JetBlue Airways Corp (JBLU) 2002 Q3 法說會逐字稿

Please stand by, we are about to begin.

Good day, everyone and welcome to the JetBlue third quarter conference call.

I would like to remind you that the conference is being recorded.

Following today's presentation we will conduct a live question and answer session.

If you'd like to ask a question, please press star, one on your touchtone phone pad.

At this time, for opening remarks and introductions, I'd like to turn the call over to Ms. Amy Carpi.

Please go ahead.

Thanks,

.

Good morning, everybody and welcome to JetBlue's third quarter earnings conference call.

We have with us today David Neeleman, JetBlue's Chief Executive Officer and John Owen, the company's Chief Financial Officer.

We'll get started in just a moment.

First I'll ask you to bear with me as I read the required statement.

As a reminder, this call contains statements of a forward-looking nature relating to future events or future financial results of JetBlue that are based on management's beliefs and assumptions and on information currently available to JetBlue's management.

Forward-looking statements involve risks, uncertainties and assumptions.

Actual results may differ materially from those expressed in the forward-looking statements due to many factors, including without limitation, the continually changing airline industry and regulatory environment following the recent terrorist attacks and threats, future terrorist attacks or fear of such attacks, our limited operating history, our ability to implement our growth strategy, our fixed obligations, our ability to establish lines of credit or obtain financing from third parties, our dependence on the New York market, our ability to renew or replace gate leases, our competitive environment, problems with our aircraft, economic and other conditions in the markets in which we operate, our reliance on third parties and sole suppliers, governmental regulation, our reliance on one type of aircraft and on automated systems, increases in maintenance costs, fuel prices, insurance premiums and purchase prices of aircraft, our failure to properly integrate LiveTV, the loss of key personnel and potential problems with our workforce including work stoppages and seasonal fluctuations in our operating results.

Additional information concerning these and other factors is contained in the company's Securities and Exchange Commission filings, including but not limited to the company's registration statement on Form S-1, as amended.

JetBlue undertakes no obligation to update any forward-looking statements to reflect events or circumstances that may arise.

And with that out of the way, I would like to turn the call over to David Neeleman.

Thanks, Amy, on those bright - on those bright words.

We'll kick off our third quarter earnings conference call.

As you can see, in the third quarter, we had a 13.6 percent operating margin, which is far and away the best in the industry - in our industry, obviously - U.S. domestic airline business, non-regional.

You know, we're pleased with these results and we're going to get into them in a lot of detail today and, you know, talk a little bit about the fourth quarter.

But before we get to that, I just wanted to give congratulations to our great crew members who deliver such a great product on a daily basis.

As many of you may have read that we were awarded the Conde Nast - Airline of the Year Award by the Conde Nast readers.

And that was an award that we received from

that has - won that award seven years in a row.

So we're - I think what we've said all along is that we're bringing humanity back to air travel.

That the strength of the brand and the strength of the franchise of JetBlue is in the day-to-day actions of our crewmembers and the Conde Nast travelers' poll and others that are - that have come out, really speaks to the strength of what we're doing here at JetBlue.

And we're very pleased about the operation of the company and our results.

As you know, our operating revenues grew 100 percent to 165 million in the very difficult industry environment.

Operating expenses were up 82 percent and we have an operating margin, of course, of 13.6, which is an improvement of 8.5 points over last year.

If you segment out the quarter into the three months - July, August and September - we had, going into September we had an operating margin which exceeded 20 percent.

September was an, obviously, a very difficult month for us, being in New York with the commemorations of 9-11.

And we also had some cost issues where a couple - and we'll discuss this in more detail and I'll discuss it in more detail.

But I think the good news from the quarter, from our perspective, is that revenues were stronger than we had projected - much stronger.

The costs were higher, as well, but they're not endemic cost issues.

We have - we had four or five items that kind of hit us in September and in July and August that - some of them we would categorize as kind of one-time events.

And other things are issues that we're working on, that will be down, that will take a quarter or two to work out.

But I think - I think the best categorization that I've heard is it's kind of shifting gears.

We're moving to a different level of company and we had some expenses in there and, you know, I think that - you know, we're not going to be - you know, a lot of people focus a lot on EPS in a given quarter.

And we're not going to - we're not a company on that basis.

We're looking for the long-term.

And we did some gear shifting this quarter.

And we'll expect our costs to return more to the second quarter levels in the fourth quarter and I'll talk about that more in a moment.

The - obviously, you've seen our - also, our press release on October.

We had 81 percent load factor in October, and we see things from a revenue perspective, we see September as kind of a one-time event.

And bookings were good in October.

We met our internal numbers forecast on the revenue side, and expect to do the same in November/December as far as we can tell right now.

So now just to briefly -- summary of the quarter, we're thrilled with the revenues.

The costs were a little bit higher than we had projected, but like I said, there were some one-time events, and John will go over those in more detail, but we had obviously some increased fuel cost in the quarter, and that was a significant amount.

We made a conscious decision in the month of September to batch a lot of

for our airplanes in September.

Took a lot of planes out of service, which caused our SM to go down, but obviously we were able to get those planes ready for the peak winter season.

And we had six little

during the quarter.

We also had a big spike up in credit card charge backs, and that was -- you can classify in the other category.

Like I said, and if you look at our costs on the operating side of the business, the day to day, we did great in those areas.

But in one of the other categories we had a big spike up in charge backs.

We are now looking at that a lot more closely and we'll see that number coming down.

We see that as a quarterly phenomenon and it may go a little bit into the fourth, but we have that under control.

We also moved into our new terminal at JFK and had very little knowledge of the expenses of that and were hit with expenses.

Some of those will continue, but others we're working on getting those down over the long term.

And so as we grow at Kennedy, which, we'll have a lot of growth there in the fourth quarter, we'll be able to spread those costs over to more flights, which will cause that cost to come down.

And then we're moving headquarters.

We got a great deal on some new office space across the street from us that we were able to commit to as much space that had

rent payments, and that will be going away at the end of this year as well, so like I said, we're good at shifting gears, there.

And then lastly, and probably one of the biggest factors, is that we see our stop at Long Beach as a very important asset to this company.

And going forward, we're going to make a lot of money in Long Beach, we believe, and we had a certain amount of what we felt like airlines that were encouraged -- that wanted to have those slots that were coming in, and we felt it was important to build Long Beach up a lot quicker than we had originally anticipated or planned.

And we spent a lot of money going from the six flights a day we had there to the 18 that we have today and onto the additional slots that we have and that's not built up.

It's ready to go.

We expect to have a lot of capital expenditures, but that also added to the quarter and our costs, and frankly, the revenue as well.

You know, you don't -- by adding that many flights in a short period of time, had we not had to do that, we would have done better with those planes flying out of New York.

But again, it was a preservation of an asset and we had to do it and it will reap long-term benefits for the company.

As I mentioned, we see our -- of course a downward trend in our costs in the fourth quarter as we get over this Long Beach issue and through the headquarters lease and get the charge backs under control and other issues related to kind of what we see as -- some of them are one-time events and some are things that it'll take a quarter or two to work through.

And I guess, just wrapping up my portion, you know, this is a very difficult environment.

And the pricing is unbelievable.

I - obviously we've been in this business a lot of years, and we have never seen such a low price out there in the market that we are being charged, and I think it is great to have a preferred product in a commodity business.

And we - as I started out with, we have tremendous amount of brand loyalty.

Just the day before yesterday, the DOT released numbers on marks

- all the airlines, as you well know have to report their average fare and traffic to the Department of Transportation, and those were released a couple days ago for second quarter of 2002.

We had marked

in virtually every market we flew, and some large increases in certain markets, but I think most striking - if you look at the fare premiums that we had to like Delta Express - and this is all public information.

But our average fare in the second quarter of jet

Fort Lauderdale was $108.00 compared to $82.00 for Delta Express.

That is just a huge difference in fare.

And obviously, what they have is not sustainable from their cost structure, but we have a sustainable, and if you go down the list, we had a significant average fare advantage and cost advantage in every single market, which I think again speaks very highly of our brand, and the desire of people to fly JetBlue, particularly in light of the touting of - that the other airlines use of their frequent flyer programs.

Obviously we are not seeing that benefit for them.

We are seeing the benefit for us.

And then lastly, we are

while I am talking about frequent flyer programs, we are excited about our TrueBlue program.

We have over 300,000 people signed up, and we have a large percentage of those, and closer to 90% of those TrueBlue members are now booking online, which has caused our - as you see in our press release - our online booking to go to an all-time high, and we are going - we see that number continuing to grow, which will help our cost as we are going forward.

So with that, I'll turn the time over to John Owen to give you more details on the financial side of the business, and then I'll - we'll take questions and then I'll give the final rap-up.

John.

Thank you David.

As David noted, this was another very solid quarter for us, both operationally and financially.

We actually exceeded our own internal profit projections for the quarter. operationally, during the quarter completion factor was 99.9% and on-time performance was up 5.6 points year-over-year to 88.5%.

The

was up slightly to 2.39%, or excuse me 2.39 per thousand customers, and customer complaints fell almost a full point to 0.33 per 100,000.

So if every one of those numbers would have ranked us either first or second across the industry, had we been reporting to the DOT.

So solid performance numbers, a tribute to our crewmembers, and again those are part of what lead to the customer satisfaction with the JetBlue experience.

We are very proud that we saw revenue passengers up 90% to a million-and-a-half this quarter.

ASM is up 97%.

New record quarter with load factor of 84.8%, up 8.4 points year-over-year.

Turning to the P&L, we reported revenues of $165. million, up right on 100% year-over-year.

It is actually quite remarkable to run the load factors in the profitability measures that we run when you double the company from one year to the next.

ASM was seven point four two cents, that's up one point six percent year-over-year, despite a 15 percent increase in average length of haul.

So, you know, very solid year-over-year ASM performance.

Yield per passenger mile was eight 49, that's down eight point seven percent and the

is our enough 15 percent of increase in length of haul.

If you look at things by market for the third quarter, versus third quarter of 2001, ASM was up very strongly in the Northeast, strongly in the Southern markets, and was basically flat in the East, West markets.

During the quarter we took four new aircraft deliveries from

.

Three of those are owned and financed with mortgages.

One was financed through a 20-year sale lease pack.

We ended the quarter with 31 aircraft, 14 leased and 17 owned.

On the cost side, operating expenses were up 82.2 percent to 142.8 million.

To CASM decrease of seven point five percent year-over-year, but a slight increase in CASM from the second quarter of this year.

The year-over-year improvement can be attributed to a 22 percent increase in average states length.

Obviously increased capacity leading to better economies of scale, decrease in fuel costs of six percent year-over-year, and just general gains in operating efficiencies across the airline.

The increase in the - over the second quarter can mostly be attributed to the items that David ran through with you a little while ago.

Basically fuel price was up six cents quarter-over-quarter, from second to third.

We had the sea checks that we deliberately scheduled into the quarter during slack time in September.

Increase terminal costs, as we now control the entire terminal at JFK, the wrap-up at Long Beach and an increase in charge backs on the credit card side.

On the fuel neutral basis, CASM was down about six point six percent year-over-year.

Within the expense line, salaries, wages, and benefits were up 92.6 percent.

Sales and marketing increased 58.1 percent, mostly as a result of increased advertising and higher credit card fees, this is because of higher passenger revenues.

Excuse me.

Sales on JetBlue.com were 65.1 percent for the quarter.

That's up 20 points year-over-year and up three point eight points compared to the second quarter this year.

That's easily the highest percentage within the United States airline industry.

That number has continued to rise since the close of the quarter.

In fact yesterday we were 69 percent on the Internet.

And again, when we talk about the Internet, we are talking solely about JetBlue Airways own Web site.

This is no other alternate Internet distribution mechanism.

Now we continue to promote sales on JetBlue.com by offering the five-dollar discount that we've had for quite some time on all flights that are booked on-line.

And with respect to our TrueBlue members, who we're still signing up at the rate of about 2,000 a day, we are offering double TrueBlue points for flights booked on-line through December 31.

Other operating expenses were up 126 percent.

Now this primarily associated with increased passengers, increased insurance costs, relative to last year, 'cause we've seen, like all other airlines, a dramatic increase in insurance costs year over year.

Our accelerated buildup for Long Beach and operating costs for terminal six that we discussed.

Interest expense increased 81.3 percent year over year, mostly attributable to incurring more debt as we've financed 11 additional aircraft in the past year with mortgages.

Also increased

related to pre-delivery deposits on aircraft.

And those, of course, were offset a bit by lower interest rates.

Interest income and other was up due to higher cash balances, mostly attributable to the money that we raised through the IPO back in April.

During the third quarter, we did recognize $400 in compensation under the stabilization act.

We received our final installment of 1.2 million from the government.

We had already accrued, previously, 800,000 of that.

So the 400,000 was simply the excess of what we received from the government over what we had previously accrued.

And just for comparison purposes, in the year ago period we had accrued $6.7 million in government aid in the interest income and other line on the P&L.

Income tax expense was $8.3 million for the quarter.

And, as we mentioned in our press release, our effective tax rate for the third quarter was 40.7 percent.

And that compares to a zero effective tax rate in the third quarter of 2001 when we were still working off the company's - the third tax asset valuation allowance during that time period.

Finally, we had 45,389,000 diluted shares outstanding for the quarter.

Turning to the balance sheet, we ended the quarter with 208 million in cash and equivalents.

That was after, of course, paying for the LiveTV acquisition, which closed on September 27.

It is reflected on the balance sheet at September 30 and the P&L effect on the third quarter of the LiveTV acquisition was immaterial because you were just looking at the days from September 27 to September 30.

Looking forward now on guidance for the balance of the year.

As David said, our booking trends look very good.

October was a very big improvement over September on the revenue front.

We beat slightly, both our budget and our close-in internal forecast targets for October on the flow in revenue perspective.

November is looking well as is December and November.

Obviously, you have more visibility on November than December, but we have no reason to believe, at this point, if booking trends continue as they are, that we should not see November coming in, meeting our forecast from a revenue perspective.

We did, yesterday, have our all-time record dollar volume booking day on the system, as well as our all-time Internet dollar volume booking day.

We expect ASMs to be up 77 to 79 percent in the fourth quarter, year over year, and up roughly 70 percent, year over year, in the first quarter of '03, assuming that the aircraft deliveries that I'll go through in a moment come as scheduled from Airbus.

Average stage length is projected to be 1,130 miles in the fourth quarter and roughly 1200 miles in the first quarter of next year.

Our current expectation based on the revised forecast we've recently completed is that our cost per available seat mile will decline roughly five percent year over year during the fourth quarter, assuming, again, no additional increases in average fuel prices.

As a result, it should be similar to the chasm we had in the second quarter of this year.

We're not really in a position to give any further chasm guidance into 2003, as we're still working through the budget process and have a series of major budget meetings planned for next week.

So we're not at a point to give you any further chasm guidance there other than the -- we are constantly focused on cost control at this company, it's just part of our lives.

And so we will obviously be reinforcing that through the budget process, as we do continually throughout the year.

We expect our operating margin for the fourth quarter to improve compared to the operating margin we reported here in the third quarter.

Based on that forecast, we do not expect the fourth quarter margin to be as high as the first and second quarter margins of this year.

We continue to expect utilization in the fourth quarter to be around 12.9 hours per day per aircraft, and that should hold steady, again, for the first quarter of '03.

We are in the best hedging position we have ever been from a fuel perspective for the company at this point.

We're approximately 50 percent hedged for the balance of the fourth quarter, 50 percent hedged for the first half of '03, and 40 percent hedged for the second half of '03.

We do that with crude, caps, and collars.

In November, those crude caps are at $31 dollar range, in December, at the $28 range, and in January, at around the $33 range.

We have collars in place as well for the fourth quarter.

Those collars cap at out at around $25 to $27 range, and they are mostly in the $31 range in the first quarter and the $26 to $29 range in the second quarter of '03.

Again, we do everything in crude and as a reminder, we do not qualify at this point for hedge accounting under FAS-133 so all of our hedging activity is marked to market as we close each quarter, which can introduce some abnormal volatility in the interest income and other line where that gets booked.

Delivery schedule from here out, we're looking at one aircraft, which we've already taken delivery of in October, planning on two in November and two in December to close out the year with 36 aircraft.

In 2003, the delivery schedule is one in January, two each in February in March, one May, two June, and one each month from July onward.

As a reminder, all of our debt and cash investments are floating.

Our average debt rate at the end of the third quarter was 3.81 percent and our average investment return rate on cash was 2.1 percent.

From an EPS perspective, we'll give you some estimates of the number of shares outstanding of '02 and the first quarter of '03, based on the following assumptions, since we can't predict that we assume no additional shares would be issued based on option exercises, we will let you all draw your own conclusions on those.

We expect there will be 9.3 million options outstanding at an 11.67 average strike price, and that is with splitted vested numbers reflecting the 3 for 2 split by the end of the fourth quarter, and roughly 10 million options outstanding at an average strike price of around $13.00 at the end of the first quarter of '03.

In working through that calculation we assume 5% market price appreciation through to the end of 2002, and 20% stock price appreciation through 2003.

Obviously you are welcome to change those assumptions any way you like.

We also assume shares issued under our crewmember stock purchase plan which began -- the initial purchase period was at October 31 here in the fourth quarter.

And just a reminder, JetBlue stock will trade X-split beginning December 13, based on the 3 for 2 stock split that was approved by our board in October, and its distributable to shareholder of record on the close of business on December 2, 2002.

Now based on all of that, for forth quarter, we are looking at 68.65 million weighted average shares outstanding for EPS purposes, and in the first quarter, 68.96.

Those are our best estimates at this point based on assumptions I gave you there, and again those numbers are post-split.

For the full year 2002 average, we are expecting right around 65.2.

Other things to keep in mind, our fourth quarter results will include all of the operations of LiveTV on a consolidated basis.

It will be our first full quarter of having LiveTV consolidated.

As we have said previously, we expect this effect to be immaterial over the next few years, and mildly creative to EPS thereafter.

On the P&L you will see a few changes as we will incur additional depreciation, amortization and salary expense related to consolidation of LiveTV, so we will see those line items on the P&L go up, and that will be offset by a reduction in the other operating expense line which is where we - prior to the acquisition, had been booking the expense of paying LiveTV for the services that they provided us.

So it is simply a shifting around within categories on the P&L more than anything else.

With that, I think we have summarized as much as we can do here.

It is time, operator, to open it up and take some questions.

Thank you sir.

If you would like to ask a question today, please press the '*' key followed by the digit '1' on your touchtone telephone.

If you are on a speakerphone, please be sure your mute function is turned off to allow your signals to reach our equipment.

Once again, if you would like to ask a question, please press the '*' key followed by the digit '1'.

We go first to

with JP Morgan.

Oh yeah, good morning.

David, with the exception of the markets where American matches your fares, I would have expected JetBlue to be the price setter.

So I am a little surprised at your comments that you have never seen such a weak pricing environment.

Have you tried and failed to raise prices?

Has the competitive landscape changed in the last quarter?

I mean what is difference this quarter versus last quarter in regards to the pricing?

Well, we're certainly not the price leader.

We charge fares that we think are fair and our price-range to Florida is $69, and we cap out, during our extreme peaks, at $229.

But we're constantly matching $59 and $49 fares that are out there on the market with really fares that are unsustainable from the economics of those airlines that are creating them.

We think that -- and we've really instructed our schedule planning department that we -- all of our pricing is based on supply and demand, and whether you get a $69 fare or whether you get a $229 fare depends on how full that flight is X number of days out.

And we clearly have a preferred product, and people clearly would rather fly on JetBlue, and that's why our average fares are higher.

And that's why I've told our folks that the margins that we're getting on some of these flights exceed that of our goal, and that's why you're seeing that in February of this year we'll have 16 daily flights from JFK to Fort Lauderdale because we're going to need that -- really that supply.

We're not interested in raising the fares too much higher than we what we have them today, or even higher.

I mean, our average fares that we have in the second quarter of $108 to Fort Lauderdale is -- you know, for a second quarter, those are good numbers.

And what I worry about is the differential in average fare, and you know, we'll keep adding frequency to be able to take all the customers that really want to fly on JetBlue.

OK, that's helpful.

And just a quick second question.

You were in discussions at one point with Airbus about a slightly larger aircraft.

Any update or color there?

You know, not that we can give you now.

You know, obviously the

jet order has piqued our interest and possibly, the 83-19 that we're looking at, you know, pricing there.

And we're always -- you know, one of the things that you'll I think realize about JetBlue is that we're always looking at opportunities that we can increase shareholder value and we'll continue to do so in the future.

OK, great.

Thanks.

We go next to

with Salomon Smith Barney.

Hi Dave, I think you mentioned that the

is up nicely on the North-South, whereas on the East-West markets it was flat year over year.

Does that reflect that you have a higher premium on the shorter haul North-South markets?

Does that reflect, perhaps, increased year over year connectivity on the North-South markets, or if you could just explain that.

I think obviously we have a lot of competition East-West, and it's interesting that the flights going from JFK-Oakland and JFK-Long Beach, of which we have five daily non-stops now from JFK-Long Beach, and we will increase that as well going forward.

You know, our average fare was 170.40 in the second quarter, whereas the numbers we have in American was 143.

So again, you see pricing pressure at unsustainable levels, you know, for them.

But there's competition out there, there's a lot of airlines that are -- you read in the press today about the demise of national airline.

That was another -- we had an airline out there that had been in bankruptcy for a couple of years, with additional pressure.

You know, Vanguard is gone and so I think, you know, the fact that we're the same year over year on the East-West is OK for us and its fine and we're holding our own and we're actually increasing market share in virtually all those markets.

Just a side note, you know, I forgot to mention in my comments -- or I neglected to mention was -- we are, as you know, we're introducing service to Las Vegas on the 7th of January, and we probably will have an announcement today.

We're moving up that service.

We're going to add a flight earlier than that to try and take up some of that demand.

And then, looking at actually even adding, maybe, a fourth flight in March to take up that service that has been left by the exit of national in those markets.

So, you'll see three to four daily flights by March 3 coming up in the first quarter - one now and then, hopefully in the next week or two, and then two additionals and then we'll hopefully get a fourth flight in March, as well.

So, that's a great market and why I think we'll do very well in that market.

And we're already in there, flying Long Beach to Vegas in the other side, so it's going to be a very inexpensive add for us.

OK.

Any comments regarding Delta increasing their schedule from JFK to Florida?

Are you seeing any of that yet?

Well, you know, they switched as of the first, you know, end of January and first of February, they're switching from the 737s to the 757s.

And, you know, I think at our fare level and, you know, they're obviously flying very full at very low fares.

And we've increased service and, at these levels, there's really a pent-up demand.

And I think there's plenty of business for all of us to go around.

And, you know, I think we're really focused on having a better product, which we do have, and, you know, serving our customers better and that's really the strength of our brand.

OK.

Thank you.

We go next to Jim Parker with Raymond James.

David, John and Amy, good morning.

Good morning.

Good morning.

John, would you detail some of these cost items that occurred in the third quarter - just like the

.

And if you could just kind of go down the list - if you have any detail on them.

Well, as an example, we did six

in the third quarter and that was up from, as I recall, in the second quarter we only did three.

So, you know, that's a good example of one of them.

And how much is each

?

They're between one and $200,000 a piece depending up - we'll say between a hundred-and-a-quarter and 200,000 depending upon whether it's a

or it's a

.

Right.

OK.

We also had, as David said, an increase in charge-backs on credit cards.

It's, you know, purely a function of credit card fraud.

And it's something that strikes, obviously, all merchants.

But merchants that sell without a signature from a customer more so than others.

Even the

guys like JetBlue.

Yes.

So one of the things we have done - we have a way of working of queue of suspicious looking bookings and verifying whether or not we think there are problems there.

We have beefed up the staff in that group.

And had hired a number of folks who are, you know, now pretty far up the learning curve in researching those sorts of things.

So we anticipate that we will see that number start to backtrack from where it is right now.

In some respects, it's one of those penalties you pay for being successful in selling over the Internet.

You know, airlines that sell much more through travel agencies will tend to see less credit card fraud because the travel agency tends to know the customer.

And so, it's just something that we have to be ever mindful and aware of and it's something that, as I said, we've already added staff to work the issue.

Did you put a number on that?

About 1.2 million higher in charge backs on the quarter.

OK, and then, John what ...

Compared to second quarter.

In addition to that, part of that's volume driven, but most of that was increase in rate.

Right, and Jim, in addition to that, we've got some new technologies that we're working on that we think will allow us to make the function a lot more -- it'll do a better job of identifying a fraudulent booking.

They're pretty actually easy to pick out.

I always thought of people -- it's like showing up at a bank and saying "Here's my ID."

Because all these people have to fly with their ID, I'm going to rob the bank, but I want to make sure you have my driver's license to find out who I am.

So this is a problem that we can solve, it's just we need to get some more technology.

It's something that we'll do a lot better on going forward.

Was there a charge from moving your corporate headquarters?

There's not a charge for moving it other than that our lease for the new space across the street began during the third quarter.

We're still transitioning from the existing space that we're in to the new building across the street.

So we're paying rent on our current space and rent on the new building during the third quarter here, and again during the fourth.

And by December, we will have vacated the existing building that we're in.

And do you have a number on the cost of paying for duplicate facilities?

It's around 80 grand a month.

240 in the month.

But also, Jim, the other thing that we did, and this just goes to the shifting gears category.

We got -- we had a great deal on the office space across the street, and we actually took more than we needed for the foreseeable future because it was a rate that was like 25 percent less per square foot than we were paying.

And it's one of these things that it's going to take us a few quarters to grow into.

But if you combine the $240,000 of rent plus the additional rent from having more space, you know, it's a meaningful number, but going forward we've got to have space.

And we can't have people sitting out in the street doing their business.

So it's in the shifting gears category and we're happy with that new space and what we're doing there.

Right, one other item you mentioned was moving to the new terminal at JFK?

No, we haven't moved to the terminal, we assumed the lease on the new terminal.

The whole lease.

And were there any expenses related to the LiveTV acquisition that were unusual?

No, expenses that are related to acquisitions are capitalized as part of the acquisition, so you'll see them booked as part of the acquisition.

There were indirectly some expenses, and our legal department was so tied up working on LiveTV throughout the quarter that a number of things that would normally have been handled by

, our General Counsel, or Jim

, our Associate General Counsel, we did farm out to some outside law firms.

So we incurred some outside legal bills on non-LiveTV things that we should not see again in the future because they were working round the clock on that transaction and couldn't deal with some of the day to day things that they normally do.

John, do you have a number on that, on how much that might be?

Don't have a number, but I'd say it's couple hundred thousand.

Plus, Jim.

I think I'd go on back to the terminal -- we committed to the whole terminal, and it's something that we need.

The gates at Kennedy, we need them today, and starting on July 1st ...

Yes, we basically had a step function here on the terminal.

We went from one rate, where we paid for a certain number of gates to another rate, which went up by $400,000 a month to get substantially more space and complete control of the terminal.

Right.

But we have been accruing that new rate since July 1, and that - with a fixed cost that went up, and then we will simply continue to layer more flights into the terminal that will spread that fixed cost over more activity in see it as a measure of casuum go down.

OK, alright.

Thanks a lot for the detail.

You are welcome.

We go next to Michael Linenberg of Merrill Lynch.

Alright, yeah, hey David, John.

Good morning.

Good morning.

Just a couple questions.

I guess it is to David.

You know I - I think you scaled back some of your service in Long Beach, you know, the little bit less that what you had originally planned, and I realize that the service schedule that was out there initially was to preserve slots.

Can you talk about maybe a change in the dynamic that has allowed you to reallocate some of those resources for the - another part of your network?

Michael, we mentioned before that we are in a FA sponsored negotiations with American and with Alaska and the city of Long Beach.

And we haven't yet completed that process, so I can't really comment on the outcome of that.

But generally we are pleased with the direction it is going, and had thought that it would be prudent to be able to pull some of those flights and we were able to bring a plane back east and do some additional Florida flying at a time of the year when we need to.

But we are at the point where we can increase those over night if we had to.

If the

negotiation broke down for whatever reason, we could be back up to our 27 flights and American would be basically the odd man out, because they are flying flights that were destined for us, so - that is all I can really say on that.

Its been announced by the FA to not comment more than that on the negotiations.

OK.

Now that is helpful.

I guess secondly, when we look out next year, and I think you are taking 14 aircraft in 2003 - correct me if I am wrong -

That is correct.

When we look at CapEx needs for next year, you know, John, any guidance on lease versus own, and then is there anything that we should see on the CapEx side related to LiveTV?

Let's take the first piece of that.

The lease versus own.

Our target is to try to do sale-leasebacks on all of the aircraft next year.

OK.

And that's fairly tax and lowest cost

driven.

OK.

That is not to say we will accomplish that, because as you might image the market for people wanting to buy aircrafts and lease them to airlines is not the world's best market at the moment.

So we are not going to do stupid deals.

If we can get lease transactions at good rates, we will do them.

If we can't we will do - we will just purchase and do mortgages on aircraft.

We have a

on how many of those 14 -

We have five, as I recall.

Five are already committed.

Already committed out, so - well five for leases, but we are committed - everything out until May, already pre-financed, either through a mortgage or a lease.

There is a little bit of mortgage financing in the first part of the year that is committed.

And then from a LiveTV capital spending perspective, we will see some capital spending measured in the teens of millions that is attributable simple to buying the equipment that will go onboard our own aircraft.

OK.

And then just lastly, this year you added two cities, Vegas and San Juan.

When we look out into '03, is it still the one, two or maybe three city adds for this year?

Yes, Michael, it's one, two, maybe three, but no more than that at this time.

I mean, obviously things could change, but we're very plane constrained on what we have.

You know, you don't fly a 90.5 percent load factor and an 81 percent in October and not have cities that are just crying for new frequencies.

So we're going to focus on beefing up frequencies in existing markets, that's our first priority, and then we'll do some connecting of the dots next year, and maybe add one additional city with -- maybe another red eye city or something like that.

That's what we're planning right now.

Obviously, that could change, but that's kind of what we're thinking.

OK, very nice quarter, thank you.

Thanks.

Thanks.

We go next to William Greene with Morgan Stanley.

Yes, hi guys.

I just have a follow up to Jim's question, and that is, when you think about other operating expense, there are a lot of moving parts here, and I'm just trying to get a sense for a run-rate going forward, as you get rid of some of the LiveTV expense, should we expect this number to come from the third quarter or will some of these items keep it higher?

Well, the LiveTV I don't think had anything to do with the run up in the other category.

We're going to see things shift around within categories, and we call that ...

When we consolidate LiveTV ...

On the geography of the P&Ls, things are going to move.

So yes, we will see it decline as a percent of chasm in the fourth quarter.

That's our forecast at this point, anyway.

OK, and then what debt to capital do you target, or will you be targeting for 2003?

We have -- interesting you should ask, because we're going to visit the rating agencies next week, and we've been working on a multi-year projection and forecast arrangement for them.

As we said on the road show, as we go -- our target is to try to be on a true debt to capital which would take off balance sheet operating leases and capitalize them and treat them as debt.

As debt to total capital, we'd like to be somewhere between 65 and 75, generally speaking over time, and certainly our forecast that we've preapared for the rating agencies indicate that going forward we should have no problem trying to stay within those constraints, but that should put us with a higher, you know, debt to cap than Southwest, but a lower debt to cap than I think any of the other majors.

So I think that's very well positioned for us and should result in both the balance sheet fare and the consistent margins that we've got and we're pretty optimistic about the kind of rating we're going to get.

So now where were you at the end of the third quarter in terms of total adjusted debt to cap?

I haven't calculated that one for the end of the third quarter, sorry.

OK, and you feel comfortable that if you did all these sale and lease backs, you'd feel comfortable that that would be the range you'd be in, it wouldn't require any other kind of capital raising?

You know, whenever you've got a capital intensive company like this that's growing at the rate we're growing, there's always the prospect that you can over-lever yourself, so I would not rule out a follow-on equity offering at some point in the future.

We were asked that a lot at the road show, and we were very blunt that that's what it takes in order to keep the balance sheet from being excessively levered that we're certainly open-minded to the idea, but we'll only do it if we think it's in the long-term best interest to shareholders.

Great.

Well, thank you for your help.

You're welcome.

We go next to Sam Buttrick, UBS Warburg.

Yes.

Good morning, everybody.

I guess I'm not as clear as I'd like to be on what your plans for the LiveTV subsidiary are.

How are you modifying the business plan?

Does it remain an active marketing organization and whatnot?

You're probably not as clear because we're not either, Sam.

You know, we have lots of options.

We can, you know, Frontier - the contract with Frontier has been signed and those installations will go forward and ...

They've already started.

They've already started, actually.

So we're going to do that.

In fact, that, you know, neutral EPS and, you know, slightly accretive going forward is without that bill.

So, we - without a doubt, the situation will only improve and it's not a cap ex to us because they're paying for the installation - the majority of installation on those airplanes.

The, you know, I think we're just going to take it case by case.

I mean, we've had, you know, some contact with some airlines that have contacted us.

We're not, you know, in a big hurry right now because we're just trying to, you know, integrate it.

And then we haven't decided exactly what we're going to do.

I think we're going to take it case by case, but as we mentioned in the conference call before, you know, we're not interested in doing business with airlines that want to create sub-fleets that are going to fly just against JetBlue.

And that was one of the reasons we bought the company.

And, you know, we think that this is a technology that's not readily or easily duplicable and, you know, with the intellectual property and the paths that we have.

And, you know, if - it's very important to us and very important to our brand, very important to our customers.

And so, we're going to take it easy.

We're not going to, you know, do anything that's - that would affect the long-term.

And, again, you know, our guiding principle will be what's best for shareholder value.

And is it small - you know, some money made today affect our brand going forward?

You know, we'll have to make those judgments as it - as those opportunities present themselves.

And secondly, on a separate subject, are you in a position to assess the relative attractiveness of

Airbus pricing versus your own?

And what opportunities, if any, might that create for you?

I think I alluded to that earlier.

We have a very good relationship with Airbus.

Sure.

And, you know, we have an understanding with them.

Nothing in writing, but we have an understanding with them that, you know, we will - they will make, you know, they'll deal those to us as they're made.

And, you know, we've been in contact with them and, you know, basically saying, look, if the bar's been lowered, we'd like to know about it.

If we want to take a little change of strategy here, if we can get some good deals on some airplanes.

So we're in discussions with Airbus and as, like I said, we always will be in the future.

I mean, we're going to - we're going to look at opportunities as they come up.

You know, whenever our name was mentioned in the press release for Easy Jet.

And that was one of the reasons, we feel, that they were able to win that business was because of the success they've had with JetBlue.

And, you know, we're going to take advantage of that - our relationship with JetBlue and the fact that, you know, we're seen in a good light for Airbus.

OK.

Thank you.

Due to time constraints, we take our final question from

,

.

Yes.

I was just wondering, do all these costs that you detailed, were they all coming in the other category, including the rents and terminal lease, which I would have thought would have fallen under the landing fee and rental item?

You're correct that the rent and terminal fees

the landing fee and other rentals piece.

So, it's not correct to say that everything was sitting in other.

Because I'm just surprised, again, that as Bill was saying that the operating expense was so much -- the other category of operating expense was up so much more than revenues.

That was a big surprise, I thought.

Remember too that that other has also got about a four-fold increase in our insurance bill year over year compared to third quarter of last year.

Right, but that was true last quarter too, I assume.

That's correct.

OK.

Well, the terminal six.

And our T-6 expenses, for instance, this is just the expenses of operating T-6.

We're up 1.4 million in the other category above what they were in the second quarter.

And part of that is -- it's a seasonal issue.

This is something that we'll work on working it down, but the -- we've got a chilled water bill for $600,000 for the month of August, which has to do with air conditioning, which obviously goes down in the winter months.

So we're really focused on that and making sure by the time we hit next summer that we focus on conservation and controls to make sure that that doesn't happen again or is significantly mitigated.

It's just one of the things you learn by running your own building, and you know, we're thrilled to have the building, but we've got a few surprises that we're working on.

And that was in the other category.

And what we've also found is that, you know, not to throw stones at anybody, we don't think the building was well-run by the prior operators.

OK, thanks.

That was a big part of that run up in other words was 1.4 million for that.

At this time, I'd like to turn the call back over to Mr. David Neeleman for any additional or closing comments.

Great.

Just in closing, we are -- we are thrilled with this quarter, and we're thrilled that we beat our own internal estimates, and we did that from extremely strong revenues, stronger than what we had thought.

And costs were obviously a little higher than we'd thought.

But we're very heartened by the fact that these costs are not endemic, that they're not

, that they're not -- a lot of the items are controllable cost and I think most importantly, you know, we love the fact that our customers prefer JetBlue.

And they're flying in record numbers, and we're taking bookings in record numbers.

And as a shareholder, which I am, and have not filed to sell any shares of my stock, I think an important thing for me is, what's your franchise?

And do you have a long-term sustainable advantage, and do your customers prefer you?

And those are questions that I feel very good about for our future going forward.

And it shows in our market share number gains, it shows in our average fares.

It shows in the really strong revenue side of the business.

And really, our challenge going forward is to continue to inspire our crew members to continue to give -- delight our customers on a daily basis, which we're very, very focused on.

And then to control our costs.

And we're focused on both of those, almost obsessed with both of those, and we'll continue to be so in the future.

So thanks again and we'll see you at the end of the fourth quarter call.

Thank you.

That concludes today's conference call.

Thank you for your participation.

You may now disconnect.