JetBlue Airways Corp (JBLU) 2003 Q1 法說會逐字稿

Good morning everybody and welcome to JetBlue's first quarter 2003 earnings conference call.

At this time all parties have been placed on a listen-only mode and today's comments will be followed by a question and answer session.

To place yourself in the queue, please press the one followed by four on your touch-tone phone at any time.

We do ask that while posing your questions that you pick up your handset to provide optimum sound quality.

We have on the call today, David Neeleman, JetBlue's CEO and John Owen, the company's CFO.

As a reminder, this call contains statements of a forward-looking nature, which represent management's beliefs and assumptions concerning future events.

Forward-looking statements involve risks, uncertainties and assumptions and are based on information currently available to JetBlue.

Actual results may differ materially from those expressed in the forward-looking statements due to many factors including, without limitation, the war in Iraq and potential hostilities in the Middle East or other regions, the company's ability to implement it's growth strategy and it's dependence on the New York market, the company's fixed obligations and its limited operating history, seasonal fluctuations in the company's operating results, increases in maintenance costs, fuel prices and interest rates, the company's competitive environment, its reliance on sole suppliers and one type of aircraft, government regulation, the company's failure to property Live TV or enforce its patents, the loss of key personnel and potential problems with our workforce including work stoppages, and continuing changes in the airline industry following the September 11th terrorist attacks and the increased risk of future attacks.

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 Annual Report on Form 10-K.

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

At this time, I'd like to turn the call over to David Neeleman for opening remarks.

Sir, the floor is yours.

Thank you, Dante (ph) .

Welcome, everybody, to our first quarter conference call.

And I'll just start out by saying that we're obviously pleased with the first quarter.

It obviously could have been better, be we had a lot of circumstances surrounding the quarter that obviously had a negative effect on our margin on a year-over-year basis; you know, the weak domestic economy, obviously, and the fare environment that we found ourselves in the first quarter, of course, the war in Iraq.

Towards the end of the first quarter, the code orange, you know, actually had some effect earlier in the quarter, as well; and then, of course, the high fuel prices, and I'll address that a little bit in a minute; and the severe weather in New York.

You know, we had -- you can see by our on-time operating performance was impacted by the weather that we had in the Northeast.

We've mentioned this before, but I think it's noting again that on President's Day we cancelled 148 flights.

If you contrast that with last year, we flew 44,000 flights in the year 2002, and we cancelled 57 for the whole year.

So, we cancelled two and a half times as many flights on one day than we did the whole year combined.

So, obviously, it was -- and that was all in the first quarter.

But in this, you know, very difficult environment, we are pleased with what we've done, and I think we give all credit to our crew members that have done, under very difficult circumstances, have been able to continue to provide the JetBlue experience.

And that, obviously, will -- the continuance of that will obviously be very important in the future of JetBlue.

If we can continue to do that then I think -- I think the thing that's heartening for us is that when we set out to build JetBlue, we really wanted to build it for bad times.

And our focus on customer service and our superior product and our just really tenacious focus on cost control, and having that combination of the lowest cost on a CASM -- on a customer-available seat [Inaudible] basis, combined with a better product.

And, you know, you can have -- 9/11 can come, and other terrorist acts and war, and, you know, we continue to make money, and to make money for nine consecutive quarters during this very difficult time in our country, and to also make double-digit operating margins for the last five quarters, is a tremendous accomplishment, of which our crew members deserve the full credit for that and for the way they treat our customers on a daily basis.

As I mentioned, the 15.9 percent operating margin was slightly lower than what we did last year at 17.5.

And I wanted to address that just for a minute.

If you take the average fuel prices we had last first quarter, if we just want to compare apples to apples, our average fuel price was 62 cents compared to 97.61 cents.

For the first quarter of this year we were in a very -- not a very good hedge position for the first quarter.

And so, if you just minus the difference in that and times it by the gallons consumed during the quarter on an apples to apples comparison, that's $13 million.

Obviously, if you put the $13 million into these results and you compare apples to apples we would have far exceeded, obviously, the margin that we had last year.

So, obviously, that's very good news for us.

The other thing, I think, that you have to take into consideration that our average haul over last year is up about 10 percent over what we did in the first quarter of last year.

And our average fare was down about $5.00 or about 4.5 percent.

Now, some of that fare last year was attributable to having Easter Passover in March.

But obviously, the fare environment in the first quarter of this year was much more difficult than it was last year.

And obviously, with 2 million customers who flew us in the first quarter, even a dollar or two or three or four added to, you know, the average fare obviously would have dropped directly to the bottom line as well.

So, if you combine the fuel and the weak fare environment and to be able to obtain a 15.9 percent operating margin, we're pleased with that.

And you know, a lot of it can be attributed to our, you know, never ending focus on cost control.

We've been telling you for quite some time that as we get bigger, our economy to scale will get better.

And, you know -- the other thing, I think, on cost that we have to continue to keep in mind is that we are still a relatively small company.

And there are things from quarter to quarter that we have that will swing that CASM up and down.

If you recall, a couple of quarters ago we talked about our charge backs.

And that caused some spike in our costs and those are now under control -- at least for this quarter.

So there are things that move it up and down, but I think if you look at it the trend is downward and we're pleased with that.

And we think that, you know -- and next, where John will give you later some guidance on next quarter's operating margin guidance and on CASM guidance.

And you know, you'll continue to see little bumps up and down, but we feel that we have the business -- we're focused on cost control and we'll continue to do so in the future.

I wanted to just talk a little bit about growth.

Those of you that are on the call probably read our announcement today that we are ordering some additional aircraft.

Some Airbus A320's and, you know, obviously in that order we have the option of going through either 19's or 21's as well.

But right now they're designated as A320's.

And they're with an additional 50 options.

And these are deliveries that run through 2011.

Now, it would seem to be an odd time to make an aircraft order, considering the condition of the market today.

But, you know, what our experience has been through the industry is that usually airlines order large orders during really good times.

And by time the planes start delivering, the times have become really bad times.

And you tend to pay a little bit more if you order planes during good times.

And so ...

times have become really bad times and you tend to pay a little bit more if you - if you order planes during good times.

And so, you know, we have a tremendous amount of faith in our business and in our economy and our - and really our customer's desire to keep flying during very difficult times.

And so, we're really planning for the long term.

Now, while we can't obviously comment on the price that we paid for these airplanes because we're prohibited by our contract - it's very confidential - if you added all the options that we have together with the - with the already delivered airplanes and with the planes that we have firm - unfirm (ph) , that total is at 202 total of Airbus A320s or options for the others.

Now, to my knowledge, I think that that would, assuming that there were no additional growth in any of those (ph) fleets, would give us the largest fleet of, you know, Airbus A320s in the world.

And I think you can rest assured that the pricing would be commensurate with that position.

And so, that's really all we're going to say about pricing, but we have - obviously it's something that we've - that we deserve to have a good price, and Airbus was cooperative.

So, that's all we're going to mention about pricing.

There's a lot of conjecture on what, you know, easyJet paid and what they didn't pay, and a lot of it is conjecture.

But, you know, we feel real good about our deal with Airbus.

We will continue to add frequency in markets where we continue to fly.

You know obviously we had a load factor tick-up over last first quarter even though the fares were lower [Inaudible] slightly.

And we do need additional frequencies.

We've added a seventh flight JFK - Long Beach.

JFK - Oakland - with the exit of American, we've gone up to six flights that will kick in over the next month or two.

In the JFK - Oakland market, we've added additional frequencies to Dulles - Long Beach. [Inaudible] another flight to JFK - Buffalo for the - for the summer months.

And then JFK to San Juan, we'll add a couple flights over the summertime.

That's a very peak time for that market, and we've very pleased with that market.

It's one of our most profitable markets, and we're very happy with that.

We will continue to, like I said, add frequency, connect the dots, and selectively add cities when we feel like they're necessary.

We've added two cities so far this year with San Diego we're very pleased with that market.

New Yorkers like to go to San Diego a lot, and people in San Diego love to come to New York.

And we found that there were a lot of people that were flying on our Long Beach flights who were actually coming up from San Diego.

So, it was - it was pretty easy to see that as an attractive option.

Also, Atlanta starts, you know, in a week or two, and so we're looking forward to that market, as well.

And we will probably have an additional city between now and the end of the year.

I haven't made a final determination on that, but we probably will add one more city, which is a total of three cities, which is probably more - one more than - one or two more than we had thought at the beginning of the year, but there are - there are plenty of opportunities for JetBlue.

We have a long list of markets that we would like to serve, and because of changes in the market, sometimes we can't get to our list maybe as quickly as we would have hoped, but we are getting to some of those markets and we're looking forward to them.

I guess just a closing comment about Song.

I'm obviously sick of talking about Song, but it's a question that continues to come up and people want to hear about it and people want to know if there's been any effect or, you know, really what our feelings are.

First of all, we need to keep in mind that Song or that Delta main line already had 757s in our market prior to Song and that started that in the first quarter.

And so we've been with them for obviously for a couple months.

And our results in the first quarter reflect that, you know, we were able to obviously take that additional capacity.

And now you have, you know, a few more seats with all coach cabin and, you know, we put a lot of growth into Florida.

We've had to put a lot of flights there, and a lot of planes and that's part of the reason we haven't been able to get to the cities down our list and the additional flights.

And so we're still evaluating exactly, you know, where we'll go next winter.

Whether we will grow where we were from this year.

We're very confident that we'll be at least at this level and if we do anything we'll probably go higher.

But, you know, we could hold at this level.

It's a lot of flights.

We peaked at 42 flights a day from JFK to Florida, and that's a lot of service in that market.

And so whether we go North of that or we stay at that level, you know, we'll make that determination as we go forward.

But we'll do what's obviously most profitable for our shareholders.

And so we'll make those decisions.

I think we're good at doing that.

And so as far as Song goes, and they've made a lot of promises.

You know, I think in our business we try and under promise and over deliver and I think maybe they've really gone out of their way to make a lot of promises and now they have to live up to it and we'll see if they can do it.

And if they do, you know, obviously there's a lot of business for all of us that provide the kind of service that JetBlue's providing on a day to day basis.

You know, obviously, one of their big selling points is their in-flight entertainment and, you know, it's not on board today and, you know, we'll with the timing in which that comes on.

Whether the non-live stuff comes on first and then add the live stuff later or they add all of it at once.

You know, those are questions that are yet to be answered and we'll see how that develops.

But we're not, obviously, over concerned.

We, you know, we would have taken the philosophy with our crew members that competition makes you better and it makes you more focused and it makes you want to please your customers more.

And, you know, we are - our crew members are very well aware that there is somebody out there that wants to try and take business from us, and I think you'll see that JetBlue will respond in the fashion that we have for the last few years and do very well.

And we will continue to do well.

So, with that, I will turn the comment - turn the time over to John Owen, our CFO, to kind of go more detain on the financial information and then I'll - we'll take questions and then I'll follow up with some closing remarks.

Thank you David.

Good morning everyone.

As David said, we're very proud of the results that we posted this morning.

Even though they are below our own internal expectations in light of the operating environment that we've been in this quarter, it's hard not to be satisfied with the results.

Operating revenues as indicated in the release, increased 63 percent, 217 million on an 82 percent increase in revenue passenger miles.

Capacity was up 81 percent in ASM's to 2.9 billion.

That was the result of having 16.5 additional aircraft in service in first quarter of '03 compared to first quarter of '02.

We had a slight improvement in load factor of six tenths of one percent to 81.4, and had a 70 percent increase in revenue passengers carried.

Excuse me.

Yield was 884, that's down 11 percent year over year.

Rassum (ph) was at 742, down 10 percent year over year.

And both of those obviously on a 6.9 percent increase in length of haul.

Revenue performance for the first quarter was certainly impacted by several factors.

As David said, we had a very lousy winter weather situation in the Northeast.

The President's Day snow storm was the worst of it, but we had quite a few snow events, and it was a very difficult winter.

As David had previously said, we thought the President's Day snow storm alone cost us between two and a half million dollars in lost passenger revenue.

There was also the reduced travel demand related to going to code orange twice during the course of the quarter; the second one, obviously, coincident with the war outbreak.

And finally, in a year-over-year comparison perspective, since we have so much New York to Florida traffic that is very strong at Easter and Passover, we did not have the Easter/Passover traffic in the first quarter this year, as we did in the first quarter of last year.

During the quarter, we took delivery of four new aircraft; three from Airbus that were financed with sale lease-back transactions, and one was an operating lease that came to us directly from ILFC.

We finished the quarter with 41 aircraft; 21 owned and 20 leased, with an average fleet age of 16.8 months.

On the cost side, operating expenses were up 66 percent, CASM was 6.25, which was an 8.2 percent decrease, year-over-year, and a 1.1 percent decrease from the fourth quarter of 2002.

We achieved that, despite the dramatically higher fuel prices in the quarter that David alluded to, on a year-over-year basis, 97 cents versus 62 cents.

The improvements that we had in CASM were attributable, one, to a 10.7 percent increase in average stage (ph) length.

Obviously, we increased capacity, and the capacity increase outpaced headcount, so some efficiency improvements there, some seasonal savings on advertising.

And, as David alluded to earlier, charge-backs are well under control, and have benefited us on the CASM side there.

On the expense line, salaries, wages and benefits were up 70 percent year-over-year; average full-time equivalent employees up 63 and a half percent; and we had, obviously, some wage-creep and an increase in profit-sharing.

That increase in the profit-sharing provision is always one of those things we like to see, even though it negatively affects CASM when we do it.

Aircraft fuel expense was up 177 percent year-over-year, and you can basically break that down to 9.9 million in additional fuel expense due to increased gallons consumed, and another 13 million increased fuel expense attributable to the higher price of fuel this year versus last year.

Sales and marketing expenses increased 16 percent over last year, and on a unit cost basis, that number dropped 36.1 percent.

The primary reasons for that were some seasonally lower advertising expense, and, of course, in the first quarter of last year we were still paying travel agency commissions, which we weren't doing in the first quarter of this year.

Bookings on JetBlue.com were 71 percent of total bookings through the quarter, and that's up from 55.1 percent in the same quarter last year.

These numbers, we believe, are still the highest percentage, by far, in the U.S. airline industry, and we continue to promote usage of JetBlue.com with a five-dollar discount each direction on flights booked on line, and with double trueBlue points for bookings made on line.

And speaking of trueBlue, our Flight Gratitude Program -- it continues to grow nicely.

We've had 625,000 people sign up now as members since we rolled the program out last June.

And 86 percent of those members' bookings are online.

So, we're very pleased with the way trueBlue is working to enhance our online percentage.

Other operating expenses increased only 28.4 percent.

There's some higher costs associated with increased capacity.

The number of passengers served and some interrupted trip expense related to the lousy weather during the quarter that went into that.

But the principle reason that other operating expenses only increased 28.4 percent, as we've noted before, since we bought Live TV and consolidated their financials into our financials before we bought Live TV the monthly service fees that we paid to Live TV were booked under other expenses.

Now those washout in consolidation and you see our Live TV related expenses showing up in salaries, wages and benefits as part of the Live TV staff.

And it increases in the depreciation and amortization related to the hard assets and the purchased technology that we got from Live TV.

Interest expense increased almost 48 percent year over year due to added debt financing of nine aircraft.

Partially offset by lower interest rates.

In the other income line, we have losses on hedging activities of $200,000.00 related to certain hedges that did not qualify under FAS 133 as well as some measure of hedge in effectiveness for hedges that did quality under 133.

And additionally, in the prior year quarter -- first quarter of 2002 -- there were $1.3 million worth of unrealized hedge gains reported in that quarter.

JetBlue generated positive cash flow from operations for the quarter of 31.7 million.

And we ended the first quarter with cash and short-term investments of 253.9 million.

Taking a look at the operating performance for the quarter -- as we said earlier, the operation was significantly impacted by severe weather experienced during the quarter.

And while our results were good, they were not what we would have liked to have seen.

It's almost 100 percent attributable to the weather here.

Completion factor was down at 98.8.

For the industry as a whole, that's a good number.

For us that's not a number that we're terribly thrilled about.

And certainly with the weather behind us, our performance numbers have bounced back up to their traditional levels.

On time performance for the quarter was only 76.6 percent.

And mishandled bags were 3.74 per 1,000.

And utilization was 13.1 hours a day.

I will point out an interesting thing about the performance number is that when you have bad weather and schedules get messed up, you tended to see all three performance metrics go south together.

And then when things improve, they'll all three improve together.

And that's certainly what we're seeing right now in the month of April.

From an ASM distribution perspective for the quarter, we had three percent of our ASM's in short haul Northeast.

Forty-five percent of our ASM's in Northeast going South.

Forty-eight percent of ASM's going East/West.

And four percent of our ASM's in short-haul on the West Coast.

Turning to guidance for second quarter and full year.

At this point, April seems to be shaping up very well on a revenue perspective.

The holiday periods, in particular, field good performance.

May is a much tougher month to call.

It is traditionally a very close-in booking month, and as a result, we just don't have that much forward visibility on May to be able to state how things are going there.

We expect ASMs to be up about 65 to 70 percent in the second quarter, compared to the same quarter last year.

And that's assuming the aircraft deliveries that I'll pass along to you in just a moment.

And for the full year 2003, we expect capacity growth, as we said earlier, to be roughly 55 to 60 percent over full year 2002.

Average [Inaudible] length projected at 1,250 miles in the second quarter and about the same for the full year 2003.

We expect CASM for the second quarter and for the full year to remain roughly flat to slightly down compared to this quarter.

That's based on an assumed net of hedging gain fuel price of 76 cents from May onward and our best guess for current fuel prices in the month of April.

Operating margin, again, at the assumed fuel prices that I just described, we're expecting a margin for second quarter to be between 14 and 16 percent and for the full year to be between 15 and 17 percent.

Utilization we still expect to be around 13 hours plus or minus a tenth or so of an hour.

During the quarter, we added significantly to our hedge position, and that was part of a strategic decision to begin locking in fuel prices rather than just buying upside protection.

So, we have started to do some swaps, and we have also started to try to go further out.

At this point, we are approximately 75 percent hedged for the second quarter of this year, 83 percent hedged in the third quarter, and 78 percent hedged in the fourth quarter based on estimated fuel burns.

We've done that now through a combination of swaps and collars.

The tops of the collars are around $28 in Q2, and swaps, which represent 31 percent of our total hedge volume for the second quarter, are at $31 a barrel.

All of these are in crude, but the way.

Collars for the second half of the year are in the vicinity of $26 for the top on the collar and the swaps represent roughly 50 percent of our hedge volume in the second half, and they're at 29.50 (ph) .

In 2004, we're 44 percent hedged in the first quarter, 23 percent hedged in the second quarter, and 21 percent hedged for the second half of '04.

Reflecting today's announcement with Airbus, we now have firm purchase orders for 111 A320s, options to acquire an additional 50.

Delivery schedule for all of the years out through 2011 is pretty evenly spaced throughout each year.

For the balance of 2003 delivery schedule, we have none this month in April, one in May, two in June.

Then we have one each month July through October, we have two deliveries in November, and now three deliveries in December.

One of those December deliveries was a January of 2004 delivery that we and Airbus have agreed to slide forward into December.

We have financing committed for two additional aircraft delivering through June - both are sale leaseback transactions.

We are very close to having term sheets signed to wrap up financing for all the remaining aircraft for this year and probably a few going into first quarter of next year.

We would anticipate that the banks involved will be done with credit committee approvals next week and that we'd have most of those term sheets signed up in the first week of May, barring any unforeseen circumstances.

Today's announcement with Airbus does provide us with firm orders for 14 aircraft now in 2004, 16 aircraft in 2005 and generally in the vicinity of 16 aircraft per year going forward after that.

Committed expenditures for those aircraft and related spare engines that go with it, because when we extended this with Airbus and signed with IAE, we did commit to the purchase of about 10 additional spare engines over the course of that time period.

Including estimates for amounts for contractual price escalations and delivered deposits, we're looking at about $480 million for the remainder of 2003.

As we previously said, all of our debt and cash investments are on floating interest rates.

Average debt rate at the end of the first quarter was 3.26 percent.

Average investment return was 1.3 percent.

For estimated shares outstanding for Q2 and for full year, based on the following assumptions; no additional share assumed outstanding from options exercises, 11.5 million options outstanding at a $15.85 average strike price and assume 20 percent market price appreciate in JetBlue's stock rate throughout the year.

Taking all those in, our estimate is that we're roughly 69.1 million weighted average shares outstanding for second quarter, and 69.3 weighted average shares outstanding for the full year.

With that, I think we're ready to answer any questions that you may have.

So, Dante (ph) , could you please start taking questions?

Thank you very much sir.

Again, ladies and gentlemen, if you do have a question or a comment at this time, please press one followed by four on your touch-tone phone.

Questions will be taken in the order they are received, and we do ask that while posing your question that you pick up your handset to provide optimum sound quality.

Our first question is coming from Michael Linenberg.

Sir, please state your affiliation and proceed with your question.

Hi.

I'm Mike Linenberg with Merrill Lynch.

Hey guys, great quarter, by the way.

Thanks Mike.

Your welcome.

Two questions here.

I guess this is a question to David.

You know, there has been some speculation over the past couple of months, you know, about JetBlue possibly looking outside, you know, lets call it the A320, the A319, 21 range.

I'm just curious, you know, are there markets that you serve where maybe you could use a smaller plane, or a larger plane?

And if JetBlue were do go down this path and pursue a slightly different aircraft, you know, is that a deviation from the strategy that you guys have in place today?

Well, Mike, this question's come quite a bit lately and I think our answer, you know, has been the same.

Is that, you know, we - the thing that's different about JetBlue than Southwest is that we - there's a lot of conventional wisdom, quote unquote, in this business.

You know, it was conventional wisdom that you couldn't fly Airbus aircraft in a low fare operation and make money.

It was conventional wisdom that JFK didn't make any sense for domestic operation.

It was conventional wisdom that Long Beach was an airline graveyard.

And I could just go on and on that conventional wisdom, that you're stupid to put TV's in airplanes and leather seats don't - I mean, we could just spend all day talking about that.

So I think what we try to do here, you know, is we try and kind of put all that aside and look at facts and data.

And we just want to look at really, you know, what is the best thing?

And one of the conventional wisdoms is obviously that the only way to really make money in this business over the long term is to have one single aircraft type.

And, you know, in actuality, Southwest has three different aircraft types.

You know, they're all 737s, but the maintenance is different.

And so, you know, it would be incumbent on us and for our shareholders to continue to look at these issues, and to look to see, you know, really what is in the marketplace, you know, what are the costs, and how profitable are they?

And, you know, you'll never see, you know, JetBlue, obviously, with 11 different aircraft types.

But, you know, I don't think that if we were -- let me just emphasize we haven't made any decisions on anything.

We always are looking and we just want to be forthright with you -- that if we were to add, you know, and aircraft, it wouldn't be a deviation, it would just -- our plan at JetBlue is to make money and to continue to return shareholder value.

And, you know, there are obviously pitfalls with adding a different aircraft type, and, you know, if we choose to do that -- which we haven't made any decisions -- then it will be in the best interests of our shareholders.

And so, just know that we have really smart management team here -- not me, but others -- that spend a lot of time looking at a lot of things that can increase shareholder value.

OK.

My second question -- looking at your utilization number, I mean it was a nice improvement, going from 12.7 hours to 13.1, and yet, as you pointed out, you had a lot of cancellations in this quarter.

Was that a function of economies of scale, increasing stage (ph) length?

Or, does that number reflect, you know, just utilization of aircraft that were in service?

I'm trying to get ...

Well, I think, we have, Mike, as I mentioned before, you have ebbs and flows.

And obviously, if you get three planes in one month, it's tough to get them all kind of in service, and the right TB (ph) in them and all that kind of stuff.

So, I think what you'll see is there'll be certain quarters where we go over 13 and certain quarters that we're a little bit below 13, and you'll just see that fluctuation.

But, you know, 13 is our goal, and that's kind of what we focus on.

And, you know, there'll be -- and I think the fact that our average stage (ph) length increased, obviously didn't hurt matters any.

But, you know, you will see fluctuations there as we add planes to the fleet.

OK.

Very good.

Thank you very much.

OK.

Thank you.

Thank you.

Our next question is coming from Jim Parker.

Sir, please state your affiliation and proceed with your question.

Good morning, John and David.

Jim Parker with Raymond James.

And regarding this new aircraft order, what would the -- if you include the options by year for the next few years, what the total aircraft deliveries look like by year?

OK, Jim -- little Jim, we should say.

That's right.

If you took firm only, you'd be looking at 14 in '04, 16 in '05, 15 in each of '06 and '07, 13 in '08, 10 in each of '09 and 2010, and six in 2011.

Then for options, there are two in each of 2006 and seven, four in 2008, eight in each of 2009 and 10, and 13 options in each of 2011 and 2012.

I hope that answers your question.

Right.

Now, is there -- you're adding currently, it appears like, 15 aircraft per year.

Assuming business -- you continue to do as well as you're doing, is it reasonable to put these options in with the firm orders in just kind of looking out at what we think longer-term capacity growth might be?

I think you'd have to draw your own conclusions on whether or not we'll exercise options.

But in the three-year history of this company, we haven't had an option yet that we haven't exercised.

Right.

OK.

And just, John, do you have a specific percentage on these credit card charge backs since they were pretty high in the third quarter of last year and you've brought them down?

Do you have a recent number for the first quarter?

We were looking at something on the order of eight-tenths of a percent in charge backs last third quarter when we had the problem and first quarter's number was about .5.

Right.

And the trend -- at the moment the trend appears to be going back down.

Right.

And further.

What we don't know is how much of that is related to seasonality factors.

See, people who commit fraud tend to try to book immediately prior to a flight so we can't catch them.

And the more you're sold out well in advance -- whether it's Christmas or Easter Passover or Spring Break or things like that -- the harder it is for them to defraud you, because they don't like to book way in advance where you can catch them.

Right.

So, we'll need to wait and watch a little bit to ensure that the trend that we're seeing that's downward continues.

And that it is not a seasonality issue.

Right.

Which means that, you know, we have a lot of day bookings, you know, the day of bookings for fraud, which kind of is a -- it's more of a GAAP issue because obviously we shouldn't even recognize the revenue.

But we're required to recognize revenue and then required to do the expense and then you can hammer us and say, why are your costs going up?

So, you know, it's like a non-event, really.

Because you've got a seat, so they took it.

We're catching them.

We're getting a lot better at what we're doing.

Right.

Well, guys, certainly a great showing for any environment, particularly this very difficult environment.

The numbers that you guys are reporting.

Thanks, Jim.

Thank you.

Thank you.

Our next question is coming from William Greene.

Sir, please state your affiliation and proceed with your question.

Yes, good morning.

Hey, it's Bill Greene with Morgan Stanley.

Hey, Bill.

Hey.

Guys, I have a question about salary, wages and benefits.

If we look at your employees per aircraft -- so if we think about sort of productivity measures here.

At 103 in place per aircraft, was there anything in the first quarter that caused that number to be abnormally low?

Or is that the kind of productivity improvement we might expect this year?

Well, first let me talk through the FTEs, because obviously you're doing a calculation based on that.

We have refined the calculation for FTEs.

And with this quarter we have started using a different formulation for calculating it.

So, the time series sequence going backwards won't necessarily be one where you can make direct comparisons.

We think we've got a better number this time, but it actually did bring the FTE number down from what the prior formulation would have said.

Do you have an estimation of how much it changed it?

It was less than 10 percent.

It was a single digit percentage that it decreased it.

But I don't have that number handy.

OK, so this run rate in terms of the FTE measure that's about -- in terms of employees per aircraft or however you want to measure it -- it's kind what we should expect then as you make this change?

I'm not entirely certain of that.

Part of the reason we were as low as we were in the first quarter is that a number of departments had budgeted a lot of headcount for the quarter and didn't actually get it all hired by the time the quarter closed.

We had, for instance, a very large class of people starting orientation on March 31st and another large class start on April 7th.

So, I think the first quarter actually will prove to be a little bit on the low side compared to where we expected it to be.

And I think back to my comment, Bill, of ebbs and flows.

You know, I think between - you know, a pilot flight attendance class we had and a customer service class we had, you know, we had, you know, 250 people starting over a period of two days.

So those people will be trained and integrated and the planes will come on, and so you'll see kind of batches of people and you'll see kind of fluctuations.

Until we get bigger, it's really hard to tell trends.

I mean you can, I think you plot it along the way and hopefully, we will trend down over time, but just because you see something spike up in a quarter, you can't say, "Oh, no.

They've lost control now."

It just has to do with spikes in growth as we get bunches of airplanes.

And - you know, and I think our Operations team - you know, our President and Chief Operating Officer, Dave Barger, has been, you know, very good to make sure that we have people to fly airplanes when they - when they get here.

And you know, in the past we've probably erred on the side of having more people.

And we have, you know, several pilots that were called away from us - almost 30 - that were called away during the war.

So we put on some extra pilot classes, which is not a bad thing to be - to be well covered.

But it does create a little bit of, you know, inefficiency but, you know, we run a better operation because of it.

And that will become smaller percentage of the pie as we get bigger.

So, you know, we are, you know, very cautious in making sure we have enough people to [Inaudible] and run the airline because, you know, we don't want to ever cancel a flight because we don't have people to fly it.

Right.

OK.

And then, John, in terms of other operating expenses, when you net out Live TV, how much does that reduce each quarter by?

Bill, I don't have that number handy.

OK.

All right.

We'll follow up then later.

Thanks.

Sure.

Thank you.

Our next question is coming from Gary Chase.

Sir, please state your affiliation and proceed with your question.

Yes, Gary Chase with Lehman Brothers.

Morning, guys.

Congratulations on a great quarter.

Just a couple quick questions to follow up a little big on what Bill was after there.

On the other operating expenses, John, I mean you noted the year-over-year variances with Live TV.

You also noted some, you know, seasonably lower advertising expenses.

But I mean if you look sequentially from the fourth to the first quarter, you know, you went down despite a much higher or a significantly higher activity levels.

I mean is this the kind of expense leverage that we can expect going forward or were some of these things that, you know, David's been talking about that hit either in the fourth quarter or before that?

We had a significant drop from fourth quarter to first quarter in the charge-backs, as an example.

That drop was 900,000 all by itself, as an example.

So, there were a few items that did come into play there.

I think it was a little bit of both.

You know, I think you'll see swings from quarter to quarter, plus that we're, you know, making progress [Inaudible] the economy.

So I think you'll, you know - it's not - it's not all one or the other, but it's kind of somewhere in between.

OK.

I mean I guess you know a similar question on selling and marketing.

If you look sequentially, there wasn't much change despite the much higher revenues.

Was there something lumpy, you know, in the fourth quarter or and should we expect this kind of leverage going forward?

It's - wasn't much change.

We tend not to do a tremendous amount of advertising in the first quarter.

Yes?

[Inaudible] it's a very peak time for us. [Inaudible] before it, it's not like we need to be advertising tremendously there.

So you do see seasonality in the way we go about our ad spend.

We spend it when we think we need to spend it to stimulate traffic or to introduce new markets.

OK.

That said, you know, we talked about the payments going up over time.

Delta marketing is one of those areas that we've given as an example that we will get better economies as we go forward.

As we mature in markets, we will spend less per ASM on an annual basis.

Now, there may be fluctuations quarter to quarter like John mentioned, based on seasonality.

But that's when [Inaudible] .

OK.

David, can I just ask you one question?

Just been trying to get our arms better around the revenue equation.

I mean, is there a way to think about - one of the things I think you noted in the last call was there were certain markets where you were getting, you know, fares relative to your competition, at least, that were better than what you would have hoped.

And I kind of took away from that that you thought there was more demand for your product than there was your product.

And you thought that was something you wanted to address.

Can you help us think about, you know, how many of those opportunities exist in your current network?

And I guess what I'm trying to get my arms around is, is there some level of revenue dilution that you would inflict upon yourself just because you're meeting that objective of satisfying the demand that's out there?

I think that you can see some of that, but I think the flip side is that when you have a frequency advantage then you get, in a lot of cases, you get a disproportionate amount of the business.

A disproportionate amount.

And when you get a disproportionate amount then you can get a little higher fare.

But I think there are two ways to look at it.

Obviously we peaked this first quarter with 16 flights from JFK to Ft. Lauderdale.

And, you know, you could definitely argue that on some of those flights on Tuesday and Wednesday, that had we had less flights we would have had either a higher fare or a higher average load factor.

But, you know, you have to balance that against lower costs of being able to fly, you know, to have better efficiencies by flying those markets and just the overall kind of market power of being able to satisfy your customers so that they think well of you and want to come back and fly you again.

You have to look kind of at the big picture.

So, again, you know, it can go both ways.

And, you know, what we're seeing, for example, you know, in our Long Beach, JFK operation where we have six flights and going to a seventh flight.

We're trying something kind of new in the summer.

We're adding what I guess you can characterize the big guy, which is a conjunctivitis issue.

It's a flight that leaves Long Beach at 5:30 in the evening and arrives in New York just before 2:00 a.m.

So that's something that I think people would find attractive, not having to fly the red eye home.

They could actually get home and still do a full day in LA.

And we're finding as we look at our fares compared to American's in that market, where we have seven flights a day or we will have seven flights a day to their three.

That we, you know, we're getting higher average fares and, you know, we're selling it for more and our planes are full, you know.

And they're in the 80s.

And, you know, I think, you know, we just do a better job of, you know, managing it and our people are more loyal, I think, our customers.

And we have more frequency.

We're the airline of choice.

Thanks a lot you guys.

Thank you.

Our next question is coming from Ray Neidl.

Sir, please state your affiliation and proceed with your question.

Yes.

Ray Neidl with Blaylock & Partners.

Good morning.

Good morning Ray.

Good morning.

Just a couple of quick things here.

I know you - I know with the yields in Rassem (ph) down, it's attributable to weak on the street pricing environment, Easter being a different quarter and the increase in length of haul.

And I guess in the future your average length of haul's going to go up so we'll still have that pressure in that area.

But are you seeing any increased competition that might be driving down yields as you enter some of these new markets and are you effecting some erosion of yield as you do enter into some new routes and have to discount to get passengers attention?

Well, that's kind of our mantra.

I mean we'll always [Inaudible] traffic.

I mean, our preference is to always have higher load factors and lower fares.

And we'll, you know, basically take the fares as low as we need to obtain our desired load factor, because we think it just maximizes the number of people that can, you know, have the JetBlue experience.

You know, I think, you know, overall it's a very weak environment.

And we're seeing, obviously, a lot of very low fares out there.

And I think it's -- that's one of the reason we've that, you know, we've built a better company; so that we could be preferred.

And if, you know, 10 or $20 is gonna make a difference, then people will select us.

You know, the Atlanta to Long Beach market -- obviously, Delta has been very aggressive in that market, and they've added a significant amount of service.

And, you know, it's a small percentage of our total ASMs, but that's when we've kind of -- obviously, we're looking at, and we start in a couple of weeks.

Load factors are, you know, about where we thought they would be, but, you know, obviously the yields are, you know, very aggressive.

But that's, you know, like I said, it's not gonna have a huge effect on a company-wide basis.

But I think that's the other thing that we do well, is that we have lots of franchises in this company.

As we get bigger, you know, we have the San Juan franchise, we have the Jetgate Open (ph) franchise, we have the New York to Florida franchise, we have the, you know, New York to Southern California and Long Beach is a great franchise for us.

So, you know, if you have skirmishes in different areas, you have other parts of the company to sustain it, particularly with our ability to move capacity around for seasonality, which we do very well.

We do that more aggressive, I think, than just about anybody.

We'll go back to 10 flights a day to Fort Lauderdale, you know, this summer, and then we'll be back up to, you know, 16 next winter.

So, you know, we can move things around and that helps even out our profit margin over the year basis, because we're very good at adjusting that.

OK.

And your sales and marketing are up only 16 percent.

I know you said in the first quarter that's your strongest quarter, and you don't do a lot of advertising, and you're saving certain marketing areas.

But that still does seem like it's awfully small.

Are we gonna see that percentage much higher in coming quarters as you grow?

Are you doing enough advertising as you go into these new routes?

Yeah, you know, we are.

And we will do what it takes.

And that's the other thing I think that we do well.

Our marketing department is just fabulous on being able to say, "We need it.

We don't need it."

You know, if we don't need it, we pull it back and we don't spend it.

But if we do, obviously, if the dollar spend in marketing brings you, you know, two or three dollars in revenue, then you'd be much better off selling -- spending the marketing than not spending it.

So, you know, we don't sit and agonize over what we're spending.

We agonize over what our loads are and then we use marketing to help drive that.

So, you'll see it definitely go up in the second quarter with a launching of these new markets.

But, you know, we've taken that into consideration in the guidance that we've given you.

And Ray, I would remind you that a year ago that sales and marketing line included travel agency commissions, and this year it did not.

OK.

Great.

Yeah, that's a good point.

Now, David, I know you've been asked this question a million times, and you're probably sick of hearing it, but I keep getting asked this question, also, so I figured I'd ask it to you one more time, to answer your critics.

A lot of people say the reason why you're so competitive is you've got free maintenance for three years from Airbuses, and any airline can make money if they had a maintenance holiday.

And with all the new aircraft that are coming on, it looks like you're gonna have a maintenance holiday for quite a few years going forward.

But, what would be your answer to that?

Well, I'm surprised you didn't mention that we get our planes for free, too.

I think your people that talk to you are a little more sophisticated than that.

We hear the free plane thing as much as we hear the free maintenance thing and obviously we pay for our airplanes, but we've addressed that in many different ways and many different times and it is really quite easy for us to look at it into the future and schedule engine overhauls and major airframe overhauls and component overhauls based on what we believe those costs will be and we have done that through 2007, 2008, and we see, and then we catch that against where Southwest is today, and concerned that we have bigger airplanes that generate more ASMs as they fly.

We're looking at three-tenths of a cent of increase in our total CASM as we look out over this period of time and when we get to that end of that period of time, and we think that there are things in our operation that we can offset that with, not totally, but largely, sales and marketing being one and just being bigger and kind of growing (ph) away from Kennedy, this is a very, very expensive airport, kind of adjusted for Kennedy, we have some of the highest, the landing fees in the New York area are the highest in the nation and some of the costs that you see in the first quarter's better utilizing our terminal.

We had to take over the whole terminal and as we had more flights in Kennedy, you'll see our costs improve there, so there's several areas that we get good economies, but the maintenance, we have not been shy by saying that the costs that you see from mainstay (ph) is at the all time low and it will never be lower, it will only go up, but we think that it's a manageable increase over a long period of time with the new airplanes we have coming on, and that we'll be able to offset it with some other things and, we're in a really bad, I think we did a calculation for last quarter, but we took in account fully matured maintenance costs over what we would have in say, 5 years from now, laid it on last quarter and we still had double-digit operating margins, so I think, which was obviously higher than Southwest or anybody else so, kind of tell on that I guess.

Ok.

And the last thing is, executive compensation, the government was talking about putting some restrictions for smaller companies like you, you're more performance incentive based.

Do you see any problems in this area going forward?

Actually, all the small airlines were exempted from that.

Were they really?

Yes.

Ok.

So no problems at Jet Blue then, as far as ...

I think what it included was the top 5, or the top most highly compensated and my salary and Dave Barger, our President's salary has not changed for 4 years, so we haven't -- I don't have any stock options and so, it wouldn't have any effect on us anyways.

Ok, great.

Thank you.

Thanks.

Thank you.

Our next question is coming from David Strine.

Sir, please state your affiliation and pursue with your question.

Good morning, Bear Stearns.

Two questions, one, could you just restate the '04 fuel hedge positions and second, circling back to I think a question that was asked earlier relating to the calculation of FTEs (ph) and it's relationship to either number of aircraft you have or capacity.

What is a reasonable expectation or relationship for capacity growth and head count growth for the next couple of years, given that change in calculation?

I think just to address the FTE (ph) thing.

If we keep adding frequency in existing markets, and if we keep flying between existing markets.

That is what - what we - our airport staff, our customer service agents and our, you know, ground ops folks - you know, that's a big factor on exactly what our FTEs (ph) are.

And - but, it fluctuates, and, you know, we like to be somewhere around 100.

I mean kind of hold there, abut like I said, if it pops up to 109 or 112 during a given quarter, it just means that we're shifting gears a little bit.

And - but, we're - you know, we're really now focusing more on crew member productivity metrics, monthly reports we're putting together, you know, how many hours are, you know, pilots flying on average per month and how many hours are flight attendants flying and how many, you know, what's our number of customers handled per crew member on - at the airports.

And so we're - I think we can refine that a lot more, and we will as we go forward.

We've just really been in a high-growth mode.

And when you're in a high growth mode, you know, you have to have more people to make sure you can handle it.

And we err on the side of making sure that we do that, and we will continue to do that.

But as it becomes, like I said, a small percentage, we can't really tell you, but, you know, we'd like to be somewhere around, you know, between 100 and 110.

You know, we obviously if we were at 90 like Southwest, that would be good, too.

But, you know, we fly our planes more hours in a day.

And those - that difference between 11 and 13, you don't have - it's not on autopilot.

There are actually people in those airplanes that have to fly them and be there.

And so we're always going to have more than them as long as we have higher aircraft utilization.

And as far as the swap position goes or the hedge position in '04, we're 44 percent hedged in Q1, 23 percent hedged in Q2, and 21 percent hedged in the second half.

In the first quarter, we've got some collars at around 25.75 (ph) , but the bulk of our hedge volume - that'd be 57 percent in the first quarter is in the form of swaps and those swaps were to lock in crude at 24.75 (ph) .

And the remainder of the hedges in '04 further out in second, third, and fourth quarter are also all swaps at 24.75 (ph) .

Great.

Thanks a lot.

OK.

Thank you.

Our next question is coming from Brian Harris.

Sir, please state your affiliation and proceed with your question.

OK.

It's Brian Harris from Smith Barney. [Inaudible] if you could comment on your yield premium that you're experiencing on, you know, say north - south flights versus east - west flights.

Is there - you know, what I'm trying to get at, are there - is there a kind of a quintessential JetBlue market where you extract the greatest yield premium versus your competition?

Well, Brian, it's a little more difficult to tell than it was last quarter simply because for whatever reason I guess the DOT is switching over to a computer - new computer system or something.

And we haven't been able to get anything - any new information for you from what we gave you last time.

All we have is second quarter of last year, and we're hoping that the third quarter will come any day and the fourth quarter will be right behind it and then we can adjust it more intelligently or you can go look at it for yourself.

But it's - what we have today is so old.

You know, we know what we're doing, but we obviously don't know what anyone else is doing.

All we know is that the fares out there - that they're laying out there, you know, are kind of ridiculous especially when you consider their cost structures and that would probably be why their bottom lines are so bad.

But, you know, it's - we're just, you know - we know what we need to make money and, you know, we need to keep - and we continue to take care of our customers, and so that's kind of what we're focusing on.

OK, and excluding any seasonality issues, has there been any interesting trends in connectivity out of JFK over the last year?

Not really.

You know, we have done more - I think with the increased frequency we have going to the South, probably a little bit more connection, you know, from the North.

John, give some specifics on it.

Yes.

I've got some statistics for you Bryan (ph) .

OK.

In the first quarter as a percent of revenue connecting traffic was 8.7 percent and as a percent of RPM's it was 9.3 percent.

And how did that compare to last year?

Do you know?

First quarter last year it was 10.5 and 12.5 respectively.

So.

Was a percentage slightly down.

Because the rest of the system got so much bigger.

We actually had more people connecting but not enough to offset the growth in the whole system.

Was that because of the addition of the East West is skewing it more towards the local?

Yes.

I think so.

I think that or, you know, the stuff we did out of Dulles, you know, where we have no connection on that stuff.

Where you have, you know additional Dulles, which goes North South and East West.

OK.

And to the extend your comfortable on this, I know the new flight you're going to be starting out between Long Beach and J and Atlanta, was there any thought as well as connecting Atlanta to your largest operation in JFK or would you view that particular route as sufficiently stimulated already?

Well, I don't know if it's sufficiently stimulated but it's sufficiently served.

You know, I think in kind of anticipation, maybe, I don't know.

I'm just conjecturing here, you know, that Delta's now put Song in that market and they've added some additional frequencies.

You know, again, we go from where we make money and we have other things on our list we can make more money than that one at this time.

Not saying that we'll never fly in that market, but, you know, right now we're having success - greater success in other markets that we think we can make more money.

And we're very pragmatic about where we have select routes.

In fact, one time I had one of our pilots had another airlines pilot accused us of not playing fair and we said, what do you mean we don't play fair?

Well, you only fly to places you can make money.

And so that's kind of what we do around here.

We just fly where we can make money.

OK.

Thank you very much.

Congratulations on the quarter.

Thanks Brian.

Thank you.

We do have one last question coming from Hellen Becker.

Ma'am, please state your affiliation and proceed with your question.

Thank you very much operator.

I'm with Buckingham Research Group.

John, I just have a question about your tax rate, 42 percent.

Is that because New York is a high tax state?

Is state taxes driving that?

It's really three things.

The two largest are New York state and New York city taxes, so it's a combination sort of an additive combination of these two.

And the third largest is, of course, California where we've got Oakland and Long Beach.

And California is not the lowest tax state on Earth either.

So the principle driver, though, is New York city and New York state.

OK.

So when we're going forward, we're at this sort of 42 percent rate then?

I would say, you know, unless we radically change the geographic distribution of where we fly, that that kind of a rate is pretty indicative of where we ought to be going forward.

Yes.

OK.

And then juts two other things.

On other revenue, did you talk about the components of that?

No.

We did not address the components of other revenue.

I can go take a quick look and give you an idea of what it breaks down to.

But the principle component of other revenue is actually our $25 change fees.

To give you an idea, other revenue was 7.2 million for the quarter and almost 4.5 million of that came $25 at a pop in change fee charges.

OK.

So that's the principle item.

We have some concession revenue.

JFK terminal six that was about 500,000.

We had about 480,000 of third party Live TV revenue, which is principally Frontier Airlines.

Then it gets down into, you know, mail, cargo, excess baggage; a few other things like that.

And have you looked at a JetBlue credit card?

That is not something that we're anywhere close to doing anything about.

But I think we've had plenty of people call on our marketing department, soliciting their interest in doing something like that.

OK.

And then, could you comment on your -- you commented, I think, on your ASMs being up 65 to 70 percent, and I think you said April -- I don't remember what you said about April, other than I heard you May was difficult to predict.

Can you make any comments about either load factor or traffic on the second quarter, relative to either the first quarter or last year?

I think the only thing that we can really tell you is that -- I think you can make your own assumptions based on what John has kind of outlined in CASM.

Minus the CASM, you take the margin and you can kind of extract where we think the revenue's gonna be.

And, you know, that's our best guess.

And, you know, obviously, the visibility of being able to look at and give you more correct information to that -- we're just guessing at this point in time based on our past history, and, you know, kind of the after effects of the war and the economy and all that are obviously still having an effect on the industry, and it will for some time to come, I assume.

OK.

Thank you very much for your help.

Ladies and gentlemen, unfortunately, due to time constraints, we do not have any further time for any questions or comments.

I would now like to turn the floor back to the management for any closing comments.

Thanks, Dante (ph) .

Just in closing, I just wanted to -- just to let you know that what our goal here at JetBlue is to try and create a company that does well in bad times.

It's not unheard of that you have companies that are in "bad industries," that outperform their industry.

And we could spend a lot of time talking about other industries -- be it the steel industry or the computer industry -- and there are outperformers in every industry.

And, you know, that's our goal.

And we want to do that by providing a better customer experience and do it at a lower cost.

And if we can continue to do that, then I think this is a good place to invest.

And if we can't, then it probably isn't.

So, those are things that you'll have to take into consideration as you look and as the management team of this company -- you know, that's our biggest goal and our obsession, is to try and keep this company moving forward with that good quality customer service, and with the lowest costs.

And, just again, just to pay tribute to our tremendous crew members that do it on a daily basis, day in, day out.

So, with that, thank you again for joining us, and we'll see you next quarter, unless we have any other information to share with you.

Thank you.

Ladies and gentlemen, thank you very much for your participation.

This does conclude today's JetBlue Airways conference call.

You may disconnect your lines at this time, and have a wonderful day.