JetBlue Airways Corp (JBLU) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your JetBlue airways second quarter earnings conference call.

At this time all parties have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation.

Ladies and gentlemen, this conference call contains statements of a forward-looking nature which represent our management's beliefs and assumptions concerning future events.

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

Actual results may differ materially from those expressed in the forward-looking statements due to many factors, including without limitation, potential hostilities in the Middle East or other regions.

Our ability to implement our growth strategy and our dependence on the New York market and our fixed obligation and our limited operating history, seasonal fluctuations in our operating results, increases in cost maintenance, fuel prices and interest rates, our competitive environment, our reliance on sole suppliers, government regulation, our failure to properly integrate Live TV or enforce its patents, our ability to hire qualified personnel, the loss of key personal 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.

As well as potential risks with the respect to: delivery, placing into service an integration into our operation of the Em barer 190 aircraft.

Additional information concerning these and other factors is contained in the company's Security and Exchange Commission filings including, but not limited to, the company's 2002 annual report on Form 10-K.

Ladies and gentlemen, on today's conference call we do have a David Neeleman, Chief Executive Officer and John Owen, Chief Financial Officer.

It is now my pleasure to turn the floor over to Mr. Neeleman.

Sir, the floor is yours.

Thank you, Dante.

Welcome, everybody, to our second quarter 2003 earning call.

We are obviously very pleased with the results of this quarter.

It's again a tribute to our unbelievable crew members on a daily basis and the wonderful job they're doing to take care of our customers and I think our customers are resipicating and coming back and lying with us again an simply proving this model is sustainable and scalable as we grow going forward.

And I think these results are particularly impressive concerning the fact that we had the aftermath of the war in Iraq, also had a code level orange during the quarter and you know, other issues that, you know, that came up that made this a very difficult time for the industry.

When you talk about sustainability and scalability, obviously we're up 64% year-over-year on revenue, very impressive.

While rolling our CASM, 2.5% which hit 6.07 cents of CASM.

Operating margin was 18.6% Again, we're very pleased with that number.

Obviously the - we received during the quarter $22.8 million of government aid money which works out to be a net amount net of profit sharing income taxes of less than $.5 million which increased 17 cents. 17 cents of the 55 cents was related to equity on that.

How do we do it and how do we continue to do it?

We certainly have a tremendous focus on cost control and we think about that every day and we've said before and we continue to say that their aspects of our operation that become more efficient as we get bigger in those areas that will continue to be the case going forward as well.

John will give you some -- later in the call will give you more guidance on cost through the end of the year as well as other guidance as well.

We have obviously high productivity.

We have the most efficient workforce and crew members in the industry who create enormous amount of available seat miles.

Our planes fly more hours per day than, you know, any airline that we know of in the country and probably in the world.

High utilization of Gates really utilizing and using efficiency to drive our costs down and I think most importantly though is keeping our crew members happy and taking good care of them and that obviously translates to our customers that have -- that are flying with JetBlue on a daily basis.

We had a very busy quarter.

Had a lot of things that went on.

I just wanted to briefly recap a few of those things.

Number one is we I'll start first with the flight additions.

We added San Diego from JFK, very successfully and our first flight in June, second flight on July 14th and announced a third flight on the 3rd of September and obviously very pleased with the performance of that market or we would not be adding a third flight.

Earlier this week we added additional service between Atlanta and Oakland as well as an additional flight between Long Beach and Ft. Lauderdale which was a service that we added earlier in the summer and we also added a third flight between Dallas and Ft. Lauderdale, a market that has been needing service for a long time.

We are anxious to get another flight in that market.

In order to do this, we took a -- two flights a day out of Atlanta to Long Beach, you know, this market we were just -- we just, you know, got in there in May and, you know, there has been, you know, some questions as to why would you go from three to one, to one flight and I wanted to address that a little bit because the question will probably come up so I'll just address it right off the bat.

Our load factor month to date in the Atlanta Long Beach route three flights a day is 83%.

So obviously we're -- we're pleased with the way the market is going but obviously this is the peek season.

We had an issue in Long Beach where we were initially received 27 slots.

That number was disputed by a couple of carries.

There was a negotiation that was started with the FAA and we finally agreed to give up a number of those slots somewhere between 23 and 22.

We have been flying the 23 slots and now Alaska airlines will exercise their option of taking one of the slots from us so we had to reduce one flight out of Long Beach.

As we looked at it, it did not -- it didn't make sense for us to continue to do the three flights a day if we had to lose one flight in that market any ways.

So we decided to keep the red eye flight, which is our lowest cost flight which will enable us to continue run very, very low fares in that market.

The other thing that happened obviously is that there was a tremendous amount of capacity build-up, almost to border predator behavior.

Delta added ten non-stops a day in that that is market, air Tran added a couple they went out and charted an airplane from someone else to operate that market.

The total cost of the market went from 13 a day to 26 a day which obviously was in light of it not being that strategically important to us.

We decided to go back to one flight where we can offer very low airfares and we'll see how that market develops.

We do have additional slots in Long Beach that we can pull-down for the short haul flying.

We have six flights a day to Oakland and two flights a day to Las Vegas so there is eight additional long haul slots that we could add if we wanted to.

But we just thought it was prudent at this time to make that move.

By the way, on our Atlanta to Oakland service we have kicked that off with a $79 fare that will be good for the month of September.

So we're excited about that market.

We think well do really well in our cost -- our costs will be very low.

In fact, Atlanta to Long Beach was our lowest cost of all of the markets that we flew.

I was reading a report the other day, by the way, of somebody that was doing some analysis as to know our CASMs in the long beach (ph)market from Oakland to JFK and they were using our last dated CASM number as well as what our cost was on that particular route and I think they used 6.4 cents.

That is obviously not our cost flying transcon.

It is much lower than that.

That is our cost to fly an average stage of 1200 miles.

And going to a low cost airport like Long Beach or Oakland drives that cost significantly below that.

I just caution any one that is doing analysis on what our revenue is per seat mile that 6.4 is not the number you should be using on that long haul flight.

Those are obviously very profitable for us.

We also announced that we were taking out row 27 on the airplane and this has been kind of a sour point with me and with our President, Dave Barger.

As many of you may well know, I make it a habit to try and fly JetBlue round-trip at least once a week.

I have never liked row 27.

As I go back there and I see people that have seats that can't recline and there is a little 1 inch less of seat pitch(ph) and narrowing of the aircraft back there, I always thought it was not the most humane treatment that you could put someone through on a flight, particularly because our average stage as I mentioned is 1200 miles.

So I -- we basically came up with this idea to take this row out and by doing so we are able to spread all the rows behind the exit row out and give them a couple more inches which means that we only have nine rows of seats on the airplane by -- I think by October 20th is the day we'll have all the seats out of the airplanes.

But we'll have 32-inch pitch, nine of 25 and the rest will have either 34-inch or I think the exit rows are like and first row were like 38 inches.

So it is going to be a very comfortable ride for our customers.

You know, those that are obviously taller, a little wider will head to the back and we think that kind of evens the cabin out.

There is a tendency for other airlines to put all the seats up-front and we like to put them in the back.

It is just a different way of doing business for JetBlue.

Obviously we're going to fly about 3.7% (inaudible) which is a slight decrease and which will increase our CASM a little bit, but we think through your management and, you know, improving our product even more that we think that the bottom line affecting this will not be -- will not be good.

It will be diminish.

We want to do it for our customers and think it is a much better product.

The other thing we did for our quarter which raised a few eyebrows was the order of the Embraer 190's.

All things we done at JetBlue I think this is one of the most exciting for us.

I want to emphasize this is not a departure from our business plan, some people have maybe suggested but an extension of our business plan into a significant number of markets that we could not have reached with the A-320.

And when I say extension of what we are doing, you've got an aircraft that is in our coach two-by-two seating,32-inch pitch, 100 leather seats, we're going to put Live TV in these airplanes and the planes have a 2100-mile range which will allow us to reach a lot of places out of New York and other cities as well.

As we looked at the markets that we were flying today, we tended to fly more in the markets that were about 600 passengers each way or more and as we looked at those markets there was only 300 -- there was 305 of them in the country which a lot of those have been created by us and by Southwest by stimulating low traffic, low-fare -- low fares.

But as we looked at the markets that were 50 peters (ph) up to 599, there was about 1700 markets and these are markets a lot of them that have been predominantly served with regional jet service which is not an efficient - nearly efficient at 50 seats and we have it at 100 seats.

So we're going to be able to take these airplanes into markets that have very high service.

I think an example that I -- that I have given recently is I was in Richmond, Virginia, the other day at the request of the governor and the example they gave me is it cost $700 on a no events purchase ticket to go to New York and that is in addition to about JFK Buffalo is about $64.

And now we're going to add a few bucks because this plane is a little bit less efficient but, you know, figure $70 average fare versus what's being charged with maybe their highest fare being $109 or $115.

We'll certainly stimulate a lot of traffic in these markets and we're going to create a lot of markets that are 600 plus.

We're also creating a lot of markets for the A-320 which will allow us to grow a lot more efficiently.

Just in closing on that, we're also going to be able to reach other markets out of New York and other places that are very seasonal but we didn't want to go into for just the winter season or just the summer season just to give all that money back.

So we'll be able to pair the A-320's with the 190's to be able to develop a lot of markets and you can look at markets like Myrtle Beach or Bermuda that we have not wanted to do because they're so seasonal but if we fly 320's in the peak and 190's in the off off-peak week we think that will be successful just to name a couple of those markets but there are a literally scores of those markets.

We had a very successful capital event in the quarter, following the close of the quarter on July 15, we offered $2.99 million shares of common stock at 42.50 a share, net proceeds at 22 million. concurrent with that on the same night we priced a convertible I guess convertible stock offering is that what they are called, John?

Convertible note.

Convertible notes.

That is what it. 2003, some rights for us to convert them sooner.

We got a great deal on those.

We are paying 3.5% interest and total net/net to the company we netted $293 million which takes our cash balance today we just checked, cash balance here at JetBlue as of the close of the day yesterday was $598 million, $598.4 million to be exact.

We're very pleased with that.

Obviously puts our cash balance in a position relative to our size and I think we probably have more cash per our size, I'm sure we do, than any other airline in the country.

Also briefly we have just announced we entered into an agreement with west jet to provide hardware and installation and programming and maintenance on our Live TV system.

Our goal with Live TV obviously has been to, you know, get enough business to help pay us back for the price that we invested in that company and we're very pleased to have west jet aboard on that service as well as frontier and I think their customers are going to love it the same way our customers do.

I hope they this charge for it like frontier does but that is another issue because I think it is a great thing for the customers.

Now, just in conclusion before I turn the call over to John,

I just wanted to again just give tremendous credit to our crew members at JetBlue.

We have a lot of men and women out there that are doing a tremendous service to our customers.

We had thunderstorms here in New York the last few days.

Our operations were disrupted.

But we did not cancel a single flight during that period of time.

Flights ran late, but people arrived where they were going and that was important to us to take care of our customers and it's just our -- I think our focus on the customers, focus on our crew members first then we take care of our customers will continue to drive this company to profitability.

We've had -- this is our eighth consecutive quarter for doing it.

In tenth.

Tenth consecutive quarter of profitability with double-digit operating margins so we hope to continue that in the future and this see any reason why we can't.

With that I'll turn the call over to our CFO, John Owen.

Thank you, David.

Good morning, everyone.

As David noted, this was our tenth consecutive quarter of profitability and our sixth consecutive quarter of double-digit operating margins.

Overall, it was an excellent quarter for JetBlue on both a financial and an operational performance basis.

Operating revenues were up 64% to $245 million, which was pretty much right on budget and ahead of the internal forecast that we prepared at the end of the first quarter.

This was driven by a 72% increase in RPM's and overall we're very pleased with the revenue performance in light of the backdrop for the industry and the end of the war in April and those sorts of things.

Capacity measured in ASM's was up 70% year-over-year to $3.3 billion with 17 additional aircraft in-service in 2003.

We're actually improved slightly on the very high load factor that we ran last year.

We were 85.3 in the second quarter of this year, up 1.2 points.

That was our highest ever second quarter load factor and there was 66% increase in revenue passengers carried for the quarter.

Second quarter yield was 8.48 cents.

That was down 4.5% year-over-year.

CASM was 747 down 3.3%.

Both of those ere after the affect of course a 3.7% increase in length of haul and 6% increase in average stay length.

During the quarter we took delivery of three new aircraft.

One was a sale lease back transaction; the other two were financed with bank debt.

We finished the quarter with an operating fleet of 44 A-320's evenly split 22 own, 22 under operating lease, average age was 18.5 month as of June 30.

On the cost side, we have excellent cost performance overall and better than we had budgeted.

Operating expenses were up 64% so $199 million.

That was a CASM of 607 which is a 3.5% decrease year-over-year in CASM despite the fact that fuel prices were ten cents a gallon higher this year than in the same quarter last year.

And it's a 2.9% decrease in CASM over the first quarter of '03.

The improvements in CASM can be a contributed to a number of thing.

One is savings in salaries.

We have not had had the head count growth as rapidly as budgeting.

Second was savings in advertising which I'll get to in a moment.

Third there was savings in fuel expense relative to first quarter this year not year-over-year but certainly relative to the prior quarter and there was savings in charge backs for bad debt expense which again I'll get to in a moment.

In the salvage wages and benefits line we were up 80% year-over-year.

That is obviously an increase in full-time employees of 69%.

Higher average wages and an increase in the provision for profit sharing.

The profit sharing provision reflects the single largest negative cost variance that we had for the quarter and a good pit of that was attributable to the fact, as David mentioned, we got $22.8 million worth of aid from the government.

And the way our profit sharing formula works, we pay 15% of pre-tax income so we made a profit sharing accrual against that government aid and that amounted to $3.4 million worth of profit sharing.

So that's part of the reason why you see a negative variance there but, frankly, negative variances for profit sharing are the kind of cost variances that will always be happy to have.

Aircraft fuel expense was up 91% year-over-year, and the principal issue there was increase year-over-year of about ten cents in fuel cost which equates to roughly 14.6% increase in price of fuel, a dime that is year-over-year.

Sales and marketing expense, increased only 23% over 2002 so on a unit cost basis it was down 28%.

That's primarily due to lower advertising expenses.

We simply haven't needed to spend what was budgeted and, you know, we have a very good marketing department that is incredibly effective and very cost conscious and they're not going to spend something just because it is budgeted.

We'll spend if we needed it and we simply didn't need to spend it.

So they have been very wise in their ad spending.

Repeated to marketing we spent 72.5% of our reservation dollars in Q2 through JetBlue.com web site.

That is up 11.2 points year other year but only 1.5 points up over first quarter of '03.

We've always expected that at some point that rate of growth would have to slow down a bit and appears we're finally seeing hat happen.

This is still, by the way, the highest percentage by far in the U.S. industry and of course we continue to offer five dollars off all flights booked on-line on JetBlue.com and to also offer double trueBlue point to encourage people to use that venue.

Speaking of trueBlue, it has 813,000 members currently and 87% of those members are booking their travel on-line so that is what we like to see.

We did just pass the one year anniversary in June of the launch of the trueBlue program.

Aircraft rent was up slower than capacity while depreciation an amortization were up faster than capacity and that is purely as a result of the mix changing year-over-year in terms of lease versus owned aircraft.

Other operating expenses increased only 29%.

We had higher cost associated with increased capacity in passengers served and higher fuel taxes but on a unit cost basis they were down 24%.

Those are due primarily to the Live TV acquisition and credit card charge backs.

Credit card charge backs are trending down much faster than we anticipated and we're very happy with our anti-fraud efforts to date.

As a reminder, the other expenses, line item, last year included our fees that we were paying to what was then an independent third company Live TV for the Live TV service and now that we own Live TV, those expenses no longer appear in the other category.

They appear as increased depreciation and amortization and as increases in salaries, wages and benefits as we consolidate Live TV into the P&L.

Interest expense was up 25 -- up 27.5% year-over-year as we added debt financing to nine additional aircraft and that was offset obviously by some lower interest rates because virtually all of our debt is floating.

I'll get to that in a moment.

Interest income and other contains two items -- well, actually interest income and other contains one item here.

It is $984,000 gains related to fuel hedging ineffectiveness under (inaudible)133 for hedges applying to future periods.

Then we have an extra line under interest income and other on the P&L for the emergency wartime compensation that we received as mentioned $22.8 million gross, net of profit sharing and income taxes it's $11.5 million or 17 cents per diluted share.

On the balance sheet David has already addressed the cash balance that we have at the end of the quarter as well as the cash balance that we have today taking into effect the convertible note offering of $175 million gross and the 2.99 million share common stock offering that were closed on July 15th.

Turning to the operational performance, as David said, our crew members produced outstanding results this quarter operationally.

We had our second highest quarterly completion factor ever of 99.9 for the quarter.

On-time performance was very solid at 87.4%.

It was our best ever second quarter and our second best quarter ever in the history of the company in on-time performance.

Mishandled bags were 3.4 per thousand and utilization continued high at 12.9 hours.

Capacity for the quarter was distributed as follows: 55% in east/west markets, 39% in north/south.

That is basically JFK and Dallas to Florida, New Orleans and San Juan.

We had 3% in short-haul Northeast market, Buffalo, Rochester, Syracuse and Burlington and 3% in short-haul West Coast markets which is principally Long Beach, Las Vegas and Long Beach, Oakland.

Switching to guidance now, at this point July and August bookings appear to be very strong so far.

We are extremely pleased with the way July and August have been booking.

September is still a little too far out for us to have good visibility given our short booking curve, but in keeping with every year that we have been in business we are forecasting a small loss for the month of September just because September is what September is.

We expect ASM's to be up approximately 60-65% in the third quarter based on the aircraft delivery schedule I'll outline shortly, and for the fourth quarter we also expect capacity to be up 60-65% year-over-year.

And that capacity guidance does include the effect on ASM, the removal of the one row of seats.

We will actually be adjusting our booking lids (ph) on all of our flights downward in early September when the very first aircraft is converted, so ASM's will be adjusted downward starting then for the balance of the year based on the 156 seats instead of 162.

Average stage length for both the third and fourth quarter projected to be just over 1300 miles.

We expect CASM for the third quarter to be down slightly compared to this quarter.

And for the full year we expect CASM to be relatively flat compared to the second quarter just ended.

That guidance is based on an assumed realized, oil and fuel price net of impact of hedges of $0.79 for the second half of the year.

For operating margin again that assumed oil and fuel prices of $0.79 for third and fourth quarter.

We're forecasting the operating margin to be between 16% and 18% for the third quarter and between 15% and 17% for the fourth quarter.

That margin guidance reflects a small shift in seasonality of our margins because historically we've tended to run a higher margin in the fourth quarter than in the third.

There was a couple of differences going on there.

One is some incremental dollars in maintenance for engine shop visits during the fourth quarter above what we'd originally planned.

As obviously some revenue dilution that we have built in relatively minor amount, but there is nevertheless some related to the reduction in ASM's on a conversion to 156 seats and obviously we have made an assumption that there is no way to test that assumption in a controlled environment so we'll have to wait and watch and see how that turns out.

But we also are not sure frankly again because we have such good visibility close in and not very good visibility far out.

We have got extremely strong bookings in July and August, and we're just not sure whether that is a seasonal issue or whether that is actually cyclical so we have not been quite as aggressive in looking at revenue forecast out in the fourth quarter as we have when we updated our third quarter numbers here.

Utilization for the third and fourth quarter we expect increase slightly to around 13.3 hours, mostly due to longer average stage length and greater number of red eye flights.

During the quarter we continued to add to our hedge position.

At this point we are 83% hedged in the third quarter, 78% in the fourth, to a combination of swaps and collars.

The collars are around $26, all of these are incrude (ph) for the second half and the swaps representing about half of our hedge volume are at about 2950 a barrel.

And in 2004, were 50% hedged first quarter, 30% hedged second quarter, 21% hedged in the second half of the year.

Some of the collars in the first quarter are around 2575, but the bulk of our hedge volume, 63% is in the form of swaps at $25.

The remainder of our hedges for '04 are swaps at around 2475.

We currently have firm purchase orders for 170 A-320's.

Option for 50 more and for the Embraer, 100 firm orders and 100 additional options beyond that.

The A-320 delivery schedule for the rest of the year, one each in July through October, three in November, two in December.

Total committed expenditures for those aircraft and spare engines estimated at $305 million for the remainder of 2003.

We've arranged debt financing on the five of our remaining 2003 deliveries.

Still working in the final stages of signing up term sheets for the balance of those aircraft.

For 2004, we're looking at deliveries, two in January, one each month February through September, two October, one November and two December which would take us to a total of 68 A-320's by the end of 2004.

One of those deliveries in early 2004 is from ILFC (ph) on an operating lease, so it is not included in our contract with Airbus.

As we've mentioned quarter after quarter, we've already said all of our debt was floating rate.

At this point we can now say that we have $175 million worth of fixed rate convertible notes.

But other than that, all of our debt is still floating rate.

Average debt rate at the end of the quarter and of course that does not include the convertible notes at 3.5% because they weren't issued until after the close of the quarter but average debt rate at the end of the quarter was 315 and average investment return was a pultry 1.32%.

For EPS estimation for your purposes we'll give you some diluted share information here.

Our estimated shares outstanding for third and fourth quarter are based on a series of assumptions here.

First, no additional shares assumed from option exercise; second the additional issuance of the 2.99 million shares of common stock on July 15, third we assumed a $45 market price at year-end; fourth, at June 30 there were $10 million options outstanding at 1477 average strike price; and working through all of that we get for Q3 an estimate of $73.7 million weighted average shares outstanding and for Q4 an average $74.8 million weighted average shares outstanding.

Another note worth mentioning, the convertible debt that we issued has the contingent convertible feature to it so the underlying shares into which it would convert would not enter into a calculation of diluted EPS until the stock market price is above the conversion price of $63.75 so there is no fully diluted effect of the convertible note at this point in time.

I think we've talked enough now in terms of filling you in on where we stand.Dante we had be glad to take some questions now.

Thank you very much.

The floor is now open for questions.

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

If at any point your question is answered, you may remove yourself from the queue by pressing the pound key.

Our first question is coming from Ray Neidl of Blaylock.

Congratulations on the quarter.

Keep up the good job.

Thanks, Ray

Just, I mean, everything looks like it is so bright here.

Let me just bring up a subject.

Let meeting your comment on a general subject where you might run into this thunderstorms ahead as you continue your expansion program.

It seems like a lot of people I talk to want to be another JetBlue.

You've got Song, now really starting to come into play and growing.

You've got looks like Southwest is stepping up their growth pace again, air Tran is being very aggressive in their aircraft acquistions even you have Virgin Atlantic talking about coming into the United States and becoming another JetBlue.

What do you think this will have on your product and growth plans going forward in the next couple of years?

I think you ought -- do you want to take them individually or collectively.

I think we were very surprised when we got the April load factor numbers of Delta express converted to a 757 in the average in April.

JFK to West Palm Beach, Song delta express average seats 192, fluid 55.8% load factor compared to our 76% today, theirs was 25 today.

Tampa, they were 59.3, JFK Tampa and 2.25 and six flights we were 83.5.

For year daily 67 on five flights a day, 67.7 and we were 81.2 on 15 flights a day.

I think that just underscores that, you know, we have a very strong brand here at JetBlue.

We certainly don't - I think Song has a long way to go to be able to, you know, compete with us affectively.

Also, you know, they haven't got their product in line yet.

They were to have the whole thing up and going with the in flight entertainment in October and I'm not sure.

We're almost to October and sounds like it has been kicked to next year.

So, you know, this is not an easy thing to do I guess is with I'm trying to say.

It looks easier than what it is.

We have a history with the folks other at virgin Atlantic.

This airline as many of you know was going to be called virgin America and we decided gracefully we would create out own brand, we can create our own brand and do a very good job of it.

I guess bottom line is, this is a very difficult thing to replicate.

If you don't look at it, look at what Southwest has been able to do over 30 plus years and it is very difficult for anyone to accomplish what they have accomplished.

And it's a big market.

I mean, there is a lot of -- a lot of things to do and that is -- you know, a lot of places to go and that is why one of the reasons we're so excited about the 190, too, because the combination of the 320 and the 190's gives us really a product or an asset that, you know, Southwest doesn't have, Song certainly doesn't have.

Delta doesn't have.

Virgin Atlantic will certainly not be in those markets, I don't think. and so we -- we feel really, you know, we think things are going to be great going forward and, you know, I think if you want to look at storm clouds, Ray.

Why don't you look behind us.

It has been a very, very, very difficult time.

I think this is -- these are times that really not sustainable on-going forward for the history at large for the non-JetBlue people.

You know, even though there was an improvement this quarter, we have a lot of leverage in our average yield is very low and to the extent we get an extra, you know, couple of bucks an average customer, you know, all that shows up on the bottom line.

So I think if we look behind us or ahead of us, the future looks brighter than the past and I think we have done pretty (ph) good in the past.

Good.

David, just one more thing, the Atlanta Long Beach route, does that -- is that kind of telling you that JetBlue in the future is precluded from going into a major hair lines hub that they reacted so violently?

Absolutely not.

That was a case more of slots.

We could have stayed in Atlanta, Long Beach and, you know, we're profitable in that market.

It was really just an asset allocation issue.

It was using three slots and one of them we didn't have any more and, you know, our cost there were very low, you know.

I don't know what the fall would have led to obviously we had not been in there for a year around basis but we just saw an opportunity to use that slot in the market where we could make more money and, you know, we're very pragmatic about these issues.

You know, it's not a thing where we lost -- I think our shareholders won and that is really what we're trying to do here is create shareholder value.

It's not an ego contest.

It's a -- you know, I like the fact that I think we're the 11th largest carrier in terms of ASM's and we'll probably be the tenth before long.

That means nothing to me.

What means more to me is we have the second. largest market cap and that is what we focus on here.

Great.

Congratulations again

Thank you.

Our next question is coming from Mr.Jim Parker of Raymond James.

Good morning

Good morning, Jim.

I think it is interesting this profit sharing about the security fee reimbursement.

You're giving your employees 15%.

How much did you give them this year based on last year when you gave them their bonus checks?

Well, Jim, our profit sharing is, you know, obviously done, you know, similar to what Southwest does.

We accrue that amount of money during the month of -- during the year and then at the end of the year once the books are closed for the year we take 15% of our pre-tax profits and then that money is put in a deferred compensation account that is given -- in each of our crew member's account.

It doesn't invest it is already 100% invested when they get it but they can do anything with it but they can't spend until they leave JetBlue.

They don't actually get a check but the amount that was contributed into their account they can take with them when they go that is 100% invested last year was 15.5% of their salaries which was a very significant amount which we're very pleased and they very pleased as well.

So, you know, I don't know what the number is going to be this year.

I have not actually gone through the calculation whether we're ahead but I would assume with the 3.2 million that we got -- which really, you know, you could say it just reimbursement for security expenses we have had in the past, maybe took some money out of them last year so they deserve to have it back this year.

There is a lot of ways to look at that.

Like I have said I have not calculated what it is going to be but hopefully it will be higher% than 15.5% last year than it was even last because our crew members deserve it.

They are doing such an amazing job that they deserve this money for their service.

David, where I'm going with this there is really going to be a bonus.

In other words, they get two bonuses.

One from the operating earnings and the other from the government fee reimbursement, which other than Southwest may be the only ones that do that.

So that has to go along ways in creating goodwill mountains amongst your employees.

(inaudible) is a great place to work and it is because we value the people that work here.

I think working for JetBlue is the biggest bonus of all for all of us.

The other thing, too, about your head count per aircraft.

Look likes it is up slightly maybe 107.6.

Why isn't that coming down a bit as you gain scale, add more aircraft, leverage labor costs?

Well, I think it will over time, Jim.

I think --As I said before, that is not a number that we're that focused on simply because we've always said, you know, I think you can point to our 99.9% completion ratio, but we're going to have a few extra folks on the payroll as we grow because we're adding 65% a year.

We do not want to get cut short and we have where we think is a pretty significant number of pilots that have been -- that are on active duty now and we had to kind of hedge for that.

We brought some extra pilots on just to make sure we didn't lose any more.

We hire quite significantly from the military because we like the product that is produced there obviously and we have to hedge for that as we go into new cities.

If you go to Kennedy you see a lot of folks out there helping a lot of people.

We're just on the side of customer service and really again focus is on the bottom line but we'll get more efficient as we go forward.

We're not sweating it right now.

I think our costs are in good shape.

I think that may give us a little leverage going forward

All right, good.

Thanks a lot.

Thank you.

Our next question is coming from Michael Linenberg of Merrill Lynch.

Good afternoon and congratulation on a good quarter.

Good afternoon.

Where are you Michael.

Good morning.

I apologize.

I feel like it is afternoon here.

Anyway, I got two revenue questions, David, if I may.

I guess the last couple of quarters you very kindly provided us with how the revenue data looked in some of the markets and I think up to that point in time the DOT had provided a date of June of '02 and I think most recent data is available and I'm curious about what sort of revenue premium you are running in some of the markets to Florida as well as some of the your West Coast markets.

If you have that information available, that would be helpful.

I think the latest is the fourth quarter.

The fourth quarter is what I have in front of me here.

If you look at Ft. Lauderdale in the fourth quarter we had an average of ten flights a day and we had $113.75 compared to Delta express is $91.70. 78% load factor compared to our 89%.

If you look at West Palm Beach we had four flights a day, 122-dollar average fare compared to Delta's $98.81.

So you can see we had 25.5% of the market compared to those 6.9%.

That is out of Kennedy -- the Kennedy comparison.

The -- if you looked at LaGuardia, you know, we were about the same.

They were -- we were 22.9 and they were 22.4 and - but we had a higher market share, net of 76% load factor and we had a 91.1.

We kind of got cut short a little bit in capacity with that market and we actually went up to -- we peaked at eight in that market so we'll -- going into the fourth quarter this year we will be up to, you know, five and six, fix flights a day.

So those are a couple of the others.

Let me see if there is anything else that is interesting here.

Another way to look at it, Michael, is that from all airports in the New York area to Ft. Lauderdale and West Palm in the fourth quarter we had the highest RASM in each of those two and for Ft. Myers, Orlando and for Tampa, we had the highest RASM among the two New York airports, Continental actually had higher RSAM out of New York.

There seems to be a pricing differential out of newyork but for the other two we had the highest RSAM for them.

The trend continues.

Michael Linenberg Good.

On my ticked question, American has become a bit more aggressive in putting in a low fares or matching your fare structure between New York and four West Coast airports and I know that has now been in place for several months.

What have you seen, if anything, with respect to, you know, share?

Is there anything that you can comment with respect to that?

Michael, I think just to put it in perspective, we see it as a non-event.

They are obviously advertising it but if you were to take a look at JFK Oakland which is one of those markets that you talked about, their average fare in that market for that quarter last year was $155. $155.78 compared to our $159.

We had a debt of -- we had a 69.7% load factor and we had an 81.9% load factor so we had a significantly higher RSAM than they did.

I doubt they were selling any fares over 299 any ways.

If you look at even Long Beach, the difference was actually even, let's see, on their Long Beach service, their average fare was even lower at 152.86 with a 4.29 RASM so compared to our .565 RASM.

So, you know, I guess the point is they're not selling anything over 299 anyway so that's why we have not seen any affect.

It just makes it basically something that they are advertising.

Michael Linenberg Well, good.

Very good.

And thank you.

Thank you.

Our next question is coming from Jamie Baker of J.P. Morgan.

Well, good morning, David, good morning, John.

Good morning

The question on the reconfiguration, how are you going to manage the expectations of your passengers with only two-thirds of the cabin becoming super sized?

I know typically you've held the first few rows for repeat passengers, those with special needs.

Does the last minute high yield traveler find him or herself in the last row?

I hope so because that's a nice row to be in.

I guess if you're not in a hurry.

Having that -- I think you brought up a good point there is people tend to want to sit in the front of the airplane.

They think that is, you know, to get off the airplane they want to be up-front so I think maybe the shorter narrower customers of ours will still want to sit up-front and they'll be totally comfortable at 32-inchpitch and totally happy with it.

It is kind of funny because you go across country and spend six hours in an airplane, we can deplane an airplane completely in about eight minutes.

So you may get off the plane six minutes quicker but you just sat in a seat with two more inches of legroom for 6 hours and people may want to do that to save that six minutes.

Now, at Long Beach and many of our airports in Florida we deplane from the front and back so people can get off quickly.

We think it a great equalizer.

We're simply not going to go to the front and take the row out that would be stupid because we think 32 inches is very comfortable.

As long as we had that row in the back and we can take that room and spread it out we thought what the heck, let's do it.

Because we do have some tall folks flying with us that are a bit uncomfortable at 32 inches and I think they'll very comfortable at 34.

And secondly as a follow-up, as you gain critical mass I think you're up to, what, 11 flights a day between here and Ft. Lauderdale and six in Long Beach the revenue opportunity here to start overbooking like some of your other low-fare peers and presuming that your answer, David, is going to be no, aren(ph) leaving some revenue on the table?

Yes and no we're not going to do it and maybe we are.

But I think, you know, one of the things our booking model is so great.

We talked about, you know, maybe taking out six seats we may want to overbook by a seat or two and then we thought, you know, that is stupid.

Our book flights, you know, most airlines, if you go ask them what their flights that were sold out weren't filling any more seats on that particular flight, what load factor went out of revenue customers, they would tell you probably somewhere in the lower nines(ph).

It's impossible to try and judge this thing to the point where you -- if you keep -- if you overbook by more than that and try to get close to 100% you're going to have massive overbook inning.

In our case our book flights -- and I'm not for sure but I think it is 98 or 99% so why get greedy.

We already have a significant -- one of the reasons we fly such a high load factor is our book flights go full and their book flights don't go full because they have this overbooking model so it is a much better way to do business and we just don't want to -- we like saying to our customers we don't overbook our flights.

We might leave a little on the table but on our book flights we pick it up in space.

Also, a customer service benefit and a crew member benefit of not having, you know, any kind of over sales and volunteers and situations at airports and those kinds of things but the other is Jamie, if we're sitting there and looking at multiple departures a day in a market, we kind of like the idea that if we booked a 156 and 154 people show up that we've got room for revenue standbys because when you have a lot of frequency in the market you'll have people that finish up early, show up at the airport early.

Can I stand by for an earlier flight and we're able to accommodate a point of couple of people occasionally when there are a couple of no shows.

So there is an advantage there from a -- you know, from an intangible customer service benefit of actually being able to help people out and get them on earlier flights.

We don't charge for that.

It's not a revenue benefit.

Right.

One of the beautiful things about JetBlue, if you buy this nonrefundable ticket and that is one of the reasons we don't overbook then you want to cancel it, you have the credit good for a year, but if you want to shorten a day of travel and you wanted to go a couple of flights earlier and there is a seat, we'll put you on as a revenue and open that seat up for somebody a little bit later.

Okay, thanks a lot.

By the way, we have seven flights a day to Long Beach, not six.

I will adjust my model accordingly.

We have what I affectionately call a peak out.

That is the last flight off the West Coast.

These are like 5 45 and arrives in New York just before 2:00 a.m. and proving to be very popular.

It's a great flight to finish the full day there and not have to be on a red eye all night.

Fair enough.

Thanks.

Thanks, Jamie.

Thank you, our next question is coming from David Strine of Bear Stearns.

Good morning.

Two questions.

One is, have you been surprised at all at the pace of decline in the CASM X-fuel and how do you feel about that rate moving into '04 and, two, can you remind me of the percentage of airports that you're serving that you can let people get off the plane at both the front and the rear?

Well, I'll answer that second one first then I'll let John comment on the CASM.

It's most of our Florida cities, all five of the cities down there.

I think we up-state I think it is most of those cities, Burlington and Buffalo I know for sure, Syracuse.

Obviously, Long Beach.

I think in Oakland we're moving Gates around so I think it is a little safer to do it there.

So like we do it -- and it's probably over 50%.

I guess much to my amazement, we have not figure out a way to do it at Kennedy Airport yet which is our home.

We're asking, but I think our folks think it is somewhat of a safety issue, but I think hopefully we'll be able to work that out as we look to, you know, redesign some facilities to be able to do it at Kennedy because that is obviously where most of our flights are.

As for the CASM, I think CASM has been trending down since the inception of the company pretty much in line with what we would have expected.

As I said for this quarter, we had lower than budget operating expenses so CASM was a bit better than we had forecast for this quarter.

But, you heard our guidance for, you know, the next two quarters in terms of where we think CASM is going to be.

I also would state though that, you know, part of what is going on with the CASM is that average stage length has gone up and that is part of what is driving it.

And you can only drive CASM down so far.

We think there is some more room, but I would also say that most of the runways are behind us.

Okay.

Great.

Thanks a much.

From your perspective, we're going to try to maintain -- if we could just maintain around the six-cent level, we would be very, very happy and that's because we have a lot of upside on the revenue side.

That is not too shabby (ph), is it?

No, it's not.

I'll never complain about six cents.

Thank you.

Our next question is from Sam Butric (ph) of UBS.

Yes, good morning, everybody.

I have got three separate things here.

First of all I would like to understand your typical pilot-hiring profile a bit better maybe.

Whatever measurement you think is relevant (ph) was a turbine time, pilot-in-command time, background, military, regional, mainland, corporate?

Secondly if you're willing to say whether or not you're done with cities for this year?

And thirdly, John, at least as we adjusted for the government welfare, we saw a lower affective tax rate and could you comment on that?

I guess I'll deal with the first one and let John deal with the government stuff.

From a pilot perspective, we are in a very enviable position to be able to do whatever we want.

Last time I checked last week we had over 6000 resumes on file with us.

We did aren't obviously taking advantage of that situation.

We are so focused on finding a person that, you know, lives kind of the JetBlue values as we call it and someone that is will to chip in and help out and we think it's important to have kind of a mix of experience and I think, you know, just -- this is very rough but we try and do like a third from the military.

We like what we see there.

A third from maybe, you know, furloughed pilots from other airlines that maybe have been furloughed a few times and I like the fact we don't furlough anybody and have a policy against that.

Those people can come in and add a lot of verification that this is a great place to work from those that may have had experience.

And then maybe a third from -- a little less maybe from the corporate side.

We like service orientation of a lot of good hours, a lot of good credits on high performance airplanes so we look at a lot of corporate pilots as well.

We try to mix it up but really what we're really looking for is a good person that can really chip in and grow with the company and be compensated, you know, accordingly.

As far as new cities, there may be one more but probably not through the end of the year.

We're looking at some thing in the first quarter but, you know, there may be a red eye city or something, but maybe not as we kind of sort things out here displacement okay, thanks.

: And, Sam, on the tax rate we had a 42% tax rate for the quarter but when we did the calculation of the government aid net of taxes, we treated that with a marginal tax rate And the marginal tax rate was 40.7 so that accounts for your difference.

So going forward low 40's is still the affective rate?

42 is still the affective average tax rate that we're using for the accrual for the year.

Great, thank you.

Thank you.

Our next question is coming from Jeff Kauffman of Fulcrum Global partners.

Jeff Kauffman Thank you very much.

David, stepping out of my analyst shoes and into my customer shoes for a second, having flown row 27 a number of times, I thank you for the change.

You're welcome.

I guess kind of let me take a different track because a lot of good questions have been asked.

One of the big selling points is the JetBlue experience.

To sustain you need to have a pleasant aircraft experience and need to hire the right people as you just addressed with Sam.

How high do you think you can run a system load factor before you start to run into limitations where maybe you risk compromising the JetBlue experience to the passenger and secondly to accommodate the growth, how difficult is it to fine the right people?

Well, I think the first question, you know, if you run 88 load factor or a 92, I think the middle seat is going to be full regardless.

It's going to be like the lottery you have an empty seat between you.

I think to minimize that we're going to give you more legroom and we're going to -- you know, you already have a wider seat which is very, very important.

They have 7.7 or 737 and then you have your television set there and, you know, we hope we're going to greet you with a lot of smiles and, you know, I think that is -- I don't think it really matters.

If we have compromised the customer experience from high load factors we have already done that so I don't think it's going to get any different than what it has on-going forward.

You know, it's interesting to note but on the 190 there isn't a middle seat on that airplane and the seat is quarter inch wider than on the A-320 so that will be interesting when our customers compare those two products side-by-side, maybe a couple inches of legroom, you know, on a portion of the fleet.

So as far as the customer experience, you know, I think it's a great experience.

I think people like to come back and they might find us -- not because I was reading yesterday the long hold times on the calls that the other airlines are experiencing, how they're trying to bring all these people back and somebody said they waited 70 minutes on the phone, I was looking at our stats.

They called and waited 70 minutes.

Called back and waited another significant time to make a change.

Our stats on our phone yesterday we had answered 1% of our calls.

Question look at at the average wait time but it was probably 14 seconds.

We do such a tremendous job from the minute you dial 1800 JetBlue and log on to JetBlue.com all the way through the time you pick up your bag, I think that makes people say, you know, the middle seat being full is not that big of a deal when you consider the whole JetBlue experience, the whole package of what we have.

What was the second. thing in.

The second question is -

The right people.

We said this a lot and actually frame this now and have it somewhere in our hiring folks and you know if it takes us in talking to 1000 people and to hire that right person we'll do that.

We have a standard that we set for the people that come to work here at jetBlue and, you know, we're not going to lower that standard.

If we have to work harder and hire more recruiters, we will.

Right now is a great time to hire.

You know, it certainly does a lot people -- there are two things obviously the economy is much softer and more people are out of work and second of all just the thing that have gone now at JetBlue, it is a good place to work and that is our goal.

We don't -- you know, there is a couple of thing that keep me up at night mainly scarring our culture, make sure that when you step on one of our airplanes five years from now when we have, you know, 15,000 crew members will it be better than it is today with our 5500?

That is the one thing that keeps me up at night.

Finding good people is not something that worries us at all.

Okay.

As someone who spends a lot of time on exclusive RJ serve markets as well I'm looking forward to your new aircraft.

Best of luck to you.

Thank you very much.

Thank you.

Our next question is coming from Gary Chase of Lehman Brothers.

Sir your line is live.

Good morning, guys.

Just a quick question for John just a clean up question.

As presented in the P&L that you reported, where is the3.4 million in profit sharing that comes from the government reimbursement?

Is that in your salaries and wages line?

Yes, it is in the salaries, wages and benefits line.

So if we exclude that, your operating margin would have been about 20% in the quarter.

Is that right or am I reading something wrong?

I would say you're doing the Matt correctly, yes.

And that is probably scarring the tax rate as well.I wondered if --I'm sorry.

I was going to say there is no doubt that the operating margin would have been higher and, therefore, the CASM would have been lower had we not paid the profit on the government statistics.

Just a couple of quick revenue questions.

Is there any perspective you can offer on how Florida did for you versus the rest of your network during the quarter?

I think it did very well mean, from a RASM perspective, we have really had a lot more capacity in Florida this summer than we did last summer and, you know, there is nothing that I think year-over-year RASM's we were very pleased with flat considering the increase in -- we were up 40% in the number of seats going to Florida for this summer and the RASM was flat so obviously we're very pleased with that.

Okay.

And as you move through the quarter, was there a significant sequential change in your year-on-year performance or is that just not as relevant given all the growth?

Year-on-year performance of what?

Of RASM?

Some carries of noted a real pickup especially in June.

I was just wondering if you have sensed that in any way?

We did have a very solid June that was above our expectation of what it was -- what it would have been say mid quarter.

There is no doubt that, you know, June did perform well.

The other think of course to remember is that we did have Easter and Passover in April during this second quarter and they were not in April the prior year for year-over-year comparisons didn't and April was a great month for us as well.

April was a very strong month, yeah.

Okay.

Just a more strategic question for David.

Going back to I think what Jeff was just asking about growth, could you maybe address the airport side of that?

You know do you think you'll have the opportunities to get Gates everyone you need to just to deliver the kind of growth that your fleet plans suggests?

Yes.

You know, with very few exceptions.

We basically have you know airports that are -- the line of airport marketing folks has gotten much longer since we announced the 190's.

Our port schedule planning folks are being bombarded with gifts.

We have mugs, cups, T-shirts you cannot imagine every airport on the planet.

I think it was exceptional.

Chicago has been, you know, a little bit of a challenge, you know at O'Hare and we're not even sure that how high that is on our list.

We're talking to Boston right now.

Things are a little tight up there right now because new the terminal is being constructed that will be done by the beginning of next year.

When that happens there will be tons of room up there.

I can't think of another airport where we're being shut out of because we don't have good gate space.

Do you think that will present challenges down the road for you in the immediate future?

I don't, no.

I think in these medium sized markets are -- I guess at the beginning a low five, the terminal down in Boston so I'm already into next year.

I'm already counting this year gone and next year I'm not caring this year gone and next year beginning low five for that terminal.

I think especially in the medium sized markets, you know they have a collection of space and they're more anxious to get us in there so that is not another thing that keeps us up at night.

Thanks a lot.

Thank you.

Ladies and gentlemen, unfortunately due to time constraints, we do have only time for 1 last question.

Our last question is coming from Haleen Becker (PH) of Benchmark.

Haleen Becker Thank you very much, operator.

Hi, gentlemen.

Hi, Heleen.

David, I think you said that the 190's seasonal market kind of thing -

Yes.

Will they be -- they will be certified for over water service so you can do something like the Bermuda?

Absolutely.

Do you have a home out there?

No, I don't right now but I'm thinking about it.

You know, Murphy asked about Bermuda service he asked about a house out there.

the other thing I had a question on with respect to as we're building up the model with the aircraft quote, you some time reach a point where crews per plane kind of decline. should we be thinking -- how should we be thinking about that as we grow, you know, the head count?

Crews, are you talking about crew members not pilots?

No, just overall if I look for employee per plain kind of thing.

I think if we got down from 107 to 100 we would be pleased but we're flying these planes a lot of hours. we cannot compare what we're doing with Southwest for a couple of reasons.

Number one, our planes are so much bigger than theirs and they fly so many more hours in a day.

You can't fly those hours without having pilots on-board so you need extra pilots.

You also need extra people at the airports and on the phones to deal with handling.

So I could go-- I mean, I said this earlier.

We're not sweating that number but if it goes down, you know, down to 100, that would be nice but we're not really necessarily saying that that will happen any time soon.

I think -

Correct, David, we were at 100 June 30.

David NeelemanWell, somebody said 107.

I guess I'm up in the night here it sounds like.

Okay, we're at 100 I don't think you -- you know, again,.

If it goes down two or three it is not going to have a meaningful affect on us.

I think JetBlue experience is more important to us than trying to squeeze every last penny out of our hiring.

David NeelemanI think the other thing this is very important is that we're growing so quickly that say we get ahead and we hire too many people, it lasts about two months and then we're back, you know, so you'll see peaks and valleys.

You see a lot of ebbs and flows.

We're going to beef up in the third quarter and get folks in training and get them ready when the planes come.

Okay, great.

Thank you so much for your help.

Mr. Neelemen I would like to turn the floor back to you for any closing comments.

Well, I'll make it brief.

We have got to get to New York City in a couple of live broadcasts so I'll be ripping down 95 here in a couple of minutes but I want to again thank you for joining us and most especially again I can't give enough credit to our leadership at JetBlue for the hard work they do in leading a great team of crew members that are delivering the JetBlue experience and just to say that we're committed to building a great company here.

We're committed to the rapid growth that we have and doing it in a controlled fashion so we can continue to deliver the JetBlue experience and our goal is to have the JetBlue experience be better going forward and not dilutive so that is something that we are obsessed with on a daily basis and we're pleased where we are today.

Thanks again for joining us and we'll talk to you again next quarter.

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

This does conclude today JetBlue airways second quarter conference call.

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