JetBlue Airways Corp (JBLU) 2003 Q3 法說會逐字稿

Good morning everyone and welcome to the JetBlue Airways third quarter 2003 conference call.

With us this morning, we have David Neeleman, CEO, and John Owen, CFO.

Opening comments will be followed by a Q and A session.

As a reminder, this call is being recorded.

Please bear with us as we read the safe harbor statement.

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

Forward-looking statements involve risks and 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 of the New York market, our fixed obligations and our limited operation history, seasonal fluctuations in our operation results, increases in maintenance costs, fuel prices, and interest rates, our competitive environment, our reliance on sole suppliers, government regulation, our failure to properly integrate live TV or enforce it's patents, our ability to hire qualified personnel, the loss of key personnel and potential problems with our work force, including work stoppages, and continuing changes in the airline industry following the September 11th terrorist attacks, and increased risk of future attacks, as well as potential risks with delivery, placing into service, and integration into our operations of the EMBRAER 190 aircraft.

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 2002 annual report on form 10-K and quarterly reports on form 10-Q.

We undertake no obligation to update any forward-looking statements to reflect events or circumstances that may arise after the date of this release.

At this point I'd like to turn the call over to David Neeleman.

Sir, you may begin.

Thank you, Vincent.

I welcome every one to our third quarter conference call.

We are obviously very pleased with the numbers that we were able to announce this morning.

Had record margins, record load factor, lowest costs that we've ever had on a CASM (ph) basis.

Accomplishing all of that where we had a 66% growth in revenue year over year.

So we're obviously very pleased with the results of quarter.

And it's again a tremendous tribute to our crew members who have continued to give the JetBlue experience on a flight by flight, day-by-day basis.

Had a lot of challenges, obviously in this quarter, with the high load factors and obviously with the blackout.

It was a really tremendous thing that we were able to accomplish over a period of two days.

We only cancelled 22 flights, had 246 that were completed.

Only two the night of the blackout.

And I was out there at the airport and it was great to be associated with such a great team of people that really took care of our customers.

I want to just read -- we got literally hundreds of letters from customers that were so appreciative of the way we went beyond really the call of duty to make sure that their trips were completed on that first night.

An excerpt from the letter, “this is my first trip on JetBlue, but because of your amazing service in a crisis, I will go out of my way to take JetBlue in the future.

Great service promotes great customer loyalty.

You have my deep gratitude and appreciation.”

And I think that kind of exemplifies what we're trying to do here at JetBlue.

And that's why I think we're a little bit of a different company, little bit of a different airline.

That's why I think results are a little bit better than the others, is that we really are focused on customer service.

And I want to talk a little bit about later in our presentation, what we're doing to make sure that as we grow this company.

We have a tremendous amount of growth going forward, how we're going to grow the culture as well.

Because we think we can become better as we become bigger.

So I wanted to spend just a little bit of time talking about the revenue side of the business for the quarter.

And kind of drill down a little bit into a couple of some individual markets and give you kind of an overview.

Our unit revenue was down one-half of 1% in the quarter.

Now, that was on an increase of stage length of 3.6%.

And that's completely reasonable that that would -- we'd expect that to happen.

We had longer flights.

And as has been the pattern with us, we are very good at switching capacity to meet demand.

And this summer is very peak for the East/West business so we moved a lot of capacity into the east/west business, over the summer months, which drove our average stage length higher.

So that's why obviously the unit revenue was down a half a point.

But I wanted to drill down a little bit and give you kind of a little bit closer view, some would call in the retail business, the same store sales numbers.

And compare those RASM numbers year over year just to kind of give you an example of how our business is growing and improving on kind of a unit revenue basis on the markets that we were in last year at the same time.

Of the 24 markets that we are we were in last year, third quarter of '02, we were up in RASM in 21 of those 24 markets.

And so only three of those markets we were down in.

And those three markets, we increased our ASMs in one market by 73%, one by 69.6%, and one, 47.9.

And they were obviously what we would consider de minimis RASM declines in those three of the 21 markets, based on the fact that we had enormous amount of growth and capacity.

So we're very comfortable with that.

Obviously our market shares have gone up significantly.

We're not really running our airline for market shares.

But it is interesting to note that to the five Florida cities of the data that we do have – I’m going back to the first quarter of '03 data, and I think this trend will continue as you go through the third quarter, because we don't have that data on a timely basis -- but our market share to the five Florida cities that we serve, if you combine all New York airports to the five Florida cities that we serve, our market share increased from 22.5% to 31.8%.

So that's a significant increase.

If you take the New York area to the Bay Area, we were up to 19.3% of the total market.

And the New York to the LA basin, which is all airports, up to 19.4%, and of course those will increase in the third quarter.

Those are stale numbers from the first quarter, but those are the latest numbers that we have.

So I guess just kind of sum up the revenue picture, we are very pleased with the growth in our business.

One of the things that we talked about last conference call was the fact that we had this wide difference in our fare versus the fares of our competitors.

And this may seem strange to you, but the numbers came out and those have narrowed quite significantly.

And we are thrilled with that, and we did not like the fact that our customers had to pay such a huge premium to fly on JetBlue over our competitors.

And we did that by -- basically the instructions were to our schedule planning department, keep adding frequency, keep adding frequency, until we get to more of an equal level on fares.

And that has happened in a lot of our markets.

For example, just looking at JFK, Fort Lauderdale, we had 103-dollar average fare, maybe down a buck or so from last time we looked at it or I don't I don't have the -- the first quarter.

That number was down quite a bit, but our market share in that market went up to 31.8%.

So we can fly profitably at 103-dollar average fare.

That's a range we feel more comfortable in.

We like our customers to have good low fares and have plenty of options.

And during that time, by the way, we had almost 13 daily flights in that market.

And so we're going to continue to add frequency as the demand requires in those Florida markets.

So we're happy with the fact that those numbers have narrowed, and that makes it even more reason to fly JetBlue.

If we move on to -- this quarter, obviously, we're getting ready for the 190s.

If you look into the future between 2003 and 2011, we have a 24% compounded annual rate of growth on the number of airplanes that we're going to be taking in over this period over the next seven, eight years.

And so we have a lot of things that we're working on here as a company.

But really the most important thing is our culture, and we're working really hard.

And we have a lot of programs in place and a lot of focus on our crew members.

It starts with obviously making sure we hire the right people, making sure that they have the best equipment and tools to do the job.

And then we're really focusing on our leadership.

We have a program called principles of leadership, which every single person in this company who is a supervisor level and above will complete by the end of this year, the first phase of that.

And there are several phases to come.

And so we really want to make this a great place to work.

We want people -- our crew members to get up every morning and feel like that they want to go to work.

And because we know that if that's the case, then the customers will know that and they'll want to come back and fly us again.

And that's why you see this growth in RASM in the vast majority of our markets year over year.

So it's very important as we add a lot of capacity.

I think what shareholders should be concerned about at JetBlue, if they look into the future, is saying, okay, well you're going to add this compounded rate of airplanes over the years.

Will the customer have the same experience as they step on a JetBlue airplane?

Or will they pick up the phone and call 1-800-JetBlue as they're having today?

And that's our obsession.

We think we can do it and so we're going to continue to do that.

We're going to be obsessed with that thing, with that particular aspect of our business because we think that's very, very important.

We also -- in addition to focusing on what we call our soft assets, our most important assets, which are our people, we also have plans underway and construction underway on a lot of different facilities that we're working on to get ready for the 190s.

In August we began construction on our maintenance facility here at JFK, which will house three A320's with office facilities and provisioning as the airline grows.

It should be completed by December of '04.

Secondly, we have also announced plans to build a hangar, a live TV hangar in Orlando which will also support the airline as well.

We’ll fit three A320s and will have that done by the first quarter of '05.

So we're looking forward to having that facility in Orlando.

With the increase of the number of customers that we have with both Frontier and West Jet, I believe next year between the JetBlue airplanes, the Frontier airplanes, the West Jet airplanes, live TV, our wholly owned subsidiary, we’ll install about 65 airplanes next year.

So we see a great business and a growing and profitable business on that side.

So we're preparing for that as well.

We also have announced the construction of a JetBlue university campus in Orlando.

This will house initial training for pilots and flight attendants and our technicians, our tech up technicians.

And we'll also have a training center for our customer service agents.

That particular facility will hold up to eight flight simulators.

We'll start it with six 4 A320 simulators, and two 190 simulators.

So that's an infrastructure thing that we're excited about and will really help us going forward to meet the need of the growth of the company.

You have probably also read, a lot of you, in the New York area that we we've been working diligently with the Port Authority, with the historical folks to come to an agreement on a new terminal facility at Kennedy Airport.

At the current time this facility is planned to be constructed -- would be approximately a 26 gate facility.

Very efficient, very low cost.

And as we crunch numbers and look at it, their goal is to actually lower our costs on a per passenger employment basis over what we have today.

And we think that that's attainable from what we have been able to drive so far.

We hope to finish that terminal by mid 2007.

And in the interim between now and 2007, with the whole area next to terminal five next to us open, we're going to have to obviously do a little bit of -- be a little bit creative on being able to add a lot of flights into that area.

But with the two structures side by side and a lot of tarmac backspace, we think we can grow to the point where we can continue to grow at Kennedy while that construction is going on.

Really, our challenge is to continue making our product fresh and to make it exciting.

We have got a lot of new changes or exciting things that we’re doing at the airline.

We're going to continue to tweak our product to make it better.

We're not content with being the best airline product as voted by Conde Nast Traveler readers.

And I think that's a huge, I think compliment to JetBlue.

I accepted the award in New York City for the second year in a row as the best domestic airline.

Our margin of victory increased over Midwest Airlines than it did the prior year.

But when I accepted the award, I said not bad for an airline that doesn't even serve food.

And these are obviously -- Conde Nast Traveler readers are very discerning, I should say, and they like their luxury.

And for them to vote us the first -- the best domestic carrier is quite an accomplishment for our people.

I might note that if you took our score and kind of laid it on the world, we had the third highest score in the world behind Singapore and Cathay Pacific, ahead of other names like British Airways and Virgin, which I thought was kind of interesting.

Maybe it's not an apples to apples comparison but it makes us feel really good.

We have just about completed -- we have 31 of the 48 airplanes completed the increased seat pitch program that we have.

We'll have the entire fleet done by Thanksgiving.

I was absolutely shocked when I went on the airplane the first time and sat down and was able to cross my legs at the 34-inch pitch.

All the rows behind row 10, 11 through 26 -- exit rows obviously are more than that -- but the ones behind the exit row are 34 inches.

Very comfortable.

I think our customers flying trans-con are going to love this service.

And so we haven't promoted it at all.

We want to make sure that we're not talking about something we don't have yet, which some other airlines like to do.

But we're not talking about it, but we will figure out a way to promote that a little bit, because we think it's a big advantage.

And remember the reason we did that is -- the main reason we did that is we had one row that was not very good at all.

It was very uncomfortable.

And even though we think that 32-inch pitch was comfortable, we needed to take that row out.

And so as long as we did, we spread out the seats, and it is very nice.

And we're very excited about that.

It's a huge product enhancement for JetBlue.

We also are in the process of adding servers, video servers to the airplanes.

We're in the final stages of working an agreement with a major studio to provide programming on our four movie channels, which will add to the 24 channels of DirectTV content we have today.

So we'll have movies on board.

Haven't really made a decision whether we'll charge for that service or not.

We're still evaluating it.

But we're excited about that.

People can watch either first run movies or popular movies that have been on the in the past.

Before I turn it over to John, just a couple of quick things on our announcement today on Boston.

On the sixteenth of January we're going to commence service -- actually we're starting Boston on the 7th.

But by the 16th of January, we'll have three daily flights to Orlando, two flights to Tampa, one each to Fort Lauderdale and Denver.

And then today we announced two additional flights in that market for a total of nine flights, we’re going to be starting Long Beach to Boston twice a day.

Very good schedule.

We're excited about that service.

Obviously, it's still early in the game, and the business doesn't start until January, but we're very encouraged by the bookings in Boston so far.

We think it's going to be a great market for us.

We have a lot of shareholders that live up there, so we're happy to be up there anyways as kind of a side benefit.

In order to accomplish that, we did announce that we're going to pull out of, cancel the two red eye flights that we had going to Atlanta from Oakland and to Long Beach.

It just didn't make any sense.

So we're in the business to make money.

And as I mentioned before, that was not a strategically important city to us.

Boston, obviously, is.

And so we have decided to make that change.

And we think it's going to help our profitability going forward, and we're going to focus on this market so we can make more money for our shareholders.

Again, Boston is a great add to our system, we're excited about that.

And with that I'll turn it over to John Owen, and I'll take some questions when John finishes his presentation.

Thank you, David.

Good morning everyone.

As David said, we had an outstanding quarter.

We set three records, as he noted, in highest quarterly load factor we've ever had, highest quarterly operating margin we've ever had, and the lowest quarterly CASM.

The operating margin of 19.7 was up 6.1 points year over year.

And as we budgeted, and as we discussed in our last quarter's call, we did incur a slight operating loss during the month of September, seasonally a very weak month, which was offset by obviously two extremely strong months in July and August.

Capacity, as measured by ASMs, was up 66% to 3.7 billion available seat miles.

That came from having an average of 17.4 additional aircraft in service in Q3 '03 as compared to '02, and a 3% improvement in utilization.

We had excellent seasonal leisure travel in July and August, which did generate, as I noted, that record load factor of 87.7, which was up 2.9 points from 2002.

And we saw a 61% increase in revenue passengers carried.

Capacity for the quarter was allocated roughly 60% east/west, 34 percent north/south, 3% short haul in the northeast and 3% short haul in the west.

Operating revenues for the quarter were up 66% to $274m, which was slightly ahead of our budget plan that was driven by a 72% increase in revenue passenger miles.

Yield was 8.14, down 4% year over year on a 7% increase in average length of haul.

RASM was 738.

As David noted it was down about half a percentage point over 2002 on a 3.6% increase in average stage length.

On the same store sale basis, as he said, using -- excluding new city pairs, but using city pairs that we've been in for both periods, RASM for the quarter was up 4.7% year over year.

Other revenue increased 82%, primarily due to increased passenger change fees of $1.7m year over year, as well as LiveTV third party revenue and increases in concession fees at terminal six at JFK.

During the quarter, we placed three new aircraft into service, all of which were financed with bank debt.

At The end of the third quarter we had a fleet of 47 aircraft, 25 owned and 22 under operating lease, and an average age of 20 months.

On the cost side.

Cost performance was excellent overall, and essentially in line with what we had budgeted and previous guidance.

Operating expenses were 220m, up 54%.

It was a CASM of 592, which was a 7.7% decrease in CASM year over year, despite a 6.5 cent increase in average jet fuel costs per gallon.

On a sequential basis, cost per available seat mile was down 2.5% from the prior quarter, due primarily to the profit sharing provision that we took in the second quarter related to the emergency war time appropriations act compensation that we received.

Within the expense items, salaries, wages and benefits were up 67% due to an increase in average full-time equivalence of 55%, higher average wage rates, and $5.1m higher provision this year than last year in the third quarter for our profit sharing plan, which is the kind of negative variance we always like to have.

Aircraft fuel expense increased 81%, on 18.8 million more gallons of fuel consumption, and after the impact of fuel hedging, it was a 9% increase in the average fuel cost per gallon.

Sales and marketing expense was up 28%, due primarily to higher credit card fees resulting from increased passengers.

On a CASM basis, sales and marketing expense was down 23%.

We booked 73.7% of our reservations through JetBlue.com in the quarter.

That was up 8.6 points year over year and 1.2 points over the prior quarter.

As we remarked on our last call, the rate of growth is continuing to slow, but this is still by far the highest percentage in the US airline industry.

And we continue to promote the use of JetBlue.com with double True Blue points and with a 5-dollar discount each way on all flights booked online through JetBlue.com.

True Blue continues to grow excellently.

As of yesterday, we were at 998,000 members.

So we anticipate that either today or tomorrow we'll pass the million mark after less than a year and a half of True Blue being in existence, and we're seeing 85% of those True Blue members booking online.

Landing fees and other rents increased 59% due to a 53% increase in departures, higher lease rates at JFK, and a $1m accrual that we made relating to a dispute over rent on our prior corporate headquarters in Queens.

We had been in litigation on that.

We had an adverse determination in court in early October, and therefore went ahead and accrued the additional $1m in expense there.

Depreciation and amortization rose due to the amortization of purchased technology as part of the LiveTV acquisition, which of course we didn't own LiveTV during the third quarter of last year, so didn't see that appear in the prior year's numbers.

And of course, more owned aircraft.

Maintenance materials and repairs increased 111% year over year because we had obviously more aircraft, 17.4 more on average, as we noted before, and a gradual aging of the fleet.

Maintenance CASM increased 27%, and part of that related to nine airframe checks in 2002 Q3 compared to six in 2002.

As well as increased engine repairs and APU repairs.

Other operating expenses increased 16%.

We had higher variable costs associated with the increased capacity and additional passengers that was substantially offset by excellent performance with lower bad debt expense, unit cost decreased by 31% as a result principally of the lower bad debt expense.

And the fact that LiveTV, which was previously expensed in the other expenses, is now appearing in depreciation and amortization, and salaries, wages, and benefits.

This is the last quarter now that we will have where you will have these odd comparisons in other expenses and depreciation and amortization on a year over year basis.

Interest expense increased 37% due to the debt financing of eight additional aircraft, and interest related to the convertible notes that we issued in July offset partly by lower interest rates.

Interest income and other for the third quarter contained a $400,000 gain related to fuel hedging ineffectiveness under FAS 133.

The prior year's quarter had a gain of $150,000 for ineffectiveness.

Turning to the balance sheet, we ended the quarter with 600m in cash and short term investments, just over $2b in total assets, and over $600m in total equity.

As a reminder on October 7th, we filed a shelf Registration, Form S3 with the SEC, which will permit us to offer up to $750m aggregate in common and preferred stock debt and pass-through certificates.

The registration statement is not yet effective, so we've not issued anything through that.

But this is planning for double ETC transactions going forward principally.

Taking a look at the operating performance.

Once again, our crew members produced an outstanding quarter.

The completion factor was 99.8%, despite the blackout and the 22 cancellations we had associated with that.

And about a half a dozen other cancellations that we had associated with Isabel.

On-time performance was solid at 86.2%.

And again, during the power blackout, we operated a lot of flights but virtually all of them were delayed.

So to have an 86.2% number despite the difficulties of the blackout days is just a real testament to what our crew members accomplish on a daily basis.

Mishandled bags, we were pleased was down to 3.1 per thousand customers and customer complaints continued to be low with the DOT at .29 per 100,000 customers.

Utilization continued this quarter at 13.2 hours.

And as David mentioned, the power failure results were very -- we're very pleased at how we performed.

We’ve tried to quantify what the effect of the power failure is.

And we estimate that the negative impact of that was about a 1.4 pre-tax in the P&L.

And that's roughly $1m in lost revenue and $400,000 in additional costs, obviously before profit sharing as well.

Turning now to guidance going forward.

We're still in the process of finalizing a budget for 2004, so my comments today are going to focus much more on the fourth quarter of 2003.

And when we have our budget done for 2004, we'll be prepared to give more detailed guidance for '04.

At this point, we feel pretty good about the way October and November are booking, with modest improvements seen year over year.

Please remember that we will continue to see a significant year-over-year jump in seats in quite a few of our markets, particularly during the month of October.

And we think the holidays at this point are shaping up as we would expect, both at Thanksgiving and Christmastime.

We continue to expect ASMs to be approximately 50% to 55% higher in the fourth quarter of 2003 compared to the prior year.

And that assumes the delivery schedule that I'll outline for you in just a moment.

And remember that this guidance includes the effect on ASMs of the removal of the one row of seats that we took out.

Because while the removal of the seats continues through October and November to get it completed, we capped every airplane at 156 seats starting in early September when we did the first aircraft reconfiguration.

So consequently the entire fourth quarter will be represented by aircraft flying 156 seats from an ASM perspective.

The result of that is that our ASMs in Q4 are going to be very close to the same as in Q3, up estimated only about 1% sequentially quarter over quarter.

At this point, our best estimate for 2004 based on preliminary budget statistics has ASM growth in the 35% to 37% range for the full year, an average stage length of just under 1400 miles, high 1300s.

And for first quarter of '04 we're expecting ASMs to be up year over year about 40% to 45%.

So the kind of flattening from third quarter to fourth quarter of this year in ASM growth is purely a one-time transitory thing.

Remember that while fourth quarter guidance indicated that that was flat.

We'll continue to see, as I said, growth sequentially every quarter next year.

Average stage length is projected at about 1300 miles in the fourth quarter.

We expect utilization for the fourth quarter to be flat compared to the third.

Cost for available seat mile for the fourth quarter, we expect to be down about 2% to 3% year over year.

And CASM for the full year should be down about 5% year over year, based on an assumed 79-cent all in net of gain on hedging of fuel price for the fourth quarter.

On a sequential basis, we expect CASM in the fourth quarter to be up relative to third quarter.

That's primarily due to 3.7% fewer ASMs per aircraft based on the seat reconfiguration.

But after adjusting for that removal of the seats, we think the fourth quarter CASM should be very close to the third quarter CASM.

Operating margin, again, at the assumed fuel price of 79 cents net of hedging is forecast to be between 15% and 17% for the fourth quarter, which would result in a full year operating margin somewhere between 17% and 18%.

The margin guidance does reflect a small shift in seasonality in our markets where fourth quarter of '03 is going to have a smaller percentage of total capacity in the north/south markets than it did in '02.

In addition, we are expecting some additional maintenance costs in the fourth quarter that we have baked into our forecast that I'd like to summarize a little bit.

We're expecting 11 C checks during the fourth quarter compared to 9 in the third, and that will include our first major C4 airframe check in the fourth quarter.

We're expecting four engine repairs, compared to three in the third quarter, somewhere around 3 to 5 APU overhauls.

And we earlier this month had an engine that was damaged from a bird strike, and we are estimating at this point roughly $500,000 to repair that engine related to the bird strike, which would be incurred in the fourth quarter.

Additionally, we've got some one time maintenance expenses in the fourth quarter related to the seat modification.

We don't capitalize anything associated with removing that seat, so all the expenses associated with removing the one row of seats does appear.

Some of it was in the third quarter because we did some during September, but the bulk of it will appear in October and November.

In addition to that, as long as we have planes on the ground and are doing this work, we've chosen to do some optional work that otherwise would be performed at future C checks, so there's at least another $1m worth of expenses -- I would estimate somewhere in that vicinity -- that we're anticipating that will occur during the course of all of this seat reconfiguration process.

During the quarter, we did add to our hedge position.

At this point fuel needs are 78% hedged for the fourth quarter.

Combination of swaps and collars, collars around $26.50 and swaps representing 50% of the hedge volume at around 29.50 a barrel for crude.

In '04, we're 60% hedged in the first half, 50% hedged in the back half of the year.

As of September 30th, we had on order 105 A 320s and 100 EMBRAER 190 aircraft.

We've made a few minor adjustments to our delivery schedule.

We have reached an agreement with Air Bus.

I'm not sure whether it is signed yet, but we have reached an agreement with Air Bus to accelerate a September '05 A 320 into October of '04.

And we also have an agreement with Air Bus that they will use best efforts to move a December of '04 aircraft into November of '04.

For the current quarter, we took one aircraft on October 1st.

We have three more deliveries coming in November, two in December, to bring the fleet to 53 at year end.

For '04, we're scheduled for two deliveries in each of January and February, 1 each April through September, 3 in October, 2 in November, and 1 in December assuming that Air Bus is able to move that 1 December airplane to November.

If they're not, then it would be 1 November, 2 December.

Either way, it brings us to a total of 69 aircraft at the end of 2004.

I would point out that one of the aircraft that's delivering in 2004 is not coming directly under our purchase contract with Air Bus.

It is coming from IOFC as an operating lease.

We've arranged debt financing for 3 of our remaining 2003 deliveries at this point, and we're in the process of negotiations, pretty late in the stage of negotiations for a sale lease back of the additional two aircraft.

We continue to plan to tap the double ETC market.

As I mentioned, we filed the shelf registration to get prepared for that.

Once we're prepared and things look good in the marketplace, we plan to go with a double ETC transaction, good probability that that will occur during this quarter.

One thing to note about that is that we would be pre-funding deliveries for next year.

So if it occurs during the quarter, we will begin incurring interest expense in the double ETCs.

The money will be reinvested in short term cash equivalence.

We’ll have a negative carry on that.

We have not assumed any negative carry associated with that into any guidance information we're supplying related to the fourth quarter.

So if we do a double ETC transaction during the fourth quarter, those of you who are running earnings models should plan on adjusting them accordingly for that transaction.

At this point, all of our debt except for the $175m of convertible notes that were issued during the quarter on July 15 is floating rate, as are all of our investments.

Average debt rate at the end of the second quarter was 3.15%.

Average investment return was 1.14%.

Estimated shares outstanding for the fourth quarter is based on the following assumptions.

No additional shares assumed from option exercises, $75 market share price at year end.

At September 30, 10.3 million options outstanding at an average strike price of $16.75.

And best estimate for Q4 2003, 76 million weighted average shares outstanding.

Remember that those numbers do not take into account the three for two split that we recently announced that will take effect on November 20, so you'll need to adjust your share numbers accordingly.

Final issue worth mentioning, related to EPS.

Obviously we did a concurrent offering in June of -- or July, rather, of common stock and converts.

In working through EPS, the convertibles have what's called a contingent convertibility feature.

So they will not enter -- the underlying shares behind them will not enter into diluted EPS until our stock price hits $76.50, which is 120% of the conversion priceand stays there for 20 days within a 30-day consecutive period ending on the last day of the quarter.

So you will not see any dilution yet, but you obviously need to monitor the stock price to see when that will enter into diluted EPS.

And with that, I think we're ready, Vincent, for to you take some questions.

And I'll turn it back to David to field questions.

Thank you.

The floor is now open for questions.

If anyone on line does have a question, we ask that you please press one followed by four on your touchtone telephone now.

We also ask that while posing your question, you pick up your handset to provide optimum sound quality.

Please hold while we poll for questions.

Hello?

Again, to pose your questions, it's one followed by four on your touchtone telephone at this time.

Hey, Vincent?

I'm here.

We show that there are some people in the queue.

We'll take the first question from Ray Neidl.

Yes, David and your staff, congratulations on another good quarter.

Thanks, Ray.

I'm just wondering, your margin has increased incredibly up to close to 120% while you continue this aggressive growth.

Usually when an airline grows and develops new markets, their operating margins tend to suffer.

One, and I know you talked about this a little bit, but how are you doing it?

How are you getting the margin up so high and can you continue this as you continue your aggressive growth program?

You know, Ray, I think the third quarter was an exceptional quarter.

I think you probably have some pent up demands because of the war that went on in the second quarter.

And so a lot of those people decided to travel, particularly in August.

July and August we had operating margins that exceeded 25% in those months, and they were tremendous months for us.

I think what we're seeing as we get more and more and more frequency in these markets, and they're really crying out for more frequency, is that the peaks are actually getting higher.

When we go through a time like September, we may go down a little bit more, then maybe we would have on a profitability basis.

But unfortunately the way the months stack up for us on the quarters, it all kind of averages out to a lot more money for us.

And obviously the fact that we have market share advantages, and there's a lot of reasons why we want to do that.

I don't know.

I mean, we've obviously not given you guidance of 19 or 20% margin in the fourth quarter.

We're looking at, we said 15 to 17, which is consistent with what we told you last quarter.

And we're -- we said we're happy with this range between 16, 17% margins.

And from time to time we'll have maybe quarters that will dip a little bit below that and others that will go above it.

But I think most importantly is that our customers love our company, and they love flying with us.

And so if you have customers that are dedicated and like to fly you, then you can grow aggressively and maintain these margins, and we expect to going forward.

Not to the extent we had in the third but in line with the guidance we gave you for the fourth.

David, with your new announcement here with Boston service -- I know Boston is really a big market, a key city and so forth -- but are you doing a small deviation from your basic plan?

It seems like you're doing a lot of overflying over JFK.

And even though Boston is a big market, there's other big cities in the east.

Will we be seeing more of that?

Yeah.

We're anxious to show that JetBlue isn't a one-trick pony, isn't just all JFK.

We started Dulles, we're doing really well out of Dulles.

We’re very pleased with that service.

We think Boston is a market that has had really a lot of reductions after 9-11 and they need more service there, especially nonstop.

They've really had some high priced stuff to their nonstop markets.

And so we think we're going to do well there.

And there's no reason that we have to believe that Boston isn't going to be another JFK and more. we can't put everything in a JFK, because we have somewhat limitations on gates here.

We have a lot -- we can probably go up to 110, 120 departures from the 80 plus that we have scheduled for the fourth quarter.

But it's something that we need to develop new markets and over time and we're anxious to continue to show people that we can serve other markets other than JFK.

And finally, speaking of JFK, just to clarify what you said before with the old TWA terminal by 2007.

Are you going to be using completely the TWA terminal and the current terminal that you're in right now, both terminals?

No.

I think if we build the 26 gate facility, we will be in the 26 gate facility, which would take us up to about 250 departures a day, which is a significant number out of the New York area.

A combination of A 320s, and 190s.

And so we're happy with that.

We're going to be just in that facility.

Now, without getting into too much detail here, because we have to get to other questioners, but the front portion will be -- the landmarked building will be kind of open and airy.

And it will be kind of a museum where people can go and have dinner and check in, but it won't be the main terminal.

You'll be able to go to skywalks that will take you over to the main terminal.

So it will kind of a fixture but not something we'll be paying for or maintaining.

It's something that will be part of the whole ambiance of the Kennedy airport.

Okay.

Good.

Thank you.

We'll take the next question from William Greene.

Hi, Bill.

A question for that you on the yield environment.

Can you give us a little color , in terms of what we should be looking for in the fourth quarter?

Are you concerned at all about it?

We've heard some cautious comments from other airlines.

We've heard those comments and we've studied hard.

Our crystal ball, we can't look more than a few months out, other than just looking year over year.

We have some markets that are way up in RASM comparison, some are the same and a few that are a little bit below.

So I think over all, considering that we have the capacity increases in the markets that we do have, I think we feel pretty good about it, really.

And it kind of goes along with my comments of the really big peaks get bigger and the troughs get a little troughier.

And October is coming about where we thought it would be.

But we have a lot of frequency over what we had last year at this time, and it's particularly in the west, and to the south.

But we're committed to having high load factors.

October load factors -- you'll see when we announce it, it will be a pretty high number.

But that may be driven as much by the fact that we'll just lower the fares until we fill up the airplanes.

But overall I think generally there's nothing we are alarmed about or concerned about in the fourth quarter, but still there's a lot of road between now and the end of the quarter.

Okay.

Bill, if I can elaborate on that just a little bit.

From our forecasting perspective, we're expecting a RASM in the fourth quarter that's pretty flat to third quarter RASM.

Okay.

Great.

And then David, if I can just ask you in terms of your holdings in the company.

Is there any update?

For a while there you had said you didn't have any intent to reduce your holdings.

Is that still the case?

Yeah, for now.

I mean, other than donating.

I've done some charitable giving, and I suspect I'll do some of that by -- before the end of the year.

But as far as selling any of my shares from my personal account, I have no plans to do that.

Thanks for your help, guys.

Great quarter.

Thank you.

Thank you.

We will take the next question from Jim Parker.

Good morning, guys.

David, you mentioned about taking aircraft out of Atlanta, Oakland, Long Beach to Boston.

And you actually mentioned shareholders, how that would be good for them.

And that's very refreshing, because all the airlines don't mention shareholders.

What does that imply, though, about future expansion and going into major airline hubs?

Is there any particular implications how you can do that but maybe it's better to do other things right now?

What can you say about that?

I think it depends on the situation, Jim.

There are certain markets where you may only have one airline in there between.

I think where we got caught a little bit is the fact that Delta was in there in a big way.

Air Tran wasn't serving it and then Air Tran started flying it, and then it became kind of a war between Air Tran and Delta.

We certainly with our cost structure could have stayed in there for a long time just to kind of prove a point, but we're not into proving points.

We're just into making money.

So we thought it was it was a lot better allocation of assets.

But there are other markets that we think can be very attractive for us and that are maybe more strategically important.

So that I wouldn't necessarily say that we made a decision not to go into those hubs.

But I will tell you that it will be much easier and less risky for or shareholders to do it with the 190.

The 190 I think will help introduce service in markets at a significantly lower cost and keep the frequency at a really high level that will allow us to do that and many other things.

I mean, we're -- we were excited when we announced the 190, and we couldn't be even more excited today.

In fact, we get pictures periodically from Brazil.

The wings are now on the plane, and the fuselage are together, and in the first quarter they're going to do the first test flight.

So I think it's going to give us a lot of flexibility that we may not have today, but we're still doing pretty dang good.

So we're excited about that.

A second question is that your head count for aircraft.

If I've calculated this correctly, the average aircraft average head count in the quarter -- you're like 108, down from 116 a year ago.

Is that correct, and is that an applesto apples, year to year comparison?

Yes, that is an applesto apples year to year comparison.

And John, just kind of looking forward here, what might be a level to which that could decline?

Well, I wouldn't even want to hazard a guess on that one, Jim.

Jim, just one thing to keep in mind.

From an operational perspective, why we're growing at 66% a year -- and maybe as the growth slows down a little bit next year, kind of to 40 to 45%, we won't maybe decide to kind of sharpen the saw a little bit, or squeeze that a little bit.

But we haven't been too anxious to focus on that number too much simply because we knew that if we had too many people one month, we wouldn't have enough next month.

So we're a fast growing company.

We want to make sure we always have plenty of pilots and flight attendants and plenty of technicians.

I think we have a pretty good cushion in that area.

And I think hopefully over time, you'll see that number go down.

But in the near term, we're not concerned about it at all because it doesn't -- it's not structurally an issue that we're concerned about because we're growing into our crew members at such a quick pace.

Right.

Guys, thanks.

Thank you.

The next question is coming from Travis Anderson.

My question was already answered.

Thank you.

Thanks, Travis.

Are there any other questions?

A question that may be coming up, may come up that hasn't been asked yet that kind of occurred to us.

I think there's a lot of people anxious to hear what effect Song has had on us.

They're kind of into full bloom now, I guess, with their full service offering to the cities.

And frankly, haven't seen a lot of effect from that.

I think it's -- we have enormous amounts of frequency compared to theirs, to the cities.

But maybe in September we saw some really low walk-up fares in the $70 range.

That's certainly not something that's sustainable on their part, I would imagine.

It's kind of a phenomenon for September.

Our bookings look good for going forward and haven't really from any kind of significance, haven't really seen any effect from Song at all on our bookings.

So that obviously could change, but right now we're feeling good about the competition and feeling good about our ability to compete against them very rigorously, which we will do in the future.

I think the load factors, their load factors probably -- we have stale numbers on June load factors, which were kind of in the mid 60's range for them.

We were in the 80's.

But in August it probably jumped up because we flew very high load factors in August, and probably spilled a little traffic that way.

We probably should have had a few more seats going to Florida than we did, but we've got plenty going there now.

Thank you.

We'll take the next question from David Strine.

Good morning.

Thanks.

I have a question, and John I apologize if you mentioned this.

I noticed that the average stage length is having a bit of an impact on yield.

How much do you think the average stage length will increase next year, percentage-wise?

We had indicated that we thought it would be in the high 1300s for '04.

High 13.

Okay.

Thanks a lot.

And that doesn't concern us from the yield side, because obviously you have commensurate benefits on costs too.

So they kind of wash each other out.

So we’re comfortable about with that.

I did on my little discussion of kind of same source store sales numbers.

That's what we really focus on is how we're doing year over year in our markets.

Great.

That's helpful.

Thanks.

Thank you.

The next question is coming from Gary Chase.

Good morning, guys.

Just a couple quick questions.

For David -- just curious, are you noticing anything?

You mentioned the impact that you're seeing or that you think you're seeing from Song.

As you look elsewhere across your network, are you noticing anything different with -- or in just how people are reacting to you?

Is there any color there that you can share with us?

Are you talking about the competitors?

Yes.

Not too much I can give you specifically.

Obviously, all that stuff is public data.

We've got rigorous competition.

There's no doubt about it.

I think there’s this kind of this old notion that low fare carriers maybe do well when the competitors don't react, and as soon as they start reacting they lose that advantage.

I remember talking to Don Burke, People Express, that told me -- I don’t know if this is the exact right numbers, but this is what he said -- is that they were flying 80% load factors and when everyone matched their prices, they went to 30% load factors.

And obviously we're not in that position at all at JetBlue.

We get rigorous matching from every airline and we're able to grow and gain market share and continue our profitability.

And that's got to be a pretty good sign for us going forward.

Okay.

Was there anything geographically that was of note in the quarter in terms of year on year performance?

Not really.

I guess we had -- the Dulles Numbers -- we started kind of beginning of last Summer, and took a little while to get going, took a little while to get known, but those numbers performed really well.

If you looked at, for example, IAD Long Beach, we had a 47% growth in ASMs, and our RASMs were up over 20%.

So that was really good.

The north did very well.

Our cities to the north have really matured and continued to do well, and we've continued to add frequency in those markets.

We will continue to add frequency, and again, the 190s will give us a lot more flexibility there.

So really, the only three markets that we were even down year over year, like I mentioned earlier in the comments, we had 50% or greater -- almost 50% or greater ASM growth, and they were kind of in the single digits RASM.

So, no, I think overall we're very, very pleased with our business both in the third quarter and kind of where we're going in the future.

And just one quick one for John.

You obviously had terrific expense control this quarter.

But one line item that kind of jumped sequentially was other expenses.

You explained the year on year change.

But I was just curious, because that has been flat for, I don't know, three or four quarters now.

And I just was wondering what the variance was quarter to quarter, if there's any color you've got there.

I don't have anything at my fingertips to offer you on that subject at this point.

It was the difference in the LiveTV, obviously accounting, and there was the bad debt expense.

His concern was sequentially from second to third quarter as opposed to year over year.

We'll follow up with you later.

Thanks a lot, guys.

Great.

Thank you.

The next question is coming from Jamie Baker.

Good morning, gentlemen.

Hi, David.

Hi, Jamie.

Once I'm on board JetBlue, there's no question the experience is a good one, but getting there isn't necessarily your strong point.

I’d have to see a human being to check in as opposed to an Internet connection.

I can't get a flight page in the event something does go wrong.

I can't review my reservation online.

In fact, I can't even see my seats until after I commit to purchasing a ticket.

And I realize I'm nit-picking here, but is there any plan to upgrade the non-flight experience to the level of what most of your competitors are offering?

Yeah.

We are, Jamie.

We're working on that.

I guess one area that I would beg to differ a little bit is that on our -- at least at Kennedy, we focus a lot at Kennedy -- when you show up at the airport, we do have obviously kiosk check-in and you can check in there.

But our lines are moving quickly and we have all of our positions staffed, which I think people care more about that than just about anything else.

And getting a boarding pass on line, if you already have a seat assignment.

But there are -- most of those items we have that we're working on, and we'll have some announcements on that with some added extras.

So we're a technologically savvy company and we've done a lot of things at in home [rez] and our percentage of bookings on line.

So we'll get back in the game here and be able to equal to or beat a lot of those things.

Some of them are not that important to our customers, they're just more for show more than anything else.

We'll determine those things that are really important and make sure we do those.

Excellent.

Look forward to it.

And as a follow-up to Jim's earlier question as to whether OA hubs are off limits going forward.

Yes, I agree, obviously Atlanta is a two carrier town.

But so is Denver, and you're expanding there.

Should we assume that Denver is also underperforming?

Or is it really a Delta issue when it comes down to it?

I guess we are expanding because we doubled service there.

We went from one flight to two flights.

I guess technically it is correct.

But I think we have a two strategy operation.

We do some cream skimming and we do some more strategic kind of dominating markets.

And Denver was -- frankly there was time on the airplane and that's as far as we could go West, so that's where we finished.

And the costs obviously are very, very, very low on that and it doesn't take much to make money, so that's why we picked it up.

Sure.

Thanks a lot for the time.

I appreciate it.

When you talked about access, I thought you were going to talk about the [Van Wick].

And I was tell you how it's moving faster now, we have an extra lane, construction is finishing off.

And we make it worth our while to go to Kennedy.

It's not the Van Wick I'm worried about.

It's the American terminal.

I actually know somebody whose livery driver was arrested trying to get through traffic there recently, and people were hoofing it to your terminal.

Great.

It should be on line before the end of the year, too, so that will be an additional help for access to our terminal.

Good.

I appreciate it.

Thank you, David.

Thank you, John.

Thank you.

The next question is coming from Sam Buttrick.

Yes.

Good morning.

Hi, Sam Buttrick.

Hi David Needleman.

John, you mentioned that you were going to be doing your first major C 4 check in the fourth quarter.

What do you budget for that and how does that schedule roll out into 2004?

Okay.

From a budgeting perspective, we've been running on the C 1s, 2s, and 3s numbers between 125 and 175, generally speaking for those.

The C 4 is more of a $400,000.

That's our estimate at this point.

Obviously we've never done one before, but based on the work (indiscernible), that's our estimate for it.

That is just for the airframe.

Yeah.

That's an airframe check.

There's not an associated engine overhaul.

No.

Engines and airframes we have on different schedules.

Okay.

And how many of these C 4 air airframe checks would be rolling out in 2004?

We're looking at seven of them in '04.

Seven.

Okay.

Over the year.

And secondly, and a smaller point.

David, you've got video, your competitors have audio, probably with some pneumatic tubes still out there.

When are you going to offer onboard audio?

It can be done clearly.

Yeah.

Stay tuned.

Okay.

That's great.

Thanks.

Thanks.

Thank you.

The next question is coming from Michael Linenberg.

Hi.

Good morning.

I guess two questions here, and I apologize if you actually have run through this earlier.

But I know coming in or previous to this quarter, the guidance was that you would probably make money in the first two months and lose money in September.

Can you just provide us with maybe how profitability differed by the months and were you in fact profitable in the month of September?

I think I already said that we did have a loss in September.

And as David previously said, we had operating margins north of 25% in each of July and August.

So again, September was the lousy month that we always expect it to be, and budget it to be.

And we, of course as we've said in the past, compound the problems with September when we reduce service and do more optional maintenance work during September, since it is a lousy traffic month.

So in addition to flying fewer ASMs and having less revenue generating potential by taking airplanes out of service, we also incur the maintenance expense associated with that.

And we also spent a lot of money in advertising in September.

So it's just kind of the nature of the beast.

Always will be.

Yeah.

It always will be.

It's kind of nice that you've got a quarter that has two stellar months that are going to be married to your worst month of the year.

We’re just glad that May, October, and September don't come in the same quarter.

My second is -- you know, David, you had talked about the new terminal facility coming on line in Kennedy in 2007.

And I think you said either 260 or 250 departures.

When you look at the number of flights that you have today and you also look at your slot exemptions, do you ever run into a problem there?

Or does the terminal come on line at the point that the slot controls, I believe they get phased out in '07?

Is there any sort of constraint there that we would see like in the late '05, '06 period?

There could be some.

I mean, we have the flexibility of moving our flights around, because remember the slot is only from 3 p.m. to 8 p.m.

There are flights that may be today are at 3:05 that could be at 2:59 or something like that.

So we could move it around.

There could be some constraints.

But as we get further and closer to the 2007, the slots are going to be easily obtainable and not that expensive for even the possibility of additional slot exemptions.

We're not really concerned about that, because the people haven't paid too much attention to slots nowadays with the decrease in service after 9-11.

It's not as big a focus as it used to be.

Thank you very much.

And Mike, just to confirm, the slots do go away on January 1 of '07.

Thank you.

Thank you.

We'll take the next question from Tom Marcico [sp].

Hi.

How you guys doing?

Can't complain.

Thanks.

I was just wondering if you can tell us the CASM that you're expecting on the 190s compared to what you're flying right now?

Yeah.

On the 190s, we did -- at the same assumed average stage length.

And we're assuming in our plan that the 190 will fly an average stage length of around 600 nautical miles.

At the same assumed average stage length, the 190 in our analysis was about 1 cent in CASM higher than the 8320 for the comparable stage length.

Then your earlier comments in reaction to one of the questions about your ability to put in the 190s into other markets and have significantly lower costs.

What does that relate to?

Are you talking about like fortress hubs or things like that?

Yes.

You mentioned Atlanta.

If you look at the trip cost difference, it's maybe -- I don't know exact percentage off the top of my head, but maybe 35, 40% cheaper per trip.

So when you have a hundred seats to be able to do that.

And a lot of these hubs you have to have frequency to make a difference.

And so you can start with a frequency level which is much higher with significantly lower risk on a per trip basis if you're just flying 100 people a flight on a 190 versus 100 people a flight on a 320.

Okay.

Thanks for answering my question.

Appreciate it.

Thank you.

The next question is coming from Michael Grutesmocker [sp].

Hi, guys.

I think JetBlue has proven the models works well when the big carriers are shrinking.

How do you feel about the announced ’04 capacity increases you've seen, specifically Delta growing eight to 10%.

Just kind of curious what you think about that.

I guess obviously the Song increases in our markets actually far exceed that.

If you look right where we're flying.

You know, they have year over year much more than 10%.

Obviously I think it puts them in more -- I think one of the reasons they've done well is because they've basically shrunk to this level and to the extent that they want to pick up the growth.

And if the business is there for them to get it, then I think they'll probably do okay, but if it's not, then they're going to be kind of back in the same soup again.

I think it's more of a question for them than it is for us.

I think we've had capacity increases in our markets that far exceed those numbers in a lot of our markets.

So we don't really see -- we focus on having the best products in the industry and the lowest cost.

And if we do that, we think we’d do good if we were selling widgets, let alone airline service.

So that's really what we're focused on.

Fair enough.

Beyond Boston next year, how many cities do you plan on adding?

Beyond Boston, maybe one or two.

Okay.

Max.

That could change, as it always does.

But we're not looking at adding a lot.

All right.

Sounds good.

Thank you.

The next question is coming from James Yakabuchi [sp] .

It's been answered.

Thank you.

Thank you.

And the next question is coming forth Salvadore Vitale [sp] .

Good morning.

I have a question regarding the impact, about the combined impact of the power failure and the hurricane to both revenue and operating profit?

Can you give us some color regarding that?

Yeah.

The power failure we estimated lost revenue in the vicinity of $1m, and incremental expenses in the vicinity of $400,000.

Those are pre-profit sharing accrual adjustments.

As far as the hurricane goes, there was only about six cancelled flights at Washington Dulles location on one day.

And we haven't even bothered to quantify that.

It was clearly a much lower magnitude than the power failure.

Okay.

Thank you.

Thank you, ladies and gentlemen.

This does conclude today's Q&A session.

Now I'd like to turn the floor back over to the host for any closing comments he'd like to make.

Great.

Thank you, Vincent, and thank you every one for joining.

I'll make this brief because we've gone over here, our call and we respect your time.

But we're excited about our company.

We're excited about our crew members.

We think we have a differentiated product.

We will continue to differentiate.

We're going to be become bigger, and we're going to become better as we go forward.

And try and reward our shareholders for their confidence in us.

So with that, we'll sign off until next quarter and thank you for your participation.

Thank you, ladies and gentlemen.

This does conclude today's conference.

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