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JetBlue Airways Corporation (NASDAQ:JBLU)

Deutsche Bank 2012 Aviation and Transportation Conference

September 6, 2012, 10:20 a.m. ET

Executives

Mark Powers – CFO

Robin Hayes – EVP, CCO

Analysts

Unidentified Analyst

Unidentified Representative

Mark joined JetBlue in 2006 as Vice President of Finance and Treasurer. And after several promotions in the finance department, he became the company CFO in April, 2012. Mark is no stranger to the aviation industry having held a number of positions in both the finance and legal departments of Continental, Northwest, and General Electric's jet engine unit before joining up with Team Blue.

Here today with Mark to give us an update on the JetBlue story is Robin Hayes, Chief Commercial Officer. And with that, I'd like to turn it over to Mark.

Mark Powers

Thank you, it's great to be here. Welcome everybody here and for those on the webcast, welcome as well. I'll try to be mindful that this is webcast as we try to flip through the pages and get you back on time.

This is a really, really big week for New York parents. Any New York parents in the room here? It's a really big week because kids are back in school. Now it's not so good a week for CFO's of airlines based in New York City because we like those kids to fly. But in any event, it's a big week. School is back.

Today I'll try to be brief. I know that many of you have already seen some of our earnings material.

Let me start by trying to set some content for the remarks. JetBlue is about 12 years in it's' growth from our first flight with many, many years to go. Rule of thumb, if you're going to start an airline, make sure your first flight is not in the middle of a snowstorm, which was the – unfortunately, we got that. But in any event, we're 12 years old. We have about 175 airplanes, 14,000 crew members, highly engaged non-union workforce. It's a terrific place to work. Everything they say about the culture is true and then some. It's about as close to GE as I've even seen in terms of strength of that culture. He obviously talked of my background, so you sort of know the other places I'm comparing that to.

It's an interesting airline in that it chose to base its' operations in I think the most competitive marketplace in the world, at least the United States, northeast Florida and Northeast. It's very, very competitive. Again, I think it's important particularly in the context of growth if you keep in mind that while we have this huge presence in New York and therefore sort of a big media presence if you will, we are really fully [inaudible] in the domestic market share.

The company itself as you can see from the bottom here has sort of gone through a growth phase where we built a brand, built a network presence, and I think probably faster than we ever thought we would probably get to. We slowed the growth to transition to among other metrics, pre-cash flow, which is a very, very effective way to measure our growth. Obviously, we have always maintained healthy liquidity.

And now we have entertained, actually starting with the last year's analyst day this crazy metric called ROIC, which is probably a metric that we haven't heard in the airline business for a long, long time. And we have absolutely embraced this return metric.

Finally, we are fiercely in it. We do believe that the long term interest of our owners is best serviced by JetBlue remaining a standalone organically growing sustainable carrier.

So quick summary of some of the results that you may have seen. Nine consecutive quarters of profitability. We finished the second quarter more than doubling last year's net income to $52 million. Operating profit margins improved by 2.7 points. We continue to outpace the domestic A4A results while at the same time growing at a reasonable clip in very targeted areas. And we'll talk a little bit more about where we do grow and why.

We also ended the quarter as we have in prior quarters with a strong liquidity position of 25% of 2012 revenues. I should note, this does not include the benefit of two revolver facilities that we have totally about $225 million. But why do you have so much cash? For sure, we're not getting great returns to anybody's getting great returns after the session. So we're not getting great returns, so that certainly is a big of friction against generating great returns. The ROIC, but cash because it still remains from a fuel perspective a very volatile uncertain market. And it's also nice as I think you can attest, Robin, on that it's nice to have cash as a flexibility to pursue organic growth opportunities. Notably, that would include things like the slot transaction that we did earlier this year where we picked up some very, very valuable [inaudible] in LaGuardia and DCA. So that's sort of why we maintain the cash.

Having said that as we'll talk about in a minute, it's also been a very, very interesting way to manage our debt. Again, the context here is that not only are we managing our debt balances, but we're also trying to manage our debt balances and preserve what I think is a pretty favorable weight of that, which cost of debt, which I think at last week, it was about 4.5%. And so as we look at new opportunities to grow and fund ourselves, we're looking at pre-payment options. Maintaining that 4.5% is absolutely critical.

But we've used our cash to reduce our debt and grow our income producing assets. We have, I think at this time last year, we probably owned one airplane through a weird series of circumstances. We probably are on track this year by the end of this year to own as many as 11 aircraft. So we've using our cash to purchase aircraft. I should also note that while we're doing this activity, we're also maintaining basically the same levels of cash balance I described earlier.

I think since the end of 2010, we've lowered our total debt by approximately $140 million. But at the same time, took 15 additional aircraft. So again, the benefits of free-cash flow management and the benefits of strong cash from operations.

Looking forward and we have taken a fair amount of work in terms of structuring the transactions that we do that involve that as well as selectively pre-paying debt in a way that our future obligations should be able to be satisfied adequately by cash from operations. It's probably not good for the investment banking side which I consider of the house because less pressure on building transactions. But nevertheless, we think it's a fairly prudent way to go.

I mentioned free-cash flow, we are on track to produce positive free-cash flows for the fourth year in a row.

So I used to work in the manufacturing, General Electric, and this is a chart that typically we have [inaudible] that agency actually drives the order book as opposed to the order book driving the growth. But one of the things that we have done and Paula, I think you would attest as well, we have actively managed our fleet growth such that when we are taking on airplanes, they are essentially assured of being flown in profit producing areas. At the same time, we still are very mindful of a use of a governor for that growth rate of the order book as we look at free-cash flow.

So we have in the past and we will in the future if required manage our deliveries, manage our fleet, manage our order book with deferrals, leases, and sales such that we do deliver a sustainable growth rate and positive free-cash flow.

Turning to the revenue side, this is actually your slide, Robin, and credit to you when you joined the company. We are largely historically a leaser based airline. So you imagine and sort of sarcastically I said, you know, September is a bad day for CFO's for leisure airlines based in New York City. But the interesting thing is Robin did a terrific job of really [inaudible]. Keep the peaks and fly the troughs, and the way that he is done this is really through these four important areas, which we will talk about in a minute. Again, the key here is that I mean the proof is in the results. Robin and his team have consistently been able to outpace the domestic A4A results as really proof of your ability to maintain the peaks and manage the troughs.

Let's focus on one of those areas, which is Boston. This really relates to your effort to build a strong network as well as to attract more business travelers. For those of you who are on the webcast, I'm on page 11. Boston is a very interesting story. For some of us in other airlines who have tried to make Boston work, we typically try to make it work as a hub. It really isn't a hub. It's not a city that geographically wants to be a hub. But what it really wants to be is a focus city for JetBlue Airlines. And that's precisely what's happened here. It's also not a situation where we've essentially come in the old 1980's southwest model and sort of built this whole demand from scratch. But rather through our pricing, through our brand, through our product, we have actually been able to effectively affect competitive change. And that's a word that we use a lot in terms of our competitor's situation. We affect competitor change. So as you can see, our share of seats has gone up largely because of seats of the other airlines have come down.

[Inaudible], this was not the map we had several years ago, four years ago or so. Again, credit to your team. But this is now our success in Boston. It is not a hub. It is a focus city. Today, we have about 100 departures a day from Boston. We also happen to have really advantageous terminal facilities through the cooperation and [inaudible]. I think Boston probably, Robin, wants to be close to 150 departures a day. And as we are able to grow profitably, we'll get there probably by '15. But in any event, we're certainly on track to do that. And I should note, it is a solidly profitable city for us.

One of the things we talk about on an earnings calls and probably should better define is this concept of relevance. It's actually a number. It's actually a metric. It's essentially a server that you can take. You go to the airport and it's a measure of whether we actually fly non-stop to where the passengers in Boston go. And Dennis Corrigan is on Robin's team. He's got a phrase sort of paraphrasing Genesis, which is relevance begets relevance. So the more relevant if you will cities that you're putting into Boston, the more relevant we become to particularly to all the important corporations and business customers.

What's missing on this list is the new addition, Dallas, which Robin, I will now admit in front of all these people, I was wrong. I thought it would be as successful as it is, so congratulations to you on that. But again, this is again a very critical concept that we do talk about from time to time on the earnings calls.

The other way that Robin's team has been really focused particularly in Boston on growing our business traveler is through enhancements through our frequent flyer program. It is called TrueBlue Mosaic for those of you who are air watchers or airliners that net trans and love airplanes. The Mosaic actually comes from one of our pretty cool tail designs. It's some other [inaudible], it's even the higher level some day.

In some respects, the success of Boston is also mirrored in the Caribbean. And I think it's also important. Again as we talk about growth, which I know in the context of sort of modern airline investment, it has a chilling impact. Again, keep in mind, we're growing off of a very, very small base. So it's not like we're just throwing a whole bunch of capacity that's going to destroy essentially the really nice profitability you're starting to see domestically. But we're also growing where we make money and we can generate profits. The affecting competitive change storey is replicated in the Caribbean. Robin and his team have essentially about 160 flights now in the region. That really wants to be a whole bunch more. And you can see, it's about 24% of our ASM's. And putting on my old treasury hat, I love the Caribbean. Actually, I hate [Inaudible], so I hate to eat, but I love the Caribbean because it typically matures really fast, particularly as compared to typical domestic flights. And that's what you're seeing here is this is, what we're reflecting here is essentially maturities defined as three years. In fact again, a footnote here, the Caribbean typically matures much faster than that. But one of the nice things about slowing the growth, which we did in '05 and '06 is it's really permitted us to enhance the overall maturity mix of the airline. And therefore of course, has been instrumental to our profitability.

Partnerships, we are essentially, we're agnostic. Whether you're alliance, whether you're one world, whether you're this world, or that world, or whatever alliance you are, we'll partner with you anyway. Maybe it's a little bit of a Statue of Liberty. It's more of a Statue of Liberty, our shipping approach that you take it. We have about 21 partners. And I think as we move forward, we're really capitalizing on terrific locations, and presence, and domestic operations in both Boston and particularly JFK. For those who have sort of actually looked at an aerial map of JFK and Boston, we also happen to have [inaudible] in both places. So we're really, really very well geographically situated as well as a strong network to partner with a lot of people.

They come in all shapes and sizes. I should note that some are on track to have sort of a one-way code arrangement. Others are just airline partnerships. They're very scalable. Most of the costs are actually born by partner related to this activity. And I love it. What CFO wouldn’t love this opportunity to really monetize our presence in both JFK and Boston and to some extent, some of our other focus cities.

Ancillary revenue, now we are mindful of the fact that we have a terrific product, a core product that we actually provide to our customers without added cost. I don’t think you're going to see billboards on your trade backs or see tables or whatever, so sorry about that. That's just not how we do business. We are mindful of the great relationship we do have with customers. We are not a nickel and dime type of airline. We are however, whether it's decidedly added value over and above our base product, we are ready, willing, and able to look at ancillary opportunities. Notably our more space product, which we've been able to configure in our seats, which provide clearly the most space in any coach product. As a matter of fact, our base coach product has actually more space than anybody else.

As we expand into looking at some of the other airport opportunities, we are also as part of the more space looking at more speed. About 30 more of our airports now have even more speed feature, which is a big part of the bundled product, which means that you can sort of go to the head of the class on the ever present and sometimes very, very long TSA lines.

Turning to costs, because it's a really big thing here, and the key here with cost is that it's not the absolute number. I actually don’t wake up thinking about where CASM is today. Rather what I think about more is what's our gap between our CASM and our peers. These are the people with whom we compete. The people against whom we, if you will, effect a competitive change. Maintaining that gap, that spread is important. Again, sort of the good news is we are in areas where the people are. It's also by the way in the Caribbean, New York, and Boston is where the costs are. As we move forward, our ability to grow and it's really interesting, my chief commercial officer is actually the biggest proponent when we do our budgets of lower CASM because and it's been a CFO's dream because I don’t have to be the bad guy. Just let Robin go crazy on the nickels and dimes that make up our CASM. Again, maintaining our low CASM relative to the people against who we are if you will preserving, or maintaining, or taking a competitive advantage is paramount. So again, if you think about it, look at it again, not the absolute number and you can't really bundle this with fear. It's not the right comparison. It's actually the parties against whom we are growing literally in Boston and in the Caribbean.

We are also again, one of the nice things about having a large, if you will, cash balance and a low cost of debt is we are ready, willing, and able to invest in efficiency producing cost savings types of investments. This is just one of the big ones I'll just highlight. I think in a week or two or whenever, we can get the report out to the airport. We're going to break ground on $190 million expansion of our current facility at T5 at JFK. This will provide us additional gates to accommodate the processing of international arrivals. It's a facility that actually will pay for itself. On an operating basis, it's at the least neutral to what we're currently paying at T4. T4 is the building right alongside us, but the big tower. You probably recognize it from all the Delta jets parked all over the place. So it assures us supply. It assures us of low cost. And believe it or not because of the congestion issues at JFK, on a daily basis, we spend the equivalent of one plane at a time taxiing our planes after they've deplaned from T4 and getting to T5. So essentially, cost neutral and we get an airplane back, so it's pretty compelling.

But again, this is just an example of we will look at opportunities to invest in ways that maintain that all important CASM spread. Tool management of course is something that's near and dear to JetBlue largely because we fly in a very congested airspace. I mean New York is just, I'm talking preacher to choir, you guys know what it's like to fly in and out of New York. The advantage of having direct routing is absolutely critical. Our CEO, Dave Barger, is heavily involved in Washington activities trying to accelerate that whole activity.

We are also looking forward to the entry of [inaudible] this year, which we hope to retrofit our A320 fleet for the promise of two, to three, to plus fuel savings. Now on a retrofit basis and of course, new aircraft are not going to be delivered with the wing lift.

And then finally, we are in '17, '18, we’re looking forward to taking our Neo aircraft, which will carry as much as 15% of multiple situations SST advantages.

Same time again, one of the nice things about our direct relationship with our workforce, notably our pilots, is that we really are the U.S. leader in a prudent smart somewhat obvious fuel conservation flight practices like single engine taxiing and the like.

Really no big change in terms of our philosophy behind fuel hedging. Of course, it is 30% to 40% of our costs. Other than to note that new last quarter, we actually because it was starting to get fairly material, we started to include in the hedging discussion fixed floor purchases that we have entered into, which have basically the same effect of providing the same sort of volatility insurance as your traditional hedges. Essentially, we have a really great relationship with the world fuel services under which we are able to essentially forward specified the price of markets depending on at the time of the lock for purchases of gas. We specify the quantity, the price, and on the day of delivery, we pay at that price. So it has really the net effect of locking in a significant portion of our fuel. It also is expressed in jet terms, so it really does eliminate a lot of the crack spread issues and of course, it does curate the disadvantage of potential merger call issues.

So let's start end with sort of the beginning, which is our revenue outlook. We are and I feel I should push this through Robin later, but August, we are working the numbers still. I think we are, mid part of next week, I think we're going to put out our, announce our task results as well as put our September guidance. But overall, I think we're very, very pleased with this summer. It was a solid, solid demand throughout the entire network, a very solid summer for us. So we are generally finishing August in line with expectations.

Moving forward again, we'll have more details on this next week. But moving forward into September, again I would caution everybody to look at September. And I'm sure you've probably heard this from every other speaker today, but sort of caution number one is that comps are going to be really, really difficult for two reasons. Number one, we had Hurricane Irene. And number two, we had the FAA tax if you will of a [inaudible] recessor, however you want to price that. Together these two items have increased September price of last year by approximately two points. I don’t think we've actually said that out loud. That might be as you think about next week, do remember that so again, comps are going to be tough. I would say generally though with respect to leisure, it looks of if we're a bit softer than expected. And on business, I think signs are encouraging. Again, it's really too soon to tell because of the compression of our booking curve. But again, we'll have more as we provide guidance next week.

And with that, I hope I got you a little bit back on time and we can, if you don’t mind, take a few questions.

Question-and-Answer Session

Mark Powers – CFO

Yes sir?

Unidentified Analyst

Mark, if I could just – that’s the month of September, there was some FA impact, I think I August?

Mark Powers – CFO

Yes, there was some – it was…

Unidentified Analyst

[Inaudible] and 2 to 3 if we were to adjust that. Is that a point? Is that a point and a half?

Mark Powers – CFO

[Inaudible], it was about 3 points.

Robin Hayes – EVP, CCO

That was factored into our guidance.

Mark Powers – CFO

Okay.

Unidentified Analyst

Great. And then just my last question, Mark had talked about one-way [inaudible]. Robin, this may be right up your alley. I think right now you had five or six one-way co-shares. What’s keeping you from going to a two-way? Is it technology, it is labor or at this point, one way is the best way to go given what’s important to you and to the partner?

Robin Hayes

Sure, thanks. I think the client from [inaudible] one-way code is [inaudible] because with one-way code, all the complexities are sitting on the shoulder of the partner and to move to two-way code, what we did about that here is we don’t rule it out but it’s not something we felt we needed to do right now. I think, you know, if and when we do get ready to do two-way code, we’ll go at it very carefully to make sure we don’t add any extra cost into our business that they can if you don’t do it in the right way.

Mark Powers – CFO

Well, thank you very much, everybody. Those on webcast, thank you for joining us. Thank you, everybody.

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