JetBlue Airways Corp (JBLU) 2006 Q2 法說會逐字稿

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

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

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

After the presentation we will hold a thirty 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 forward-looking statements due to many factors, including without limitation, the extremely competitive interest rate, increases in fuel prices, maintenance costs, and interest rates, the Company's ability to implement its growth strategy, including the integration of the EMBRAER E-190 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, its reliance on automated systems and technology, its reliance on a limited number of suppliers, changes in/or addition additional government regulations, changes in the industry due to other airlines' 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 10-K and quarterly reports on Form 10-Q.

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

Good morning everyone.

Thank you for joining us here on our second quarter earnings call.

We certainly have better news to report this quarter than we did last quarter.

And we are certainly very pleased in the direction that we're headed.

Our RASM or passenger -- our revenue was up 14% in the second quarter, and that was with a 5.5 point drop in load factor.

Our operating margin was 7.7%, which was above the guidance that we gave.

And we made $0.08 a share.

Obviously, this is much better vis-a-vis the industry than we did in the first quarter.

We certainly closed the gap on -- we did very poorly in the first quarter relative to the industry.

And I think if you look at the difference on reported carriers versus what they did in the first quarter and we did, we're like I said, much, much happier about these results.

Capacity grew 23%, and the average stage length was down 8% due to slightly less capacity and a percentage of our total -- our total allocated -- our flying allocated to long-haul flying, as well as the impact of the E-190.

We will talk a little bit more of the impact on that on cost as well during the call.

In the quarter -- I guess I will talk about it now.

Our CASM was up 18% in the quarter, and obviously a lot of that was driven by fuel.

It was up 9% ex fuel.

And those ex fuel differences John will detail -- will give you a great detail on that in his remarks.

But it was obviously driven by the lower stage length, and the stock comp, and the T5 and some lingering inefficiencies from the 190.

And we talk about that every quarter, but he will give you more detail on that.

This reversal or turnaround from one quarter to the next has obviously been driven by a great commitment by our crew remembers.

They have done a fabulous job of seizing the moment.

And they are very committed to profitability here at JetBlue.

They're very, very engaged in the process.

This is the first step in a very long process.

We can do better on our revenues.

We can do better on our costs.

And there is no reason why we can't not only be equal -- in the pack of the industry there's no reason why we can't return to industry-leading margins.

And we will detail that in more as we go along.

I want to talk first about revenue.

Certainly our revenue performance was very good in the second quarter.

Our average fare on our 320s was $130 versus $110 in the year ago period.

So that is a $20 increase.

The 190 also performed very well.

Obviously we don't have the year-over-year comparisons for the 190, but if we look at the average fare in the first quarter versus the second quarter, average fare was 87 versus $70, and that was with a haul which decreased 7%.

Even though the haul went down 7%, the average fare was up $17, so very good performance.

I'm going to talk more about the 190 in a moment.

Obviously, the industry environment you have heard a lot of airlines talking about the strong revenue environment.

And so we're obviously benefiting from that.

We're also benefiting obviously from capacity reductions in some of our markets.

And I think as we look forward to the third and fourth quarters those capacity reductions are even greater than they have been in the second quarter.

During the second quarter Delta's overall capacity in JetBlue markets decreased only about 7%.

If you go forward to the fourth quarter and you look at overall industry capacity in the same markets, we're looking at down of 19% out of New York, and 26% out of Boston.

Obviously, as we give guidance and you look at the RASM increases that we're calling for in the fourth quarter, a lot of that obviously is driven by the capacity decreases, and obviously some of the things that we're doing on the revenue management side, which I will talk about in a second.

I think generally we are seeing an industry that is, particularly those airlines that are now out of bankruptcy that are more profit motivated than they have been in a long, long time.

We have people who are actually making decisions based on profitability as opposed to maybe trying to increase their losses so they can get better labor contracts.

It was a very perverse situation that we found ourselves in, but I think the industry is improving.

The other thing I think that is positive for us is that the world market for airplanes is tight.

And as you look forward to 2007, there's really not that much of an ability for airlines to add a lot of capacity.

And so I think the revenue outlook for us is very good going forward.

I want to talk a little bit about our revenue management and the improvements that we made there and how we are progressing.

I talked a lot about in the past about our group living from Salt Lake to New York.

They are fully ensconced here in New York.

And we have new leadership in place with our new Vice President, Rick Zeni.

And they are taking a -- there's a different philosophy that we have.

We're driving higher fares and reducing load factors.

And I think the reason that that is important for us is that it really gives us a lot more upside.

We have done this through obviously selling a lot fewer of the really low-priced tickets.

Really working on the mix of fares that we sell, and even adding fares along the way.

Our highest fare went from 349 to 399, which we use on peak and sold out flights.

I think we've got a ways to go though.

We can do better in that area.

Like I said, on the cost side and on the revenue side we're one step into a long, long race.

I don't believe that we have yet hit the sweet spot on exactly where we want to be on revenue management.

And we certainly have upside when it comes to pricing connections and using an optimizer and a forecaster, which we haven't fully implemented.

And so we have a great group of people.

The technology is getting better.

And this whole thing is an art and a science and so you have to -- the science is okay and getting better, and the art they are getting certainly better at that.

So I see upside from our revenue management and what our folks are doing.

Now we have also diversified our route system.

That was one of things that we talk about on the first quarter call.

We have become a lot less dependent on transcon flying than we have been in the past and all just North/South flying.

During this quarter we began flying to Bermuda, Portland, Maine, Jacksonville and Pittsburgh.

In July we began service to Charlotte and Raleigh.

And soon we will begin operations to Nashville, Aruba, Houston, Sarasota, Tucson, Columbus, and Cancun.

That is quite a list.

But I can't tell you that the bookings on these markets -- if you took the whole group together, we're very pleased.

Certainly certain markets are doing better than others, but as they mature and as they do better, what we can see from that number I gave you on the 190, the maturing process in these markets happens pretty quickly from quarter to quarter.

And we expect them to get to the point in the not too distant future to add to our profitability.

We are excited about those markets.

We have talked a little bit about the upside from lower load factors.

Obviously, if you're flying at 90% load factors it stresses the operation, and it also doesn't give you the ability to have upside.

I think to be in the low 80s load factor allows us to really leverage our brand in such a way through things like the American Express card, the JetBlue American Express card, our True Blue program.

We even have a getaways package division that is doing very well and profitable and contributing to our bottom line.

We have even formed a new charter division to maximize charter operations during our seasonally low periods.

We've got a lot of charters booked in the September and October period.

We are flying a lot of football teams and a lot of other things, so that is going to help our revenue as well.

Finally, I think the thing that will help us the most is that we're in kind of final what I would consider final stage negotiations with several of the GDSs, global distribution systems.

They have become deregulated of late.

Their economics work for us now.

They didn't really work for us in the past.

So they make sense.

They fit within our cost model.

And we think that there is a channel of business, be it the corporate or be it people who go to travel agents, that we have not been able to participate in.

SouthWest is in Saber, AirTrans is in I believe all the GDSs.

So we're kind of the only airline that hasn't participated in some form of GDS.

We think that that is going to add some good incremental business from areas that we aren't currently seeing business.

And I think that is going to help us a lot.

Like I said, we have no announcement today, but expect to have some announcement on that in the near future.

Let's go a little deeper now into the 190.

We are pleased with the performance.

It has improved as we have gotten along from an operating performance.

Overall reliability is today at about -- in the second quarter it was about 97% dispatch reliability, up from 94% dispatch reliability in the first quarter.

We're still utilizing spares in New York and in Boston, and have not yet reached obviously economies of scale on that airplane.

But we do see -- if we look at the cost from the first quarter to the second quarter the CASM is down significantly.

And as I mentioned, the revenue is up significantly as well.

Our RASM increased from the first to second quarter on the 190s -- are up 26%.

Certainly a healthy increase there and we are seeing those, like I mentioned, mature rather quickly.

I guess the question is when will we reach full economies of scale with that airplane?

We have talked about year-end, at year-end we will have I think about 25 or 26 of the airplanes.

By the end of next year we will be in the low 40s.

I think somewhere between the end of this year and the end of next year we will reach full economies of scale.

There is lots of ways.

I think one of the questions that will come up is are you making money on these airplanes?

And certainly there are lots of ways to calculate profit.

I can tell you that they are contributing tremendously in connecting customers into our system, bringing fresh revenue from cities that we didn't serve before.

If you calculate that revenue, and there's a lot of ways to calculate it, but there are ways to calculate it.

And even looking at the cost that we have today that aren't even -- markets are not mature.

Costs are not certainly optimized.

We feel like that if you -- however, you calculate it, we can say we're profitable with that airplane.

It certainly is dependent on how you allocate revenues.

But we think it is just going to get better from here on out.

I will talk a little bit -- I wanted to spend just a moment and talk about the unionization drive we had here at JetBlue with the IAM.

I'm happy to share with you, as you may have read in the news reports, that the National Mediation Board dismissed the IAM's petition because the IAM lacked to show at least 35% of the eligible crew members supported holding election.

That was obviously big for us.

We started with a philosophy here that we want to communicate directly with our crew members.

And the fact that they couldn't even get 35% to sign a petition I think is good news.

Although we are very committed to working with our crew members, not just our ground ops crew members that were targeted, but all of our crew members, in such a way that they don't feel like they need to go outside this organization to be represented by a third-party.

We think we can treat them well.

This wasn't necessarily about pay.

If you look at the pay that we pay compared to what -- the reduced pay of the IAM carriers it is not a pay issue.

I think it was some things that we needed to address, and we're fully committed to doing that.

And we're really proud of our crew members.

The strength of this Company is in our crew members.

The J.D.

Powers award that came out a couple -- a few weeks ago, the strength of that number, and were all customer service-related metrics.

I think we won like every single category of the seven categories.

And they had to do with customer service.

And as we push our fares up to cover these increased prices of fuel, certainly it is incumbent on our crew members to continue to an outstanding job of serving our customers, which they have done.

And as I mentioned, they are fully engaged in the process and very excited to get back to their (indiscernible) checks.

I want to talk a little bit about the outlook.

I guess I want to preface the outlook comment with -- John is going to going to go into more detail about this, but I think there were some guidance that we gave on the first quarter that showed fuel price for the year at a certain level, and it wasn't really the right number.

I will just make the point that any kind of decreased guidance that we're going to give on this call is 100% related to fuel.

It doesn't really -- the other metrics are tracking very well.

John will go into more detail in what we're doing on the cost side.

If you take the third and fourth quarters for JetBlue, and it may be different at other airlines, but the third and fourth quarters are very similar for us from a profitability standpoint.

We gave guidance of 4 to 6% in the third quarter -- in the second quarter, and certainly we beat that with the 7.7%.

Had we had the same fuel price -- if we were to have the same fuel price in the third quarter as we had in the second quarter, then certainly the margin would be very similar to what we did in the second quarter.

However, the guidance that we're giving of 4 to 6% is reduced, and that is just because we're using a fuel price net of hedges of 220 versus the price of 206 that we had in the second quarter.

So it is 100% related to fuel.

If you look at the net margins, or the pretax margins, that we have in the release, I think you show that the range that we give you is negative 1 to plus 1.

With the new price of fuel that we have been in our projections -- our internal projections are still showing a modest profit for the third and fourth quarters, but still a small loss for the year.

Although we believe that we can still make money for the year.

But this, of course, is highly dependent on the price of fuel.

If it were to go down from this level then obviously we would -- had we given -- had we used the 210 fuel for the rest of the year like we did on the last quarter call, we would be showing a profit for the full year.

So it is obviously highly dependent on fuel.

And the I guess lastly, what I will say before I turn the time over to John is that I think hopefully what the transition from the first to the second quarter shows here at JetBlue is that we are very committed to returning this Company to profitability.

And we'll make whatever adjustments are required on our revenue side, our cost side, and even on the growth side if we need to, regardless of the price of fuel.

If the new normal is 220, or if the new normal is 250, or if the new normal is $2, we will make those adjustments.

Obviously, it takes a quarter or two to make those adjustments and that is reflected in our third and fourth quarter guidance.

But make no mistake about it, we have an obsession around here with our cost and with our revenues, and we're very, very focused.

With that I will turn the time over to John, and he will give you a little more color on the financial aspects of the quarter.

Good morning everyone.

As I look at our numbers for the quarter I think they reflect a real dedication across the Company to low-cost carrier spending habits.

And while this is a good start, it is really only the beginning.

We must remain focused with respect to reducing our overall cost structure if we want to remain a profitable airline over the long run.

For the second quarter CASM was $0.0783, up 17.8%.

The year-over-year increase can be primarily attributed to the fact that fuel cost per gallon increased 37.9% to $2.06 versus $1.50 in the year ago period.

Not surprising to anyone, fuel prices remains historically high during the second quarter.

As many of you are aware, since last summer we have become much more systematic in our approach to fuel hedging.

Our internal goal is to have hedged 50% of our projected consumption for the prompt quarter, 30% in the quarter after that, 20% in the next quarter, and 10% in the quarter after that.

That said, our fuel hedge position for the rest of the year is as follows.

In Q3 we have 53% of our forecasted consumption hedged, 30% via heat collars and swaps, with upside protection at $1.98 per gallon, and 20% -- excuse me -- 23% via crude caps, with upsides protection beginning at $68 per barrel.

The crude caps themselves are capped at 85 per barrel.

In the fourth quarter we're 31% hedged, 18% via heat collars, with upside protection at $2.31 per gallon, and 13% via crude caps, with upside protection beginning at $67 a barrel, again capped at 85.

Excluding fuel, our CASM for the second quarter was up 9%.

The primary drivers were, one, a stage length decrease of 8.4%.

By the math, roughly 50% of our ex fuel CASM increase in the quarter was attributable to the decrease in stage length.

Two, charges related to stock compensation, as well as straight line rental expense for our new terminal at JSK.

And, three, some continuing inefficiencies on the E-190, specifically lower than targeted utilization, as well as overhead inefficiencies as we continue to grow into some of the startup costs on the aircraft.

On a unit cost basis, salaries, wages and benefits increased 3%, due primarily to the stock-based charge of $6 million.

This represents 20% on our ex fuel CASM increase.

Landing fees and other rents increased 13% due due to ground rents associated with terminal 5, which totaled 3 million in the quarter.

This represents 10% of our ex fuel CASM increase.

Depreciation and amortization increased 14% as a result of our new seven gate temporary facility at JFK, as well as our hangers, training center and flight [thins], none of which were fully reflected in 2005.

The increased attributable to these items totaled 2.2 million, resulting in 9% of the ex fuel CASM increase.

Sales and marketing increased 18% due to more advertising as a result of launching our new ad campaign, Sincerely JetBlue, during the quarter.

Maintenance expense was up 35%, primarily due to the fact that engines sent in for repairs during the second quarter of last year were still under warranty, while we recognized expense in Q2 of this year under our MTU Power by the Hour agreement.

All things being equal, we do not expect to see the same percentage increase on a unit cost basis throughout the remainder of the year.

In fact, we're actually forecasting a slight decrease in maintenance expense on a unit cost basis in Q3.

Other items.

Please note that in the interest income line this quarter we recorded $6 million in mark-to-market gains in our fuel hedging, which equates to about $0.02 on the EPS line.

Interest expense increased 65% due primarily to the debt financing of 16 additional aircraft, 6 [thins], our Orlando hanger and training facility center, as well as higher rates.

Our blended interest expense rate at the end of the quarter was just north of 6%.

Interest expense also included the accumulation of $2 million in interest on our T5 construction obligation, which was also capitalized, and contributed to the $3 million increase in cap interest.

I would like to take a few minutes to discuss our return to profitability cost initiatives and our progress to date I'm very happy to report that overall we're doing quite well, and we're actually tracking slightly ahead of our plan.

In the area of fuel conservation, we saved an estimated $3 million during the second quarter through our various RGP initiatives including, one, better flight and fuel planning, which accounted for about 20% of the savings.

Two, increased reliance on single-engine taxi, which accounted for about 20% of the savings.

As of today roughly 85% of our pilots are now performing single-engine taxis, compared to 70% in the first quarter.

And three, increased usage of ground power units and reduced usage of APUs on the aircraft at the gate, which accounted again for about 20% of the savings.

We estimate that about 30% of the total savings was a result of just running a lower load factor and the resulting reduced aircraft weight.

With respect to corporate initiatives, we saved an estimated 1.5 million in the second quarter through reducing spend in areas such as consulting, shop and office supplies, and personnel expenses.

The next area, crew member costs, resulted in a savings of roughly $5 million for the quarter through increased productivity, labor efficiencies, and reduced overhead hedge.

As you know, we are actively managing the number of full-time equivalent crew members per aircraft.

We have established a goal to reduce FTEs per aircraft from our April 2006 level of 91 to 80 by the end of 2007 or the first half of '08.

Accordingly, all new and replacement hires now need to be approved by a committee consisting of David, our President Dave Barger, and myself.

Finally, in the area of supply chain management, they slightly underperformed to target for the quarter, due mainly to timing issues.

Quite frankly they were just a little late getting out of the gate.

So in short, we really don't believe the area supply chain management will hit its RTP goals for the year.

However, we believe that the cost savings associated with the three areas previously discussed will more than make up for this shortfall.

Overall we're feeling very good about our ability to execute on the RTP targets we share previously, especially given the fact that we're slightly ahead of plan during the second quarter, and we can see continued good traction looking into the second half of the year.

Turning to financing, I would like to quickly mention the automatic shelf registration statement that we filed at the end of June.

It was time to reload our shelf, and the registration statement we filed will allow us to quickly react to the market conditions and sell debt securities, double EPCs, equity or quite frankly pretty much any other security our Board deems necessary or prudent.

During the quarter we took delivery of four new A320 aircraft, all mortgage financed through European banks.

And we also accepted delivery of additional six EMBRAER 190 aircraft, all of which were financed through sale leasebacks with our friends at Gcast.

At the end of the second quarter our fleet totaled 92 Airbus A320s and 17 EMBRAER E-190's, of which 68 were owned and 41 released under opt leases.

The average age of our fleet was around 2.6 years.

Moving on to guidance for the upcoming quarter end full year.

Later today we plan to furnish an investor update in the form of an 8-K, which will include answers to your most frequently asked questions.

Going forward it is our intention to routinely file a mid quarter guidance update sometime during the middle of the last month in every quarter.

So given that we will be filing detailed guidance later this afternoon, I won't go into great detail here other than to mention a few key metrics.

Looking ahead, we expect capacity to grow between 20 and 22% for the full year.

For the third quarter we expect ASMs to be up 19 to 21%.

Average stage length is projected to be around 1,200 miles in the third quarter and around 1,200 miles for the year.

For the third quarter we expect year-over-year passenger RASM increases in July and August to be somewhere in the mid teens at September to come in around the low 20s.

Overall for the quarter, passenger RASM increase year-over-year will be somewhere between 18 and 20%.

For the third quarter we expect CASM to increase roughly 17 to 19% year-over-year, again, at an assumed realized fuel price of 220 net of hedges.

We expect CASM ex fuel to be up approximately 8 to 10% in the third quarter.

Adjusted for a shorter average stage length of 18% year-over-year, our Q3 ex fuel CASM actually decline.

As of today, we expect to close on the sale of two of our five A320s in September, with the other three closing and exiting the fleet in October.

We expect to book any gain on the P&L during the fourth quarter.

And we will provide an update on that amount in our mid quarter guidance once all the documents have been executed.

As David discussed, based on our current forecast, our operating margin in the third quarter is expected the between 4 and 6%.

At an assumed fuel price per gallon net of hedges of $2.20, we expect pretax margin for the third quarter to be between negative 1 and positive 1%.

With respect to our full year guidance, I want to make an editorial correction that is causing some confusion.

There was a slight error in the full year fuel cost estimate we gave on last quarter's earnings release.

While we stated back in April that our full year fuel cost would be 210 net of hedges, we should have said 204 for the full year, as we were assuming 210 for the last three quarters of the year with $1.86 actual in the first quarter.

As such, our new full year fuel guidance of $2.09 actually reflects a $0.05 increase in the expected cost of fuel per gallon.

We expect to report an operating margin between 2 and 4% for the year, and a pretax margin between negative 1 and positive 1% for the year.

To repeat, both of these annual margins assume a fuel price net of hedges for the full year of $2.09.

And with that David and I will be happy to answer any questions.

(OPERATOR INSTRUCTIONS).

William Green of Morgan Stanley.

Can I just ask for a clarification on the CASM ex fuel guidance?

I thought that in the April press release you talked about it going up about 6 to 8%.

Now it is 7 to 9.

What is behind that change?

The CASM ex fuel for the -- excuse me.

For the full year.

Sorry.

The CASM ex fuel for the full year, when we look at the numbers, right now we're looking at something that is really based upon our RTP guidance.

All of our cost estimates are coming in line with the guidance we have previously given you with respect to RTP.

Every little bit that is coming online nowadays is based purely upon a stage length decrease and fuel prices.

I think the answer would be is that probably the fuel -- we added a lot of shorter flying in the fourth quarter than what we had maybe given you guidance for earlier.

Our plans changed a little bit.

So I think probably it is related to the shorter stage length.

We can verify that can get back to you.

We will.

Can you also speak to your views on leverage at this point and your need to [issue]?

Sure.

We have talked previously about our debt to cap ratio.

We target 75%.

For those of you who have been tracking the score at home, we have actually been a little above 75% recently -- $0.76, $0.77, $0.78.

As we look at the numbers right now through the end of the year, I think we going to be floating close to 80% adjusted debt to cap rate.

I think that is where we're going to end the year.

As of this moment in time we really don't have any plans to go out and raise additional equity.

Certainly we have reloaded the shelf.

That is an option available to us, if the Board so deems that is something that we want to go after.

Quite frankly, internally here we're looking at liquidity ratio.

That is really one of our primary concerns right now is to make sure we have enough cash on the balance sheet.

Liquidity ratios through the end of the year right now we're projecting to be roughly 23%.

That is cash and short-term over the last 12 months revenue.

All things being equal, I probably would like to have a little more cash on the balance sheet right now.

And again, we will avail ourselves of financing opportunities should we need to.

But as of right now I think 80% give or take adjusted debt to cap by the end of the year, a liquidity ratio of 23% is where we're going to finish out.

Just quickly, do you have any hedges in '07?

Yes, we do have some small hedges in '07, and Amy and Cindy can follow-up after the call with those details.

Michael Linenberg of Merrill Lynch.

Just some questions on the 190.

You highlighted how you continue to have 190 spares in Boston and New York.

How many spares do you have, and what is the 190 utilization running today?

And maybe just to give us some context, where is the utilization on your A320s?

Certainly the A320s will always have a higher utilization because they fly longer stage lengths, and it is much easier to have higher utilization when the plane spends less time on the ground.

I think the 320 is still hanging in there in the high 12s --.

13ish. 12.5, 13ish.

High 12s, low 13s.

And by comparison the 190 is about 8.3.

That is what it was in the second quarter.

We are looking at a 190 utilization that is more 10.5, 11 (multiple speakers).

Suffice to say that if you took the ownership costs on the -- obviously we pay less for the 190s than we do for the 320s, but if you took total ownership costs in the second quarter, divided by the number of hours we flew, it was more than 320.

It just underscores that --.

It is better in the -- we're making progress.

The utilization for the aircraft in the second quarter -- in the third quarter is going to be higher obviously than the second, and the second higher than the first.

I don't have those numbers right in front of me, but that is something we should probably get to you.

But that number will continue to ease off until we get in the double digits by the end of the year.

And I think we will be -- by the end of next year we will be where we want to be.

And then just my second, and this is sort of a repeat of a question I asked on last call about the connectivity and what you were seeing.

You threw out some characterizations of saying -- I think it was tremendously powerful some of the connections in some of the smaller markets, the flows that you're seeing.

Can you give us -- maybe put some numbers to that to give us a sense on what feed revenue the 190's are driving into your JFK hub?

There are two sides to that story.

We spend a lot of time studying this over even the last couple of days.

Our system, the way we do our technology and the way we allocate our resource, I don't believe that we fully maximize pricing.

We were looking at a lot of different fares where we were priced quite significantly higher than some of our competitors.

And markets where we have a seat here and a seat here we could have sold that, but it is not priced well.

Even with that, we are seeing our connection traffic improve.

It is still below 10%.

I think it was 6 to 8, and it is still today below 10.

That is one area that I think, even though we are doing very well, there's a couple of markets that really come to mind.

JFK Boston is certainly -- if you have as many fights as you had out of Boston, as many fights as you have out of JFK, we have high load factors in those markets and a lot of connecting customers.

If people couldn't have flown on us to some of the destinations -- they wouldn't have flown on JetBlue had we not had that service.

It is improving.

It is contributing mightily, but I think the upside is really great.

Jim Parker with Raymond James.

David, will you clarify your Delta capacity cuts.

I think you said -- you gave some numbers for Delta, and then you said capacity -- maybe industry capacity against JetBlue.

Can you just -- what is the Delta decrease coming up in the fall?

The Delta capacity decrease in the fall in the five cities we have for the information we have today is 31% reduction out of New York and 55% out of Boston.

The industry, including us because we backfill some of that service and we will do a little bit more, is down 19% out of New York and 26% out of Boston.

You're selling some aircraft, those five A320s, of course, less capacity in your own markets by JetBlue helps RASM.

What about selling some more?

Is there any thinking that you might move some more aircraft out?

I think what we will continue to look at, as I said in my comments, that we will -- the key to this Company is profitability, and we will do everything in our power to return this Company to profitability.

And if we feel like that we need to do that, we will.

But right now the way we have our aircraft allocated for this winter we feel very good about the schedule that we have and based on what we're doing today.

I think the capacity New York to Florida, this winter is actually less than it was even this summer.

We feel really good about the direction we're headed.

And don't see a need to do it, but if oil keeps running obviously and our profits keep getting squeezed without our ability to either raise revenue or lower cost to make up for it, then that certainly something we would consider in the future.

In that context, September is always a very difficult month for you guys.

What is your capacity this year?

I think you said you were going to park some aircraft and you're moving -- you are selling some.

Year to year what will be your capacity this September?

What will be the change?

I think we look at it more in a reduction from August to September.

And that number is 16%.

We're going to cut capacity from August to September about 16%.

A lot of that is coming obviously out of the transcon and doing some day of the week stuff.

We need to do better in September.

You're right.

We are really focused on that.

It is really tough to make all this money in July and August and then give it back in September.

But we will get better as time goes on.

I think getting into these other markets that are less maybe seasonal, that are more maybe corporate-based or aren't so vacation oriented, places like Pittsburgh and Charlotte and Raleigh, I think will help us as we move forward to diversify our route system.

Jamie Baker of JP Morgan.

David, I believe in your beginning comments you mentioned that there is no reason that JetBlue can't return to margin superiority to the industry.

I found this to be an interesting statement given that your peak margins in the past occurred at a time when industry labor costs were about 6 or $7 billion higher than they are now, and the legacy RASM premium was at its lowest point in history.

I'm sure that you have absolute confidence in JetBlue's performance, but I wonder if you're also expecting some deterioration in the industry outlook, or possibly a return to the basket cases that your competition at one point represented.

Any thoughts on this?

I don't have a lot of thoughts on the competition, although I'm comparing ourselves to the competition, so I probably should.

But I think what we are talking about internally and really focused on, and John touched on it with the FTE 80 phenomenon that we have going, certainly we have -- industry costs have come down.

And our gap -- our spread between where our costs are today and where theirs are today is narrower.

If you do the math on the FTE 80, it is a significant amount of money.

And also the other initiatives that we have going on, we think that they have kind of come down to where they are going to be at.

I don't see any -- especially for those carriers that have come out of bankruptcy -- I don't see an ability to do a lot more on a cost reduction, and we think that we can do some.

We think that we can become more efficient.

And we can -- if we have 150 airplanes and we are doing 10 less or 11 less crew members per airplane, that is 1,500 people times a site -- it is a lot of money.

It is really a focus on ours to be better at costs and to use the same kind of rigor that they have used to squeeze every bit of costs out of our operations.

When we do those numbers certainly our margins improve dramatically.

That's very helpful.

John, just as a follow-up, you're ex fuel Possum CASM reconciliations were very helpful.

Can you give us how much of your RASM performance in the quarter was attributable to changes in stage lengths and/or what RASM would have been on I guess a same-store basis for lack of a better term?

We can get back to you.

We can pull those numbers for you.

I am seeing an initial draft of it, and I want to confirm the math before we pass it out.

You can add that to the list of our frequently asked questions then.

Fair enough.

I just want to make one clarification on the fourth quarter revenue.

We have said this before is that the RASMs that we are seeing are being obviously -- and this goes to the heart of your question -- driven a lot by the shorter stage lengths.

And also the 190s, certainly the RPMs on that airplane are much higher than what we have on the 320s.

And they are having a larger -- that is driving a lot of that RASM increase.

And then when you look at the capacity reductions in the fourth quarter, and you look at the ability for the 190 to also improve year-over-year -- we had a terrible fourth quarter last year obviously.

The hurdle isn't all that high.

Year-over-year comparisons are very favorable for us.

That helps the 320.

And then the 190, certainly with the lower stage length, is driving a very high RASM.

David Stein of Bear Stearns.

A question about some longer-term issues.

Given the change in the mix because of the 190, looking out into '07, where do you think the stage length will settle?

And given the reduction in the overall stage length, and also given the RTP plan that you have in place and the cost reductions you are making, do you think it will be possible to keep nonfuel CASM stable out into '07?

I think certainly.

I think if -- you ought to run the math for sure, and we are just starting our budget process for next year.

I tell you that the conversations are going much differently around here than they did last year at this time as far as what is being added and what isn't being added.

We haven't done the full math, but I can tell you with the math I just ran through with Jamie, and you talk about the sizable amounts of costs that can still come out of reorganization, it certainly will -- if not hold it flat, it I will certainly help the increases over time.

What we said from the beginning on the 190, and we still hold it is that that airplane will be accretive to our -- it will be RASM accretive.

So if it drives a higher CASM it is going to drive more revenue than that increase in CASM, and we will certainly do everything we can to keep the cost at a bare minimum.

I would just like to talk a little bit about RTP and the overall cost structure.

As we said on the last call, the whole RTP initiative, revenue and cost, was roughly $70 million.

And it was 50% revenue and 50% cost.

And we have talked about FTE 80 and what that means.

Reducing headcount -- we're starting at 91 trying to get down to 80.

We are looking at 11 heads per aircraft.

Based upon our average salary, and granted it may differ a little bit but just back of the envelope math, you're talking $100 million right there with respect to FTE 80 and the cost savings to the bottom line.

And you add the other RTP initiatives from a cost perspective on top of that and you are 125 million.

As we mentioned earlier, RTP is really only step one.

We have a commitment here to low-cost carrier spending habits.

And David is right.

We're going to start our 2007 budget process probably in the next four to six weeks.

And the whole attitude going into the budget process is going to be quite different than in previous years.

There is definitely a focus and a dedication here, are not only delivering RTP, but going above and beyond to get the cost structure where it needs to be.

That is driven obviously by -- fuel keeps going up.

And I think you can say, well, blame everything on fuel, but if you're a better company and you are more efficient than you were before, then I think you can certainly set yourself up great if fuel price ever does come down -- not to where it was before, but even if it goes down at all, we become obviously much, much, much more profitable than had we not gone through this exercise in the first place.

On the stage length adjusted basis, as our stage length drops, certainly I would like to -- I use Southwest Airlines as a proxy.

I would love to see us get our cost structure on a stage length basis down to their level.

A follow-up on that, and also something, David, you mentioned earlier in your remarks.

I think you referenced 20% RASM increase when you were speaking about the 190.

What timeframe were you referring to?

That was over the first quarter.

That is what we did in the first quarter compared to the second -- the second quarter compared to the first sorry.

I understood.

Can you give a sense of how the operating margins are on the 190s relative to the 320s at this point?

It is really difficult to tell, because first of all, we have some numbers.

We are tracking the numbers very carefully.

And I can tell you that the CASM quarter over quarter is down substantially.

I also mentioned on the call that the ownership cost per hour is higher than the 320, so obviously that doesn't help its cause any.

And the same thing for the crew cost, because there's such a large portion of our percentage of our crews that are being trained on it.

I think you have to strip all that out and you have to look at it on more of a normalized basis.

And then you have to give its contribution from the revenue it is producing.

And I can tell you that is profitable.

And is it to the same margins as the 320?

It depends on how you figure that revenue.

And, yes, you can make a case that it is better or you can make a case that is worse.

I think the trend is what is important.

The revenue, the RASM trends and the CASM are going in the right direction.

And we know -- we feel very comfortable that it will and up in a certain place that will make them accretive and with a higher margin than we have on the 320s.

Last question.

I know that Jim asked you about growth earlier on the call.

But I just wanted to get a feel if you had any sort of benchmark in mind with respect to perhaps return on equity or return on invested capital that you are using to trigger either more or less growth going forward?

I think what we have said all along is that if we had margins that were in the mid teens that takes care of the invested capital calculation.

We're not there yet.

And obviously to the extent that we can't go year after year and not make money in our business and continue to run the business the same way.

I think from a return on equity, or a return on total capital, certainly it is a benchmark that we look at, but we're really focused more on our margins and profitability.

Just as last follow-up on that.

Is there a timeframe that you feel is reasonable to get back to achieving those margins?

Tell me what the price of fuel is going to be next year.

I think that --.

No, I meant not related to when you think it is going to happen, but over what time period do you feel it is necessary to achieve that in order to have it affect your decisions on growth.

I think next year is a critical year for us.

I think we have already reduced the number of 320s that we have coming into the fleet.

We're still taking 18 190s.

We're going to get through this year.

And the improvements are coming, and they will continue to come on the cost and revenue side.

And then we're going to go into '07 with a bang.

I think '07 is going to be critical.

Right now there're no plans to cut the growth in '07.

I think that the effects would take beyond that obviously.

But a lot of that is highly dependent on where fuel goes and how the economy is and a lot of different factors.

[Kevin Christie] of UBS.

Two quick questions.

One is what are you saying in terms of elasticity of demand?

Are you getting any pushback at all yet regarding any fare pass along to the extent that you do that?

Obviously, the higher fares you charge the less people travel.

That I think was reflected in our 5.5% drop -- percent drop in load factor -- not 5% but 5 point drop.

You charge higher fares, people travel less often.

That is just the way it is.

As I mentioned also, there is a sweet spot that is the maximum RAMS increase.

Obviously had we held our load factor constant, and our average fares would've gone up as much as they did, it would have just been ridiculous, our RASM.

Probably maybe another couple of points of load factor and a couple of dollars on fare it would probably yield a higher RASM.

And so our revenue management people are busy trying to find that sweet spot.

Very good.

Can you tell me what it costs maybe on average to open a new market -- for you guys to go into a brand new market what kind of dollars that would run between advertising personnel -- whatever those cost categories are?

It depends on the market obviously.

There're certain places we go where they offer a complete buildout for us, where we spend very little money, just equipment to come in and plug everything in.

And then they offer us even some advertising money to spend.

And there are other markets where we have a bigger buildout.

And so it goes all the way from very, very little to I would say $1 million or so.

You can't really take what we're adding and times that by 1 million because that is not the average obviously.

In other markets they just have one flight a day.

It is just really not that much expense when we go in.

It is time and effort from our people.

It certainly is a huge effort to go in and open things up, but from a financial standpoint it is not a material amount.

Bill Mastoris of Bank of New York Capital Markets.

I would like to drill down a little bit on the sale of the five aircraft.

What type of expected gain do you anticipate on those aircraft?

I would love to share that with you, but right now those aircraft are only subject to an LOI, and until I get executed documents in place, and we expect to have those within the next month, I really don't want to share that publicly.

Can I just confirm then that at least the encumbrance on those aircraft is roughly about 100 million?

Would that be correct?

About 110.

About 110.

Also, you indicated possible financings during the second half of the year.

This is in conjunction obviously with the refiling of the automatic shelf.

John, would it be correct to surmise that it would be strictly a secured financing, or might we see some unsecured financing such as high yields or maybe another convertible?

Any color that you could shed on that would be greatly appreciated.

Sure.

Right now we have no plans to do any financing through the back half of this year, other than just knocking out the aircraft pursuant to the delivery schedule.

All the aircraft in the back half of this year financing has been circled for with the exception of one December delivery.

And quite frankly, that aircraft slid back in the delivery schedule about six months.

And we had financing for it, but when slid back six months the lender just thought that was too long to hold the commitment at that pricing level.

And I was not willing to pay the revised pricing level.

At present no plans to do anything in the back half of the year.

Obviously the shelf test has been reloaded.

We continue to evaluate options and look at different scenarios.

We have started looking at 2007 aircraft financing as we speak.

I would think right now secured would be the most likely route, but who knows what the future may hold.

Okay.

And any of those financings now -- they didn't used to be sensitive to any type of credit rating changes, but are any of those financing sensitive to any credit ratings where you might have an escalation if you get a down drift at all?

No sir, all the pricing is locked at the time you close the deal.

There's no such sensitivity in any of our deals.

It is all fixed financing.

Some of it floats, but it floats on three or six months LIBOR.

There's no variability with respect to the credit spread.

Ray Neidl of Calyon.

Just to tie up a few loose ends on questions that had been asked before.

As far as capacity goes, you mentioned where you might cut back your increases if you don't receive the right ROE by next year.

My thought is it is a very tight aircraft market, and with your orders going out there what kind of flexibility would you have in canceling orders or selling aircraft?

It seems like you might be able to make some money switching over some of the aircraft.

I think the market is tight.

And certainly witnessed by the deal that we've got on our (indiscernible).

The airline that we have the LOI with is not the only one that was bidding for these airplanes.

We have a pretty hotly contested group of people that were bidding for it.

We know that -- we think we have a better indication today of the A320 market.

And we could do that.

We aren't really in the business of taking new airplanes and selling them.

We don't think that is the right thing to do for Airbus.

And the ones that we gave back to them it helped them.

I think our relationship with Airbus is very good.

I think we were to sell more airplanes, and have no current plans to do so, it would be selling our older airplanes.

Because the price that we got -- if you took the price we paid and while we sold them for, and you take into consideration that we flew those planes for 6.5, 7 years it is a very good deal for us.

Now on the 190 side, the first 190 that is available I think for delivery -- Embraer told me last week is '08 -- maybe the first quarter of '08.

We have had calls on the 190s as well, but again, have no current plans.

But I think your point is a good one that the world market is tight for these two types of airplanes and it certainly gives us flexibility.

Your load factor, even though it has come down, it is still pretty high.

You're still really wearing out your assets.

Do you see yourself taking it down a load factor further and getting your yields up further?

I don't think so.

I was looking at these numbers yesterday.

I think there were only two or three carriers that had a lower load factor than us in the month -- last month.

We had a lot of airlines that had higher load factor than we did.

I think there is a sweet spot there.

And I think that it may be even a pointer to higher if you look at the load factors of our competitors.

They are now higher than us.

We were the highest for years, and now we are in the bottom tier.

And then finally, with Southwest with their fuel hedges going down a bit, I know you can't talk too much about pricing, but do you see generally in the market an easing up on resistance to price increases, especially for low-cost carriers?

I think Southwest certainly has to recover the going away of their hedges somewhere.

I think they have proven that they are a profit motivated company, and the only way they can do that is to either make it up in load factor or in yield or in RASM.

And that is going to be a combination of load factors and average fares.

That can be bad for the industry, if Southwest is raising their prices.

Finally, is there anything you want to say about Newwark Airport, how your service is there, what you're doing against Continental?

I think if you look at our load factors compared to Continental, they compare very well.

We're right at them or a couple above, a couple below.

I think we have had great acceptance over there.

I think people out of New Jersey love flying on JetBlue.

As I mentioned before, it is a tough operating environment out of there.

A lot of ground related programs, and it is tough.

And it kind of gives us a little pause on adding our service out of there frankly because of the -- more because of the cost and the operational side of it more than how we are doing on the revenue side.

Daniel McKenzie of Credit Suisse.

David, on the GDS system you mentioned that there could be an announcement coming within the next -- well, the coming weeks or so.

I'm just wondering, what would be the time frame for phasing that in?

And is it included in your revenue guidance?

And if not, is it logical to assume that your revenue guidance could perhaps be better than you're suggesting?

I think that is a pretty good assumption.

We're pretty conservative on our guidance.

We don't like to get the cart before the horse on a lot of this stuff.

Since the deals aren't done, and since they aren't hooked up yet, we don't count our chickens before they are hatched.

I would say that that is not in our numbers.

That said, I think our systems that we have through [Navicare] has full capability to plug these guys in on a pretty quick basis.

We would have to test for a couple of weeks, but we can easily get them turned on in a short period of time once we come to an agreement on the contracts.

Good.

Looking at the number of new cities that you folks are starting service to this year, I think I have counted 13 or perhaps 14.

I've lost exact count.

But philosophically is that a good runrate looking ahead to 2007, or is 2007 a little bit different in that you would perhaps be connecting the existing cities that you have?

I think that is a really fair assessment.

The more dots you get out there the more capability we have to connect the dots.

I think a lot of these markets that I listed earlier are going to need some more capacity.

There is a few of them that could probably use it today already.

We've got to service the capacity from those new markets.

Not too much, as we have in the past.

And then from all of those new cities our schedule planning team is now working out possible cities that we serve out of all those cities.

It is certainly our druthers to be in a city and to have more places to fly out of there.

But we're playing catch-up.

There were a lot of years that we did really slow growth on the cities.

And we virtually had no cities between here and Florida and here and the West Coast.

We've got a lot of filling in to do in the Mid-Atlantic region and the Midwest and in the Southwest.

We started to do that.

There's a lot more to do.

But then we may be constrained by our own business as we go forward.

I wouldn't think today that we would have the same number next year as we do today -- as we did this year.

But certainly the industry changes and we will adapt to those changes.

If you just permit me one last question here.

Following up on JFK operations, you had touched on that in the last conference call.

And I think Delta announced that they wanted to turn JFK into a hub.

And I think they were, at least a few weeks ago, 185 departures.

And I think their goal is ultimately to get up to 250 departures, but they're pulling capacity back.

Has their departure out of -- the number of departures out of JFK stabilizing or is there any color you can add with respect to just JKF ops in general?

Yes, a couple of things.

Number one, obviously if you are adding a lot more capacity -- and it is not just them, it is us as well.

We're both going to be adding flights and ours are not Dash 8s like they are adding.

And so it is kind of to get out of the air space a little bit quicker.

We have spent a lot of time on our operations team -- Dave Barger has and his ops planning teams have spent a lot of time analyzing JFK.

And a couple of interesting things that we found is the kind of the lines between what -- the air space lines around here have not been redrawn since 1968.

The huge advantage that JFK has, is it has four really good runways.

And if you look at the utilization at LaGuardia for the two runways that cross each other, and what Newark does over there, we think that there is a potential for increased utilization from Kennedy.

The FAA adapts really well to that kind of stuff.

We had issues down in Fort Lauderdale the winter before last, and they started using all the asphalt that they had, and the issues kind of went away.

We think, given our increased number of flights and what Delta is doing and utilizing the full -- using two runways to take off in the evening instead of one, and the adjustments that the FAA would have to do, and some of the things that we would have to do a little bit different on our procedures, we feel good that we can fix that.

It is not something that can be done overnight.

But there's a lot of effort -- a lot of focus on it from us and from the FAA, and even from the other carriers as well.

This concludes our session with investors and analysts.

At this time we would like to open the floor to media. (OPERATOR INSTRUCTIONS).

Andy Compart of Travel Weekly.

I had a couple of questions.

First of all, Jamie Baker talked about in one of his reports he believes there is some automotive displacement going on short haul routes where people are actually -- because of the high gas prices maybe more willing or have greater preference to fly now than they would have driven on some routes.

Have you seen that at all on your short haul service?

I think it is certainly not hurting us.

I talked to a reservationist the other day that said that somebody called up and said $89 to Florida, I used to pay 69.

I want to pay 69.

Well, sir, the fare is now 89.

You know, fuel costs are higher.

And then can you drive time to Florida for $89?

And he said, good point, and booked the ticket.

Certainly the higher fuel prices are helping drive some people to airplanes.

I think that is certainly -- I don't know to which degree that is the case, but certainly could be accounting for some of the increase in traffic that we are seeing and other carriers are seeing as well.

Secondly, are the big, big problems in Boston affecting your demand at the airport there at all, since it is a route to the airport?

Not yet.

I think we're certainly hopeful that that tunnel can get opened by the start of school.

I think -- same as New York, you see a greatly reduced traffic flows on the roads during the time the schools are out, and people are away on vacation.

I think the reports that I have read, and what we have accounted with our people up there is that it is working.

It is not perfect, but it is not horrible either.

I know there's a lot of focus up there with Governor Romney to get those tunnels open, but get them open safely.

And so hopefully they will do it as soon as possible, but with making sure that they are safe.

Chris Reder of Reuters.

Good morning.

I just wanted to ask whether the savings targets that you have communicated in the past, like that $80 million, are those still consistent?

Are you still targeting those same numbers at this point?

And you mentioned some of the numbers that you have hit so far on target.

Could you like aggregate those?

Where are you on the different like revenue promotion and cost savings efforts?

I believe you're talking about our Return to Profitability plan.

Right.

What we have said previously, in fact it was the last call, we targeted a total of $70 million.

To date we're actually running a bit ahead of that based upon 2Q results.

So very positive overall.

But as I mentioned on the call, of the different initiatives, supply chain would be the one that I would say to date is not going to meet its initial target.

But we appear to be able to make up more for that shortfall in all the other areas.

Right now we're expecting to meet and/or beat our $70 million target.

I think just for clarification, that 70 million was not an annualized number.

It was just --.

May to December.

May to December.

So if you annualize that number, obviously it would be closer to 100 million.

Do you want to hit that number then by the end of this year, is that the target?

Yes.

Yes.

May to December is not an annualized basis, but the cost-cutting from May to December.

Yes.

That 70 million this cost-cutting plus revenue.

It is an all in number.

And again we're hitting -- meeting or exceeding our targets across all initiatives but supply chain, but we will more than make up for that shortfall across the other areas.

Can you tell me where you are at, like what did you do in the second quarter?

We're about year to date targeting roughly 5% better than expectation.

I just wanted to -- and the return to profitability, do you think -- like aircraft sales.

The first two were going to be sold today and the second --?

No, we're looking to sell five aircraft in total to one party.

We have a letter of intent signed.

We're working on contracts now.

But all five aircraft sales would take place later this fall.

Presently two of those aircraft would exit the fleet in September.

Three of those aircraft would exit the fleet in October.

You can't comment on that price, or can you?

Not at this time, no.

The first two in September and --?

The remaining three in October.

This concludes our Q&A session with the media.

With that we will turn it over to David Neeleman for closing remarks.

I think we've got on long enough.

And I just went to say that we are just, as I close my remarks, to say that we are very committed to returning to profitability, not just for this quarter but for years to come.

I just wanted to say that I greatly appreciate the efforts of our crew members and all those, and the loyalty of our customers as we adjust to these higher fuel prices.

And I know we will become a better Company for this, and we will be much stronger when it is all said and done.

Again, appreciate you for your support and talk to you next quarter.

Thank you.

Thank you.

This concludes today's JetBlue Airways conference call.

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