JetBlue Airways Corp (JBLU) 2004 Q1 法說會逐字稿

Good morning everybody and welcome to JetBlue's first quarter earnings conference call. (OPERATOR INSTRUCTIONS). We have on the call today David Neeleman, JetBlue's Chief Executive Officer, and John Owen, the Company's Chief Financial Officer.

As a reminder this call contains statements of forward-looking nature which represent management's beliefs and assumptions concerning future events. Forward-looking statements involve risks, uncertainties and assumptions and are based on information currently available. Actual results may differ materially from those expressed in the forward-looking statements due to many factors including without limitation the extremely competitive industry, the Company's ability to implement its growth strategy including the integration of the EMBRAER E1 90 aircraft into its operation, the Company's significant fixed obligations and its reliance on high daily aircraft utilization, increases in maintenance cost, fuel prices and interest rates, the Company's dependence on the New York market, seasonal fluctuations in its operating results, its reliance on sole suppliers, government regulations, the loss of key personnel and potential problems with its workforce, the potential liability associated with the handling of customer data, and future acts of terrorism or the threat of such acts or escalation of U.S. military involvement overseas.

Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings including but not limited to the Company's annual report on Form 10-K and quarterly reports on Form 10-Q. At this time I would like to turn the call over to David Neeleman for opening remarks.

Thank you very much. Thank you all for joining us today as we report our first quarter earnings of '04. Obviously we are a little mixed today. I mean obviously we're happy that we were able to beat our margin guidance, but obviously we're not -- we would like to do better in the quarter, but I think in light of the circumstances we face in the first quarter, and these were not anticipated from our last call, I think we exceeded our own expectations. Particularly on the cost side we're very pleased with that. And as you recall we had given margin guidance of between 9 and 11 percent, and we came in actually at the top end of that range at 11.3 percent margin. And at 14 cents per share, which is of course also ahead of expectations.

Our fuel costs that we use for that 9 to 11 percent guidance number, if you recall, was 85 cents a gallon and we actually came in at 92 cents a gallon. That is net of hedges, which added kind of a preprofit-sharing number of about 3.8 million to our costs. So I think that even highlights even more how pleased we are with the cost side of the business.

We entered obviously the first quarter with about 53 percent of our capacity in the transcon business. And we were obviously somewhat exposed when we had the melt down of that business with a lot of increased capacity and some very, very low fares. And so obviously in light of that, plus also the two-for-one discounts that were being offered by American that was matched by Delta and United were obviously of a concern to us. And as I mentioned with high fuel prices, and so to come up on top of our range we're very pleased with that and we're satisfied.

By the way, during the quarter we added 217,000 new TrueBlue members to our program. So obviously we're growing and adding a lot of new customers and a lot of happy customers are flying JetBlue. And that is obviously a direct result to the unbelievable service that is garnered every day from our fantastic crew members.

And I think I talk about this every conference call, and hopefully I'll never stop talking about it. But the secret weapon at JetBlue is our people. We do an absolute fantastic job of hiring the best people, and our people do a great job of setting expectations and taking care of our customers. And when you think about how travel patterns have changed out of New York, and how people are flocking to Kennedy Airport to take fights from maybe two airports that were preferred, in a lot of cases they are actually paying more for that privilege.

And now foregoing international tickets that were offered to them free, and to be able to do as well as we have done is just truly remarkable. And it is 100 percent attributable to our tremendous group of people here at JetBlue that are so absolutely committed to giving great customer service. I think sometimes the analysts miss that. They just look at the numbers and they don't realize that we've got the best people in the industry here that are taking care of it. And that is really our edge. We have said it a million times that our TVs are the most overrated part of JetBlue and our people are the most underrated part. And we will continue to say that.

We were honored obviously with lots of awards. We continue to be, and again, a tribute to our people the Conde Nast Travel Magazine is obviously the second year in a row awarded us their honor, and that was last year. But also just recently the University of Nebraska and Wichita State University study was obviously based on the strength of our operating metrics of the DOT, again a tribute to our people.

That was really picked up by a lot of media outlets and was reported widely. I think there were over 800 TV hits on that particular story. And I think what I attribute to it is a little bit different when you see a low-fare carrier with the really low fares being given the best quality award. It is a bit of a dichotomy, and it hasn’t really happened to the past. And I think people are obviously interested in that news. And we are obviously very proud of our people.

You know we're committed to growth. We're going to add a lot more new cities and new planes. During the quarter we began service between JFK and Sacramento. That service is doing well. And we began service to Boston to five initial destinations. The three destinations are Florida, Tampa, Fort Lauderdale, Orlando. We also added Long Beach and Denver, and soon we would be adding our sixth which is Oakland. We're very pleased with the Boston performance, particularly north-south. We were profitable in those markets which is in the first quarter, which is obviously -- we said we were profitable in February and August, we were in March as well. And which is amazing to be profitable the first month in those markets. Now obviously its a peak time of year and we have the summer season to go through, but we're very helpful for those markets.

We also in early May will begin new service between Dulles and Sacramento, kind of our capital to capital service, and are looking forward to flying that additional service. We're going to fly to Dulles. We will add our fourth Long Beach and our third Dulles to Oakland flight. Early May we will begin two nonstops, as I mentioned, between Boston and Oakland, a new service to JFK San Jose.

We're going to increase our frequency from JFK to San Juan from the -- from four that we currently have up to six, and possibly seven for the summer. That is looking very good. It is a very good market for us. We are also starting new daily service from JFK to Aguadilla, Puerto Rico. We're very pleased with Puerto Rico. And we think we will do well in Aguadilla as well. Subject to government approval, of course, we going to start in June, two daily flights to Santiago in the Dominican Republic, and also one daily flight to Santo Domingo.

We also added additional summer service from JFK to Denver. We added additional service from JFK to Denver. We added an initial flight. We also added a second flight to New Orleans from JFK, which is doing well. And then we have added flights up to seven daily departures JFK Buffalo, and we're up to five now to Rochester. We're very pleased with our upstate New York service, even though it is a small percentage of our ASMs. They are big contributors to our bottom line. And we're very pleased with that business and we will continue to grow that.

We have also announced plans to begin service out of LaGuardia. And we have received an extension from the Federal Aviation Administration to start that service at the end of September. And as we mentioned before, we will have seven departures a day out of there. And like I said we will start those at the end of September. And they will be primarily Fort Lauderdale flights going to -- from LaGuardia to Fort Lauderdale. That is a market that we do very well in. Some of our customers would like to go out of LaGuardia and so we're going to offer that service as well.

If we look forward to the winter, obviously we did very well north-south. We're very, very pleased with that business. We peaked at 53 daily flights on our highest day between JFK and Florida. And as we're putting together the winter schedule for next year, we think we will be about 65 flights a day. So we're going to continue to grow that business between New York and Florida. We are very, very pleased with the performance. Our customers love this service. And I think as we get more and more frequency it gives us a tremendous advantage going forward.

We have another 11 A-320s delivering this year, 15 next year. Plus we will begin delivering our EMBRAER 190's, which we're starting to call our E190's by the way just for information sake, for a total of 7 next year, so there will be a total of 22 airplanes next year.

And we're going to just continue to do what we do best, taking care of our customers, treating our crew members well and continuing to grow. Looking forward now to the second quarter and beyond, April is looking very good. We have a good visibility into April now. We're seeing more strength in the West. It is improving greatly from the first quarter than we had even expected. As of now May is booking at or above last year's levels in each region, which I think is significant given what happened in the first quarter in transcon. And that is also significant I think in light of Delta's expansion out of JFK to the West markets to Denver and San Diego and Seattle and other places, L.A. and San Francisco, the places where we fly, plus the increased service that is being added by others in the transcon market, America West, United, America and others.

And the strength that we're seeing is primarily in volume, obviously not in yields, but we will take it. It is all revenue to us. At this point our guidance on operating margin for the second quarter will be between 14 and 16 percent, obviously up from 11.3 that we saw. So we are feeling pretty good at this point in time about the second quarter.

While John will go into more detail, his guidance assumes -- this guidance assumes seasonal improvement in our transcon markets. And yet it takes into account the current excess of capacity and resulting revenue weakness. We're not assuming any improvements in the competitive environment. We're not assuming that somebody gives up and goes home. But we are assuming that there is going to be a seasonal increase. And of course it takes into account higher fuel prices, which we put in our model and made those increased judgments. So I think that is -- we feel good about that guidance considering the increased fuel prices and the increased capacity on the transcon markets. And as we are looking into the second quarter we like what we see so far.

For the full year of 2004 we're happy to be able to reaffirm operating margin guidance that should come in. We're still going to keep with our 13 to 15 number for the year. And that is obviously despite significant increases in our assumed fuel price. We are using a 92 cent fuel price for between now and the end of the year, which is about 13.5 million preprofit-sharing. And so to be able to keep that guidance and add all that extra fuel expense then I think you can tell that we are feeling better about the year, and obviously our visibility is into the second quarter. But we feel good about our Company and our franchise and all the things that we have been able to accomplish, and most particularly the loyalty of our customers as they continue to come to JetBlue and fly us and tell all their friends, and as their friends are flying us it is a really gratifying thing.

I think I want to mention one thing about transcon a little bit too before I turn the time over to John. While we are exposed on transcon to the competition that is out there and the added frequency, I think we're somewhat more insulated than others that are really duking it out in the LAX market. We have seven daily nonstops this summer between JFK and Long Beach. Last year we had seven daily nonstops between JFK and Long Beach. But in addition to that American had three out of Orange County, and they had three out of Long Beach. So it was a total of six from American and seven for us.

This year American has decided to get out of the Orange County market and drop one flight to Long Beach. That is really -- instead of 7 versus 6, it is 7 versus 2. And obviously people in California really like their airports. They don't like driving those freeways, and so we feel pretty good about the fact that we are somewhat insulated in Long Beach. It is a great airport. It is great operation for us. So we're hopeful that we will have a good summer there.

I think the same applies for Oakland. Now we're currently the only airline flying from JFK to Oakland. And while we have added service to Sacramento that has taken care of some of the people that have made that trip over from Sacramento, and also people who have come north from San Jose, we feel good about the fact that there are people that live in the East Bay -- the Bay area that are more than happy to fly out of Oakland. It is a great airport as well. And it is a low-cost airport, and it is one that has very little delays. And so we feel good about where we are at transcon, and we're looking forward to the summer.

We had 53 percent of our business in the first quarter of transcon. We're going to have 60 percent this summer, but obviously we will be adding some additional north-south flying in the fourth quarter and pulling back some of the frequencies on a seasonal adjusted basis. So we expect that we will have less than 53 percent as we head to next first quarter. So we are going to try and adjust the capacity to the demand, maybe a little bit better than we did this first quarter. And we have learned a lot. And frankly I'm not sure that what happened in the first quarter this year was sustainable for some of our competitors based on our cost advantage and our product advantage and the fact that we are in Long Beach, I feel really good about where we are today.

So with that let me turn the time over to John Owen, our CFO. And he will give you some more details on some of the numbers that I have talked about so far.

Good morning everyone. As David said earlier, we had some mixed emotions about this quarter. On the one hand you can never be satisfied or pleased to report a margin that is lower year-over-year and absolute earnings that are lower year-over-year. So from that perspective we're not that happy about it.

On the other hand, in light of the unprecedented competitive backdrop that existed in the quarter in the Transcontinental markets in particular we have to be very satisfied with the performance we have turned in. Certainly the 11.3 operating margin was higher than we had expected it to be and higher than the guidance that we had given. It was principally, but basically entirely due to cost performance because our revenues for the quarter based on the forecast that we did when we made our last conference call here at the end of January, our revenues for the quarter literally came in within $1 million of what our forecast was.

So all of the improvement that we saw in the quarter was on the cost side. And we did a very good job of forecasting revenues. Capacity was up 45 percent measured in ASM's to 4.2 billion ASMs, with a 35 percent increase in departures during the quarter.

Utilization was up slightly at 13.3 hours a day. Our ASMs were a bit ahead of guidance that we had given at the end of the first quarter due principally to additional extra section flying around Presidents' Day, with a quarterly load factor of 79.9, which was down 1.5 points year-over-year from 2003 -- a 32 percent increase in passengers carried.

As David said, the East-West transcon business was 53 percent of our ASMs in the first quarter. The seasonally strong north-south business was 42 percent. The short haul in the Northeast that David alluded to, which is performing so very well, was 3 percent. And our short haul activity on the West Coast was 2 percent.

Virtually all of our markets, as David talked about, saw some unprecedented competitive pressures particularly in the form of the buy two get one free promotion that was offered by American and was matched with minor tweaks by both United and Delta.

The first quarter saw continued improvement in the transcons though throughout the quarter. And the environment in the transcon was characterized by obviously capacity additions by us and by others, and tremendous yield pressures, as David alluded to before. But we did see sequential improvement from January to February to March. And as David remarked, we have seen significant improvement in April relative to March as well. So you can see that the transcons are coming out of their off-season winter and getting into their peak. And we're definitely seeing trends that we had anticipated seeing based on seasonality.

Obviously in the first quarter the seasonal strength in the north-south markets offset the weakness in the transcon. And that has always been something that we have endeavored to do -- it is one of the things that David has driven home from the beginning at this Company is that we should have blocks of our system that act counter seasonally in nature to help smooth earnings throughout the year, rather than being totally dependent on something that peaks at one time of the year. We definitely saw that in this quarter.

Revenues for the quarter were up 33 percent to 289 million. That is a 42 percent increase in RPM's. Yield was 829, which is down 6 percent year-over-year on a 7.8 percent increase in average length of haul. For the quarter RASM was 685. That was down 7.9 percent over 2003 first quarter, but on an 11 percent increase in average stage length.

If you exclude the effect of new markets, going back to our usual same-store sales approach that we like to use because of the rate at which we're growing, RASM for same-store sales year-over-year was down 2.2 percent for the quarter, while ASMs in those markets that were counted in the same-store sales were up 21 percent. So we're pretty comfortable with the way that transpired in light of the competitive environment that was there.

We actually saw in the month of March that same-store sales RASM increased 3 percent year-over-year for March what was an 11 percent increase in ASMs in the same-store sales markets.

During the quarter we took delivery of five new aircraft. Two were financed through bank debt, two were financed with escrowed funds from our first ever EETC transaction, which I will speak to a little bit more in a moment. That was priced on March 18th. And the other airplane was an operating lease which we took from ILFC. At the end of the quarter the fleet was 58 aircraft, of which 33 were owned, 25 were operating leases. The average fleet age, 22 months.

Speaking to the cost side of the equation, as we said cost performance was excellent overall, much better than we had expected despite a realized fuel price net of hedges in the quarter that was 7 cents higher, as David said, than the number we had embedded in our guidance. Operating expenses totaled 256 million. That was up 40 percent year over year. CASM of 608, which was down 2.9 percent year-over-year. And that is despite a rise in maintenance cost and, of course, a 3.7 percent reduction in number of seats per aircraft resulting from the removal of one row of seats that we did last September.

Actually on a sequential basis compared to fourth quarter, despite a 44 percent increase in maintenance expense and a fuel price that is 7.3 cents higher, CASM remained flat for the first quarter this year compared to fourth quarter of 2003.

The year-over-year improvements in CASM -- there is a couple of things going on there. One, obviously continuing economies of scale, longer average stage length, continued reduction in sales and marketing expenses, and we had lower-than-expected fuel burn per block hour. Our system operations and flight operations folks have been extremely diligent on working through a variety of operational changes to try to improve fuel burn. And we absolutely saw it in reduced fuel burn per block hour in the quarter, which was one of the things that we had not been anticipating.

Significant differentials within the expense lines, sales and marketing as I said have decreased. That is down 18.7 percent on a unit cost basis. It is due mainly to better economies of scale and not needing to do spend all of our ad budget, with a small improvement in our sales online. For the quarter we took in 76.9 percent of reservations at JetBlue.com. That is up 5.9 points year-over-year and 2.3 points compared to the fourth quarter of '03.

We did recently modify the discount for bookings made online, as it had previously been $5 and it is now $3. We saw a minimal change in our online booking percentage as a result of that. And of course we do continue to offer double TrueBlue points for all flights booked online. TrueBlue Flight Gratitude Program membership continued to grow. As David alluded, we added about 200,000 new members and closed the quarter with roughly 1.4 million members in TrueBlue.

Maintenance, materials and repairs increased as we expected it would. It was up 159 percent on a unit cost basis year-over-year, with an average of 17 more operating aircrafts in the first quarter of '04 compared to '03. And our first quarter this year saw 18 airframe checks compared to six airframe checks in the first quarter of '03. We recognized in the fuel line the benefits of $5.4 million worth of hedge effectiveness in the quarter, which is obviously embedded in that 91.7 cent fuel price average that we had for the quarter.

Interestingly, in the -- below the line where we have to book hedge ineffectiveness, we have in the past tended to have gains from hedge ineffectiveness that we were required to book as income for perverse reasons that only students of FAS 133 can possibly understand. We actually booked $400,000 reversal of gains. So essentially $400,000 loss on hedge ineffectiveness that appears in other income.

Tax rate for the quarter was 41 percent. That is obviously our best estimate at this point in time of what we think our tax rate will be for the full year. As for the balance sheet we ended the quarter with $585 million in cash and short-term investments, and $693 million in equity.

Concerning operating performance, once again the crew members at JetBlue produced an outstanding quarter with a completion factor of 99.8 for the quarter, which should prove, based on past trends, to be industry-leading once all the other airlines have reported. And our on-time performance was also good at 83.7 percent. Mishandled bags were 3.1 per 1,000 customers. And our customer complaints was a nice low .38 per 100,000 customers, with not a single complaint for the month of February. And as David alluded, we were given the Airline Quality Rating Survey No. 1 ranking by the professors at the University of Nebraska and Wichita State based on those solid DOT metrics.

Now I'll turn to guidance for the second quarter and the full year. David has actually given most of the significant guidance already with respect to the margin guidance. But we are encouraged by the trends we're seeing. In April bookings were very solid there. May is booking at or above last year's RASM levels at this point in each of the regions we fly, although the revenue environment obviously continues to show pressure because of the competitive transcon business.

For ASMs we expect capacity to grow between 37 and 39 percent for the full year. And for the second quarter we expect it to be up 40 to 42 percent compared to the second quarter of last year. And that is based on the aircraft delivery schedule, which I will go over in a moment.

Average stage length is projected to be around 1,350 miles in the second quarter, and just under 1,400 miles for the full year. And we expect utilization to remain around the 13.3 hours that we had in the first quarter for the full year. As David said, operating margin guidance is between 14 and 16 percent based on a 92 cent net of hedges fuel price assumption for the second quarter of the year. That is versus an 18.6 margin that we produced in the second quarter of last year.

And for the full year, margin guidance again based on the 92 cent net of hedges, fuel price is between 13 and 15 percent compared with the 16.9 percent margin that we reported for the full year last year.

As far as distribution throughout the quarters, we still expect the third quarter to be our strongest operating margin quarter. That the fourth quarter will be the second strongest, third quarter -- excuse me -- second quarter will be the second strongest -- or the third strongest rather, second weakest. And that the first quarter that just past would have been our weakest margin quarter for the year. That is the way the forecast looks.

As for CASM we're actually going to revise our CASM guidance that we had given at the end of the first quarter a tad. We now expect CASM to be flat year-over-year at a net assumed fuel price of 92 cents. Previously we had said we expect it to be up slightly 1 to 2 percent, something like that on an 85 cent fuel price. So based on revisions and refinements that we have made in our forecast right now it is showing a very good flat CASM guidance. And again that is despite the fewer seats that we have in the airplane this year compared to last year.

From a maintenance perspective we continue to expect full year maintenance costs on a unit basis will increase about a tenth of a cent in CASM over 2003 unit costs. For the full year we expect to perform a total of 49 C checks, 7 of which will be the major C4 checks, and a total of 33 engine repairs. By way of comparisons for '03 we had 34 C checks, only one of which was a C4, and only 9 engine repairs.

So we expect maintenance costs to be highest in the third quarter as we have done a lot in prior years where we pull multiple airplanes out of service in September, since it is our lousy operating month for the airline business anyway, and try to concentrate as much aircraft check activity into that month as we can.

Concerning fuel hedging, we've got 44 percent of our fuel requirements hedged in the second quarter of '04 in the form of swaps at 25, 35 on average for the price per barrel accrued. And we have almost 40 percent hedged in the second half with swaps also averaging about 25 to 35. We have also put in place in April here our very first positions out into 2005. We have hedged roughly 20 percent of our '05 needs at just a tad under $30 a barrel.

The aircraft delivery schedule, one per month May through September for a total of 5 there. And then we're heavily loaded late in the year, we have 3 in October, 2 in November and 1 December. That is 16 aircraft total for the year, ending the year with 69. And of course the EMBRAER 190's will not appear until August of 2005.

For capital spending. Now we're going to talk about the financing of a lot of our capital spending for the year with the EETCs. In March we successfully completed a $431 million EETC offering to finance 13 aircraft delivering through the end of this year. So we essentially have taken care of all of our financing needs by prefinancing with that.

It was our first foray into the public debt capital markets on a secured basis, other than of course our convert last summer. It was extremely successful with healthy demand for investors, priced very competitively. And we believe we are correct in making the statement that this was the first C tranche of a EETC that has been sold since 9/11.

The cash proceeds from a EETC are invested and held in escrow to finance the airplane deliveries through the year. To date two airplanes have been delivered, and we have drawn down the funds from that by the end of the first quarter to do that. The EETC is floating rate and it has a weighted average all-in rate of about 3.6 percent at the moment.

We are going to have negative carry in our P&L for the balance of this year as these airplanes deliver. Based on the difference between the 3.6 percent that we will be paying on the EETCs and the roughly 1.1 percent investment rate that the money will earn while it is invested pending the delivery of aircraft. So please take into account that interest expense in the EETCs and the partially offsetting interest income on the undrawn balance of cash as you do your forecast for the year.

Also to clarify the balance sheet treatment of the EETCs, the EETC debt only goes on our balance sheet as each aircraft delivers and is financed. And it is roughly $33 million per airplane. So of the 431 million only about 65 to 66 million of it is on our balance sheet for right now. By the end of the year all 431 million of it will be on our balance sheet and reflected as debt.

From a capital spending perspective, total capital expenditures for aircraft, spare engines and simulators for the remaining nine months of the year is expected to be $480 million, including predelivery deposits. And non-aircraft capital expenditures are expected to total 130 million, which of course includes major real estate projects that we are working on, as well as live TV equipment. Average debt rate at the end of the first quarter was 3.2 percent. The average investment return on our cash was 1.2.

For outstanding share guidance on estimated shares for Q2 and year end we have used an assumption of no additional shares assumed from option exercises. There are 16.9 million options outstanding at a $14 average strike price. We have assumed 20 percent market appreciation in the stock pro rata throughout the year 2004. And that leads us to an estimate for Q2 of 111.4 million weighted average shares outstanding on a diluted basis, and for full year, 111.7 million.

I think that includes all of our prepared remarks in terms of walking through the numbers. And, operator, we're prepared to take questions.

(OPERATOR INSTRUCTIONS). Jim Parker of Raymond James.

That is a terrific performance right across the board, but particularly on the cost side. I'm just curious about your FTEs per aircraft are coming down nicely in the fourth quarter and first quarter, and looks like you were at 95.7 at the end of the first quarter. I just wonder do you have any goals like where you could get this down to? I think we heard recently that Southwest was down to 80 people per aircraft. Can you give us some thoughts on that?

We really don't use that as a metric for goals around here. Our job is to try to obviously be as efficient as we can be everywhere, and that number will be a fallout of our attempts at efficiency in all departments. I would remind people who are trying to do an apples-to-apples comparison though between us and Southwest that, of course, we are operating our aircraft about 20 percent more hours per day than Southwest. They are at around 11 and we are at 13 3. So that takes a lot more pilots and flight attendants from that perspective compared to what they would do. So I would be careful about making those kinds of comparisons.

A question for David on live TV. Just regarding your in-flight entertainment product relative to that of phone -- and just in general the whole industry -- or just the technology for this type product is evolving rather rapidly. And how does live TV stack up relative to competing products that are out there or likely to be out there?

Well, I think we stack up well, Jim, when you consider the cost of our system. And we don't obviously know the cost of all the other systems, but from what we understand the complexity and the cost, we have a very good system that is very reliable.

We have announced our deal with XM Radio and expect to have, hopefully by Thanksgiving we will have XM Radio on all the planes, 100 channels, which I think will help it. I think Song has some music today that we don't have, but we will have that by Thanksgiving. And also we're talking to DirecTV about some more channels. So we're looking at increasing the channel offering as well. Haven't made any announcements on that yet. So when it is finalized, we will let you know.

And then we have announced our deal with Fox. So we will have -- we have got four channels that we will have by Thanksgiving as well. We will be able to run first run movies. And we have our deal signed with Fox for two of the four channels. And then we can also sign another studio deal for the other two. So I think by the time you get the increased channels of TV and 100 channels of XM Radio and the movie channels, I think we're going to have a great product. And I think our customers -- like I said that is a -- (indiscernible) overrated part of what we do, but our customers really enjoy it. And we're going to continue to kind of push the envelope on the product enhancements there.

Ray Neidl of Blaylock & Partners.

David, going forward now you are going to continue to be moving, as you said, into more competitive territory. That may put some pressure on your margins. I'm just wondering from a philosophical viewpoint as you look at the board and try to expand, what do you think your biggest threat is going to come from? Is it going to come from the legacy carriers such what (indiscernible) is doing now putting on additional capacity between Boston and Florida? Or is it going to be more from other LCC that are kind of imitating your product and starting to grow pretty rapidly? Which do you think is the biggest threat to your future growth plans and margins?

I think it is all threat. Obviously we don't focus on one or the other. I think we focus on trying to pick great markets, markets we know we can make money in, and then just doing a great job of taking care of our customers, and having them come back. I think the combination of the superior product offering that we have at JetBlue combined with our stellar cost performance is a very powerful thing. And it needs to be, because we're in a very, very difficult revenue environment, and a very difficult competitive environment where people are doing what can be considered really irrational things, which we believe are not sustainable. So our job is sustainability.

We have a sustainable competitive advantage, and we're going to continue to improve on that, and continue to pick great markets. And I am sure we will get competition from all sides, but we're not new to competition. This isn't something that is new. We have had seen some really creative ways of trying to compete with the 2-for-1, things that probably haven't been done before in the industry. But -- and probably not sustainable over the long term. They can be in maybe off-peak seasons, where maybe a quarter here and a quarter there. But as long as we do our job and keep our cost flow and take care of our customers and have the best product, we are going to be fine. We're going to continue to do well.

And as you continue to expand, I guess you're doing it in a somewhat conservative way in that filling in the dots. In other words you're putting more service into cities you currently serve instead of opening a lot of new cities. But what do you think -- what do you think that effect is that going to have on your load factor as you continue this rapid expansion?

I am not really sure. I mean we are adding a lot of new cities. Our properties and facilities folks just keep reminding me that we have just added Sacramento, San Jose, three cities in the Caribbean. To them they don't think we're connecting the dots. We are obviously doing both, but I think, like I said, -- I think our load factor has come down a little bit based on our own capacity growth. So I think the number that I was really impressed with, or the one that John gave was the fact that even with the transcon meltdown that was going on to be up 3 percent on same-store sales, while we were adding 11 percent in those markets and on those city pairs, is a pretty impressive performance considering that we had a lot of growth in those markets.

And you kind of gave it away with the Caribbean, when you start getting the Embraers without giving away your future plans, is there going to be a big expansion in the Caribbean?

Well, I think there is going to be an expansion everywhere. I mean that's when you're going to see a lot of new cities coming online. We told the properties and facilities folks this is just a warm up for what is going to happen. Towards the end of next year there is going to be a lot of new stuff. And that airplane gives us a tremendous amount of flexibility. And you know I read with interest someone made a report that said that they thought the margins would go down when the 190s came in because it would be fiercely competitive.

I think it is actually going to be the opposite. I think the margins will go up with that airplane, because I think we will have less competition and there will be more difficult competition to react against, because we will be in cities where it is -- we're not going to be in high-profile transcon markets, we will be in other markets where you don't have as much competition and the fares are very high.

William Greene of Morgan Stanley.

David, you mentioned that you're going to be opening up a lot more cities. So is that a change then from your former statements that you know sort of a couple of cities a year and we will kind of manage the growth that way, and we will do more connecting the dots. This is a change I guess because of the EMBRAER?

Yes, that changed when the EMBRAER came on.

Okay. What is a good number in terms of cities per year then?

That's tough to know. I'm sitting here looking at my RVP of schedule planning, and I guess you could hold up fingers. But you know we haven't -- there's going to be -- it is going to be a very interesting process when we sit down and start deciding where the 190s are going first. Because I got my own ideas where I think they should go. They have their own ideas. Other people have their own ideas, and they're all good. They're all good choices for us.

A lot of them will strengthen what we're doing at Kennedy Airport. But it will really -- you won't see that obviously in '05. '05 is going to be -- the planes actually won't start flying until October. And I think we will use those airplanes somewhat conservatively. It is a new aircraft type in the end of '05. And really where you are really going to see a lot of new cities will be in '06. That is when you're going to really see things really tick up.

The point is a lot of new cities. I can't give you a number exactly. There will be some connecting the dots, some flyover stuff that we will be doing. They may be flying from upstate to Florida during the winter time. They may be doing some other things that is connecting the dots, but also they will going into a lot of new cities.

If you look at our route system it is very barren between here and Florida and between here and the West Coast. And there is a lot of cities in between all that area that are going to be recipients of these fine airplanes.

And then on the last conference call I had asked you, did you think that your margin guidance of 13 to 15 percent was a one-year step down from your historical guidance of 15 to 20 percent? You had said, well, you weren't exactly sure but it might be if this held for a few year. Are you revising that at all? Do you think there's a bit of a change here where maybe it is just a one year thing?

Yes, I said (indiscernible) industry. I think what is important to us is that we have industry-leading margins. And the fact that we -- of the non kind of non pay ASM for hire carriers, we are going to have -- I believe that we will probably have the highest margin in the first quarter. So I think we're somewhat -- we're somewhat tied to the industry. If they want to do things like do $79 transcon fares, we're certainly going to have to be part of that thing which will drive our margins down. And I think it depends a lot on the industry. But as long as we're doing better than the industry that is really all we can hope for, because we are somewhat tied to the fortunes of the rest of the folks that we do business -- compete with on a daily basis.

Gary Chase of Lehman Brothers.

Congratulations. I just wondered if you might be able to elaborate a little bit on the transcon? You had said -- David, at one point you had said that Long Beach was kind of isolated. That I think is a route that is relatively mature for you where your growth really isn't -- your capacity really isn't changing a whole heck of a lot there. I might also include JFK Seattle in there as one where you haven't made tweaks.

Are those markets performing better than the ones that you're growing in? You know as you sort of throw out what is happening in the transcon -- the places where you are not growing as quickly are those holding up better for you?

Well, I think if you look at our same-store sales number for March that would tell you, yes it is. But also you know the competitive environment has changed from last summer to this summer. And to what we said in May is that we are performing at -- we had a great summer last summer. And for May to tell you that we are at above in every region where we were last year, I think would probably give you a pretty good indication that if we do throttle back a little bit on the growth on the transcon markets -- on the ones where we already had service to (indiscernible) places like into Sacramento and in San Jose and other places -- that I think we're bound to do better in those than if we continue to add capacity.

Once you have 7 flights a day you have pretty well covered the day. We do have additional slots that we could use in Long Beach if we wanted to that we're holding -- that we fly obviously to Oakland out of Long Beach and we fly a couple flights to Las Vegas. So we could throttle that up to 9 or 10 flights a day if we saw the need to, and probably will someday when the environment becomes a little more stable.

Two quick questions, I guess, for John. First, as you look at CASM through the year, based on the first quarter I guess I probably would have guessed that your guidance will go down a little bit more. Can you maybe elaborate, is there some infrastructure need, whether it be people or assets to ramp on the 190s that is included in the guidance that you gave?

Absolutely. There is infrastructure that was included in our guidance back in January and again now related to ramping up for the 190s. We have a dedicated team of people housed in Fort Lauderdale at EMBRAER's North American offices. I don't know, half a dozen folks or so who have been borrowed from various departments and put specifically on the task of overseeing that project.

What is that (inaudible) to be doing, spending money?

Yes. And we will see added headcount through the year as we start planning for additional staffing in places like the people department for recruiting and background checks and that sort of thing, because we will be hiring more people next year. Jeff Wildo (ph) is going to be adding a variety of people. Most of that is going to be coming later in the year obviously as we get closer to delivery.

And you say, wait a minute, they don't deliver until August of '05, but if you work backwards from August of '05, we have to be recruiting and hiring and making job offers for pilots in particular and maintenance technicians who are the long lead time from a training perspective. We will be doing that by the February, March time period. So there is some of that that has always been baked into our budget and forecast for the year.

Okay. Thanks for clarifying that. One last question. I just want to make sure that I heard you right. I thought I heard you say that -- and I'm just tried to look back, I can’t find it exactly -- but you had said May RASM on a same-store basis is booking better than last year?

No, when I spoke to May I wasn't talking about same-store sales, I was just talking about the regions.

Right. Right.

The way we look RASM, we do a curve that watches the trend of RASM build for any given month. And you can look at the curves for May of '04 and overlay them on the curves for May of '03 and compare, and we do it by region. We do the Northeast. We do the north-south, and we do the East-West. And those curves -- and RASM is at the same point on the curve this year at this point in time compared as of April of whatever -- as it was at this point in time last year. So we basically spot on the RASM build as it is building.

That is no guarantee obviously that final RASM turns out to be that way. Because you have a lot of close in bookings yet to go. And May is a particularly close in booking month. It doesn't have any real holidays in it other than right at the end of the month where you have got Memorial Day. And as result of that you don't have a lot of people who do a lot of long advance bookings. That is why we compare May obviously to May as opposed to comparing May to April. So that was not a same-store sales comment.

And not necessarily intended to suggest that you would be flat on RASM or slightly up for the quarter, just a data point?

It is a data point for the month of May obviously. That's all it is, a data point at this point in time for the month of May. And obviously June is too far out to have a hell of a lot of visibility on.

Michael Linenberg of Merrill Lynch.

I guess two questions. Moving into the Dominican Republic, I guess that is going to be your first international flights. And is there any sort of change in the way you have to operate into what's called an international market? Are you able to turn the planes as quickly? Is there anything that we should see there with respect to utilization?

There's nothing that you're going to see that is really going to hurt utilization, but I will explain a little bit about what we're going to do. You know Terminal 6 at JFK does not have inspection facilities for customs. So our departures to the Dominican Republic are going to go from Terminal 6 through where we reside. But they will come back into Terminal 4 where it is the big international arrivals terminal at JFK. And we will have customers clear customs there.

So we are building in extra turn time. We are actually building in a two-hour turn from when the plane blocks in at Terminal 4. The planes clear customs and then be towed and repositioned back over to Terminal 6. Now one thing to remember too though is that as you look at the DR -- the one trip to Santo Domingo and one of the two trips to Santiago are red eyes. These are ways of building added utilization.

Now as far as operational things, there is a myriad of little operational changes that we have had to make to deal with flying internationally. And we have had a task force of people who meet on a regular basis working through all of those issues to make sure that the new international service goes off without a hitch.

John, is there any chance that down the road you could get your customers to preclear in the Dominican Republic like what occurs in so many of the Caribbean countries?

We would love it if that could be done. We are all for it.

We've met with some of the officials down there and they have come to visit us. And it was kind of our precondition to kind of going down there they made a commitment that they will continue to push that. I think it is a possibility. I mean it happens in a lot of different places in the Caribbean and in Canada. So it is certainly a possibility and you know obviously we're not banking on that, but it would be nice if it happened, and hopefully it will someday.

It sounds like not much of an issue. Going onto my second question, when you look at your labor costs through the year and the fact that your work force is becoming more senior, are there any sort of step increases or onetime bump ups that we should be aware of as we move into '04 and '05?

None that I'm aware of that should be of concern in terms of labor cost pressure. No.

David Strine of Bear Stearns.

A couple of questions. First, John, I believe if my memory serves me right you mentioned that CASM performed a bit better than you had expected in the first quarter because there was a lower than expected fuel burn per block hour. Was that helped a bit by the stage length increase? And was it more than you anticipated even considering the stage length increase? And is that something that will change when the 190's come in?

Well, yes, what has happened with the fuel burn per block hour is that it helped offset the fact that fuel price was a lot higher than we expected. So you know net net we did windup with higher fuel expense than we had anticipated, but this helped mitigate it.

And again as near as we can determine, it really does relate to operational changes that we made as fuel conservation measures that have proven quite effective. And as far as the EMBRAER 190's clearly the EMBRAER 190 is going to burn a different amount of fuel per block hour and be flying on a significantly shorter average stage length than the A320. So once we start flying that, I think we will probably need to start considering fuel burn per block hour plus (indiscernible) in terms of two different equipment types with two different burn rates.

And other than the fuel burn was there anything other meaningful -- anything else that was meaningful that caused it to be a little lower than you expected that we should extrapolate out into the future?

Well, there were a couple of things -- a couple of things that made our CASM lower than we had expected. Which were as we closed the books in January, February and March we frankly found a couple of busts in the budget where people had budgeted things a little bit too high, and that accounted for a portion of it.

So each time we reforecast, one of the things that we do is look at actuals versus budget and trends, and see what is going on and take any new information that we've got. So yes, to the extent that we corrected a few minor errors in the budget that does account for a little bit of what was in there. The rest of it, hiring didn't happen quite as fast as we expected hiring to happen in the first quarter. That seems to be a chronic thing. People put all these budgeted headcounts for the new year and they simply don't get them hired as fast as they anticipate, particularly in staff functions. But --.

I guess it is better to be hiring than firing.

You said that.

One other thing, I think you mentioned on the last call that you had about 50 C checks this year. I was wondering how many of those occurred in the first quarter?

C checks in the first quarter this year did you say or last year?

I think you have 50 this year. Is that correct?

We have 18 in the first quarter -- .

18 in the first quarter. Okay.

Versus 6 as I recall for first quarter last year.

And last question, did you mention a second quarter CASM guidance?

Yes, we basically said that CASM was expected to be flat.

So same as the full year?

Yes. For flat year-over-year for the second quarter, and flat year-over-year for the full year, again based on the 92 cent net of hedges number.

Helene Becker of Benchmark.

David, when you talked about LaGuardia, do I understand you correctly to say the only markets that you're going to are Florida, or did you just say the initial market?

(indiscernible) has seven flights out of there so there is not -- we're kind of a frequency. We like a lot of frequency, particularly to Fort Lauderdale. It is kind of interesting to know that we peaked -- our most peak day, our peakest day, which isn't a word, but John (indiscernible). Nineteen flights between JFK and Fort Lauderdale in one single day.

I actually saw that also earlier in April.

Yes, so it is a huge number. And so we could have actually had more had we had airplanes. The demand was so strong. So we think by taking some of that traffic over to LaGuardia -- we only have 7, so if you say you are all going to Florida and they're predominately going to Fort Lauderdale, it doesn't really give us a lot of options over there in case some other folks give their spots back and we have some additional gates. So we will start with that and we will see how things develop.

It will give us a little bit of breathing room over at Kennedy too as we expand Terminal 6 and as we start -- hopefully we'll get an agreement here soon on Terminal 5 that we can announce. And it will take a little while to get some new facilities there. So it is going to take a little pressure off Kennedy too.

And then the other question I had was, did you give a number for profit-sharing component on the salaries?

For the first quarter?

For the first quarter, yes.

We did not list our profit-sharing individually for the quarter, but I have got.

I have got it right here. It's 4.5, 4 6 million. 4.546

619 to be exact.

Okay. And then, John, my last question is with respect to training for the E190s you said you were going to hire people probably starting in the first quarter of '05. So as we look out to one year from now we should be thinking in terms of headcount going up greater than I guess -- or cost of headcount going up greater than the revenue to offset it initially, right?

You'll see some of that, yes. But remember you get yourself in February March, and this is a Company that will have over 70 airplanes flying, and we will be hiring the crews associated with our first one or two EMBRAER airplanes. So you are really not going to be layering on that many on a relative percentage basis. But we absolutely will have some of it, yes.

Dan McKenzie of Smith Barney.

David, JetBlue's average fare in the first quarter was about 18 percent higher than Southwest and about 37 percent higher than AirTran, at least in the fourth quarter. Historically I guess it has been higher than Song. And going forward it seems evident the majors are likely to continue stepping up capacity in JetBlue's markets. I guess my question is with more low fares and other choices out there, how important will it be to be viewed as a low-fare leader? That is recognizing that JetBlue's primary competitors are the majors. If JetBlue is not viewed as a low-fare leader in the industry, will that hurt its business model longer-term?

Obviously it is something that we are concerned about. If it wasn't, we wouldn't have had 19 flights between JFK and Fort Lauderdale. Our pricing on each individual flight is a function of our demand. And the only way we can help that is to add more frequencies to offset that, to stay more competitive. And we will continue to do that.

That is why we're going to add more New York, Florida frequencies during the peak season, because we need to add more. Because we want to give our people more choices and a very good competitive fare. And we think it is -- and at our cost levels, we think it is not sustainable for our competitors to continue to add frequency at those levels, as our network gets bigger and spreads out and they have to do it more and more.

And I guess secondly, salaries for pilots, mechanics and other labor groups are still coming down at the majors. I guess my question -- my second question is will that impact how JetBlue pays its workforce?

If you are asking the question are we going to cut our salaries, the answer is no. We're not going to. But I think when you don't have -- when you have more rational salaries at your competitors where you have -- you know when the United deal was signed and Delta deal shortly thereafter for their pilots, it did put a lot of pressure on everyone I think at every airline to increase those salaries.

But with those now having come down, I think we're feeling less pressure. But you have to remember that our biggest savings -- we pay our people really well. And I think they feel good about what they're paid. But it is really our productivity that really makes us -- that makes our cost lower than everybody else's. Our pilots fly more -- probably hours in the month than just about any other pilots. They don't work more days I wouldn't think necessarily, but they just -- while they're there they fly the hours instead of sitting around in the hub somewhere.

Our final question is coming from Dan Hammel with Prudential.

John, you said your cost performance expectations in your '04 margins of 13 to 16 percent, your forecast -- can you talk a little bit about what the risks are to the cost performance over the near-term just in '04?

Risks to the cost performance in the near term. You mean for the balance of the year?

Yes. In other words, what could change your outlook from a cost standpoint?

Well, increased fuel prices.

Fuel prices would probably be the single biggest issue. The second would be if, frankly, we just have some engine failures or things like that that would trigger some expensive shop visits that aren't in the plan right now. Or for that matter, bird ingestions or something like that that could drive up maintenance costs beyond what we expect. I would say that those are our two biggest at risk issues from a cost perspective.

I think another one I guess, John, would be if we make more money and we have to pay out more profit-sharing. That is a big concern. That's a nice problem to have.

A good problem. I guess what I am hearing is your cost and your expectation for costs are relatively fixed, with the exception of a couple of key variables here that may otherwise be undetermined I guess.

Yes, really with the exception of dramatically exceeding our expectations for this quarter, we generally have been pretty damn good at forecasting cost and come in pretty close. So, yes, we think we've got most almost those cost categories locked down pretty nicely.

I think as you get bigger and the base gets bigger its -- an engine or two doesn't have as big of an effect as it did when you were smaller. And so I think that is going easier. We have more stability. We have more stability in our costs than we did maybe a year or two ago when we were smaller.

And then as a result of your over budgeting in the first quarter did you look to second, third and fourth and take that into consideration of your margin guidance?

Yes, we did.

You did?

As I said, we take everything that we know and we wrap it into the new forecast. So we update everything we can possibly update to be as accurate as we can.

At this time I would like to turn the floor back over to Mr. David Neeleman for any further or closing remarks.

Well, okay, thank you all for joining us. I think we are over time here, but I just wanted to thank everyone and their interest in JetBlue. And we're committed to continuing to take care of our crew members and let them take care of our customers, and building a great Company here. And we will talk to you next quarter. Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.