JetBlue Airways Corp (JBLU) 2004 Q2 法說會逐字稿

Good morning everybody, and welcome to JetBlue Second Quarter 2004 Earnings Conference Call.

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 a forward-looking nature, which represent management's beliefs and assumptions concerning future events.

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

Actual results may differ materially from those expressed in forward-looking statements due to many factors, including without limitation potential hostilities in the Middle East or other regions, the Company's ability to implement its growth strategy and its dependence on the New York market, its fixed obligation, and its limited operating history, seasonal fluctuation in its operating results, increase in maintenance costs, fuel prices and interest rates, the Company's competitive environment, its reliance on sole suppliers, government regulations, its failure to properly integrate LiveTV or its patent, its ability to hire qualified personnel, a loss of key personnel and potential problems with its workforce, including work stoppages and continuing changes in the airline industry following the September 11 terrorist attacks, and the increased risk of future attacks, the potential risk with the delivery, placing into service and integration, and to its operation of its EMBRAER 190 aircraft, as well as the potential liability relating to the Company's handling of customer data.

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'd like to turn the call over the David Neeleman for opening remarks.

Thank you Ashley.

Thank you everyone for joining the call this morning.

As you see, we have released our second quarter operating results.

And I think on balance and on whole, we are very pleased with the results that we've been able to obtain with our 14.1% operating profit, and with our earnings per share of 19 cents.

Certainly, obviously all of the airlines haven't reported yet, but we think that we will continue our industry-leading margins as we have for the last several quarters.

And we believe, obviously, that this is because of our great products and low costs.

And I think as you look at the quarter, we had a great cost performance.

We are very pleased with what we were able to accomplish on the cost side.

As I mentioned in a conference not too long ago, when I reaffirmed the margin guidance, that our revenue environment has been challenging, and not like it was last summer obviously.

But in the backdrop of these higher fuel prices, to have this good cost performance that we have had, and also with the challenging revenue environment, particularly on Trans Con and other markets, we're very pleased with what we've been able to do.

And I think, as we look to the future and talk about our long-term sustainable competitive advantage, the combination of our products and our costs are -- we couldn't feel better about our Company today.

I just want to talk a little bit about performance because I think one of the things that helps us on our loyalty with our customers is our ability to get our customers where they're going to safely, and without canceling flights.

It's a big indicator for us.

In the quarter, we flew 22,145 flights.

And there were only 5 cancellations out of over 22,000 flights.

Considering the thunderstorms and the difficulties we've had, that's an amazing number.

We didn't cancel a single flight in the month of June.

I think that's just a tremendous tribute to our crew members, our operating team, and our systems operations team that does a great job of getting our customers safely where they want to go.

And I think that speaks strongly to our ability to continue doing that and to have these industry leading margins.

I think people tend to forget that, that our products -- I think that of the two important competitive weapons that we have for the future, people talk a lot about our costs.

But I think there's not enough said about our product and the experience of flying on JetBlue.

And it's a great experience.

And our crew members, I just give them a tremendous amount of thanks for the job that they're doing.

The competitive environment in the markets that we are flying in obviously has been, as I mentioned, has been challenging.

If you look at what Delta is doing out of JFK, they added 15 new flights in our markets.

They have 5 new cities, additional frequencies in 4 additional cities.

In fact, 41% of all Delta's domestic mainline ASMs were in our markets.

The growth that they added in this quarter were - July over July --, if you look at July-over-July, 41% of Delta's increases are in our markets.

And these are markets, in some cases, where they have been in before and have left, and they've attempted now to come back, and so are coming in with lower fares.

There's a lot been said about Delta's costs and their need to restructure.

And obviously that will happen, but the costs need to come down.

And I think, again, the strength of our position at Kennedy Airport is that virtually in every single market where we compete against Delta, we have a unit revenue premium, and that could be a combination of either higher fare or higher load factor.

But as competition comes in and they add service back into other markets they've flown before or new markets, then obviously you have to lower your fares and meet that.

And that tends to affect revenue.

It makes revenue a little softer than obviously we would have hoped.

But overall, we're very pleased with this backdrop of what we've been able to accomplish.

And I think as we talk about it again, talk about sustainable levels, what's sustainable from either a cost and also from a revenue perspective.

We do very well out of Kennedy Airport.

That's our home, and when you are fighting for your home, and your offices are a few miles from the airport, you tend to focus more on those issues.

And so we're going to continue to be very aggressive.

And we're going to continue to add a lot of capacity out of JFK, and particularly JFK and other markets as we go forward.

Obviously, we've grown since day 1.

And our growth will remain intact.

As we look to the fall and the rest of the summer, obviously we're still seeing softness.

And we will because of the capacity increases.

But again, I think it's all relative and better for us, obviously because of our cost position and our product position.

I think probably we've had a little bit of load factor decline.

And I think our revenue-management people have kind of looked at last year's booking curves and maybe anticipated that a little bit too much.

And I think maybe we weren't as aggressive on some of the faring as maybe we should have been early on.

So we're in the process now of beefing up revenue with additional systems and people and have really put out a decree that if a flight is going to sell out, manage it out.

But if it's not, we're going to be a lot more aggressive on fares and a lot more competitive in making sure that we can defend our markets, and that our customers who want to fly JetBlue will fly it.

I think we're also going to -- we've done a lot of following on fare sales.

And we're going to do a little bit more leading.

And I think that kind of brings us to our million seat sale that we have going on now.

I think when you put out a sale on JetBlue, and you have fares as low as $49 to Florida, that creates a lot of excitement with our customers because you can't always get on a JetBlue flight for $49.

And we've seen a tremendous response to that sale.

And our phones were lit up to levels that they've never been lit up before.

We have record booking days, record booking weeks.

And so it just speaks to the strength of our position at the Company, and in particular in the New York area.

As we look forward to our schedule for the rest of the year, we're going to be a little bit more judicious on Trans Con reductions.

And as you go to the off-season, Oakland and Long Beach are two big areas Trans Con.

And we're going to take Oakland, we'll go from 7 departures a day down to 5 by the time we hit November.

Long Beach will go from 7 to 6.

Sso you will see some reductions a little bit sooner than you did last year.

I think we'll do better there in the fourth and first quarter than we did last year.

We hope that will be the case.

As far as Florida, as we go into peak season, we did tremendously well in Florida last year.

We're seeing strength in Florida.

And so at out peak last year, we did 71 departures, daily departures from Florida.

At our peak last year, we did 55 departures from JFK to Florida.

And this year we're going to go to 71.

And that includes LaGuardia obviously.

But we have some additional airplanes we could put in there.

And we will put additional capacity in there if we need to, because if you look at -- what's important for us is that we stay competitive and also that when people want to fly JetBlue that we have seats for them to fly.

And so we'll continue to add frequency added in our strength.

We'll also continue to do some capacity increasing out of Boston.

We did really well there in the winter months to Florida.

And so we're looking forward to another great winter season up there in Boston.

So what does all this mean for guidance for the year?

Obviously, we've got rising fuel pricing and softness in revenue.

I will tell you on the revenue side, if you look at our booking curve, bookings far out look about like they did last year.

I think where we're seeing softness is on the inside of two weeks, where we're having to have lower fares because of competition.

We're being more aggressive on the walk-up fares.

And that's, I think, where we're seeing the weakness, not on the far out stuff but on the closeness.

So it makes it a little bit tougher to gauge as we look forward.

But I think we've got it kind of figured out what the new normal is.

And with that new normal, we've made some adjustments to our revenue going forward to the end of the year.

And with that, previously we have given guidance that we would obtain a 13% to 15% operating margin for the year.

We, as I mentioned, gave guidance at 14% to 16% for this quarter, and we were kind of the lower range of that obviously, coming up 14.1%.

So because of that and further weakness we see in the third and fourth quarters, we're going to be adjusting our year guidance down from 13%-15% to 12%-14%.

So we're going to drop it a percentage point.

We think that's realistic based on what we see today.

And we've been pretty good at trying to guess that.

But we are in a new normal here.

We don't think it's sustainable.

We think the other airlines have told us -- not told us but told the market that these are fares that are dismal.

And you've heard all kinds of quotes on that.

But for us, if we could continue to do these kinds of margins when fuel prices are at these levels, and that our competitors are not performing well, then we obviously feel very, very confident for the future.

And the strong cash flow from operations position, we are able to finance our aircraft deliveries, because of our strong balance sheet and because of our strong operating margins.

We're going to make additional product improvements on the product.

We're working with Direct TV to add additional channels on our LiveTV system.

By the end of the year, we hope to have the 100 channels of XM radio.

And also by Thanksgiving hopefully we'll have all the movie channels on as well, onto our TV, because it's been real popular with the -- I think we have 15 or 16 of our 60 airplanes are out flying with that.

And I've been on many of those flights.

And our customers love that option of watching movies.

I think we've got "The Sound of Music" and Princess Bride playing now, for those of you who want to come and fly with us.

So with that, I'll turn the time over to John Owen, our Chief Financial Officer, to give you kind of the nuts and bolts.

And then we'll be able to answer questions.

So, John?

Okay, thank you David.

Good morning everyone.

The 14.1% operating margin that David just discussed that we reported for the quarter was at the low end of our guidance range.

And the variation for that, as David noted, is a weaker revenue environment and higher than anticipated fuel costs, which were certainly offset by some savings on fuel items.

We're very pleased with the cost control that we had.

I would note that when we originally gave the margin guidance range of 14% to 16% back in April, it was predicated on a 92 cents per gallon fuel price.

We actually realized that it hedges around 97 cents for the quarter, so that our operating margin, had we had that 92 cents, would have been much closer to the mid-point of that guidance range than it turned out.

Capacity in ASMs was up 42% year-over-year to 4.7 billion available seat miles.

There was a 37% increase in departures during the quarter, and a higher aircraft utilization, 13.7 hours versus 12.9 hours in the year-ago period.

We reported a quarter load factor of 84.5%, which was down marginally at .8% from the same quarter in 2003, and had a 32 percent increase in revenue passengers carried.

We also, just very recently here in July, surpassed the 25 million passenger mark in terms of total passengers carried since the inception of JetBlue.

In the second quarter, the distribution of capacity was 57% in East/West markets, 38% in what we call the North/South markets, and 5% in other, which is short haul in the Northeast, short haul on the West Coast, plus the Dominican Republic International service that we inaugurated during the quarter as our first International service.

Revenues for the quarter were up 31% to $320m, driven by a 41% increase in revenue passenger miles.

Yield was 786, down 7.4% year-over-year on a 6-1/2% increase in average length of haul.

RASM was 687, down 8.1% over 2003, on a 7.6% increase in average stage length.

If you exclude the effect of new markets on a same-store sales basis, RASM was down 5.2%, while ASMs in those same-store markets were up 23%.

Most of that same-store sales RASM decline is attributed to East/West markets, as same-store sales RASM in all the other regional categories I just described actually improved year-over-year.

During the quarter, we placed 3 new aircraft into service, all of which were financed with escrow funds from the HHPC transaction, which we priced back in March.

At the end of the quarter, we had 60 Airbus 8320's in the fleet, 35 owned, 25 leased.

Average age of the fleet was just under 2 years, and we're headed toward a total of 69 aircraft at year-end.

On the cost side of the P&L, cost performance was just excellent overall and continuing with the trend this year that it's been better than we expected, despite a realized fuel price during the quarter that was 5 cents higher than was assumed in our guidance.

Operating expenses for the quarter totaled $275m, up 38% year-over-year, at the CASM of 590, which was a 3% decrease year-over-year, despite a 3.7% decrease in the number of seats per aircraft as a result of removing a row of seats, which we commenced in the second half of last year.

A year-over-year improvement in CASM can be primarily attributed to a number of things.

Certainly, we continue to have better economies of scale and higher aircraft utilization.

We've had longer average stage length.

We had a continued reduction in sales and marketing expense relative to ASM growth.

And we had accruals for 2 one-time tax refunds related to operations in the State of California and the State of New York that collectively aggregated about $1m.

In addition, I should note that CASM in second quarter last year was somewhat artificially inflated by $3.4m worth of profit-sharing expense accrued against the one-time payment of government aid that occurred in the second quarter of last year.

Significant differentials in the expense line items, as I said sales and marketing expense, it actually decreased by 11.3% on a unit-cost basis year-over-year.

We just simply weren't doing as much advertising relative to the growth in ASMs that we had in the Company.

For the quarter, we booked 75.2% of our reservations through JetBlue.com, which was up 2.7 points year-over-year, despite having reduced from $5 to $3 a discount that we offer from booking on our website.

TrueBlue, our flight gratitude program, just continues to rock along doing very well.

We recently hit the 1.6 million member mark.

Maintenance, materials and repairs was another item that increased 10% year-over-year on a unit-cost basis due to having an additional 17 more operating aircraft than in 2003.

We completed 11 airframe checks in the quarter compared to 8 in the same period in 2003.

We had increased engine and component repairs, but we did not have as many engine shop visits as we expected in the quarter.

And we anticipate we'll see some of those pop up in the second half of the year instead of in the second quarter.

Tax rate for the quarter was 41%, which is obviously our estimate of what we think the rate will be for the full year as of this point in time.

With the balance sheet, we ended the year with right on $550m in cash and short-term investments, $732m in shareholders' equity.

Cash flow from operations was $112m for the 6 months ended June 30, and $58m for the 3 months ended June 30.

Turning to the operations side of things, as David said, our crew members did a stellar job this quarter in performance.

Completion factors officially reported at 99.9% for the quarter.

We did not have a single cancellation in the month of June, and as David alluded to, only 5 total cancellations in the entire quarter.

That completion factor is almost certain to prove to be industry leading once all of the airlines have reported to the DOT.

And, as David said, our on-time performance was quite good, despite some of the worst thunderstorms in the East Coast in about the last 5 years, which caused a lot of ATC and operational problems, but our system operations folks did a fabulous job of responding to that in aircraft swaps and all kinds of things necessary to keep the performance of the Company up and satisfy our customers.

Mishandled bags was a nice low 2.6 per 1,000 customers.

We continue to improve on that metric.

Hats off to our folks in our customer service operation, Nigel Adams and his whole group, because they have really been focusing on the mishandled bag number, and have done a very good job on improving those statistics year-over-year.

And customer complaints were down to only .24 per 100,000 customers in terms of complaints to the DOT.

And we did not have a single complaint for the month of April to the DOT.

All in all, given heavy passenger volume, high loads, and 6 new routes opened, 4 new cities, 2 new International destinations, which were our first International destinations, just a great operating performance all around.

So again, congratulations to all our crew members for what they did to accomplish that.

One other item of significance that was noted in our press release this morning is that both Dave Barger, our President and Chief Operating Officer, and David Neeleman, our Chairman and CEO, signed extensions to their existing contracts with the Company, so that they now expire in 2008 and 2009, respectively.

So for those who were concerned that we did not have Dave and David signed on for long enough terms from a contract perspective, I think we've dealt with that.

Those were signed yesterday at a Board Meeting.

And I believe at this point, that I can't think among major carriers of a duo of CEO and President that have served a longer period of time already, talking about from a consistency perspective, than the combination of Dave and David.

Now we'll go ahead and turn to guidance for the third quarter and the full year.

As David mentioned before, we are encouraged by the booking activity that we are seeing into July, and the very strong booking results that we've gotten from our Fall fare sale.

It's certainly exceeded our expectations in terms of the call volume and hits on our website that we've seen, as well as the actual segments and revenue booked that we got in the early day direct sale.

From an ASM perspective, we are slightly raising our capacity expectations for the full year to between 40% and 42% growth over 2003.

That's mainly due to the fact that we've added a lot more incremental nighttime flying into the system than was originally predicated in our budget.

Examples would be JFK and Dulles to Sacramento, JFK to Aquadilla and Puerto Rico, JFK to San Juan, California, the new International service to Santo Domingo and Santiago in the Dominican Republic.

Two of the 3 flights there obviously are red-eye flights, as well as Boston, Oakland, and the commencement planned this Fall that we announced recently of JFK/Phoenix.

For the third quarter, we expect ASMs to be up 34% to 36%.

And again all these ASM numbers are predicated on an aircraft delivery schedule that I'll go over with you in a moment.

Average stage length is projected to be just under 1,400 miles in the third quarter, and just over 1,350 miles for the full year.

We are expecting aircraft utilization to remain at around 13-1/2 hours for the full year.

On operating margin for the third quarter, we're expecting it to be between 12% and 14%, and same for the full year, as David said, between 12% and 14%, both at an assumed all-in 92 cents fuel price net of hedges.

This is adjusted downward for the year by 1 point from the range we had previously given, simply to reflect the weaker revenue environment than our original expectations.

Our summer East/West peak, while we have seen seasonal improvement versus earlier in the year as we expected, simply is not proving to be as powerful as the very strong peak that we had at this time last summer.

As a result of that downward revision, it's pretty easy to draw the conclusion that we were expecting the second quarter to be our strongest in terms of operating margin.

That would be followed by the fourth quarter, based on our current projections, then third, then of course the first quarter, we expect will prove to have been our poorest margin result for the year.

CASM for the third quarter, we expect it to decline slightly year-over-year, which is an improvement in guidance from what we had previously given.

Again, assuming a realized fuel price net of hedges of 92 cents.

We are now assuming that CASM will be down about 2% year-over-year for the year, which is an improvement, obviously, as I said, over our earlier expectations.

Maintenance we continue to expect full-year maintenance on a unit-cost basis to be up about a tenth of a cent in CASM over 2003.

For the full year, we'll perform 49 seat checks, 7 of which will be the major C-4 checks and 33 engine repairs.

That's our expectation at this point.

By way of comparison, in '03, it was 34 seat checks, only 1 of which was a C-4, and only 9 engine repairs.

We continue to expect maintenance costs to be highest in the third quarter of this year, among the 4 quarters of the year, partly due to additional airframe checks in the third quarter, and partly due to what would appear to be a peak in engine removals during the third quarter as well.

With respect to fuel, just under 40% of our fuel requirements are hedged in the second half of 2004 in the form of crude oil swaps, average price there of 25 to 35.

We have a small position of hedging in 2005, 20% for the whole year of our anticipated fuel burn needs are hedged at just under $30 a barrel.

Aircraft delivery schedule for the rest of the year, July through September, 1 aircraft per month, for a total of 3, followed by 3 in October, 2 in November, and 1 in December.

Total of 16 aircraft additions for the year, and as I said, we'll finish the year with 69 A-320 aircraft.

As a reminder, the first EMBRAER 190 is not expected to deliver in until August 2005.

From a capital spending perspective, please be sure to remember to include in your models the negative carry associated with the EETC pre-funding, because we haven't taken delivery of all those aircraft yet.

Sso we're incurring the interest expense associated with the debt on our balance sheet, and offsetting income obviously, at a lower level than we are paying interest expense.

So the un-drawn balance there does trigger some negative carry through to the end of the year as we continue to fund those deliveries.

Total aircraft capital expenditures for the second half of the year are now expected to be about $345m, including pre-delivery payments.

Average debt rate at the end of the quarter was 3.3%.

Average investment return was 1.1%.

Shares outstanding from a guidance perspective, our estimated shares outstanding for Q-3 2004 and for year-end, based on the following assumptions, no additional shares assumed from option exercise, 17.1 million options outstanding at a $15 average strike price, and 20% market appreciation in the underlying stock price through 2004.

That yields us for Q-3 2004 a weighted average diluted shares outstanding estimate of 111.9 million, and for the full year, weighted average diluted shares outstanding estimate of 111.6 million.

With that, I think I've covered all the guidance I was planning to give, and we'll be glad actually to take some calls and field questions.

Thank you.

The floor is now open for questions. (Caller instructions.)

Our first question is coming from William Greene of Morgan Stanley.

Please go ahead.

Yeah good morning.

David I'm wondering if you can talk a little bit more about Trans Con.

You mentioned that you might pull down, or you will pull down some flights this Fall in the Long Beach and Oakland markets.

Is that suggesting you're about the size that you're going to get there, so any future growth in those markets would need to be in new markets?

Not necessarily Bill.

I think you have to look at peak and off-peak.

And I think our load factors, particularly to the South, what we're seeing in Ontario and Long Beach, are very strong this summer.

And as we look to next summer, and we add capacity back in, I wouldn't necessarily be surprised if we didn't go above the 7.

Our JFK/Long Beach is maybe to a number that maybe is 8 or even 9, or maybe even some additional frequencies in other places.

So I think we're just getting a little smarter at -- and we've done this really well in Florida.

But I think we just built Trans Con up over time, and never did any capacity reductions to reflect the seasonality.

And so I think we're just doing more in the Trans Con markets that we did in Florida all along.

So I think it's just trying to meet capacity with demand.

Any sense that your competitors are matching you with that capacity change for the Fall?

I think there are some reductions out there.

But I think we're a little bit isolated where we are at.

I don't think we see the full brunt of what's going on maybe in the SFO market and in the LAX market, because we're the only carrier that flies to Oakland out of JFK.

And the East Bay is its own market we think.

I don't think anyone that lives in the East Bay is going to go over and fly to San Francisco.

And then from south of LAX, as far as you look at the non-stop service with our 7 non-stops, American has 2 out of Long Beach, and they've gotten rid of their Orange County service.

So south of LAX, other than the 2 Americans, it's 7 on JetBlue.

So we're a little bit protected from that, and so we're, I guess, not as concerned about capacity additions in LAX and SFO.

It does have an effect on us, but not as directly as it would for somebody else.

Okay, and then just last question, CASM.

At what point do we reach a level where it can't go any lower?

The CASM Limbo game, huh?

How low can we go?

I don't know.

I guess it depends on fuel obviously.

Fuel is a big factor in CASM.

Okay, so ex-fuel then.

Yeah, on the ex-fuel side, I think we're pretty well near the bottom of it.

Obviously, maintenance is going to continue to go up, as we've said all along.

But I think we do have some marketing potential.

We have some savings there, and some little better economies of scale in some of our stations.

But I think the 190s are obviously going to help the CASM go up, obviously.

But there's going to be commensurate revenue increases that we think will far outweigh that.

So I think that we're probably near the bottom of where we're going to see it I would guess.

Okay, thanks for your help.

Thank you.

Thank you.

Our next question is coming from Ray Neidl of Blaylock & Partners.

Please go ahead.

Yeah John I just wanted to verify.

Did you say the average cost of fuel with hedges for the third and fourth quarters is going to be 92 cents?

And could you give guidance on gallons consumed for those 2 quarters?

What we've said was that the margin guidance that we gave was predicated on 92 cents net of hedges.

So obviously, the margin will vary depending upon whether our actual realized fuel price is north or south of that 92 cents net of hedge assumption.

And in terms of fuel burned, expectations for those 2 quarters, I don't have that handy, but we'll be glad to have Amy call you offline and give you some gallon projections then.

Great, and then overall user taxes, a lot of your bigger competitors have been complaining about how heavy the burden is.

And they're going to start breaking them out.

Do you have any opinion on user taxes?

You're probably one of the bigger payers of them being concentrated at JFK.

Is that something that you feel is burdening your margins?

Which particular taxes are you alluding to Ray?

Well, that's the security taxes and the airport taxes.

A lot of it goes with the infrastructure.

This whole industry is pretty heavily taxed.

We all know that, in a variety of fashions.

And I know some of our competitors have been very vocal in whining a complaining about it.

We simply view them as the cost of doing business, and they are what they are.

We're taxed commensurately with our competitors.

I think you make a point about New York.

And when you look at CASM, I think the remarkable thing about JetBlue and our ability to keep CASMs in check and under control is that we are operating out of one of the more expensive airports in the United States, or maybe in the world.

But the ability to utilize that facility, and what we're doing there, and as we look to the future and how much capacity going out of our existing terminal, and we've said publicly we're in negotiations with the Port Authority in New York and New Jersey on a new terminal.

And the costs associated with that and utilization is really the key to our model.

And so being able to be in New York with the advantages of the revenue environment here, being the largest travel market in the world, and being able to be efficient and use those wisely, those assets that are very costly, is really I think one of our secrets.

Obviously, that's been Southwest's advantage over the years, is being efficient.

And you've got to be ultra-efficient when you're operating out of New York obviously.

Okay and David do you want to share with us any of your thoughts or speculation on some of your chief competitors, Delta as they go with their new model in August, or U.S.

Airways with their financial troubles, or even Virgin American, who I think wants to take you on head-to-head with their financing?

Well, I think if you want to get, I guess you start with Virgin.

I don't know, you just don't know enough about what's going on there.

And I think that what we've just always said to ourselves is there are going to competitors come and there'll be competitors go.

And what's really important for us is that we have a product that's the best in the industry, and we feel like our people do the best job.

And we keep our costs low, and it's certainly going to make it more difficult for people to compete with us if we continue to do that.

So we're focused on us.

And we can't really control what goes on around us, other than if we continue to stay strong, then it's going to be more difficult for people to compete against us.

I mean if Virgin thinks that they can, obviously at this point in time, with the state of the Trans Con market, if they want to get in there and think they're going to make a lot of money, I'm afraid they're going to be sorely disappointed.

Because this is a very tough market right now.

And I'm just thrilled that we're in the position we're in.

And I would hate to be starting an airline, or out trying to raise money to start an airline really, because this is a very tough time.

As far as U.S.

Airways and Delta, I mentioned -- I alluded to Delta a little bit.

Obviously, they have a cost problem.

But I think there's a revenue issue there.

It's very tough to compete against JetBlue.

I mean I wouldn't -- in our home, it's a very difficult thing to do.

We obsess with it.

We think about it when we go to bed at night, and we think about it when we wake up.

We're constantly thinking of ways to please our customers better and take better care of them.

And I don't think that's an enviable position to be competing in our stronghold.

So we're going to continue to build that up.

We think with our existing structure that we have here, before we even get into the new terminal, using a combination of other terminals and other things that we have planned, we can double the size of what we're doing out of Kennedy before we move into our new terminal.

And we're making preparations for that as we go forward.

U.S.

Airways I don't know.

Kind of strangely enough for us, we like status quo, and we like the way things are going, and U.S.

Airways has not been necessarily one of our biggest competitors.

We don't really fly into a lot of markets where they fly.

So it would really kind of upset the apple cart a little bit, and so we're maybe even hoping that they stick around, because they're not one of our chief competitors.

Great, thanks a lot.

Thank you.

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

Please go ahead.

Good morning David and John.

John would you give us your revised, kind of longer term game plan for maintenance costs for ASM.

I think before the 190 order you were talking about, maybe in '07 it would hit four-tenths of a cent.

What are thinking now?

Jim we haven't revised a projection out beyond year-end here in enough detail.

We're still working on it.

So I'm not in a position to answer that question at this point.

Okay, David a question for you following on Ray's question as well.

Just how do you see the Legacy carriers evolving over the next few years?

And in that they've brought back a lot of capacity against you guys, it's essentially backfired on them.

They've exacerbated their losses, but yet they haven't openly signaled any significant decreases in capacity.

So what's your version on when they run out of money, and what happens over the longer term?

Well, I don't know Jim.

Airlines, as you know, can stay up for a long time.

And there's a lot of cash flow going on in this business.

But it's a very difficult thing.

I mean, if you look at it chronologically, there are areas that they're doing very well.

Internationally -- certainly we don't fly internationally to any great extent, other than what we do in the Caribbean.

They certainly have strength in their mid-continent hubs and strength in their mega-hubs.

And you kind of wonder a little bit as they venture out into this point-to-point flying, kind of the New York to Florida stuff, even the Trans Con business.

Is that the best suited for them based on their structure and their cost?

I think that they obviously think that it is.

But I think time will tell.

But I think those are things that we do really well.

And those are things that we make money in during really bad times.

And if you just take it out to the nth degree and say if we can make money at 20% margins, or be in the 20% margin in Florida during really good times, and overall 15%, and we can do that forever, and our competitors are, because of a combination of higher costs and lower revenues, are losing money in those markets, eventually you think something's got to give.

So again, we're just focusing on what we're doing.

And we'll kind of let that take care of itself.

But it's mathematical after a while.

It just depends on how much they want to cross-subsidize losses, but that's really up to them to decide, not us.

Okay thanks.

Thank you.

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

Please ahead.

Yeah, hey David and John.

David I think earlier you had talked about your unit revenue premium versus Delta.

And I think you were referring to JFK market in particular.

How has that revenue premium changed over the last year?

I'm trying to get a better sense now that Song has been up and running for some time.

Has that gap widened?

Has it stayed constant?

What sort of level, I mean is this like a 5% or 10% premium?

You know Michael, these statistics are run really late.

So it's very difficult, with any kind of clarity, to know anything except for a 6-month delay.

Okay.

Last month, I don't think -- do you have the last quarter Dave?

Yeah, we have the fourth quarter.

So we're analyzing that.

Haven't really taken a close look at it, but I've been very uncomfortable, to be honest with you, with the extent of our average fare difference.

And I think when they were trying to get established and they were out there with some really low fares, and we were full, it was really difficult for us to match the fares.

I told our people -- I don't want to have a $20 fare premium, average fare premium.

I don't think that's good for the long-term success of our business.

And the only way you can counteract that is to add more frequency.

And so I would rather have a unit revenue premium because of load factor.

And we certainly have a lot easier time doing that.

If we're both flying around 135 people on an airplane, Song I'm talking about particularly, we're flying in the mid-80% load factors, and they're flying the mid-60s.

And so that's more what I'd like to see, is let's continue to have capacity so we have the same number of people on airplanes.

And then instead of doing it through a higher average fare.

Because I don't want people to pay more money to fly on JetBlue than they fly on Song for.

And so that's why we bumped up capacity, and we'll continue to do so, until we are able to take the demand of our customers that want to fly us, and not have to pay more money to do so.

Thanks.

And my second question, I guess this is to John.

John, I guess in light of your comments about the 92 cent fuel assumption, the 92 cent net of hedges, what are you currently paying at the pump?

What's your all-in average?

You know Mike, I don't have that handy.

But in terms of before hedges at the pump it is in excess of $1.

Okay.

JFK is our cheapest place, and it's been running closer to $1.10 I would say, somewhere between $1.05 and $1.10 in recent weeks.

And that's generally the cheapest spot on our system for buying jet fuel.

And I take it the spread out on the West Coast is still a lot higher.

The spread on the West Coast is behaving itself much better now than it was during the spike back in May.

Okay.

There was a point there where we were seeing 25 cent differentials between the Gulf Coast pricing that we have for JFK and West Coast pricing.

And here lately, it's been back more towards the dime type of differential that is historically persistent.

So there was that one weird spike back there in the middle of the second quarter, but it seems to have normalized.

Okay, thank you.

You're welcome.

Thank you.

Our next question is coming from Jamie Baker of JP Morgan.

Please go ahead.

Yeah, good morning gentlemen.

I'm interested in these adjustments to your revenue management process.

Can you give a little more color on what it is that you intend to do differently?

And does that potentially include overbooking for example?

No, it will never include overbooking Jamie.

I mean, that's one of the things that we're proudest of, is that if you don't cancel any flights, if you cancel as few flights as you possibly can, and you don't deny anyone boarding on your flights, then we think that's a huge customer advantage.

And we have, most everybody shows up for their flights.

So we don't lose very much revenue on that.

I think what we're, as I've spent some time out in Salt Lake in roundtable with our revenue management people, and we do that function out there with some really bright and capable people, I've said, look, I have no problem with softer revenues if that's what the market says that we have to have.

But it better be because we were aggressive on price -- it better be not because of load factor.

I don't want to lose a sell, and have the fact that somebody said, "I tried to book JetBlue but I couldn't". "I couldn't get on."

And so that's -- I don't want that to contribute to softer revenues.

I want the fact that we were more aggressive on price and took a lower yield.

We've always emphasized load factor, but I think it's just a kind of a new normal.

Throw all the old booking curves out guys.

Let's just, if a flight is going to sell out anyway, yeah we've got to manage it up, even if we're a little bit more expensive.

But if a flight is not going to sell out, let's make sure that we're very price competitive.

And if it means that we even take our fares lower, let's do it.

And that's why we came up with the million seat sell.

So we're going try and lead this stuff as much as we can.

Mmm-hmm.

And then there's also, we have a tool I think that is a much more effective tool is going out and looking at where our competition is on each individual flight, so we can be much more effective of reacting to that, those competitive changes a lot quicker than maybe we have in the past.

Automation is obviously a big key to that.

And as a follow-up David, and thank you for that, your comments regarding U.S.

Airways I thought were somewhat interesting.

They seemed to suggest that you don't personally view there being an opportunity for JetBlue, given the demonstrable difficulties that that company is in.

Southwest, arguably your most potent competitor, thinks differently.

Is this suggesting that you might be more concerned with eventual hand-to-hand combat with Southwest?

Or am I simply reading too much into it?

I think you're probably reading too much into it.

I think it's all a matter of timing I guess.

I mean, there's certainly, they are an East Coast-based airline.

We're an East Coast-based airline.

So to say that we wouldn't have any benefit, you hate to look at your business and hope that people go out of business.

Everybody else is.

That's just not the way we've ever thought.

We just really focus on ourselves.

But our ability to kind of react and be able to take advantage of, not advantage, I mean to react to that event if it were to happen, I guess we'd probably be better equipped for it a couple of years from now than we are today because our planes are utilized.

We're not really competing head-to-head with them on very many markets.

So I think obviously, if they run out of - if they were at peak operations, Southwest would, out of Philadelphia.

But we're not in Philadelphia.

So we've got lots to do here in our area and Boston and in places where we are.

There's plenty of business for people who do it right.

And we're just trying to do it right.

Okay, thanks a lot.

I appreciate it.

Thank you.

Our next question is coming from Tony Cristello of BB&T Capital Markets.

Please go ahead.

Thank you.

Dave I wonder if you can comment a little bit on what you are seeing or what's going on with - in Dulles right now, with United Independence Air, and where you view JetBlue's opportunity at some point to get in there, particularly if United has to sort of rationalize or take down capacity in some sense, should Independent Air's load not perform as well.

Well, you know there's been, obviously, very little information coming out of the Independence Air operation.

And everything that you're hearing -- there are a couple of analyst's reports that I found kind of interesting.

And it's obviously very anecdotal at this point time.

But from what I can see just kind of cruising around the website, and the average fares that they're charging during the really peak of the peak here in July and August, I am a little surprised at the fares that are still out there, based on the size of the airplanes, relative to the size of the airplanes.

And now we're heading into the off-peak season in a lot of the markets.

So, obviously I think from their perspective they think that they haven't put all the spokes on their hub yet.

And once they do that, they'll do better, and once they get the word out.

But it's certainly not -- what we're seeing today from a model perspective and what you need on revenues versus where the costs are, it's a very difficult position that they find themselves in, and United as well.

So we're very interested in Dulles.

It's a good market for us, and so we don't have a lot of exposure there because we're mainly Trans Con, and a little bit of Florida.

But I'm certainly, if there were some changes in that market, we would be positioned to take advantage of it as it plays out over the next couple of years.

So when you look at the 190s and a lot of the city growth that you can go into with those aircraft, is that a situation where you could build out of Dulles?

And then secondly, from what you can tell, how easy will it be for you to extend gate space if needed?

I think the 190s, we've just begun to have -- we've got a lot of plans for the 190s.

But just trying to finalize those, and kind of distill them down into something that the first 3 or 4 airplanes will be doing.

And it's very tough.

There are so many demands for that airplane, and so many places that we want to put it.

And if you look at additional markets out of Kennedy that are just extremely high fare, and we think can be a lot bigger than they are today, markets out of Boston, I would think that, with what's going on down in Dulles, between United and Independence, that wouldn't be the first place we'd want to take the airplane until things kind of sort themselves out, and don't think that that situation is tenable.

Someone has got to blink and do something.

And then if they do, then I think that would certainly be a place that we would want to be with the 190s.

But it wouldn't be high on the priority list, based on the current -- what's going on there in the market today.

Okay, John maybe you can, the first quarter, I think on the AATC you had $56m.

Where was that number at the end of the second quarter?

And can we still assume about $30m or so for aircraft as you add that on?

We financed 3 more aircraft at roughly $33m apiece during the second quarter.

So from $66m it went up to around $160m, in that vicinity, at the end of the second quarter.

And then obviously, by the end of the fourth quarter, we will have gone the entire $431m in proceeds down.

Okay, great, thank you.

You're welcome.

Thank you.

Our next question is coming from David Strine of Bear Stearns.

Please go ahead.

Good morning David and John.

With respect to the fare sale that's going on for this Fall, I think you both mentioned it's doing really phenomenally well.

Can you contrast it to performance last year, and describe whether or not the depth and breadth of the sale is all that much different?

I think the fares on the -- I can't remember what the Trans Con fares were last year at this time, if we got down to $99.

But our Florida didn't get down to $49.

I think it was $59 at that time.

So it's a little bit, it's lower obviously.

But the reaction has been really astonishing.

And it's really been much more than it was last year at this time.

So, we did it a little bit later.

And it was -- the fares were a little bit higher.

But frankly, it took all we had in the Company to be able to answer the phones over the last week or so.

Things are just now starting to slow down so we can catch our breath a little bit.

But it's been really astonishing, the reaction to that.

And I think, like I mentioned earlier, you combine JetBlue with low fares, and we're already a low-fare carrier.

But you do $49 to Florida, and you can do it on JetBlue, it tends to make you want to go travel more than maybe if you saw it on another carrier.

So if the loads are tremendous, does that suggest that the non-sale fares you may have a little bit of pricing power in those moving into the Fall?

I wouldn't say pricing power, because I don't think there's such a thing nowadays.

But I would say that you have certain flights on sale, and it certainly helps if you can get a flight going down for $49 and you pay $89 or $109 coming back, you're more apt maybe to buy it.

And so I think maybe it is driving some other sales on some other flights that aren't $49.

Okay, and last question.

What is the timing of the pull-back in Oakland and in Long Beach?

The Long Beach is on Labor Day.

We have a flight out - is it the pink eye?

Yeah, we've got a flight we call the pink eye, which leaves kind of late in the afternoon in LA and gets in here just before 2:00 in the morning.

So that flight goes away Labor Day, just after Labor Day.

Then we pull 1 Oakland flight at that same time to go to 6.

And then by November 1, then we go to 5 on Oakland.

And then we use those airplanes, obviously, to start beefing up our Florida business, which really gets cranking around November 1, and particularly around Thanksgiving and then into Christmas and the holiday period of time, then on to Passover and Easter and all that.

Okay, thanks a bunch.

Appreciate it.

Thank you.

Our next question is coming from Dan McKenzie of Smith Barney.

Please go ahead.

Good morning, thanks.

John, could you remind me again how you are accounting for the heavy maintenance?

Is that expenses incurred?

Or is that capitalized and does that end up on the balance sheet.

It's all expenses incurred.

Okay, thanks.

And then secondly, if you could help me think about labor productivity.

Southwest has targeted 80 employees I think for aircraft or selling.

As I look at where you folks are, I think it was around 91 in the first quarter, and then it jumped up to 96 in the second quarter.

How should I be thinking about that metric as we move ahead for the remainder of the year 2005 and out on?

Or is there a better way to think about labor productivity for you folks?

We really don't look at headcount per aircraft as much, because it's a very difficult measure to compare apples to apples, depending upon what gets in-sourced and what gets outsourced at various carriers, and also, average daily utilization of airplanes.

Southwest may be at 80, with 11 hours a day of utilization per airplane.

But we're sitting in second quarter at 13.7 hours of utilization.

So you get into those positions, it's very difficult to compare.

So we tend to do our own internal measures for tracking out how things are going in our monthly financial reporting packages internally.

We tend to look at how many ASMs are generated per employee, or how many labor hours are involved per 1,000 ASMs and things like that, so that we can look internally at our own productivity measures and work it that way.

I see, okay.

Thanks very much.

Thank you.

Our next question is coming from Sam Buttrick of UBS.

Please go ahead.

Yes, good morning.

John just to be crystal clear on the subject of budgeted jet fuel cost.

Is 92 cents for the third quarter your best estimate of current spot net of your hedges?

Or does that require a reduction in the current spot market position?

Because my rough calculation would say that it should be $1 or maybe slightly north of $1 current spot maintained for the duration.

At this point, I would say that 92 cents is not our best estimate.

We kept with the 92 cents for consistency of assumptions in the guidance that we had given starting in the early part of the year, so that we would be giving apples to apples guidance.

I would say if you had to force me to make a best estimate early in the quarter with, what can you say, over two-thirds of the quarter left to go.

And obviously you're buying at spot prices that change every week.

I would say, based on where we are right now, if things stayed the same, figure we're in the high-90s.

Okay, that's helpful.

And secondly, while I'm sure you all are not going to disclose your segment P&L in this forum or perhaps any other public forum, can you give us some broad sense for essentially what it looks like?

What are the patterns?

Is New York better than the aggregate of Boston and Washington?

What are some of the geographic [inaudible]?

And I guess in part what I'm thinking of here is to what extent will growth outside of New York require heavy marketing commitments?

But there are some other implications as well.

Sam, we've already reviewed segment profitability on a segment-by-segment basis.

It's pretty damn proprietary stuff around here.

So it's not something that we normally get into answering questions about specifically.

Yeah, I'm fully aware of that.

That's why I'm looking for some broad characterizations.

I think Sam I can give you a little bit of color and just tell you that obviously we do well in New York.

But we've been in New York for almost 5 years.

I think when you go into a Boston, you have less -- I think you more seasonal downturn in the early years, before you get well-known and you're able to build up additional frequencies in the winter, I would tell you that this winter, we could have had more frequency out of Boston and done better.

Down to Florida, right?

Yeah, so we're going to add more capacity, and then pull it back to maybe levels that we had this summer.

And we fully intend on doing better on that market next year than we did this summer, because we will have been there longer and had a bigger base and had more customers and more True Blue members.

And I think that applies for every market.

And I can remember the first time we flew New York to Tampa.

And we did great in the winter.

We thought, "Hey, this is going to be great".

We got into the summer and I looked at it and went, "What's going on here?

Do we only have one market that can make money, Fort Lauderdale?"

And now Tampa is a great market for us on a year-round basis.

I think that goes with ID.

Even with all the problems that are going down there, we've been there.

We've added capacity -- Trans Con.

And it's doing better this year than it did last year.

I mean, it's one of these things where you build markets, and it takes a little bit of time to get the loyalty and the customers.

And so I think that wouldn't necessarily be indicative to say, because any time in market and number of loyal customers would have to figure into that.

Absolutely, thanks for that.

And lastly, an update on JFK terminal.

It sounds like you're starting to think about some contingencies that maybe you weren't perhaps fully planning on before.

What's the quick update on that?

Yeah, I'll give you an update on that.

We always had some contingencies in, because if you go from a -- we think we can go from about 14 gates, 13 or 14 gates of what we have, per the terminal we have today.

And that would take us up to maybe 130 departures.

We're about 90 today out of our current facility.

We need to do some improvements.

We're installing a lot of kiosks and doing some things, working close with the TSA to make sure the flow is moving through there.

But as we move into our new terminal, it's looking like if we get it done, and caveat, caveat, caveat, that it would be early 2008.

Now we need to be closer to maybe a couple hundred flights a day to be able to take a terminal that has 26 gates in it, which is what we're looking at.

And so we need to get from 140 to 200.

And we're looking at -- there are gates available that we can use at the airport.

And we've got pricing on that.

It makes total sense to us.

And so we've got to get from 130, 140 up to 180, 190 between now and 2008.

And we can absolutely do that.

We're trying to think of the best way to kind of split the operation into Trans Con over here, and everything else over here.

What's the best way to do that?

And we haven't totally sorted that out, but we're confident that we will be able to do that.

But it's always been our plan to do some phasing and do some kind of interim type flying to be able to get to that level.

We can't go from this size terminal today to the next size without growing during the, in the interim time.

When would expect a definitive commitment?

From the Port Authority?

Yes.

I think it's pretty imminent.

Okay.

Our people have been working with them for months.

Exactly, that's my point.

Yeah, we've been pretty public about that, and don't have anything officially to announce.

But I think we're pretty well as close as we've ever been.

So I think we're pretty comfortable with where that's shaping out.

And also, I think very importantly is from a cost perspective.

We've really focused on trying to keep our costs for enplanement levels, even in 2008 dollars, that are levels that we have today.

And so that's critically important if we're going to continue to stimulate traffic.

And so it's not one of these things where you're betting the farm without having the costs advantage -- the costs that we have today.

And so we're very comfortable with that.

Great.

Thanks very much.

Thank you.

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

Please go ahead.

Good morning guys.

John or David, just wanted to clarify something.

Quickly, if I put your margin assumptions for the third quarter into a model, it would appear that in the fourth quarter you need to be probably at least flat with last year, maybe up, to hit the full-year number.

Is that a fair characterization?

And could you give us a little color on what the thought process is there, understanding that was a difficult period for you last year?

I would say that your Algebra sounds like it's working pretty well.

And I think part of the key as David alluded to, if you got into November and December last year, we had a surprise, which we acknowledged, which was that we saw some real seasonality drop-offs in East/West markets, that we'd never seen before, because we kept growing and throwing capacity and trying to meet demand.

And the seasonality had been masked.

And then finally, we saw it last year.

But as David said, we have trimmed back flights for the off-season, not just the two that he mentioned JFK/Oakland and JFK/Long Beach, but also seasonally in the winter time for San Diego we're doing 2 flights instead of 3.

But we think we have made the right adjustments so that we won't have some kind of the revenue issues that we had seen in that fourth quarter last year.

So that's part of it.

So peak/off-peak management.

Are there any operational constraints in your ability to continue with the kind of utilization that you're seeing here, up at 13-1/2 hours?

Or can we think that's a sustainable number going forward, depending on the mix of flying that you're doing?

Operationally, it is a sustainable number.

We can get all the aircraft maintenance that's necessary to be done accomplished, and still continue to run numbers in the 13 range with any problem from a utilization perspective.

The only real issue is if we ever run out of markets to be able to do red-eye flying in, because the 13 is dependent on some backside of the clock flying.

And that's not just out of Kennedy.

You've got to think what additional red-eyes we could do out of Boston and out of Washington.

We do a lot of them out of there, and we have other cities that we can do as well.

For example, we fly Dulles to Sacramento, and we fly Denver to Boston, so it's not just red-eyes flying out of JFK.

And David, just one quick one.

When did you implement the revenue changes that you were describing earlier?

Well, I think it's a process.

It's not something that you're going to flip a switch overnight.

The thing about revenue management, it's part science, part art.

And you have to kind of give it the human touch.

And there's a computer touch.

And I think it's part of this philosophy.

And so we've been working on it in the last 30 days.

And we're, like I said, going to beef up that department.

We're going to add some more folks there, some more technology.

So it's going to be a process, but I think some of it's already started and you'll see more of it as we go forward.

The philosophy is let's be more competitive on some of these fares, and let's make sure that our load factor is its highest levels, because we want as many people to fly on JetBlue and have the JetBlue experience as we possibly can.

So it's a gradual thing.

Okay, thanks a lot guys.

At this time, I'd like to turn the floor back over to Mr. Neeleman.

Well great.

There's never a dull moment in this business and we're looking forward to more non-dull moments as we move forward.

And just to summarize, just thank everyone for joining us.

We look forward to speaking to you next quarter at this time, and summarize that as we look at our business, and as we look at our long-term sustainable competitive advantage, we couldn't be more pleased today with the product that we have, the product differential that we have over our competitors, and with our costs.

And just give a tremendous thanks to our crew members for all the work they're doing, to not only be efficient in what they're doing in helping to keep our costs low, but more importantly to take such good care of our customer so they want to come back and fly us again.

So that when we do have a [inaudible] like this, it's just tremendous when see the quality and the depth and strength of our brand, it's pretty exciting.

And I think we've got a great future, so we're real excited about.

And that said, there's likely to be some rough spots in the road as we go forward with higher fuel prices and these revenue challenges that we have.

But we're trying to look -- we always look long-term.

We're not nearly as concerned about this quarter or that quarter as we are what's going to happen next year and the year after.

And those are things that we're really focusing on as the future, and not the quarter-to-quarter.

And I think that's what our shareholders want us to do, is look at the big picture and look at the future.

And I think we're well positioned to take advantage of that.

So thank you very much.

Appreciate your time today.

Thank you.

That does conclude the conference.

You may disconnect your lines at this time.

Have a wonderful day.