JetBlue Airways Corp (JBLU) 2006 Q4 法說會逐字稿

Welcome to JetBlue Airways Corporation's fourth quarter and full year 2006 earnings conference call.

Today's call is being recorded.

We have on the call today David Neeleman, JetBlue's CEO; and John Harvey, JetBlue's CFO.

As a reminder this morning's call includes forward-looking statements about future events.

Actual results may differ from those expressed in forward-looking statements due to many factors, and therefore, investors should not place undue reliance on these statements.

For additional information, please refer to the Company's periodic filings with the Securities and Exchange Commission.

At this time, I would like to turn the call over to David Neeleman.

Please go ahead, sir.

Thank you very much.

Welcome, everyone to our fourth quarter conference call.

As can you see from the results, we're much happier this fourth quarter in talking about the results than we were last fourth quarter, and certainly very pleased, not only for the fourth quarter but for the direction that we're heading into '07.

For the quarter, our RASM was up 22.8% year-over-year; and it was up 13.7% for the year.

For the quarter, we had an operating margin of 10.2% and earnings per share of $0.10, compared to a negative 7.1% in the fourth quarter of last year, where we lost $0.25 a share.

For the quarter, year-over-year pretax income was an impressive $85 million swing in that we had a $55 million loss last fourth quarter, and we have a $30 million pretax net income of this year.

I guess if they had a comeback airline of the year award, we'd have to at least be nominated for that based on our impressive performance of the fourth quarter.

For the year, we had operating margin of 5.4 and a loss of $0.00 compared to a margin of the previous year of 2.8 with a loss of $0.13 a share.

So as tough as '06 was, it was even -- it was better than -- certainly was better than '05.

Our breakeven result for the year are pretty incredible when you consider the following things.

We had a $47 million pretax loss in the first quarter of '06, number one.

Number two, our stock compensation expense was $21 million compared to 9 million in '05.

We also accrued $3 million in profit sharing, and we had -- we paid no profit sharing in '05.

And bizarrely enough, our tax rate in '06 was 109%.

Go figure.

I'm not sure how you do that, but we'll let all of the experts explain that to you.

So, really impressive considering the -- those differences that we had from '05 to '06.

Capacity for the quarter was up 14.5%.

When you consider the capacity was up 14.5% and RASM was up 22.8, that's very impressive.

The average stage length was down 18% for the fourth quarter, which drove some of that -- certainly drove some of that RASM improvement.

It's important to note that we increased our guidance during the quarter on the strength of the revenues that we're seeing in the fourth quarter as well as the cost that were coming in lower than we had projected than we had on our quarterly call.

We became -- our results came right in -- on track with the guidance that we gave.

I think the only thing that was a little bit different is that after we gave that guidance, the price of oil dropped and so we had mark-to-market hedges that were below the operating line, which, in part, I think led to a little bit lower earnings per share.

But that's just one of the craziness of moving around oil prices, so we're still very pleased and we came in exactly where we thought we were going to be.

The year-over-year comparison of the fourth quarter is even more impressive when you consider that our fuel price was $0.05 higher in '06 than it was in '05, and our CASM was up only 4%; and ex-fuel, our CASM was up only 2.3%, which again, is impressive considering the stage length -- the less stage length by -- the 18% less stage length.

We accomplished this through cutting our costs and focusing on costs, but we didn't layoff anyone.

We didn't cut any salaries and really, it's an incredible credit to our crew members and for our leadership that we've been able to do such a great job in lowering our cost and improving our revenue.

In the fourth quarter of '05 and I -- this is the last thing I'll say about it.

We had the worst -- I guess we had one of the worst operating margins amongst all major airlines, as I mentioned before, 7.1% negative; and of the airlines that have reported so far, and I doubt any will be higher, we went from certainly one worst to one of the best in the fourth quarter.

I guess the best.

I haven't seen anything that's -- that rivals our 10.2 operating margin that we had in the fourth quarter.

And so, of course, I can't say enough about our crew members.

They really stepped up to help bring our company back to profitability, and we -- as I said, we feel much, much better about the direction we're headed.

Certainly results don't come without an improvement like -- these don't come without improvements in both revenues and costs.

I want to speak, for a minute, just about our revenue improvement and what's happening in that area.

As we have detailed many times on these calls, we have a renewed focus on revenue and since we've moved our revenue team from Salt Lake City here to New York, we've seen -- every quarter we've seen an improvement.

And since we've move our schedule planning folks from Connecticut down here and they're altogether, that team is working really great together.

We've also really beefed up that great team with some -- with some leadership.

Many of you may have seen the announcement that we hired Trey Urbahn as our Chief Revenue Officer, and he's been here just a short period of time but is making an impact.

And that's added to Marty St. George, who is in our schedule planning area, and Rick Zeni, who's running our revenue management.

So really great leaders there as well as great crew members that are doing a tremendous job.

The fourth quarter was improved, obviously, by a better pricing environment that we had and better revenue management.

Our revenue was up 25% for the year.

Our load was down 1.4% and that's what drove our PRASM at 21 -- 22.8, which is pretty remarkable when you consider that 26% of all of our seats in the fourth quarter were in new market which are defined in markets that we were in less than 12 months.

Looking forward to February and March in the first quarter -- I guess the full first quarter.

January is traditionally a softer month, given the post holiday weakness, and so we're getting through January and looking forward to heading into February and March.

We're seeing bookings -- they look very strong particularly in March which may be in part due to the closeness of the holiday in April, close to March, but things are really looking good from the bookings side.

Our year-over-year RASM growth for the first quarter will be between 13 and 15%.

And for the year, our PRASM growth rate will be 11 to 13%.

The year-over-year PRASM growth slows down as we get through the year because it becomes -- the comparisons become more difficult given the really strong fourth quarter that we had in '06.

Now, keep in mind that these PRASM guidance numbers are impacted by our decreasing stage length as well as the removal of six seats from our A320 aircraft.

I'll talk about that in a minute in more detail.

We are -- we continue to be pleased to see the bookings and the average fares that we're getting through the GDSs, or the global distribution systems.

At our investor day, we highlighted that we thought that the incremental amount of revenue that we were going to get -- and this is just additional revenue in '07 from our participation in those globe distribution systems would be about $100 million.

So a very good thing for us, particularly as we branch out in more of these business market that's we're in.

We're still undecided about our future participation in the OTAs, or the online travel services like Expedia, Travelocity and Orbits.

We're currently running a test with Travelocity, and we should be deciding which direction we're going to go with those three entities within the new few months.

Moving to the 190 and 190 performance, in '07, we estimate that 10% of our ASMs will be flown by the 190s, which is still a relatively small percentage of our total ASMs as the airline.

When you look at the -- our profitability in the fourth quarter for the 190s, we see that the costs are coming down, driven by aircraft utilization.

We also see revenue improvements because markets are maturing.

We're also not -- we're not where we want to be with the airplane yet, but at least the cost and revenues are headed in the right direction.

I think the most -- I guess the brightest spot of the 190 is the amount of connecting revenue that it's driving to our system.

The 190 continues to do that.

Year-over-year connecting revenue for JetBlue is up about 60%, and now accounts for almost 10% of our total system revenue.

So you all know we were very low in connecting traffic, but the 190 is driving more connecting traffic to our system, I think, which is helping profitability of a lot of our different destinations.

Dispatch reliability continues to be below what the 320 is, and we're seeing those numbers fluctuate anywhere between 95 and 97% depending on the month.

In December, we had -- the E-190 utilization was 10.2 hours a day, and we expect that number to reach 11 hours a day by the end of '07 -- the end of this year.

We're excited at how -- I guess moving now to routes and markets.

We don't provide too much detail in this area, but just to tell you that our winter markets are performed well, our new ones particularly.

Some Caribbean markets that we added performed well in the fourth quarter.

Are doing very well in the first quarter, and so we're seeing solid load factors in those markets as well as very strong fares.

New York to -- New York to Florida fares have obviously been helped by the reduced capacity that we've seen, both in the first quarter -- fourth quarter, the first quarter, and what we'll see in '07.

So the RASM gains are very impressive in those markets as well.

And during '06, we opened 16 new cities.

We expect to open about 8 to 10 new cities in '07, of which 3, Chicago, San Francisco, and White Plains, have either been announced or are already flying.

In the case of Chicago, we're already flying that market; and we're starting White Plains and San Francisco.

San Francisco starts just after the first quarter ends, and White Plains, same time.

So they start about the same time.

John's going to give you a lot more detail our cost performance, and since he was such an integral part in that cost performance, I don't want to steal his thunder, but I just wanted to say a couple of things.

First of all, that our primary goal is to institutionalize low cost carrier spending habits.

We are really, really focused on not only keeping low cost but even driving our cost even lower through improved productivity and through automation.

And we think that we have some room to go on our cost initiatives, and John'll -- like I said, will give you a lot more detail on that.

I want to talk a little bit about the one -- the decision to go to 150 on the A320's.

It seems for a carrier that's focused on cost you would think, well, why would you do something like that by removing seats of the airplane.

The effect is a slight CASM increase.

So why would you do such a thing?

Well, we did a very in-depth analysis here, probably -- we did more analysis on this than probably anything we've ever done before just to make sure we made the right decision.

When we looked at a normalize year, the cost savings would be about $30 million a year.

As many of you know, you -- there is an FAA requirement that you have one flight attendant for every 50 seats you have on the airplane; and by going from 156 seats down to 150, we were able to fly with three flight attendants instead of four.

That cost savings we quantified at about $30 million a year.

And as we tried to go through and look at all the flights that we had on board.

Flight that's we had six -- that were sold out during the year and what would be the revenue impact from having six less seats, we just couldn't get to that number.

There was just no way that we could -- we could see that the revenue loss would be more than the cost savings.

Now, what's exciting about that is that that is a better answer for us, even if not one single person decides to fly with JetBlue because of the increased pitch, and I guess I should have started out by that.

By removing these six seats, we were able to spread the first 11 seats of the aircraft out to a 36 inches pitch, which is remarkable and is -- when you add it to what we have going on in the back of the airplane is certainly industry-leading leg room for the industry. 44% of our seats will have 36 inches and the rest will have 34 inches.

So, we are convinced that there are some of the highest paying customers out there that don't fly JetBlue today because we don't provide them either a first class section or maybe access to a good seat at the last minute, and so we have -- we're going to be rolling out some really good programs, very exciting programs that we think will add revenue.

But even if we don't, the answer was still the right thing to do.

So given the upside and given the lack of a downside, we're very excited about it.

As of this morning, 75 of our 97 A320s have already been converted.

We expect to finish that process sometime by the middle of February, which will be ahead of schedule.

And I was out to the airport last Friday and had the opportunity to sit in those seats, and the feedback that we're getting from our customers is tremendous.

Very, very excited about it.

Now, we did this, of course, without laying off any of our in-flight crew members.

They've had to -- certainly, it was something that we had to explain to them.

They were very focused on giving great customer service, and that's one of the hallmarks to JetBlue is the great customer service that our in-flight crew members give.

When we explained the whole leg room thing and the fact that there would be no layoffs, then certainly they went along with it and were very pleased to be able to offer much better service to our customers through this increased leg room.

So we're excited about it.

In closing, I wanted to just say again how pleased we are, but not only for our performance in the past, but the direction that we're headed. 2006 was a very tough year for JetBlue.

But I -- I'm convinced that we are a stronger airline because of it, because of the lessons learned; and we're really upbeat about as we head into 2007.

You can see from our press release that we released this morning that our margin guidance for the first quarter is 2 to 4%, which would give us a net loss for the quarter and that is due, obviously, primarily to kind of a weak first quarter, but also there is some transition cost for the 150 in that we started blocking the airplanes mid January, didn't get the revenue and then had the cost associated with the -- with our -- the third -- the fourth flight attendant through March -- to the beginning of March.

So those results are a little bit affected by that.

But the positive trend will continue, which is much better.

Last first quarter, we lost 5.2% operating margin, and we're guiding to 2 to 4.

So this trend of improved year-over-year quarter comparisons will continue in the first quarter; and then for the year, we guided to 10 to 12, which is much better than the 5.4 we had to '06.

So we've made a lot of progress.

We have a tremendous improvement that we think we'll do in '07 compared to '06, but there's lots of hard work to do and lots of things left to do here.

And so I am, again, just want to close by saying how grateful I am to everyone at JetBlue for their willingness to chip in and understanding as we've made this transition.

And now I'll turn the time over to John Harvey to give you more details on the quarter.

Thanks, David.

I'm pleased to be able to share with everyone this morning that we're starting to see the results of our efforts to reduce spending across all areas of the Company, rationalize headcount, and overall, do more with less.

As David mentioned for 2007, we anticipate the return to a full year double digit operating margin; and we expect to reach low to mid teen operating margins through some of our stronger quarters this summer.

Best of all, with a renewed focus to low cost carrier spending habits and having made the decision late last year to further slow our growth, we believe we have the right plan in place to grow profitably, improve our cash flow and thus our cash balance, and strengthen our competitive position.

As you all know, back in May of last year, we instituted a program called RTP or return to profitability.

This program was designed as a first step in reducing our cost structure in order to return the Company to the black.

I'm happy to say that as of the end of year, we have outperformed our cost targets on nearly all of our initiatives.

In fact, we achieved a total of $48 million in cost savings, outperforming our initial target by 14%.

Specifically, with respect to crew member cost, our initial target was 14 million and we achieved 18 million in savings.

Regarding corporate initiatives, our initial target was 12 million, and we achieved 13 million in savings.

For supply chain, our initial target was 6 million and we achieved 4 million in savings.

This was actually the only area in which we underperformed.

And finally, with respect to fuel burn, our initial target was 10 million, and we achieved 13 million in savings.

Of course, none of this could have been achieved without the tremendous hard work of our crew members across the Company, and so we thank them all for their efforts.

Going forward, we have institutionalized the spirit of RTP into our annual operating plan, as we've implemented an ongoing and comprehensive committment to low cost carrier spending habits.

And while we feel good about all the progress we've made over the last year, I think we've learned a good lesson, which is that we must never be satisfied and we must never feel that we've done all there is to do, as there is always room for improvement.

Taking a detailed look into '06.

For the quarter, CASM was up 4.1% or 2.3% on an ex-fuel basis.

For the full year, CASM was up 12.1%.

Excluding fuel, CASM was up 5.5%.

It should be noted, however, that our stage length in the fourth quarter decreased 18% versus the year ago period; and for the full year, stage length decreased nearly 13%.

And as we all know, a shorter stage length has the effect of increasing CASM.

If we stage length adjust our ex-fuel CASM to get a look at how our core cost truly trended, we see that stage length adjusted ex-fuel CASM was down 7% for the quarter and 1.4% for the full year.

Looking at the individual line items, salaries, wages and benefits for the full year increased 7% on a unit cost basis, due mainly to the increase in stock based comp expense and profit sharing, which accounted for roughly 40% of the increase.

Our full-time equivalent crew members per aircraft at year end was 78.

That's a 14% decrease from year end 2005, ahead of plan, and better than our initial goal of 80 FTEs.

As I've mentioned previously, however, 80 was not a magic number but merely a starting point, and we plan to continue to drive efficiencies that will reduce our headcount per aircraft.

Fuel expense increased 28% on a unit cost basis due to the increase in fuel price.

That said, through the hard work of our crew members throughout the organization, our fuel consumption per block hour actually decreased 5% as a result of various fuel conservation efforts.

Landing fees and other was up 17% on a unit cost basis due in large part to ground rents associated with our new terminal at JFK, which was responsible for nearly 50% of that increase.

Maintenance CASM up was 13% year-over-year due equally to full year flight hour agreement payments on several of our airframe component parts, compared to time and material payments last year, some one-time warranty coverage on our engineers during 2005, and outsourced daily check for our E-190s.

The other expense line was down 7% for the year on a unit cost basis, due mainly to the fact that we had $12 million gain in 2006 related to the sale of 5 A320s.

I should also remind everyone that we hit a $6 million writeoff related to an M&E system in 2005.

Backing out each of these one-time items, other expenses were actually down 2% year-over-year on a unit cost basis.

Moving below the line, interest expense increased 62% year-over-year due mostly to the fact that we had 17 new aircraft under debt and capital leases as well as interest on our new hangar and training center in Orlando.

In addition, we had 7 million in expense related to our new terminal under construction at JFK, offset by our related 7 million in capitalized interest.

Our blended debt rate was also a bit higher in '06 at 6.3% versus 5.6 last year.

Interest income and other increased 44% primarily due to higher rates. 5.3% versus 4%, 2006 versus 2005, as well as higher cash balances offset by 5 million in fuel hedge losses.

Our effective tax rate for the year was 109% compared to 15% in 2005.

The rate is driven by the non-deducibility of certain items for tax purposes, relative to the size of our $9 million pretax income for the year.

For 2006 our non-deductible permanent items were nearly twice our pretax book income with our non-cash stock option comp expense being the primary driver.

At year-end, we had cash equivalents and investments of 699 million compared to 484 million at year end '05.

Cash from operations funded the airline in 2006, while the increase you see in our cash position was due mainly to the financings of previously unsecured owned assets, including our hangar at JFK, spare engines, certain rotables, and a flight sim.

Our liquidity ratio at the end of the year was 30% above our stated minimum target of 25, and we also made significant progress throughout the year in better balancing our mix of fixed and floating rate debt.

At year-end we were approximately 50/50, floating/fixed versus the start of the year when we were closer to roughly 70% floating and 30% fixed.

The decision to slow our aircraft delivery schedule has improved our liquidity outlook by considerably reducing our financing needs, nearly 350 million for 2007.

As we look ahead into 2007, we intend to maintain our liquidity targets through improved cash flow from operations, and as such, at this time we do not anticipate the issuance of any additional equity.

At year-end, we had 96 A320s, of which 25 were under operating lease, 2 under capital lease, and the remaining 69 were debt financed.

We had 23 E-190s, of which 22 were financed with op leases and 1 was debt financed.

Looking ahead, we expect capacity to grow 14 to 16% in the first quarter of the year and 11 to 14% for the full year.

These numbers do reflect our decision to remove one row of seats from our A320s, which we expect will be completed by March.

This will have the effect of reducing capacity for the year by about 3%.

We anticipate taking delivery of 12 A320s and 10 E-190s this year.

And we would like to remind everyone that provided market conditions are right, you may very well see additional aircraft sales this year.

We expect PRASM to increase 13 to 15% in the first quarter and 11 to 13% for the full year.

Stage length adjusted PRASM for the year should be up 7 to 9%.

Both of these estimates reflect the impact of lower ASMs as a result of our decision to reduce the seats on our A320s.

All-in CASM is expected to increase 6 to 8% for the first quarter and 5 to 7% for the full year.

CASM ex-fuel is expected to increase 4 to 6% for the first quarter and 7 to 9% for the full year.

In considering this, it is important to keep in mind that we continue to decrease our stage length, estimated to be down 14% year-over-year in the first quarter and 7% for the full year.

Stage length adjusted, we expect ex-fuel CASM to be down 3 to 5% in the first quarter and up 3 to 5% for the full year.

And I would be remiss if I didn't remind you that the reduction in seats from 156 to 150 negatively impacts the CASM comparison.

Once we adjust for the seat reduction, we're looking at CASM that is up around 1 to 3% stage length adjusted for the full year.

And if you back out our estimated increase in profit sharing between 2007 and 2006, CASM would be close to flat for the year.

All of this is a very long winded way of saying we feel good about the direction our core costs are trending, absent some of the distorting factors such as the drop in stage length and the removal of one row of seats.

Our CASM guidance assumes an estimate average fuel cost per gallon of $1.91 in the first quarter and $1.93 for the full year.

We arrive at these estimates by looking at the forward curve and netting out our hedge position.

As of today, we have about 45% of our 2007 fuel needs hedged.

This brings us to an operating margin between 2 and 4% in the first quarter and 10 and 12% for the full year.

In terms of seasonality, we expect that from an operating margin perspective, the second quarter will be our strongest, followed by the third and then the fourth, the first quarter, obviously, being our weakest.

Pretax margin is estimated at negative 4 to negative 2% for the first quarter, and between 5 and 7% for the full year.

Financing has been locked for 8 of the 10 E-190s we will receive this year in the form of operating leases, and debt financing has been locked for the first 7 of our 12 A320s, and we're currently evaluating several firm offers to cover the remaining positions.

Non-aircraft CapEx should total approximately 140 million in 2007, 60 million of which is leasehold improvements related to the construction of our new terminal at JFK.

Aircraft CapEx should total approximately 830 million.

As always, we will have detailed guidance available in our investor update, filed as an 8-K later today.

And with that, we're happy to take your questions.

[OPERATOR INSTRUCTIONS].

Robert Barry, Goldman Sachs.

Hi, good morning.

Good morning.

Was wondering if you could -- to the extent this is possible -- give us a sense of the 7 to 9% in PRASM growth expectation that's stage adjusted.

What are the buckets that are driving that, such at maturation of new markets, centering the GDSs, removing the seats from the A320s.

All the above.

Is it evenly divided?

No.

It's not evenly divided.

It's a very complex analysis that we do, and every little thing helps, and I can't give you 12% was seats and so on, but they all contributed to that.

But certainly when you -- when you do -- when you shorten the stage length and you can charge a higher fare for a shorter flight, then it -- that's probably the biggest determiner is the shorter stage length, and then the seats certainly help because your load factor goes up because you have less seats to sell.

And apologies if I missed this, but can you provide any update on the international connection [co-chairing] at JFK?

We didn't.

We're still fully intending to do it.

We still have some things to announce, but it's just the whole technology of getting all the stuff done is just taking a little while longer.

We've been more focused, I think, on getting us back to profitability than -- but we have a small team working on it pretty much full-time and we hope -- no promises, no time lines, but we should have something to announce in the not-too-distant future.

And then just -- maybe too early to answer this, but any thoughts on the ExpressJet plan to launch point-to-point service in a number of markets.

I think a lot of them coming out of the West Coast.

Do you see any impact?

No, I don't think so.

I mean, that's such a tough -- obviously, when you have a 190 with 100 seats and a 320 with 150 seats, it's a tough cost comparison.

I would assume they would have those in markets where we wouldn't be, but I haven't seen any market specifics it, but I think Independence Air tried that with a 50-seat airplane and it's a tough thing to do.

They've got to really be careful what markets to select and how quickly they grow.

Okay.

Thanks a lot.

Ray Neidl, Calyon.

Yes.

Just a couple quick ones here.

Did you give the stage length by equipment type, and if you have that, can you forecast what it's going to be for this year?

We didn't give it, Ray, and we don't have it in front of us.

No, we don't.

I don't know if that's something that -- we don't have it, but maybe if you called in that's something we could probably estimate for you.

Okay.

Great.

And any impact with Delta/US Airways?

Do you care one way or the other if they merge or if they go their separate ways?

What effect do you think that might have on your operations, if any?

I think -- I think -- I've said this before.

I think either way it's good for us.

If they go their separate ways, Delta's certainly selling a much higher market cap than any other airline has today, maybe expect for Southwest and so we're going to have to see a lot more discipline out of those folks than we've maybe seen in the past.

So that's good for us.

Discipline's good.

Bankruptcy, probably isn't all that great.

And then if US Airways comes in and takes over, there'll be some capacity reductions.

And since about two thirds of our markets overlap directly with Delta, then assume the capacity reductions in our markets would be good as well.

So I think either way.

I think what's important for us is just to focus on our business and keep our costs as low as they possibly can and have the best product possible and the customers will come fly us anyways.

Great.

You are the comeback kids, and good guidance.

Thank you, Ray.

Bill Greene, Morgan Stanley.

Yes, hi.

I was wondering, John, can I ask you to kind of go over the fuel price assumptions.

What's the price you're paying at the pump now?

The price I'm paying at the pump right now?

I'm doing this off the top of my head because I don't have my laptop in front of me --

Or what's -- so you're using the forward curve.

What's embedded in your $1.93 for full year in terms of an oil price assumption or jet fuel assumption?

Well, it'd been the forward curve last week when we pulled it, Bill, but what the second is I've got a lot of hedges in place.

And some of those hedges right now date to -- because we've have a systemic program, they date to positions we put on place a year ago and specifically or -- it's my heat and my crude collars, so let me just give you a little sensitivity here.

We pulled the fuel curve as of January 24th.

That's the $1.91 for the quarter and the $1.93 for the year were based off of, but I've got heat and crude collars that were put in position 9 months ago, 6 months ago.

If I backed those out, and let's just assume I didn't have them, that -- those prices drop to $1.87 for the first quarter and $1.91 for the year because I've got some heat -- some heat collars right now that have puts of $1.95 and I've got crude collars that have puts at 59 a barrel.

So I'm definitely being impacted by the fact that we have a systemic hedging program and we've been dollar cost averaging over the last year.

But it's only -- it's not -- it's a few cents a gallon.

Yes, it's a few pennies.

Okay.

So it's just a few cents a gallon using the forward curve, and obviously, if we use sort of current prices, then presumably you would have a little bit more savings on the half of that --

Oh, yes.

I mean, there's a $0.20 to $0.25 contango in the curve between now and the end of the year, without a doubt.

Right.

Fair enough.

Okay.

And then --

Bill, I keep trying to get John to use today's price for the fourth quarter, but he won't do it.

He says that's not what the curve says.

So, hopefully --

It's an on going to debate within JetBlue.

Okay.

I just want to know what's in the assumption, that's all.

And then, when we think about the cost savings -- so you had, I guess, roughly a $45 million target that you beat for '07 -- I'm sorry, for '06.

In '07 what's the target again?

There is no target in '07.

We're moving away from the RTP nomenclature because we've embedded into our annual operating plan, so I've got a plan that shows a 10 to 12% operating margin for the year, and that's what we're going to beat everybody with a stick to achieve.

Okay.

So then the last question's on -- just on FTEs then per aircraft.

I know you don't have a target.

You've already hit that and achieved that.

Do you -- given the reduction in just the flight attendants can that -- should we assume that's a few, maybe one or two heads per aircraft from that alone, or is that math wrong?

Well, the 78 number that I gave you, obviously, doesn't have any of the flight attendant reductions in it because it's as of the end of the year.

So the way I will answer that and the way I will continue to answer that is I don't have a magic box.

I don't have a magic number.

We will continue to drive efficiencies.

I'll give a great example.

Our folks in the airports group have done a great job this year in just become more efficient with everything they do, but there's a lot of opportunity there with respect to technology, kiosk improvements and what not that I know will drive additional efficiencies in our airports group that are not currently baked into our 2007 annual operating plan because we've got a lot of other initiatives on the board, so 78 as of the end of the year and going lower, Bill, is what I'll say.

But, Bill, in answer to your question, it's simple math when you take the number of flight attendants we have per airplane and you reduce it by 25% per airplane.

It's 3 or 4 just for that alone.

So, yes.

I mean, that's certainly going to help that 78 number just that alone, and then plus some other things that we're working on.

Okay.

Thanks for your help.

Jim Parker, Raymond James.

Good morning, David and John.

Hi, Jim.

Regarding your RASM guidance, and say up 13 to 15% for the first quarter, which would place it flat or maybe just a little bit down from the fourth quarter.

I'm wondering, is this seasonal?

Are you not expecting any continuing strength in RASM?

In the past, it looks like the first quarter has risen above the fourth quarter in your RASM.

Well, I think the first quarter -- as we get bigger and bigger, Jim.

We've had in the past really heavy reliance on New York to Florida, and we were helped by that in the first quarter compared to other airlines.

But as we've broadened our network and done some other things, those markets do much better in the second and third, but they don't do as well in the first.

So I think that's part of the reason that you may see us maybe not doing as well in the first as we did in the fourth.

The fourth was great this year.

I mean, we had a lot of holiday traffic, and things worked well with these new markets.

I think these new markets that are non-Florida markets do better in the second, third and fourth quarter then they do in the first.

So I think maybe that may be a little bit of a drag on it.

But overall, we're much better off for having them.

Okay.

And a second question.

It appears to me that you're 190s are just a much better product than what else is out there, and also with your 320s now with 150 seats and increasing the pitch.

My question would be do you anticipate higher fares to get a premium price for this greater comfort and better service?

Well, I -- certainly aren't going to expect lower fares, that's for sure.

As I said in our -- we've got tremendous leverage with our customers, and we haven't used it and we're not -- we want to be low fare.

We want to be able to offer people a great experience at a really low fare.

But to think that we're not going to be able to get some additional revenue from this amazing seat pitch that we have compared to other airlines.

We're very -- we are, and we've got some programs that we're going to have rolling out here shortly that are going to -- we think even add to the attraction of flying on JetBlue from those that pay the most amount of money.

So, stay tuned, but the exciting thing about the 150 as I said in my comments, that even if we didn't get any additional revenue, the cost side made the decision for us and then anything we get on the revenue side is just pure upside.

Okay.

Thank you.

Thank you.

Michael Linenberg, Merrill Lynch.

Yes, I guess, David, two questions.

I guess the first one, your recent announcement to move into the San Francisco market.

What -- can you talk about maybe the catalyst that historically would be viewed as an un-JetBlue-like market and the rationale and does that mean that LAX may not be that far behind?

Well, we -- we aren't in the habit of announcing markets on conference calls, but I will tell you that as we looked at the San Francisco yields and our product, the 150 -- going to the 150 and the extra leg room and the differential and fare that there was between Oakland and SFO, and the number, frankly, of customers that we have that were coming from that area.

It was kind of something that was quite obvious that we had to do.

Also, San Francisco has been plagued by a little bit of ATC trouble in the past, but hasn't had near the problems that it's had in the past.

And when you compare it to the markets we fly here on the East Coast, it really seemed like -- real positive.

So, it was just a logical thing.

And as for your question to LAX, certainly no announcement there, and -- but we'll continue to take a look at it.

I know there's a lot of concern from the carriers in LAX about rising costs there.

That's something that we'd have to take into consideration if we ever decide to go there.

But our strategy for -- if you look at the Bay area.

We're going to -- we're going to be back to two flights a day into San Jose.

We've got the four flights into SFO and four flights into Oakland, and we'll have ten departures a day from New York, and I think the next closest person has nine.

So it's a Bay area strategy and a lot of people live between the airports and so we can take them out of one airport and back to another.

And the same things goes for California with being in Burbank and with Long Beach and Ontario.

So will we go to LAX?

I don't know.

But it's certainly something we haven't ruled out.

Okay.

And just a second question.

Obviously, with Virgin America there's still a lot of wood to chop, but I was curious if you had actually taken a look at their website on their product and maybe any initial thoughts on that product?

I think it's -- if I'm not mistaken, there's a few little things added from what Song has to their product.

I think it's the same provider as the Song product.

There is ability to order food and a couple of other things that aren't on the Song product.

But it's really that and so we're familiar with that and we're used to competing against it.

And it's -- they've done a nice job laying things out and the product looks really good, but ours is -- ours is going to be better because we feel like we're the best airline so we're going to keep -- if it takes us making some further improvements we will continue to do that.

And competition's good if it makes you be better, and we're going to continue to be better.

Okay.

Very good.

Thank you.

David Strine, Bear Stearns.

Good morning.

Thank you.

With respect to -- to the New York market, are you seeing a pretty significant underperformance in Newark versus JFK because of all the capacity Continental's thrown on there?

I think it's just the opposite.

I mean, I think last year there was a -- kind of a battle royale that ensued in the fourth quarter, and that was probably part of our fourth quarter problems last year.

But this year Newark's doing well, and I think there's been -- we pulled back capacity just a little bit, and Continental's kind of back to where they were last year, but it's not -- that was the story last year.

It's not the story this year.

We're very pleased with what we're doing out of Newark.

So it's not -- Newark is not underperforming JFK?

No.

Okay.

John, did you mention what the mark-to-market hedges were?

In the quarter?

For the fourth quarter, the below the line -- did we give -- I did not -- I did not talk to that specifically, but give Cindy a call and she can give you the data afterwards.

We've got it.

I just didn't talk about it specifically on the call.

He didn't talk about it, and I brought it up.

So I guess --

He always likes to bring it up.

I always bring it up.

I hate the fact that the oil goes down, and it affects our quarter, so.

What I keep trying to remind him, though, is that hedging is about risk mitigation and reduction of volatility.

It's good, John.

I appreciate it.

Well, maybe -- maybe David will and change the accounting rules at some point.

Last question, David, in your comments in the the beginning.

You -- I think you alluded to a new revenue initiative in relation to your comments about the seat pitch and I think somebody else just asked about this.

What's -- what are you thinking about there in terms of restricting access to some of those seats at a higher price.

I mean, how would -- how would it work and how would it blend with the overall philosophy of JetBlue?

Well, we have a -- we have a very egalitarian company here, and we like to let everyone sit comfortably and I think if somebody books early and gets a 34 inch pitch seat, we don't have to have -- we don't have to apologize for that.

We have a great product from the first row of the airplane to the back row.

And these are on the 320s, and 190s I think even better because you don't have a middle seat to contend with.

So I think we've been doing a lot of thinking on this and to the extent that we maybe hold out a few of the 36 inch pitch seats for our highest paying customers that would probably be a really smart thing for us to do.

But nobody will be disappointed on JetBlue.

I think one of the things that -- the questions that came up about Virgin that I didn't mention is they have a 32 inch pitch seat in the back and we have a 34" pitch seat.

So even when you're in coach, you're going to be much more comfortable flying on JetBlue.

Is Virgin still relevant for you?

I don't know.

I mean, I'm just bringing it up because it was brought up.

So I'm just talking about as far as overall comfort, there's nobody that rivals the product that we're going to have.

Okay.

Looking forward to it.

Hey, David?

Yes.

Your magic number below the line in Q4 $3 million. 2 million of it is a mark-to-market, and 1 million is hedge ineffectiveness.

And if you want any further detail, like I said, feel free to call Cindy and she'll give that to you.

Okay.

Thanks, John.

Thanks, David.

Gary Chase, Lehman Brothers.

Good morning, guys.

Good morning.

Quick question to see if you could give us a little bit of help on -- just to help us think through the guidance you've given in relation to the change in the seats.

For starters, is there a way to give us a -- just an all-in cost for reconfiguring?

I know that's hitting the quarter.

What's the actual dollar cost, and how much does that impact 1Q?

It's about -- it's about $3 million.

It's not huge.

We're doing it internally with our crew members.

Our tech op guys are doing it.

I think the biggest expense would be that -- we were able -- I think I mentioned this in my comments -- starting on March 1st, we offered very generous leave programs for our in-flight crew members.

Our flight attendants, and they we able -- we were able to reduce the number that we needed and so we aren't paying the salaries as of March 1st.

And -- so that was the biggest expense that we were really limiting revenue from the 15th of January through March 1st and still having the expense from their salaries.

Right.

Now, David, that wasn't in the 3 million you said, right?

The 3 million was --

And then there was an additional 2 to 3 million that was just cost of doing the reconfigurations of -- over time and some pieces and parts.

Maybe a little lower than that.

Q1, it's about $3 million, 2 million of it's related to a writeoff of seats and life rafts and then about $1 million in internal reconfiguration cost.

Yes, so the total's 3, but it just depends how we get there.

And then the flight attendants, if you say that's 30 million a year and you're not going to get it until March 1st, is it fair to take kind of a month and a half on the 30 million to assume how much that impact was?

Yes, that's fair.

Okay.

And then --

There's some transition costs, but yes.

When you look at -- and there shouldn't be anything lingering beyond March 1st, right?

So when we look at the guidance on cost for beyond Q1, that you should all be reflective of having made the appropriate adjustments, correct?

Yes, yes.

Okay.

And then --

Hey, Gary, just to be clear, over five years, there is $30 million of net savings.

Over five years.

Net savings and that then adjusts if for the lost revenue that we're giving up.

That's the five year number, but that's adjusting the revenue loss.

Correct.

That's adjusting revenue lost.

But in the year as we did -- if you divide 30 by 5 and that includes the changes, each individual year is different and --

Correct.

But overall, in each individual year the cost -- you had a cost of salaries, weight on the airplane, per diem, uniforms, all that kind of stuff.

And every way we looked at it -- even -- in that analysis, the 30 million number over five years was done with no additional revenue assumed from any kind, hey, people are going to come fly us more than they would have otherwise.

Correct.

Okay.

The -- what's the cost -- so then it's 5 million a year or 6 million a year in actual cost reduction?

No -- well, it's -- I mean, now we're getting all confused here.

The point is the removing of the flight attendant and the per diem and all those costs associated with it on an annual basis is about $30 million.

But then we had to net off of that the revenues that we would lose that were in the low 20s.

And it was higher in the first year.

So when we did the five year number, that's how we got to 30 million.

So assuming -- the 30 million's kind of the same for the five year in approximate cost, so -- and now we've gotten things all confused here.

But there's a definite cost advantage and that number is close to 30 million on an annual basis, and then we net off the revenue it's also about 30 million over five years.

Okay.

But there's a cost penalty in the first quarter and not beyond that?

Yes.

Not beyond that.

The second question is just -- when you look at ASM production in the first quarter given the dates of reconfiguration, you started Jan 15.

You've got 75 of about 100 done.

What's the -- what's the sort of ASM impact in the first quarter?

And then I assume once you get beyond the first quarter, we're done, right?

Once we get to March 30th, you'll have all the seats out, and it'll just be sort of the 4% change in the seat count that affects CASM, correct?

That's correct.

And we -- we didn't take planes out of service to do it anymore more than we would have from the seasonal downturn.

Usually from the end of the holiday period to President's Day, we have a number of planes that are out of service and they go to [seat check], and they do other things.

And so we were able to take advantage at this time to make that -- the seat change over.

Okay, guys.

Thanks.

Thank you.

Daniel Mckenzie, Credit Suisse.

Good morning.

Thanks.

Just digging into the 10 to 12% guidance a little bit further, does that include revenue improvements from capturing higher fares from the seats that are now at 36 inch pitch?

And then secondly, does -- would that include perhaps revenue improvements from Travelocity, or is Travelocity sort of -- just as a second part to that same question, is Travelocity included in the cost and revenue guidance looking ahead as well?

I would say no and no.

Because we haven't made the decision whether to go into the online travel agencies.

It's really hard to tell.

It's harder, actually, to tell on the OTAs than it is on the GDSs because on the GDSs, the average are higher.

We can go research the people that booked and see if they were past customers.

On the online travel agencies, the fares are more in line with what we get from jetBlue.com.

And rather -- and to know if -- because we're doing such a small test right now with only Travelocity, it's really hard to tell.

But I would tell you that since that decision has been made, I think there is some further upside there and since we haven't announced any programs with the 36 inch pitch, we haven't baked any revenue for that as well.

And then also, the -- potentially the co-chair revenues are not factored into the operating margin guidance as well from international partners potentially here?

No, and that will start out really slow and it will build over time.

It's -- it's something that is not going to be -- and in the first year, maybe, or two is the magnitude of say what the GDSs were to us.

So it's going to be -- it's going to be a lot less than that but it will build.

And will be, I think, a very important part of our business as we go forward, but it's going to take some time.

And then my last question here.

I know that you guys have been working with the FAA to try to free up capacity at JFK.

And I was just wondering if you can provide some perspective of where we're at, and if there's any capacity improvements that could be coming on line here later this year?

Well, I'm sitting right across the table here from Dave Barger who's our President and Chief Operating Officer, and I think he does have -- he has a full-time job and then he has a full-time job working on this particular issue.

And they've done -- he's done a tremendous job as well as a lot of people have in concert with the FAA with the Port Authority, with not only ourselves, but with and Delta and with American.

We're -- we're operating JFK differently today than we did, say, a quarter ago; and we've got further improvement left to go.

So it's slow, it's steady, and I think we're starting to see some of the results already, but we're very encouraged and think that we have a really long way to go.

There's a lot of asphalt out there, and it's just -- the airport's been operated a certain way for 50 years, and it needs to be operated differently and we've cooperation from all three.

It was simple stuff like the Port Authority use to always take down a certain runway everyday just to do maintenance, and they just kind of kept doing that and we kind of reminded them that actually there's a lot more flights out of here.

You can't do that.

You need to do maintenance on the off-peak hours in the evening.

So just stuff like that.

It seems obvious, but just kind of retraining everyone to think differently.

We're seeing improvements there, and so I'm pleased with the direction we're headed.

Okay.

Good.

Thanks very much.

Helane Becker, Benchmark.

Thanks very much, operator.

Hi, gentlemen and ladies.

The question I had was with respect to some comments you made, David, about the increased potential in the number of business travelers you might be able to get.

How do you really quantify that, because -- do you really know who's business, who's leisure on your flights?

I -- we do.

We do quite extensive surveying.

I'm not going to tell you exactly the numbers, and it varies from every single route.

But every single -- we have a certain small percentage of people on every flight that gets a survey, and an astounding percentage of people actually return those.

It's an online survey.

And so we can -- we can quantify that on a route-by-route basis, and it's something that we see as proprietary to us.

But I think -- let me just give you an example.

I had a friend who got a call from someone saying, hey, our -- my flight is delayed on this other airline six hours.

He said, we even thought of calling JetBlue and booking them.

And he said, well, the problem with JetBlue, if I book at this late hour, I'm going to get a middle seat kind of in the least pitch area of the airplane.

So the question is, how do we make sure that those that paying the most amount of money have a -- can feel confident that they're going to get a seat in the 36 inch pitch seat or a 34 inch pitch seat and give the confidence to our customers that that's the case.

We haven't spent a lot of time doing that in at past, and we have to do a better time of it.

And knowing that even those early bookers will get a great seat makes us feel a lot better to kind of treat everybody great at JetBlue.

So there's -- there's some great improvements that we can do in those areas, and we've done very little in the past.

Okay.

And then just one follow-up.

On one of your numbers -- I think your percentage of sales through JetBlue is 76% down from 70.6 year-on-year for the quarter.

Is that -- do you attribute that to increased GDS bookings?

I think that would be part of it.

There's probably a small part of that.

I mean, our -- I'm just looking at it.

Yes, it's down -- down a little bit.

We've done different things in the past like offer $5 off and different things, and we haven't really done a lot lately to -- you do get -- you get double TrueBlue points, but haven't done a lot of incentives in that area.

But I would -- I'd probably guess that that's down a little bit because of the GDSs and maybe the test we're doing a little bit on Travelocity.

Okay.

Thank you.

Thank you.

Thank you.

This concludes our session with investors and analysts.

With that, we will turn the call over to David Neeleman for closing remarks.

Well, great.

I guess I'll just sum it up by saying I feel a lot better then I did a year ago at this time.

And hopefully, a year from now we'll even feel better than we do today.

So, again, I just wanted to give just tremendous thanks to all of our leaders here at JetBlue that have provided such great leadership to our crew members who have kind of had a lot of patience with us as we've tried to get back to profitability, and tell them thank you so much for their efforts and let's go have a great year and pay a heck of a lot more profit sharing than we did this year, so.

And in '06 we'll pay -- hopefully pay a lot more than we do in '07.

So thanks again, and we'll see you next quarter.

This concludes today's JetBlue Airways conference call.

You may now disconnect.