JetBlue Airways Corp (JBLU) 2007 Q2 法說會逐字稿

Welcome to JetBlue Airways Corporation's second-quarter 2007 earnings conference call.

Today's call is being recorded.

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

As a reminder, this morning's call included 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 Dave Barger.

Please go ahead, sir.

Thank you very much and a very good morning to everyone and thank you for joining us for our call today.

As most of you have seen from our press release this morning, we achieved an operating margin of 10% and diluted earnings per share of $0.11.

This compares to a 7.7% operating margin and diluted earnings per share of $0.08 in 2006.

For the quarter, we realized a net income of $21 million.

That's a $43 million swing from the first quarter.

On balance, it's fair to say we're very pleased with these results, especially against the backdrop of a very challenging operating environment and relatively soft domestic demand.

As you look at the quarter, we drove solid cost performance across the airline.

At the beginning of the quarter, we provided CASM guidance of 6% to 8%, and ended up at a year-over-year increase of just under 4% for the quarter.

John, of course, will go into more detail on our cost performance, but I would like to take this opportunity to sincerely thank our 11,000 crew members for their hard work.

Clearly, cost performance is really driven by the front line, who make it happen every day, at the same time, simultaneously, delivering the award-winning JetBlue Experience to our customers.

As I mentioned at an airline investor conference last month, we have taken a hard look at our aircraft delivery schedule and corresponding growth rate.

Of course, we've been asking a few key questions.

For example, how many airplanes do we need and when?

Where can we best deploy our new aircraft?

We want to ensure that each airplane we bring into the fleet earns its way into the route network.

It has to earn its way on an ongoing basis, and that's certainly how we take a look at our delivery stream.

The key for us to maintaining stable a sustainable growth rate is flexibility.

I think that's a really key word, the ability to turn the dial up or down and to quickly respond to market conditions and opportunities when they arise.

You'll hear more about the term flexibility as a result of our delivery stream.

The current demand for both the Airbus A320 and the Embraer 190 worldwide is particularly strong.

This allows us to maintain our desired flexibility, again either by selling some of our older aircraft, returning leased aircraft or deferring deliveries of new aircraft.

As such, we're very pleased to announce that we have entered into an agreement to sell three A320s later this year to a European-based leasing company.

We will also defer 16 Embraer E190 aircraft originally scheduled for delivery from 2007 through 2012 to 2013 through 2015.

As a result, our E190 fleet will grow by seven net aircraft in 2007 and by six net aircraft in both 2008 and 2009.

That's 11 fewer E190s over the next two and a half years than previously reported.

This lower capacity growth strengthens our balance sheet and it certainly allows us to deploy our aircraft more strategically.

Specific details regarding our E190 delivery schedule can be found in the press release we issued this morning, but I would like to highlight that our options for both the Embraer and the Airbus remain unchanged.

Again, that allows us to maximize our growth flexibility -- again, a key term in terms of our business plan.

These options, along with our current aircraft delivery schedule, position us very well for the future.

Moving on to revenue, our second-quarter PRASM increased 5.4% year over year.

We're certainly pleased with this result, especially given the challenging domestic revenue environment you have all heard about from ourselves and other carriers in the past few months.

We are also pleased with our second-quarter PRASM performance, given that 16% of our ASMs during the quarter were in new markets.

By the way, our definition of a new market is a market that has been open for less than one year or 12 months.

Of note, average stage length was down 9.4% during the quarter, which also drove some of our RASM improvement.

Our capacity grew 12% for the quarter year over year.

Looking at ASMs by region, 48.7% of our ASMs were East-West, 31.5% north to Florida, 9.7% between New York and the Caribbean, 4.2% Northeast shorthauls and 2.8% of our ASMs were between New York and the Southeast.

We decreased our PRASM guidance during the quarter on general domestic demand softening, similar to what airlines have reported.

We've received many questions from investors regarding what exactly do we mean by the word softening.

Just to clarify, it doesn't mean that we had trouble filling our airplanes.

Load factor for the quarter was up 1.3 points year over year.

The pressure has been on yield.

We have compensated with higher loads and a corresponding lower average fare, which in the second quarter was $122.17, down from $127.87 in 2006.

In late May, we started to see encouraging revenue trends, and June was a strong month for us.

Of note, we would have performed even better than we had projected on the revenue side, had it not been for the weather-related flight cancellations in June.

By the way, in June, pretty significant weather mainly way up in the Northeast -- convective activity, thunderstorms -- we experienced 401 cancellations during the month of June.

As you compare revenues to last year, keep in mind that 2006 was a solid year for us in terms of revenue performance.

So a year-over-year comparison is difficult.

Nevertheless, again, we are pleased with our direction and we're optimistic about the summer.

We also continue to be pleased with the bookings and the average fares that we're getting through the GDSs.

We recently joined Expedia and soon will be in Travelocity.

As a result, our revenue percentages by distribution channel have been evolving over this time.

During the last six weeks, for example, about 73% of our total ticket sales were booked by our website, jetblue.com, 18% were booked through our reservation agents, 6% through the GDSs and 3% through OTAs.

By comparison, during the third quarter of 2006, approximately 79% of our ticket sales were booked through our website and 21% through our reservation agents.

We also recently increased change fees to $45 per passenger, $35 if done on our website.

We believe that this will have, certainly, a positive impact on our revenue futures.

However, I should add that we still maintain one of the lowest change fees among US airlines.

Looking forward, bookings for July and August are strong.

We expect yields to improve in the third quarter compared to the second quarter.

We are encouraged by the most recent booking trends that we have been seeing, especially in our transcon markets and specifically in the Caribbean.

Keep in mind that September is traditionally a softer month for us, as the schools are back in place here in the Northeast, and so certainly as we take a look at year over year, September is always an interesting time.

Also keep in mind that last September, we were impacted by the liquid ban imposed by the TSA.

This will also be interesting to see how year-over-year comps play out.

Our year-over-year PRASM growth for the third quarter will be somewhere between 7% and 9%.

For the full year, our projected PRASM growth will be between 6% and 8%.

At this time, I would like to talk a little bit about JFK, our home base of operations.

As we've said many times, New York is and will remain our home base.

We currently serve five airports in the New York area; but JFK, again, is our home.

We're excited about the construction progress on our Terminal 5 project, and of note, very pleased to say that at this point in time it's on schedule, on budget and we look forward to welcoming our customers there during the fourth quarter of 2008.

Our team, working with the Port Authority of New York and New Jersey, has performed incredibly well since breaking ground in 2006 on this project.

There has also been a lot of news and discussion recently about JFK congestion.

Yes, in addition to all the other carriers at JFK, now numbering close to 90, we have certainly been negatively impacted by this congestion.

It's going to continue to challenge us into the future with operational challenges, due to the increase in flight activity.

We believe that rationalization needs to take place at Kennedy.

We are working with the FAA and our partners at the Port Authority to this end, as well as with other airlines, to find ways to maximize runway use and get planes in and out of the airspace more quickly.

We're very confident that we have the right leadership team in place to manage these issues who know how to deal with the day-to-day challenges of JFK and our weather patterns.

In fact, I'm joined today by Russ Chew, our new Chief Operating Officer.

Russ has now been with the airline for very close to four months and is joining us from the FAA.

He has brought in an outstanding team to the operation to support us with our system operations control center with over 100 years of industry experience, supporting Russ Chew in the day-to-day operational control of the airline.

I'd like to provide everyone with a quick update on the 190, and the continuously improving performance we're seeing with this fleet type.

We're very pleased with the improved dispatch reliability of the aircraft in this quarter, and we're certainly seeing the benefits from the most recent modification program we performed on the aircraft earlier this spring.

In fact, in the past few weeks, we have experienced E190 reliability numbers which rival our A320 fleet.

I have to say that I believe that this is remarkable, considering our A320 reliability has been recognized by Airbus as best in the world over the last six years.

Our Embraer 190 utilization has also improved considerably quarter over quarter.

We ended the quarter with an average daily utilization of 10.66 hours per day, and that is 27% greater than it was in the year-ago period.

In closing, and before turning it over to John, I just want to say again how pleased we are, not only with the performance in the second quarter but I think also very important to stay with our direction.

I very much appreciate the opportunity David and our Board has given me to take JetBlue into the next chapter, and I am looking forward to continuing our working relationship together as David takes on more of a strategic role as Chairman and I lead and manage the day-to-day operation of JetBlue.

I believe the combination of our great product, exceptional crew members and, of course, our low cost structure is unmatched in the industry.

As a testament to these strengths, we were recently awarded the highest honors in airline customer satisfaction among low-cost airlines from JD Power and Associates.

We were also named the favorite airline of US flyers according to a survey by Consumer Reports.

Of note, Consumer Reports conducted its survey both before and after the February weather-related disruptions.

Interestingly enough, the Consumer Report results show that the events had little effect on our overall levels of satisfaction and we remained among the top-rated carriers.

Both of these awards are especially meaningful to us, especially after the well-publicized February operational challenges.

They demonstrate that our crew members continue to deliver the high-quality service and that our customers continue to believe in the JetBlue brand.

As the CEO of the eighth largest airline in the country, I'm very excited about what the future has in store for JetBlue.

With that, I'll turn it over to John Harvey for a more detailed review of our results.

John?

Thanks, Dave, and good morning, everyone.

As Dave mentioned, we're very pleased with our second-quarter results.

Our 10% operating margin was at the high end of our initial guidance, and although our revenue performance during the quarter was negatively impacted by a tough operating environment, our costs came in better than projected.

Before we take a more detailed look at our results, I would like to elaborate a bit on our announcement earlier today to sell three A320s and defer deliveries of 16 E190s.

From my perspective as CFO, slower growth not only strengthens the balance sheet and builds cash, but also facilitates earnings growth.

Our long-term goal is to fund this airline with cash from operations.

Having the flexibility to be able to manage growth, both up and down, in response to macroeconomic and industry variables is vital.

We view our order book with both Airbus and Embraer as an asset, and we are confident in our ability to both divest aircraft on attractive terms and accelerate fleet growth when opportunities arise.

I believe our decision to sell aircraft this year and defer deliveries certainly positions us well for the future.

Having said that, we will continue to evaluate our growth plans and make adjustments as economic conditions warrant.

Turning to our Q2 results, for the quarter, our cost per available seat mile was $0.814, an increase of 3.9% year over year or 3.3% on an ex-fuel basis.

Our CASM increase for the quarter can be attributed mostly to a decrease in our average stage length, which was down about 9% year over year.

If we stage length adjust our ex-fuel CASM for a better year-over-year comp, we see that ex-fuel CASM actually decreased 1.7% for the quarter.

In addition, our completion factor during the quarter was 98.5% compared to 99.8% a year ago, resulting in fewer ASMs and therefore higher unit costs.

With the same completion factor as 2006, our CASM in the second quarter would have been up only 2.5% year over year.

As we have discussed, we may continue to proactively cancel more flights in the future, due to weather and air traffic congestion.

Our other operating expenses, which include the bulk of our discretionary spending, continue to trend well, down 2% on a unit costs basis year over year.

Stage length adjusted, our other operating expenses decreased approximately 6%.

We're pleased with these results, because they demonstrate our continued commitment to low-cost carrier spending habits.

As Dave mentioned, none of these results could have been achieved without the tireless efforts of all of our crew members.

Looking at a few other line items from our income statement, salaries, wages and benefits for the quarter increased 5.4% on a unit cost basis, due mainly to the change in our profit-sharing plan that was implemented last quarter.

As we discussed in our last earnings call, we changed our profit-sharing program to guarantee every crew member a tax-deferred profit-sharing contribution of 5% of his or her eligible earnings.

As a result, we accrued an additional $6 million in expense during the quarter, which represents about 80% of the year-over-year increase.

Fuel continues to be our largest operating expense, and was up about 5% on a unit cost basis.

The good news is that our fuel consumption per block hour decreased about 4% year over year.

Again, this decrease is driven by our continued commitment to several fuel conservation initiatives, including single-engine taxi and rapid deployment of ground power gates.

Landing fees and other rents increased roughly 13% year over year.

This year-over-year increase is driven in part by the fact that a larger percentage of our ASMs are being flown by the E190, which has a shorter average stage length, and are being flown to higher-cost airports.

Aircraft rent increased 11.2%, due primarily to 10 additional E190 leases.

Similar to the first quarter, maintenance expense increased 7.3% on a unit cost basis.

This increase was driven primarily by three additional C-checks versus the same period a year ago.

Moving on to the balance sheet, at quarter end, we had cash equivalents and investments of $772 million, compared to $699 million at the end of last year.

We are happy with our cash position, but we are committed to continued vigilance in driving additional balance sheet improvements going forward.

I am pleased to report that debt and lease financing has been arranged for all of our Airbus A320 deliveries scheduled through the first quarter of 2008 and all of our 190 deliveries scheduled through the end of this year.

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

However, I would like to take a minute and share a few highlights.

We expect capacity to grow between 10% and 12% in the third quarter and 10% and 12% for the full year.

We currently anticipate taking delivery of five more A320s and three E190s during the remainder of the year.

With the A320 aircraft sales, we will operate a fleet of 105 A320s and 30 E190s at year end.

That is six fewer than originally planned.

As Dave mentioned, we expect PRASM to increase 7% to 9% in the third quarter and 6% to 8% for the full year.

Stage length adjusted PRASM for the year should be up 3% to 5%.

We expect CASM to increase 8% to 10% for the third quarter and 7% to 9% for the full year.

CASM ex-fuel is expected to increase 8% to 10% for the third quarter and 6% to 8% for the full year.

We expect that our year-over-year increases in ex-fuel CASM for the third quarter will be driven in part by the increases in pilot comp and changes to our profit-sharing and 401(k) plans, which we announced last quarter.

Our CASM guidance assumes an estimated average fuel cost per gallon of $2.18 in the third quarter and $2.07 for the full year net of hedges.

Details on our hedging program will be available in our 8-K filed later today, which will show that we are roughly 51% hedged in Q3 and 35% in Q4.

This brings us to an expected operating margin between 6% and 8% in the third quarter and 5% to 7% for the full year.

We estimate our pretax margin to be between 1% and 3% for the third quarter and between 1% and 3% for the full year.

We continue to forecast a net profit for the full year, even with fuel at $2.18 per gallon this upcoming quarter.

It is interesting to note that we had originally budgeted fuel at $1.93 for the full year, and we certainly did not expect to take a $41 million revenue hit in the first quarter due to the ice storms.

So the fact that we're projecting a profit for the full year, to me, tells a very positive story, both on the revenue side and the cost front.

Before I open it up for questions, I would like to share with everyone that we have decided to discontinue issuing mid-quarter guidance.

We believe that the issuance of mid-quarter guidance increases the focus on short-term results rather than long-term shareholder value.

Of course, we will continue to keep the investment community apprised of material developments as they occur, and we will still provide quarterly guidance, updating it as necessary.

With that, we are happy to take your questions.

(OPERATOR INSTRUCTIONS).

William Greene, Morgan Stanley.

I'm wondering if you can talk, John, a little bit more about the CASM trends.

What accounts for the big year-over-year increase in non-fuel CASM for the third quarter relative to the change we saw in the second?

Well, some of that year over year in the third quarter, third quarter to third quarter driven by what I mentioned earlier, the pilot comp, the 401(k), the profit-sharing.

But also some of it in the year-over-year comp -- last year, we sold five aircraft, $7 million of gain booked in the third quarter of last year.

That was actually coming through the expense side of the house.

This year, for the three aircraft sales, only about $2 million is going to be coming through the third quarter.

Most of the gain this year is going to be coming through Q4.

So you have got about a $5 million delta, if you will, on the expense side due to the aircraft sales year over year.

Okay, so you included the gain in your numbers for last year when you referred to your 8% to 10%?

Yes, sir.

On the RASM guidance, why do you have the confidence that it can improve on a sequential basis going forward?

Is it just the comps get easier, or do you see, actually, strength in the numbers?

I'll take the first shot at that and let Dave follow me up.

Certainly, as we're looking at the numbers right now, I think, like some of the other carriers, we actually see a pretty strong third quarter.

Now, I think Rick Zeni, our Head of Revenue Management, would tell you that over the last seven years, last year was probably the best of the last seven.

This year may be shaping up to be the second-best of the last seven.

So year over year, the comps may be somewhat difficult, but the summer is looking strong.

Much past 90 days, though, we have got some visibility problems, and so we're not quite sure what the fourth quarter may bring.

Dave, I don't know if you want to add to that?

No, I think what I would also offer is we're starting to see -- last year, we opened 16 new cities.

That's an awful lot of news cities in one year in 2006, and I've shared in several conferences and discussions with you for example -- let's just calm it down.

For example, this year we've opened four new cities, one seasonally in Nantucket, but reentry to Santo Domingo, Chicago, San Francisco.

We do not have plans at this point for new cities into this year, and again, there's still another five and a half months left.

But 16 cities -- some of the maturation that's taking place, we're certainly seeing some of that as well.

I think that's positive.

As we start to take a look at, year over year, the ability to also mine the GDSs and to access these markets as well, the small business traveler and not necessarily through CompanyBlue; that's still maturing for us.

But the ability for a traveler in these 16 new locations -- a Nashville, a Pittsburgh, a Columbus, a Raleigh, a Charlotte -- to find us is much easier today.

So I think all of that bodes well as we talk about PRASM into the future.

Dave, is this -- the announcement on the change in the Embraer order -- that was the final part of your business review, or you still have more to go on what you were doing?

Yes, I appreciate that.

I think it's fair to say there's more to go from the standpoint of our review.

I really want to take the opportunity to thank John's team specifically and Treasury with Mark Powers, working with not just the A320s as well as with Embraer, as we're talking about what we're doing with just slowing our growth latter part of 2007, 2008 and 2009.

Of course, it's not possible without our legal team -- Jim Hnat, our General Counsel, who is here today.

So as I've mentioned publicly, the opportunity to really take a look at everything that we're doing -- part of it is certainly fleet, and I think it's fair to say that as we take a look at the network -- and we are flying to 54 locations.

We're going to close -- well, 130 airplanes today we fly out of 54 locations.

We just closed the quarter, so we now have the opportunity to take a look at Q2, a lot of them in the new markets.

I think it's fair to say that every station that we fly to has to continue to earn its way onto the route network as well, and we're right in the midst of reviewing the trends, the maturation, the trajectory.

I think it's probably, in the not-too-distant future we will have some pretty good -- a pretty good deal for, hey, how does the network look today?

What does it want to look like in the future?

Robert Barry, Goldman Sachs.

A couple of clarification things and then one other question.

The 10% to 12% growth that you see in the third quarter -- is that all predominantly in the domestic US market?

The ASM growth, yes.

Obviously, I don't think we've mentioned any new cities that we are bringing online in Q3 or Q4.

So yes, it would all be existing markets.

Yes, it is; everything is existing markets.

How should we think -- maybe you mentioned this and I missed it -- about the growth rate overall for the Company ASMs in 2008, given the revised order book?

We have not shared any 2008 thoughts yet.

You guys can see what our revised delivery schedule is.

Certainly, as we come to the end of the year, we will give you 2008 numbers.

But right now, you're kind of on your own to project.

Then in terms of -- I just wanted to follow up also on the target growth rate for the Company.

It sounds like you are thinking about it on a plane-by-plane or a market-by-market basis.

But are there any company-level targets that you set against which to adjust the growth rate?

Or should we really think about the growth rate going forward as something that's more fluid, that you can flex almost on a quarter-by-quarter basis?

I love the idea of the concept of flexibility on a quarter-by-quarter basis.

Certainly, that's one of the things we have attempted to do by retaining all of our optionality.

We've slowed it down.

From my perspective as the CFO, the project last year to slow it down was really driven off of the balance sheet, cash flow from operations, cash flow deficit, liquidity metrics.

As Dave mentioned earlier, when you open up 16 new markets -- I think there was, at one point last fall, it was a third of our seats or a third of our ASMs, I forget which, were in markets 12 months or less.

Those markets are maturing.

That's a drag on the P&L.

So when I speak of we're slowing the growth, we're strengthening the balance sheet, I actually do believe it's earnings-positive at the end of the day, because you are just not going into that many new, fresh, young markets.

As Dave mentioned during his comments, we can certainly be more strategic about the markets we do pick.

So that's how I think about looking at the overall growth.

I would probably add to that as well, there's flexibility, the ability to dial it up, dial it down, based on opportunities.

I think that's such an important aspect of our business plan.

Keep in mind, as well, even as we are slowing the Embraer deliveries over the next two-plus years, by and large, those airplanes have been tethered to the East Coast as we have been maturing into operational reliability as well.

Some of the metrics that we started to see -- and we have been seeing them, but the improvement into Q2 -- the ability to utilize this airplane, back to when we presented it to our Board, this 100-seat gauge airplane opens up 850-plus city pairs.

Pretty exciting stuff.

The opportunity to open up new markets, mine some new geography as well -- no announcements at this point in time, but we're starting to see that this airplane is maturing as we expected, although a little bit later than what we were expecting.

So it sounds like the growth going forward is really going to be more about mining opportunities in existing markets or connecting existing dots?

I think both, really.

It's connecting the dots.

These 16 cities that we opened last year -- one word that comes to my mind is "inefficient." If you are into a location that's four times a day and we have staff at airport gates, whatever it might be -- the opportunity to connect those dots, to mine new geographies, to really work the gauge from a seasonality perspective or time of day.

That's what's so nice about having 100-seat and 150-seat aircraft in our toolkit.

I think, as we go forward, we're going to continue to open up new markets.

I don't want to leave anybody with the impression that we're not going to grow this airline.

Certainly, this year, we have opened up four or five.

It depends on how you want to score Nantucket; it's summer only.

Maybe four and a half cities or something this year.

But a far reduction from 16 last year, and I think that's what we're trying to communicate to the market is.

I don't think you're going to see us open 10, 12, 13, 14, 15 cities.

The pace going forward may be more along the lines of two to four per year.

Ray Neidl, Calyon Securities.

Just in general at JFK, I guess progress is going pretty well with your new terminal.

I'm just wondering what type of flexibility may you have in that terminal, with either your own system or taking in a tenant or possible future consolidation?

Can you add to that terminal a customs area and maybe gates for larger aircraft?

The terminal -- again, a project that's $875 million, funded by the Port Authority, 26 narrow-body domestic gates is how that facility was built.

We're operating out of what was 21; we are actually down to 19 gates because of construction phasing with our Terminal 6 and our Terminal 6 prime facility.

So really, can one provide a change order to allow for international customs immigrations, agriculture?

You can always do that.

Or allow for another tenant such as a wide-body customer?

You can always do that.

It would be incredibly sub-optimal for what that facility was designed.

As we worked with the Port Authority over pretty close to three years on the lease, there was a lot of dialogue regarding utilization standards, our product, dual taxiways, the ability to push back and drive efficiency, all that kind of stuff when you have international operations, let alone the agreement from the government to staff a facility such as a Terminal 5.

There's an awful lot of unknowns.

Longer-term, Port Authority master planning, whether it's connecting into Terminal 4, Terminal 6 -- all that is a possibility as well.

It's no secret that Terminal 6 is old infrastructure.

But I think [my headline] again, it is a domestic narrow-body facility, and that's exclusively how we designed it.

Great.

You were talking about the benefits of the 190, even though you're slowing down the growth of delivery.

Just as a toss-out here, is there a possibility -- is this one of your game plans, that if the 190 doesn't produce, you can go back to one fleet type?

I think the 190 is a long-term part of our fleet plan.

I've learned a long time ago to never say never, but what you just laid out is not a thought at all in my mind or senior leadership at this point.

Fact -- has it taken longer to mature the reliability on the 190 than we expected?

Yes, that's fact.

Are we starting to see numbers that we're pleased with?

Absolutely.

So, even though we have dialed back the growth as a result of our growth plans, as well as just making sure that Embraer is also digesting their delivery book across the world, that's a win-win for both of us.

So that airplane -- not to lose sight of almost a 2,000-mile-range airplane, over-water equipped with all the in-flight entertainment that we have, really starts to open up some interesting geography.

I would think that it's an airplane that many airlines would want to have.

So it truly is, from my knothole, a long-term part of our fleet plan.

Mike Linenberg, Merrill Lynch.

Dave, you talked about ongoing talks -- I presume you and Russ are leading those -- with the Port Authority about finding some new capacity.

I think it's been pretty well documented that JFK is -- the use of that airport is sub-optimal.

That said, because some of these changes do take time, is there the possibility that, given maybe a long leadtime here, that with the airplanes still coming in and sort of the long-term goals that you'd like to have at Kennedy, and also with the growth of Delta at that airport, that you may have to consider moving some airplanes out of that market, maybe putting them at one of your other hubs, whether it's 190s or A320s?

Do we run into that in the not-too-distant future?

The ability to grow Kennedy, in my mind, is still very real.

Do we have to be smarter about where we add capacity by time of day?

Yes.

The previously slotted hours, with the sunset of the high-density rule and the afternoon timeframe -- we're starting to see 1,400-plus movements per day.

It wasn't -- well, back when we started flying there, it was 800-plus movements per day at Kennedy.

So there's been a lot of growth at JFK.

All that said, there are many hours of the day where there's capacity, and I think it's also fair to say that our peak in a sub-optimal facility today -- we have been at 185 departures.

When we start to take a look at 26 gates plus some operational spares in there, there's still another, say, 50 or so departures that we can grow in our infrastructure that we're building with Terminal 5.

I think that's very doable.

I think that the FAA and the Port Authority -- and we have been in direct dialogue with them regarding, hey, listen, just rationalization regarding supply and demand.

From our point of view, Congress has mandated the FAA -- they are empowered to really be involved when, in fact, capacity is being outstripped by demand.

So I think, really, rationalization is going to take place and we can continue to grow.

It's not lost on us that we can start to also overfly.

Things like Buffalo down to Fort Lauderdale, that we announced, the ability to -- Syracuse down to Orlando, Syracuse down to Fort Lauderdale.

All that kind of stuff we can do with both fleet types.

So JFK congestion is a concern, but I think we should be fine with what we're building there.

Now that we've seen the official launch of Virgin America and we have seen some of the markets that they've targeted, and some of these markets are markets that you are in, what is your initial take?

Anything out there that you find interesting?

I believe one of the things that they are doing is they are charging a premium for bulkhead and exit row seats.

So just your initial take?

My initial take, whether it's a Skybus or a Virgin America, is new business models, as they enter the landscape, we certainly have to be cognizant of what they are doing.

I think we can't become arrogant regarding new competition in the landscape.

Fred and the Virgin America team, plus the brand -- it's a significant brand name entering the landscape.

This isn't like it's a new brand.

So a little bit different play with first-class seating, what they're doing with charging for bulkhead, aisle seats, the in-in-flight entertainment system.

So we're certainly going to keep abreast of it, as you would expect that we would do.

But at the same time, I think we look at -- for example, like the Bay Area.

We're attacking the Bay Area from the East Coast, and we are doing that into San Francisco and Oakland and San Jose, and we are doing with seven years' worth of brand loyalty.

But it's not going to be lost on us that, really, their overlap that we see measured on seats is north of 10% on top of our route network.

So a lot of competition in the landscape.

We're not going to take it lightly, but certainly we're going to learn from some new ideas, too.

Jim Parker, Raymond James.

Just calculating, based on your quarterly report, your full-time employees for aircraft, 74.4 versus 90.9.

You may have given the figure earlier; I may have missed that.

But I'm just curious, one, how much of that decline is due to the 190s?

Then also, where do you think -- what is the goal?

Where can you go with this?

That's a great question, Jim, and one that certainly gets a lot of discussion here within JetBlue about the goal.

I don't have the exact number off the top of my head with respect to what's due to the 190s, and we can circle back with you; I'll have [Lisa] circle back with you on that one.

As to where we can drive the thing, I really look at Southwest Airlines as the standard bearer for low-cost carriers in this industry.

I think the last number I saw -- you probably know this better than I do.

I think Gary and them are somewhere in the mid 60's -- 66, 68.

I certainly think that's achievable for us.

I think we've just begun to scratch the service in some of these areas.

I think we have some staffing opportunities across airports.

I think we have some staffing opportunities across res.

I think we have some staffing opportunities even across our technical operations areas.

So, over the last year, from my prospective, we have been really going after some low-hanging fruit here.

We have been taking advantage of what we can to get it down from 91 to 74.

Now we have to really get serious and dial it up a little bit and start really digging a little deeper across these areas for these efficiencies.

But I see no reason why we can't be down at the Southwest Airlines numbers.

I want to follow up on Mike's question a bit about the Virgin America product relative to JetBlue, and then about JetBlue really perhaps charging for assigned seats or bulkhead seats.

Because you all went through a decision recently to take the number of seats on the A320s from 156 to 150.

You could have gone back to 162.

Is that working?

Perhaps, since you have more room, could you actually charge a premium fare for those roomier seats or more legroom on those seats?

I think, first of all, the move to 150 versus 156, 162 -- yes, I believe it's working because of the cost that we stripped out with the fourth in-flight crew member.

So that's a positive.

I think it's also fair to say that we've got some dry powder with regard to what do we want to do from the standpoint of some type of a product enhancement on the 320 aircraft as well?

We're starting to -- we're very close to working with, through our CompanyBlue, things like maybe refundable fare testing algorithms that allow the late booker a better seat on the airplane.

There's some interesting enhancements that we're not ready to roll out yet.

We have been public about what those are.

But I think the answer is yes, that we can do some things that are rather interesting.

I think ancillary revenue is an incredible opportunity for this airline, wherever that might be, whether it's change fees, whether it's some type of enhancement onboard the airplane.

But there's -- I can't believe what works in Europe will not work here in the United States, to some extent, or Asia, back in the United States.

So I think there is some upside.

The Virgin America product -- again, I think it's a -- again, we're looking at 150 people on the aircraft, customers, with 36-34-inch pitch versus, basically, eight sleeper seats, if you will, in first-class and 31-32-inch pitch in coach -- different model.

So our democratic model, I think, is one that has worked well for us -- transcons have been strong -- and, I believe, will continue to work well into the future.

Jamie Baker, JPMorgan.

The full-year RASM guidance of 6% to 8% is down, albeit just slightly, from 7% to 9% that you estimated just a month ago.

Since that time, you've actually pulled a little bit of capacity out of the fourth quarter, it appears.

So I would have thought the RASM might have actually improved.

You obviously highlighted some components of the demand environment in an absolute sense.

But I'm wondering if there was anything specific as to how your modeling has changed in the last month, or if it was simply a refresh of your assumptions.

It was more of a refresh of the assumptions.

I think we've got pretty good visibility into the next 90 days.

We do think the third quarter is shaping up quite nicely, and as we started looking at Q4 it was more, hey, you know what?

The visibility is not quite there.

Let's just refresh the assumptions and just dial it down a little bit, to be real candid with you.

As a follow-up, are there any out-of-period hedge gains in the $2.18 fuel guidance for the third quarter?

I'm just, back of the envelope, having a little bit of difficulty reconciling that number.

Out-of-period hedge gains?

In the second quarter, we had some inefficiency, some [133] inefficiency that came through for the tune of about $3.5 million.

But I am unaware of any out-of-period hedge gains in the third quarter.

I can have Lisa circle back with you off-line to confirm that.

Sounds fair.

Finally, while suspending the mid-quarter update, I trust you're still going to incorporate monthly PRASM data into your traffic releases?

At this time, yes.

Kevin Crissey, UBS.

When you consider the aircraft earning its way onto your route network, what kind of threshold for aircraft and other types of projects do you have in terms of return on invested capital?

What kind of threshold do you think of?

How we've always taken a look at it to date -- I'm not saying this is the best way to do it; I think we are evolving with how we do this analysis.

But we have always tried to target like a double-digit operating margin.

Back in the heyday, you go back to 2003, we were doing operating margins that were running 15% to 20%.

Now, I do think in today's fuel environment, today's competitive environment, that is a very difficult task to achieve.

I do believe, however, and even our initial guidance this year indicated when we had fuel at $1.93 a gallon, that we were anticipating the potential of getting back to at least a 10% operating margin.

I think, at the end of the day, I'd like to tell you, unless fuel goes crazy -- and I don't know what go crazy means, but certainly call it $2.00, $2.20, I think that's reality -- I would like to see this airline targeting, again, lower double-digit operating margins.

Gary Chase, Lehman Brothers.

Could I just follow up on that last question that Kevin was asking and just put it in the context of the review that you're undertaking?

As you look at what you're cutting, is that -- in other words, what underlies this process that you're doing, a drive towards double-digit operating margin?

From my standpoint, it's a drive toward profitability, and I'm looking at double-digit operating margins.

As I would look at the numbers -- and this is something that we're debating internally now and we're having some good dialogue on.

I look at routes that -- some markets mature quicker than others.

Let's just being honest about it.

There are some markets that may be going a little slower than we anticipated, and the questions that I'm going to be asking as CFO is, are those markets strategic to the airline?

At the end of the day, we've got certain markets that -- I'm going to use the term are cash cows.

They make a healthy return.

They've made a healthy return for a long amount of time.

I think we all kind of know where JetBlue does well.

Well, when you add new markets, if you don't want a drag on your P&L, you can only add so many new markets at a time.

So, when you start adding 16 new markets in one year, all of them maturing at once, you have a drag on your P&L.

So, again, I'm going to look at some of these markets and I'm going to be saying, hey, gang, they haven't necessarily met our expectations to date.

We have been flying in some of these markets for something longer than a maturity period, call it 18, 24 months plus.

Are they strategic, yes or no?

Do we do to either, A, reduce frequency to these markets or, B, pull out of them completely?

Those are the conversations we're having internally.

I'd just pick up a few more comments that John laid out.

Market maturity is so important.

What we have seen is a nondiscretionary destination.

Granted, many of our destinations are.

But a new beach destination seems to mature quite quickly versus a business destination.

You would expect that, because of the footprint of our airline and, really, some of the corporate purchasing models that are in place with some of the network guys.

I think we also take a look at not specifically just the new cities, but of the new cities, as an example -- for the most part, we can only offer you Kennedy and maybe a little Boston.

For the network, is that the best use of that location, 30% of the [compass rows]?

I think there's some pretty good examples in the landscape about just a much better utilization and efficiency type model in these locations.

As we look at specifically these new markets, it's JFK and congestion into the afternoon enters into the discussion, and the fact that we have tethered the E190 to maintenance bases along the East Coast -- that has also entered into the equation.

So we're starting to see, okay, what is the reality of that congestion, even though I think the dust will settle at Kennedy?

With E190 reliability, what do we want to do with that airplane?

Because when you have ground delay programs in the afternoon and you're trying to connect customers, or just move from someplace in the Midwest over Kennedy connecting to the Northeast, it's probably not the best use of an airplane, either.

So those are some of the items that we are taking a look at with, okay, of the 54 cities we are flying to today, is that the best use of the asset and the route network?

I interpreted a question that you were answering earlier to mean you weren't done with your review.

That might be a mistake on my part, but I thought the fact that you weren't willing to set the forward guidance meant that this was an ongoing process.

What I'm wondering is, how strongly should we tie this link?

In other words, should we be thinking that you will keep pruning until you hit that 10% to 12% margin?

Or is there another nuance in this process?

I'll tell you, there's certainly nuance in the process.

But the return to double-digit margins is certainly right at the top of the pyramid.

I think, again, our finance team, the opportunity to really build this company through free cash flow is very, very important.

So again, I wouldn't encourage that you read too much into the ongoing route review.

Again, we just closed the books on the second quarter, the ability to look at the maturation of these markets.

However, if something is not maturing quick enough, or doesn't make long-term sense for the network, I'll tell you what, we will make the hard decision.

I know the crew members are listening in, and certainly other shareholders that live in geography.

But we'll make the tough call, if we have to.

I think, over the course of the remainder of the summer, we're going to have some real good visibility in terms of what we're doing with the network into the future.

On Virgin or on the transcons, which you have answered several times, is the planning assumption that RASM will be negative?

Can you just give us some flavor for sort of what you expect to happen to you in this margin guidance you've provided?

I think it's fair to say that we believe that it will be a negative as a result of Virgin into the transcons.

It's different than, say, the last time America West entered into the transcons, because of their model and their pricing points.

But yes, built into that guidance is a negative as a result of the competitive landscape.

Daniel McKenzie, Credit Suisse.

I just wanted to circle back to on JFK.

The utilization was up 27% from a year ago, I guess, in the second quarter.

But the congestion seems to be getting worse at JFK.

I was just curious; maybe you can provide some more perspective on -- you mentioned that a rationalization at JFK would occur.

I'm wondering if you have any thoughts about the timing and what that could possibly mean for JetBlue.

Is that incorporated into your guidance currently?

I think that it's fair to say we have been in discussions, active discussions, with the FAA, with the Port Authority.

In fact, last week, I represented JetBlue with Rob Land, Government Affairs, at Port Authority task force.

Russ will be involved with that task force.

Rob Maruster, who heads up our airport group, will be in the customer service side of the task force.

I believe that sometime this year that certainly -- not that I know this sure, but my belief is that there's going to be some type of involvement by the FAA.

Certainly the Port Authority is involved today.

I think it's fair to say the FAA is very concerned, too, about all the growth that's taking place out of JFK.

I could be wrong from that perspective, but the basis upon which I believe there will be rationalization -- first of all, there's growth.

I think people just get better as a result of it, whether it's our own staff, whether it's people in the FAA tower, whether it's the [trade cons] New York Center -- you just get better as a result of what's in play.

I have to believe that, with 5,000 acres and four runways and the kind of activity that's taking place at JFK -- it's not that much higher than Newark, which is about half the size and three runways -- even though you can't look at it airport by airport, that we're all tied into this New York airspace.

There's aspects for improvement along those lines.

I also think that, as airlines are building -- and you know the airlines that are building, and we're one of those as well.

If you're spending more time on the taxiway than you are en route to Hartford, Connecticut, or Albany or whatever the case might be, I the there's going to be some rationalization that takes place.

So could JFK become re-slotted or something along those lines?

It's really not our call.

By the way, the growth happened well in advance of, say, January 1st this year, when the sunset took place with high-density.

So I'm still very optimistic, but we're going to have to be realistic, too, with what JFK can give us.

From a guidance perspective, we did not bake in any operational improvement in the second half of 2007.

With respect to the congestion in air traffic control, I understand there's some new technologies on the way, one of which is being implemented right now by some, which is the RNP technology.

I'm wondering if that is something that JetBlue is utilizing currently, or if that is something that you will be able to begin to utilize, and perhaps some cost savings that you believe could result from that improved technology?

The answer is yes.

I can't size it for you just yet.

But what's very comforting is having Russ Chew at JetBlue, Russ coming from the FAA, and the benefits of what RNP will do.

Our fleet equipage, along those lines, I think we're going to be fine with it.

It really becomes timing underneath the redesign of the airspace here in the New York metropolitan area and then the ability to optimize, once that airspace has been redesigned.

So I think administrator is on record as saying sometime in September-October timeframe, possibly this redesign will be closed out.

So in late Q3, early Q4, and then it will take us a period of time as a result of, really, designing the RNP departures and the approaches, the ability to take advantage of that real estate.

So I think there is a good guy out there in the not-too-distant landscape.

But, as John mentioned, it's not baked into any numbers this year.

It's probably going to be 2008, at the earliest.

Lastly, JetBlue has talked about international coach here.

Is that on track to be implemented this year?

Any thoughts about timing, potential benefit of that as we look ahead?

The answer is yes, although we haven't provided a great deal of visibility yet, because we are working through some technological enhancements of our own res system, if you will.

So Aer Lingus has been quite vocal regarding a potential relationship with JetBlue.

That's one that we're excited about as well.

We've been on record as saying that we believe that can transpire into the fourth quarter of this year.

I would say that's still the same timeframe that we're expecting that to take place.

Again, though, from a guidance perspective, we have got nothing baked in for that this year.

Frank Boroch, Bear Stearns.

I was wondering if you could give us an update on the operations at Newark and how that performed in the second quarter.

Operations from Newark -- we're pleased with the results.

I think the headline -- we're not a large player over at Newark.

We are in the New York metropolitan area with the five airports.

But what we're seeing is there's an awful lot of demand between the carriers, including us, between Newark and the Newark catchment into the Florida areas, and it has worked quite well for us.

My final question -- maybe you touched this, and I apologize.

In the comprehensive top-down review that you have embarked on, has that been solely focused on internal initiative, or has that also included looking at other strategic partnerships and asset sales beyond aircraft and that sort of thing?

I think it's fair to say that we're really taking a look at how we deployed our assets, and are we efficient in those 54 cities?

How are our routes doing in those 54 cities?

That includes the size of the fleet.

That includes the number of locations that we fly to.

Is it fair to say that we're always taking a look at the landscape of additional partnerships, such as an Aer Lingus or a Cape Air?

You bet we are.

I think the opportunity to really take advantage of what I believe is the best route network at JFK -- incredible upside along those lines.

So it would be our responsibility to make sure we are looking at those partnerships.

This concludes our Q&A session with investors and analysts.

With that, we will now turn it over to Dave Barger for closing remarks.

Very good, thank you.

I'll be very brief with closing remarks.

But once again, as we close this call, very pleased with our second-quarter results.

I think this is especially considering the very difficult first quarter that JetBlue encountered.

Also I think it's important to note we feel very good about our future, both into the third quarter as well as long-term.

If you think about it again -- you've heard this in the past, but our product, our focus on low cost, our brand and, most importantly, our crew members delivering the JetBlue product, we think we're positioned second to none out in the domestic landscape.

I also want to take this opportunity to thank our JetBlue crew members, 11,000 strong, supporting the 600-plus flights a day, 70,000 customers.

Thanks for what you're doing and for those of you participating and listening in on today's call and webcast.

Have a good day.

Thanks for your time.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

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