JetBlue Airways Corp (JBLU) 2006 Q3 法說會逐字稿

Good morning, everyone, and welcome to JetBlue's third 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 begin with comments from David Neeleman followed by John Harvey.

After the presentation we will hold a 30-minute question-and-answer 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 belief and assumptions concerning future events; forward-looking statements involve risks, uncertainties and assumptions, and 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 E-190 aircraft into its operation, 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 being subject to potential Unionization, its reliance on a limited number of suppliers, changes in or additional government regulation, changes in the industry due to other airlines' financial conditions, and external geopolitical events and conditions.

Further information concerning these and other factors is contained in the Company's Securities and Exchange Commission filing, including but not limited to the Company's 2005 annual report on Form 10-K and quarterly reports on Form 10-Q.

Additionally, this call may contain non-GAAP financial measures which the Company believes are useful to help investors better understand us financial performance.

For a full reconciliation of non-GAAP to GAAP measures please view the financial tables in the earnings release issued earlier available at the Company's Investor Relations website, investor.jetblue.com.

The Company undertakes no obligation to update any forward-looking statements or 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.

Thank you.

Welcome everyone to our third quarter conference call.

As you have seen the press release this morning, you can see that we made a pretax profit for the third quarter and had a net loss, some funny tax rules, but John will go into more of that.

I think I want to start out by saying that we're -- although we're not pleased to basically break even for the quarter, we are very pleased in the direction that we're headed.

If you look at what we did last third quarter, we had a negative -- I mean, an operating margin of 3.1% and 6.6% operating margin this quarter, even if you subtract out the aircraft that we sold during the quarter, we're still better, much better than we were last third quarter.

The guidance that we put in for the fourth quarter is going forward -- last year we had a 7.1 negative operating margin, even had some extraordinary items.

Even without that we had a negative 4%, and now we're guiding to a 6 to 8% plus operating margin.

So if you look at -- the trend is decidedly positive.

Even looking into the first quarter, which we haven't given you guidance on, it wouldn't be very difficult to beat the negative 5.2% margin.

So this whole process of kind of returning to profitability started in the fourth quarter of last year and into the first quarter where we realized that we needed to make some serious course adjustments to our company, and we've had a lot of people working really hard to work on the revenue side and on the cost side to be able to improve that, and I think you are seeing the fruits of those efforts in the third quarter and we believe that you'll see those into the fourth quarter and for the foreseeable future as JetBlue begins to recover from this period of time that we have gone through.

Just, now focusing a little bit on the third quarter, it was kind of strange and unusual quarter for us.

We had read some of the other airlines we've talked about their hedge losses and out of period losses.

We had some of that as well.

On the other income line, and John will go into more detail on this we had about $11 million hedge loss of which 7 million of that was out of period.

We also estimate that we lost 9 or $10 million of revenue from the security measures that were enacted on August 10, and that's down from the numbers we guided to on the last call.

And so those were two negative things that affected our bottom line in the third quarter.

We also had a positive thing where we recognized about $7 million for the sale of a couple of aircraft that we sold in September.

But all in all, given the fact that there were more negative things that happened than positive things, if you net them all out, we're happy with what happened in the third quarter, but happier, obviously, with the direction that we're headed.

Passenger RASM was up 14.7% in the quarter, which we think was very good.

Our -- obviously our RASM -- overall RASM was up even higher than that as was stated in the press release.

The operating margin I have already talked about a 6.6%, that was on a capacity that grew 19% during the quarter.

Moving a little bit to the cost side, I'll get into more detail with the cost side but I think the most heartening thing about the cost side is that our nonfuel CASM, our CASM was up 12.3%, but if you took fuel out and neutralized it from last year we were only up 4.7%, and that was with the decrease during the quarter, 18%.

So really a great cost performance from all of our folks here that have worked really hard to get that cost number down.

Like I said, I'll talk in more detail about that, and so will John in his remarks.

In our press release this morning, you have also read about our desire to slow the growth a little bit more than what we've already slowed it.

We announced back in April a plan to improve revenue as part of the whole plan.

We cut -- we decided that we would sell five A-320s and we would defer six A-320s in 2007 through 2009 for a total of 12 airplanes in those two years and move them down the line.

Since that time, we have really spent a lot of time looking at our growth rate and looking at our balance sheet, looking at our cash flows, and for the last 60 days we have really spent a lot of time looking at -- with a real detailed and methodical process to take a look at our growth rate over the next few years.

As I mentioned, we looked at the cash flows and the balance sheets.

We have scheduled today to deliver next year about 30 airplanes and for the foreseeable future.

So we tested that and looked at it.

For next year the growth rate, if we were to take these 30 airplanes, which we are planning to now, would have been about 18 to 20%.

So after a comprehensive analysis we determined to slow our growth rate over the next three years.

For 2007 we're expecting our capacity to increase somewhere between 14 and 17%.

We're giving a wider range because we really want to allow ourselves the flexibility and the capacity to continue to respond to market conditions and opportunities when they arise.

The details, we're not going to give you details on numbers of aircraft and what type.

Those will be forthcoming.

But we do expect this to affect both EMBRAER and our Airbus deliveries both, not just one or the other.

We view our order books as an asset.

We have great manufacturers, both Airbus and EMBRAER, and we have been in discussions with both of them, and we really think that the demand for these two aircraft types will allow us to preserve the flexibility, whether we sell some older airplanes, whether we defer some deliveries, but we really want to be able to say next year here's the number we want to do, and years after have some options that we can go from and preserve the flexibility while not having the requirement to do so.

So we feel really very strongly that the slower growth will be a positive benefit for both our investors and most importantly our crew members, and it will help us, if you talk about what are the benefits of this, we're going to have a lot stronger balance sheet.

There's been a lot of conjecture in the market, okay, with this growth rate, at these profits, you're going to have to go out and raise some additional equity.

By slowing the growth rate, as it stands today we have no intention of raising any additional equity.

And I think that's important for our shareholders to know that.

And we can sustain the 14 to 17% growth without raising equity.

And that obviously has to do with our improving financial situation as well.

By having a smaller number of airplanes that we will be getting delivery I think we will be more judicious on where we put airplanes.

We will be able to put airplanes where we need them.

We're already looking at next year and saying, oh, man, where should we do this?

Where should we do this?

So it gives us a discipline that is healthy for us.

We'll also allow all of the new markets that we added this year to mature.

That's part of our enthusiasm for next year.

I'll talk a little bit more about maturing markets in a second.

But finally, I want to reiterate that we are still a growth airline.

We don't need to be embarrassed by growing 14 to 17% next year.

We are still going to be a growth airline, and compared to the industry of 3 to 5% growth rate, it's still healthy for us but something that we think we can manage a lot better.

We will also be able with this number of airplanes to defend our markets and vigorously go after markets that we think are still -- will give us profitable opportunities in the future.

So that's enough about growth.

I'm sure there will be some questions come up about that.

I guess the hallmark is slowing but retain some flexibility to meet industry demands while still maintaining a strong balance sheet, which is very important.

Revenue, like other airlines, we saw, and I think I mentioned this earlier, we did see an effect on our revenues post August 10, and we quantified that in August and September, somewhere around 9 to $10 million of revenue hit.

It was probably more pronounced because we had began to shift a lot of our long-haul flights into short-haul flying and the effect was even more on the short haul side than the long-haul side.

Here's some numbers you'll find interesting, because we've always talked about what percentage of our business is in short haul and long haul.

I won't go through all the regions, but in the third quarter of '05 only 3.6% of our business, or ASMs, were in our, what we call our short haul markets.

In the fourth quarter of '06, that number will increase to 9.5%.

So that's that shifting that we're talking about.

Conversely, on the long haul side, the Transcon markets, were at 61%, in the third quarter of '05 and in the fourth quarter of '06 we're going to be down to 46.5%.

What that has allowed us to do in the long haul markets, by being a little bit more careful how we allocate that capacity we have seen great benefits in RASMs on the long haul even more than our system averages.

We had great -- a great July and August.

We did very well, and our margins were very good.

September was a tough month for us.

And partially because of the security directives that came out on August 10, but also we were in the midst of a transition.

We pulled down a lot of long haul flying and we started a lot of new markets, and obviously when you fly a market on its first month, and it's in September it doesn't do as well as on its 13th month.

So we had a combination of new markets, security directives, and so that really kind of drug down the quarter in September.

But what we are seeing now is that October is -- I don't know if it's the security directives and now our markets have matured, and they're much older, we're much happier about the way things are going now in October and in the fourth quarter, and I think that has led to us increase our guidance.

We gave kind of a mid-quarter guidance of 2 to 4% for the quarter, for the fourth quarter, and now we have increased that to 4 to 6%.

And that's really in direct relationship to better and improving revenues in the fourth quarter over where we had in September.

We also are -- obviously that has some to do with costs as well.

If you look at the third quarter, as same-store sales -- on a same-store sales basis from RASMs, we were up 12% on the markets we were in more than a year.

So I think that's pretty healthy.

It compares I think pretty well to the industry, the nongrowth side of the industry.

And so we were happy with that.

As I mentioned earlier that 12% was even higher if you looked at long haul markets.

I want to touch just a little bit on the 190s.

We have talked a lot about them in the past.

Want to remind you first of all that in the quarter, only 6% of our ASMs were in the 190s.

So I think they get a lot of attention around here but it still is only about 6% of our ASMs, so we need to keep in that mind.

Now, that said, the vast majority of these airplanes, virtually 95% of the ASMs are in brand-new markets, markets we have been in less than 12 months.

With every market this is like the laws of airline economics, that it takes awhile to mature laws of airline economics, that it takes awhile to mature a market.

And it's no different with these markets that the 190s are in.

So I'd probably tell you the revenue, the unit revenue on the 190s are probably as low as they'll ever be in the history of our company because all the markets are less than 12 months.

We have a Board member who is on our Board who is on a department store Board and he says they don't even report stores that are open less than 12 months.

So obviously that's a phenomenon in all industries.

The 190s in virtually all markets that are in less than 12 months.

They are improving if you look at them month over month.

We're excited to get to the first month where we can actually compare year-over-year, which is JFK-Boston, and we expect the revenue to continue to improve on the 190s.

Also, on the cost side, the costs are probably as high as they'll be in a very long time because, utilization is on its way up, we still have spare aircraft in Boston, and in JFK, and we have a partial system spare, but as you put more and more airplanes into the fleet that percentage goes down.

We expect to see 190 fleet utilization at ten hours a day by the end of the year but it's still not the 11 hours a day that we initially targeted but expect to get there sometime next year.

But it's, of course, better than the eight hours a day we had in past quarters.

I want to spend just a minute talking about new markets.

We will be in 16 markets this year.

We have announced 15.

We are going to make a market announcement tomorrow, a new market that we're excited about, and so watch the press for that.

Some markets are doing better than others, as is the case, but overall we're very pleased with the maturity of these markets, particularly winter markets like Aruba and Cancun.

Those have gotten off to a great start.

We can hardly wait to get into Cancun, one of my family's favorite places to vacation.

I mentioned earlier that our stage lengths are dropping.

We lost 18% average days in the third quarter over last third quarter and we are going to do another 18% drop in the fourth quarter, which obviously helps us to -- on our RASM side and it helps us in a lot of area, but it's very important that we continue to try and control our costs.

As we're looking forward, another reason that we have a lot of optimism for the fourth quarter and the first quarter is that the capacity in the Florida markets are still down and down quite significantly.

If you look at all NYC to Florida, which includes all airports to Florida, in the fourth quarter it's down 15%.

In the first quarter down 19%.

In Boston-Florida, fourth quarter is down 20%, and then first quarter of next year is down 13%.

And Boston does better in the first quarter by and large it's a very strong market.

So we're -- the trends are really good and I think those are some of the things that make us feel so much better going forward, not only about the fourth quarter but the first quarter as well.

With lower load factors, and you've seen that in this quarter we had 6 points of load factor lower than what we had last year, we have a lot more capability to do connecting traffic, so we're working hard to price that attractively.

In the past we haven't really focused that much on connecting traffic.

We have seen an increase of connecting traffic.

We're currently about 9% connecting and don't want to become a hub-and-spoke carrier but certainly have the ability to go higher to pick up some incremental revenue.

Last conference call we talked about we weren't in Sabre yet and we weren't in Galileo.

Those are two systems that turned on during the quarter.

We are very happy, in fact, Worldspan turned on last week so now we have three GDSs.

We are getting a greater amount of business from those GDSs than we thought we were going to get.

Really, the interesting thing about that, a couple things that really stand out, number one is, we think about two-thirds of that business, or 66%, is new incremental business to JetBlue.

These are customers that we have never seen before.

And our jetblue.com business has stayed nearly 80%, so it hasn't really affected that.

So we're getting this new incremental business.

The other thing that's very encouraging is that the average fare that we're getting from these GDS bookings, from these new customers, are about $35 higher per segment net of the cost of being in the CRSs than what we're getting from jetblue.com.

Also, our off-peak days around here are Tuesday Wednesday and Thursday, and really a big chunk of that business is coming on Tuesday's and Wednesday's and Thursday's, so it's all really, really positive.

As we look and as we project into the fourth quarter, and part of that, really, frankly, some of these increased margins, are because of this -- of some of this incremental business coming from the GDSs.

As we look into next year and we project out what we think that could add to us on an incremental basis, it could be as much as $100 million in 2007.

So good news on the GDS side.

Another thing that we talked about on previous calls, and probably getting a little tired of us talking about it and not making announcements, but we have been having some very serious discussions with several carriers about doing some codeshare partnerships to help monetize our very strong presence here at Kennedy airport.

As we've added more and more cities out of Kennedy, you can't imagine the airlines that are now interested in coming in here and asking for us to hook up our network with theirs.

So we see a lot of upside there.

Even though we don't have anything to announce, hopefully by next call we'll give you more details on this, but they are very significant players at Kennedy that are interested.

And that would certainly be great as we move into our new terminal, and that construction is progressing on budget and running slightly ahead of schedule, and we should be in there by the fall of 2008.

So we're very pleased with our new home at Kennedy and how it's coming out of the ground.

Want to talk a little bit about costs, and John will give you a lot more detail on the cost side.

Our costs in the third quarter came in $30 million better than we had thought.

Certainly we were helped by fuel.

But if you net out fuel and net out the accounting gains that we had from the sale of the two aircraft our costs came in $12 million better than our expectation that we had given you on the last call.

So that's a tremendous thing, and that's one of the reasons we're excited about the future, because that's one thing that we can control, unlike some revenue and some costs.

And like I said John will give you more detail on that.

We are constantly looking at innovative ways to improve our productivity.

We'll continue our intense focus on things such as driving our customers to kiosks and checking in online.

Our on-line check-in is up nearly 10 points, percentage points year-over-year and we have got some technological things that we're doing and advances that we think that will improve that number greatly as we move forward.

As you know, last quarter we talked about an initiative called FTE 80, which is full time equivalents 80.

That's the number of crew members that we have per airplane.

We're making great progress on that.

We wanted to be at FTE 80, full time equivalents 80, per airplane by the end of 2007.

When we put that target in place we had about 93 FTEs per aircraft.

And as of now we're down to at the end of the quarter, end of September, about 84.

So we feel that we'll easily make the 80 number, and I would tell you maybe we should maybe readjust our goal a little bit down, but with the slower growth and still make FTE 80 would be a tremendous accomplishment to everyone here at JetBlue who are really working harder on figuring out ways to be more productive and more efficient.

So as we look into next year and as we look at the costs, it's still a little early in the budgeting process, and we're working to pin down the exact numbers, but we have kind of a -- an indication and something that we'd want to do, we're looking at a cost savings next year of about $120 million on the annualized basis.

This year we started the RTP, the return to profitability, kind of after the year had started, and so if you look at the full year we're looking at something of around $120 million next year, and that's even given the slower growth rate.

So that's very, very positive.

So just in closing and before I turn it over to John, I just wanted to let you know how grateful I am to our crew members here and our leadership for really recognizing the difficulty that we were in and the challenges that JetBlue was in at the time.

We started this year with a $47 million pretax loss, and we've been rolling up our sleeves and digging ourselves out of this hole, and based on the guidance that you see in the press release where we're guiding to a negative 1% margins, on the pretax margin, we're saying it's going to be negative 1 to plus 1.

So based on that guidance that we're giving you, we still think that if things go our way on fuel and a couple of other things on revenue, we could make pretax profit this year, and if we can do that, that would be a tremendous accomplishment, and so we're very focused on that, and I just wanted to let our crew members know really how much I appreciate their efforts in not only becoming cost efficient but more importantly taking care of our customers on a day-to-day basis so they want to come back and fly us again.

We currently -- recently were awarded our fifth U.S. best domestic airline by Conde Nast Readers Travelers, five years in a row, and it's all because of our crew members and the fantastic job they do of taking care of our customers.

With that I will turn the time over to John.

Thanks, David.

Good morning.

I'm extremely pleased to share with all of you this morning that we're hitting our cost targets throughout the Company.

On point our fuel costs not only came in better than expected but adjusted to take into account the 18% decrease in stage length our ex fuel CASM actually decreased year-over-year.

As you all know there's been a deep and widespread effort across JetBlue to identify areas of cost reductions through better productivity, increased efficiency, and in certain cases simply doing without.

This intense focus impacts every department and every crew member.

It touches all the cities we serve as well as our business partners.

In the long run, we believe it will make us s better company with a leaner structure, better equipped to compete irrespective of the revenue environment.

For the third quarter, CASM was $0.0779, up 12.3%.

However, our operating expenses during the period did include a one-time gain in the depreciation and amortization line of approximately $7 million related to the sale of two of our older 8320 aircraft that closed during the quarter.

Backing out this one-time gain CASM was up 13.7%.

The year-over-year increase in CASM can be primarily attributed to the fact that fuel costs per gallon increased by 24% to $2.12, versus $1.70 in the year-ago period.

On average fuel prices remained very high during the quarter.

Our cost per gallon actually increased $0.06 sequentially over the second quarter.

However, we did begin to see some benefit from declining fuel costs toward the end of the quarter.

The month of September averaged $2.03 per gallon compared to $2.17 during the month of August.

When we exclude fuel and the one-time gain on the aircraft sales in our CASM count, our unit costs ex fuel increased 6.7%.

This represents an improvement over our expectations on last quarter's call when we forecast an ex fuel CASM increase of between 8 and 10% for the third quarter.

As I mentioned earlier when you take into account the fact that our stage length decreased 18% we calculate that our ex fuel CASM actually decreased by nearly 4% year-over-year excluding the benefit from the aircraft sale.

I'm proud of these results as they demonstrate that we are executing on all aspects of our cost savings program with improved fuel efficiency, better supply-chain management, and an initial goal of full-time equivalent employees of no greater than 80 per aircraft that is trending ahead of plan and better overall spending discipline throughout the Company.

As of September 30, we were 21% ahead of our RTP cost goals for the period May through September.

Taking a more detailed look at the costs for the quarter on a unit cost basis salaries, wages, and benefits increased 9% due in part to 5 million in stock comp expense related to FAS 123R which accounted for almost half of the 9% increase.

Aircraft fuel expense increased 29% due to the increase in fuel prices.

This was partially offset by greater fuel efficiency.

We saw fuel consumption per block hour decrease 6% in the quarter resulting in an estimated savings of $14 million.

Landing fees and other rents were up 29% due to ground rents on our new T-5 terminal under construction at JFK as well as the impact of new station costs.

The impact of T-5 fees was responsible for nearly 30% of the year-over-year unit cost increase.

Aircraft rent was up 26% due to a higher percentage of our fleet being leased.

As a reminder all of our E-190s to date have been leased with the exception of one.

Moving below the line total interest expense increased 58% due mainly to the fact that we're now carrying debt on 16 new aircraft, six simulators, and our hangar and training facility in Orlando, which is not reflected in the year-ago period.

The interest income and other line contains 11 million in fuel hedging loss for the period which does include the marked to market of our undesignated hedges in future periods as well as the loss on some of our hedge positions which settled in the third quarter.

While we have previously anticipated booking the gain on the sale of our two 8320 aircraft in this line, upon further review, we determined that the gain should properly be recorded in depreciation and amortization.

We reported a modest pretax profit of 1.3 million for the quarter resulting in $0.00 per share.

I'm pleased to report that we have signed a term sheet for debt financing on all of our 8320 deliveries through December 2007.

Additionally, we are in advanced discussions with several financing sources regarding the E-190s that remain to be financed next year.

As a reminder we have prearranged lease financing with G-Cast on all -- excuse, me, on our first 30 E-190 deliveries.

At the end of third quarter our fleet totaled 94 AirBus 8320 aircraft and 21 EMBRAER E-190 aircraft.

Of which 69 were owned, 45 were leased under op leases, and one was leased under a capital lease.

The average age of our fleet was around 2.6 years.

We have made significant progress during the quarter and throughout the year in reducing our exposure to interest rate risk.

We anticipate by the end of this year roughly half of our debt will be floating rate and half fixed.

This compares with the end of last year when approximately 70% of our debt was floating and 30% fixed.

We ended the quarter with 456 million in cash, equivalents, and short-term investments and expect to end this year at approximately 600 million give or take a little.

We expect to close on several deals in Q4 including the financing of our hangar at JFK, a spare engines deal, and a simulator financing.

We continue to maintain our focus on liquidity and our announced growth rate reduction should greatly improve our cash position over the next several years all else holding constant.

Moving on to guidance for the upcoming quarter and full year, later today we plan to furnish an investor update in the form of an 8-K filing which will include more detailed guidance, therefore I will only highlight a few of the key metrics this morning.

Looking ahead we expect capacity to grow between 19 and 21% for the full year.

For the fourth quarter we expect ASMs to be up 13 to 15%.

This is down slightly from earlier expectations due to the anticipated deferral by EMBRAER of three of our E-190s in the fourth quarter.

Average stage planes projected to be around 1100 miles in Q4, and around 1200 miles for the year.

For the quarter we expect our year-over-year passenger RASM increases to be somewhere between 21 and 23%.

Also in Q4 we expect CASM to increase roughly 6 to 8% year-over-year at an assumed fuel price of $1.94 net of hedges.

We expect CASM ex fuel to be up approximately 5 to 7% in the quarter driven by a shorter average stage length of 18%.

Stage length adjusted we once again anticipate our ex fuel CASM will decline year-over-year.

As David discussed, based on our current forecast, our operating margin in the fourth quarter is expected to be between 6 and 8%, again at an assumed fuel price per gallon net of hedges of $1.94.

We expect pretax margin for the quarter to be between positive 1 and 3%.

With respect to our full-year margin guidance we now expect to report an operating margin between 4 and 6% for the year and a pretax margin between negative 1 and positive 1%.

Both of the annual margins assume a fuel price net of hedges for the full year of $2.

Details on our hedging position will be available in our 8-K filed later today, but at this point we're roughly 63% hedged in Q4, 40% in Q1, 20% in Q2, and 10% in Q3.

Using a combination of heat swaps and collars and crude caps and collars.

To close, I'd like to elaborate a bit on today's announcement that we plan to further reduce our rate of growth over the next several years.

From my perspective as CFO, a slow down in our rate of growth should enable us to return to bottom line earnings growth while building cash reserves and strengthening our balance sheet, all of this without having to resort to issuing equity, which none of us have an appetite for at these levels.

Finally, as many of you know, the global market for aircraft is strong and the 8320 and E-190 are highly monetizable.

We view our order books at both manufacturers as assets and whether we wind up selling or leasing some of our aircraft or working directly with the manufacturer we're confident in our ability to divest on attractive terms.

With that David and I are happy to answer any questions you may have.

[OPERATOR INSTRUCTIONS] Our first question is coming from William Greene with Morgan Stanley.

I'm wondering if you can talk a little bit about how the CapEx will change going forward as a result of your changes to the fleet?

Bill, at this point we're not in position to actually give you exact numbers.

We know those numbers but we're working with the manufacturers right now.

We're working with folks in the market in order to determine what the most efficient mechanism is for slowing the growth and reducing aircraft.

What I will tell you, however, is the analysis that we put together was really based upon free cash flow.

As you are aware, we have had a free cash flow deficit over the last few years, actually a growing deficit, free cash flow is defined by cash from operations less CapEx, and really this exercise was to kind of get us on equal footing, so in theory our cash flow from operations funded our CapEx.

I will tell you we are very, very close to that kind of at the end of our growth plan here, so further details to come on the exact mechanism that we're going to use to kind of slow the growth as well as what the actual numbers are in the out years.

Are you suggesting when you say there you don't have an appetite to raise capital what you're saying is for the next three years, or you're just sort of saying next 12 months, or what was the time horizon you're talking about?

Well, certainly at the end of the day it's a Board level decision but right now the growth plan that we have put together, we believe, if it's executed properly, we would not have to raise equity over the next three years.

Okay.

Then just the last question is on FTEs per aircraft.

If you are already down in sort of the low 80s here, why wouldn't you think you could get lower than 80 by, I don't know, midyear next year or even sooner?

Well, originally when we put together the plan you have to remember it was kind of based upon 30 aircraft coming in next year.

So we are slowing the growth.

Obviously that plays into the math a little bit.

Further, I have actually said publicly that I'm -- I think 80 is a starting point.

I certainly see us going through 80, pushing into the 70s at some point.

So I don't think 80 by any means is the end.

We're on target to get there and we'll continue to push it.

We won't stop at 80.

Absolutely not.

Thanks for your help.

Thank you.

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

Good morning John and David.

Hi, Jim.

Would you explain the nonoperating category in that it looks like your interest expense rose very sharply from the second quarter and certainly that category rose very sharply.

Can you explain the components there?

Amy and Cindy can get back to you on the details on that, Jim.

On the nonop, if you want to talk about--.

Well, the nonop we talked about was the hedges.

It's the 11 million in hedges we talked about.

But the interest income we can get back -- Amy and Cindy can get you details on that.

And the 190 reliability in the quarter, what was that?

Jim, what we saw is initially, and I didn't -- we have talked a lot about this.

I think it's a little bit of yesterday's news.

We just keep moving forward, but it was -- it improved for awhile, then it got a little bit worse, and now we're working back up to improvement.

It's still mid to high 90s.

It just depends on the month.

We have enough spare coverage to cover it.

We're doing some mods in conjunction with EMBRAER to improve the reliability, but we're pleased with the direction and we're certainly pleased also with not only EMBRAER, but others, like GE, and Honeywell, and Hamilton Sunstrand that have really come to the table to make this plane the best plane possible.

We are seeing some great direction in that area.

David, regarding the news story over the weekend on this pilot fatigue test that you did, are there any repercussions or anything likely to impact the stock as a result of this?

Hasn't been so far, Jim.

I don't think so.

This something that was a year and a half ago.

It's like -- talking about yesterday's news, we're talking about year and a half ago news.

We got approval on our local FAA to do the test, then somebody in Washington said, maybe our local guy didn't have the authority to do that.

So we see it more as even an FAA issue.

Certainly we're involved in it, but it was a test that was 50 flights.

We do 500 flights a day.

To put it in perspective it's really much to do about nothing.

I think the Wall Street Journal needed some space to fill over the weekend.

Thanks.

Thank you.

Our next question is coming from Mike Linenberg with Merrill Lynch.

Good morning.

I guess two questions.

I guess, David, in the last three, four months, you sort of have taken this philosophical -- a different approach to pricing where maybe you've relied less on loads and more on yield.

Given maybe the tweaking that we've seen, where do you think you are in that process?

Are you still at the point where maybe you think you're leaving too much revenue on the table?

What potential upside -- any details on that?

I guess it depends who you ask.

Rick Zeni is sitting right next to me, and I don't want him to poke me one, but I would tell that you we still haven't found the sweet spot yet.

We're a bit of trial and error.

We're going a little bit guardrail to guardrail.

In July, for example, we could have done better, bottom line.

I think we maybe squeezed a little bit too hard.

In August we were doing it just about right, then the security thing came along.

So we're learning.

And not only learning to find the sweet spot on the core revenue but then also figuring out how to add incremental revenue on top of that through things like connecting revenue where we haven't -- in markets where we have never had traffic, and the CRSs and our getaways program which is increasing every month, our package division.

I think it's getting the sweet spot on the core and then figuring out how to add incremental so that that really drives to the bottom line.

Then just my second question, back four or five, six months when you talked about the FTE 80 program, going from north of 90 FTEs per airplane down to 80 as I recall there was actually a pretty large cost savings number associated with that.

I don't know if it was 40, 50, 60 million.

It seemed like it was a big number.

You have gotten all the way down to 84.

We have seen some cost savings, but it doesn't seem like it hunts with maybe the original estimate.

Well, the original estimate was for -- and you can do these numbers.

It's very simple math.

You take our average salary and you times it by 10 and do the number of airplanes.

It's $100 million.

On an annual basis.

So you divide it up by quarter.

We're just beginning to see the benefits of it.

We were 12 million lower ex fuel and ex everything else than we were in the quarter, and, I don't know, John, if you want to talk to that a little bit.

Yes.

The only thing I'll add is, David mentioned in his remarks that we were looking at $120 million out of the cost structure next year, and what we've said publicly is between FTE 80 and the RTP initiatives we're looking at an annualized number of 150 million by the end of '07.

The 120 that David cited earlier, that is real 2007 savings.

That isn't we're going to get to that level by the end of '07.

We're actually lacking at 120 million out of the '07 cost structure at a slower growth rate than we had previously anticipated.

So very bullish sentiments within JetBlue with respect to where we're headed on the cost front.

Good.

Thank you very much.

Just to mention, I've got the numbers here on the 190 here.

Dispatch reliability for technical reasons, we started out in January with about a 93% dispatch reliability.

In September it was 96%.

So certainly headed in the right direction.

We're 99% on the 320s.

And we only cancelled one flight in the month of September.

So very reliable fleet.

If you are not getting there exactly on time you're getting there.

That's the hallmark of JetBlue.

Thank you.

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

Just want to clarify a couple points.

On the margin guidance, is there any aircraft sale gain embedded in that operating margin guidance for the fourth quarter?

No, actually it goes the other direction.

We may have a slight book loss on the three aircraft that we're looking to sell in the fourth quarter.

Okay.

Any sense as to how much that might be?

Wouldn't be very much.

No, it's good.

I think the last time I lacked at the numbers it was less than $0.5 million.

My controller is nodding her head up and down, so less than $0.5 million.

I know that you don't want to go into too much detail on the aircraft decisions, but I want to just a get feel for your expectations for growth and how you're structuring it.

It sounds like you want to build some flexibility.

So should we read it to be that you're moving orders that are now firm to options in 2007, '8, and '9?

That's the first part of the question.

The second part is the range for ASM growth of 14 to 17% in '07 do you expect that growth rate to decelerate as we move through the end of the decade or to remain in that range?

I think they are related questions that you ask, and I think all things being constant, if we were to take the same number of airplanes in '07, '08, and '09, obviously you would decelerate because you have a larger base, and if you are taking the same number of airplanes, the plan -- right now as it envisions has the same number of airplanes in those three years.

However to your first point, we have been talking to both of our manufacturers of saying, look, three years is a long time away, and market conditions change.

Let's take some of these firm airplanes and let's put some optionality on them with a reasonable amount of time to let you know.

So we have the ability to then contract back up against based on market conditions.

And it may be on -- on one of them, may say, yes, that's great, we'll do it.

The other one may say, actually, we don't want to do that then we can still keep the positions and then sell off the bottom of the deck, like we have been doing.

So we have flexibility.

It's not a one size fits all, but we have the number out there that looks really good, and then we want to preserve flexibility to be able to take that number up the 14 to 17% number, hold it more constant as we go out into the years, in '08 and '09, if market conditions warrants by having these options.

Okay.

And last question.

With respect to connecting traffic and, David, I think you also mentioned in your remarks codesharing opportunities at JFK, when you mentioned that were you thinking of an international carrier or a domestic carrier?

All international.

Obviously, because international carriers are -- a lot of them are here and they don't have the kind of feed that they need.

There's very little feed traffic.

Delta is building is up a network, but other than Delta there's really very little connecting traffic in and out of Kennedy, and there's a lot of airlines here.

And the timing on that will be probably over the next quarter?

Yes.

Over the next quarter.

There's some technological hurdles we have to get over, but we feel good about it.

Thanks, guys.

Appreciate it.

Thank you.

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

Hey, David, a follow-up to that last question.

Are any of the carriers you're talking to current members of the major global alliances?

Of course.

Are they bigger than a bread box?

Yes.

Yes, they are.

There's certain global alliances that allow people to have more flexibility than other ones, and, yes, the answer would be yes.

Everyone -- seems like everyone would be, so if we had to deal with carriers that just were without a global alliance it would limit who we're talking to but, yes, they definitely are.

Doesn't that imply -- I know alliances are a somewhat murky phenomenon, but doesn't that imply that your U.S. legacy competitors are going to have to buy off on this?

I don't think it implies anything.

I think what it implies is if there's not the ability to provide the service from their U.S. legacy counterparts, then I think they have the ability to do so.

At least, that's what they're telling us.

We're not experts on that murky world, but there's a lot of interest.

Okay.

Fair enough.

If it doesn't exist they have the provision to allow them to do what they have to do to be successful.

Thanks a lot David.

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

Good morning, guys.

Just a couple of cost related questions for you.

Wanted to see if you could just give us a sense -- the 120 million that you talked about targeting for '07, is that incremental to the savings that you've booked this year?

In other words, is that a cumulative or an incremental number?

If memory serves you said you were going to take something like 35 million out of the structure in the second half of this year, so annualized that would be about 70 million.

Is that what we should compare the 120 to or is that above and beyond the 70?

No, the RTP run rate is buried into the 120.

So it's an all-inclusive number.

You said you were on track as well this year, John, right?

So the 35 million is presumably coming in a little bit better than you anticipated, right?

It was more like 40 to 45, and, yes, it's coming in better than anticipated.

Okay.

So incrementally, as you look into 2007 -- I apologize, let me back up.

It's 40 to 45 million on an annualized basis?

40 to 45 was May to December of this year.

That was the RTP cost made to December of this year.

So on an annualized basis, you're running at, I don't know, let's call it, 75 to 80, something like that and the run rate picks up to around 120 next year?

Yes.

I'd say more like 60 to 65 on an annual run rate, but, yes, what we're saying is in '07 we can pick that up to about 120.

Now all of this is predicated on the fact that we are just now starting our '07 budget plan, and that will actually allow us to dig into the details, bottom-up approach, and really go at it and strip out the costs on a line item by line item basis.

So next call will have a lot more detail.

Without a doubt.

Just in terms of the progress you have made to date, when you look beyond the headcount and as you articulated the plan previously there were kind of two sides to it.

There was the FTE 80 then there was another, I think you guys were using like 40 to 50 million in sort of nonvalue-added expenses.

How are we doing on that second bucket?

Sure.

There were actually four prongs, if you will, to the cost side of RTP.

One was the headcount, crew member costs, or FTE 80.

That's tracking ahead.

One was fuel burn, and that's definitely tracking ahead.

One was corporate initiatives.

And that was really just kind of scrubbing the expense accounts, account by account, but from a top-down approach.

That's on target, and that's what -- that's the one that I'm real excited to get into the '07 budget plan on, because that's really going to allow us to go at it from a bottom-up approach and really go line item by line item.

The fourth element was supply-chain management.

That's slightly behind but they have done a great job, the supply-chain team in really closing the gap over the last quarter, so we are cautiously optimistic by the end of the year that supply chain will meet their goal.

When we look beyond the headcount, you're tracking well there also?

Without a doubt.

Okay.

With more to come.

Thanks, guys.

Thank you.

Our next question is coming from Dan McKenzie with Credit Suisse.

Good morning.

Thanks.

I wonder if you could provide some perspective about the fourth quarter and full year tax -- taxes for you folks.

Ah, taxes.

Rather than bore everybody with a technical conversation that I'm not sure I myself quite understand without my tax accountants in the room, Amy and Cindy will be able to answer detailed questions off-line but I will tell you what's causing the problem are our permanent differences.

With our pretax income within a certain range of 0 we have such large permanent differences that any slight movement in pretax income is causing great volatility to our tax rate.

And really for the purpose of this call you have now exhausted my 30,000 foot explanation without getting into heavy detail.

I think a big chunk of that permanent difference is the stock option expense piece.

It's $21 million this year we're estimating, or $22 million, we told you before, that is there, and those things are not tax deductible, then it affects the tax rate obviously.

Okay.

Those are noncash issues.

Sure.

I understand.

That's a green shade guys cooking up in the room up in Connecticut, and now we have to deal with it.

Also I'm hoping you can provide some perspective on JFK operations and perhaps how you're working with the FAA to free up some additional capacity there?

Yes, that's a good question.

Certainly with the addition of more capacity at Kennedy and primarily the addition of not only our flights but what Delta has done with a lot of their Dash8s and regional jets, the modus operandi, the M.O. of how they have operated that airport over the last number of years is evolving and it needs to change.

There are issues with LaGuardia airspace, and issues with environmental issues.

We have been meeting with the FAA and the air traffic organization looking at different ways that they can depart off two run base.

That's really the key.

When we get to the afternoon rush, there are arrivals on two runways, but there aren't departures off two runways as often as we'd like.

The asphalt exists.

The airspace exists.

It just needs to be a little bit of changing in the way things have been done in the past.

I'm very confident with the progress we have made with the FAA, they want to run an on-time operation as much as we do and they are very motivated to do so, so we're taking a look at different options, and we're actually going to be doing some things a little bit different, and then that will take some time to change some other things but we're confident that given the runways we're going to be just fine.

Okay.

Great.

Is this something that would phase into the fourth quarter here or is this something that would take a little longer to implement?

And I guess what I'm really getting at is this factored in -- is perhaps better performance already factored into the cost guidance that you've already made public here?

I don't think that really affects the cost estimate that much.

Really what -- it's a little bit more fuel burned and it's an annoyance for our customers to have to taxi for a little bit longer in the afternoons.

It doesn't really affect costs that much in a material manner.

It's more of our on-time percentage that really is something we're focused on.

This time of year at Kennedy is more of an off-peak time, so it gives us a little time before we get to next summer to not only fix that but also get some construction out of the way.

Frankly, a lot of the taxi way construction that the port authority has been doing has affected our ability to use the two runways as well.

By the time we hit next summer hopefully we'll be -- we'll have a lot of this stuff in effect.

Great.

That's helpful, thanks.

Our next question is coming from Ray Neidl with Calyon Securities.

Regarding the EMBRAER aircraft, I know a few people are quite high on that aircraft, and this is the first time that you're cutting back on your planned growth in that area.

Is it because of problems you're having introducing that aircraft to your fleet or is it as you said before, trying to mature new cities that you're going to emphasize where these aircraft were going, or is it just a deal that you got with them in being able to cut back your growth with the least penalty?

I think it's a little bit of the second two.

We are very high on the airplane and we're very excited about it.

What we found, there's a couple things that we underestimated.

I think the biggest one is that if you get a lot of 190s, you get 18 in a year, and they're all going in brand-new markets and they're all going short haul, that you have to add a lot of cities, then you have a lot of markets to mature.

So I think it's prudent, once you get the base of airplanes down, which we have today, and the reliability will take care of itself.

We're very confident of that.

But to be able to add at a little bit slower rate, and frankly, it helps out EMBRAER as well.

They announced they had some problems delivering some airplanes this year with some of the things that they're doing down there, dealing with the growth rate and some other issues that they have.

So they're more than willing to accommodate us.

And they also have a lot of airlines who want the airplane.

And so their ability to open up a slot or two here and there to be able to sell the airplanes, they announced the order with Northwest, I think they're thrilled to say, hey, whatever number you want, we'll do it, within reason, and so it's really a great relationship we have with them.

And your planned slow down in your growth rate is not going to have any effect on your expansion, your new terminal at JFK, is it?

No.

Absolutely not.

What it means, Ray, is that maybe we have Boston we're building up, we have New York we're building up, we have added some flights at Dulles.

A lot of talk, well, where's your next big place to go?

We are going to go to the Midwest and somewhere and build a big hub?

Maybe it means that we just build up Boston and New York for awhile and we don't have the risk of building up a new place now until we can get the profitability where we need to with our margins that we think need -- deserve to be industry leading, and we haven't done that in the last two years.

Right.

And that fits in with what you said, that you are going to emphasize growth on the East Coast, because you said, I think, capacity is being cut back.

I guess the only risk there is when Delta comes out of bankruptcy they will be coming out as a lower cost airline.

Is that having any effect on your plans?

They've done a great job.

You look at their year-over-year profits, I think their costs are already down.

The thing that we're looking forward as Delta comes out of bankruptcy, they will also be an airline that's focused on profits, and an airline that is going into bankruptcy maybe isn't as focused on profits as those that are out of bankruptcy like a US Airways.

I think they're more focused on make money.

We're fine with our position and our strength in our markets and have -- and our costs that are decreasing.

That's one of the reasons we're lowering our costs, is because we're -- those are things that we can affect and we need to lower that gap between where Delta is going to be at, and we need to create that gap that we had before.

So we've got a great product, and we're very confident with where we stand today.

Great.

Thank you.

Thank you.

Our next question is coming from Helane Becker the Benchmark Company.

Thank you very much, operator.

Hi, guys.

Just a couple of questions.

One, on selling the aircraft with live TV in it do you get then live TV revenue?

Or are you delivering them without the TVs?

How does that work?

Right now it appears as if we have a new live TV customer.

They have got the equipment, and they are excited to get it, and live TV is happy that we're doing that for them.

Good.

Okay.

Well, that was what I was trying to get at, if that's a new customer and how much of that is revenue.

My second question is on -- so I'm a little confused, I'm sorry, on the whole D&A line, because I guess you took the 7 million out of that line, right, because it went down sequentially?

Yes.

So how are we -- do you have a new full-year number for us for '06?

How are we supposed to think about that?

Is that 32 million, the new run rate, or how will that work?

I'm a little bit confused.

So am I.

Well, all would you have to do is add back the 7 million that we reduced the depreciation and amortization by, and you'll get what the actual run rate is for the year.

Okay.

Thank you very much.

That was my other question.

And clears up my confusion.

Then the last thing, I think somebody said you were getting more business from the GDSs than you thought you would.

Is that number of passengers, or is that -- revenue?

How is that--?

That somebody was me.

Yes, we are.

It's more revenue.

Actually the average fare is $35 higher net of the cost per segment, and we're getting more customers as well, and they're falling on our days where we really need them, on Tuesday's, Wednesday's.

So it's more customers at a higher fare is how I should think about that.

Yes.

Thank you.

See you next month.

Thank you.

Next quarter.

Thank you.

Our next question is coming from Bob McAdoo with Prudential.

Just a couple quick ones.

When we think of the 14 to 17% growth rate next year what kind of assumptions should we be making about what your average flight length is going to be next year versus say what it was in third quarter or fourth quarter?

We haven't done that number yet, Bob.

Well, I guess we've done it, but we're not prepared to talk about it on the call here.

I think we've come down 18% third quarter over third quarter, another 18% in the third quarter.

At some point this number will start leveling off.

It's not going to continue to drop at the rate it's dropped.

Is the second 18% that you just quoted is that 18% fourth quarter versus fourth quarter or is that 18% from third quarter going into fourth quarter?

It is--.

Year-over-year.

Year-over-year.

Year-over-year, still 18%.

Yes.

What you're saying, is that you think that kind of drop is probably going to slow going forward is what it sounds like you're saying.

Yes.

As we deploy the 190s and as they become more a part of what we've doing--.

You've obviously had a big burst of one 190s, new cities, new 190 activities.

Right.

The other thing is, as you talk about slowing growth and the impact of that on costs, and your ability to get cost savings, are you saying that slowing the growth makes it easier or makes it more difficult to get cost savings?

Obviously if -- it could be more difficult if you didn't have your eye on the costs, but the fact that we're still growing, I think a lot of air lines, when they completely stop the growth it's hard to control costs, because, for obvious reasons, but still growing at the rate that we're planning on growing and keeping an eye on our FTEs, our full time equivalents.

It wouldn't maybe be as easy to do when you're adding 30 airplanes, as when you're adding 30 airplanes, but as long as you -- you have rigorous controls like we have in place today, then we feel confident that we'll be able to do what we told you on the call today.

Well, it seems to me that like if you're slowing growth you have got a lot less people tied up in training and a lot of those kinds of activities, less people running around looking for new facilities to operate out of and things like that.

So that seems to be one of the things that would actually be helpful.

You're right.

Definitely training costs are enormous when you're adding that many planes.

So those are one of the things that are positive about it.

Thanks a lot.

Let me counter that.

You have people who are coming on newer with lower salaries, as a percentage, so those -- I think those things kind of wash each other out.

Thanks a lot.

Thank you.

Our next question is coming from William Greene with Morgan Stanley.

Just a quick follow-up.

Sorry.

Just a quick follow-up on the hedging.

How much -- what hedge price are you at in the fourth quarter and next year?

For the fourth quarter of this year we're going to have all of that detail in our investor update coming out later today, but since you asked the question, we're all over the board using both heat and crude in the fourth quarter, Bill.

We have roughly a little over 60% of our consumption hedged in Q4, 30% of the consumption is that heat swaps and an average swap of $1.92 per gallon, about 20% is in heat collars with the cap, average cap price at $2.31 per gallon, and the average put at $1.93.

The remaining percentage are in crude caps with upside protection beginning at $67 per barrel.

And again you will see both Q4 and all of next year in our investor update later today.

Cool.

Then on the 120 million savings how much of that is fuel and how much of that is non fuel for '07?

None of it is in the price of fuel.

Correct.

But we do have some fuel savings from what we have been -- some of the carry-over from this year that we have been doing as John talked about, our fuel burn, some of the things that we're doing to reduce fuel burn in the Company, so no fuel on the price, just fuel on consumption.

Okay.

Thanks for your help.

Thank you.

We now have time to take questions from the media.