JetBlue Airways Corp (JBLU) 2008 Q2 法說會逐字稿

Ladies and gentlemen, this is the operator.

( OPERATOR INSTRUCTIONS) .

Welcome to JetBlue Airways Corporation second quarter 2008 earnings conference call.

Today's call is being recorded.

We have on call today Dave Barger, JetBlue's CEO; and Ed Barnes, 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 & Exchange Commission.

At this time I would like to turn the call over to Dave Barger.

Please go ahead,

Thank you, operator.

Good morning, everyone.

Thank you all for joining us today.

This morning we announced our financial results for the second quarter.

We reported an operating margin of 2.4% resulting in a net loss of $7 million or $0.03 per diluted share.

Our second quarter results were in line with all of our guidance ranges despite higher than expected fuel which was about $0.08 higher than our issued guidance.

Unit revenues continued to show impressive growth during the second quarter.

Passenger revenue per available seat mile or PRASM grew 9.8% year-over-year and RASM which includes our ancillary revenues gained over 13% on a year-over-year basis.

Unfortunately unit revenue gains have been far from sufficient to keep pace from the extraordinary increase in the price of fuel.

JetBlue's average fuel price increased nearly 60% or over $1 per gallon versus the second quarter of 2007.

Record fuel prices have transformed the industry landscape not only because of the magnitude of the run up in the price of fuel but because of the pace of this increase.

On our last earnings call I outlined several key actions JetBlue has been taking to adapt to what we call the new normal.

We believe this industry environment creates opportunities for those who maintain adequately liquidity, capacity control, and service quality.

With respect to service quality, I would like to first thank our 11,500 crew members for all their hard work.

Record fuel costs and an uncertain economy are not an excuse to provide anything less than the JetBlue experience.

I am pleased that in the face of this industry turmoil JetBlue recently achieved the number one Customer Service ranking among low cost carriers from J.D.

Power & Associates for the fourth year in a row.

This award is a true testament to the dedication of our crew members who continue to deliver exceptional customer service to our 20 million annual customers.

A primary part of our plan to combat record fuel costs has been to aggressively manage our capacity in 2008 and beyond.

We have revised our 2008 capacity plans further downward with the bulk of these reductions beginning in September.

We expect negative capacity growth during both the third and the fourth quarters of this year, a first in JetBlue's history.

We expect our third quarter capacity to decrease between 1 and 3% year-over-year with most of the capacity reductions falling in September when our capacity will be down about 10% on a year-over-year basis.

We expect our fourth quarter capacity to be down roughly 6 to 9%.

This pulldown in ASM's during the fourth quarter is significantly larger than the negative 2.8% we announced previously.

As a result of these planned capacity reductions, we have reduced our 2008 estimated growth range from the 6 to 9% range we provided at the beginning of 2008 to between 0 and 2%.

We've continued to successfully manage our capacity through aircraft sales and deferrals.

As we previously announced, we have entered into agreements to sell nine used A-320's this year and completed four sales during the second quarter.

We intend to make additional capacity reductions beginning in September beyond aircraft sales through a combination of aircraft age adjustments, lower utilization during trough periods and day of week capacity adjustments.

Slower growth affords us the opportunity to focus on strengthening our core network.

After the peak summer travel period we plan to significantly reduce our Transcontinental capacity which we expect to be down roughly 30% in the fourth quarter compared to the same quarter in 2007.

We expect about 30% of our ASM's in the fourth quarter to be in the Transcontinental markets compared to 45% in the fourth quarter of 2007.

As many of you read by now in today's press release, we will discontinue service to Ontario, California, on September 3, 2008.

Unfortunately this market is not sustainable at current fuel prices.

When we began service to Ontario in July 2000, oil was trading at $30 per barrel.

There are many routes that made sense at $30, $50, or $60 per barrel of oil, but not at $120 plus costs.

Just to give you a better sense of the magnitude of the impact of the spike in fuel, our average fare between JFK and Ontario increased 18% between the end of 2001, our first full year of service in that market, and 2007.

At the same time the cost of fuel for that flight has more than quadrupled.

This fuel environment forces us to constantly revisit the assumptions and performance of every market, route and city, even one like Ontario which was our first West Coast city.

As you will recall, we also suspended service to Tucson, Columbus, and Nashville earlier this year and we deferred the start up of our service to Los Angeles International Airport or LAX.

These were very difficult decisions for us primarily due to the impact they have on crew members in these cities and our commitment to these communities.

As I said in the past every aircraft has to earn its way into the route network.

We will continue to make network adjustments as appropriate to ensure our aircraft are deployed more profitably.

In this environment we believe it is prudent to reallocate capacity to our areas of strength and where we see opportunities.

Given the current fuel environment, we plan to reduce our relative exposure to east/west markets while increasing our presence in north/south and shorter haul markets where the yields are better and fuel is less of a factor.

We will continue to leverage our market presence in New York, Boston, Florida, the Caribbean, and on the West Coast.

We also plan to continue our focus on connecting the dots.

That is adding flights between our existing cities to help improve efficiency and asset utilization.

While we remain focused on our core network, we also remain flexible as industry conditions create profitable opportunities.

For example, we recently announced plans to say reallocate capacity to San Juan and the Dominican Republic this fall where we have continued to perform very well.

We also added new service into White Plains where we are now the largest carrier.

This coupled with our service to JFK, La Guardia, Newark and Stewart further bolsters our position as New York's true hometown airline.

Given the current environment it it simply does not make economic sense for us to grow our capacity in 2009.

We have continued to manage our growth through opportunistic aircraft sales and deferrals.

In May we announced a deferral of 21 Airbus A-320 aircraft originally scheduled for delivery from 2009 to 2011, to 2014 to 2015.

We had originally planned to take deliver of 18 A-320's aircraft in 2009 and we currently plan to take delivery of two A-320,s in 2009 net of deferrals and sales.

In addition, I am pleased to announce today that we have entered into an agreement with Embraer to defer 10 Embraer aircraft originally scheduled for delivery from 2009 through 2011 to 2016 including one deferral in 2009.

We currently plan to take delivery of eight Embraer 190's in 2009.

We're prepared to reduce our growth even further and we'll continue to evaluate fleet opportunities as they arise.

Our fleet order book provides us with the ability to quickly react to changing market conditions.

We have been successfully managing our fleet growth through aircraft sales, deferrals, and one early lease return.

At the same time we have aircraft purchase options which gives us the flexibility to accelerate aircraft deliveries should conditions change.

Slower growth helps our new markets mature.

It wasn't too long ago that we opened 16 cities in one year.

We continue to benefit from the maturation of once new markets as they now become a smaller percentage of our overall network.

During the second quarter only about 10 percent of our seats were in new markets which we define as markets open less than twelve months compared to about 22% of our seats in the second quarter of 2007.

Slower growth helped drive second quarter unit revenue performance which was once again among the best in the industry.

As I mentioned, PRASM was up 9.8% year-over-year which is even more impressive when you consider this past quarter did not have the benefit of the Easter holiday.

The second quarter PRASM increase was driven by 13.7% increase in yield.

We achieved record fares with an average fare for the quarter of about $138, which is a 13% increase over second quarter 2007.

We're starting to see significantly higher fares in many of our newer markets which have been in their ramp-up period.

Not surprisingly, our existing markets in the second quarter out performed our new markets.

Same store PRASM was about 13% higher than our PRASM in new markets.

We also continued to benefit from reduced industry capacity which was down slightly in our markets on a year-over-year basis approximately down .5%, and from our own tactical capacity adjustments such as aircraft gauge and day of week pulldowns.

With regard to revenue growth throughout our network, the Caribbean has continued to perform exceptionally well.

Our greater ASM growth in this region has magnified this relative contribution.

RASM was up almost 30% in the Caribbean during the month of June alone.

13% of our ASM's were in the Caribbean during the second quarter, up over 35% to the second quarter of 2007 when 9.7% of our ASM's were in the Caribbean.

We have been very pleased with our Caribbean markets because they tend to mature very quickly from both a P&L and a cash perspective.

These destinations also generally require minimal up-front capital and despite limited daily frequency, are relatively low cost.

In addition, we're benefiting from our heightened focus on ancillary revenues.

RASM was up 13.2% year-over-year during the second quarter.

Our other revenues increased by $33 million, or roughly 70%, compared to the second quarter of 2007.

We collected approximately $8 per customer in ancillary revenue during the second quarter compared to about $4 per customer in the year-ago period.

The results of our ancillary revenue initiatives are very encouraging.

Customer response to our even more leg room offering, which we anticipate will result in $40 million in incremental revenue this year, continues to exceed our expectations.

As a result, we have changed the ML pricing structure at the end of May to better match demand increasing the long haul price from $20 to $30 and medium haul from $15 to $20.

We also recently began collecting a $20 fee from customers who check a second bag.

Results thus far have been in line with our expectations of an additional $20 million this year.

During the second quarter we also adjusted our change fee from $50 to $100.

This is part of a basket of fee changes that we expect will deliver $50 million in additional revenue annually.

Our goal is to tailor our products and services around what our customers value most and are willing to pay for, and we will continue to look for additional ways to drive ancillary revenue.

While everything is on the table in this environment, we're also very mindful of the potential impact these changes may have on our brand in our relationship with our customers.

Looking ahead to the third quarter, the revenue outlook is positive.

Demand is reflected in our forward booking curve remains relatively strong although we're certainly aware of the potential impact of an economic slow down.

Our booking curve is moved a bit further out which is consistent with what other carriers are experiencing based on other airline fare and pricing activity.

This shift could be a sign of some softening in demand while we have been adjusting our pricing strategy accordingly.

We expect both July and August to be strong months while demand for air travel declined significantly in September as schools reopened and the summer travel period ends.

Capacity reductions by both JetBlue and other carriers carriers will certainly be beneficial.

We expect industry third quarter capacity to be down 2.5% and fourth quarter capacity to be down 5% in our markets.

At the same time we continue to look for ways to improve our revenue performance during our trough periods.

For example, with increased focus on our charter and cargo businesses.

We expect our year-over-year PRASM growth for both the third quarter and full year will be between 14 and 16%.

We expect RASM to increase 19 to 21% during the third quarter and 18 to 20% for the full year.

While slower growth certainly helps drive better unit performance, it also pressures our unit costs in the near term as it - - expectedly takes more time to extract the same percentage of costs from the system.

Since a large percentage of our capacity cuts are coming out of the Transcon markets, we expect a disproportionate negative impact to our ex-fuel CASM costs in the near term.

In addition, our commitment to a no furlough policy pressures our unit costs.

We believe this is the right approach over the long-term because it creates a better work environment, resulting in greater productivity and efficiency across our work force.

To combat these cost pressures, we continue to drive improvements in productivity across the airline, and we're working to ensure all over head associated with our reduced level of flying is eliminated.

Reduced capacity mean that we will need fewer people to run the airline, and our goal is to reduce our head count commensurate with our capacity reductions.

On our last earnings call we announced that we had implemented a head count freeze for all management and support staff.

We will also be offering refresh and rejuvenate programs, or R and R programs, as we call them at JetBlue and voluntary opt-out packages for those work groups where it makes good business sense.

We certainly have more work to do on the cost front we are committed to aggressively manage our costs going toward.

Cost control coupled with revenue enhancements and slower growth helps bolster our liquidity.

We have a solid cash balance with over $800 million in cash excluding about $300 million in option rate securities.

Ed will discuss liquidity in more detail in a moment, but I would like to - - reiterate our focus on cash.

Liquidity preservation remains a top priority.

Our negative capacity growth going forward reflects our focus on cash and our commitment to only grow responsibly in this environment.

Before closing, I would like to provide a brief update on terminal five at JFK.

We are very excited to open our new home at JFK's terminal five in September, almost six months ahead of schedule and on budget.

We're in the final stages of construction and are proceeding with testing and commissioning of the new terminal.

We really look forward to providing both our customers and our crew members with a significantly improved experience.

We have a unique position in New York as JFK's largest domestic carrier, and we look forward to be able to continue to leverage our market presence here.

In closing, I wanted to thank our crew members and shareholders for their support and continued confidence in our ability to execute during the challenging time.

We believe we will emerge out of this period a substantially stronger company.

JetBlue is well-positioned with a strong route network, a flexible fleet order book, solid liquidity, the best crew members in the industry and a management team that will continue to respond quickly and prudently to the challenges that lie ahead.

We will continue to move aggressively to adapt to this changing environment to ensure that we are well-positioned to benefit from the opportunities that lie ahead.

With that, it is my pleasure to turn it over to Ed Barnes our CFO for more detailed review of our financial performance during the quarter.

Thanks, Dave.

Good morning, everyone.

We are pleased to report another quarter of industry leading unit revenue performance.

Strong revenue growth, however, was in no way sufficient to offset the impact of record fuel costs which in the second quarter were nearly 60% higher than last year.

Had the price of jet fuel stayed constant to where it was in the second quarter of 2007, our fuel expense would have been about $135 million lower.

Escalating fuel costs continue to pressure the business, not just for JetBlue, but for the entire industry.

Fortunately, we are well-positioned with a solid cash position, and as Dave just indicated, a strong commitment to liquidity preservation.

We ended the second quarter with $846 million in cash and cash equivalents.

This cash balance excludes $300 million in student loan related option rate securities.

As we previously disclosed, options for these securities began failing in February and continue to fail.

It is important to note that while the options have been unsuccessful, we're still receiving the failure interest rate.

And we are encouraged by reports of various issuers finding alternatives to this market and calling their securities at par.

In fact, we have had several partial calls at par since the failures began, including about 3 million during the second quarter.

These securities, substantially all which of are guaranteed by the United States government, continue to maintain their high credit rating and continue - - and we continue to believe these securities will eventually clear and be called at par.

Even excluding these option rate securities, our cash position as of the end of the second quarter represents about 27% of our trailing twelve months revenue.

Amongst the highest liquidity coverage ratios of the major carriers.

Additionally, this morning we announced that we obtained a new $110 million line of credit with Citigroup Global Markets.

The credit facility is secured by a portion of our option rate securities and expires next July.

We plan to use the funds for general corporate purposes including working capital and capital expenditures.

Given the current environment, we believe it is essential to continue to take more financially conservative approach to managing our business.

For JetBlue that means mitigating risk and preserving liquidity.

During the second quarter we took several steps to further bolster our liquidity position.

First, we successfully addressed access to capital markets raising $201 million through the public offering of convertible to [benchers].

As part of this financing we deposited $30 million of the proceeds, equivalent to the first six semi-annual interest payments, in escrow for the benefit of the no holders.

After deducting this escrow deposit and other transaction fees, the net proceeds of the offering was approximately $165 million.

We used the proceeds to repay substantially all the $175 million convertible debt financing the [trust] last week, so we basically refinanced the debt.

Second, we completed four previously announced A-320 aircraft sales which generated cash proceeds of about $130 million.

We paid down about $185 million in related aircraft debt resulting in $45 million of positive cash flow.

We also netted a P&L gain of $13 million from the four sales.

We have commitments to say sell five additional A-320 aircraft throughout the remainder of 2008 and one A-320 aircraft in the first quarter of 2009.

In addition to providing us with a steady source of liquidity, aircraft sales have helped us manage our fleet growth.

While we haven't seen any significant slowdown in the market for our used aircraft, we believe it is prudent to mitigate risk in this environment.

Accordingly, as Dave mentioned earlier, we have entered into an agreement with Embraer to defer delivery of ten E-190 aircrafts scheduled for delivery between 2009 and 2011 to 2016.

We will be deferring one in 2009, five in 2010, and four in 2011.

As previously disclosed during the second quarter, we also deferred delivery of 21 Airbus A-320 aircraft including the deferral of nine deliveries from 2009.

In addition, the fleet management aircraft deferrals reduce our near term capital funding requirements and debt burden which help strengthen our balance sheet and free cash flow.

To date we have deferred total of 114 aircraft and have sold, or announced plans to sell, 18 aircraft along with one early lease termination.

In summary, we currently project our aircraft additions, net of our announced sales and deferrals, to be ten in 2009, which is two A-320's and eight E-190's, six aircraft in 2010, three A-320's and three E-190's, and nine in 2011, five A-320's and four E-190's.

We also maintain flexibility with favorable purchase options to respond to market conditions when they arise.

Before turning to a review of our second quarter cost performance, I would like to provide a brief update on our credit card processing agreement.

During the second quarter we posted a $35 million letter of credit with our primary credit card processor representing about 15% of the processor's air traffic liability exposure.

This reserve amount was in line with what we had anticipated and previously disclosed.

Let's turn now to a more detailed look at second quarter results.

Our costs per available seat mile, excluding fuel, increased 4.7% compared to the second quarter of 2007 which was slightly better than we projected at the beginning of the quarter.

Fuel continues to be our largest operating expense and now represents a staggering 44% of our total costs.

During the second quarter our fuel costs were up almost 60% year-over-year on a unit cost basis.

Our average fuel price for the second quarter net of hedges was $3.17 a gallon which was about $0.08 higher than we had forecast.

We continue to take a disciplined approach to fuel hedging.

We hedged approximately 47% of our fuel consumption during the second quarter and recognized about $59 million in fuel hedging gains.

Of this total $1 million are unrealized gains related to fuel hedges for future periods which were required to be recognized in the second quarter.

We also continue to work on improving our fuel efficiency with an average - - aircraft age of approximately three years, JetBlue operates one of the youngest, most fuel efficient fleets in the industry.

We have continued to focus on our various crew member led fuel conservation initiatives, such as single engine taxi and rapid deployment of ground power units at our airport gates.

As a result our fuel consumption per block hour decreased 2% year-over-year.

I would like to thank all of our crew members and especially our pilots for keeping the focus on fuel conservation.

Our maintenance expense increased about 13% on a unit cost basis during the second quarter which was similar to our first quarter unit cost increase.

Due mainly to the gradual aging of our fleet which results in additional repairs.

We also had more E-190 heavy maintenance checks during the second quarter.

Sales and marketing expense increased 32% on a unit cost basis due primarily to our new jetting advertising campaign, as well as higher advertising expense compared to last year which was impacted by the February storm.

Moving onto the balance sheet, we expect to end the year with cash in excess of our target of 20 to 25% of trailing twelve months revenue, and this forecast excludes the line of credit we announced earlier this morning.

While we feel comfortable with our current cash position, we are committed to continued vigilance in driving additional balance sheet improvements going forward.

We have - - continued to successfully access the debt markets.

I am pleased to report that in addition to all of our 2008 aircraft deliveries, we have secured debt financing for all of our 2009 Airbus A-320 deliveries and three of our A-E- 190 deliveries.

Looking ahead at the third quarter and full year, we will have detailed guidance available in our investor update filed as an 8-K and posted to our website later today.

However, let me take a moment to share a few of the highlights.

For the full year of 2008 we expect to grow capacity between 0 and 2%.

For the remainder of 2008 we anticipate taking delivery of six new A-320's and one E-190 with the five A-320 sales we have previously announced for the remainder of this year.

We expect to end the year with 107 A-320's and 37 E-190's.

That's 53 fewer aircraft than we had planned at the start of 2006.

We are currently working on our 2009 capacity plans and evaluating our fleet requirements.

We do not have specific numbers to share with you at this point, but as Dave mentioned, we currently do not plan to grow our capacity at all in 2009.

Moving onto CASM.

For the third quarter we expect CASM to increase between 33 and 35%.

This year-over-year increase is driven mainly by the increase in the price of fuel which we expect to be up about 70% over the third quarter of 2007.

For the full year we project CASM will increase 25 to 27%.

Excluding fuel we expect CASM in the third quarter to be up 12 to 14% and up 8 to 10% for the full year.

Of course as we reduce capacity we will face near term cost pressures as it takes time to extract costs from the system.

At the same time we must continue to make appropriate investments in our brand, culture and technology to ensure that we are well-positioned to drive future results.

We're committed to a policy of no involuntary reductions for our crew members which also pressures costs.

As Dave mentioned, we plan to reduce staffing and overhead costs through a combination of normal attrition and voluntary opt-out programs.

In addition, we have heightened our focus on all discretionary spending.

However, we clearly need to do more on the cost front as we position ourselves for 2009.

With regard to fuel, our CASM guidance assumes an estimated average fuel cost per gallon of $3.59 in the third quarter and $3.27 for the full year.

These numbers are based on the forward heating oil curve as of July 17th.

There are hedged roughly 46% in Q3 and about 38% in Q4 which is in line with our fuel hedging targets.

Finally, moving onto CapEx, we've reduced our aircraft capital expenditures for 2008 from $700 million to $660 million in connection with with the Airbus deferral we announced in May.

We were able to apply the pre-delivery deposits we made on the deferred aircraft to other deliveries.

In addition, we deferred near term pre-delivery payments on aircraft which have been rescheduled based on the revised delivery dates.

With respect to non-aircraft CapEx, we have lowered our full year estimate from $150 million to $130 million which reflects our continued cost discipline and our commitment to investment that drive revenue and improve productivity.

In closing, I would like to thank our crew members for all of their hard work in this challenging environment.

Although many challenges lie ahead, we believe that we have the right long-term strategy.

We're taking a conservative approach to managing our business and remain focused on liquidity preservation.

At the same time we remain confident with an opportunistic mindset and a challenging environment.

We maintain flexibility with a favorable aircraft delivery option to accelerate our fleet growth to respond to market opportunities as they arise.

Our flexible order book for both the A-320 and the E-190 is one of our most strategic assets and we intend to continue to take advantage of it.

We believe we are in a position of strength with solid liquidity, the best brand in the industry, great crew members, and a lower customer base and the largest travel market in the United States.

And with that, we are happy to take your questions.

Thank you, Mr.

Barnes.

Now we will begin the 30-minute question and answer session for investors and analysts.

We would like to ask everyone to please limit themselves to one or two questions with a brief follow-up so that we can accommodate as many as possible.

Gentlemen, your first question comes from William Green of Morgan Stanley.

Hi.

I am just wondering on the 8 to 10% CASM ex-fuel guidance that you gave, it seems like that's a rather high inflation rate because the capacity growth rate if I recall correctly is about flat.

So can you just sort of talk a little bit about what the pressures are there?

Is that the right run rate we should use for your cost inflation?

I think that the CASM guidance that we gave is really reflecting the significant pulldowns that we had in both the third and the fourth quarter in our capacity.

And as we continue to try to manage the trough periods more aggressively, it is just taking us a little longer to get the costs out that we have in the system.

But I think Dave and myself and the entire company is committed to right sizing our cost structure for our growth plans.

All right.

Can we turn to liquidity?

Other than maybe LiveTV, and sort of aircraft sales, are there any other sort of assets you have there that you can monetize that we wouldn't normally think about?

I don't think that there is any other significant assets that I would be thinking about.

I would like to clarify one statement that I said during the call though which I may have misread.

In the second quarter we completed four aircraft sales with proceeds of about $130 million, and we paid down $85 million in debt, resulting in 45 million of positive cash flow.

I think I may have one $185.

Okay.

Just last question, in your capacity outlook for 2009, what fuel price do you assume?

For 2009?

Yeah.

How did you decide perhaps what should the fuel prices be?

We haven't given any guidance for 2009, so I think we're just assuming that it is kind of the current kind of market rate.

Like 125, 130?

In that range.

All right.

Thanks.

Thanks, Bill.

Your next question is from the line of Duane Pfennigwerth of Raymond James.

Hi.

Thanks.

Wondering on the ancillary revenue line if you could segment what's driven the incremental $4 year-to-year and of sort the initiatives that you've outlined, how many do not have a sort of full quarter's contribution here in the second quarter?

Good morning, Duane.

The eight over four dollar figure, and - - we're really using that to across the airline as well as a means of educating the value of fees as well as other revenues.

And so the contribution on that number - - tremendous amount that's the fee package that we commented on as well as the second bag fee, and things like even more leg room tends to be into the revenue figure if you will.

But there is still plenty of upside that we think see out in the landscape for other revenues really across our business model.

So paying up for more leg room, that's going to flow through the fare as opposed to the ancillary?

Yes.

That is in the average fare for the quarter, that's correct.

Okay.

That's great.

And then just two, wondering since there is no update really here on LiveTV, should we read anything into that in terms of interest from other parties or where are you in that evaluation process?

Sure.

It is a LiveTV as we commented previously as we engaged our financial adviser Morgan Stanley, rather robust process that's been taking place over the last 90 days since the last call.

And so nothing material to share today in terms of how that process is weaving out, Duane, but we're quite pleased with again what we are seeing in perspective interest to at least granted us options to evaluate should we want to pursue them.

I think at the end of the day, again, this wholly-owned subsidiary of LiveTV we think is a very, very important asset to the company, and we certainly value it that way, and not just in terms of the brand but also value to the company.

Great.

And then just lastly, wondering on the sales and marketing line in terms of the year to year growth there, can you just talk about what's driving that increase and when we might round-trip some of that stuff up?

Thanks a lot.

Thanks, Duane.

I think again it is important to comment that year-over-year results specific to that line, we were on the back side of the events from last February, so it is a little bit of an apples and orange comparison.

We also made the investment to move forward with our jetting advertising marketing campaign, really call it a brand campaign because we think we're declaring a new space from a brand perspective and one that is multi-year if you will as opposed to a normal advertising campaign that runs its due course.

So it is a little bit early in terms of providing what kind of fruit that we're seeing as a result of that.

But the basis behind it, again, and why would we do this at this point in time with oil burdening the airline and the industry, we're doing it because we want to invest in the brand.

We want awareness to be out there in markets such as Austin to the West Coast, Austin to Florida, from Seattle to San Diego and Long Beach, down into the Caribbean.

It's a - - if I may, I just want to make the comment, too, we've converted over to a Spanish website to to really be able to be able to communicate with the Hispanic and Latino population.

And so this is an investment as well as not unlike the Jetting brand, so we hope to be able to tie the results to that monetarily as it plays out in the months ahead.

Next in queue we have Gary Chase of Lehman Brothers.

Good morning, guys.

Good morning, Gary.

Wondering if just I guess first on the processor, Ed, get this out of the way, if you do the quick math on what you described the 35 million in 15%, about 200 million of additional exposure, what kind of trigger should we be thinking would prompt you to need to move higher to that?

Move towards that $200 million additional (inaudible)?

Well really under the terms of the agreement, the credit card processor could require additional holdbacks at any point in time they would like to do that.

The way that we're trying to manage it is to be very transparent with that processor providing them with, financial statements and forward-looking information and just really managing it as a debtor relationship.

And I don't think I can give you any metrics that you can look at to try to find triggers .

Sort of at will there.

Second, shifting gears, when you take a look at the fourth quarter capacity reduction that you've already talked to, the 6 to 9% and roll that into 2009, you're obviously on a much different run rate than I know you said you're going to be flat or no growth in '09.

Should we interpret that as flat or should we be thinking that the run rate from where you leave the fourth quarter is a better guesstimate of what '09 will actually be?

I think as we continue to look at just planning for 2009, right now the only thing we're comfortable with saying is that we are going to be not growing ASM's in 2009, or at least we don't plan to at this point in time.

I think we'll be able to get more granular on that as we get a little bit closer to 2009.

Gary, I'd probably just add to that, too, as we talk about Bill's earlier question about CASM guidance.

This year-over-year reduction in the Transcons, which makes absolute sense based on what we're doing with costs of fuel, and as opportunities - - present themselves such as what we're doing down in San Juan, down in Santa Domingo as well as recently we added service from Washington Dulles down into the Florida market as well as White Plains.

It's fair to say that to look at '09 we're really right in the midst of evaluating, not just our own markets, but also what's happening in the landscape.

It is with - - we're optimistic as we take a look at some of these opportunities.

The brand is strong and it's well known in these markets and we'll seize upon those opportunities.

And then just actually perfect segway into my last question, Dave, you had mentioned that you were ready to sort of pounce on the deliveries if opportunities present themselves.

Just given the macro back drop and the fact that you've been doing the opposite.

I was just curious if you can give us some additional color, what is it going to take to get JetBlue to really start dialing growth back up again?

Well I think it is - - you're right.

We do want to have that opportunity to pounce, and I think the flexibility in the order book that we have and the relationship that we have with Embraer as evidenced by today's announcement as well as Airbus, and leasing companies that we work with, that we have that flexibility.

I think it is much being governed now, Gary, by just how much industry capacity is going to be coming out.

And so while we're seeing in our own markets a reduction to a lesser extent in Q3 and Q4 and we've all seen what the other carriers are highlighting for '09, Is it 10%, is it 20%, and is it oil at, pick a number, 125 to 130 with a crack spread at 30 plus.

And if that's a new normal, we'll adjust accordingly, and I would fully expect that we'll be able to revenue manage to that and dial growth back up.

All right.

But that's not the Dave's case expectation right now.

I think right now we're into the liquidity is very, very important, preserve cash, invest in certainly the culture, brand, and let's take advantage of opening up the new terminal in New York which is under slot constraints.

And as well as a city like Boston where we're now the largest airline and fly to more nonstop cities or Washington, Orlando, Ft.

Lauderdale.

So best case really right now, Gary, is one - - this is a good time to be a conservative.

Got it.

Thanks.

Thank you.

Your next question is from Mike Linenberg of Merrill Lynch.

Yes, Dave, as you were going through the changes in the Transcon, you have a significant reduction coming later this year, and you gave us the share.

Can you give us what the geographic breakdown is at that point, sort of what JetBlue looks like as you scale back - - where the focus will be.

It's a - - Mike, I think the highlight really is one of this '08 Q4 over Q7 with the Transcon.

It was 45% becomes 30%.

I think that because we seasonalize so much across our route system, we're obviously going to be dialing back up Transcons as we go into that peak summer time frame.

But I think if there is color I could add, it is more focused north/south, not just the East Coast, but more along the West Coast.

We're much smaller out west with north/south than we are out east, and it is certainly from Boston, New York, and Washington down into Florida.

But I think the highlights I would share would be to the Caribbean and the international markets across Mexico, North and South America and Central America, and it is really where I would add color and how I want you to be thinking about how we're looking at the future.

Okay and then just my second which sort of adds onto that.

You talk about zero growth or no growth in 2009.

I think you're planning to start service to Bogota.

I don't know if it is later this year or maybe it's going to be pushed back to 2009.

What when we think about city adds in 2009, even though you're talking about a no-growth plan, there are markets you have pulled out,or are in the process of pulling out.

Could we see new cities despite zero growth, could we see new cities in 2009?

I'm not saying on a net basis, but additional new dots on the JetBlue map?

Absolutely, Mike.

In fact, with Bogota we requested a deferral on the start-up of service just to hit the peak time of the year.

We'll see if impact we're granted that authority not unlike other airlines.

Philadelphia, over to Beijing and also Chicago to San Francisco, and over into [inaudible].

So I think we're optimistic that we'll be granted that delay.

But I think as we dial back the Transcons and as we look at opportunities, specifically say Kennedy under this new slot program that we have in place.

Granted that it sunsets in October of '09, but I think we're thinking it's going - - there will be a continuance in some fashion.

But you bet we're looking at new locations, whether it is tied into New York or whether it is tied into - - recently when we cut the ribbon on Orlando into markets that we currently fly to - - Cancun and Santa Domingo.

But cities like Bogota, I see us definitely opening new cities in '09.

Okay, very good.

Thank you.

Thanks, Mike.

Gentlemen, you have a question from the line of Jamie Baker of J.P.

Morgan.

Quite an introduction there.

Hi, guys.

At the end of the first quarter you had fair value of I think of $313 million or so on your option rate securities.

Just curious how much of that was actually used to secure the $110 million line of credit.

Also, any color as to the advance rate, the borrowing costs will be greatly appreciated.

Thanks, Jamie.

We used about two-thirds of the option rate securities to secure that line.

We're going to have more details on the exact terms of the line in our 10Q, but it is premarket rates, I think, on anything that we would borrow underneath it.

Okay.

And as a follow-up, what level of net aircraft sale proceeds are incorporated into the second half guidance?

Let me get back to you on that one, Jamie.

I don't have the number exactly in front of me.

Okay.

Thank you.

Thanks, Jamie.

Next in queue is Ray Neidl of Calyon Securities.

Yes, in more general terms your second equipments at E-190.

If fuel prices were to reverse and start going back up again, would it reach a point where that equipment type might become non-economical, uneconomical for your operations, or could you possibly decide to contract that out to a third party?

Good morning, Ray.

It is interesting to talk about fuel doing a 180 and going back up right from something that's just below 130.

It's just a new normal we're in.

I think - - let me go to the second question first.

We do not have any discussions across JetBlue about somebody else flying that airplane for us.

We believe that it makes sense to have our own crew members supporting the JetBlue experience, any fleet type that's part of our mix, and so that's how we're viewing the 190 on a go-forward basis.

I think with the fuel costs, first of all, to have that technology as part of our order book, an airplane that is roughly 575 gallons per hour of burn - - for 100 seats, it is certainly best in class as we're sitting here in today's environment with anything from the OEM's in a 100 seats type of class.

And on our ability to really deploy that airplane, and I think again to revenue manage, I really just want to take the opportunity to highlight Rick Zinney who head's up Revenue Management, Marty St.

George, Network Planning group and then Mark Powers with his work with the OEM's.

I think that airplane is a really important part of our tool kit on a go-forward basis.

Very confident with it.

Great.

And secondly, just in terms of partnerships, if you want to give us an update on what's going on there and, in particular, I guess Southwest and WestJet partnering up, do you think JetBlue would be a good third party to that arrangement?

I think with Southwest and WestJet it is not surprising at all to me where we're starting to see that a traditional low-cost carrier that tended to build their own market base where we're seeing that type of creativity.

And I would use the word - - I am excited about that kind of prospect, and I wouldn't draw conclusion that that's meaningful for us at this point in time, but I think those are like-type brands that this industry is moving into.

This next chapter if you will, WestJet customers connecting to Southwest.

I think that's a very interesting prospect for us as we look into the future.

Specific to what we're doing today, we're now into really - - into year three with Cape Air and as well as just closing the first quarter if you will of Aer Lingus.

And we're on target with the revenue plans that we were estimating as a result of both Cape and Aer Lingus.

So pleased with those results.

And a little color on Lufthansa and Swiss, I think we talk about Lufthansa a lot, but Swiss is wholly owned by Lufthansa and tremendous capacity into North America as well as specifically here in New York.

Actively working that relationship with the teams in Germany as well as here at JetBlue in the states.

Right now we're looking at '09 from the standpoint of revenue contribution, and I am very pleased that we're starting to actually see promotions out in the landscape.

And we've got promotion that's in play with JetBlue and Lufthansa if you purchase travel across the North Atlantic at the end of June and at the end of July where vouchers are given for future travel depending on how you purchase your ticket.

So we're starting to get the brands out there cooperatively which is exciting.

Great.

Thank you.

Thanks so much, Ray.

Next in queue is Kevin Crissey of UBS.

Good morning.

Good morning.

Can you talk about how the GDS, your participation in the GDS has helped or where - - you are in terms of fares to the GDS?

Sure, Kevin.

I think we're really pleased that we're in the GDS, and about 7% of our bookings are coming through the GDS.

And what we're seeing is something that looks like $35 to $45 higher average fare through the GDS.

So this is just one more way for us to penetrate the small, medium-sized business flier or nondiscretionary flier, not unlike we're doing with refundable fares and just being more business friendly if you will.

And that's certainly key to us as we take a look at the trough periods, and this product works in the discretionary markets, it will certainly work in the nondiscretionary markets as well.

Thank you.

And can you talk about your no furlough policy, and I understand that you're kind of a smaller airline relative to some of those that are laying off, but I think about an airline without unions and they're not having furloughs or layoffs, and those that have are.

So can you talk about that?

Sure.

We started the airline back in 2000, and I certainly won't go into that long of a story, but I think we looked at what business models - - what has driven failure if you will in the industry.

And the ability to create a model whereby you have trust in the organization, from those delivering the product at the front line, to the senior executives at the airline, building trust and just integrity and honestly and quality of life and taking care of one another.

That translates into a better product, that translates into productivity, efficiency, and I think there was a reason why we saw 2% improvement in fuel burn on a year-over-year basis through working with our team.

I think there is a reason why J.D.

Power for the fourth year bestowed best in class, so that is absolutely core, this relationship with our front line on a go-forward basis.

And regarding direct relationship, regarding unionized or nonunionized, I think at the end of the day a directed relationship with our staff so we're welcome in the cockpit and break rooms and at crew member meetings.

That is truly a differential as we take a look at not just our success today but our plans in the future.

Thank you very much.

Thank you.

And, gentlemen, your final question comes from Daniel Mckenzie of Credit Suisse.

Good morning.

Thanks.

Good morning.

JetBlue is the first to link capacity cuts with a specific PRASM improvement, and I wonder if you can provide some perspective about how much of the increase is tied to a reduction in the worst PRASM flying versus the amount say tied to revenue initiatives?

You know, Dan, I probably would take a look at those markets that from your comment worst PRASM type of a market that we have, and it really is difficult.

We make decisions such as we announced today with Ontario, we've been flying there for eight years.

Ontario, Nashville,Tucson, Columbus, we didn't open LAX.

That wasn't the right time to open a new market.

So clearly these decisions are made on the fact that - - where are we maturing on a month over month, quarter over quarter basis, whatever the case might to be offset the new normal.

And by definition what we're seeing across the rest of the airline is we believe that everything else is on track to work as we're looking at this new normal of their strategic importance to it.

So I think that to link if you will what we're doing with capacity reductions and PRASM and how we balance ancillary - - it's all in.

We're looking certainly at the other revenues, by employment, by market, as well as what we're seeing with that PRASM improvement, what's happening with the competitive landscape in that market, and then we make a decision.

And so there is a lot of science involved with it, and this is again where we're quite optimistic about what happens in the rest of the industry and be prepared to seize upon these opportunities, and we'll do so.

So it is really how we're looking at the market, Dan, the network.

I see.

Okay.

And then just quickly secondly here, wonder if you can provide some perspective about the competitive/revenue dynamic in the markets you're [inaudible] and I guess in particular given the - - I think you used pardon me the E-190's.

Primarily the lattice, and I am wonder if the deferral of the 190 suggests that you have any concerns about latticing the network in general.

No, we don't, Dan.

We're pleased with what we're seeing with latticing the network and whether it's what we affectionately call the over flies or the under flies here that aren't making their way through Kennedy.

So the recent announcement this week with Richmond down to Orlando, I should say last week, Richmond to Orlando, we're pleased with what we're seeing with that latticing.

The color that I would add to today's announcement with the Embraer goes right back to our goal is liquidity, preservation of cash, and we have a great business relationship with Embraer.

And let's take advantage of being able to predict what type of growth we want to see or not over the course of the near term as opposed to having to rely on aircraft sales.

Okay.

Great.

Thanks.

I appreciate it.

Thanks, Dan.

Have a good day.

This concludes our session with investors and analysts.

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

Great.

Thank you very much.

Thank you very much, operator.

In closing there is no doubt that many challenges lie ahead for JetBlue.

Fortunately, we believe our airline is well prepared for this environment.

We have a strong cash position and award-winning product with exceptional crew members and a team that's willing to make the difficult, but necessary, decisions in response to these unprecedented challenges.

Thanks, everyone, for joining us today on this call.

Have a great day.

Ladies and gentlemen, that concludes our conference.

You may now disconnect.