting them to be down on a year-over-year basis in terms of competitive ASMs.

And so its Boston, its the Caribbean, Mike its Sabre, its the contributions of Sabre in many different ways, whether its pricing, yield management, whether its the ability to really be moving much quicker in terms of with our air price system in terms of pricing models with fair environment, its the maturation, fewer ASMs on a year-over-year basis that are in new markets that are less than 12 months, the partnership traffic as well as is kicking in again. And again in the prepared comments, seventh interline announcement named by the end of the month. So it's a combination of all of the above, plus we go into the strong holiday period.

Michael Linenberg - Deutsche Bank

My second question and Dave, and this is maybe more of a conceptual question. If you go back pre-Southwest AirTran, you've always wanted to remain independent and it was interesting that post that transaction there was a lot of talk about who's next, and what people have to do. And I think you were on record very clearly saying that independence was the path for JetBlue. The question though that I ask you is, as we watch these major carriers come together, you could argue that there is a slightly different passenger segment that at the end of the day they are going after, its that inter-continental business traveler its being able to fly to 150 countries and thousands of destinations. But when I think about AirTran and Southwest, I feel like the combination of that entity is much more of a competitive threat to you guys. And I realize you have a very strong position in JFK and Boston, but with AirTran, Southwest really starts to get into some of these markets that in some cases overlap with you.

And so to boil it down to one question, if I was a corporate travel manager at a company where we represented the price business, the price sensitive business traveler, if JetBlue came in and pitched the deal to me about breath of coverage and service et cetera, and then the AirTran Southwest guys came in and talked about what they offer, I would feel like what Southwest AirTran had to offer would be superior. I am talking about network, I am talking about the number of destinations, the density, how would you compete against that? Or maybe it's irrelevant; maybe it's the wrong comparison, your thoughts on that?

Dave Barger

Sure Mike, I think you know headline again, we are focused on organic or natural growth. We think and again this most recent quarter and the trend that we have seen I think speaks nicely to the success that we're seeing with that. And so, we wrap that with the open architecture.

When I look at this combined entity as you mentioned Southwest and AirTran, our models are so different Mike, this open architecture at Kennedy's 70 airlines, we'll announce our seventh partnership, plus the opportunity to flow that traffic over Boston as an example. And so I think natural growth, organic growth plus enhancing our partnership traffic and taking advantage of that, again when I look at for example our models, your model is this diversity across Boston, New York, Orlando Fort Lauderdale down into the Caribbean, [Transcons] down to the West coast. And so, I think we feel very, very strong about how we're positioned truly in terms of what's happening and at the end of the day Mike, consolidation at a high level is something we support. It is stripping out some of this unnecessary capacity and all you have to take a look at it is micro into some markets. For example Boston to Baltimore and there's many markets like that. I think that, this board real well for the industry but specifically for us.

Michael Linenberg - Deutsche Bank

Yes agreed. Well, very good and again, nice going this quarter.

Dave Barger

Thanks a lot, Mike.

Operator

The next question is from Bill Green from Morgan Stanley. Please go ahead.

Bill Greene - Morgan Stanley

I was thinking about sort of the competitive landscape and if we look at some of the recent M&A, I'm curious how you think it's going to affect your strategy. I know you say you prefer to remain independent but certainly those shares that have been involved in consolidation have reactively quite favorably suggesting at least investors think it's good for the industry framework if we see more consolidation here.

So what would cause you to sort of reevaluate that view and think differently on M&A do you think?

Dave Barger

I appreciate the question. I think again to get a high level of this consolidation as I mentioned to Mike, it's excellent in terms of stripping out some of the unnecessary capacity but candidly, I don't anything has transpired that has surprised us. And in terms of something that would jolt us to be looking differently. And so, are we through the M&A period? I think probably not, don't know what that means in terms of those who are unaligned, who maybe interested in that but candidly Bill, in terms of what we see, over our 10 years and the positions that we have in our network and the open architecture and by the way the implementation that we had Sabre earlier this year that facilitate that. I think we feel real strong about it.

Ed, any comments you want to add into that?

Ed Barnes

No. I think we have our business plan and I don't think that anything has changed our business plan as a result of the M&A activity I think we feel very confident.

Bill Greene - Morgan Stanley

And, alright can I just ask a second follow up here which is on capacity, I know it might be a little soon to sort of give much color on 2011 but we are seeing some CASM pressure here so how do you think about the need for growth in light of that CASM pressure?

Ed Barnes

Well I think we, thanks Bill for the question, I think that we've been pretty clear on past calls that we are really not letting that influence our network strategy and really the network strategy is influencing how much we want to grow and not any CASM pressures so we saw an opportunity this year to grow Boston and significantly and the Caribbean significantly and those were the opportunities that we directed those aircraft against. The way I look going forward is I think that would be very opportunistic with growth opportunity into the future.

Operator

The next question is from Jamie Baker from JPMorgan, please go ahead

Jamie Baker - JPMorgan

David I am curious, this question you probably haven't gotten yet today I am curious if you and your current partners or any potential future partners have explored what would be required in constructing an airside light rail link to JFK that would permit connection between T5, 7 and 8 without requiring additional screening?

Dave Barger

See T5, 7 and 8 in terms of light rail, first of all again thanks Jamie for the question I think Kennedy I am so pleased that we made decision when we did almost, it's over 7 years ago now with the investment in Terminal 5 plus we are closing out the real estate underneath Terminal 6 to work with Port authority in terms of our former home. What we are doing with those 27 acres specifically to a train connection need to be transparent, I don't believe there has been any discussion on a train connection between those terminals, it's a one regret I have is that we never working with the port authority the train went in before our terminal went in and so it was hard to change the light rail system. But I think it's the ability to create a connection on to our partners such that as seamless possible even though its going to be across more than a couple of terminal so that's baggage that could include ramp side transfers as well, working with the port authority, FA and the TSA. And obviously if you've cleared security domestically and you are on a outbound international trip, the ability to really try to streamline that experience. So, we are working with that, I don't see a train but I do see something that will make the transition across Kennedy to be very effective.

Jamie Baker - JPMorgan

There is not like a fuel depot there? I mean I know the airport reasonably well, but I couldn't think of any infrastructure that would impair the possible connectivity rail or otherwise.

Dave Barger

Its really kind of interesting because T5 was truly as close to a Greenfield site behind the [Sheraton] building obviously TWA which will by the way open up later this year. And then the underneath terminal 6 nothing physically prohibits, terminal 7 is obviously British Airways and their leasehold through 2015, that's clean and then the former terminal 8 site there is a lot of…its really a Brownfield site today. I should say eight and nine is now named number 8 but about a third of that tarmac has already been clean. So, it's quite clean, all things considered.

Jamie Baker - JPMorgan

Second question, I have got to image that you are occasionally pitched the idea of a third fleet type for international operation, you look at the returns that others are generating across the Atlantic, you look at the model that area is your X is getting into. I am wondering about the JetBlue business model and if there is anything other than just maybe your own prudence that prevents you from doing something similar?

Dave Barger

Jaime, I think candidly in transparency, I think we're now at a point where a big change is taking place in our company, whereby the network is driving the fleet, the needs of the fleet as opposed to the other way around. And so, I think now as we take a look at our commercial team and that group, Robin Hayes and his group driving the need for a different platform, that would be the driver as opposed to be really being on the receiving end of a pitch from one of the large OEMs.

I think specifically, it sure would be nice to have an airplane that had the capability to fly off the West Coast under the Caribbean nonstop. It would sure be nice to see an A320 with winglets because the engineering is out there as well, which I think allows us to continue to look at what makes sense from a fleet perspective. But we don't see a need to take the pitch from an OEM to try and fix something. And that's what a lot of airlines tend to do. They're trying to fix their current order book by taking airplanes they don't need. I think we are in a good position, and as soon as the commercial team comes up with the idea, we'll be all yours.

Jamie Baker - JPMorgan

My question wasn't specific, perhaps Robin's white body genes, well I am talking about Robin's prior employer would effect that. I didn't mean specifically as a result of a pitch.

Dave Barger

I think what's really nice about what's transpired with the commercial team, Robin and team is the international expertise experience that they have. Coming from, whether it's British Airways or United or whoever the case might be, and that's a really important lens to look through. It's unlike one of the earlier questions I think that we received regarding the consolidation of the Southwest AirTran model. I mean our network demands expertise that has the global lens to look at it and I think we are real well positioned to be real smart in that area.

Operator

Thank you, the next question is from Duane Pfennigwerth from Raymond James. Please go ahead.

Duane Pfennigwerth - Raymond James

Just wondering if you could quantify for us the revenue from the partnerships that you saw in the third quarter either RASM or just total revenue?

Dave Barger

In terms of specifically breaking out, we are not going to do that, its grand enough. Some of these are just also so new. When you look at Aer Lingus has been in place for a period of time, and we've talked fairly openly regarding seeing a 100, a 100 plus customers per day each way across Kennedy and Boston. But outside of that it's been very early, whether it's South African, whether its American Airlines and the capability that sell off the websites later this year, Lufthansa.

So we're not going to get specific on it Duane, but when I think about potentially what it means is we are announcing a seventh interline relationship later this month. It's playing real nicely in terms of supporting the investments that we have made previously with the Sabre.

Duane Pfennigwerth - Raymond James

And just to segway in terms of the investment in Sabre this year, can you help us think about the size of that, and specifically as it relates to the growth rate in ex fuel CASM next year? How much can not having a transition to Sabre help your ex fuel cost growth moderate? Thanks.

Ed Barnes

Yes Duane, I think we said that the onetime cost this year in Sabre were in and about the $15 million range. Obviously, we're going to continue to make investments into the future in Sabre adding additional functionality. So no guidance on what we're going to do in 2011 relative to the Sabre spend, but I don't think in size to the revenue payback that the cost was all that significant or substantial.

Duane Pfennigwerth - Raymond James

But I guess is 6% the right way to think about next year or are some of these initiatives not likely to repeat and that growth rate should come down?

Ed Barnes

Well, we have some other onetime investments this year as well as some kind of unusual items. So if you think about the write off of the spectrum license, if you think about the onetime payment from Airbus of $5 million that's going to happen in the fourth quarter and won't be expensed in the fourth quarter. The investment in Sabre as well as other things that we've invested in on the technology front, the runway closure at JFK, all those have kind of pressured the cost this year. So I think that we'd be looking at something more aligned with the back half of our year versus the front half our year next year.

Operator

Thank you, the next question is from Will Randow from Citigroup. Please go ahead.

Will Randow - Citigroup

I had a few follow-on questions on the non-fuel cost growth in terms of 2011. How much of it's driven by labor? And I guess how are you thinking about potential unionization of your work groups with NMB's recent role change?

Ed Barnes

Well, I think a lot of the first half growth in our CASM was associated with some of the labor adjustments that we made, more specifically the pilots. We tend to look at our frontline crew member pay as something where we want to have fair pay relative to the peer set. And so, we tend to look at that on an annual basis is to whether people are appropriately compensated relative to their peers so I don't see any big surprises going forward. I think that we did have something that we made up for in the first half of this year but I think going forward that it's probably going to be more moderate then those changes from a union front, Dave do you want to address that.

Dave Barger

Sure thanks Ed, thanks for question Will, I think again as we take a look our model, a direct relationship we don't see the benefit of having to pay a third party to speak on behalf of our workforce. Now that said we are certainly aware of NMB rule change in June of this year and move to a popular vote. And so we are not running the company different Will I think it's, as we look at our model, we've been very please with what we have seen over the first 10 years. Has there lots of noise because of this, boy no doubt in the industry especially with our model I mean we are non-union airline. But I think we feel very good. And again its quarters like this that I think reaffirm what we are doing with our organic growth, the open architecture, a direct relationship, the focus on free cash flow and balancing shareholders customers and crew members so that's kind of where we are currently placed right now, Will.

Will Randow - Citigroup

And as a follow on in terms of the $5 million payment to Airbus, I guess the first is that actual cash outflow or are you just forfeiting [EPs] and then are you comfortable with 7 A320s for year end '12 and '13. And I guess lastly how do you think about return of invested capital in terms of providing a goal to investors given that it seems like you are becoming more focused on.

Dave Barger

Yes, Will I think, the first of all, the Airbus payment will be a cash payment in the fourth quarter. Secondly I think the deferral gives us some optionality, we talked in the script about having some lease deferrals in those same years and so I think that we have the ability to still manage our A320 fleet growth in those years, depending on whether we decide whether we are going to extend those leases or return those aircraft. And then on return on invested capital I think we look at it from an industry perspective is the industry has to have a commitment to a return on invested capital metric, I think that we are coming closer to that, I start hearing a lot more people talk about that but we are ready to give any specific number at this time.

Operator

Thank you, the next question is from Glenn Engel from Bank of America-Merrill Lynch. Please go ahead.

Glenn Engel - Bank of America Merrill Lynch

Question first on cost, you mentioned you cancelled the lot fewer flights, your ASMs are higher than expected, it push down PRASM, why did you see a cost surprise. And if I adjust for the two one time items, it still seems like the cost in the fourth quarter are couple of points higher than what you have initially thought so? Where are you seeing the greater pressures?

Ed Barnes

I think Glenn, we are probably about where we expected to be, and we obviously had some one time items in the spectrum write off and A320 deferrals but I don't think that we have been necessarily shocked by the cost. And we are relatively within our cost guidance for the full year if you adjust from those two items so as we said before we continue to make investments whether it's in crew members or whether it's in technology and we are just executing on a plan.

Glenn Engel - Bank of America Merrill Lynch

It still seems that its' coming in again higher than you though if you took out the …if you hadn't cancelled so many, if you have to cancel the less fewer flights this year you should have seen the CASM down versus your expectation so you didn't something must have been higher that you thought.

Ed Barnes

Again I am not surprised by where we ended up, I think that we again have some one time adjustments but I think we are within the guidance range that at least we expect

Glenn Engel - Bank of America Merrill Lynch

And on the interlines why not co-chairs, will there be co-chairs at some point?

Dave Barger

Well I think the our model has really been different as we have been working with our different partners today Glenn. And so interline today it could lead to a one way co-chair or wherever the case might be. Lets face it, we are still talking about co-chair, we have all kinds of workforce issues as well that are very important to work. So I think we feel real good about where we are at with really the value of our network at Kennedy, largest domestic airline in New York and then Boston as well so. And it is nice to because as we take a look at the selling and interline, it's really the summing sectors and as opposed to the traditional pro rate with when you are start talking about the square root of mileage. So I think its we are really pleased with what we are seeing, by the way we do have one way co-chair with Lufthansa we have had since we started the agreement back in November of last year. So its not that we don't have it but we feel really good about what we are doing right now

Glenn Engel - Bank of America Merrill Lynch

What holded it back is it your technology, is it just your choice so it is labor contracts at other airlines?

Dave Barger

I think technology is really in place and I think we just want to be very thoughtful about what we are doing on a go forward basis, by the way its not lost on us the earlier question about the global expertise that we have in our commercial team. Co-chair is more complex and so interline is simplified if you will so it's I think right now we are seeing the best of all worlds. So lets see how it plays, we've learned to never say never.

Operator

Thank you, the next question is from Hunter Keay from Stifel Nicolaus. Please go ahead.

Hunter Keay - Stifel Nicolaus

I know you are hesitant to disclose the details of this program, but maybe can you help us think about the impact at least on a year-over-year change basis for your PRASM that the All You Can Jet program had this year? Was it a good guy, was it a bad guy or was it kind of neutral?

Ed Barnes

I think your first comment was right; we're hesitant to disclose any details on All You Can Jet. I can say that it does have a positive impact or we wouldn't do it, but to the significance of that impact I don't think we would provide guidance to that.

Hunter Keay - Stifel Nicolaus

Not even on a sort of relative to last year, not relative to your overall revenue base, but sort of relative to how we did last year, directionally?

Ed Barnes

Well we do capacity control some of that in the number that we even sell. So I think all of that's in our guidance and has been. So I don't think it was significant to the year-over-year.

Hunter Keay - Stifel Nicolaus

And just a little more on M&A. I know you guys are dedicated on your standalone plan and I respect that, but if we're to sort of run through this scenario and think about potential M&A partners, particular for carriers that are either relatively close to your size or bigger. Do you think it's even remotely feasible to consider a scenario, or you guys have partnered up with an airline which any at all New York City presents given your domestic flight portfolio at JFK?

Dave Barger

You know Hunter I think when and by the way of course a little bit more on M&A, right especially what we are living in right now with what's happening around us. The lens certainly that I look through, but the team looks through when we look at by the way a direct relationship with our crew members that's a really important lens. And so and I mean we're certainly at a different model along those lines.

And so, when you start to even take a look at those kinds of scenarios, this is really part of the heritage in terms of organic growth, natural growth, the right partnerships. By the way, specific to your question in terms of New York City, it's no surprise that we're partnering on an interline basis with American Airlines, right, 18 of our domestic routes to 14 of their international route.

So, we're certainly not afraid to do something right in our backyard with a quality airline like American Airlines, or up in Boston as well. So, it's just we're flying those same customers from New Orleans to Heathrow. We're doing it a little bit differently, if you will as opposed to maybe what the global alliances are doing, or what those carriers are doing through the M&A activity.

Operator

Thank you, the next question is from Gary Chase from Barclays Capital. Please go ahead.

Gary Chase - Barclays Capital

Wanted to see if I could get a little bit more color on some of the revenue issues. First, presumably the true up on those true blue explorations that you were talking about, Ed presumably those are going to hit December right?

Ed Barnes

They would hit December, yes.

Gary Chase - Barclays Capital

So there's none of that in the October comps that you just described for us.

Ed Barnes

No.

Gary Chase - Barclays Capital

And then, I think at least most of us believe and it's pretty hard when you look at JetBlue's comps cause your network has changed around I think quite a bit in the last few years, but it does look like your headed into some tougher months and in terms of your RASM comparison. And the 12 to 15 PRASM guide based on the October would imply a lot of acceleration even when you ex out the mileage expiration. Are the bookings for Thanksgiving and Christmas that much better? And are they pointing in that direction, or is there something else that gives you the confidence that those November and December number are going to be there? And then, frankly I wanted to ask the flipside of it which was, September seemed a little soft to us. So how do you think about the question in light of what you experienced in September on your own performance?

Dave Barger

Just coming on September Gary, I think that it was interesting because it went through quiet a bit of weather activity just as we closed the month. We are actually quiet pleased, I mean really when I look at the consecutive activity, July, August on the year-over-year basis, our on time performance was up. September was significantly down, and then those cancellations that we did see were all so later in the month pushed some of that revenue into we believe October into Q4.

I think again, its even more color I think to the earlier question that we had on the call with what we are seeing from a revenue perspective. Let me just get inside Boston a little bit more, I mean its industry ASMs around us continue to move southward. Airlines that closing crew bases in Boston as we are adding the frequency, and I think the beauty of the 190 as well, the ability to add frequency under the O'Hare's, Pittsburg, Charlotte, Raleigh's. And what we are seeing is we are adding capacity, but load factor is up. Yield is up and so just specifically in the Boston it just doesn't get better than that.

And so plus we are seeing the benefits of the partnership activity in New York. We have the runway back. Plus we are seeing the Caribbean maturation, and also industry ASMs around this are down. So as we look at the fourth quarter PRASM bill, we actually feel quiet good about it. I think the comments regarding Thanksgiving solid. And what we're seeing the early looks if you will into Christmas, Honokaa and New Years, we feel real good about as well.

So that's the color I can give you at this point Gary.

Gary Chase - Barclays Capital

It sounds like you are seeing trends that are reasonably better even in what you are saw and what you are seeing in this current period for thanksgiving and Christmas.

Dave Barger

I think we use the term solid bookings in terms of the thanksgiving timeframe I mean historically is always been a very good time of year for us anyway because of the discretionary traveler that we had historically same into the Christmas timeframe. So, I don't think we are using terms that thanksgiving is stronger than the summer traffic; I mean summer was strong and solid as well, so is that helpful?

Gary Chase - Barclays Capital

I guess I was think year-on-year if thanksgiving looks that much better than last year?

Dave Barger

I really think that as we are taking a look on a year-over-year basis, it's the same in terms of traffic but the fare environment certainly different, we are $142 in the third quarter; year-over-year I believe the number was $127 or $129 in Q3 of last year. So we are seeing the same type of benefits as we go into the fourth quarter.

Operator

Thank you, the next question is from Kevin Crissey from UBS. Please go ahead.

Kevin Crissey - UBS

Capacity guidance for '11, did you give it or did you not get it, I may have missed it.

Ed Barnes

We do not give it.

Kevin Crissey - UBS

How should we think about it maybe in general and as it relates to this year or past growth, I think it's a big issue for the industry and just kind of sense where you guys might be?

Ed Barnes

Kevin I think you should look at it relative to a lot of our aircraft deliveries this year have been a little later in the year specially the six A320s that we took that we were the previously on leases. So next year we are taking additional nine aircraft.

Kevin Crissey - UBS

And are those going to be received earlier or later in the year then?

Ed Barnes

I think they are kind of throughout the year, so its I think a lot of the capacity that's weighted towards the back half of this year plus the deliveries for next year. And I would think that our capacity growth next year as we kind of said on the call we are on the through the scripts was and really its going to be weighted I think at the Boston and the Caribbean is where you can expect a lot of that capacity be going.

Kevin Crissey - UBS

So kind of like you are saying on the cost side being more like the back half may be the growth will be more like the back half as well. Transcon did you mention strength or any comment on the transcon at all? I think Delta was saying they saw a strengthen in New York, strength transcon, thought that's something to do with your stock being up yesterday and then really what I have heard from you is Caribbean and Boston so.

Dave Barger

Yes Kevin the trancons were strong over the course of this summer and they continue to be strong. As we are arrange our route network obviously the ASM start to flow a little bit more north-south and they do east-west in the Q4 and Q1. The transcons were strong over the course of the summer and not just the San Francisco and LA axis I mean from Seattle down through San Diego there was…by the way its transcons Boston, Caribbean we have commented about we are seeing more of a business customer as well so but before it use to (inaudible) by third week more so like in Boston and other locations. It's been a nice mix of diversity on the revenue side, several different initiatives that are really been quite helpful

Operator

Thank you the next question is from Helane Becker from Dahlman Rose & Co. Please go ahead.

Helane Becker - Dahlman Rose & Co.

Just on, you keep referring on the business traffic and how that is helping on the revenue side, can you just give us a percentage may be of what yu you are quantifying as business traffic now versus leisure.

Dave Barger

We have been pretty steady in terms of 15% to 20% of our traffic and in terms of core business. I think what's different is that number is now north of 20% and we are seeing it grow as well into Boston. And so again this benefit of, we use to have a one trip between Boston and O'Hare, and as we are adding frequency three and growing same in the rally of Pittsburg, Charlotte business markets as well. So seeing a higher business customers mix in Boston which is really nice from a relevance perspective and its driving the opening of Reagan National Airport in Washington November 1st. Its driving Boston to New York in May of next year with four frequencies of very high price routes and so I think we are positive in terms of our investment with Massport and our crew members up at the Logan.

Helane Becker - Dahlman Rose & Co.

Okay, so as we think about the adds in aircrafts that you have and some new markets you may be announcing we should really think in terms of business markets out of Boston primarily and Caribbean kind of secondarily. And then you said something that kind of interested in me, you said New York, Boston is a high fare market which I won't disagree with but with that mean that you would go into those markets with their fares that are equal to or close to where the existing fare structure is?

David Barger

Well we've traditionally take a look at Boston to Washington, Reagan National our fare structure is totally different then what use to be in place prior to our announcement so, I think you can expect a similar philosophy from Boston down to New York. I think new aircraft again, we haven't guided it if you will in terms of capacity next year, number of markets but I think it's fair to say that really, the ones that we're looking through tends to be Boston but also the Caribbean, not unlike the Turks & Caicos that we're opening in the February timeframe, daily out of JFK and then on weekends out of Boston. So, it has been a nice model that's been working over the last couple of years and there will be the occasional Hartford as well. We're opening that November 17th for service to Orlando and Fort Lauderdale. So, something's that a little bit different then say Boston, Caribbean but it fits nicely with our typology of Florida. So, that kind of how we are looking at 2011.

Operator

Thank you. The next question is from Dan Mckenzie from Hudson Securities. Please go ahead.

Dan Mckenzie - Hudson Securities

Given our fact meeting yesterday in Los Angeles, have a hunch and coasting on four hours of sleep or less so, nice job and the perspective this morning. Hoping I can get a little bit more on two topic and maybe kicking, hope I'm not kicking a dead horse here but first topic is Florida and then the second is a relationship with AMR. But starting with Florida first, how is JetBlue thinking about the shift in the competitive landscape and I guess what I'm getting at is JetBlue is identified Orlando and Fort Lauderdale as focus cities but in light of Spirit's looming IPO and southwest acquisition of AirTran, the competitors in that market are of course are changing pretty dramatically. So, I guess I'm wondering in particular one, how you are thinking about further investments in Florida and two, how critical is Florida as a platform for growth?

Dave Barger

Florida, very important, it's been an engine for this company since we started the airline back in 2000. So that continues to be the case I think as we look at our ASMs and how we redeploy ASMs, north south especially in the snowboard time of year that will be the similar philosophy that we've had on a year-over-year basis.

So I think that when you look at Florida, of course Southwest, AirTran spirit they are all large operations down in Florida, but so do we. We are performing well, and it works real nice for not just the ability to add traffic north of Florida but also south Florida. And so that ties nicely into the Caribbean Dan. We got a 10 year celebration down in San Juan last weekend with a 1,000 crew members as we are doing that this year with our 10 year anniversary and the ability to see the traffic out of Orlando, out of Fort Lauderdale, and to places like not just San Juan, Ponce, Aguadilla, San Jose, Costa Rica, Bogotá. I mean it's a nice blend, if you will in terms of relevance with what we are seeing North South.

I think the M&A activity that's going on and how it impacts Florida, my sense it's going to some of the ASMs deployed by competitors maybe less because of our consolidation. And Florida will continue to be a very important focus of this company.

Dan Mckenzie - Hudson Securities

I guess that leads to my second question. With respect to JetBlue's relationship with AMR, when I look at the schedules that I am seeing double digit growth from JetBlue into AMR markets, which suggest JetBlue is very much a tough competitor for AMR. So it's a difficult relationship for me to reconcile, and I am wondering what additional perspective you can share about how we should think about the existing relation and the potential looking ahead?

Ed Barnes

Well I think it's a fair to say that we remain very ardent competitors, but at the same time I think we are partners as well. And so that's not surprising I think, rather when you look through a contrary lens. And so I think you can really see more of that into the future as well. And what we are doing for example, we just announced San Juan to Tampa, San Juan to Jacksonville will be over 30 departures daily off the Commonwealth to Puerto Rico next summer.

So, our business plan we are going to continue to move forward with it. At the same time I think we are delighted that we can connect customers to Tokyo, to Buenos Aires, to Heathrow. We'll start to see frequent flyer [capacity] as well. And the American brand in New York, in Boston, it's significant and its been here for decades as well. So I think we are real optimistic and pleased with what we are doing on the partnership front as well there.

Dan Mckenzie - Hudson Securities

So if I understand correctly more competition but also more partnership?

Ed Barnes

Yes, absolutely.

Operator

Our last question will be from Steve O'Hara from Sidoti & Company. Please go ahead.

Steve O'Hara - Sidoti & Company

Could you just talk briefly about, I wonder if you had given some initial cost guidance for 2011?

Ed Barnes

I think the only guidance we are going to give to 2011 was some of the remarks we made before about some of the onetime costs that we saw this year, some of the investments we made this year, specifically in the first half of the year. And next year looking more moderate relative to what you are seeing in the back half of the year.

Steve O'Hara - Sidoti & Company

And then, you guys have talked a lot about free cash flow this year. And I am just wondering your lets say maybe outlook for free cash flow in the future, is that something that's kind of go away once some of these CapEx items start to pop in again?

Ed Barnes

We are still very committed to delivering free cash flow. I think we said that that is our model; I don't think we are afraid to make investments when those investments make sense, but certainly that would have to be something that we can explain to our investors.

Operator

We have no further questions at this time. This concludes our session with inventors and analysts. With that, we will turn the call over to Mr. Dave Barger for closing remarks. Please go ahead.

Dave Barger

Thank you very much Sandra, we will close and say thank you for joining us today. Thank you to our crew members for delivering incredible performance as well. And we will look forward to talking to everybody in the new year, in the January timeframe. Thanks Sandra have a good day.

Operator

Ladies and Gentlemen this concludes today's conference, thank you for participating, you may now disconnect.

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