JetBlue Airways Corp (JBLU) 2006 Q1 法說會逐字稿

Good morning, everyone and welcome to JetBlue's first quarter conference call.

We have on the call today David Neeleman, JetBlue's Chief Executive Officer and John Owen, the Company's Chief Financial Officer.

Today's call will begin with comments from David Neeleman, followed by John Owen, who will discuss the Company's financial results in more detail.

After the presentation, we will hold a 30 minute Q&A session for investors, followed by a 20 minute Q&A session for the media.

Please bear with me as I review the required Safe Harbor.

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

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

Actual results may differ materially from those expressed in the forward-looking statements due to many factors, including without limitation; the extremely competitive industry, increases in fuel prices, maintenance costs and interest rates, the Company's ability to implement its growth strategy, including the integration of the Embraer E190 aircraft into its operations, the Company's significant fixed obligations, its ability to attract and retain qualified personnel and maintain its culture as it grows.

Its reliance on high daily aircraft utilization, the Company's dependence on the New York metropolitan market, it's reliance on automated systems and technology, it's reliance on a limited number of suppliers, changes in or additional government regulation, changes in the industry due to other airline's financial condition and external geopolitical events and conditions.

Further 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 2005 annual report on Form 10K and quarterly reports on Form 10Q.

The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

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

Great, thank you.

Thank you, all for joining us here on the -- for our first quarter conference call.

Obviously, it wasn't a great quarter for us.

It's not something we're pleased with or happy about.

We had a negative operating margin of 5.2%, which was a loss of $0.18 per share in the first quarter.

That was driven by weak revenue in the north/south markets and somewhat to a blizzard that we had here in the Northeast that we calculate we lost about $4.5 million, when you combine loss of revenue and increased costs during period of time.

Like I said, it was not a good quarter.

We're disappointed with the results and would have, obviously, fuel affected us and we would have had a higher margin.

Had we not had the high fuel prices, it would have been a positive margin.

However, I think what's become apparent to us, starting with the fourth quarter of last year, and continuing into the first quarter this year, is that we haven't done a good job of maintaining our -- of managing our business for fuel prices that are over $2 a gallon.

Primarily in the way we price our product and how we schedule our flights and how we control our costs.

Fortunately, as you can see from our guidance and the press release this morning, our outlook for the second quarter of this year is much improved.

The primary driver for this is, that we've undertaken a comprehensive return to profitability plan here at JetBlue.

With an extreme focus on right-sizing capacity, which includes aircraft deferrals and sales.

As well as some revenue enhancements and some cost reductions that I want to get into in more detail in this call today.

And first of all, I want to talk first about the capacity reductions.

We said in the press release today that we're going to slow the growth of the A320's.

That's primarily due to; rising fuel costs have had a very negative impact on our long haul flying.

Obviously, if someone's flying across the country, they consume more fuel on a per-customer basis than someone just going on a one or two hour flight.

And so to that end, since our A320's fly mainly long haul or primarily or exclusively, I should say long haul, it has changed that business.

And so to that end, we have made an agreement with Airbus to defer some deliveries next year and the year after in 2008 and 2009.

And also we do have some airplanes that we will have for sale between two and five, that we have -- that have been depreciated down to the point where we think that we can sell those airplanes.

Also, it will have a positive impact on cash, as well.

With the summer pull downs, we're going to fly trans-con this summer.

And I'll get into this into a little more detail.

We see really strong bookings on our trans-con business this summer, but we're going to -- as we get to the fall, we're going to be much more aggressive at pulling down those trans-con flights than we have been in the past because we need a higher average fare, based on the new realities of the fuel price that we're seeing.

As I said in the press release this morning, our lower growth rate will account for -- past guidance was at 28% to 30% growth.

And now we're looking at growth between 20% and 22% for the year.

Now, it's interesting to note, there may be some out there that say; "well is this enough?

Have you done enough?"

If you take the A320 ASM growth between now, the second quarter through the fourth quarter, is only going to be up 12%, which is less than half of the growth we experienced in the fourth quarter, which was almost 24%.

And what we -- and obviously it would be less than 12% if we sell.

That's based on two airplanes selling, not five.

And it would be lower than 10% if we sold five airplanes.

We really feel that the -- we're much more comfortable obviously, with that number around 12%, in light of the market development that's going on with the 190's.

In fact, we're already seeing some markets in the 190's that we feel like will become A320 markets and also the increased flow of customers that we're seeing from the 190's.

And as I -- and I will talk about the 190's in a second in more detail.

We're pleased with the partnerships that we have to date with both Airbus and IAE, our engine supplier.

They are certainly great business partners of ours and they understand the challenges of high fuel price and our route system that we got cut with these high fuel prices.

And so, they've been flexible on deferring these and I'm sure would show additional flexibility if needed be.

And certainly that's being driven by a strong demand for the A320 on a worldwide basis.

And so, it's much easier for them to remarket those airplanes in other parts of the world.

We're also going to be diversifying our route network.

As I mentioned, as we pull down these trans-con flights, we are going to redeploy these airplanes in medium haul and shorter haul markets that are less affected by the huge spike in fuel prices.

And so we will, obviously, have our average stage length will be coming down.

We've initially guided to eight to 10 new cities this year.

We've already announced eight.

And at this point, we're expecting to open more than that based on this redeployment of airplanes from long haul to medium and short haul.

Now, let's transition first -- I want to talk about revenues and costs.

But first of all, I want to talk about the 190's because that airplane is integral, obviously very important to our future growth strategy.

We are not deferring any aircraft deliveries of the 190.

And for that reason we're very pleased with the initial market data and transit we're seeing from this airplane.

As we mentioned in the last quarter call, we were having some challenges on the operating side of the business and we are -- that situation is pretty much behind us now.

The delivery schedule is pretty much -- will be back online by the second half of the year.

The technical dispatch reliability of the airplane continues to trend upwards.

And in recent weeks, we've seen it north of 98% dispatch reliability, which is getting closer to the dispatch reliability that we have on the A320.

We've also have the dual head displays that are certified, we have the LiveTV that's certified, we the Fox in flight TV and XM radios were all installed on all the airplanes.

And our customers are absolutely loving that plane.

Our utilization on the plane, we expect by mid-year to be in the 11-hour range.

And -- which is really what we need for -- to get the costs where we had anticipated them to be.

And the costs overall are coming in exactly where we thought we'd be.

And really the good guys, the fuel burn is a bit better than what we had anticipated.

So, from the cost side, from the operations side, we're really happy with that airplane.

I want to just give you a few examples on the revenue side that make us very, very encouraged.

We did an internal analysis on the normalized E190 cost, that is if the planes would have been flying their 11 hours a day.

And for the month of March, the E190 fleet is already profitable, if we would have had those normalized costs, obviously.

And so the markets are ramping up very nicely.

In the four markets we've been in since January, the lowest-performing route has a RASM increase of 24% from January to March.

These are markets we've just added.

And overall, the RASM improvement for all four markets averages an increase of an astounding 55%.

So, just -- it's obviously much easier to get higher RASM's on an airplane that's smaller and flying shorter distances.

And so we're very, very pleased with that airplane and it is obviously very important to our future.

And we couldn't be more thrilled that we made the decision to buy the 190.

Now, let's talk about revenue.

We've put out some revenue guidance going forward that some may think is a bit aggressive.

And obviously, we're coming from a pretty low base, so, as you increase revenue from a low base, it makes it a little bit easier to do.

Internally, we have at least 15 different revenue initiatives that we're working on, which deal with our core customer revenue as well as other revenue.

Areas that we feel like we can drive other revenue.

We had a system average fare in the first quarter of only $105.

Which, by the way, was about the same number we had last year and the year before.

So, we had very little improvement our system average fare, even though fuel costs have gone up.

And our other costs have gone up a little bit, as well.

And so, how do we get that average fare?

Because certainly, if we would had an average fare of $110 or $115, we would have been reporting much different results here for this first quarter.

Well, really good news on this front.

We feel like we have plenty of upside.

We hired Rick Zeni, who is our new Vice President of Revenue Management, who came from US Airways.

He is a technician, a scientist, understands the art of revenue management.

We have completed the move from our analysts and our group -- our revenue management team that has come from Salt Lake City that are now here.

Firmly ensconced here in Forest Hills and Rick is starting to instill the discipline to that team and use some science to move those average fares up where we need to be.

There is also a mind shift change that we're going to have to go through.

We need to trade some load factor for higher average fares.

In the first quarter, we had lots of routes that had load factors in excess of 90% with the yields just weren't where they need to be.

And so, we need part of yield management, obviously, is getting the highest average revenue you can get on a flight, whether you do it through load factor or average fare.

And we think that we can do that and still maintain low fares but just get a better mix of fares.

If we are trying to get an average fare to Florida, that's something north of $100, then it's just maybe selling a lot less $69 fares.

And selling fares more in the 89 and 79 area can easily accomplish that.

And then -- so, we don't see really any changes to our fare structure.

We will make some tweaks.

Yesterday we announced, because of the fuel prices, obviously, that our trans-con fare went from $349 to $399.

So, that's one adjustment.

But for the most part, we're just going to keep our fares the same but just get a better mix of fares and a better mix in the middle.

So, seeing some great results.

I will talk a little bit about the second quarter and what we're seeing in RASM increases in the second quarter in a minute.

But it's really starting to bear some fruit.

We also have other areas on the revenue side that we're working on.

I mentioned other revenue sources and they're two numerous to get into in detail on this call.

We're also looking at corporate booking tools that we're installing -- or not looking at, but we're actually installing some of the corporate booking tools to give access to the corporations to our inventory.

In the systems that used to book this stuff, there -- it's a corporate booking tool that fits between the GDS and what the corporations use to manage their costs.

And so, we will be in the majority of those within the next month or two, which will bring us additional corporate business.

We need to do better in that area.

We're also open minded about participating in other forms of distribution.

We've talked to the online travel agencies, haven't made any decisions on that.

But there are things that we continue to look at to broaden our net.

We don't feel like we have a demand problem.

We have a tremendous amount of demand for our product.

People really want to fly on JetBlue, it's just a matter -- so, maybe distribution isn't nearly as important as making sure we get the fare mix right.

And so as a result of some of these revenue improvements that we're seeing, they're starting to kick in.

And so currently in the second quarter, we're forecasting a solid RASM improvement in April, May and June.

And we're looking at something in the low teens, which certainly beats the whatever out of what we did in the first quarter.

And as the year progresses and these initiatives become more entrenched in what we're doing, we expect that number to improve not only from just the core revenue but the other revenue, as well.

And one of the core drivers, obviously, for that, is the 190 begins to grow.

It's amazing as you look at what we're projecting for the 190 RASM's compared to the 320, even though it's a very small percentage of our ASM's, it's having a disproportionate effect on the RASM growth going forward.

And so, we expect that low teens number to improve as we go beyond the year, as I mentioned, because of these initiatives, because of the slowing growth of the 320 and the increasing number of percentage of the 190's.

Let's move to costs.

Costs are -- I think on these calls before and in -- there's been lots of questions about costs.

And I think there's been a perception and I think probably not too -- probably some truth to that perception, that we've not had an urgency with respect to our costs.

And I think, necessity is the mother of invention, as I guess I'd like to say a lot lately.

And so we have really turned our focus to our costs.

We spend -- we have an all-hands meeting every week for three hours where we review all of our costs.

We -- and so we have a go-forward plan that will reduce some costs from this organization.

And let me just cover briefly some of the areas that we're really focused on.

Number one is labor efficiencies.

If you take our full-time equivalents, our FTE's in the first quarter, we had 93 full-time equivalents per airplane, which obviously isn't as good as what an AirTran or Southwest does.

Our operation is different.

We don't do as much outsourcing as they do, not Southwest, but maybe AirTran.

But we think that we can improve that number.

That number can go down and we're very focused on bringing that number down.

And so that goes to labor efficiencies.

Doing more with less, using more technology, better use of technology and just employing our people to better schedule our folks, particularly at airports and in reservations and having less head count, even on the corporate side.

And to show you how serious we are about this initiative, as of a couple of weeks ago, all head count additions for this year are considered unbudgeted and will thoroughly be reviewed on a go-forward basis.

So, everyone has to justify every single person that we hire on a go-forward basis.

And so, I think you'll see some increased labor efficiencies and we're really counting on that.

We're also thinking we can do better on our fuel usage and conservation efforts.

That's -- certainly, with fuel at this price, and it doesn't take much to drive a good guy in that area.

We are really focusing on more rigorous supply chain management.

We have Tom Anderson, our Senior VP, is running that effort and is doing a tremendous job there and we're going to see some benefits there.

And then just an intensive review of all expenses throughout the whole organization.

And we have some cross functional teams that are working on a lot of areas and we've identified a number -- what we think is a very significant number of cost savings that we can drive out of the organization.

Now, it's important that as we look at these revenue initiatives, as we try to move up the average fare from north of 105 that we had in the first quarter, we have -- are always keeping in mind our brand and our relationship with our customers.

Because we're very proud of the fact that, you know, they love to fly on JetBlue.

Also, we're very, very careful with our culture of our people.

And we have never laid off a single soul in this Company, have no intention to do so.

And so increased labor efficiencies obviously has nothing to do with layoffs, but it is growing at a slower rate as we add airplanes and becoming more efficient.

So, the combined number that we've come up with between these revenue initiatives and the cost initiatives and they're about split 50/50.

So, if you're going to ask the question, it's about $70 million.

And if we, obviously, run that 70 million through the P&L, we are forecasting at 2.10 price of fuel, which may be fantasy over what's happened for the last week or so, but 2.10 net of hedges, we do have some hedges.

We are not forecasting a profit for the remainder of the year, which includes the second through the fourth quarters.

And so, it's obviously something that we're very, very focused on and we're very much looking forward to getting back to profitability.

We like to have industry-leading margins and we don't like to have industry-lagging margins and so we're very, very focused on it.

Let's move -- I wanted to address -- there was some concern expressed in a report that came out a couple of months ago about our ability or desire to grow out of JFK on the short and medium haul routes.

And so I wanted to address that.

We have, currently operating out of JFK, about 130 flights a day.

We have a temporary facility, and this is something we've talked about before, we have seven temporary gates that we will be moving here at JFK in early June.

So, we will be using all of those for a total of 21 gates.

In addition to the gates that we have at Terminal 6 and the auxiliary gates that we have, we also have access to additional gates and facilities at Terminal 4.

In fact, we're operating our San Juan flights out of Terminal 4 today and there is additional capacity that we can add there.

When you take the additional seven gates and the gates that we will have in the facilities at Terminal 4, we can almost double the number of flights that we're currently flying out of Kennedy before we move into the new terminal.

So, I hope that will kind of dispel any notions out there that we don't have room to grow in Kennedy.

And that we have -- don't have a desire or willingness to split the operation because that is not true.

And we will -- obviously there are lots of cities that we can add out of here.

New York is the largest travel market in the world and it's our home and we're focused on it.

And you've seen additions of cities like Pittsburgh and Richmond and Raleigh and Charlotte and Jacksonville.

And there will be many others that will be coming to be able to fill that space.

And that's even before we move into the new terminal in late '08.

Our operating performance in the first quarter was greatly improved over the year prior, with the exception of February.

February was a tough month.

We did much better in March and we did much better in January, that we did.

February was a very unusual month for us.

It's something that we haven't experienced.

We had these amazing headwinds that were in the -- were just overhead, something we have never experienced in six years of operation.

Which certainly slowed our flights going westbound and caused our on-time percentage to be lower in February than it was last February.

And also we had the blizzard, which knocked out a bunch of flights and really caused us some on-time difficulties for a few days surrounding that blizzard.

So, if you were to take, certainly the headwinds out and the blizzard and these things are going to happen all the time but they were somewhat unprecedented in those two events.

So overall, we feel very good about the trend line of our on-time percentage.

In fact, in April, the current month that we're in, our on-time percentage is running close to 80%.

And that's even with some pretty tough weather we had over the weekend.

We're also working on what's called our Blue Turn process, where we have now structured and have come up with a plan to turn airplanes.

And we're going to turn those planes quicker and more efficiently.

And that will also help us keep our utilization up as well as our on-time percentage will continue, I believe, to trend in the right direction.

I guess I need to mention a little bit about our outlook and why some of the optimism that we have for our RASM increases going forward, certainly has to do with the capacity reduction we've seen in the north/south market.

On the La Guardia and Kennedy capacity going to Florida for this summer, it is down about 15% over where we had last summer.

And then Boston to Florida is down about 25%.

And so, we're certainly seeing strong booking trends and higher average fares because of those reductions for the summer.

And we're very confident with the situation we find ourselves in for the summer.

Trans-con New York is down almost 10%.

About 8% from New York to LA and the Southern California markets.

And so, that's obviously going to help us.

We have a lot of exposure there.

And some of that reduction, by the way, is us.

We've taken out a New York to Ontario flight that we used to have.

We only have one now.

And then we've reduced our JFK to Long Beach flights by a flight and then two during August.

And so, we're very serious about right-sizing our capacity to be able to get higher average fares that we need to return to profitability.

As you've all seen from the release this morning, our guidance, it's important to note that we added $0.10 per gallon in fuel to our numbers.

And we are guiding to 1 percentage point higher in operating margin, due to the 70 million that I discussed earlier in the costs and the revenue side.

And we are now forecasting a margin for the full year to be between 3% and 5%.

And that's assuming a 2.10 price, net of our hedges.

Before I turn the call over to John, I want to -- I'm going to close my comments by saying; nobody likes high fuel prices in our industry.

And it's a very difficult thing for us to cope with.

But I think our attitude is that we're really looking at this as a silver lining because it is forcing us to sharpen our sword and become a better Company on how we manage our revenue and how we manage our costs.

And there's no doubt that going forward we're going to be a much stronger Company and better-positioned to deal with high fuel prices in the future than we've been over the last couple of quarters.

The good news is that the -- with the improvements that we're making, we do have plenty of upside.

We have a powerful brand and we believe that we have the best customer service in the industry.

We've created true brand loyalty in a commodity business.

Our crew members' enthusiasm and commitment to keeping the JetBlue experience unique for our customers has been recognized time and time again.

Most recently, by the "Air Transport World" Best Passenger Service Award.

And the Best Domestic Airline by "Travel and Leisure Magazine".

And then recently just in the last couple of weeks, we, for the third year in a row, were awarded the quality -- number one in the quality -- airline quality rating by Wichita State University and University of Nebraska.

And so, we're very pleased by those awards because it affirms what we believe is that we do have the best product in the industry.

And we feel extremely optimistic about our return to profitability and we're excited about further improving our business model.

And we certainly cannot thank our crew members, those every day that take care of those customers, for their passion and commitment to continuing to grow this Company.

And to take care of our most, obviously, a very important asset, which is our customers.

So, with that, I will turn the call over to John.

John Owen, to give you a little more detail on the quarter.

Thank you, David.

Good morning, everyone.

As the press release said, operating revenues were up a little over 31% to 490 million.

That's a big increase in RPM's of 25%.

And just a $2.00 increase in average fare, which as David said, just wasn't acceptable and we've instituted a lot of things to try to remedy that.

Capacity in the first quarter increased just over 27%.

Aircraft utilization was down 2.9% year-over-year to 12.8 hours.

That's principally due to the way we slowed down utilization on the 190's during the course of the quarter and held an extra spare to loosen things up a little bit and make sure to improve the operating metrics on that.

As David said earlier, the improvement in the performance of that airplane just continues to move upward over time.

And we're very pleased with the number of issues that we've put behind us on that airplane and how it's performing now.

We did report a slightly lower load factor of 84.2%.

That was down 1.6 points from a year ago.

Not surprising, given that we had neither Easter nor Passover in March this year, they both fall into the month of April.

As far as capacity in the first quarter, it was 47% east/west, 38% Florida, 8% Caribbean, 5% short haul and 2% medium haul.

First quarter yield was 837, up again, only 4% year-over-year on a slight decrease in average length of haul of 2.1%.

For the quarter, RASM was 746.

That was up 3.3% over 2005.

Excluding the effects of new markets, using our same-store sales basis, passenger RASM was up 4.2%, while ASM's were down .2%.

Other revenue increased 67% year-over-year, primarily due to increases of $3 million for LiveTV, third party revenue, an increase of $3 million in the marketing component of TrueBlue point sales and an increase of change fees of $2 million.

As a reminder, we did raise our change fee, it used to be $20 online, $25 by phone.

And we did raise that earlier in the first quarter to 25 and 30 respectively.

During the quarter, we put three new A320 aircraft into service.

All financed by the issuance of 12-year fixed rate notes to a European bank.

And we also accepted delivery of four Embraer 190's, all financed through sale-leasebacks with GE Capital.

At the end of the quarter, we operated a fleet of 88 A320's, 11 E190's. 64 of those aircraft were owned. 35 were leased under operating lease.

Average fleet age, 2.6 years.

Turning to the balance sheet, we ended the quarter with 419 million in cash and investment securities.

That's down from year-end.

The principal reason for that is that we paid off about $45 million of aircraft debt in March in anticipation of closing or refinancing of those aircraft in April.

Cash flow from operations for the quarter was $87 million.

On the expense side, operating expenses were up 48% year-over-year.

CASM of 784, which was up 16.3% year-over-year.

That's principally attributed to the fuel increase of 42.5%, to $1.86 a gallon, net of hedges in the first quarter of '60, versus $1.31 net of hedges in the year-ago period.

Excluding fuel, CASM was up 6.7%.

The main drivers for that were stock comp expense.

This is our first year to be doing that under FAS 123R.

We had approximately $5 million of stock option expense in the first quarter, that accounted for 1.5 of those 6.7 points increase in CASM.

We had $3 million in straight line ground rental expense for Terminal 5 that's under construction in JFK, which we're incurring already, even though we won't be occupying that new terminal until early 2009.

That accounted for about another 1% of that increase.

Then we had lower utilization on the 190, as we mentioned.

And a little bit of a drag on salaries due to inefficient E190 pilot labor costs, just because of a small pool of airplanes and our reduction in utilization there.

And finally, we had a stage length decrease of about 4%, that accounted for a portion of the CASM increase.

And quick comment there on stage length and CASM.

As David said earlier, we're going to be doing more short and medium haul flights going forward, less long haul.

And as we do that, and further integrate the 190, you will, of course, see CASM increase because of the shorter average stage length and so should RASM, along with it.

On a fuel neutral basis, had we had the $1.31 fuel price we saw in the first quarter of '05, we'd have reported a CASM of 7.12, which would have been up about 6% year-over-year, largely due to the same items I just highlighted.

Fuel neutral operating margin, year-over-year, would have been 4.6%, a 2 point decrease compared to 2005.

Taking a closer look at the other line items.

Landing fees and terminal rents increased 13% on a unit cost basis.

That's mostly due to the ground rent, I mentioned a moment ago, on the new terminal that's under construction.

Maintenance materials and repairs were up 22% on a unit cost basis, due in large part to increased engine expenses and an increase in our average fleet age.

As we mentioned before, we have a new agreement with MTU for engine maintenance that will make that a much more predictable expenditure stream going forward.

And on the seat check front, we're pleased to report that we have now received approval from the FAA to increase the interval on our seat checks from 5,000 to 6,000 flight hours, in accordance with the new, resized Airbus maintenance program and that's effective in April.

So, we will start seeing the benefits of that here in the second quarter as we'll have fewer seat checks than we otherwise would have incurred had we not received that approval.

Within the other income line, we recorded a $3 million mark-to-market gain on our fuel hedges.

As far as taxes go, our effective income tax rate was 33% in the first quarter.

Because we are forecasting a pretax income number that is near break even, our tax rate could very well swing wildly from quarter-to-quarter this year, based on small changes in earnings forecast each quarter.

Mostly as a result of the magnified effect of certain nondeductible permanent items, most notably the stock comp expense.

So, moving on to guidance, in accordance with the return to profitability plan, we now expect capacity to only grow between 20% and 22% for the full year.

That's down roughly 8 to 10 percentage points from where we previously guided.

For the second quarter, ASM's are expected to be up 22% to 24%.

Average state length is projected to be around 1250 in the second quarter and around 1200 for the year.

As far as aircraft go, as David said, we're looking to sell at least two and possibly as many as five existing A320 aircraft.

A320 delivery schedule for this year is one in April, one in May, two in June.

For a total of four in the second quarter.

There will be five in the third quarter, four in the fourth quarter.

It will bring us to a total of 99 A320's by year-end 2006, assuming the sale of two aircraft.

The A190 delivery schedule is set for one in April and two in both May and June.

So, five for the first quarter.

Six in the third quarter.

Four in the fourth quarter.

And we would end the year with a total of 26 E190's.

Based on current forecasts, the margin guidance for the second quarter is expected to be between 4% and 6%, again, at 2.10 a gallon net of hedges for fuel.

And full year operating margin between 3% and 5%, again, based on that same 2.10 a gallon net of hedges for fuel.

And for the full year, that would bring us to a net loss for the year.

As far as 123R goes, it's included in our 2006 forecast, it's the first year we've Incorporated that.

We expect about $20 million in expense, that was $5 million in the first quarter and about $5 million per quarter, roughly, for the balance of the year.

But please keep in mind that these are rough estimates.

They're determined by a number of volatile factors that go into it and they are likely to change during the year.

CASM -- we expect CASM to increase roughly 19% to 20% year-over-year in the second quarter.

Again, based on that 2.10 net of hedges fuel price.

CASM ex-fuel in the second quarter would be up 9% to 11%.

Largely as a result of reducing capacity on both the E190's and the A320's, as we've discussed.

Plus, still some of the inefficiencies of having a small fleet and lower utilization than we planned on the E190's.

Which should work its way out during the second and into the third quarter where we won't see that anymore.

The other drivers, of course, are the stock comp expense and the T5 rent expense that I mentioned earlier.

And in second quarter, we are forecasting an 8% shorter average stage length.

So, of course, that will be a contributor to driving CASM up, as well.

RASM for the second quarter, we expect year-over-year RASM increases in April and June to be somewhere in the mid double digits -- or mid-teens, I should say.

And in May, to come in in the higher single digits.

April is actually performing very, very strongly, as one would expect with Easter and Passover both falling in the month of April.

As far as fuel, it continues to be our largest expense at 31% of total operating expenses in the last quarter, where we were $1.86 net of hedges.

We will be consuming roughly 300 million gallons of fuel for the remainder of the year, so $0.01 increase in fuel adds about $3 million to our expense or likewise $0.01 decrease would drop it by $3 million.

Looking forward with respect to fuel, we've got some -- a variety of hedges and I will summarize them as quickly as I can here.

In terms of heating oil swaps, we have 24% of our expected second quarter consumption locked in at $1.73 a gallon.

And for third quarter, we have 7% of our consumption locked in at $1.75 a gallon.

We've also added some upside protection, utilizing crude oil caps and NYMEX heat collars.

The current positions there, in terms of crude, for the second quarter, we have 36% of consumption with upside protection at $68 a barrel capped at 82.

For third quarter, it's 23% of consumption, protected at 68, capped at 84.

For fourth quarter, it's 12% of our consumption, capped at 67 -- upside protection at 67, capped at 86.

In terms of heat collars, we've also got 4% of third quarter protected at $2.18 a gallon on the upside, with downside risk at $1.80.

And for fourth quarter, 11% of our consumption protected at $2.25 on the upside with a downside risk at $1.86 a gallon.

Presently, our caps are not designated as hedges, so I all will get mark-to-market through the P&L.

As far as CapEx goes, we are looking at roughly 890 million, including predelivery deposits for the remainder of the year, for aircraft.

And about $150 million for all other, which include spare parts, LiveTV and so forth.

The majority of our debt is with, the principal exception, of our 425 million in convertible notes.

Floats, average debt rate at the end of the quarter was 6%.

Average investment return rate was 4.5%.

We expect interest expense to total just over 121 million for the remainder of the year.

As far as shares outstanding go, we've estimated shares outstanding for Q2 and full year based on the following assumptions.

No additional shares to be assumed from option exercises, And convertible debt to be assumed to be anti-dilutive.

We expect there will be 31 million options outstanding at a $12 average strike price.

Due to the in fact we're forecasting a net loss for the year, none of these options are included in the diluted share count for the full year.

So, basic and diluted count for the year are essentially the same.

In second quarter, then, we're looking at 181 million shares average diluted outstanding.

And for full year, 175 million weighted average shares outstanding.

So, I think that covers everything that David and I have to say from a prepared remarks perspective and we're ready to open the call up for questions.

Thank you. [ OPERATOR INSTRUCTIONS ] Our first question comes from Raymond Neidl with Calyon Securities.

Yes, David, you gave a very good overview of your plans to return to profitability.

I'm just wondering, though, how would you describe this?

Would it be tinkering with your system or is it a major overhaul?

Is it going back to your roots?

Was it a mistake going into the longer haul markets where you're competing more with the legacy carriers?

Is it going to be really a major upheaval, going back to your roots?

I think it's somewhere between a major overall and tinkering.

I don't think you can characterize it either as one or the other.

I think it is somewhat going back to our roots.

I mean we had a plan where we had 44 cities that we were going to fly to JFK and we had so much success on the trans-con business, as you should when you have sub dollar fuel, that we found that an effective way to grow.

And I still -- we believe we have a very good franchise on the trans-con business.

We have a lot of loyal customers that fly now to Long Beach, that love that airport, that would never go back to LAX.

We have a growing number of people that feel the same about Burbank.

Certainly, if you live out in the Ontario area, you would never drive to LAX, it's a long, long drive during certain times of the day.

And in the Bay Area, we have the East Bay of San Francisco, which is a very growing area.

And San Jose, we're the only airline that flies from New York to San Jose.

And that goes for Portland and a lot of other cities that we fly to.

So, that's a very good franchise that we have, but we seem to manage it differently.

And we need to pull back some of the capacity, especially on the off-peak times of the year.

So, we just don't see a lot of growth there, as much as we have had in the past.

And then as we look back to the 44 cities that we said we were going to fly, certainly the majority of those cities we never added service to.

And so, it's now moving into the cities.

And fortunately, we have the 190 because it can help develop the markets at a lot less risk.

We can go in there with higher frequencies and garner a higher percentage of the overall business.

But appeal to both leisure and business by getting that increased frequency.

And then develop them and move the A320's in behind it.

So, I think what's really changed; certainly fuel has changed the way we look at the world and it has on the revenue side and on the cost side.

I think as big a story here as what we're doing on the revenue side and how we're changing around the route system, going back to our roots, is an acknowledgement that we can do better on the cost side and we will do better on the cost side.

So, there's a big focus there, as well.

And as far as the sale of the aircraft, first the deferral of deliveries, you're selling the aircraft this year because you couldn't defer this year's deliveries.

Airbus is allowing you to defer further out, is that the reason for that?

Yes, it's obviously difficult to defer deliveries when you're inside of 12 months.

But there's advantages of selling older airplanes, certainly.

These are airplanes that are paid down a lot and there's a cash advantage.

And there's also a -- you're basically selling an airplane that has older and has higher maintenance costs and replacing with the new airplane.

So, it's not all bad that we can sell the older airplanes.

And we feel like for at least two that would be something that we could do.

And we would consider selling up to five if someone wanted a standardized fleet and wanted to kind of get going into India or China or wherever they're buying airplanes nowadays.

And you're not looking for any major price increases, you're looking more for better yield management and seat inventory management.

Is that what you said?

Yes, just a matter of mix of fares.

I think Last time we said this, we certainly -- we're in the process and now all the pieces are in place.

There was a lot of; "oh, my gosh!

JetBlue is going to increase fares across the board."

And we're not really saying that.

Obviously, if fuel continues to go up, we participated in a $5 increase last week that was driven by the latest spike in fuel prices but it's really just a better mix of fares.

I don't -- New York to Florida, we have a $299 fare.

I'd just assume not sell that many of those.

I'd rather sell a lot more $119 and $109 and $99 fares than maybe we've sold in the past.

I think we've sold too many cheap seats, and then go and try to sell way too many really expensive seats.

And we just need a better mix.

Okay, good.

Thank you very much.

Our next question comes from Mike Linenberg with Merrill Lynch.

Please go ahead.

Yes, David, I think earlier you were talking about the cities that you were going to add in 2006, you said eight to 10 cities.

You had already added eight but now you were looking to go beyond that.

What should we -- when we think about additional new cities for 2006, how should we think about that?

I can't give you a specific number, Michael.

I know what it is but I think it's something that we want to kind of keep a little close to our chest.

But I'm just telling you, it's going to be more than the eight to 10.

And it could be a few more than that.

But it's something that we can manage and there are cities that we think will do very well.

Okay.

And then just my second, I think prior to the change in your delivery schedule for the A320's, I believe maybe you were looking at 7% to 8% of your ASM's being flown by the 190's in '06 and maybe 12% or 13% in '07.

Can you talk about how maybe that mix has changed?

And sort of as a follow-up to that, you talked about some of the flow opportunities through Kennedy.

Any sort of anecdotes, maybe early take-aways on what you're seeing as the 190's get meshed into the schedule?

I think to your first question, I'm looking across the room.

What I really -- what we really focused on is, obviously -- the growth of the A320's was, like I mentioned on the remarks, was 24%.

And it was going to go to 12% in the last three quarters of the year.

But we're looking at a mix in '07 of only about 11% of the 190's.

But as I mentioned, the RASM's on that airplane are so much higher that it really effectively moves the needle.

As far as anecdotes go, we saw some very strong connecting traffic on our our JFK to Boston flights.

That was one that one that by tying the 50 -- one of the things that I neglected to say in my remarks, it was circled here, but I didn't get to it, was that Boston is doing much, much better for us.

We have 50 flights a day.

As -- we certainly can go to a lot more flights out of Boston based on the number of gates that we have.

But part of that reason.

I think, is we've tied JFK and Boston together.

And so we're seeing a lot more options for Boston customers to go out of Boston, over JFK or go nonstop to the cities we fly.

And then are many other examples where we're seeing flow increase.

I think as we've mentioned before, our connecting traffic is only 6% to 8% in the past.

And I don't know -- Southwest doesn't really advertised what theirs is, but certainly much higher than what we have.

You could argue it's somewhere in the 20%.

So, we need to take that 6 to 8 higher.

And you do that through good frequencies and the 190 can really contribute to that.

So, we're going to improve that number.

We have to also get better pricing those.

Our system that we have hasn't done a good job of pricing the connecting markets but we're really focused on that as well.

Okay, thank you very much.

Thanks.

Our next question comes from Gary Chase with Lehman Brothers.

Good morning, guys.

Just wondered if you could give us a little more color?

You mentioned the low teens RASM gain in the second quarter, if our math is close to right, that's high teens in the second half.

Historically, you've talked about, I think you've used the term same-store sales gain or whatever.

As we think about all the different things that are moving around, I'm wondering what's embedded in the assumptions about the core A320 flying?

And any help you can give us on what you're assuming there would be helpful.

Well certainly, it's going to be up.

And part of the reason it's going to be up, Gary, is that we -- for example -- let me just give you one example.

Last September, we had eight flights a day from JFK to Long Beach.

Not sure what we were thinking but we had eight flights a day.

And that's the same number we had in August.

This September, we have flight five flights scheduled.

You take that on a percentage basis, it's a significant drop.

So, we didn't do well, obviously, from JFK to Long Beach on an average fare point of view.

It probably would have worked great with $0.60 fuel or $0.80 fuel, but with what we had in the fourth quarter it didn't work well, in the third quarter.

So, when -- we are really focusing on; what's the right capacity for this market, for this time of year?

And as we right-size that capacity, certainly it's much easier to drive a RASM increase on a same-store sales, which is higher than what we had last year.

Particularly, when some of these markets had very low RASM's to begin with.

High load factors, but very low average fares and so as we cut back capacity in those markets in off-peak times, we're seeing those go up.

So, certainly it's going to be -- same-store sales on the 320's, are, less than the average -- or less than the whole system simply because the 190's are playing such a big role in those RASM increases.

So, we can -- it's really about the only color that we have on that, is that we're really focusing on the same-store markets, making sure we get it right.

And that's what's really driving a lot of those RASM increase.

And really the 190 is really starting to contribute on that RASM number.

If we're coming to 14% or 15% on a same-store basis in the second half, does that sound about the right order of magnitude?

I'd say it's probably a little bit high.

But I think you have to mix in the 190 with it, as well.

It does move the needle if you look at the significantly higher RASM's on the 190.

And David, I'm not exactly sure how to ask this question well, but it seems like you're moving --when you go from 28% to 30%, down to 20 or 22, it feels like you're putting a lot of additional RASM kind of in the model.

How much of this is a function of the capacity that you're taking out?

And how much of what you're forecasting is is a function of the other things you're doing around revenue management?

And really what I'm driving at is; if you can get a lot of these gains on the of the better revenue management, does it make sense to take that growth rate down now?

Well, I think it's a very good question and that's why we have flexibility, I think, in determining whether we sell two airplanes or five airplanes.

And whether we defer -- we have five airplanes next year.

I think what we're really anxious to do, given the new fuel reality of over $2.00 a gallon; is we've got to drive higher fares on our trans-con business.

And the way to do that is to offer up less capacity.

And it's much easier to do that, obviously, if there is less capacity.

I think -- I have very high hopes with what we're doing in revenue management.

I spend a lot of time up there and I spend a lot of time with Rick and his team and it's a bit of a mindset change.

These people have for so long selling very low fares and we've got to inch the average fares up.

But I think we're going to do very well there.

I'm very optimistic about what we're seeing in the second quarter and beyond.

But I think it's -- given the high fuel prices and given the long average days length, I think it's prudent to be able to take some units out.

They're not a lot of units.

We have flexibility to do more if we want to.

But we feel comfortable by growing the A 320 ASM's by 12% from between now and the end of the year.

And we think that we can do that effectively.

Okay, and just one last one.

Can you put a little context around the 70 million you're talking about?

Is that embedded in the guidance for '06?

Is that a number that you're going to work up to?

Is that sort of a run rate number that you will accomplish at some point during '07?

Or is that what you took out of your CASM numbers for '06?

What we did -- as I mentioned in my remarks, they are embedded in the guidance for this year with roughly a 50/50 split between the cost savings that we've identified.

And those cost savings will obviously be -- the higher percentage of them will be in the second and -- in third and fourth quarters.

We don't have as much opportunity here in the second quarter to see some of that stuff come through.

The majority, you will see, in the third and fourth quarters.

And then on the revenue side, it's just -- when you look at our total revenue and look at that -- I think it's not very aggressive on the revenue side, given the upside that we have through the things that we've talked about.

So, just on a run rate basis it would get better in '07?

Yes, these are permanent changes to the way we look at the world.

Thank you very much.

Our next question comes from Jamie Baker with J.P. Morgan.

Good morning, everyone.

First question for John.

In the past, you've adhered to a net debt of capital ratio of around 75%.

I found it a bit peculiar that Moody's didn't even cite this in their downgrade a couple of weeks ago.

But according to our calculations, you're at that point right now.

Does it still hold as a target?

And assuming, John, that the answer is yes, are we right to assume that a potential equity offering is around the corner?

Or are you simply withdrawing significant cash from the aircraft sales to fund the incremental deliveries?

Can you just give us an update on that?

Well, the aircraft sales aren't going to generate any kind of significant amount of cash to do anything in the way of deliveries.

So, the answer to that is no.

You are correct that we have had an internal target that we have spoken about a lot, that we would prefer long-term not to have our adjusted debt to adjusted total cap ratio exceed 75%.

Though, it has done that in the past at times.

And we are right about there and that's part of why we were trimming back growth rate.

We didn't like the looks of what we were seeing and the way that the balance sheet leverage was going up.

And we weren't adding equity to the balance sheet, the good old-fashioned way through retained earnings.

So, balance sheet concerns is one of the reasons why we have elected to scale back the growth rate.

So, that is definitely something we're focused on and you should not expect us to want to accelerate anything until we get the P&L back to where the P&L needs to be.

Now, as far as the common equity offering, that's something I can't speculate on.

But we have done it in the past.

And we have said if it was necessary to keep the balance sheet in line, we would consider one.

Okay.

And as a follow-up, David, you have spoken in the past about the JetBlue experience and LiveTV obviously playing into that.

I'm just curious as you migrate into shorter haul markets that tend to be more populated by business travelers; it isn't clear to me that JetBlue would necessarily be the carrier of choice in some of these markets.

Do you have any thoughts on that?

Well, I don't think we need to be the carrier of choice.

The difference between what the average fares are on the market and what we're putting into our projections are vastly lower.

And I think there's a lot of upside there.

It depends on the business market.

There are some markets that we do better than others and other markets where we keep fares loaded to simulate demand.

So, I think in some of the Carolina markets that we've announced, particularly in places like Charlotte, where fares have been so high for so long.

And there's a pretty big catchmen area where people can drive up from South Carolina and come up from other places where they really have seen some very high fares in the past.

And so we're confident that we can get with our projected level and not necessarily have the highest fare in the market like we have in our New York to Florida markets.

Okay.

Thank you, John and David.

Appreciate it.

One more thing, Jamie.

Yes?

Happy birthday.

Thank you, David! [Laughter]

Our next question comes from Jim Parker with Raymond James.

Good morning, David and John.

Just regarding your capacity growth with the aircraft that you're deferring and you may sell, what is the capacity growth, ballpark numbers, for '07/'08?

Jim, I didn't work all of them, but I think I did look at the 320 growth rate for '07 and '08.

And certainly, it's about half of what we've done in the past.

We're about 15% in '07 on the A320 side.

And about 10% in '08 on the A320.

So, as the base gets larger, obviously these percentage increases get lower.

And we think that, as I mentioned earlier, that with the number of 190's we're getting and the flow and the developmental markets, these are planes that we think we're going to -- that we're very confident that we're going to need.

And so we're more comfortable with that number.

Knowing that it -- certainly, we could make further adjustments to it but that's a number we feel comfortable with now.

David, would you update us on how your Burbank base is moving along?

How you're doing there?

At Burbank?

Yes.

Well, New York to Burbank, we had four flights last year.

We have five this year.

So, it's kind of the only markets that we're seeing an increase in.

We're very pleased with it.

By and large, the average fares have been higher out of Burbank than they have been out of Long Beach.

And I think that's driven by, there's a lot of companies that are in the area there and then tend to book more on Tuesdays and Wednesdays and give us a higher fare.

The only other flights that we have out of Burbank, we have just a flight in the afternoon that hops over to Vegas and back.

Just because we had airplane time.

And then we also have a Burbank to Orlando flight, which doesn't start until July.

And I looked at it the other day and the bookings look like they're coming in fine.

That will obviously, combine Disney from Burbank to Orlando.

We think there's a lot of business travel there and I think we will do fine on that market.

Okay, thanks.

Thank you.

Our next question comes from David Strine with Bear Stearns.

Thanks, happy 29th, Jamie!

And Hi David and John.

That's 38th!

No, he's only 29!

He looks young! [Laughter] Two questions.

First on the 190's I noticed that in the press release, David Barger was making comments about how pleased he is with the performance of the 190's.

And David, you were mentioning earlier how strong the RASM is on that plane.

Would it be would be possible for you to give us some sense of how the operating margin is for the 190's right now, relative to the rest of the Company?

Well, I think what I mentioned in the remarks is that in the month of March, we took kind of a normalized cost, had the planes been flying and had we got to the CASM that we thought we'd have.

We would have made money in March.

So, as far as our margin compared to what we did in March, I think it's really pretty similar.

But I think the important part is is that we've only been in the markets for just a couple of months and we're seeing month over month RASM increases that are quite staggering.

So, I think -- what we feel really good about is our ability to grow RASM on the 190's.

Because you just have less seats on the airplane and we can grow up.

So, it's not really -- I think it's not really comparing apples-to-apples when you talk about 190 to 320 yes, because of the normalized issue and because we're all -- we're so new in all the markets.

But to say that we're profitable on a normalized basis in kind of month three of these markets that we're -- we've just got started in;

I think is very positive from our point of view.

Okay.

And with respect to your thinking and the logic behind the sales versus the deferrals of the 320, I had been thinking perhaps there would be more sales.

Because as you mentioned, the savings from maintenance and other issues.

Why did you decide to defer as oppose to sell more aircraft?

I think that was more of a sure thing.

Something that Airbus was willing to do.

And maintenance has become -- people used to focus on a lot on maintenance.

But it's become a very small percentage of our overall costs.

Unfortunately with fuels, the rise of fuels.

But I think that was more of a sure thing that we could do it.

Certainly, we could sell more older airplanes as we move forward.

And if there's demand to do that, we will do that.

And is there any flexibility to snap back to get those planes back if you needed to?

I'm sure Airbus had a position available or if somebody wanted to trade, they would certainly offer them to us.

We have a good relationship with them.

We're going to be, when we get our firm deliveries, one of their largest A320 operators in the world.

And so they're very willing to be flexible with us.

Okay.

Last question, can you just give us an update on now things are shaping up at Newark to Florida?

Newark to Florida.

That market has, I think, done well and if you think about a market you just get started in.

But given the backdrop of the high fuel prices, I mentioned before that , it's a very tough operating environment over there.

It's almost daily, there's a ground delay program.

I haven't seen one yet for today, but probably anticipate it because it's clear here in New York and the sun is shining.

So, that's probably a good determiner.

Like I said, it's a difficult operating airport.

The average fares were good.

Certainly, we've had an effect on Continental over there.

When you look at their fourth quarter RASM's, mid-teen declines in RASM's.

But I think we have to take a look at how -- are we serious about the first quarter of next year.

And we've pulled back some capacity out of Newark.

We have a summer capacity.

And thinking probably very seriously about maybe keeping that level through the winter and work on those average based on the new realities of fuel.

So, it's -- I'm glad we're there but I don't see that as a growth market for us, given the difficulty of the fuel price and our need to get fares that are higher than what we have today.

Our next question come from Helane Becker with Benchmark.

Thank you operator, that timing is perfect.

David, you just talked about getting fares up and keeping the summer capacity in Florida into the winter.

Do you think Continental would go along with fare increases in those markets if you raised fares?

I don't know.

That's a fair answer.

I think everyone is under pressure obviously.

And New York to Florida is a big part of what they do.

And we've just said that our system fare in the first quarter was $105 and it wasn't good enough because we lost money.

And we're not anticipating losing money going forward.

So, we're going to cut our costs and we're going to try and figure out how to get that average fare a bit.

And I think Continental is obviously experiencing some of the difficulties that we are as well, because they buy fuel.

So, I think the trend in this industry are to get higher average fares all around.

Got you.

And then my second questions, probably more for John.

With respect to the balance sheet, can you fix the interest rate on any of your floating rate debt?

I think you said in your prepared remarks that you have a high percentage of floating rate debt.

Does it make sense to do that?

Actually, as we go through this year, we will be skewing that percentage fairly substantially.

Because every aircraft we're taking delivery of this year is being financed on a fixed rate basis.

So, as you layer on all of this additional fixed rate debt, and continue to pay down older floating rate debt as we go; the mix from fixed and floating is going to -- I should say the percentage floating is going to continue to decline.

And we should be down to around 55% floating by end of the year.

So, that's a fairly substantial move for us.

And on the past we've floated and it's worked very nicely when you had a nice positively sloped yield curve.

But when the yield curve is as fast as it is today, the advantages of floating aren't what they used to be.

Got you.

And then is that include or -- and it's a tough question because your cash balances will obviously be helped by higher interest rates but the rate you're borrowing will be hurt.

But does that -- is that included in the cost, like the $35 million of cost improvement you're looking for?

No.

Roughly half of the 70 million that David was talking about in terms of cost is all operating cost.

So, it has nothing to do with interest expense.

Our next question comes from Kevin [Chrisie] with UBS.

Actually, my question had been answered regarding Newark.

But I was interested also in whether you'd consider any reconfiguration of the aircraft for long haul at any point in time?

Are you talking about adding first class?

Yes, if -- are you going to try to capture any kind of revenue premium there?

I think, right now our feeling is that with the entertainment options we have on the airplane and with the extra leg room that we have on the back 2/3 of the airplane.

I think we're feeling pretty good about it.

That would preclude us from coming up with programs that make it easier for someone to buy the middle seat.

We see that quite a bit, where our customers are even buying out three seats and getting it for a lower price than a first class ticket.

And they can watch three different TV programs at one time, or three games at one time during the NBA Playoffs.

But it's something that we can continue to look and refine.

But I think if we can figure out a way to make it easier to have that middle seat open or to buy it, then I think that would actually be a better than some domestic first class that is out there.

This concludes our session with investors and analysts.