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Mark Powers – Chief Financial Officer


Glenn Engel – Bank of America/Merrill Lynch

JetBlue Airways Corporation (JBLU) Bank of America Merrill Lynch Global Transportation Conference Call May 17, 2012 10:50 AM ET

Glenn Engel – Bank of America/Merrill Lynch

Powers, Chief Financial Officer of JetBlue. Having joined JetBlue in 2006, Mark became CFO last year and he brings a relatively young airline, plenty of experience gleaned from his years at Continental, Northwest, GE Capital. JetBlue often likes to talk about its commitment to all of its stakeholders. And I'd like to think that Mark is probably the most forceful advocate for the shareholder within JetBlue, and for that, I appreciate him.

Mark Powers

So, that's put pressure on me right? So, this is Investor Relations. Glenn, thank you very much. And I know this is webcast, so for those of you who are joining us on webcast today, welcome as well. It's a pleasure to be here. It's also very interesting that we are speaking in Boston today. For those of you have who have the joy of looking across the harbor and seeing airplanes take off, most of the airplanes that you will be seeing today support the JetBlue tail. JetBlue is a big player in the aviation market in Boston. We are the number one carrier here virtually by every metric that you can imagine.

We have 100 departures a day. About, 23% I think of the seat share at least domestically, we are big player socially here. And while we are a New York-based carrier, we find ourselves in the great position of also sponsoring the Boston Red Sox. So, it's that – and it's amazing how much loyalty that sponsorship has driven for us. We actually have a plane that sports the Red Sox colors and I will get our Director of Investor Relations, Lisa Reifer, in front know I'll get off the Red Sox jag in one minute, but we are also the sponsors of JetBlue Park in Tampa, which is their spring training facility and also sports big events like softball tournaments, but in any case it's wonderful to be in Boston. So, with that, why don't we start?

Solid first quarter, we are one of the few carriers to report a profit, $30 million of net income, $0.09 rather per share. We posted a 7.4% operating margin in the first quarter. The other very, very interesting thing is we continue to perform well on the price of metric even in the phase of 12% more capacity driven in part by 1.5% higher load factors as well as yields that increased quarter-over-quarter by about 5.9%. We also enjoyed a nice ex-fuel CASM decline of 1%, to be candid, driven in large part by unbelievable ASMs, driven in turn by unbelievable weather. And we have sort of the downside I guess of the terrific weather as we find ourselves with perhaps a few more piles of salt for de-icing than we need, but that's a high-class problem. Ended the quarter with about 1.2 little over that of cash and which represents about a 26% of our trailing total revenues. This was our eighth consecutive quarter of profitability.

The other interesting thing in the quarter is that we continue to see competitive capacity in some of our key markets, notably Boston declines. Specifically in Boston, we saw competitive capacity decline almost 4%.

This is – the next chart is for those of you on the webcast, its page 4. This is a chart that sort of high-level depicts overall the elements of our strategy, well outlined, if you'd like to sort of get into the details of that in our Analyst Day presentation, which I believe still is on our website. Simply to say though that we – and I would like to reiterate our commitment to ROIC, which is a commitment that we made for the first time, planned at the Analyst Day this year. The commitment was to grow ROIC by on average 1% per year. We are on track to meet that commitment as we speak today. So, we are pleased with that.

So, let me get a little bit more in the details of financial side of the business. Again, as I noted, we ended the quarter with strong liquidity. We’ve always had real strong liquidity past couple of years, largely – and I think that the strong liquidity is necessary for a couple of reasons. Number one of course is that fuel is still volatile. I mean just look what happened after the elections in France. At the same time, perhaps the need for strong liquidity has dissipated somewhat, particularly since '08 when the competitive market I think sort of a credit to the overall industry. We have gotten off of the cycle of insane fare war type of behavior. So, candidly, I would say that 26% is probably as we manage our cash balances in the future probably in the high-end and look for increased willingness on our part to purchase aircraft and perhaps other assets that might otherwise be financed with cash. This also by the way plays well into the other sort of piece of the ROIC commitment which is managing your cost of capital and managing the amount of invested capital. So, we will continue to look at opportunities to invest in planes and other good assets.

And we currently have the luxury to the extent that we are financing aircraft of trying to make sure that, that the rates on the financing that we do enter into is inside or competitive with our current average cost of debt. Part and parcel of the cash balances is a manageable maturity is one of the things that we've done a pretty good job of I think is we did have a lot of towers through restructuring a lot of our debt and making some prepayments. I feel comfortable that we are able to satisfy all of these obligations set forth on this page with cash from operations. To the extent that we are not notably in 2014 which you can see is a bit of a spike, but candidly in historical perspective is not a spike that we couldn't handle the cash from operations, but to the extent that we did want to, the payments that we are making in 2014 will release a lot of aircraft. So, we could easily securitize those aircraft.

Long story short, I think is one of the key drivers of our financial health is the realization that we really shouldn't limit accessing new capital and try to satisfy all obligations obviously with cash from operations, and that’s what's reflected here.

Networks strategy drives our order book. I happened to have a little experience with from the manufacturing side. And one of the things that you really want to avoid as an airline is the order book shouldn’t drive your growth plans. It’s the networks that should drive your growth plans. We have, I think since 2005, I demonstrated the willingness and ability to sell, lease, and defer aircraft. In fact, I think the total number of sold, leased and deferred aircrafts in 2005 totaled around 130, 140 aircraft. So, again, clearly in the next couple of years, those are very manageable deliveries consistent with our more or less 5% type of growth plan. As you look in the out years particularly '15 and beyond, again we have a lot of time to plan for that to the extent that we needed to soften those deliveries. We have shown no hesitation to take the actions to do so.

Obviously, one of the benefits with an ability to manage your fleet plan is an ability to generate positive free cash flow, which we've been able to do successfully for the past three years. And frankly, we will continue to do so as we move forward. So, we will continue to manage the interplay between our cash from operations and our capital expenditures to produce positive free cash flow numbers. Our analysis by the way in – as we measure this is we are not using adjusted free cash flow or we are not using sort of the net finance price, we were actually using the invoice price of the capital – for purposes of this calculation. I think I have seen other players who will basically say for purposes of the capital expenditure component of free cash flow, they are using the cash portion or un-financed portion. But we use the full boat, even though we maybe financing those deliveries.

High competitive costs, here it’s interesting, it's probably safe to say that we are not a low-cost carrier in the tradition of Spirit or Allegiant. But what’s critical is that we maintain a significant low cost advantage against those – against who we vigorously compete. And as you can see here, and when we talk about Boston, this will be a feature that looms large. So, maintaining the competitive cost environment is absolutely critical particularly relative to our competitors and particularly in view of the fact that we happen to fly in some fairly high cost areas. Again, this sort of the downside of being the big carrier in the New York area and in Boston, but having said that, again it's very important that we maintain this cost advantage. This really does enable our growth.

We had a couple of conversations on the earnings calls lately as well as probably with some of you individually about maintenance costs. What's really happening here just to sort of give you the main driver of maintenance cost increase. And again don’t forget the context relative to other airlines, our maintenance cost reflect the advantage of having a fleet, that’s only 6.2 years old. So, as a percentage of total CASM, we still have an advantage, but nonetheless, we have seen some pretty big increases over the past couple of years in maintenance costs largely driven by the bunching of aircraft that we took delivery of in the early 2000 period.

And so as we had those we were taking this is incredible as this may seem for those of you who are JetBlue customers at the time, we were saying on our in-flight public announcements with a lot of pride, which would probably make all of you cringe and certainly as a treasure will make me cringe, we are taking a new airplane every 10 days. What part of that can be good? And in fact here is what you are sort of seeing is the downside of that is that when you are taking that many aircraft sort of that bubble comes through the system and so you have a fairly concentrated period of time on which the heavy checks are all coming due. That’s what's driving a big chunk of this.

The other big chunk of what we are seeing here in the – at least in the near term this year that’s causing a fair amount of maintenance pressure is one of our key providers of fly hour services for our components, quickly went into a liquidation situation. Good news is for whatever that's where we were able to get our parts out without undue expense, which is always the big problem, when you – when you have these kinds of situation. So, we got our parts back, so we didn’t have to go out and buy whole bunch of new parts. The bad news is we had a really nice contract with that provider for flight hour terms that were favorable. And so we are guiding a little bit higher on maintenance costs largely because we have to go find an alternate provider of those goods and services at, hopefully, at a final agreement price that is as favorable as that which we had before.

So, we are expecting moving forward sort of beyond this little nuance here and beyond the aircraft bubble, we are expecting that maintenance cost CASM will flatten out in 2014 and 2015. I am trying to manage this whole area such that we're going look at sort of a more smooth maintenance cost expense as we manage the business going forward. Fuel continues to be a big chunk of our expense, about 40% of our expenses right now. Before I talk about hedging for a moment in terms of management, one of the nice I would attributes of having a great relationship with our flight crews is really, really, really good behaviors.

You can imagine the impact and we have actually quantified it in the multiple millions of dollars, between the single and dual engine taxi practices, particularly when you are in JFK and Boston with areas, where you can have some pretty healthy taxi times. We're obviously proponents of, and our Chairman or rather our CEOs is a big participant in a lot of the FFA-related activity about, it looks like the airplanes actually fly in a straight line and sort of land directly as opposed to circling and circling and circling and taking indirect routes.

Hopefully, we'll see something happen there. But again, that's largely Washington issue. Things that are in our control include using the SelectTwo engine on the V2500 using the fuel efficiency of 34 on the E190 as well as then selecting winglets on our planes moving forward on the A320 and we are incredibly excited about the delivery of the neos, which could the A320 neos, which would on a flight-by-flight basis particularly a long base flight could provide us as much as 14% to 15% fuel consumption savings. So, that we're looking forward to those 200s that is not an actual claim that you see here that is in fact an A321 with the winglets. First of all, I don't know it's probably not the new engine. We did select the Pratt engine, the GTF, to power our neos moving forward.

With respect to fuel and hedging, we've – I think one of the things we do is we carefully watch what other airlines are doing with the intention of not getting ahead or too far behind. I think it's probably safe to say that most of the airlines have been sort of capitally on the sidelines at least those that do engage in hedging activity. Candidly, we've been back in the market a little bit more aggressively as I think a number of our competitor since the elections in France. I have no idea what the French elections had to do with the price of fuel at the pump. But nonetheless, we are seeing the May dip and so, I think you are going to see little bit wider positions on the fuel hedging side, at least from JetBlue's perspective at the current favorable prices.

We've also had a terrific relationship with our fuel supplier, World Fuel, which enables us to essentially make commitments on four prices, which has been a really nice way to sort of de facto lock in some of these prices moving forward to control our costs. I am not, if I were here sort of talking about pennies and what-not you would rightfully infer that I was speculating. If I were really smart at that, I probably wouldn't be looking at an airline, but we'll be making a lot of money trading oil somewhere. I don't think I'm that smart, so we kind of view the whole fuel hedging activity as a form of insurance, which is to say I really want to having lifted the incredible rollercoaster ride of 2008, I really want to use hedging as a way to protect against that kind of eventuality. You recall it went up to $147 and then dropped precipitously. So, again, hedging is really viewed as a form of insurance don't look at sort of on a quarter-by-quarter, how much are you in the money or out of the money. It's really how much are you protected if fuel goes up 5%, 10%, 15% that sort of thing, that's really how we measure other success in program.

One of the things that was how has always been a historical challenge with JetBlue is largely, at historically a leisure focused airline, which was terrific in the peaks, but not so good in the trust. You'd almost want to ground your fleet in September. So, one of the things that the commercial team has done a terrific job doing is really managing those troughs in a couple of ways, number one is sort of building a stronger network that is less peaky or less troughy is focused on business and customer mix. Number two is looking at products and services and finally is partnership. And as you seen a few minutes, I think the proof in the pudding when you look at our PRASM performance, particularly relative to A4A airlines.

Starting with – since we're in Boston, I'm just going to focus on Boston. Here is a – this has been a terrific story for us. Our seat share has increased from 12% to 23%. Since the first quarter of 2007 again largely at the expense if you will capacity drops by other airlines as you see in the chart here. Again as I noted, we're the number one carrier here in Boston. We have 45 destinations and 100 departures moving probably by 2015 to 150 departures. And you will see on a lot of our pure business type of markets, a higher shift of relative to the other mix a high shift towards business traffic. So, hopefully some of you had the opportunity to fly us today if you are move – going home or if you live here, you hopefully have the opportunity to fly us in one of our many destinations. The daily departures again we are seeing by this next couple of quarters to be 100, going to 150 by 2015, and again, largely because competitive capacity has dropped.

We are seeing the same kind of success in the Caribbean, where in terms of ASM since the first quarter of 2008, our ASMs have increased from 13% to 27%. Here again, this is sort of the next area that we are using – looking to grow. The really nice thing candidly about the Caribbean is that it tends to go P&L and cash positive sooner than normal routes. So, it's just a terrific success story. And again I think that we will continue to grow, but it will probably be just limited to Caribbean, Latin America, and Boston in the near years ahead.

Obviously, one of the nice things you've seen and one of the dividends if you will of a slower growth rate, particularly since '08/07 is the mix of mature versus non-mature markets or startup or developmental markets has radically shifted. Again, you can see that from '07 until today, the mix of our mature to new markets has moved from 55% to 86%. Obviously, that carries tremendous yield benefits at the same time, from a cash perspective, if you are less mature markets, i.e., those that are less than one year really relieves a lot of pressure, which probably is why we are generating so much cash from operations.

This chart really is sort of a chart that talks about Boston and it's a not to paraphrase Genesis too much, but its relevance -- (indiscernible) relevance. And what you see here is that particularly for corporate travelers if we are actually able to fly, where the corporation wants us to fly, we will also be able to capture other places that they want to, fly. For example, what's not included here, but we just started Boston, Dallas. We do know the two key local corporations rather large corporations were just waiting for that one particular route to be started before they can move their corporate accounts to us. Those corporate accounts, they don't fly just to Dallas, they fly to all these other places. So, again in the corporate context, of course, and one of the nice things that we have – the commercial team has done in Boston is really built and focused on our relevance.

We all talk a lot about ancillary revenue. I love it because of course typically the cost of generating a dollar of ancillary revenue is a lot cheaper than buying an airplane and fueling it up. We are currently averaging about $21 a passenger of ancillary revenue largely driven I think by a really cool product called even more includes the legroom. It also includes the ability to board sooner. It also in some airports includes the ability to go through expedited security. So, the even more product has proven to be an incredibly useful product moving I think from $120 million, which is $140 million in terms of its contribution to it.

We are seeing 180% growth in our ancillary revenue. At the same time, again we are – we are not going to do the nickel and dime type of exercise with our passengers. So, consistent with our ability to attract premium revenues and premium fares, we will not be nickel and diming, but we will be certainly building up the whole ancillary revenue opportunities.

And finally, partnerships, partnerships are actually really neat in that here again we happen to have acquired both at JFK and at Boston and other locations unbelievable ground facilities there are so well-suited to serving the needs of alliance partners. So, what we are seeing is – we are – in the near, we've been really sort of going for quantity as we moved the whole partnership opportunity forward. Now, we are looking to deepening those – the quality of those relationships, we are starting now – now to talk about a lot more a one-way coacher type of relationships notably with Emirates and JAL and that sort of thing.

So, we have a lot of partnerships. We probably will not be – because of this we will probably not be a main candidate to join one of the big alliances, because in fact as you can see from the logos on the page, we have alliances represented. All three alliances represented in a number of those customers and then we have no alliances represented by some of those airlines. So, again, the theory here is take advantage of the real estate and move forward from that.

The other really interesting thing about partnerships, again recall that one of our challenges is to address the troughs. This actually is the – we were not allowed to use the logo of this particular partner, but this is typicals of many of the partners, where their trough is our peak and conversely their peak is our trough. So, it’s highly complementary, particularly again, as we move away from sort of that early 2000 type of leisure type of airline and moving to trying to fill the airplane and manage for yields. So, the proof, if you will, and again for those of you who are on webcast on page 23 is that. And here is the proof and this is really sort of your PRASM performance. And we continue to do it very, very well.

The two or the four boxes – the three boxes rather that we have circled are in fact right in the middle of our troughs. And you can see from a PRASM period-over-period improvement, this is the proof of the success of the network, the commercial, the product and the partnership strategy. And bringing us up-to-date again we continue to, we had a great April – just a great April. Yeah, PRASM performance is up 9%, just a terrific month. We continue to be pleased by PRASM performance relative to the A4A Airlines. And whereas we look forward in the near-term, I think the word would be solid in terms of booking revenue trends. We are very optimistic about that.

Note as we move forward and look at your PRASM numbers in May that the accounts are going to be difficult year-over-year largely because last May our RASM was up 19%. So, we were all high-fiving each other last May. And as we move into this May, we are sort of wondering oh, guys, the tough comps - tough comps.

So, with that, I think I’ve got about six minutes left and we’d be delighted to take some questions.

Question-and-Answer Session

Unidentified Analyst

Your RASM numbers and that shows it has actually been somewhat more volatile than your peers, you are not seeing as big of an April, let's say, in a small of May. Is there any reason why your RASM seems to be moving up and down much more on a monthly basis than others?

Mark Powers

I think again you have to get back in the comps, because we have – I mean the comps are, or the year-over-year comps get kind of crazy particularly since we historically have been so susceptible to storms or lack of storms. We also had, I think last quarter, last year a lower ASM number as we were actually doing a fair amount of pilot training. So, again, there is some of that to agree in there. But you are seeing that – some of the comps again it's just a lot of swings is you are starting to see big swings, because we are focused on filling the troughs. Our troughs have bigger opportunities than the other airlines. And that’s where how you have to look at it.

Unidentified Analyst

On the partnership revenues, I think Alaska right now gets 13% to 15% of their revenues through interline partners and code shares. I assume you are 1% at most, how big that opportunity be. I actually – so I don’t want to endorse your assumption, because – so, I don’t want to – but yeah I think as we start to look at code shares as you start to see some 380s on the tarmac, it could be very, very significant. Again, the revenues is not just in terms of the number of enplanements, but it's when they occur. That’s also the really nice thing about the whole partnership relationship. Filling those troughs is absolutely critical. And as we start to look at more code share type of relationships and as the international carriers start to perhaps carry a little bit more in terms of a capacity to us, it has a huge upside for us.

Unidentified Analyst

Spirit operates A320s with I think 179 seats, you've got 150 seats. For those 29 fewer seats, are you really getting paid for those – for having so much fewer seats?

Mark Powers

That’s a great question, I'll tell you. I think the answer is, I think the right question though is your mix on your 150 42 versus 42 seats in EML and the others not EML is that the right mix? You recall that when we actually moved from configuration if I believe it was 162. And I think this might have been in 2007 or later, when we moved from 162 to 150, a big driver of that decision was one less flight attendant. One flight attendant per 50 passengers and so at 150 we were able to save some labor costs. As we – and candidly, I am kind of – my bias is sort of similar to yours, which is Robin Hayes, our Commercial Director, come on, let's put some more people in here, let's go, let's go. And as we run the math, it really is a question of should we increase the EML mix in the 150-seat passenger map rather than increase the number of seats on the aircraft. Now, it will be interesting to see and I don’t actually have the answer, so I'm just going tease you guys. But it will be interesting to see how we configure our deliveries of the A321 again in terms of how many EML seats we'll put on the aircraft, because obviously the A321 provides us the opportunity to bring in a lot more passengers, but also manage the EML mix.

Unidentified Analyst

Can you talk about LiveTV and WiFi and how you view entertainment evolving? And two, why do you still need to own LiveTV?

Mark Powers

Lot of good questions there. LiveTV is a terrific product, the – as we move forward and work closely with a great partner called ViaSat, I think one of the premier satellite designers and manufacturers in the country. We will be launching the ViaSat, WiFi product towards the end of this year on a couple of airplanes with a view to actually retrofitting as much as possible – as quickly as possible. The – it's a little bit sort of if you can remember 10 years ago, when you – sort of the difference between the dial-in, where you dial-in, that irritating a little tone, that's kind of what the technology is today. The WiFi band that we are looking at is the Ka-band it's a little bit of difference between the plug-in and listening to that irritating whine to today's product.

So, we played with the Ku-band. In fact, we just sold that spectrum back, but we played with the Ku-band. And I think we came to the conclusion that it wasn’t scalable. It really wasn’t something you wanted to pay for. It was probably best to wait and get the best product and that's preciously what we are doing. LiveTV is a terrific company, great technology. There is no compelling reason why an airline should own it, but I think we'll just sort of hold for a while pending proving the Ka versus Ku difference and then we'll look at our options with LiveTV thereafter. Did I get all the questions?

Unidentified Analyst

Yeah. Boston, I think Robin said at your day that it takes about a year or two, maybe closer, before that’s starts making money versus Caribbean, which you said makes money pretty quickly, do we start seeing where is Boston in terms of profitability versus JFK and when do you see that gap closing?

Mark Powers

We are making money in Boston. We are making money today. And on that note, I couldn't have timed that any better.

Unidentified Analyst

Thank you very much.

Mark Powers

Thank you.

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