JetBlue Airways Corp (JBLU) 2009 Q2 法說會逐字稿

Welcome to JetBlue Airways corporation's second quarter 2009 earnings conference call.

Today's call is being recorded.

We have on the 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 materially from those expressed in the forward-looking statements due to many factors, and therefore investors should not place undue reliance on these statements.

For additional information concerning factors that could cause statements to differ from the forward-looking statements, please refer to the Company's annual and periodic reports filed with the Securities and Exchange Commission.

This call also references non-GAAP results.

You can find a reconciliation of those non-GAAP results in JetBlue's earnings press conference release on the Investor Relations section of the Company's website at www.jetblue.com.

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

Dave Barger.

Please go ahead, sir.

Yes, thank you, Anthony.

Good morning to everyone, and thank you for joining us today.

In the face of a very challenging economic environment, we're pleased to report our second consecutive quarterly profit.

We reported net income of $20 million or earnings of $0.07 per diluted share.

Included in these results is a $6 million gain related to the valuation of our auction rate securities.

Excluding this gain, our earnings for the quarter would have been $14 million or $0.05 per diluted share.

This compares to a pretax loss of $13 million in the year ago quarter.

At a time when we are facing one of the worst economic recessions in history, reporting a profit in two consecutive quarters is a significant accomplishment.

The recession is clearly having a major impact on the demand for air travel.

Our unit revenues for the quarter were down 4% versus last year, and total revenues for the quarter were down 6% year-over-year.

Fortunately, the actions we have taken over the past couple of years, including aggressive actions to manage our capacity and preserve liquidity, have prepared us to weather these challenges.

Despite challenging credit markets, we raised over $300 million in new liquidity in the second quarter.

This, coupled with cash from operations and reduced capital expenditures, drove our cash balance to $880 million as of June 30th.

As a result, we believe we are in a strong position to navigate the current economic environment.

We've also benefited from lower fuel prices, as the hedges we put in place last year when fuel prices were rising are now rolling off.

During the second quarter we paid about $140 million less for fuel than we paid during the same period last year, driving a 13% decline in our operating expenses.

As a result, our operating income increased $55 million year-over-year.

JetBlue crew members continue to work together to run a terrific operation.

For the first six months of the year, our on-time performance has improved by more than 3 points versus last year.

As a testament to the efforts of our crew members, we recently achieved the number one customer service ranking among low-cost carriers from J.D.

Power for the fifth year in a row.

This is an extraordinary accomplishment.

I'd like to take this opportunity to thank our 12,000 crew members for their hard work and dedication in delivering the JetBlue experience to our customers.

While the industry continues to face significant challenges, we've demonstrated the ability to adapt quickly on multiple fronts.

Take Mexico, for example, where we moved quickly to reduce capacity as H1N1 developed, as we were implementing immediate tactical capacity cuts within a week of the outbreak, and redeploying aircraft and flight crews to other parts of our network with minimal cost impact.

I should note this could not have been accomplished without the solid working relationship we have with our crew members.

In addition, our fleet of Airbus A320s and Embraer 190s has provided flexibility in scheduling to better match capacity with demand in certain markets.

Our strong liquidity position has also helped us seize market opportunities, particularly in the Caribbean.

Our continued focus on liquidity allows us to not only be nimble but also to build financial flexibility.

As Ed will discuss in more detail, as fuel prices began to rise during the second quarter we purchased forward caps to protect against future fuel price volatility.

Our disciplined approach to capacity has played a key role in our ability to successfully adapt to changing conditions.

During the past couple of years, we've restructured our fleet plan with the sale, lease and deferral of over 80 aircraft.

As a result, we have removed significant capacity from our network.

During the first half of this year, our capacity was down 4% year-over-year.

We took delivery of six Embraer 190s and 3 Airbus A320s during the first half of the year, and do not have any more deliveries scheduled for the rest of the year.

We still expect essentially flat ASM growth in 2009 versus 2008.

Looking beyond 2009, we continue to be disciplined about managing our capacity.

Earlier this month, we deferred the delivery of three airbus A320s from 2010 to 2011.

We believe this is prudent, given the uncertainty in the economic environment and the tightening of the credit markets.

Taking fewer aircraft will also help us keep our capital expenditures at modest levels, a critical component of improved free cash flow.

While we continue to be disciplined when it comes to capacity, we want to ensure we're poised for success in the long run.

With that in mind, we've made several strategic additions to our markets this year, particularly in the Caribbean and Latin America.

In the first quarter we began new service to Bogota, Columbia, and San Jose, Costa Rica, and in May we began new service to Montego Bay, Jamaica.

We have been particularly pleased with the performance of Montego Bay, which has been our most successful market launch, in terms of a single route's path to profitability.

Building on our continued success in the Caribbean, as we previously announced, we plan to commence new service in the fall to three other Caribbean destinations, Kingston, Jamaica, Saint Lucia and Barbados.

In September and October we expect our Caribbean capacity will be up over 50% year-over-year, largely due to the launch of these new markets, which will add a significant amount of ASMs to our network on a year-over-year basis.

By comparison, we expect ASM growth in the rest of our network to be flat during September and October.

Given the relative strength of our Caribbean markets, we believe it is prudent to continue to pursue opportunities there.

We also continue to focus on strengthening our core network; of course, New York, Boston, Florida and the West Coast.

During the second quarter we began new service at Los Angeles International Airport, LAX, and also continue to grow our Boston operation.

We look forward to the launch of our new service between Boston and Baltimore in September, further solidifying our position as the largest carrier in Boston in terms of destinations served.

For the third quarter we expect our capacity to be up between 1% and 3% year-over-year, and we expect our fourth quarter capacity to be up between 3% and 5% year-over-year.

Our disciplined capacity approach has been somewhat masked by the capacity reductions we made between September and December of last year.

When compared to the second half of 2007, we expect our system capacity in the second half of this year will be down 2%.

Now turning to revenue.

During the second quarter our passenger revenue per available seat mile, or PRASM, declined 5.7% year-over-year.

Yield during the second quarter was down 4%, and load factor was down 1.1 points on 2% less capacity.

These results were better than our expectations as outlined in the guidance we provided at the end of May, due to [load in strength] during the last two weeks of June, which drove higher than expected yield.

We've continued to outperform our peers in unit revenue performance on a year-over-year basis.

This PRASM outperformance has been driven in part by limited exposure to premium business traffic, particularly Trans-Atlantic and Pacific traffic, and our strong visiting friends and relatives, or VFR, traffic in our Caribbean markets, which appears to be less price-sensitive.

As noted in my earlier comments, we continue to be very pleased with the performance of our Caribbean and international markets.

Sequentially, PRASM improved by 4% in April, and declined by 10% in May and 12% in June.

We experienced relative yield in [low factor] strength in April due to the Easter holiday.

May is historically a trough period for us, and the environment became more challenging with the outbreak of H1N1 at the beginning of the month.

While Mexico represented less than 2% of our ASMs, and we estimate that the impact of H1N1 reduced second quarter revenue in Mexico by approximately $5 million, H1N1 had a negative effect on demand throughout our network.

The good news is that in June we saw booking trends start to pick back up again, as the booking curve became even more compressed during the second quarter.

As everyone is aware, the pricing environment has remained relatively weak as domestic airfares have been on sale throughout the summer.

While we have tactically raised fares when we've had the opportunity to do so, including a system-wide fare increase last week, we have continued to see negative pressure on yields during both peak and non-peak travel periods.

As a result of the weak pricing environment, our average fare during the second quarter declined approximately 8% year-over-year.

While we faced pressure on the pricing front, we continue to be encouraged by the success of our ancillary revenue initiatives.

When we combined all of our ancillary revenue reported in the passenger revenue line with those in the other revenue line, our total ancillary revenue increased about 10% year-over-year in the second quarter to about $17.50 per passenger.

This compares to about $16 per passenger in the year ago period.

Our goal is to provide customers with options to customize their travel experience according to what they value most, and we continue to look for opportunities to grow our ancillary revenue streams.

Our "Even more leg room" offering, for example, continues to be very well received by our customers.

As a result, we changed the "Even more leg room" pricing structure during the second quarter to better match demand, increasing the long-haul price from $30 to $40, and the medium-haul price from $20 to $25.

We also increased several other fees, including raising the second check bag fee from $20 to $30.

Many of our ancillary revenue initiatives have shown less sensitivity to the weakening economic environment; thus, with relatively stable load factors our ancillary revenue growth has helped offset some of the fare weakness we have experienced.

We believe the JetBlue brand is well positioned in this recessionary environment.

We have been very pleased with the performance of our "More" brand campaign, which highlights our unique value position, including more leg room, more free entertainment and more friendly service.

We believe our unique value proposition differentiates JetBlue within the industry, and we remain committed to building our brand on an unrivaled customer experience.

Forward bookings continue to be characterized by tremendous volatility, resulting in limited ability to make reliable projections.

However, we have been encouraged by recent bookings trends, and we are cautiously optimistic about the rest of the year.

For July, we expect a modest improvement in year-over-year PRASM performance compared to June.

Looking at August, load factors are holding up relatively well as we're seeing demand move in closer to departure for the summer peak travel period.

We continue, however, to face yield pressures.

In addition, pricing comparisons are much tougher versus the summer of 2008, when we had the benefit of fuel costs-driven fare increases.

We have limited visibility beyond August, and September is historically a seasonal weak month for JetBlue.

Moreover, sale activity for the fall has already began pressuring yields.

Our continued focus on ancillary revenues, which we currently expect to increase by about 17% year-over-year in 2009, should help RASM.

Thus, we are expecting PRASM to decline 8% to 11% in the third quarter, and RASM to decline between 7% and 10% in the same period.

While we certainly face a challenging revenue environment moving forward, we believe we will continue to perform better than our peers on a year-over-year basis.

We believe we are well positioned in this environment with a superior product, a strong brand, limited exposures to declines in business traffic, and somewhat inelastic VFR traffic, particularly in the Caribbean.

As a result, we are maintaining our full year revenue projections.

Specifically, for the full year we expect PRASM to decline between 4% and 7%, and RASM to decline between 2% and 5%.

Our strong balance sheet and focus on liquidity allows us to not only navigate the current environment, but also to build for the future.

We view the economic downturn an as opportunity to selectively invest in initiatives that promote growth.

Despite the economic challenges, we continue to make prudent investments in our business and make advancements on the technology front.

The transition to our new reservation system, Sabre, is on track for implementation in the first quarter of 2010, and progressing quickly.

During the second quarter, we completed the first in a series of milestones with the implementation of the [Air Price] pricing system.

This was an important step as we worked to overhaul and upgrade the way we do business with Sabre's advanced technology.

This investment in our new reservation system, among others, reflects our confidence in our long-term strategy.

At the same time, however, we're keenly focused on maintaining our low-cost discipline as we continue to look for ways to further reduce costs.

Before closing, I would like to provide a brief update on our relationship with Lufthansa.

We are very pleased that Lufthansa participated in our recent equity offering to maintain their 15.6% ownership interest, and we are working diligently to finalize the details of our commercial relationship.

As we look at the rest of the year, there is great uncertainty and we will continue to face new challenges.

The operating environment can change very quickly, whether it is the unprecedented rise in the price of fuel last year or the decline in revenue this year.

While we continue to anticipate a tough environment, we believe we are well-positioned to succeed.

The hard work we have done in recent years to bolster liquidity and slow our growth has better prepared us to face these challenging times.

Despite the very difficult economic environment, we continue to expect to earn a profit in every quarter of 2009.

Most importantly, we remain focused on running a safe, reliable operation, and delivering exceptional service to our customers.

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

Thanks, Dave.

Good morning, and again thank you all for joining us.

As Dave said, we are very please to earn our second consecutive quarterly profit despite the challenges emanating from the recession.

Our second quarter results were certainly impacted by the effects of the current economic conditions, as overall demand for air travel continue to be pressured.

While our total revenues declined 6% or $52 million year-over-year, JetBlue's operating expenses declined by $107 million, reflecting the impact of significantly lower fuel prices.

We ended the quarter with $880 million in cash and cash equivalents, or 27% of our trailing 12 months' revenue.

We believe this percent is among the strongest liquidity positions of the major US carriers.

Included in this cash balance is approximately $300 million in net proceeds from the combined convertible debt offering and equity we issued in June.

We continue to believe that liquidity and financial flexibility are paramount in today's uncertain environment.

Not included in our cash balance as of June 30th is $227 million in auction rate securities at fair market value, which are reflected as non-current assets on our balance sheet.

Our quarterly results include a $6 million gain related to valuation of these securities.

As we have discussed on prior calls, we have secured an $84 million line of credit from Citigroup and a $56 million loan from UBS, which are collateralized by these securities.

During the second quarter we repaid $74 million we had previously drawn on the Citi line of credit, so that the -- so the entire $84 million is currently available and is not included in our cash balance.

The proceeds from the UBS loan are included in our quarter-end cash balance.

During the second quarter, we used a portion of our liquidity to repurchase $3 million of our convertible notes that will most likely be put to us in March 2010.

You recall these notes had an original principal balance of $250 million.

We also repurchased an additional $16 million of these notes in July, and as a result of these two repurchases we have further reduced the outstanding principal amount on the issue to $158 million.

In addition to extinguishing debt at a discount, these repurchases will save future interest expense on the retired debt amount.

Turning to the fleet, JetBlue ended the quarter with 151 aircraft.

During the second quarter we took delivery of four aircraft, which were financed using a debt facility provided by a commercial bank.

We do not have any more aircraft deliveries planned for the rest of the year.

However, we recently extended the lease of one of our A320s, which was originally scheduled for return to the lessor at the end of this year.

At the same time, we extended the lease for one of our A320s, which had been scheduled for return to the same lessor in March of 2010.

In addition, as Dave mentioned, we have deferred the delivery of three A320s originally scheduled for 2010 to 2011.

This deferral will help us better manage our capacity, reduce our cash requirements in the near term, and assist with meeting our stated goal of delivering improved free cash flow.

We currently expect total CapEx to be around $395 million for 2009, which is $105 million lower than our guidance at the beginning of the year.

During the second quarter we spent $25 million in non-aircraft CapEx.

We anticipate approximately $40 million of non-aircraft CapEx during the third quarter, and $45 million for the fourth quarter.

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

Lower fuel prices helped to mitigate some of the revenue weakness we experienced during the second quarter.

Although fuel prices have risen since earlier this year, they are still significantly lower than last year at this time.

Our total fuel expense in the second quarter was approximately $140 million lower than the same period of last year.

For the second quarter, our average fuel price per gallon, including the impact of hedges, was $1.97, which was $1.20 lower than what we averaged for the same period last year.

Our unhedged fuel price for the quarter was $1.61 per gallon.

As discussed previously, we effectively unwound our 2009 swap contracts in the fourth quarter of 2008, due in large part to concerns about the impact of cash collateral requirements on our liquidity.

At the end of last year we had $117 million in cash collateral posted with our fuel hedge counterparties, relating to these 2009 contracts.

Most of these contracts were settled during the first half of this year, resulting in a cash collateral balance of only $14 million as of June 30th.

While fuel hedge losses had a negative impact on our costs during the second quarter, these losses had no cash impact during the quarter, as we essentially prepaid a portion of our fuel expense in 2008.

Assuming fuel prices remain at current levels, we expect to have minimal cash collateral posted with our counterparties at the end of the third quarter.

Thus, the challenges we face with respect to the fuel hedges we entered into last year have largely dissipated.

During the second quarter we began to rebuild our fuel hedge portfolio, using primarily out of the money crude call options or caps, with protections beginning at $83 a barrel in the fourth quarter of 2009, and slightly higher prices in 2010.

We entered into caps representing approximately 10% of our projected fuel consumption for the fourth quarter of 2009 and full-year 2010.

Call options give us the flexibility to continue to take advantage of lower fuel prices, while providing protection against a significant increase in fuel prices.

While these cap contracts required an initial cash premium, they present no additional exposure to cash collateral requirements.

We also entered into additional heating oil collars in July, representing 6% of our projected fourth quarter 2009 fuel consumption and 5% of our projected consumption for 2010.

As a result, approximately 15% of our fuel consumption in the second half of this year is hedged with a combination of heating oil collars and crude oil caps.

The underlying details of these positions are more specifically described in our investor update, which we file later today.

We expect to pay $2.03 per gallon for jet fuel in the third quarter, including a negative hedge impact of $0.22 per gallon.

For the full year we expect to pay $1.97 per gallon, including a negative hedge impact of about $0.30 per gallon.

These prices exclude taxes, transportation and in-flight fees.

Going forward, we will continue to closely monitor the fuel markets, and plan to enter into additional contracts with a mix of products as market opportunities arise.

While fuel prices drove our unit costs down in the second quarter by 11% year-over-year, our non-fuel unit costs continue to be pressured by our slower growth.

Excluding fuel, our second quarter unit costs rose by about 10% year-over-year.

These results were better than our expectations as outlined in our guidance we provided last quarter, reflecting our companywide efforts to reduce costs.

In addition, we recognized approximately $11 million in tax incentives during the second quarter, which, due to their nature, were credited to other operating expenses.

Our maintenance expense for the quarter was also lower than expected.

The majority of year-over-year increase to [ex-fuel] CASM can be attributed to our capacity reductions during the second quarter.

In addition, our [transcontinental] capacity reductions, which declined 25% year-over-year, drove a 6% shorter average stage length during the second quarter.

Salaries, wages and benefits increased roughly 16% per ASM on a year-over-year basis, driven primarily by wage increases.

In addition, our no furlough policy has continued to pressure our unit costs.

However, we continue to fervently believe our commitment to a no furlough policy differentiates JetBlue from the industry, bolsters our crew member morale, and thus contributes to our long-term shareholder value.

Landing fees and other rents increased 10% year-over-year on a unit cost basis, due to 5% more departures versus 2008, and higher landing fee rates.

Depreciation expense increased about 25% year-over-year during the second quarter on a unit cost basis.

This increase was driven in large part by the new terminal at JFK, which we are considered the owner of for accounting purposes.

In addition a larger percentage of our fleet is owned, which also drove a portion of the increase.

Other operating expenses were relatively flat year-over-year on a unit cost basis, reflecting our continued focus on minimizing discretionary spending.

Our other operating expenses in the second quarter of 2008 included $13 million in gains on the sale of aircraft, which were offset in the second quarter of 2009 by $11 million in tax incentives.

Moving below the line, interest expense decreased 14% year-over-year, or $7 million, due primarily to a decrease in interest rates.

Interest income and other decreased by 9% or $1 million, due in part to lower interest rates earned on our investments and a lower average investment balance.

We had very manageable debt maturities of approximately $35 million in the third quarter, and $160 million for the full year of 2009; significantly lower than our 2008 debt repayments, which were in excess of $700 million.

In the absence of opportunistic debt prepayments, we expect to end the year with a cash balance as a percentage of trailing 12 months' revenue in the range of 25% to 30%.

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

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

Let me share a few of the highlights.

We expect our third quarter ASMs to increase between 1% and 3% year-over-year, and to remain flat-- essentially flat for the full year.

While we are encouraged by recent booking trends, we continue to face significant pressure on yields.

As a result, we currently expect a year-over-year PRASM decline of between 8% and 11% in the third quarter.

With limited visibility beyond August, our full year outlook remains cautious.

We currently expect PRASM for the full year to decrease between 4% and 7%.

Our ancillary revenue initiatives continue to help offset some of the fare weaknesses we're experiencing.

We expect our year-over-year RASM to increase between 7% and 10% during the third quarter, and to decline between 2% and 5% for the full year.

We expect lower fuel expense to continue to drive significant year-over-year unit cost improvement.

For the third quarter we expect CASM to decline between 12% and 14%, and for the full-year we expect CASM to be down between 8% and 10%.

During the first half of the year, our non-fuel unit cost performance has been slightly better than our initial projections.

Accordingly, we have revised our full year unit cost guidance downward to previous levels -- from previous levels.

We now expect full-year ex-fuel CASM to increase between 8% and 10%.

We anticipate a 9% to 11% year-over-year increase in ex-fuel CASM during the third quarter.

This increase is due to part to our expected decline in stage length, which we anticipate to be down 5% year-over-year during the third quarter.

Adjusted for stage length, we expect our third quarter CASM excluding fuel to be up between 7% and 9% year-over-year.

In addition, maintenance expense will continue to be pressured in the third quarter, as our fleet ages and a higher percentage of our E190s undergo heavy maintenance checks.

In closing, let me thank all our crew members for all their hard work.

Despite a tough economic environment, our results in the first half of this year have improved significantly versus last year, and we continue to expect to earn a profit every quarter this year.

This certainly would not be possible without the dedication of our outstanding crew members.

With that, we're happy to take questions.

(Operator Instructions)

Our first question comes from the line of Mike Linenberg with Banc of America.

Please go ahead.

Hey, good morning, everyone.

Two questions here.

The auction rate securities, the $227 million fair value, what is the amount of that at par?

Mike, the par value of those are $274 million.

Okay.

Okay.

And then -- thanks.

And then just my second question, and maybe this is just to Dave, you know, you guys entered into the LAX market, and I was just curious, you know, how that -- how that was going, and, you know, I know it is a crowded market.

You know, any color on that would be great.

Thanks.

Yes, sure.

Good morning, Mike.

Thanks for your questions.

I think LAX we would really really describe as very, very pleased with the launch.

It's -- in fact, in the full month of June it was one of the strongest load factors that we had across the system, and not just as a benefit of the introductory fares, which we have had fun with, with the Route 105 fare, $105 fare structure that we had in place.

Very pleased with LAX and the L.A.

Basin strategy that we currently have.

And LAX, of course, is New York and Boston today, but a really strong launch, Mike.

One last one because you brought up about the strong load factors in the L.A.

market and it had me thinking, you know, when you look at your loads, I mean, you clearly have gone from being a very high-load carrier to, you know, even in this quarter, you look at your loads versus everybody else -- and maybe it's just a function of the fact that, you know, you're not in some of these big international markets where you see 95%, 100%-type loads.

But when you think about the ancillaries, and you ran through a bunch of ancillaries, and that number dries up, do you -- you know, is there the potential there for, you know, a change?

It is not a philosophical change, but where you start working, you know, to try to get more people on the airplane.

I mean, any color on that, you know, where your thinking is?

Yes, it's -- and you're right, Mike, the first chapter was one of load factor, it was trial, and then obviously much more offer an overall RASM performance type of philosophy.

I think it is fair to say, though, with Robin Hayes, and his team, and we have Dennis Corgan now in revenue management, and Rick Zeni previously.

This whole approach now to -- not just to load factor but also the yield, and much more sophistication, I think, that's taking place with revenue management.

And, I mean, LAX was one of these examples of just real strong loads.

We talked about Montego bay as well, of course it's on the strength of the summer.

So I think you'll continue to see a focus of the combination of yield and load factor, and obviously if we're trialing a new market, or whatever the competitive landscape may be, there may be a nuance from region to region, but really pleased.

I want to just make a comment on the ancillary revenue structure, as well.

We are going to continue that focus.

We're pleased with the 10% year-over-year improvement in the second quarter.

And, by the way, things like change fees, we saw less of them just because you start to -- you have the closer-in booking curve that we've seen.

So pretty interesting effect of what's happening in the economy.

Okay.

Very good.

A nice quarter.

Thank you.

Thanks, Mike.

Our next question comes from Jamie Baker of JPMorgan.

Please go ahead.

Good morning, David.

I'm curious, first, if you believe that any distressed industry assets might come up for sale over the next year, and if -- well, depending on our answer, whether you believe your current liquidity gives you adequate firepower to bid on any assets, or if you would imagine having to tap the market again?

Good morning, Jamie.

I think that, you know, as we look at the landscape, we remain interested in, first of all, having a strong balance sheet so that we have the flexibility if some of these assets could become available.

I characterize assets as slots or gates in key airports and, you know, so it's no secret we've talked about it in the past.

Our interest in places like Washington Reagan National Airport.

And so we'll see what plays.

I think that we feel good about the balance sheet strength.

Ed, your thoughts on the ability to -- let's say what if it happens along those lines?

Good morning, Jamie.

You know, that was one of our reasons for wanting to build up some liquidity last quarter.

I mean one was, you know, looking towards 2010 and the put of those -- convertible debt.

But the second was to build up that liquidity position, so as industry assets became available we could play in that space.

So I think we're very comfortable with the liquidity that we have today.

Excellent.

Gentlemen, I appreciate the color.

Take care.

You, too, Jamie.

Our next question comes from William Greene of Morgan Stanley.

Please go ahead.

I wonder if we could talk a little bit more about the capacity outlook.

Given the RASM outlook that you provided, I guess I was a little surprised, or it strikes me maybe as a little bit early to begin growing capacity.

I also wonder if we could talk a little bit about 2010, and maybe should we extrapolate the second half growth rates into 2010 as just a preliminary outlook for capacity?

Sure, good morning, Bill.

I think 2010 is a little bit early.

I wouldn't suggest taking a look at the back half of 2009 as an indicator of 2010.

It's a -- we discussed aircraft deferrals, and also really a renewal of a couple of leases.

I mean, it's early.

We haven't tumbled -- finalized our 2010 plan.

I think we can get a bit more surgical in the back half of this year.

It's a -- the eight markets that we'll be opening this year, six of them are in the Caribbean and the international basin, and we have four more markets that we're opening in the second semester, Baltimore and then the three down in the Caribbean.

And so if you take a look at -- we were -- we ripped ASMs really hard last year, specifically in the September and the October timeframe.

So I think it's a little bit of a -- it is not an apples-to-apples comparison, hence the color on the 2007 comparison.

In fact when you take a look at just September and October, '09 versus '08, we take a look at, you know, the amount of capacity that we pulled, and in the Caribbean ads that we're layering in there, I mean ASMs just in those months alone were up 7% to 8% versus 2008.

By the way, the new markets again, and this is also the run rate of the markets that we opened earlier this year that are being reflected later in the year.

So we feel comfortable in terms of what we're doing with our growth and the number of cities that we're opening.

All that, over the course of the year, relatively flat from an ASM perspective.

So are you suggesting the RASM outlook for the second half includes a -- some sort of degradation in RASM due to new markets?

No, I mean it's actually -- as we look at -- as we take a look at full-year guidance, and then specifically third-year guidance, you can really infer that there is somewhat of a strength in Q4.

It's probably a too strong of a word to use, but relative strength in the fourth quarter versus third quarter, for a couple of different reasons.

One is, for example, Montego Bay, month one, one of the best routes to maturity and profitability that we've ever seen in the Company.

We think that we're seeing that really across the Caribbean.

That's why, again, in the second quarter, 23% of our ASMs were down -- dedicated to that part of the world.

We don't have reliance on the business customer.

We're starting to see trial of the business customer.

The VFR traffic, it's a -- it's not inelastic, but I'll tell you it has been really strong in terms of the Caribbean markets specifically.

So as we take a look at all that, and we have been rolling it into our forecasting, again, being conservative, we actually see some improvement into the fourth quarter versus the third quarter.

But it is still -- it's not a perfect science right now, because bookings are so close in.

Okay.

Can I just, for clarification on your July comments about RASM, you said modestly better than June, but I don't think we have the base.

So where we are to date here in July, a rough sort of estimate of where the RASM looks year-over-year?

Yes, I think also in the second quarter because we had the benefit of Easter, and of course year-to-year, right, airlines are like just how you look at the Easter holiday, but that positive that we had in April, down 10% in the May timeframe year-over-year, down 12% into the June timeframe.

And again, we're closing out the month but, yes, relative improvement to June.

I can't put a number onto it, Bill, but my sense is that we could see something that looks like a return to single digits, though.

Okay.

Thanks for the help.

You're welcome.

Thanks, Bill.

Our next question comes from Jim Parker of Raymond James.

Please go ahead.

Good morning, Dave and Ed.

Good morning, Jim.

Explain to me, you're suggesting -- I believe you mentioned that you've raised fares, and some other airlines have done the same thing, but at the same thing you're more pessimistic, I think, regarding the revenue outlook.

So I need a little enlightenment.

It's like, why bother if the market won't bear it; why are you raising fares?

Jim, I think the -- we've been involved in some of the fare increases in the second quarter.

We led one.

Maybe a way to think about it could be the ability to -- in some of these markets which have been quite strong, it's the ability to really start to raise the upper level of the fare structure.

And, you know, tactically the ability to do that has rewarded us quite well in some of these key markets.

I mean, you start to take a look at just some of the other carrier pull-down, relatively speaking, year-over-year, again I allude to the Caribbean international markets, there is quite a bit of capacity that is no longer flying in that part of the world.

We don't want to be out there as a gouge model airline, but there has been some real interesting tactical opportunities on offer upper most likely, you know, on the upper end of the fare structure.

So you're suggesting -- you're not raising fares across-the-board, you're just doing on the upper end in certain markets, because the net bottom line is that your revenue outlook is more pessimistic?

We had that one fare structure that was across-the-board.

Actually, as we're taking a look at the revenue -- the revenue environment, Jim, and again it's difficult because there is -- we just don't have that visibility, as all the airlines don't really have, into the future, but as we take a look at PRASM guidance Q3 versus full-year, you can start to run the math in your model and, you know, I think we're starting to see less -- less impact of H1N1.

I think our business model with the relatively resilient VFR traffic, we don't have the reliance on the business customer, we're getting trial.

So I think that we're actually seeing, as you run -- as you compare those numbers, you know, relative -- relatively speaking a little bit more strength, and again it is a tough word to use in this economy and -- as we close the year, versus the current quarter that we're in.

Okay.

Thank you.

Thank you, Jim.

Our next question comes from Bob McAdoo of Avondale Partners.

Please go ahead.

Hi, guys.

As I try to understand the guidance, and you talk about costs in this quarter being up 9% to 11%, and I go back and I apply that to last year, and then I look at sequentially what that means going from second quarter to third quarter, it looks like it takes the CASM ex-fuel from like 6.12 up to 6.56.

I'm wondering, sequentially that is like a 7% or 8% increase sequentially.

I'm curious as to what is going on in the third quarter versus the second quarter costwise?

Where would the cost increases be, or did I do a calculation wrong?

Morning, Bob.

I don't think it's necessarily that significant of an increase quarter-over-quarter.

One of the things that we had in third quarter of last year was a $7 million tax credit that was accounted for, and other operating expenses.

So that may be one of the inputs that makes maybe third quarter look a little bit higher.

You know, our stage length is going to continue to be substantially less than last year, so that is something you have to take into consideration as well.

And our departures are up quite a bit year-over-year.

But in terms of going from second quarter this year to third quarter this year, you are saying there really shouldn't be that much difference in terms of unit cost?

What you're saying is it may be that I have to -- I didn't take into account that tax credit last year, is that what you're saying?

I think you probably should take into account that tax credit from last year, but I don't think there is anything specific that I can mention that is going on between the second and third quarter.

Okay.

All right.

I'll go back and take another look.

That's all I had.

Thanks.

Thanks, Bob.

Our next question comes from Gary Chase of Barclays Capital.

Please go ahead.

Good morning, everybody.

Good morning, Gary.

You know, since you were just talking about it I wanted to see if I could follow up on Bob's question for a second there.

And I don't know his exact numbers, but we share the perception that, you know, the cost numbers at least, you've been performing at a much -- better level than what, you know, you're guiding to, so that the -- and from our perspective, too, I mean, shouldn't the cost comps start to get easier?

Because last year at this time, you know, as you noted in some of your other remarks about capacity, you did start to pull the network down a bit.

So is there any color that either explains why the -- you know, the first and second quarters were lighter on cost, or why the third and fourth might be more -- or is that just conservatism in the guidance?

Gary, I think I would probably say that it was conservatism in the guidance.

You know, we continue to, you know, take a look into the future on an expense basis, and consider some of our costs as investments into the future, and I don't think that there is any significant difference between the two.

You know, the one thing that's a little bit unpredictable is the timing of some of our maintenance.

And so while that may shift from quarter to quarter, on a full-year basis I think we're fairly comfortable with our guidance.

And, Gary, just if I may add, as I take a look at the different pieces that are moving within -- within our structure as well, there is less capacity, specific in the second quarter, again, flat over the course of the year.

But we have the stage length decrease.

We are up departures 5%.

And we also saw, interestingly enough, this improvement in on-time performance, which is, especially being based in New York and, you know, how that extrapolates whether it is fuel burn -- our relative fuel burn on a -- the aggregated amount on a year-over-year basis in Q2 was relatively flat, but our departures are up 5%.

Which is interesting, because those are more inefficient departures, or should be, because they're short haul.

So there's quite a few pieces that are in play there as well.

Even when airplanes arrive earlier, crew costs, et cetera, as it makes its way through the model -- by the way, I'm not suggesting that the New York airspace is anywhere near fixed, but it is interesting to see the on-time performance up three points year-over-year in the first semester.

I think our team's operational integrity efforts, and the new terminal at Kennedy, are really, really helping us out a great deal.

Just as an editorial, I'm not observing New York airspace as totally fixed, either.

But we do think, while it is probably never going to be totally fixed, that is a significant source of future savings, or potentially significant and, you know, since you mentioned it, I mean, do you think that's going to be sustainable, or do you think there's -- you know, is there something unique?

As somebody who lives here, I would say there's been plenty of gray and cloudy and rainy days.

So it hasn't been the weather.

Yes, which is -- you're right, one of the wettest Junes ever, for those on the call who live in different geography, along the East Coast, and do I think it is sustainable?

I think that we're going to continue to see the right focus out of Washington, the Port Authority, I think the carriers working collaboratively.

Maybe a little bit of color there.

I think it's nice to see an administration that is not looking to auction slots, so we're not having to fight those battles.

With Secretary LaHood and FA Administrator Babbitt [calling] this focus on New York, my sense is that there is good focus that is happening with the FAA.

I think collaboratively speaking, no secret, the runway -- the long runway in New York will be closed for four months next year, from March 1st to the end of June, and the ability to work collaboratively across the airport community I think is a real positive signal.

So I think there is a combination of just small victories, maybe I'll call them, that are very helpful.

I'll tell you what, though, Gary, Terminal 5 is so helpful.

I mean if we are running off schedule, the ground delay program, or there are delay programs in place down in Florida with thunderstorms, wherever it might be, the ability to -- not just the customer experience, to gate the airplane, to arrive the airplane, to have an airplane in the penalty box.

That entire side of the airport as a result of the investment in T5, I this is repeatedly -- between Terminal 4, 5, 6 -- previously 6 and 7, even over to Terminal 8, has really been helpful to our operation.

Okay.

We'll probably follow up a bit more off-line.

Just lastly, you know, I think you answered this, it doesn't feel to us like your guidance implies revenue erosion.

And I just wanted to make sure that -- you know, I realize the comps get worse, but you're also up against a much tougher set of comparisons in the third and fourth quarter.

To us it actually looks like the underlying baseline here is improving just a little bit in order for you to get from your third quarter -- second to third and then third to fourth quarter.

Is that a fair assessment, or do you think it's more conservative than that?

I think it's a fair assessment, Gary.

In fact, again, the fourth quarter comparisons start to get a little bit more easier, if you will, only from a revenue -- you know, we started to see the degradation in revenue at the end of last year into 2009.

So I think the way you really characterized how we're looking at, you know, a slight improvement, if you will, relative to the third quarter, is accurate.

And, again, just strength of -- where we're currently focused on this VFR -- not just focused now, I mean the core of JetBlue has been this VFR traffic, and the trial that we're also getting with the business fliers, who are looking for -- hey, you know, corporations are managing their T&E accounts, and it is a good experience out of places like Boston and T5, and across our route network.

So I think you characterized it well.

Thanks, guys.

Thank you.

Our next question comes from Dan McKenzie of Next Generation.

Please go ahead.

Good morning.

Good job on the quarter here.

Dave, in response to an earlier question on industry assets that might become available, I'm wondering where we're at with the potentially forced auction of slots in the New York area that the FAA pushed last year.

And I believe the industry sued the FAA over the initiative, and I guess related to this, as slots become available from another carrier, is it your read that those are for the FAA to distribute, or are they assets that can be bought and sold by the incumbent carrier?

I guess the reason I'm asking you guys specifically is because, you know, of JetBlue's significant number of slots in the New York area, of course.

Dan, I think that, you know, that's -- with the previous administration, the auction of slots, that lawsuit has been withdrawn.

And so as we take a look at -- I think what is germane, though, is this -- the slots -- the -- not the high-density rule, but the slots being placed back into Kennedy Airport had temporary language tied to it that does sunset, and so we're still waiting for what's the next iteration of this language.

The last time the high density rule went into effect it was here for 37 years before it was repealed, and then it was only gone for about a year and-a-half, and hence the re-slotting of Kennedy Airport underneath this temporary language.

So that's the one item that's probably out there in terms of -- it's a little bit of an unknown what is the language tied to a slot, can you purchase them, lease them, et cetera?

What's the timing of a slot?

Because, again, that language was temporary.

Understood.

And then I guess as a follow-up, I'm wondering if you could talk about where you're at with respect to ancillary revenue initiatives tied to the growth in the Caribbean?

In the past you mentioned there could be some package opportunities, given some empty hotels down there.

I'm wondering if that is still an opportunity, or where you might be on that initiative?

Thanks, Dan, very much so.

Our route network with the hotels, golf courses, casinos, cruise ships, is so well positioned to take advantage of places like the Caribbean.

I think it's fair to characterize -- our Chief Technology Officer, Joe Eng, and Rick Zeni leading the charge -- the change to our CSS system.

We're somewhat in a -- lockdown is probably too harsh, but somewhat in a transition for any type of project, technologically speaking, it's not like we're getting ready to move into the new Terminal 5, let's be careful about complicating things until such time as Sabre is well along and now part of our IT infrastructure.

So now that we take a look at the -- the get-aways program that we have today, the ancillary revenue is tied to what it could mean specifically in the Caribbean.

By the way, not to undersell the Las Vegases, the Orlandos, the Californias of the world, the packaging, what happens in terms of the revenue buckets, I think there's a lot of excitement that's happening with Robin and his team, so that we can really mine our route network, and the Caribbean is absolutely perfect, Dan.

Understood.

So it sounds like it potentially is a first quarter 2010 opportunity then, if that is the case?

I think we're really looking at first quarter as the CSS conversion, and let's make sure that -- you know, the quality assurance on the conversion.

So probably end of the -- excuse me, the end of the first semester into the second semester next year, it would be great to take advantage of the summer peak for sure.

Yes, perfect.

Thanks a lot.

Thanks, Dan.

Our next question comes from Mike Derchin of FTN Capital.

Please go ahead.

Hi, guys.

How does Continental's entry into the Star Alliance with antitrust immunity affect your relationship with Lufthansa?

And also any thoughts on Alliance plans or Co-Chair?

Mike, I think the Lufthansa investment in JetBlue, long-term strategic investment, I think your question is probably a real good one for Lufthansa, in terms of how they look at Star, and Continental joining, United, et cetera.

So it's a -- we have not had discussions, you know, regarding, you know, any entry into Star or any other alliance.

And so as we take a look at Lufthansa, there is -- you know, we're real excited about the commercial agreement.

Again, think about the CSS conversion, the ability to change out to Sabre will help us to optimize that relationship.

And so again into -- as we make that conversion right now, we're excited about how we then exchange customers with Continental.

I think the last part of your question was would we take a look at other opportunities with airlines, and you bet.

I mean, I think it's a -- you know, our assets at New York, at Terminal 5 today, you know, that building in what I would argue is the most lucrative air transportation market with the number of connections coming across that gateway, which is perfect from Europe, South America, Asia, well you bet we want to continue to be able to be real receptive to that on behalf of our shareholders, and of course respectful to our largest investors, as well.

Okay.

And so in terms of route, though, meshing with Lufthansa, do you think it would be fair to say that -- it would be more likely not being in the New York area but, you know, elsewhere like in Orlando or other parts of your system?

I think it's a -- I mean, for example, as we take a look at Lufthansa, again exchanging customers with Lufthansa as part of our commercial agreement, we look at New York, we look at Boston, we look at our focus in Orlando.

In Orlando, their newest North American gateway -- by the way, Aer Lingus, that is their newest North American gateway as well.

So I think, you know, New York as well as our focus cities, I think that our network is really well positioned to take advantage of exchanging customers.

And just one more, do you have a latest breakdown of your capacity by major market?

Especially in light of the big expansion in the Caribbean, how much does that represent these days?

Yes, in the -- to give you a feel for ASMs in the second quarter of 2009, Caribbean was 23% of our deployment of ASMs.

To give you a feel for that, in 2007 it was 10%.

Right.

And East to West, so for the most part it's transcon with 31%; to give you a feel again, 45% second quarter '07.

Rounding that out, Florida 32%, and then the shorter haul, medium haul markets, 14%.

Great.

Thank you very much.

Thank you, Mike.

Our next question comes from Kevin Crissey of UBS, please go ahead.

Good morning, everybody.

Good morning.

With Continental purchasing and rolling out the LiveTV, DirectTV service, can you talk about how that affects your ancillary, and then how it affects your thoughts on charging for TV, even if it's somewhat less than what Continental would do?

It would still be nice incremental revenue.

Kevin, the -- Continental is the newest customer of LiveTV.

As we closed the second quarter, we had 16 installs on the Continental fleet.

And, you know, what we're hearing back from Continental, or what LiveTV is hearing, is they are very pleased with the rollout.

As we look with the swipe model, again the visibility is really to LiveTV in terms of the metrics that are taking place, and there are other swipe models part of their portfolio.

We take a look at -- yes, that is potentially an opportunity for us if we want to look at converting to a swipe model.

But it's -- we have to be really careful with this.

The nickel and diming, the perception of nickel and diming, the fact that it has embedded into the price of a ticket with LiveTV, XM radio, the Wi-Fi experience, PDA, which again we think is the route forward as opposed to broadband, it's -- I think we're going to be real careful.

Do we have the capability to pull that lever?

Yes, we do.

But maybe that is something we can become a little bit more sophisticated as we make the conversion into Sabre; and again, what does somebody pay as they get on board the airplane?

I think we're a long way away from converting over to a swipe model at this point for our entire customer base.

Okay.

And in terms of the financial impact of -- it's still most, I think we said last time mostly a 2010 event, or maybe late in 2010, to really see the effects?

Because they are rolling it out on their network now, and you should start to see the revenue starting to come in now, right?

Kevin, I think that you know the relationship with Continental, as Dave said, we had I think 12 at the end of the second quarter, we'll have 16 here, I think, currently.

You know, it's a revenue-sharing model, so certainly that's going to start to come into our other ancillary revenues this year.

I think that on a year-over-year basis the impact will be larger in 2010, but we're going to start enjoying that revenue in 2009.

Thank you very much.

Thanks, Kevin.

Our next question comes from Helane Becker of Jesup & Lamont.

Please go ahead.

Thank you very much, operator, actually all my questions have been asked and answered.

Thanks, gentlemen.

Thanks, Helane.

Our next question comes from Kim Zotter of Imperial Capital.

Please go ahead.

Good morning.

Just real quickly I just wanted to do confirm, you repurchased -- it was 3 million of the 3.75 converts converts in the second quarter and 16 million in July, is that right?

That's correct.

Okay.

And then, do you intend to continue doing so I guess opportunistically, of course, going forward?

We will certainly be looking at buying some additional converts as we work towards that March 2010 date.

Okay.

Thank you.

So impressive ancillary growth this quarter.

Now you referenced a split of ancillary revenues between passenger and other revenue.

Could you remind us of which are booked in each bucket, or which ancillary fees are booked in which bucket?

I think Lisa will get back to you on that.

It is probably a fairly detailed answer.

Okay.

Fair enough.

Thank you.

Our next question comes from Steve O'Hara of Sidoti & Company, please go ahead.

Good morning.

I'm just curious on the convert purchase, were they pretty much purchased at par?

Was there a small gain in the quarter?

Very, very slight gain.

I mean, we're repurchasing those very close to par, but I think that's a good use of our capital at this point because the return to the put date is actually better than we could otherwise invest those funds.

Okay.

And then just lastly the -- did you say there was a gain in the other operating expense line this quarter, and if so, how much was it?

There was.

It was $11 million, and it was related to a tax rebate that we received.

All right.

Perfect.

Thank you.

This concludes our session with investors and analysts.

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

Thanks, Anthony.

In closing, I would like to thank everybody on the telephone for joining us, also on the webcast.

And also a special call out to our 12,000 crew members, thanks so much for running a great operation, not just in the second quarter, but as we take a look at 2009, the J.D.

Power Award five years in a row.

And very, very pleased with the second quarter as we look to building strength over the course of 2009 and beyond.

So thank you very much for joining today, and everybody have a good day.