JetBlue Airways Corp (JBLU) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the JetBlue Airways first quarter 2010 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 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 now like to turn the call over to Dave Barger.

Please go ahead, sir.

Thank you, John.

Good morning, everyone.

Thank you all for joining us today.

First quarter presented many challenges, including rising fuel prices and several winter storms in the Northeast which severely limited operations at JFK, our home base for extended periods of time.

In addition, we successfully implemented significant phases of Sabre, our new customer services and reservation system.

Despite record first quarter revenues, these factors contributed to a net loss of $1 million or $0.01 per diluted share.

Throughout the quarter, JetBlue's 12,500 crew members continued to run a great airline and delivered exceptional service to our customers.

While we're disappointed to report a loss after four consecutive quarters of profitability, we remain focused on long-term sustainable growth which drives the focus on controlling costs, maximizing revenues and managing capital expenditures.

We continue to focus on building and maintaining our financial strength.

Even after paying down $155 million of convertible debt, we ended the quarter with over $1 billion in unrestricted cash and short term investments or 30% of trailing 12 months revenue, among the best liquidity positions in the industry.

The revenue environment has certainly been improving and we're encouraged by recent trends.

Passenger unit revenues for the quarter were up approximately 5% versus last year, driven by a 4% increase in yield.

We had an average one way fare of $142, our second highest quarterly average fare ever, reflecting the progress of several key initiatives aimed at attracting higher yielding customers, in addition to the effects of an improving economic environment.

During the quarter, as I mentioned, we successfully transitioned to a new customer service and reservation systems Sabre, a Company-wide effort that we began working on in early 2009.

In conjunction with this change, we also integrated new revenue management, revenue accounting and customer loyalty systems.

As many of you are aware, these large scale transitions typically don't go smoothly.

The extensive preparation and investment we made up-front to support customers and crew members during this cutover, including a Verizon back-up call center to assist with customer calls, cap load factors and reduced flight schedules during the cutover period, were key drivers of our success.

Using many of the practices we learned during the successful opening of our JFK terminal in New York, our team worked hard to make the transition as seamless as possible for our customers with the understanding that a limited level of disruption was unavoidable.

While customers have experienced longer than usual call hold times for certain transactions, we're working diligently to complete the key remaining customer touching faces of Sabre, including enhancements to our website made last week.

We're excited about the revenue opportunities Sabre presents, both in the near and long-term.

In fact, we've already seen some of the benefits of this more robust system.

Using our prior system, for example, we restricted filing fare increases and launching sales during the regular operations.

With Sabe we were recently were able to match an industry-wide fare increase during a severe weather event, a seemingly modest accomplishment but a sharp contrast to prior capabilities.

We're also starting to seat benefits of real time, GDS connectivity, resulting in higher yielding traffic.

We plan to add more functionality to the Sabre platform as we move into the second half of this year.

When fully implemented, the Sabre system will provide an important engine for JetBlue's future revenue growth.

It will are provide pricing flexibility that we believe will enable us to attract more business customers and broaden ancillary revenue and partnership opportunities; all core JetBlue initiatives.

With respect to airline partnerships, Sabre is e-ticketing platform will help us to better leverage our growing presence in Boston and our unique position as JFK's largest domestic carrier and New York's true hometown airline.

JFK is arguably the most important gateway in the world, served by over 70 International carriers.

With the Sabre platform, our new terminal, strong network, superior product, low cost and valuable JFK slot portfolio, we believe we're very well-positioned to serve global carriers.

To that end, we recently announced an exciting partnership with American Airlines to essentially feed their key international routes at JFK and Boston.

Specifically, JetBlue customers will have new access to 12 international routes on American, while American customers will have new access to 18 of JetBlue's domestic routes.

We believe this partnership is an innovative and cost-effective way of generating additional revenue by leveraging the network strengths of both carriers and bolstering each airline's New York and Boston's presence.

We also continue to benefit from our partnerships with Aer Lingus and Lufthansa.

As discussed on prior calls, we intend to continue to develop opportunities to monetize our valuable presence in New York and Boston by linking our network with other airlines.

We expect to make additional partnership announcements in the months to come.

Boston continues to be an attractive growth market given our position as Logan airport's leading carrier, particularly as we expect competitive capacity in Boston to decline significantly during the second and third quarters on a year-over-year basis.

In addition, Logan effectively attracts a favorable mix of business, leisure and international traffic.

As a result, we plan to increase our Boston departures by approximately 30% year-over-year this summer, accounting for 4.5 points of our expected 2010 ASM growth.

We believe our competitive position in Boston will continue to improve as, after years of effort, we have an agreement to acquire eight coveted round trip slot pairs at Ronald Reagan, Washington's National Airport.

In addition, as previously announced, we're awaiting approval from the DOT of our bid to acquire five additional slot pairs at this airport from US Airways.

We plan to begin service between Boston and Washington National in November with seven days of round trip flights.

We've long desired to offer our customers this service, as Washington National is the fourth largest domestic market from Boston as measured by revenues.

We expect this new service will generate returns relatively quickly and strengthen our leadership position in Boston.

We also plan to connect Washington National to our other focus cities including Orlando and Ft.

Lauderdale with one daily round trip flight each.

Our Caribbean and Latin-American markets continue to produce strong results.

In addition, these destinations generally require a minimal up-front capital and despite limited daily frequencies, are relatively low cost and consistent with our sustainable growth and free cash flow goals.

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 plan to begin service next month to Punta Cana which will be our fourth destination in the Dominican Republic.

We offer more flights to the Dominican Republic from the continental United States than any other carrier.

In the second quarter, we expect our Caribbean Latin America capacity will be up approximately 20% year over year, accounting for 3.5 points of our expected 2010 ASM growth.

Turning to the fleet, we did not take delivery of any new aircraft during the first quarter, keeping total capital expenditures at modest levels.

As a result, we remain on track to generate positive free cash flow in 2010.

We continue to work with our aircraft manufacturers to reduce our capital expenditures, a critical component of the past positive free cash flow.

In early February, as part of our on-going discussions with airbus regarding our fleet plan, we deferred six 8320 aircraft scheduled for delivery in 2011 and 2012 to 2015.

Our financial strength affords us the flexibility to take advantage of new opportunities.

To that end, we plan to lease on a six-year basis seven used A-320s from G-cast later this year.

These aircraft were previously owned by JetBlue, and will be overhauled and returned to JetBlue's original configuration prior to lease commencement.

Subject to meeting these delivery conditions, three of these A-320s are currently scheduled to be delivered in June, two in the third quarter and two in the fourth quarter.

With these deliveries, we expect to end 2010 with a fleet of 162 aircraft.

We expect the favorable lease terms of these aircraft will support important and profitable growth opportunities in our network, including the launch of new service to Washington National Airport and new service from Hartford, Connecticut to Ft.

Lauderdale and Orlando, building on our successful Northeast to Florida network which is core to JetBlue's franchise.

As we discussed in our last earnings call, the bulk of our 2010 growth is being driven by higher aircraft utilization in the annual run rate of new cities and aircraft added to the fleet in 2009.

While we believe our existing aircraft are either producing returns or are invested in markets with significant strategic potential, we continue to identify opportunities to further increase utilization where demand exists.

For example, we have successfully utilized overnight aircraft time on flights to Puerto Rico and the Dominican Republic, driving revenues with minimal costs.

In contrast, success in key markets such as Washington National will require incremental aircraft for optimal scheduling with prime time departures.

We expect the seven A-320s with drive modest additional capacity growth for the full year or about half a percentage point.

As a result, we expect our 2010 ASMs to increase between 6% and 8%.

For the second quarter, we expect our ASM growth to be up between 4% and 6% year-over-year, again, largely driven by more efficient asset utilization.

Before closing, I would like to provide a brief update on the closure and rehabilitation of JFK's principal runway, known as 13 right, 31 left.

The port authority of New York and New Jersey is about halfway through the project which began on March 1st.

As previously discussed, the major carriers operating at JFK have reduced flights, helping to mitigate the impact of this closure.

We also continue to work with the FAA and the port authority on various operational initiatives to reduce delays during this period.

As a result of extensive planning, we have experienced minimal operational impact thus far.

While we faced challenging weather conditions at JFK during March, we've experienced only brief delays as a result of the runway closure.

Favorable weather conditions during the month of April have certainly helped to minute mise the impact.

The project is currently on schedule with the runway expected to reopen on July 1st, ahead of the summer peak travel schedule.

We look forward to this completion as we believe it will alleviate some of the challenges of operating at JFK.

In closing, I would like to thank our 12,500 crew members for all of their hard work and dedication.

All airlines by the nature of this business are particularly susceptible to changes in fuel, GDP and a host of other external forces.

I believe JetBlue is well-positioned with a strong network, solid liquidity and the best crew members in the industry.

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

Thank you, Dave.

Good morning, everyone and thanks again for joining us today.

I would also like to join Dave in thanking our 12,500 crew members for all of their hard work during a challenging quarter.

Transitioning to a new reservation system has been an enormous undertaking, impacting all of our crew members who have risen to the challenge by running a solid operation during this transition, despite unusually severe weather in the Northeast, including several multiday weather events.

To put this in context, during the quarter we canceled over 1300 flights due to weather, compared to only 550 weather related flight cancellations in the first quarter of 2009.

As a result of the severe weather, we estimate first quarter results were negatively impacted by a net $10 million, including $15 million in lost revenue which was offset in part by $5 million in fuel savings and landing fee reductions.

One-time Sabre related expenses during the quarter were approximately $15 million.

Further, we estimate approximately $8 million in lost revenue related to flight load caps, fee waivers and schedule adjustments made to ensure a successful cutover.

These factors along with rising fuel prices drove a $31 million year-over-year decline in operating income.

Total revenue for the quarter increased 9.7% year-over-year to a record $870 million.

Unit revenues for the quarter increased 3.4% compared to a year ago.

This was a significant improvement from the 3.6% year-over-year decline we experienced in the fourth quarter.

Yield during the first quarter was up 3.8% and load factor was up about 1% on 6% more capacity.

We benefited from positive pricing traction across all markets and participated in several industry-wide fare increases during the quarter.

Monthly PRASM improved throughout the quarter with PRASM down 3% in January and up by 2% in February and 16% in March.

March results significantly exceeded our expectations due to increased strength during the latter part of the month as demand for travel was particularly strong leading into the Easter and Passover holidays, driving higher than expected yield.

We estimate the positive impact of Easter and Passover on March PRASM was approximately 7 percentage points or about 2.5 percentage points of first quarter PRASM.

Given our BFR and leisure focus along with strong Northeast Florida traffic, the Easter and Passover holiday tend to have a greater impact on us compared to many of our peers.

While positive pricing traction during peak travel periods has been encouraging, we still see considerable difference in demand during peak and off-peak periods.

We believe the Sabre platform when fully implemented will help us better manage these trough periods by improving our overall business leisure mix.

In fact, we have already seen some nice yield traction in short haul business-oriented markets since the transition to Sabre only three months ago.

We believe Sabre will also help us maximize ancillary revenues.

For example, we recently began testing our variable pricing approach to even more legroom offering.

Prior to Sabre, we were restricted to pricing EML seats only by segment length of haul.

The new Sabre functionality allows us to set unique EML prices for different markets, regardless of length of haul, to better match price with demand similar to the way we set fares.

We're currently testing various pricing changes in select markets and while it is still early, we believe this change to EML pricing could increase revenue by nearly $20 million on an annual basis.

Turning to our ancillary revenue performance for the quarter, as a result of extraordinary weather in the Northeast and the cutover to Sabre, we voluntarily waived change fees for our customers during more events than we had anticipated, resulting in larger, lower change fees -- lower change fee ancillary revenue.

When ancillary revenue is reported in the passenger revenue line are combined with those in the other revenue lines, total ancillary revenue for the first quarter was about $18 per passenger.

Shifting to costs, fuel remains our most significant cost, representing over 30% of our total operating expenses in the first quarter.

While the price of crude oil increased by about 80% compared to last year, we continue to actively manage our fuel hedge portfolio to help manage price volatility.

Including the impact of fuel hedging, JetBlue paid $32 million more for jet fuel in the first quarter.

For the second quarter of 2010, we've had approximately 42% of our anticipated jet fuel requirements, using swap arrangements, [coffer powers] and caps.

For the rest of the year, approximately 38% of our projected fuel consumption is hedged and we have oil, crude oil caps in place for the first three quarters of 2011.

The underlying details of our hedge positions are more specifically described in our investor update which we filed later today.

The cost of jet fuel has increased since last quarter and remains volatile, particularly in prompt periods.

We're planning on a price of $2.43 per gallon in the second quarter and $2.44 for the full year, including the impact of hedges and taxes.

As indicated in the investor update, these prices are based on the forward curve as of April 23rd and exclude transportation and plane fees.

Excluding fuel, first quarter unit costs rose 8.9% year-over-year.

This was slightly worse than our guidance as flight cancellations resulting from the storms reduced our planned year-over-year ASM growth by about 1 percentage point.

Excluding the impact of the flight cancellations, exfuel costs increased 6.7%, in line with our guidance.

Salaries, wages and benefits increased roughly 11% per ASM on a year-over-year basis, driven primarily by the pilot pay increases that was implemented in June of last year and additional staffing levels related to the implementation of Sabre.

We estimate we incurred one-time costs of approximately $6 million in connection with Sabre-related staffing during the first quarter.

Other operating expenses increased 25% per ASM, due primarily to costs related to the implementation of Sabre.

We incurred one-time other operating expenses of approximately $10 million during the quarter, including the Verizon back-up call center.

Moving below the line, interest expense decreased 6% year-over-year or $2 million, due primarily to lower interest rates.

At the same time, interest income and other increased by $8 million, primarily due to the unrealized holding losses recorded in the first quarter of 2009 related to the valuation of auction rate securities held at that time, impacting year-over-year comparisons.

Turning to the balance sheet, we ended the quarter with unrestricted cash and short term investments of $1.1 billion.

During the first quarter, we made $205 million in debt and capital lease payments, including $155 million of our 3.75% convertible bonds, having original balance of $250 million that as expected, will put us in March.

Our scheduled principal payments for debt and capital leases are expected to be a very manageable $110 million for the second quarter and $200 million for the remainder of the year.

This includes repayment in full of the $63 million loan from UBS which is collateralized by $72 million par value of auction rate securities.

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

We intend to repay the UBS loan from these proceeds.

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

With regard to CapEx, we spent approximately $30 million in nonaircraft CapEx during the first quarter; $7 million of which related to the implementation of Sabre.

We estimate capital expenditures of about $130 million in the second quarter and $365 million for the full year, $220 million of which relates to aircraft.

With minimal debt maturities and capital commitments for the rest of the 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%.

Turning to the revenue outlook, we're encouraged by signs of an improving economy.

In April, we face a more difficult year-over-year PRASM comparison than we did in March.

We currently expect April PRASM to be up about 3% year-over-year.

When we combine our March revenue performance with estimates for April to neutralize the effect of the holiday shift, we expect total PRASM for these months will be approximately 8% on a year-over-year basis.

Although May is historically a trough month due to the large leisure customer base, we expect to benefit from easier year-over-year comparisons.

For the second quarter, we expect PRASM and RASM to increase between 6% and 9%.

While it is still early, preliminary bookings for the summer travel period looks strong.

As we move through the second half of the year, PRASM comparisons become sequentially easier as we expect to benefit from the continued growth maturation of new markets opened in and before 2009.

And in addition, we expect to see continued revenue benefits from Sabre.

While ancillary revenues lag a bit in the first quarter as a result of change fee waivers associated with the severe weather and our transition to Sabre, we expect ancillary revenues for the full year to increase approximately 10% year-over-year.

We currently expect full-year RASM and PRASM to increase between 6% and 9% year over year.

We continue to work hard on the cost side while at the same time making prudent investments in our infrastructure, product and network.

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

As we discussed in our last call, we expect these cost pressures to be heavily weighted in the first half of the year as we anticipate realizing the benefits for modifications to work rules toward the end of the second quarter.

While we don't expect any additional material one-time expenses associated with our transition to Sabre, we do expect to face continued pressures on salaries, wages and benefits due to longer talk times for our reservation agents required by the increased Sabre functionality and recent changes made to our loyalty program TrueBlue.

Also, as a reminder, we recognized approximately $11 million in tax incentives during the second quarter of 2009 which were credited to other operating expenses.

This will impact our year-over-year exfuel CASM comparisons in the second quarter by about 2 percentage points.

We expect exfuel CASM in the second quarter to be up between 9 and 11 and CASM all increased about 12 to 14.

For the full year, we project CASM will increase 8% to 10% and exfuel CASM will be consistent with our January guidance of up 3% to 5%.

In closing, while it is disappointing to report a $1 million loss for the quarter, particularly against the backdrop of four consecutive quarters of profitability, we believe we are on the right track to return to sustained profitability.

We're making prudent investments designed to generate additional revenue over the long term while maintaining our financial strength.

We thank you customers for their business and our shareholders for their continued support.

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

Thank you.

We will now begin the 30-minute question-and-answer session for the investors and analysts.

(Operator Instructions).

Our first question comes from Bill Greene from Morgan Stanley.

Please go ahead.

Good morning.

I'm wondering, can I just talk more on the Sabre one-time items?

If I heard you correctly, it was about $15 million in costs and $8 million in lost revenue.

Is that right?

That's correct.

Does any of this roll forward into your second quarter guidance or are those truly one time that don't repeat?

There is a few one-time items that will roll into the second quarter, but they're not of any significance.

The majority of it really hit in the first quarter.

Okay.

Going forward, there's not a higher expense number we need to bake in for Sabre just for running it, just being a more expensive system or something?

There are a couple of things you need to take into consideration.

First is I don't think we're ever going to get back to where we were at from a reservation center perspective.

This is a system with additional functionality.

There's probably some built-in inefficiencies there.

Also, we have a little bit of a shift in distribution channels with higher GDS bookings, and as the revenues increase, also higher credit card fees.

There are some ongoing, but more than offset by the revenue that will be generated.

Okay.

Then if I listen to your RASM guidance, I just want to make sure I understand this, you said a plus 3 is your expectation I think for April.

If I remember correctly last year, you had plus 5 on the RASM numbers.

That's actually a pretty good starting point for the comps to get a lot easier, down double digit in May and June.

Wouldn't that suggest something much better for RASM or what do you see that's giving you the decision that you want to be conservative here?

Yes, good morning, Bill.

When we look at the second quarter and you're right, the year-over-year comps in May and June do become easier.

This is still -- when you get outside the Passover, Easter, spring break travel period, for our company, as it stands today, even though we're looking to further diversify our customer base, this is a period of time where we traditionally have been weaker than other quarters.

This is how the math is running right now.

It was really interesting to watch the March bill.

So much of what we thought was transpiring was tied into the holiday peak and the peaks are strong as before, but the troughs are still the troughs.

And this is what we're looking to minimize across our company.

But you had a number of negative one-time events that won't repeat as well that should make it easier.

No?

That's true.

I think when you look at things like the number of winter events that we had and that type thing.

But it is still -- when I look at our customer base and the strength of -- again, seasonally, Florida, the Caribbean, as we're looking to smooth in more of a business base, this is where the math is taking us.

And I think we've always attempted to be very transparent when it comes to our guidance.

No, you have.

I was thinking adding back $8 million of this stuff would be -- it just feels like it should be a stronger number.

I understand you want to be conservative and that's tough to predict.

Thank you for the time.

Thanks, Bill.

Our next question comes from Will Randow from Citigroup.

Please go ahead.

Good morning, guys.

Good morning.

Can you talk about the -- when you thought about the seven aircraft, can you talk about the incremental return on capital?

How you thought about that, assuming that you're capitalizing leases when you're running your math and just how we should think about that?

Will, I think there are a couple of things we took into account on these aircraft.

One was the ability to defer some of the A-320s going forward.

If you look at our commitment to take A-320s, it really hasn't shifted much for the next three years as we deferred six and moved seven forward.

Second thing is we previously owned these aircraft.

We're pretty familiar with the aircraft.

They are in our configuration.

They're going to be coming off of C checks and engine overhauls and landing gear changeout.

They should be in pretty good condition.

We really got some pretty favorable lease conditions on these as well.

All in, I think it was a win-win.

You couple that with really, as we've said before, we're not going to let the order book dictate what the network looks like.

The network really had a need for these aircraft.

They more or less pulled them through and the timing worked out well, I think for us.

Just as a follow-up, did these aircraft hit the return of invested capital target or is it more you're trying to build business schedules in Boston?

How should we think about that piece of it?

I think they really fit in well with our free cash flow.

From not having to put down predelivery deposits on the aircraft, from having favorable lease payments on the aircraft, as well as maybe a maintenance holiday on them as well, I think they fit well in with free cash flow.

The markets we're going to put them in immediately, I think they're actually accretive with free cash flow for 2010.

Just lastly, Dave, could you hit some of the potential second half ancillary initiatives we should be thinking about, given the Sabre limitation?

I believe you were testing a number of initiatives recently.

Good morning, Will.

I think we're managing expectations with the ancillary revenue initiatives.

What I mean by that is Sabre, the conversion of Sabre is still pretty fresh.

Our technology team likes to remind us and they're accurate that the tail on the implementation of Sabre is several months as we move throughout -- really into the second semester of the year.

Things like even more legroom, as Ed mentioned in his comments, in the ability to really price into the LA basin, but differentiate what we're doing versus a Burbank versus a Long Beach.

That's a real positive.

Last quarter, really not tied into Sabre.

Ed talked about the ability to buy on board product, which is really out into the second semester this year.

I think it's probably -- the headline really, Will, is even though Sabre gives us a great deal of capability, we still need to further digest the system before we really roll out further ancillary revenue initiatives.

I think this is where we're being tempered in terms of how we're taking a look at the rest of -- the second half of 2010 versus the first half.

Thanks, guys.

Sure.

Thanks.

Our next question comes from Gary Chase from Barclays Capital.

Please go ahead.

Good morning, everybody.

Good morning, Gary.

Just wanted to get a little bit more color if I could, on your thoughts about how the back half of the year plays out.

I know you've got accelerating capacity growth.

And by the way, as somebody who has Hartford as the hometown airport, I appreciate it.

Not complaining about that part of it, but we generally think of incremental costs on that incremental capacity.

I think I understand where the CASM guidance goes as you move throughout the year.

What's a little harder for me to get my arms around is the RASM guidance.

It would seem like the incremental profitability you're talking about as you add these flights is going to be significantly better than I would naturally guess.

I'm trying to drive at what's in the assumptions?

Do you have industry improvement modeled in?

Do you think some of the partnerships kick in?

Is there a meaningful contribution from the GDS mix?

What is it that makes this accelerating capacity so compelling?

Good morning, Gary.

I think again, first of all, just to highlight the four ember airs that we are taking the share, as well as the seven A-320s announced today, aggregated as approximately 1% of our ASMs over the course of the year.

I think of these aircraft really as more running into 2011 and beyond, if you will.

When we take a look at first quarter from the standpoint of revenue, and again, the strength really into March tied to the holidays.

A little bit early to try to dissect -- what are we seeing through the GDS channels.

What are we seeing as a result of Sabre and then the seasonality of what we're seeing into the second half of the year, it is really the maturation of markets.

I think I would probably manage expectations.

It is less about Hartford and Reagan and even Punta Cana because Hartford and Reagan are really in the November timeframe.

It is the overall economy.

It is the industry's strength that we're seeing.

I think again, it is this commitment to building strength in Boston and building strength in Latin America and really, the rest of the system is still flat.

This is truly an investment in two targeted areas.

And again, these markets, several that we opened last year, there's maturation on a year-over-year basis.

Something I would add to that, Dave, also the impact of Sabre toward the back half of the year as well.

Definitely.

Whether it is GDSs or changing business mix or otherwise, I think it will be added.

It is a little hard to tell.

It feels like not necessarily for JetBlue, but you're certainly going against some tougher industry comps as we get into the third and fourth quarter.

It seems like you're suggesting your own performance is going to accelerate against that backdrop.

Is there a way to think about how much of it is maturation?

Is that basically the story?

Do you have a material contribution from partnerships and a different business mix with Sabre?

Yes, and thanks, Gary, for highlighting the partnerships because I didn't cover that in my first set of comments.

I think again, managing expectations, the Sabre conversion is so close in.

Things like Lufthansa, not overly meaningful at this point, especially as we take a look at how we're being sold as a nonstar carrier.

Things like American really aren't into the second -- later into the second semester.

What's really in play has been the historic presence of Aer Lingus.

I think it is -- I would ask you to take a look at the second half of the year as less about partnerships, although we're building the partnerships.

We've made the investments, Sabre, terminal five, the focus up in Boston as well.

I think -- I would think of it as really Boston investment, year-over-year, we're up 30%.

Six years ago, we weren't in Boston.

This summer, we'll be at close to 80 departures a day and this investment in Latin America as well.

And the industry, as you know, we don't fly the long haul international first class, business class.

We're not a 70% corporate based company.

When we look at our network, during difficult times, we tend to do very well.

And when the economy is raising all ships, maybe we're not as hot as some of the other carriers as well, the cyclicality if you will, of their business model.

That's how we're looking at our revenue environment.

Okay.

I apologize.

This is a cleanup.

Sure.

If you said it -- the Sabre cost impact in Q2, did you quantify that in dollars?

We did not.

Okay.

Is there a meaningful -- is that --

It is not a meaningful one-time cost.

There is some stuff that dribbles over a little bit.

But there are on-going costs and we did cover that in the RES center and an increase in GDS bookings.

That's the way you should think about it.

Okay, guys.

Thanks.

Thanks, Gary.

Our next question comes from Jamie Baker from JPMorgan Chase.

Please go ahead.

Hey, David.

Good morning.

Good morning.

I'm more of a white planes guy myself versus Hartford.

But yes, whatever.

Question on the cost guidance and tarmac delays.

I'm wondering if you specifically budgeted for any violations of new three-hour rule.

The reason I ask is that obviously a single event could be as much as a $4 million hit.

In the event that you had a violation, I'm trying to decide whether that automatically brings earnings down or if you've not -- if you've already baked something in relative to storms, then maybe it doesn't.

Obviously, the goal is to avoid those delays.

If it happens, I'm wondering how we should treat our models.

Yes, it is a -- Jamie, as I look at it, the three-hour tarmac delay rule into effect this past Monday, we look at zero as the right number.

And so that's how we're building our model, whether it is operationally or financially.

By the way, I think internally at JetBlue, we're calling it a two-hour model.

That will start to trigger decisions at two hours.

We'll see how the rest of the industry treats it.

We have to be sensitive because of our geography up here in New York or up in the Northeast.

That's how we're looking at it.

It is -- zero is the right number.

Okay.

That's a big help.

Thank you very much.

Great.

Jamie, by the way, largest airplane at White Plains so maybe --

I've noticed every time I'm in the backyard.

Thank you.

Our next question comes from Kevin Crissey from UBS.

Please go ahead.

Good morning.

Good morning.

Did my math not work or was it the adjustments from Sabre and the other effects with the monthly RASMs not totaling to your quarterly RASM or did I do something wrong on that?

If ASM weight the guidance that you had on the monthly RASMs, I came out at 6%.

I think the number was a bit lower than that.

I don't think there was anything wrong there.

The monthly traffic that we release are preliminary numbers.

As we go through the quarter close, certainly subject to adjustment and sometimes those round down.

Okay.

And then are you seeing -- for the Caribbean in May, we have data that looks a little soft in the Caribbean in May.

Something you're seeing as well?

Or not so much?

We're seeing strength in the Caribbean.

That said, our ASMs are up on a year-over-year basis and and the industry, when we look at our landscape, is also up on a year-over-year basis.

But I think anything that we're seeing in the Caribbean as opposed to a one-month look and two weeks ago, as we spent three days in the Dominican Republic as an example, Latin America, the Caribbean, very strong.

Okay.

One last note if I could, Dave, you mentioned looking at how Lufthansa's selling your tickets as a nonstar carrier.

I took that to be not as well as you would like.

And if that's the case, I want to understand their thoughts on your AMR relationship and their seats on the Board and their share of ownership.

Sure.

I think headline with the Lufthansa team -- incredible strength that it has provided to JetBlue and respect the investment the Board seeks global expertise.

We always knew though, Kevin, that as a result of not being part of star, then you add Continental into star, that when you look at biased from the standpoint of connecting opportunities, there would be less of it.

Now, all of that said, Lufthansa is one airline, there are several airlines within the star alliance.

As you look at the American partnership that we've announced at this point, it is airline slot trades, the ability to really use our architecture at JFK and Boston in -- I think we're starting to see this affirmation of our investments.

It is Aer Lingus, it is Lufthansa, it is American.

And as I mentioned in my prepared comments, additional announcements in the weeks and months to come.

I think that's the way I would ask you to take a look at it.

That's pretty much the way that our commercial team has been looking at it over the last several months, not knowing exactly what would transpire until we made the conversion over into Sabre.

Okay.

Thank you.

You got it.

Thanks.

Our next question comes from Dan McKenzie from Hudson Securities.

Good morning, guys.

Good morning.

One quick follow-up question here on the tarmac rule.

Potentially, a problem here with canceling flights at JFK is the lack of gates to return to.

I'm wondering if you can elaborate a little on your contingency plans, such as gate or hard stand space availability.

Sure.

Good morning, Dan.

By the way, the port authority conducts, and the FAA, a fabulous tour of the runway construction project.

Even though we're talking about the early July timeframe, I wouldn't be surprised if the project comes in not just on time, but early.

I think the way that we're looking at Kennedy and as we're looking at our entire network this way, it -- always be ready for the unexpected.

By the way, that could be a diversion, Atlantic City, think Hartford.

It could be a Stuart Newburg or whatever the case may be up here.

How we're looking at Kennedy, our investment, 26 gates plus our hard stand, 14 acres adjacent to terminal four terminal five, as well as acreage over at terminal six, our former home, I think really sets us in very good shape at Kennedy.

But the spirit of Kennedy, we're taking to every other station across our network.

If I may, too, Dan, I think what's really interesting about what's happening at Kennedy today and applaud us to the FAA and the port authority, some of the procedural changes, departure sequencing and the ability to sequence through a centralized command center access to the runway, we would like to think this will stay in place even after the runway construction process.

This is a real positive for Kennedy airport and the attributes of being environmentally friendly, et cetera, are significant.

We're also doing things such as 31 right departures.

You're very familiar with JFK and the ability to see flights heading over the west coast over Robinsville, but departing on 31 right.

Decoupling with La Guardia, a real positive, Dan.

I think there are some really good lessons learned, but we're not taking the three-hour tarmac delay lightly.

That's a statute that's very meaningful to this company.

Okay.

Thanks for that.

And then secondly, costs that are up 12% to 14% versus revenues only up 6% to 9%, obviously are not sustainable.

It look like these trends are moderated with respect to the full year.

And it looks like a lot of the relative mismatch in 2010 seems to be capacity that left JFK and went to Boston, perhaps other markets which may be pressuring overall RASM trends given the increased overlap with Southwest.

My question is whether or not the network strategy has reset again once the runway at JFK is fixed.

More specifically, wondering if you can help us understand the balance, the commitment to markets that you're in today versus the competitive headwinds.

Sure, Dan.

JFK, home base, new terminal, working with the port authority on other investments, the decision to relocate to Long Island, City in Queens, New York's hometown carrier.

No movement at all away from our commitment to New York and the five airports that we serve.

By the way, a comment, the slot trade with American Airlines for -- as we'll call them off-peak slots for us, relative to American's network, in exchange for very valuable commodity at Reagan National, very positive.

When the -- and this year by the way, the use it or lose it rule with the slots is waived because of the construction.

But even with this trade, JetBlue, largest carrier at JFK, that's very meaningful to us and other global carriers that find New York as arguably the most significant gateway in the world.

When I look at Boston, this commitment to Boston, there is a significant year-over-year build.

I wouldn't think of this as a drag on RASM at all.

I would think of this as a longer term commitment to build relevance in Boston or in Latin America.

Let me just go back to Boston for a moment, frequencies for the business flier, Sabre, a new TrueBlue program.

It is a -- as we look at the rest of our network, commitment to the rest of our network, but very significant commitment to Boston, Latin America.

Okay.

Thanks a lot.

I appreciate that.

You got it, Dan.

Our next question comes from [Justine Fisher] from Goldman Sachs.

Go ahead.

Good morning.

Good morning.

Speaking of targeting more of the corporate market in Boston, with the new relationship with AMR, given that they don't have a shuttle, is there any way -- would you guys consider creating a shuttle-type, more corporate focused operation with them between New York and Boston now to compete with the other shuttles?

Interesting, Justine, and good morning.

As we take a look at Boston, our focus into New York is really through Kennedy.

And if I read your question, is there something we can do with American into La Guardia with what they're doing with Eagle and I can honestly tell you we've had discussions on interline and slot trade and we'll see where the teams go with further discussions regarding partnership with American Airlines.

But today, the only focus is really on the 18 JetBlue routes and the 12 American routes.

We're not talking about Boston and La Guardia specifically.

Okay.

And then just on the A-320s, you guys chose to defer the newer aircraft to 2015.

It seems as though whatever capacity was going to be added, that you would have used those for your [nine Ds] new leased aircraft.

Why the decision not to take the new deliveries?

Was it PDP financing or just getting attractive lease rates?

Why would you not -- or was the timing of the decisions different, such as you had made the decision to defer before you got the deal from G-Cast?

I think it is all of the above.

There was a need to move some aircraft forward.

The leases are very favorable.

They do defer PDPs at the same time as we defer those aircraft.

As I said, very accretive to free cash flow.

I think it fits well with our business plan.

Okay.

Thanks very much.

Thanks.

Our next question comes from Hunter Keay from Stifel Nicolaus.

Thanks very much, guys.

Good morning.

Question for you on your slots at JFK, how many more of these do you think you're willing or able to monetize?

Is there a bit of a concern from maybe a political blowback and the way you received the slots in the first place if you try to -- I don't want to say divest, but let's say swap any more slots going forward?

Do you think there is a cap on that as much as you would be willing to go?

Hunter, I think as we look at Kennedy, it is significant investment.

That's our home.

This was a perfect opportunity because of underutilized slots because of time of day and then access into Reagan National.

I would never say never, in terms of the ability to take advantage of another opportunity that might be in the landscape.

But we built terminal five for close to 200 departures a day.

We need our slot portfolio to support what we're looking to do with our investment at terminal five.

Hopefully that gives you color there.

That's helpful.

Thank you.

Just to -- a little bit of a piggyback on Justine's question, I would like a little more color if you would, on the lease decision.

Because it looks like you're running your fleet -- you're clearly running it less than 12 hours a day.

Utilization is down something like 14% from peak levels.

Do you think there might have been an opportunity there to fund some of this growth in new markets from underperforming [revenue]?

You mentioned yourself that the trough periods are not performing as well as you hoped.

Maybe some Southwest-like-schedule optimization to fund the new growth rather than pulling forward new aircraft and leasing new (inaudible) from G-Cast?

Any color there would be helpful and thanks a lot.

Sure.

Hunter, I think it has more to do with the overall business plan.

The way that we achieved a lot of utilization in past years was really back of the clock flying, a lot of red eye type flights.

And what we had the need for specifically with Boston and DCA was more business type flights.

They needed to be more peak period flying.

That was the need for the additional aircraft.

As the economy comes back, I think there will still be the ability to add back of the clock flying and maybe push [stabilization of bull whip].

Very good.Thank you.

Thanks.

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

Thank you very much, operator.

Hi, guys.

Thank you for taking my question.

Most have been answered, but I do have one on the revenue that was affected in the first quarter.

Did that number you gave us include the impact of the waived fees?

And if not, do you have an estimate for what waiving fees would have cost you in the quarter?

Yes, the lost revenue in the first quarter associated with the weather event did include the lost fees.

We haven't specifically indicated what the exact amount of the waiver was, but it did impact the other ancillary revenue lines.

I think it is probably something you can figure out.

Yes, yes.

Okay.

Thank you.

Then the other question I have is just with respect to the tarmac rule.

If you have to cancel a flight and then you rebook -- your goal would obviously be to rebook the passengers.

Do you have to refund the money if they're not able to rebook?

I think that when we look at -- in essence, that would probably be a weather cancellation, the way that I'm surprising how you asked that question.

We're certainly going to take care of the customer.

We have our own bill of rights that has been put into place since 2007.

Including when we can't make good on a trip, due to weather, we're certainly going to give you the opportunity to rebook.

But if you can't, Helane, and that's pretty rare, I'm sure we would take care of the customer.

Okay.

Just from an industry point of view, that's going to be a company by company decision?

Yes, I would think so.

The statute itself, it is specific in terms of the statute.

I think every airline will take their own position on what they're doing with customer service.

Again, I believe we're the only airline out there in the landscape with our own passenger bill of rights.

And so again, my comments earlier on the call, we pick the tarmac delay statute -- we take the tarmac delay statute very seriously.

Okay.

Got you.

Okay.

Thank you very much.

I appreciate your help.

Sure, Helane, have a good day.

Thank you.

Our next question comes from Duane Pfennigwerth from Raymond James.

Good morning.

Just on the aircraft that you're pulling forward, I missed the justification on that.

It was that you couldn't grow fast enough in Boston without them?

I think, Duane, it was really more the alignment of opportunities.

It was the opportunity to grow in Boston.

It was the opportunity to grow in DCA.

Along with and well aligned with the need for G-cast to lease the seven aircraft that came back to them.

Getting favorable leases on the aircraft that are well aligned with opportunities I think was a win-win.

Okay.

What was your capacity growth in Boston for the second half ex these aircraft?

Really, these -- overall, the seven aircraft, the way that they're layered in, Duane, it is like 0.55% of our ASMs for the year so it is not material.

What we're doing with Boston and down to DCA really isn't until the November timeframe.

I think, you know, as Ed mentioned, this is an opportunity -- these aircraft, we have maintenance program on these aircraft since we took delivery of them.

It is not too often, aircraft that we've sold at I think a nice gain, that come back into the portfolio that we're familiar with, that fits quite well with our free cash flow model and works quite well with what we're looking to do with the network as well.

That's what really drove the decision.

I do think, Dave, a lot of the growth is very targeted as we've said before into the Caribbean and into Boston.

A lot of it was funded, as you had suggested, by the remainder of the network.

If you looked at the rest of our network, absent Boston and the Caribbean, it would actually be down.

It was either through increased utilization of existing aircraft or pulling down other routes, then you had the addition of these aircraft as well.

Okay.

On your exfuel CASM growth this year, call it 4 points, can you quantify how much of that is nonrecurring Sabre and JFK?

Looking forward, how much of that do you think you can get back next year?

What are you thinking -- given these aircraft that you're pulling forward, how are you thinking about growth beyond 2010?

Should we be thinking about 10% growth next year?

And in that context, should we be thinking about continued pressure on exfuel CASM next year?

Any help there, please.

I do think that we have -- probably moving forward, an easier time with exfuel CASM.

If you look at the increase in pilot pay that we implemented in June of 2009 and the expected efficiencies from work rules that will be roughly in the balance of this year, you look at the one-time cost of $15 million for the Sabre implementation that impact the first quarter of this year, compared to the following years where we'll get some of the efficiencies from actually implementing that.

I do think they get easier, the potential wild card in that -- not a wild card, but we will have increasing maintenance probably over the next couple of years as the fleet continues to age.

I don't see any other big drivers of exfuel CASM moving forward.

And any thoughts on [eleven] growth at this point?

No, we really haven't guided to that.

You can look at what our commitments are for aircraft.

We have four A-320s and five E-190s committed in 2011.

Thanks.

I think Jim may have a question.

Sure.

Yes, I have a question.

Jim Parker for Dave.

Bringing the six 319s forward, just reminds me that the industry most -- well, a lot of people in the industry are saying we've learned our lesson about growing capacity.

But you are bringing six aircraft forward, the industry has deferred a lot of aircraft perhaps they, if certain parties begin to bring aircraft the others will are want to take their market share.

Dave, my question is, and I think you've been an advocate of suggesting that big problem with the industry is there's too much capacity.

Is the industry going forward, is the revenue environment that good that they -- maybe it is time to think about adding capacity and has the industry learned its lesson?

Thanks, Jim.

And I think the -- just clarification, we're -- seven A-320 fits right into the fleet.

We also in February announced a deferral of six A-320s from 2011 and 2012 into the 2015 timeframe, just a clarity there.

I think -- what we're doing with our growth, even before these aircraft -- and so as you look at our ASM guidance that was issued in the last call, ASM guidance that's issued today which is fairly -- it is not a large number of change because of the way the aircraft are hitting the fleet.

But our growth, Jim, is very targeted in Boston.

Boston is again -- we weren't there six years ago.

We'll be close to 80 departures a day this summer.

And then Latin America -- when I think about our targeted growth because the rest of -- our system is flat or down just a little bit.

You're right and I have been challenged with that about the rest of the industry.

My comments would be that we're driving our business based on free cash flow on a sustainable basis.

Every investor conference I go to is the return on invested capital metric.

And without declaring what that range is, you bet.

That's how we're running our company.

I think that when I look at the rest of the industry, who has tended to benefit from either some reset in their business plan called bankruptcy or a merger or acquisition, they've run their models differently.

I continue to believe that the way that they look at North America or across relative to our route network is differently.

They look globally and I think the way that we look is certainly our focus it is -- it has been New York.

Obviously it is Boston.

It is Latin America and other focus cities as well.

I think that's why we're different, Jim.

Okay.

Thank you.

You got it.

Talk to you later today.

Our next question comes from [Steve O'Hare] from Sidoti and Company.

Good morning.

Good morning.

Can you just talk about the unitization pressures and if you guys think there will be any added pressure, given the environment and the administration going forward?

Sure.

And thanks for the question, Steve.

The answer is yes.

And I think as we take a look at -- what I mean by that is a change within the NMB and there's been quite a bit of discussion regarding changing the landscape, in terms of employees electing to unionize which obviously they have the right to do so.

And so there's quite a bit of changes taking place from Washington.

All of that said, I would like to think we are running our company regardless of changes taking place in Washington underneath the NMB rules.

That is that we want to collaborate with our crew members, as opposed to negotiate with our crew members.

And so I think that yes, there's changes taking place within Washington.

The landscape is shifting a little bit differently.

I would like to thank our 12,500 crew members, including leadership, we're looking at our vision and our goals through the same lens.

Okay.

Thank you very much.

Thanks.

Our next question comes from Bill Mastoris from Broadpoint.

Please go ahead.

Thank you.

All of my questions have been answered, although Ed, if I could ask you to briefly review your long-term debt payments, that would be appreciated.

Bill, maybe instead of doing it on the call here, we can just hook up later.

Okay.

Sounds great .

Our next question comes from Bill Greene from Morgan Stanley.

Please go ahead.

John, I think Bill was the first question out of the box.

Pardon me.

Bill Greene, your line is now open.

More than happy to take it if Bill is there.

At this time, we have no further questions.

With that, we'll turn it back to you, Dave, for closing remarks.

Thanks, John.

To those of you on the call today, we certainly appreciate you joining us.

For those listening in on the webcast as well, I think most importantly to our 12,500 crew members, truly appreciate your dedication to delivering the JetBlue experience.

Until our next quarter, thank you for joining us today on behalf of our crew and New York's hometown airline.

We'll talk to you in 90 days.

Thanks.