JetBlue Airways Corp (JBLU) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the JetBlue Airways fourth quarter and full year 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 place -- should not place undue reliance on these statements.

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

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

Please go ahead, sir.

Thank you, Hilda.

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

We're very pleased to announce our fourth consecutive quarterly profit.

This morning we reported fourth quarter net income of $11 million, or earnings of $0.04 per diluted share as compared to a $58 million net loss in fourth quarter 2008.

For full year 2009 we reported net income of $58 million or $0.20 per diluted share.

This result represents an improvement of $143 million over 2008.

2009 presented many challenges to the airline industry, including significant pressures on revenues as a result of the recession, continued tightening of the credit markets and volatility in the price of fuel.

Nevertheless we generated positive free cash flow for the first time in JetBlue's history, and we were one of only a few US carriers to achieve a profit in all four quarters of 2009.

All while delivering an experience to our customers that is unrivaled in the industry and well deserving of our fifth consecutive JD Power Award for service excellence.

I'd like to take this opportunity to thank our 12,000 crew members for helping us to achieve these strong, impressive results.

Our 2009 results demonstrate the benefits of slower growth which we started in 2006.

While we were originally scheduled to take 36 aircraft in 2009, the steps we took to sell, defer and lease aircraft helped us to enhance our liquidity, reduce capacity and capital expenditures and optimize our network.

These actions, combined with a $450 million year-over-year decline in fuel expense resulted in our highest net income since 2003.

We also achieved many operational successes throughout 2009, improving, for instance, on-time performance by [4.6 points] (corrected by Company) compared to 2008.

We also continued to enhance the JetBlue experience for our customers.

We launched an improved version of our customer loyalty program known as TrueBlue, which we believe will broaden JetBlue's already loyal customer base.

In addition, we began codeshare operations with Lufthansa providing our customers with access to a global network and providing Lufthansa's customers access to our growing footprint in the Americas.

Due to the economic pressures that broadly impacted all industries in 2009 we faced a difficult revenue environment throughout the year.

Leisure traffic remained relatively strong as our loads for the full year were essential flat compared to 2008 but like other carriers we experienced pressure on yields due to extensive sale activity across the industry.

For 2009 our total revenues declined 3% year-over-year and unit revenues were down by about 3.5%.

With relatively stable load factors our ancillary revenue initiatives helped offset some of the fare weakness we experienced over the year.

During 2009 ancillary revenues grew $60 million or 17% as compared to 2008.

This increase was driven primarily by a full year of our Even More Legroom offering.

The customer response to EML continues to surpass our expectations.

In 2009 Even More Legroom generated over $70 million of revenue.

We're encouraged by recent trends in unit revenues and especially in light of the tough comparison to our record fourth quarter unit revenues in 2008.

To put in this perspective, our four quarter 2009 Passenger Revenue Per Available Seat Mile, or PRASM, was up 11% compared to 2007.

While we're encouraged by recent trends we remain cautious about 2010 as there continues to be a great deal of uncertainty about the pace of the economic recovery.

We believe, however, that our strong balance sheet will enable us to successfully navigate through the uncertainty that lies ahead.

Throughout 2009 we continued to strengthen our liquidity position.

We ended the year with over $1 billion in unrestricted cash and short-term investments.

That puts our cash and short-term investments at 35% of trailing 12 months revenue which we believe is among the best in the industry and reflects our solid financial health and continued stability.

We believe the ability to generate positive free cash flow is an important driver of shareholder value and we remain committed to seeking to generate positive free cash flow in 2010 and beyond.

We've continued to work with our aircraft manufacturers to reduce our capital expenditures, a critical component of the path to positive free cash flow.

Over the past three years, we have deferred over 80 aircraft.

In this regard I'm pleased to announce further changes to our fleet plan, which should provide for a slower and smoother aircraft delivery schedule with increased flexibility.

Specifically, we have agreed with Embraer to defer delivery of 16 E-190 aircraft originally scheduled for delivery between 2012 and 2016, to 2017 through 2018.

At the same time, we are accelerating delivery of four E-190s into 2010 that were previously scheduled for delivery in 2012.

Specifically, two of these E-190s are scheduled to be delivered in the second quarter.

One E-190 in the third quarter and the fourth in the fourth quarter of this year.

With these deliveries we expect to end 2010 with a fleet of 155 aircraft.

As part of this agreement we have also obtained financing commitments for these four Embraer deliveries.

Shifting the new aircraft delivery dates allows us to spread our fleet growth out more evenly between 2010 and 2018.

More details on the revised fleet plan will be provided in our investor update filed later today.

Even with the addition of these four E-190s, we expect to generate positive free cash flow in 2010.

We expect approximately $395 million in capital expenditures during 2010 compared to roughly $400 million in 2009.

Lower CapEx is critical to our goal of consistently generating positive free cash flow.

At the same time, we do need to make -- continue to make strategic investments.

We took delivery of nine net aircraft in 2009 but kept our ASM essentially flat compared to 2008.

This was accomplished primarily through lower aircraft utilization which decreased 5% year-over-year.

In addition we continue to more tactically manage capacity by matching schedule frequency to demand with day of week and gauge adjustments.

We focused on strengthening our core network centered in New York, Boston, Florida and the West Coast.

Boston has been valuable for us both financially and strategically.

Our footprint at this key airport has grown over the past six years from two gates and nine flights per day to 11 gates and nearly 70 flights per day.

We now serve more destinations and offer more seats out of Boston than any carrier.

Boston's response to our brand from both businesses and leisure customers continues to surpass our expectations.

In the summer of 2010 we plan to increase our Boston departures by approximately 30% year-over-year, driven primarily by increased frequencies to business oriented markets such as Baltimore, Charlotte, and Raleigh Durham.

JetBlue's goal is to be the carrier of choice in Boston.

We also continue to build on our success in the Caribbean and Latin America.

Of the eight new cities opened in 2009, six were in the Caribbean and Latin America, namely Bogota, Colombia; San Jose, Costa Rica; Montego Bay and Kingston, Jamaica; St.

Lucia, and Barbados.

These new markets have achieved great success in their first year of operation.

Our Visiting Friends and Relatives, or VFR markets continue to complement our leisure driven markets very nicely from both the seasonal and day of week perspective.

As previously announced we have applied for government approval to serve Punta Cana which will be our fourth destination in the Dominican Republic beginning in May.

By the end of 2010 we expect roughly 25% of our ASMs will be in the Caribbean-Latin America market.

As a result of our expansion in Boston and the Caribbean and a return to more normal aircraft utilization we plan to grow our ASMs between 5% and 7% in 2010 versus 2009.

The full year impact of new cities we added in 2009 particularly longer haul Caribbean routes accounts for about two to three points of our expected ASM growth in 2010.

While we are growing significantly in Boston and the Caribbean the rest of our network will actually be shrinking in 2010 on a year-over-year basis.

We believe this to be prudent growth.

We're targeting specific markets where ramp-up is relatively quick and our brand resonates well with customers.

Our ability to adjust our network quickly and the flexibility of our fleet allows us to respond quickly to favorable market opportunities and seize upon them in the competitive landscape.

We continue to have one of the highest aircraft utilization rates in the industry and enjoy the added flexibility of being able to adjust utilization either up or down as conditions warrant.

Our long-term success depends in large part on having the appropriate technology platform to support our future growth and revenue initiatives.

As discussed on prior calls, we've been working on the implementation of a new customer service system, Sabre, over the past year.

All the system and process changes that are critical for transition to the Sabre platform are in place and a comprehensive testing program has been completed.

We plan to cut over to the new system this weekend.

For system implementation of this magnitude we anticipate and have planned for some disruption and delays.

However, we believe we are well prepared, and we have extensive plans in place to support the cut-over including a Verizon tele performance call center on stand-by to assist with calls to 1-800-JetBlue and a reduced flight schedule during the cut-over period.

Transitioning to this new platform offers us the flexibility and robust tools to expand the products and services we offer our customers.

As a result, we believe the system will help improve the overall customer experience and further enhance the JetBlue brand.

When fully implemented the Sabre system will provide pricing flexibility that will enable us to attract more business customers, broaden ancillary revenue opportunities and facilitate airline partnerships, all core initiatives for JetBlue.

With the transition to Sabre, we will make significant improvements to our website and implement a new revenue management system which we believe will strengthen our revenue generating capabilities.

We're excited about the opportunity Sabre presents.

As we speak, we are focused on making sure the transition goes smoothly, and similar to the seamless opening of our new terminal at JFK in 2008 we believe we will successfully accomplish this task.

Before closing, I would like to briefly discuss the planned closure and rehabilitation of JFK's bay runway 31 left, 13 right, between March 1st and June 30th of this year.

This very important project will ultimately improve operations at our home base in New York.

We continue to actively work with the FAA and the Port Authority on various initiative to reduce delays during the project.

To help mitigate the impact of the closure the major US carriers operating at JFK have agreed to reduce flights and maintain a March flight schedule throughout the period.

We plan to redeploy a portion of our JFK capacity to other parts of our network during the closure, and will operate approximately 10% fewer departures at Kennedy compared to last year.

While we anticipate some operational challenges during this period, we believe the reduced capacity should help alleviate congestion and may also have a positive impact on RASM.

We face several uncertainties looking forward into 2010.

It's unclear if the initial signs of economic improvement will gain traction.

However, we believe we are well positioned with a strong balance sheet, an excellent brand and a superior product.

More importantly, our outstanding crew members and unique culture continues to set us apart.

While many challenges lie ahead, our profitability over the past year and our ability to generate positive free cash flow for the first time in the Company's history against the backdrop of a weak economic environment demonstrate that we are headed in the right direction.

We expect 2010 will be another successful and profitable year for JetBlue.

In closing, on February 11th we will celebrate our 10th anniversary of our first flight.

Few airlines reach the 10-year mark and even fewer do so as a viable, healthy enterprise.

JetBlue's crew members and the exceptional service they provide to our customers everyday are the reason behind our success.

We believe our unique culture and direct relationship with our crew members will provide the foundation for continued success as we enter our second decade.

And with that I would like to turn the call over to Ed Barnes for a more detailed review of our financial results.

Thank you, Dave.

Good mornings everyone and thanks again for joining us today.

As Dave said we are very pleased to be one of the few US carriers to report a profit in all four quarters of 2009.

The actions we have taken over the past few years to build our brand, control growth, bolster liquidity and strengthen our financial position have clearly helped us face the challenges of a weak economy.

Operating income for the fourth quarter improved $15 million year-over-year, driven by a $56 million decline in fuel expense and a $21 million increase in revenues, offset by a $62 million increase in non fuel costs.

Overall, our operating margin for the quarter was 7.6%.

Fourth quarter unit revenues declined 4% compared to a year ago.

This is a significant improvement from the 8% year-over-year decline we experienced in the third quarter.

Yield during the fourth quarter was down 5% and load factor was up about 1% on 6% more capacity.

These results were generally in line with the guidance that we provided at the end of October.

As we expected, demand during the Thanksgiving and Christmas holiday travel periods held up relatively well.

Fares during the December holiday travel period were similar to levels -- similar to levels to last year when as Dave said we experienced record fare levels.

While the positive pricing traction during peak travel periods has been encouraging, the off-peak periods remain a challenge as aggressive pricing across the airline industry has had a significant impact on yields.

We continue to be encouraged by the success of our ancillary revenue initiatives.

When we combine all of our ancillary revenue reported in the passenger revenue line with those in the other revenue line total ancillary revenue for the fourth quarter was about $20 per passenger.

I would like to point out that we changed our accounting approach to the classification of fuel taxes in the fourth quarter.

Following industry practice, we now record these costs in the fuel expense line.

Previously, these taxes were recorded in other operating expenses.

Total 2009 fuel taxes were $34 million, $11 million lower than 2008.

As a result, a number of our comparisons from 2008, including ex fuel CASM have been impacted and revised.

Lower fuel prices helped drive a 5% decrease in our fourth quarter CASM.

Fuel price per gallon decreased 24% year-over-year to $2.08 in the fourth quarter, including fuel taxes.

While market prices are significantly below 2008 levels, fuel remains our most significant cost, representing approximately 30% of our total operating expenses in the fourth quarter of 2009.

Fortunately we have a young fuel efficient fleet.

In addition, we have built a solid portfolio of fuel hedges to manage fuel price volatility.

During the fourth quarter we continued to add to our fuel hedge portfolio consisting primarily of jet fuel swaps and heating oil collars in the near term and out of the money, crude call options, or caps further out.

For the first quarter of 2010 we have hedged approximately 64% of our anticipated jet fuel requirements, using swap agreements, costless collars and caps.

For the full year, approximately 45% of our projected fuel consumption is hedged.

The underlying details of these positions are more specifically described in our investor update which will be filed later today.

While the cost of fuel remains volatile, we are planning on a price of $2.18 per gallon in the first quarter, and $2.26 for the full year, including the impact of hedges and taxes.

These prices are based on the forward curve as of January 22nd and exclude transportation and the plane fees.

Excluding fuel, our fourth quarter unit costs rose by about 6% year-over-year, which was in line with our guidance.

The two areas which continue to see greatest cost pressure are salaries, wages, and benefits and maintenance expense.

Salaries, wages, and benefits increased roughly 8% per ASM on a year-over-year basis driven primarily by pilot pay increases we implemented in June of last year, and additional staffing levels related to the implementation of our new Sabre customer service system.

We estimate that we incurred one-time costs of approximately $4 million in connection with Sabre related staffing during the fourth quarter.

Our maintenance expense per ASM increased 20% year-over-year.

This was primarily attributable to the gradual aging of our fleet which drove an increase in the number of heavy maintenance checks.

Other operating expenses increased 15% per ASM due in part to increased costs related to the implementation of the customer service system.

We estimate we incurred one-time costs of approximately $2 million related to Sabre personnel costs during the fourth quarter.

In addition, we recorded an $8 million gain and other operating expenses related to aircraft sales during the fourth quarter of 2008, negatively impacting our year-over-year comparisons.

Moving below the line, interest expense was -- interest expense decreased 21% year-over-year, or $11 million due primarily to approximately $9 million of interest expense we recognized during the fourth quarter of 2008 related to the early conversion of our 5.5% convertible notes.

At the same time, interest income and other increased by $49 million due to the $53 million valuation adjustment related to our auction-rate securities that was recorded in 2008.

We have continued to take action to improve our liquidity.

We ended the year with unrestricted cash and short-term investments of $1.1 billion.

Our year end cash balance includes the $56 million loan from UBS, which is collateralized by $85 million of auction-rate securities and included in short-term investments.

As you may recall, UBS is required to repurchase these securities at par value in June of this year.

And we will repay the UBS loan with proceeds from the auction rate security sales.

Since year end, $12 million of these auction-rate securities have been redeemed at par.

The proceeds of which have been used to reduce the UBS loan to $44 million.

As a result of our strong cash balance and other financial metrics, our largest credit card processor reduced the amount of our hold-back to zero.

During the fourth quarter, we repaid $50 million in debt and capital leases.

While we have several obligations coming due in 2010, including the assumed put of the remaining balance of our 3.75% convertible bonds in March, about $156 million.

We are very comfortable with our current cash position.

Our scheduled principal payments from debt and capital leases -- capital leases are expected to be about $195 million in the first quarter, and $390 million for the full year.

This includes the assumed $156 million convert repayment, the $56 million UBS loan, and approximately $170 million of regularly scheduled aircraft debt repayments.

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

As Dave mentioned, we have revised our E-190 delivery schedule.

These revisions substantially reduce our aircraft commitments between 2012 and 2015 helping smooth our future debt and pre delivery deposit requirements.

I'm also pleased to report that we have committed financing in place for the four E-190s we are taking this year.

With regard to CapEx, we spent approximately $45 million in non aircraft CapEx during the fourth quarter, of which $9 million was related to the implementation of Sabre.

We estimate capital expenditures of about $395 million in 2010 of which $250 million relates to aircraft and $145 million to non aircraft related expenditures.

The non aircraft CapEx includes $95 million related to LiveTV and approximately $15 million related to the implementation of Sabre and future enhancements.

With manageable debt maturities and capital commitments in the upcoming year we believe JetBlue is positioned to generate positive free cash flow and maintain strong liquidity in 2010.

We expect to end the year with cash as a percentage of trailing 12 months revenue of at least 25%.

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

As we look into 2010, we are encouraged by signs of the economy stabilizing.

PRASM declines have leveled off and we are seeing signs of improvement from what we were experiencing earlier in 2009.

In addition, sale activity appears to have tapered off a bit relative to last year.

While we are encouraged by recent booking trends we remain cautious about air travel demand in 2010 as it will depend in large part on the pace of the economic recovery.

January is traditionally a trough travel period for us as holiday traffic subsides.

In addition, we face difficult comparisons versus last January when PRASM increased 15% year-over-year.

We currently expect January PRASM to be down about 2% year-over-year.

The year-over-year comparison should get a bit easier in February.

While we continue to face yield pressures during off-peak travel periods we are seeing positive yield trends for the peak President's Day and spring break periods in March.

We expect our RASM and PRASM will both be in the range of down 1% to up 2% year-over-year in the first quarter.

Our visibility is limited beyond March.

But as we move throughout the year we expect to benefit from the continued growth and maturation of the new markets we started in prior periods.

In addition, we expect to begin to see the revenue benefits of the additional functionality that will be enabled through Sabre later this year.

In 2010 we expect our ancillary revenues to increase approximately 10% year-over-year.

While it is difficult to make full-year revenue projections, given the uncertain economic environment, we currently expect full-year RASM and PRASM to increase between 5% and 8% year-over-year.

We continue to work hard on the cost side while at the same time making prudent investments in our business.

In 2010 we expect continued cost pressures on salaries, wages and benefits as a result of the impact of the pilot wage increases we implemented in June of last year.

These cost pressures are expected to be heavily weighted in the first half of the year as we anticipate that modifications to work rules will increase efficiencies beginning in the third quarter.

Our transition to Sabre will continue to impact salaries, wages, and benefits and other operating expenses during the first quarter.

We anticipate the total one-time impact on operating expenses to be approximately $10 million in the first quarter, of which $3 million will be recorded in salaries, wages, and benefits.

And the remainder captured in other operating expenses.

We also expect our maintenance costs will continue to increase in 2010 as our fleet ages and more aircraft come off warranty.

We also expect an increase in the number of heavy maintenance checks on our E-190 fleet.

We expect ex fuel CASM in the first quarter to be up 6% to 8% and CASM all in to increase 7% to 9%.

For the full year, we project CASM will increase 5% to 7% and ex fuel CASM will increase 3% to 5%.

We believe these cost increases will be offset by an increase in revenue beginning in the second quarter.

That said, we will continue to focus on efficiency and work to contain costs.

Before closing I would like to take care of a few housekeeping items.

The transition to Sabre will impact almost every aspect of our business, including our revenue accounting, and financial reporting.

We're managing the change with proactive planning and caution, and therefore, are extending our financial reporting cycle during the initial months of the transition.

As a result, we expect to delay the release of our February and March traffic results by several days, and we plan to report our first quarter earnings during the last week of April, about a week later than last year.

Finally, we expect a brief window of time on the day of cut-over when our website will be unavailable.

We thank you for your patience as we work to implement this exciting change.

We're also making a few minor changes to our investor update which will be filed later today to better conform with industry practices.

We have eliminated operating margin guidance and replaced pretax margin with non-operating expense guidance.

In addition, we have eliminated stock compensation expense and changed the way we provide estimated share count.

To conclude, we are pleased with our operating results which continue to be amongst the best in the industry and demonstrate our continued ability to withstand the impact of a weak economy.

Throughout 2009, we remained focused on the future strength and flexibility of our airline.

As we begin 2010, we continue to look for opportunities to build our financial flexibility and lay the foundation for sustainable growth.

With that, we're happy to take your questions.

Thank you.

(Operator Instructions).

Our first question comes from Mike Linenberg from Banc of America.

Hi.

Good morning, everybody.

Couple questions here.

Ed, I heard you, you indicated that the hold-back went to zero.

What was the hold-back before, and then what was the trigger?

I did see you got a couple upgrades from the various rating agencies.

Thanks, Mike.

The hold-back prior to that was $30 million.

And I think the primary trigger was really I think the current cash position of $1.1 billion, as well as the sustainable growth in free cash flow model that we're operating on today.

Okay, good.

Then my second question, and this is Ed or Dave, as we look at your fleet plan, we saw the changes with the 190s, and that definitely smoothes that out.

When I look out over the next couple years, it looks like you do have a decent number of A-320s.

I think it may be eight airplanes in 2011, and maybe 13 in 2012.

That's a decent number.

Is the thinking -- would you sort of take a similar view to the bigger airplanes as you look out to 2011 and 2012 and beyond?

Yes, Mike, I think it's safe to say that we're very committed to free cash flow.

We realize there's a lot of airplanes coming at us in these later years.

I think you've seen us in the past years be very flexible with our fleet planning, and working with the manufacturers to accomplish that.

So I think that's probably what we'll do on a forward basis.

Okay.

Very good.

Thanks.

Thanks, Mike.

Our next question comes from Hunter Keay from Stifel Nicolaus.

Please go ahead.

Thanks very much.

Good morning.

You guys talked -- I still think I'm getting some sort of mixed signals from you in the prepared remarks.

You talked a lot about uncertainty in the economic recovery but you're pulling forward aircraft.

You're pulling forward the 190s.

You're growing your ASMs by about 7%, with a lot of that down to the Caribbean.

Delta referenced specifically weakness in the Caribbean and Central America because of excess capacity growth as they framed it.

Why should we not be concerned with your ability to meet full-year PRASM guidance?

It looks like you're baking at a pretty solid second and third quarter period following the 1Q flattish guidance.

Good morning, Hunter.

Couple thoughts.

First of all, I think embedded in the prepared comments are really some significant change investment that's going on.

I think specific to JetBlue versus the rest of the airline industry, one is the conversion to Sabre platform, which is -- that is very significant change, and we're obviously being very guarded regarding the conversion, even though the planning has gone quite well.

So there's additional costs associated with that.

There's also, from the standpoint of revenue opportunities that we believe are back end loaded, we won't see that day one with the conversion.

It takes a period of time.

So right behind it is the runway construction at JFK as well, our home base of operations.

And so I think the theme is a tale of two semesters.

The first six months of this year, continued significant investment right in our backyard, or in our airline, then reaping the benefits of that into the second half of the year.

I think from the standpoint of your comments, uncertainty, let's face it, we're fresh out of a recession, and I think that we want to be pragmatic about how we're looking at the world.

All that said, when I look at sequentially PRASM minus 8% year-over-year Q3, minus 4% year-over-year Q4, and then our guidance that we issued today for the first quarter and for the year, we're fairly optimistic that maybe there's going to be some stickiness to what we're seeing with the rebound.

But that's just a comment that I would share regarding uncertainty.

We're fresh out of a recession, and probably the most significant recession that we've been living in, in our lifetime.

Last thought, ASM growth, I can't speak for other carriers, but our continued investment in Boston, our continued investment in the Caribbean and Latin America is very much right in alignment with, as Ed mentioned, free cash flow and sustainable growth.

So it's been very positive for JetBlue.

Hunter, the thing that I would add to that is, I think a lot of what you are seeing in the PRASM, RASM, especially later in the year, is maturing markets, especially in the Caribbean where we added a lot of capacity last year.

A lot of connecting the dots out of Boston to markets that we already serve, and I think a lot of the utilization adds that you are seeing -- or a lot of the capacity adds you're seeing is just better utilization of existing assets, both on the aircraft side as well as crew members.

So I think it's very prudent to add in that additional capacity.

Okay, appreciate that.

And obviously this ties back to Sabre as well.

You mentioned specifically in the release, I think you phrased it product and revenue initiative.

I'd love a little more color on that, specifically differentiating between what's product and what revenue.

In the product bucket is there anything that we should maybe assume from a potential first bag fee once the Sabre is implemented?

Thanks for your time.

Sure, thanks, Hunter.

I wouldn't read into -- there's an overnight change into a first bag fee.

We know that that's something in our arsenal if we opt to go that way.

I think that really with Sabre, first and foremost, it's scalability in our network as we grow the airline.

That was first and foremost the reason for the change.

And the e-ticketing platform that does allow us to really start to maximize the opportunities, whether it's codeshare, interline agreements, and with our basic Kennedy focused cities like Boston, Orlando and others, very, very positive.

I think it's fair to say that the ancillary revenue streams through the booking flow and the ability to optimize things like packaged travel.

We're really excited about what Sabre -- the capabilities that it gives us as we look into 2010 and beyond.

Maybe just to comment as well, I think again that the planning that's going into this conversion, the training, the things like the Verizon call center as a backup, our business partner, things such as, again, planning the schedule accordingly, load factors accordingly for this weekend, a slower time frame as well, I think bodes very well for again our confidence to make the conversion.

It's difficult, but in a very professional manner.

So thanks, Hunter.

Okay thank you.

Our next question comes from Duane Pfennigwerth from Raymond James.

Hi, thanks, good morning.

Morning.

Just with regard to your RASM/PRASM guidance and ancillary guidance up 10%, what does that assume in terms of new products on the ancillary front and how willing would you be to sort of guide to new products ahead of a systems migration?

Duane, thanks for the question.

The ancillary revenue, so much of what we saw was really Even More Legroom, and we're at a pricing point now, $10, $25, $40 in terms of stage length.

We saw the full year's worth of performance.

That doesn't change as we make the migration into Sabre.

I think, Sabre again, it's -- and not that I'm going to shed any color in terms of some of the additional products that we're looking at, or maybe enhancements.

Today, because I think the focus is really, let's make sure we get through the conversion professionally as opposed to trying to advertise some of our changes that we're looking at putting into place later this year.

The commercial team has really made an awful lot of change in terms of the network and things like Even More Legroom and additional ancillary revenues.

So I think it's -- as you take a look at our growth over the course of the year with ancillary revenues I think we're going to be well placed.

Probably later in this year you will hear much more about some of the ideas that we've been working on as we put them into reality with ancillary revenues.

That's helpful.

Just to follow up there, so does your guidance of 10% ancillary growth consider new products you may roll out in the second half?

Duane, I think the 10% has a lot to do with just the year-over-year increase in existing programs.

I would say the only thing that we're working on right now that we really haven't launched is on board food sales.

That's not going to have a significant impact on ancillaries.

So I think as we implement Sabre and as we have opportunities to maybe put in additional programs, that may be a little up side potential.

Thank you.

I think Jim has a question.

Dave, I want to ask you, I believe that you've gone on record saying the industry has too much capacity in last few months, and so JetBlue is increasing capacity 5% to 7% in 2010.

I'm curious, these 190s, that you're going to -- deliveries that you are going to take, was that a trade-off to get the deferrals in latter years?

I think, Jim, specific to the Embraers and why I won't go into any of the discussions that we've had with Embraer, I think what we really wanted to do is just flatten growth.

And the earlier question about the Airbus delivery stream, the Skyline Embraer with the 190s, we had an awful lot of airplanes bunched up that now are much smoother, if you will over the course of 2018.

But all that said, Jim, I think that JetBlue is also an airline that's played an awful lot of defense going back to 2006, and rightly so.

We've really trimmed our growth rate significantly.

Last year, for example, nine aircraft versus 36.

I am of the opinion that the industry has too much capacity.

And I think that some airlines, including JetBlue, have earned the right to grow.

I think it's things like, as we talk about, again, not to disclose a return on invested capital metric, free cash flow, things like our operating margin and those airplanes earning their way on to the network, you bet we're going to take advantage of that.

When airlines all of a sudden, they've been committed to areas like Boston for decades, and crew bases are closing, and our brand is resonating, you bet we're going to take advantage of that.

It's the same down in the Caribbean, Jim.

I will close.

We had a team visiting the Commonwealth of Puerto Rico earlier this year.

I don't mean just an in and out trip, but I mean on Island and in the area for a couple of days, and there's a lot of opportunity that works very well with JetBlue for the foreseeable future down there.

So that's what's really driving our footprint, our growth as we look at 2010.

And I would add to that, Jim, those aircraft are coming in in the second, third, and fourth quarter of this year.

And I don't think that the -- they're not a significant factor in our capacity growth.

The capacity growth I think has more to do with, again, going back to the connecting the dots, plans that we have in Boston as well as in the Caribbean.

Okay.

And, Dave, your longer term growth rate going forward, the economy is growing again next several years.

What's the pace of growth for JetBlue?

Yes, Jim, I think that at your conference and in other settings, I've been on record of saying I think this is a growth story.

We have to earn our right to grow.

And again, focusing on free cash flow you've heard it several times in the prepared comments, and even in the commentary here, but this allows us to grow, and I think as we look at the future, I think this is an airline that can grow 5% plus per year.

Certain years we're going to be afforded the opportunity to maybe grow more than that but the flexibility with our crew members, with our order book also allows us to dial it down like we did last year.

We were flat last year, and I think, again, it's one of the best performances this Company has had in the last six plus years.

So -- but this is a growth Company, Jim, and we're running the business that way.

Okay, thanks, guys.

Thanks, Jim.

Our next question comes from Bill Greene from Morgan Stanley.

Yes, good morning.

Just one follow-up on the -- basically it's a capacity and a unit cost question.

The growth in unit costs you sort of outlined what some of the drivers are there.

How much of the capacity growth is with an eye on that trying to manage that?

Because obviously flat capacity, it's a bit of a challenge to keep unit costs flat in that world.

Yes, Bill, thanks for the question.

I really think that the capacity increase had more to do with opportunities that we see in our network, and more to do with our long-term network plans, and so it didn't really have anything to do with cost guidance.

If we look at your headcount, you've sort of been this 70 headcount FTEs per aircraft for some time.

Some of your low-cost peers are quite a bit lower than that.

Is there an opportunity there, or is it just that they've outsourced more and you're kind of about where it's going to be as you grow?

I think it's partially an outsourcing story, but I think it's also that JetBlue does need to look for additional ways to become more efficient.

And certainly as we look forward to ways to automate things, or as we connect the dots in our network and make our existing assets more efficient, I think we'll have the opportunity to do that.

Do you want to hazard a guess how low that could go?

Not at the moment.

Okay.

Lastly, just on the JFK runway closure, is it possible that could have a net P&L positive effect on you if capacity there is reduced?

Good morning, Bill, it's -- I would look at Kennedy -- that's possible, depending on what plays out with the competitive landscape.

I think what we're seeing in the OAG for March is going to continue through the summertime frame.

The US flags are certainly going to take advantage of moving into the peak traffic period.

I think how we look at it though is, again, planning for this months ahead of time, the redeployment of these airplanes, Boston up 30% on a year-over-year basis as we move into the summertime frame, the ability to build a pattern of service for the business customer as well as the discretionary customer.

I think we're pretty optimistic about how that can play out.

From the standpoint of slots at JFK, and use it or lose it, and we're hopeful that that will be suspended through the end of the year, even after the runway rehabilitation project closes out on June 30th.

But I think there's no secrets that some of the flying that airlines are doing in the New York metropolitan area isn't necessarily in their best interest because they are holding slots at places like New York LaGuardia and at Kennedy as well.

Potentially that could be the case, Bill, but we're certainly not -- it would be nice to see instead of we're planning to see that.

Is there any reason to think the new Boston capacity or whatnot could spool up, profitability-wise, faster, or should it just follow normal curves?

I'll tell you we're so pleased with what we're seeing in Boston, so a normal curve that we're seeing in Boston is very pleasant to us, and it could exceed that.

Our growth up there from a JetBlue perspective, our partnership with Cape Air, Aer Lingus, Lufthansa, the relationships that we have in the community, it's very heartening for us, but again, we're not hoping for something that hasn't materialized in the past.

What is the maturation curve that we've been seeing in markets like Boston, Pittsburgh adding service, Boston to O'Hare adding service and planning accordingly.

So Boston's been very important to us.

In fact, the ASMs are now over 20% across our network.

All right, thank you for the time.

Thanks, Bill.

Our next question comes from Jamie Baker from JPMorgan.

Hey, good morning, everybody.

Good morning.

David, forgive my ignorance, but have there been any seamless transitions to Sabre in the last few years?

Obviously WestJet's cut-over went poorly, and I think there were a couple of other examples.

I'm impressed with the contingency planning.

I'm just trying to assess if disruption is a foregone conclusion at this point.

Jamie, I love your intro comment.

Forgive the ignorance.

Your point is very well taken.

It's -- transitions with any type of customer service system are challenging, and so we've planned for some level of disruption, some level of delay, but I think the planning that we've seen, according to our business partners with Sabre, they haven't seen this in the past.

The partnership that we've had with other carriers.

By the way, I'll call out to WestJet and Sean and his team.

They've been very helpful to our team in terms of lessons learned.

The training has been going on for months across our airline.

The recurrent training, because the people who went through it six months ago, and the preparation for it.

I think this weekend taking down the schedule some level intentionally and load factors intentionally.

I think internally really managing expectations that it takes a period of time before people are proficient more quickly in the airport, takes a little bit longer in the reservations environment, but I think the belts and suspenders that have been put into place, Jamie, I think similar to terminal five, when we also had questions regarding our ability to basically plug it in.

I'm not going to tell that you we're overly confident, but I think there's some really good planning that's gone into place with this conversion.

Two quick follow-ups then.

Is it possible to even switch back to Navitaire if things don't get off to a smooth start?

And secondly, what level of RASM weakness, if any, related to the cut-over is captured by the Q1 RASM forecast?

I guess put it differently, if you were sticking with the Navitaire, would your Q1 RASM guidance be the same as it is?

The world is binary.

Once you make the decision to convert, and over the course of a 24-hour to 36-hour time frame, you make the conversion, you're running on Sabre, and that's how we're looking at the world.

There's not an opportunity to run simultaneous systems or to fall back.

There are trigger points over the course of the conversion period but it's very limited over that 24-hour period.

Right now by the way, we're agreeing, looking at the weather that's moving across the Mid-Atlantic, our preparation across the airline, I think it's fair to say that as we look at the RASM guidance that we've given into the first quarter, into the year, it's probably helpful to take a look at the full year guidance relative to what we think we can continue to see, not just with our core network, but also with optimizing some of the opportunities that a new CSS system gives us.

So I think it's less relevant to look at that first quarter conversion as opposed to maybe looking at it from a full year perspective.

Okay, I appreciate it.

Thanks, guys.

Thanks, Jamie.

Our next question comes from Will [Rundow] from Citi.

Thank you.

A question on your RASM guidance.

I know it's been asked a couple of different ways.

What sort of improvement is assumed relative to run rates to hit your current guidance?

And then, thinking about it, how does that compare to your industry expectation for RASM?

I've certainly seen industry expectations at a number that looks like PRASM, at 10%, Will, across the industry.

I think that we are, as Ed alluded to we had eight new markets last year.

We're looking for maturation of those markets.

As we build capacity, build frequencies into markets like Boston, and we've announced Punta Cana, again, we're not looking to move off the maturation curve in any significant way there, so it's -- probably the best way I can answer it is, again, we're fairly optimistic with what we're seeing as we move here into 2010, from a PRASM perspective and RASM perspective.

And at the same time we want to be prudent about it.

There's a lot of change going on within JetBlue that I don't think is impacting other airlines, such as the CSS conversion and also the runway project.

I think they will both go very well, but all that said, this is somewhat of a tale of two semesters at JetBlue, if you take a look at first quarter, and again, like back to Jamie's question, I would really -- I would encourage everybody to take a look at our full year, because the second half of the year is so different than the first half of the year because of these two projects.

Then I guess lastly, what is implied by -- for unit costs in terms of growth related to the JFK runway closure, the Sabre implementation, and some of these other one-off issues, and how does that go away when we think about 2011?

I think we did have some one-time costs as we indicated earlier in the first quarter related to Sabre.

That was about $10 million of costs that we won't incur in future periods.

On the runway closure, we have some assumptions, and maybe a little bit more block time related to the runway closure because we want to make sure that we protect our brand and our culture as they move through that process.

But I wouldn't say that that is overly significant.

Okay.

And, Dave just curious, how was St.

Elmo's?

Thank you guys.

Yes, we didn't participate in that, but I think that Bob and his team participated in a nice luncheon yesterday.

Thanks, Will.

Thanks.

Our next question comes from Gary Chase from Barclays Capital.

Good morning, everybody.

Good morning, Gary.

Just one quick nit before I get into some of the network stuff.

You said something about Sabre changing revenue accounting.

I obviously could understand how that would delay your release.

But it's not going to change financial accounting for revenue.

I just want to be crystal clear on that.

No, Gary, it's not changing the way we account for anything.

Then just kind of going back to this issue that I know everybody is kind of trying to tease out a little bit on, can you maybe walk us through, are there fundamental changes that you're making to the network that sort of change the seasonality where we ought to think differently about how the first half is going to compare to the first half last year versus the second half, or is most of what you are describing, Dave, and I know you're trying to point people to look at the full year, is most of the acceleration that I think we're all believing is there, is that a function of initiatives codesharing the capabilities that you think Sabre is going to bring on?

Good morning, Gary.

I think that fundamental changes to the network would not be how I would think about how we're looking at 2010 over 2009.

With a couple of exceptions.

When you're growing in place like, a focused city like Boston 30% year-over-year, that's significant.

And when those flights are into markets like Chicago, we've been in Pittsburgh, we opened Baltimore, Raleigh, Charlotte, clearly those are geared to business markets, business frequencies.

I think they'll benefit our core customer base heretofore in terms of the leisure base.

That is a way to think a little differently about the network.

Kennedy is really underneath a cap, if you will, from the standpoint of the runway construction, and we've intentionally taken out approximately 10% of the flying up in and through the runway construction period.

But no changes there.

As I look at what we're doing down in Orlando, down in Fort Lauderdale, down into Latin America and out on the West Coast, two, thoughts.

One is we're continue to focus into the Caribbean and Latin America.

So no change, no fundamental change in terms of how we're building that part of our network.

As we mentioned in the prepared comments, we believe we'll be approximately 25% of our ASMs in that part of the world.

But here is what's different.

Barbados is now into year two.

St.

Lucia is into year two.

Kingston is into year two.

Montego Bay and the new frequencies into year two.

We're starting to see Bogota into year two.

San Jose, Costa Rica.

So there's maturation that's taking place in that part of the world, there's certainly seasonality with it.

The last comment, Gary that I would offer is, and people would say on the West Coast, as we take a look at our network, in the competitive landscape and carriers that are offering $99 transcon fares, that's certainly something that impacts us, but it's core to us, and we're going to keep flying to places like San Francisco and to LAX and adding frequency into those markets as well.

And feel free to follow up on this, Gary, because I wouldn't want you to think that there's a fundamental change to what we're doing with the network.

It's more building on our strength and the maturation that we're seeing.

And in some of these places, very quick maturation, such as down in the Caribbean and Latin America.

Follow-up, Gary?

You knew I would.

Are you suggesting that off peak the transcons have really -- is there something about the way those are behaving in the early part of the year that we should be thinking factors into the guidance?

No, I just think that when people take a look at JetBlue and the comparisons that take place to other carriers, that it's important to also take a look at -- I know you guys do, but the competitive landscape, as we move throughout the year, the transcons are still 30% of our ASMs, a little bit less than that seasonally in the first quarter.

No, I wouldn't want you to draw a conclusion that there's anything different than usual seasonality going on in the transcon.

But we do overlap with 14% of our seats are into Virgin America markets, and that's a little bit different than I think many other carriers out there.

Just one last one on this topic of reallocating the seats around.

And I know you have talked about how that might be, quote, RASM positive.

I could clearly see how that would be RASM positive in JFK.

But based on the capacity guidance, it looks like the seats are going to be moving elsewhere in the network.

When you think about that stuff coming out of JFK, and going elsewhere, is it at a system level RASM positive?

Because I would think not.

I think it could be, but the way that we're looking at it more is, more from a flat perspective, Gary.

It could.

Kennedy, this 120-day relaxation of the slot rule by the carriers operating out of there, we have every intention of flying those slots when the runways opened up again and building our presence at JFK.

So I think that interestingly enough though, it does afford us the benefit to really take advantage of some seismic changes that are taking place in places like Boston.

I mean, there are airlines, they've been there for decades.

I mentioned earlier that when crew bases are being ripped out, there's still an awful lot of flying opportunity in places like Boston, additional gates, additional flying.

It potentially could but we're not counting on it from the standpoint of a net-net, it's a RASM improvement over the course -- at a system level.

Appreciate the time, guys.

Thanks, Gary.

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

Thanks very much, operator.

Hi, guys.

Most of my questions have actually been asked and answered.

Thank you very much.

But I just have one.

Well two, really.

There's no way, or is there any way to run the website simultaneously while you're doing the cut-off, or it does have to just be shut down?

Good morning, Helane.

It is, it's binary.

We've been out there with communicating along those lines.

There's a migration path that takes place really with customer records, from one system to the next, and then we come up with the new system, and so it's not like you can run two systems simultaneously.

It really is.

You have to migrate the data.

I see, okay, thank you.

Then the other question I have is, I noticed the discussion about moving headquarters to Orlando.

Can you just talk a little bit about that, or is that just, I don't know, I was surprised to see that I guess.

Sure.

I will comment on that.

Potentially we have crew members hopefully listening as well.

Certainly they will on the recording of the webcast.

We are speaking to you from our Forest Hills support center, and this lease expires in 2012, in Darien, Connecticut, we have the same dynamic.

Approximately between 800 and 1,000 crew members potentially on these two campuses.

I mean, the exact numbers, we have an exact number, but it depends on some other positions that are already being reallocated in the airline.

By the end of the first quarter, we'll make a decision whether we remain in New York, whether we relocate.

I think we've been very, very pleased with interest from New York officials, from Orlando officials.

By the way, we have a large operation in Orlando with our training center.

And at the same time, we have a lot of history here, and it's core to the brand from the standpoint of our commitment to our operational center here at Kennedy.

End of the first quarter we'll make a decision.

I think we're placed real well to really seize upon the power of the brand.

Again, in either location, but we're about another 60 days out before we decide.

I see, okay.

And given the expansion that is going on in Boston, is that a consideration?

No, we had a process over the last half year, and it's down to New York and Orlando, and so Boston, we're just going to keep adding gates and frequencies and support space, such as hangars, and take care of our crew members and customers up there.

Okay, thank you very much.

Thanks, Helane.

Our next question comes from Daniel McKenzie from Next Generation Equity Research.

Hi, good morning, thanks.

Dave, just following up on some of your network commentary strategy with respect to Latin America.

I'm wondering if I can just give you a little friendly push-back here.

And I guess what I'm getting at, on the one hand, Bogota is not a typical leisure destination.

JetBlue's price on the market has been pretty stagnant over the past year but on the other, I see JetBlue has adjusted its schedule from an afternoon departure from Orlando to an evening departure, which presumably attracts more business travelers who don't want to cut their day in half.

Just for the record, I've used the service from Orlando, so from a personal standpoint, I hope you don't discontinue it, but from what I can tell Bogota doesn't appear good, so I'm wondering how committed you are to Latin America in general.

I know you've made some positive commentary, but please feel free to disagree with some of my conclusions here.

Thanks, Dan.

By the way, thanks for flying us in and out of Bogota.

It's our first foray into South America.

A couple thoughts, we're very pleased with how Bogota is ramping up.

We also, as we look at how do you feed traffic into Orlando, to connect into Bogota, that's one issue that we look at.

We also look at when we arrive at Bogota, because there's many connecting opportunities on South American carriers and to pick the cities, well, there's Calais, Cartagena, Medellin.

Over into Venezuela, it's interesting what happens there late at night.

But we are very pleased with how Bogota is building.

Interesting to note, the origin traffic to your point is, as we expected, it's heavily Bogota.

And, yes, it's certainly people that are heading to Orlando and the attractions, but it's a business customer who has a choice as well into our network, whether it's point to point, Orlando or into our network.

So we're pleased with Bogota.

As we look at, again, it's, within the company, we talk about being Americas' favorite airline.

That's North, Central, South America and Latin America.

Interesting with what you're seeing with the pricing, but again we're very pleased with how it's maturing.

Thanks.

That will do it for me.

Thanks a lot, Dan.

Our next question comes from Steve O'Hara from Sidoti & Company.

Hi, good morning.

I was wondering if you could just talk about your tax rate.

I apologize if you've kind of gone over it.

It looks like it was 45% in the quarter.

I know it swung around a lot this year.

I'm wondering if you could provide guidance for next year what we might be able to model in.

Yes, Steve, that information will be in the investor update that we file later today.

Okay.

And then secondly, I mean, in terms of the checked bag fees, there's been a couple questions here this morning.

Southwest has been pretty vocal on it.

Can you confirm or deny whether you've seen similar movement in passenger preferences to you guys versus other carriers?

Sure, good morning, Steve.

Anecdotally, yes, we have.

We hear from people, people who are the ASMs of today, snow birds flying down to Florida, north of 35% of our ASM this time of year.

You bet, people are choosing our brand for lots of different reasons, but including the fact the first bag is free.

Anecdotally and potentially more we're certainly seeing that and hearing that from our customer base.

Great, thank you very much.

Thanks, Steve.

We have no further questions.

This concludes our session with investors and analysts.

With that we would like to turn it over to Dave Barger for closing remarkets.

Thank you, Hilda.

Just very quickly, let me close by once again saying thank you for joining us all today on the telephone.

And again, I would like to once again thank our crew members for their excellent contributions in driving profitability in 2009, and even more importantly, in celebration in advance of our ten year anniversary moving JetBlue into the second decade.

Thanks for joining us today.

We will talk to you next quarter.

Thank you, ladies and gentlemen.

We thank you for participating, and you may now disconnect.