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JetBlue Airways (NASDAQ:JBLU)

Q3 2012 Earnings Call

October 25, 2012 10:00 am ET

Executives

David Barger - Chief Executive officer, President, Director and Member of Airline Safety Committee

Mark D. Powers - Chief Financial Officer and Executive Vice President

Robin Hayes - Chief Commercial Officer and Executive Vice President

Robert Maruster - Chief Operating Officer and Executive Vice President

Analysts

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Michael Linenberg - Deutsche Bank AG, Research Division

David E. Fintzen - Barclays Capital, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Hunter K. Keay - Wolfe Trahan & Co.

Glenn D. Engel - BofA Merrill Lynch, Research Division

James D. Parker - Raymond James & Associates, Inc., Research Division

John D. Godyn - Morgan Stanley, Research Division

Kevin Crissey - UBS Investment Bank, Research Division

Raymond Neidl - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Thomas Kim - Goldman Sachs Group Inc., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the JetBlue Airways Third Quarter 2012 Earnings Conference Call. Today's call is being recorded.

We have on the call today, Dave Barger, JetBlue's CEO; and Mark Powers, JetBlue's CFO. Also on the call for Q&A is Robin Hayes, JetBlue's Chief Commercial Officer.

As a reminder, this morning’s call includes forward-looking statements about future events. Actual results may differ materially from those expressed in the forward-looking statements due to many factors, and therefore, investors should not place undue reliance on these statements. For additional information concerning factors that could cause results to differ from the forward-looking statements, please refer to the company’s annual and periodic reports filed with the Securities and Exchange Commission.

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

David Barger

Thank you, John, and good morning, everyone, and thank you, all, for joining us. This morning, we are pleased to report another profitable quarter for JetBlue. This marks our 10th consecutive profitable quarter. We reported a third quarter net profit of $45 million or $0.14 per diluted share and operating margin of 8.6%. Despite continued economic uncertainty, total revenues grew 9% year-over-year. Our solid revenue performance though was offset by a 10% increase in operating expenses.

JetBlue ended the quarter with approximately $1.1 billion in unrestricted cash and short-term investments or 22% of trailing 12 months revenue. We view a strong liquidity position as paramount in this high fuel cost and uncertain economic environment. We continue to use our strong liquidity position to make balance sheet improvements, including paying down high-cost debt and paying for aircraft in cash.

These results reflect the hard work and dedication of JetBlue's 14,500 crew members in delivering an industry-leading customer experience every day. In addition to delivering the JetBlue experience, our crew members achieved excellent operating results this quarter, evidenced by improved completion factor, on-time performance and mishandled baggage claims. I'd like to take this opportunity to thank our crew members for running a safe and reliable operation.

We're very pleased with our revenue results during the summer peak travel period. In September, historically a seasonally weak period for leisure travel, we were particularly pleased with the performance of our Boston business-focused markets. East Coast short haul markets were again the best performing part of our network on a year-over-year basis. Our relevance in Boston continues to improve. We measure relevance as the number of routes JetBlue serves on a nonstop basis relative to the total number of domestic and international routes flown by travelers in Boston.

Today, we are relevant to about 62% of Boston's customers, an increase of 25 points since 2007, significantly higher than any other carrier at Logan Airport. Relevance is particularly important as it enables increasing penetration of business travel segments.

Looking forward to 2013, we expect to continue targeted growth in Boston adding new business markets as we build relevance to our customers in Boston. Through our partnership with Massport, we have secured critical infrastructure necessary to execute our growth plan, including additional gates and an improved customer experience at Terminal C.

As we build our Boston network to improve our appeal to business customers and add corporate contracts, we continue to effect competitive change. Specifically, competitive capacity in Boston decreased by about 6% in the third quarter. We expect additional competitive reductions of about 5% during the fourth quarter. Boston is succeeding as an important part of our network, which is currently centered on 6 focus cities.

In Boston, we have built an operation in which approximately 90% of our customers travel on nonstop itineraries. This network structure in Boston, historically a city not well-suited geographically to a hub-and-spoke structure, enables JetBlue to generate a revenue premium with lower costs than those of our legacy competitors.

For the full year, we expect Boston to contribute materially to improving JetBlue's ROIC. Specifically, trailing 12-month pretax margins in Boston have improved by 8 points year-over-year.

We're also executing on our profitable growth strategy in the Caribbean and Latin America. We are pleased with the performance of our new services offered from Florida to the Caribbean and are expanding intra-Caribbean service. Bookings in Caribbean markets commencing in November are ramping in line with our expectations. These destinations include: Cartagena, Colombia; Samana in the Dominican Republic and Grand Cayman Island in the Cayman Islands.

We recently announced a new interline agreement with Royal Air Maroc, our 8th new partnership this year, bringing our partnership total to 22. As we have added new partnerships and deepened existing partnerships, we are pleased with the growth trajectory of our partnership portfolio, which feeds quality high-margin traffic into our network.

Turning to cost. Cost discipline remains an essential part of our success. While Mark will discuss our cost performance in detail, I would like to highlight a few areas. In an effort to bend unsustainable cost inflation associated with health care benefits, we've changed our health care plans for 2013. These new plans are designed to improve the health and wellness of our crew members and their families, while better managing company and crew member expenses. Further, we believe our new health care plans will avoid approximately $90 million in new excise taxes resulting from recent federal health care reform between 2018 and 2023. In addition, starting next year, we expect to reduce per crew member total cost inflation by approximately 3 percentage points annually over the next 10 years.

We continue to look for ways to improve operational and fuel efficiency also. JetBlue is working with our industry to implement the next generation air transportation system commonly referred to as NextGen. An important part of NextGen is automatic dependent surveillance broadcast out, known as ADS-B Out. This is a surveillance technology designed to improve safety and operational efficiency in airspace. Real-time GPS feeds to air-traffic control of aircraft at altitude will enable greater reliability and traffic flow, particularly during the regular operations. Thanks to our partnership with the FAA, JetBlue expects to have 35 A320 aircraft equipped with ADS-B Out technology by the end of 2012, with initial testing expected by summer of 2013. While testing on future routing is still ongoing, we anticipate that when in place, this technology will reduce average flight times on these routes between the Northeast and southern Florida and near Caribbean destinations.

We also expect to improve operational efficiency and the customer experience when the first portion of a new terminal opens in Long Beach, California in December this year. Financed primarily by passenger facility charges, the project will include a larger and faster security checkpoint, indoor and outdoor passenger seating areas, a greatly enhanced concession program and improved baggage claim areas.

Before closing, I'd like to provide a brief update on LiveTV. We expect LiveTV will begin installation of Wi-Fi and Ka-band satellite transmission equipment on the first aircraft during the first quarter next year. As we begin rolling out in-flight broadband, customers will enjoy free baseline connectivity with the option to upgrade to a paid premium service. We believe the unrivaled speed and reliability of our Ka-band product will be a competitive advantage, particularly as we expand our presence in business-focused markets.

In closing, I'd like to thank our 14,500 crew members once again for their excellent work during the quarter in helping us to achieve solid profitability. We're committed to growing on a sustainable basis and generating positive free cash flow. We remain committed to improving ROIC by 1 percentage point per year for the foreseeable future.

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

Mark D. Powers

Thanks, Dave. Excuse me. Good morning, everyone, and thank you for joining us today. I suspect also joining us today, by phone at least, is our Director of Investor Relations Lisa Reifer, who brought us on September 25th, baby Ella, so we'd like to wish them both our very, very best.

I join Dave in congratulating our crew members on a great quarter. Today, we reported our 10th consecutive quarter of profitability with operating income of $113 million. The $5 million year-over-year improvement in operating income was driven primarily by $113 million of higher revenue offset by higher operating expenses of $108 million.

Third quarter year-over-year passenger unit revenues increased 1% on capacity increase of 9%. Yield improvements helped drive the quarter's solid revenue performance, as did a load factor improvement of 0.3 points. Our average one-way fare was $154. Passenger unit revenue was up in July by 3% and in August by 3%. Passenger unit revenue in September declined by 4%. As disclosed previously, August and September year-over-year PRASM comparisons were impacted by 2 items: one, Hurricane Irene last year increased both August and September PRASM by 1 point; and two, the federal excise tax holiday increased August PRASM by 2 points and September PRASM by 1 point.

Consistent with what we noted in the early part of September, we saw leisure softness throughout September. This softness was offset to some extent by the strength in our East Coast short-haul markets, particularly, as Dave noted, in Boston business-focused markets.

Bottom line, we believe our network strategy is working as evidenced by continued strength in our business markets.

Total ancillary revenue in the third quarter increased 9% year-over-year to $147 million. During the third quarter, ancillary revenue per passenger was about $19. Recall, ancillary revenue is measured as a combination of ancillary revenues reported in passenger revenue, such as our Even More offering, and other revenue. While we continue to see growth in passenger-driven ancillary revenue year-over-year, generally lower margin at non-passenger-driven ancillary revenue did decline.

The Even More offering remains on track to generate approximately $150 million this year. Customer response to this offering continues to be strong. We completed the E190 seat retrofits previously disclosed and started selling the additional 8 seats inventory in early August. This change preserves competitive seat pitch without reducing the total number of seats on our E190 aircraft.

Turning to costs. Quarterly operating expenses increased 10% year-over-year or $108 million. While fuel prices declined 2% year-over-year, a 9% increase in consumption resulted in a $27 million increase to fuel expense. We believe our operating procedures and techniques to conserve fuel position us well to manage future fuel costs. Additionally, we operate a young, fuel-efficient fleet with an average age of only 6.6 years.

We continue to maintain a fuel-hedge portfolio as a form of insurance against sudden spikes in fuel prices. Specifically in the third quarter, we hedged approximately 27% of our fuel consumption. We recorded a $2 million gain related to our fuel hedges settled during the quarter, bringing year-to-date fuel hedge gains to about $10 million. Additionally, fixed forward price agreements or FFPs covered approximately 18% of our third quarter fuel consumption. So including the impact of fuel hedging, FFPs and taxes, our fuel price in the third quarter was $3.17.

For the fourth quarter, we've hedged approximately 27% of our anticipated jet fuel requirements. Additionally, FFPs cover approximately 19% of our projected fuel consumption for the remainder of the year at an average jet price of $2.94. The underlying details of our FFPs and hedge positions as of October 19 are more specifically detailed in our investor update, which will be filed with the SEC later today.

Brent crude, based on the forward curve as of October 19, is averaging around $112 a barrel for the full year 2012 and the crude to heating oil crack spread is averaging around $15 a barrel. Based on this curve and including the impact of hedges, FFPs and taxes, we're estimating a fourth quarter fuel price of $3.25 per gallon and a full year gallon price of $3.22.

Excluding fuel, year-over-year third quarter unit costs increased 3.7%. This is below the guidance range we'd previously provided. Consistent with prior quarters, the majority of this year-over-year increase was driven by maintenance expense, which increased 33% year-over-year on a unit cost basis. This increase is mainly attributable to more heavy maintenance checks associated with large numbers of A320 aircraft delivered in the mid-2000 range and normal aging of our fleet.

We're pleased to report in this regard that we've successfully secured replacement business partners for the maintenance services previously provided by Aveos, a supplier that liquidated in March, earlier this year. As a result, we expect a minimal increase in the rates compared to those that prevailed under our Aveos agreement. And we expect the total impact of the Aveos liquidation on 2012 maintenance expense to be approximately $8 million, much less than previously indicated. In addition, we're finalizing maintenance agreements for the components of our E190 airframes, which we believe should further contribute to a smoother, more predictable future maintenance expense.

Another significant driver of x fuel CASM growth during the quarter was profit sharing. This item increased by $5 million year-over-year. As fuel prices increased in the third quarter and the revenue environment in September softened somewhat, third quarter profit sharing expenses decreased relative to the guidance we provided in July, driving lower than expected x fuel CASM. Please recall, profit sharing is calculated as the greater of 15% of pretax income or 5% of eligible wage dollars paid to nonmanagement crew members.

Moving below the line. Nonoperating operating expenses improved $12 million year-over-year. Recall again, 2 items in 2011 affect year-over-year comps. First, last year, we recorded a $5 million loss related to prepayment of a portion of our 6 3/4% convertible notes. Second, last year, we recorded a noncash fuel-hedging ineffectiveness [ph] loss of approximately $3 million.

Moving to the balance sheet. We ended the quarter with unrestricted cash and short-term investments of approximately $1.1 billion. This includes $50 million drawn on our line of credit with Morgan Stanley. It does not include our quarterly cash balance of our corporate fuel purchasing line with American Express of $125 million and the remaining $50 million undrawn on the Morgan line. Our weighted average cost of debt currently stands at about 4.5%. During the quarter, we refinanced debt secured by 3 A320s, lowering future annual interest expense by approximately $1 million. JetBlue made approximately $45 million in debt and capital lease payments during the third quarter. This year, JetBlue has made approximately $310 million of debt and capital lease principal payments, including debt prepayments.

Fourth quarter scheduled principal payments from debt and capital leases are expected to be a very manageable $55 million. With strong cash from operations and manageable capital commitments in debt maturities for the remainder of the year, we believe JetBlue is positioned to maintain a strong liquidity balance and generate positive free cash flow. We expect to end the year with cash as a percentage of trailing 12 months revenue of approximately 20% to 22%.

Next year's scheduled debt maturities are approximately $390 million. We believe achieving returns for our -- returns for our providers of capital is critical. We remain focused on improving returns that close the gap with our cost of capital. In this regard, we're pleased to announce the Board of Directors authorized a share repurchase program for up to 25 million shares over a 5-year period, the primary objective of which is to offset the impact of future dilution from crew member equity grants and our crew member stock purchase programs.

With respect to fleet and capital expenditures. JetBlue ended the quarter with a total fleet of 175 aircraft. For the remainder of 2012, we expect to take delivery of 4 A320s and 1 E190. We currently intend to pay cash for the 4 A320s scheduled for delivery in the fourth quarter. Again, we believe this action is consistent with our goal to improve ROIC.

In the third quarter, we spent approximately $40 million in aircraft CapEx and $30 million in non-aircraft CapEx, while generating operating cash flow of approximately $50 million. We estimate capital expenditures of about $250 million in the fourth quarter, bringing the total to $635 million for the full year.

Turning to capacity. This is of course, before Hurricane Sandy. We expect to increase fourth quarter ASMs between 5% and 7% year-over-year. Consistent with previous quarters, we anticipate most of this growth will be driven by our focus on the Caribbean and Latin America, which is expected to be up approximately 20% year-over-year. We anticipate Boston capacity will increase by approximately 11% year-over-year as we see our profitable growth strategy continue to succeed. Full year ASMs are expected to increase 7% to 9%. This is slightly higher than our previous guidance due to higher anticipated completion factors.

Turning to the revenue outlook. Despite broader economic uncertainty and leisure softness in September, seen across the entire industry, we're pleased with our forward bookings. Although we have limited visibility, we see sequential improvement in October trends. We're very pleased with the continued strength in our business markets and expect improved trends in our leisure market based on the forward bookings. We currently expect October PRASM to be between negative 0.5% to 0.5% year-over-year. Keep in mind PRASM in October 2011 increased 11%.

With respect to the CASM outlook, for the fourth quarter we expect x fuel CASM to be up between 2% to 4% from the prior year. Again, maintenance expense accounts for approximately 1/2 of the expected increase. We project fourth quarter CASM will be up between 2% to 4%. We expect x fuel CASM for the full year to be up again between 2% to 4%, and finally, we project all-in CASM for the full year to increase by 1.5% to 3.5%.

In closing, JetBlue had a solid quarter. We continue to execute on our strategy with targeted profitable growth. We remain committed to generating appropriate returns for our shareholders through sustained profitability by diversifying revenues, taking a disciplined approach to our costs and capital spending, and prudent balance sheet management.

And with that, Dave, Robin and I are happy to take your questions. Operator, thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jamie Baker from JPMorgan.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

I heard, David, I heard your comment in the opening remarks in regards to the 22% liquidity and percent of trailing revenue metric. I believe you framed it against the uncertain fuel environment. But there are other ways that airlines can protect against earnings shock besides just holding a lot of cash that otherwise doesn't really do anything. Any thoughts on this?

David Barger

Actually, I think, as we look at -- well, first of all, with fuel shock, who knows? It's been, as we've seen behavior in the fuel environment, it's actually been a good guy as we look at year-over-year in terms of Q3. A little bit of uncertain economic environment as well, even though I think we're seeing strength going into Q4. I think though specifically, Jamie, to your question, I really think that Mark and the team, they've done a very nice job utilizing the balance sheet to really -- you start to take a look at paying down some of the high cost of debt. And as we close the year now with 7 aircraft free and clear and looking to pay cash for new aircraft coming into the fourth quarter -- by the way, Jamie, as we look at even things like working with the port authority to use our cash portfolio to build out the Terminal 5 international expansion. So I think it's -- I don't think that we're an airline that's hoarding our cash, if you will, as we take a look at these type of activities, including even the share repurchase program. Granted, smaller in comparison to some, but I think quite meaningful as we look at not diluting shareholders in the future for some of our crew member activities. So Mark, anything you want to add to that?

Mark D. Powers

No. I mean, Tim, you're absolutely correct, a big cash balance is for sure a drag on an ROIC target. And mindful of that again, we continue to look for good opportunities to prepay debt and purchase assets and including, as Dave mentioned, the facility at Terminal 5 that we'll be building for international arrivals. So we are looking for good opportunities to use that cash and bring the debt balance down.

David Barger

I may also add too, the ability earlier this year to purchase the slots at LaGuardia and DCA and it's no surprise. I mean, we're a carrier that continues to be quite focused on the opportunity for additional assets as the industry continues to look at what other carriers are doing, so slots and gates, route authorities, et cetera. So I think we feel that we're in a very good position but certainly using that cash balance appropriately.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Maybe that's a good segue into my second question and Robin can weigh in if he's there. But American operations clearly haven't been up to snuff, and Virgin America continues to generate significant losses. The former might be helping you, the latter might hurt, at least in the near term. Any RASM color as it relates to your overlapped markets with these 2 airlines?

Robin Hayes

I don't think we've sort of seen a significant sort of positive impact from some of the sort of operational challenges that American has had. I think we continue to get much more benefit there just with the sort of very strong, robust commercial partnership that we have with American. In terms of transcon, I do think that without kind of commenting on any carrier specifically, as we look to next year, I do think we're going to see some industry capacity reductions on transcon. If you look at the quarter 1 schedules within that capacity down and as we -- from a JetBlue perspective, we certainly see that as an opportunity for us.

Operator

Our next question comes from Michael Linenberg from Deutsche Bank.

Michael Linenberg - Deutsche Bank AG, Research Division

I guess 2 questions here. Dave, you talked about Boston and I appreciate you giving us some color on the profitability. You talked about a year-over-year improvement in pretax margin by 8 points and I recall, I believe the last commentary, I want to say a few, maybe a couple of quarters back, was that Boston wasn't yet profitable. And then more recently, we had heard that it was profitable. So that 8 percentage-point improvement, can we assume that maybe Boston went from a small loss to now a healthy, healthy profit on a pretax basis?

David Barger

Mike, I think again, the script specifically was trailing 12-month at the end of this quarter, so I'm not going go into specifics with how '11 was closing into '12 but there's a lot of commentary regarding Boston with our investment, which has been really significant. I mean, in the third quarter this year, we're going to be just under 100 departures a day. We're going to be as high as 109 in Q4. There has been some commentary regarding, nobody else has really been able to do it in the past, and so we felt it prudent and responsible to share some additional light on the investment in Boston, how it's performing, this relevance that's taking place as well. And I tell you we're just very, very pleased with it. It's like when we look at over the years the number of airplanes that we've allocated into Boston, fair to say, in the first couple of years as we were ramping, Robin, like 20% to 30% annually, I mean there was -- it takes an investment to start to pull some of that corporate base off of these other airlines and their corporate contracts and frequent flyer programs. But we're very, very pleased with how Boston is sitting today and our plans to grow Boston in the future. Robin, any additional color you want to add on Boston?

Robin Hayes

Yes, we feel very -- we feel very good about Boston. I mean, last I know, the September RASM number was a number that we of course ended up being disappointed with. Frankly, if we had more exposure to Boston market that would have been a better result. It was definitely the highlight for us. And if you start looking at some of the competitive capacity trends into next year, at the moment Boston is showing in quarter 1 a double-digit reduction in competitive capacity. So as we look into next year, we continue to see a market in Boston that should continue to get better and better for JetBlue.

Michael Linenberg - Deutsche Bank AG, Research Division

The gates in Boston, Dave, and maybe, Robin, on this, you mentioned that you have picked up some additional gates in Terminal C from Massport. Where are you now, like 11 or 12? And what are you going to?

David Barger

Mike, I'd say working with Massport, and it's just been terrific over the years. And so we're currently got obligations on up to 25 gates at Terminal C. And I think, again, Massport's master plan up there, whether it's land side and air side, Terminal C over the course of the next couple of years, there's additional infrastructure being built out. And it's no secret when the -- the size of United's footprint in terms of with the new United, if you will, that was a challenge for Massport to build some additional infrastructure over towards Terminal B. And there's been other changes at the airport. But we're committed to at least 25 gates working with Massport, and I think some additional infrastructure to improve some of the connections of the gates. There's 3 current gates out there that used to be operated by another carrier, even goes back to the TWA days and AirTran. And so connectivity, so we have a seamless operation. The ability to connect seamlessly over to Terminal E as well with the international arrivals and departures for our partner carriers. So feeling really good about what's taking place up in Boston. One other comment, Mike, is we're very pleased to partner with Cape Air in Boston as well. It's a significant part of the operation that we have in Terminal C. And we plan to have that in place on a go-forward basis.

Michael Linenberg - Deutsche Bank AG, Research Division

And then just a quick second on the share repurchase, which -- it's nice to see that. Does the authorization, is that purely equity, i.e. stock, or would it potentially cover equity-linked securities?

Mark D. Powers

No, no, it's just pure shares.

Operator

Our next question comes from David Fintzen from Barclays Capital.

David E. Fintzen - Barclays Capital, Research Division

I just wanted to circle back on some of -- Dave, your comments on sort of relevance in Boston. I'm actually wondering how was your relevance in sort of the non-Boston, non-New York, kind of the outstations doing as -- are you seeing benefits from having a second destination in Pittsburgh or wherever, or has some of the consolidation where maybe now Delta and United and Southwest have 6, 7, 8 destinations on the map. Does that just sort of net out? I'm just curious sort of if there's some ancillary benefits to Boston outside in the rest of your network?

David Barger

Yes, there is, Dave. And as I listen to your question, when you think about -- get inside a market like Buffalo, where we have significant service to New York and Boston, right? So it's a business and a leisure customer, and we also have Florida service out of Buffalo and access to Canada. Think about places like Raleigh-Durham and places like Jacksonville and those type of markets, or into Austin or New Orleans, you bet we have greater relevance as we're into those markets because we're not just flying to New York. We're not just a one-route airline from those locations into our focus cities up in the Northeast. So there's been some great benefit to it, and it's helped a great deal.

David E. Fintzen - Barclays Capital, Research Division

Have you done anything where you sort of parse out point of sale, sort of relative revenue performance on more of a point-of-sale basis? So you have a sense of, are you closing more of a gap in some of the outstations versus peers? Is there -- it's something sort of analytically you've spent time on?

Robin Hayes

It's Robin. I'll take that. Yes, obviously, we, for each of our markets, understand how our point-of-sale performance compares at each end. Very important to ask because we're an airline that built our network on point-to-point and not transferred traffic. So that point-of-sale performance is extremely important. I think everything we do from an investment as we think about where we invest, where we put our sales force, where we structure our corporate deals, is really geared around Boston. To Dave's point, there are some benefits that you get at the other end of the market just by having a bigger network there. But that's not something we specifically go out and invest in. So every time we start a new market from Boston it's really predicated on certain assumptions around our point-of-sale performance in Boston. There are also some operational efficiencies clearly as you -- in airports where we have our own crew members, we're able to go from 3, 4, 5, 6, 7 flights a day, that the incremental cost of adding those flights, we see some benefit from. But it's very much a Boston story. It's going to continue to be a Boston story.

Operator

Our next question comes from Duane Pfennigwerth from Evercore Partners.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

As we think about next year, 2013, wondered if you could talk through some of the positives and negatives we should be thinking about with respect to your nonfuel cost structure.

David Barger

Yes, sure. Duane, I think -- well, first of all, as we look at 2013, the guidance that we provided this year for the -- our nonfuel CASM, so x fuel CASM, actually quite pleased with what I've seen across the company. Yes, we've had some challenges when you think about the liquidation with the maintenance supplier and the aging of the fleet, a lot of those airplanes coming through the mid-2000 time frame. I think -- and we also had some benefit with, let's face it, with greater completion factor as well. When we look at 2013, we haven't provided guidance as of this point into 2013. There are 10 aircraft that are firm right now in the skyline as we look at 2013. 7 of those with the Airbus variety, 4 of them with the A321s, and first time ever, obviously a larger platform in 3 190s. And the same rigor and the same focus is going to take place as we take a look at -- and by the way, from a fuel perspective, that's not your question, but you bet, we want to be very much involved with really leading the charge with fuel efficiency. And so things like ADS-B Out, things like the JFK, RMP [ph] '13 arrivals, things like technique in the cockpit and on the ground and then dispatch, fuel over destinations, that 40% of our cost structure. So that said, when you get inside of labor and you start to get inside of even things like health care and the maintenance costs -- Mark, additional commentary on 2013, even though we're not providing guidance at this point?

Mark D. Powers

Yes, so just a flavor. And again, I'll just pick up on the maintenance side. You know, we do still expect to see continued year-over-year maintenance cost pressure. But I think, for sure, the rate over -- the increased period-over-period will decline from the kind of levels you've been seeing in the 30% range of this year. Largely, as a result of the fact that, number 1, the big bubble of aging aircraft are sort of through us; number 2 is that we'll really start to see the benefit of some of these long-term flight hour agreements, and other actions that Rob Maruster and his team are taking on, on the whole maintenance cost environment. The other thing, sort of a little bit below the lines and perhaps on the rent side, you'll continue to see is a decrease in interest expense while we will increase the base of our profit-producing assets. And we noted, for example, in today's press release, that we've been able, since December of 2011, to increase the number of unencumbered aircraft to 7 while decreasing our total debt balance by $213 million. Obviously, a lot of interest expense savings there. The other thing that is embedded in the current results is lease renewals at sometimes half, if not more of former lease rates reflecting of course the opportunities to get some pretty good A320 lease renewals out there. So I think you'll see that. And then as David mentioned, I think you'll see at least a lot more effort in terms of the rate of inflation on year-over-year health care and other benefits.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Sounds like all tailwinds, no headwinds.

Mark D. Powers

Well, I didn't say that. Dave gives it that way, and I tend to look at the world with a lot of headwinds that we want to get proactive and get ahead of.

David Barger

And I would say, Duane, it's -- listen, x fuel CASM and the focus on it, it's very much a part of the culture of this company. And as we're building our 2013 plan at this point in time -- and by the way, it's a 5-year plan. But again, really getting surgically into 2013, you bet. I mean, this is something that permeates across 14,500 crew members in terms of what we're doing. X fuel CASM, it's like it's critical to the ability for our company to grow, I mean, period. I mean for us to go in and offer the type of fares that we offer, we need to have a competitive x fuel CASM, all-in CASM relative to the network carriers as well as the combination of the LCCs that are out there.

Operator

Our next question comes from Hunter Keay from Wolfe Trahan.

Hunter K. Keay - Wolfe Trahan & Co.

Robin, let's talk about ancillary for a second. Even More products going to add about $150 million. Interesting what you said about the lower margin ancillary, maybe that was Mark, actually. Lower margin ancillary sort of decelerating a little bit, can you break down what's in that $20? What's in the component? How does that build up? And how has that changed over the last couple of years?

Robin Hayes

Just to clarify Mark's comments, there's a certain amount of our ancillary revenue that are very linked to passenger volume, and there's those that really are unrelated. And so some of the reductions that we've seen in some of the non-passenger-related ancillary revenues are really things that we looked at and we just decided that we didn't necessarily want to continue with, or we wanted to look at it differently. So examples of things in there are things like, we get revenue from renting our simulators. As we got busy doing our own training, there was less opportunity. LiveTV lost AirTran as a customer and so we didn't see those revenues in this year. We decided not to continue with the now [ph] contract that we had because we thought it was unprofitable. In terms of passenger revenue side, when we think about that number that you've asked, it includes all of the passenger and the non-passenger related revenue. So it includes things like the Even More Space product, the Even More Speed product that we just started to roll out; all the revenues linked to change fees, baggage fees; our partnership with American Express; concession revenue; getaway revenue; charter revenue; reservation fees; some of the things I just talked about, in-flight sales; and then all of that kind of gets bundled up into a ancillary revenue per passenger number, which is the one that we quote.

Hunter K. Keay - Wolfe Trahan & Co.

So the Even More suite, would you say that's less than half of the $20 based on that?

David Barger

We don't -- we don't break it out but you can kind of work it out, right, in terms of, I think, we said about 150 for this year.

Hunter K. Keay - Wolfe Trahan & Co.

And let's talk about codesharing, too, for a second. Just correct me if I'm wrong. I don't think you guys 2-way codeshare with anyone. First of all, is that right?

Robin Hayes

That is correct.

Hunter K. Keay - Wolfe Trahan & Co.

Okay. So there are risks and there are benefits to 2-way codesharing, obviously. There's re-accommodation risk. You got to think about lost bags. You got to think about how people perceive your product. I don't think anybody's going to go on jetblue.com to book a trip to Johannesburg. How do you think about the benefits and the risks of codesharing 2 ways with a much larger carrier?

Robin Hayes

No, Hunter, it's a great question. And I think we've approached this from the beginning in terms of as we thought about partners, we wanted to do it very differently to how maybe other airlines have looked at doing it. So we wanted to start with interline relationships. We wanted to start with -- and we talked about how we priced before. But you can't just look at an average prorate fare and assume that that's what we're getting. I mean we are -- we really design our agreements around some effective fares so we can look at it in equivalent yield to what we would get on our own website. That changes the economics significantly. Where we saw with some of our partners' interline relationships working well and there was a benefit in moving to codeshare, we have migrated a number of them to 1-way code, so we have 5 or 6 of our partners where we are now codesharing 1-way, which has been putting their codes on us, because, you're right, to take that to the next level with 2-way code, it does add some complexity. Now there may well be some of our partners where we look at the benefits of moving from 1-way and 2-way code, where despite that additional complexity, it's worth doing. But for now, we continue to be very much focused on how do we mine the current relationships we've got and by moving interline to 1-way code.

Operator

Our next question comes from Glenn Engel from Bank of America.

Glenn D. Engel - BofA Merrill Lynch, Research Division

You were kind enough to give us capacity numbers competitive on Boston. Can you give us a sense of what they look like transcon, Florida and the Caribbean?

Robin Hayes

Sure. Let me...

Glenn D. Engel - BofA Merrill Lynch, Research Division

Third and fourth quarter.

Robin Hayes

Yes, I'll give you fourth quarter and quarter 1 as we see them, and we look at seats from ASMs, just so you sort of -- the ASM number may be different. We look at seats because we think that's a better measure of actual competitive available capacity. So we look at Boston about 5 points down in quarter 4, about 10, 11 points in quarter 1 down. I think I mentioned those numbers earlier. As we look at the Caribbean and Latin America, about 1% to 2% down in quarter 4, between 5% to 6% down in quarter 1. As we look at Florida, about 3% to 4% up in both quarters and as we look at transcon, actually up between 2% to 3% in quarter 4 but down just under 5% in quarter 1 next year.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And if Boston's doing well and your October PRASM is flat and running about 3 points less than the industry it seems, which markets are holding you back the most?

Robin Hayes

I think we continue to see, we saw some significant yield pressure in September really across much of the leisure network. We have added a lot of capacity into Latin America and the Caribbean. We've talked about before how there are some significant opportunities that we've taken advantage with in San Juan, so we are definitely seeing some RASM pressure in those markets as we cycle against very significant increases in capacity. But once we get into December, we really been -- we cycled through most of those big increases that we put in either late last year or earlier this year. And the fact that the October would be, as Mark mentioned, the trend from September, October has improved significantly, I think means that we feel most of that yield pressure is behind us and we feel better about what we see going forward.

Glenn D. Engel - BofA Merrill Lynch, Research Division

So your comparisons get easier as the quarter progresses?

Robert Maruster

Well, we have a tough comp. October, November are particularly tough comp for us. I think the November -- I'm trying to think what the last November number was. So I think the comp is actually higher in November than December, if I remember. I think it was up to 15% in November. So that creates some pressure and we're not guiding to November and December. But we don't, let me just say this, we're not expecting any RASM deacceleration as we go through the quarter.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And finally, if I look at fuel consumption, it was up 9.4% in the third quarter, capacity up 8.6%. Why are you becoming less fuel efficient?

Mark D. Powers

Let me look into that. I would only speculate. Let me drill into that and get back to you.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And there was a comment about offsetting. I'm not sure if it was the 3 points of labor cost inflation, I was -- can you go over that again? I think trying to...

Mark D. Powers

You're referring in particular, I think, to the attachment to the press release. There's a couple of elements there. The primary element, I think, is profit sharing. And don't forget that that's embedded in that number on that salary and wage number.

Glenn D. Engel - BofA Merrill Lynch, Research Division

I thought Dave was making some comments in the beginning about undergoing actions to try to off -- reduce labor cost inflation over time.

Mark D. Powers

Oh, benefits, yes, that was a discussion of -- we are literally in the midst of rolling out a new benefit program that will, in the long term, provide increased wellness for our crew members, but at the same time, really stop this insane sort of year-over-year inflationary increase on health care benefit cost increases.

Operator

Our next question comes from Jim Parker from Raymond James.

James D. Parker - Raymond James & Associates, Inc., Research Division

This question has probably been asked in previous calls but I'd like to revisit it, and it has to do with JetBlue's capacity growth versus other leading carriers in the industry. And of course, if you look at the legacies in Southwest, it's like 80% of domestic seats, and they are not growing. And their capacity discipline seems to be improving their profitability substantially. So my question is, would it actually improve JetBlue's profitability to adhere to similar capacity discipline, and perhaps not grow its capacity? And second part of that is, is there any concern on your part that your growing as a leading carrier might cause this capacity discipline to become unraveled?

David Barger

Dave. I think we take the same approach. As we look over the years, we've certainly -- we know what it feels like to grow too fast. And again, that's several years ago. And the growth that we have in place right now with the 11 aircraft this year. Right now, we have another 10 on the skyline. We look at this opportunity in Boston as an example. Boston, what we're seeing with our investment in Boston, and these opportunities that they just don't come along this often. And so we are effecting change in a meaningful way up across Boston and New England, and so we're going to take advantage of that. When you start to get inside of even like the slot acquisitions over at LaGuardia and DCA, some of that line was candidly funded out of JFK and also out of Dulles and some rationalization, if you will, into those markets. But these are opportunities, some of the new flying, that access those airports, and we are interested in further access to those airports or airports like Newark, I'll tell you, you bet. I mean it takes aircraft deliveries to take advantage of that. When we look at what we are doing down in the Caribbean and Latin America -- and there's been commentary regarding how deep is that market. And I think the fourth quarter is a good example, first ever service to Cartagena, down in Colombia; hooking in Grand Cayman; as well as Samana, our 6th destination down in the Dominican Republic, never flown before out of the New York Metropolitan area; and other markets that we're looking at. We think, actually, we're being quite responsible with the growth that we have in place and to leave something unbuilt, if you will, is irresponsible. And so second part of your commentary regarding our growth. And again, we guided to a 7% to 9% over the course of the year, there's some of that as a result of completion factor for the full year 2012. This is -- I think other airlines are going through -- listen, they're still on the backside of consolidation and rationalization of their networks. And you know who they are in terms of all the mergers that have taken place, which is also creating opportunities for airlines like JetBlue as we look at landscape that was previously filled by somebody else. And so I think we're being quite prudent and actually responsible, Jim, with regard to our growth.

Operator

Our next question comes from John Godyn from Morgan Stanley.

John D. Godyn - Morgan Stanley, Research Division

I just want to follow up on a few things. Robin, I think to a question earlier on the call, you said that -- did I hear you right, that you're not expecting any reacceleration in PRASM from the October level? Was that the right comment?

Robin Hayes

No, I was saying that if we think about October, we think about the quarter, I was just suggesting that whilst we're not giving guidance, we don't expect any deacceleration of the quarter number compared to October.

John D. Godyn - Morgan Stanley, Research Division

And then, Dave, I know that you were reluctant to talk about sort of 2013 guidance. I think last quarter, Robin, you had suggested that 2013 capacity growth shouldn't deviate much from sort of a mid single-digit long-term trend. Is that still the case? Or are macro concerns creating downside risk to that, or some of these growth opportunities creating upside risk to that? I'm just trying to put it in context to what we've heard today.

David Barger

I think that's still -- Robin mentioned that previously. Mark's mentioned it. I've mentioned it. This is, I think, very rational as we're looking at 2013, John. Again, a lot of it has to do with -- we look at these opportunities, as I talked about. And you also have to look at where the aircraft deliveries are taking place over the course of the year as well. And I would love to have 321s come in, in the first quarter. Guess what, we don't see them until late in the fourth quarter, as an example. So I think it's a good way to be thinking about how we're looking at annual growth at our company.

John D. Godyn - Morgan Stanley, Research Division

And just last question, I know it comes up every so often so just an update would be helpful. But with the focus on business, any updated thoughts on revisiting a 2-class product?

Robin Hayes

Yes, no, John, happy to address that. I mean, I think as we book up most of our network, I think it really wouldn't make very much sense to ask us to do that. We have -- with the Even More product, we have a product that is very equivalent to business travel market. We have a fare that often makes that lower than our competitors can offer. And we don't want to get into this business of just having a product there that's really full of upgrades. We don't -- we think that is model, as we look to build this airline differently, isn't a road we want to go down. If we look at the segment of our business where there is a paid first-class market that we don't have access to, then -- think, transcon. There is a -- you take markets like New York, LAX, San Francisco, some of the Boston markets, there is a paid first-class market there. We don't get access to that clearly today because we don't have a first-class product. We know from some of our customers who fly our network on transcon, they don't always fly with us because of that reason. And we would be negligent if that wasn't something that we were aware of and thinking about.

Operator

Our next question comes from Kevin Crissey from UBS.

Kevin Crissey - UBS Investment Bank, Research Division

I want to come back to, I think, Glenn Engel's question. And I think, Mark, you addressed the health care piece but I was also confused. I think maybe, as Dave said, longer-term targeting 3% per crew member. Is that a new structural -- I'm not sure if it was related to the health care comment or if it was a new structural program to reduce cost. I just wanted clarity on that one.

David Barger

Sure, Kevin. It's actually part of the -- my script comments. This is tied into health care and so the change is -- back to the comment, is, we're looking to bend unsustainable cost inflation. And by the way, we're looking to do that by driving health and wellness, right, across our crew member population. And obviously, making sure that people have the proper insurance in place. And all that said, as we look at total cost inflation, looking to reduce that per crew member by approximately 3 percentage points annually over the next 10 years. We believe that by introducing things like health reimbursement accounts, health care savings accounts into our portfolio will make good sense for us. So it's specifically tied to health care.

Kevin Crissey - UBS Investment Bank, Research Division

And then follow-up, if I could. Given the growth of your corporate markets, can you talk about how your distribution channels have changed to maybe your percentage of jetblue.com versus other avenues?

Robin Hayes

Yes, Kevin, I'll take that. Obviously, we don't give specific numbers, but I'll give you a flavor. We continue to make sure that jetblue.com and our direct channels are our primary form of distribution. Having said that, we have seen since we've been developing this kind of corporate business, our business through the corporate GDS channels increase. We've been pleased with that. That continues to come at a yield premium compared to jetblue.com because the mix is different. And then the final piece of that is the LPAs [ph], where we really have done our best to either maintain or reduce that share of business. That tends to really just be more what we're selling on jetblue.com. And as I've said before, jury's out long-term for us in terms of whether that's a channel where we're seeing true added value by being in.

Operator

Our next question comes from Ray Neidl from Maxim Group.

Raymond Neidl - Credit Agricole Securities (USA) Inc., Research Division

I apologize, I got in a little late, but the ROIC, you did mention that your goal is to increase it 1 percentage point per year. Did you give the current ROIC for the past 12 months? And what is your goal?

Mark D. Powers

No, we're not going to sort of go into the monthly or quarterly this is where we are on ROIC. Just to update though from the Analyst Day last year, we said we're sitting by our calculation, which by the way is in the investor update filed on our website. By our calculation, last year in December, we were at 4%. And as Dave indicated, we remain committed to improving that ROIC number which, by the way, is not fuel-adjusted, by 1% per year at least, on average. And I think, Dave, we also indicated that we're on track.

Raymond Neidl - Credit Agricole Securities (USA) Inc., Research Division

And generally on NextGen, it's a system I've been following. I commend you for participating in that. But that thing is, is that a system that's going to be far in the distance when it becomes into play? From what I understand, it's still in the developmental stages. And is it worth making the investment currently to participate? And if other airlines aren't participating, it really doesn't do a single airline much good to have that system, is that correct?

David Barger

Actually, NextGen is now gen. I mean there are aspects of NextGen that are in our portfolio at JetBlue today. And so things like the RMP [ph] '13 approaches at Kennedy Airport which is new, by the way. And that, for example, is independent of equipage of other type of aircraft that are flying into Kennedy Airport. We believe that could save as much as somewhere between 15 and 20 gallons for each arrival. Things like automatic dependent surveillance broadcast out equipage that we have with 35 A320s in cooperation with the FAA, pioneering new routes from the Northeast down to south Florida and also down into the near Caribbean destinations. That's real. That's going to be taking place in early 20 -- the first semester of 2013. So there's a lot of good stuff that's happening with NextGen, not the least of which is also federal budgeting into the FAA to support further movement with NextGen, not just equipage but also training, et cetera. So appreciate the question, Ray. It's very good for an airline that's based in the most congested airspace in the world.

Operator

Our next question comes from Tom Kim from Goldman Sachs.

Thomas Kim - Goldman Sachs Group Inc., Research Division

I had a quick question on the PRASM guidance of plus or minus 50 bps, which seems a little lackluster given your more, I would suggest, relatively positive commentary on forward bookings. Could you be conservative on your PRASM guidance?

Robin Hayes

No, I mean I think, just given the time of the month for October, I would say we feel very, very confident about that guidance number.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay. And just another -- a separate question. With regard to your business and leisure travel mix, would you be able to just let us know where that mix might me today, whether in revenue or traffic? And where you think it might be in a couple of years just given the good growth prospects we're seeing?

Robin Hayes

Yes, no, happy to. We break out the -- as we think about business and leisure, most of our efforts on the business travel story are really much centered around Boston. And there, what we tend to do is look at the percentage of flyers into business travel markets, and we tend to continue to see in excess of sort of 20% of our customer base being business travelers, and that continues to grow. As you think about our network more broadly then we have said sort of said before, sort of the 15% to 20% range of customers that are flying us for business travel.

Thomas Kim - Goldman Sachs Group Inc., Research Division

If I could just squeeze in one more question, just with regard to your international partnerships which I think is great and the progression you're showing there is very encouraging, have you disclosed what sort of incremental traffic or revenues being generated from that?

Robin Hayes

No, Tom, that's not something we disclose. We next expect to give an update on that at our annual investor update, which is going to be scheduled for early next year.

Operator

Dave, we have no further questions at this time.

David Barger

Great. Thank you, John. I'd like to thank everybody for joining us this morning for the overview of the third quarter 2012. I'd also like to thank our crew members for an excellent operation in the third quarter. And of course, we look forward to talking to you early next year. Thank you, everybody. Have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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