JetBlue Airways Corp (JBLU) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the JetBlue Airways second quarter 2010 earnings conference call.

Today's call is being recorded.

We have on the call today, Dave Barger, JetBlue Airways CEO and Ed Barnes, JetBlues CFO.

As a reminder, this mornings 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 an therefore investors should not place undue reliance on those statements.

For additional information concerning factors that would 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 for joining us.

We're pleased to return a profitability in the second quarter and record an operating margin of 10.1%, our highest operating margin since the third quarter of 2007.

We reported net income of $30 million, or earnings of $0.10 per diluted share, that's $10 million better than a year ago.

Our second quarter results show meaningful improvement over last year, and represent our best performance in the last 11 quarters, underscoring the progress we have made to strengthen our network, maximize revenues, control costs and maintain a long-term sustainable growth rate.

We also continued to focus on building and maintaining our financial strength, ending the quarter with roughly $1 billion in unrestricted cash and short-term investments, or 28% of trailing 12 months revenue, among the best liquidity positions in the industry.

All 12,500 JetBlue crew members should be extremely proud of what they accomplished during the quarter, especially in light of the challenges of acclimating to our new customer service and reservation system saver, which we began implementing in the first quarter.

As a testament to these efforts and the strength of our product and brand we were recently awarded the highest customer service ranking among low cost carriers by J.D.

Power & Associates for sixth year in a row.

Of note we have the highest score of any North American airline ranked in the survey.

I'd like to take this opportunity to thank our crew members for their tremendous hard work and dedication.

We believe running a safe, reliable and productive high quality operation with a strong customer focus is the backbone of our success.

Our increasingly loyal customer base helps maximize profitability of our network which we believe in turn enables sustainable growth.

To sustain growth, we must make prudent investments in our future, the Sabre platform is allowing us to better scale our business, including more seamless integration with airline partners and better connectivity to global distribution systems.

While we began to realize some benefits of this most robust system back in February we continue to see even more revenue growth as we add functionality to the Sabre platform.

For example, we recently added several classes to our fare structure, enhancing our pricing and revenue management capabilities.

In addition to improved revenue management capabilities Sabre has enabled us to expand our ancillary revenues initiatives as well.

I mentioned last quarter, that we had begun adjusting the pricing structure of our even more leg room or EML product, and now we're able to offer 11 price points for EML based on customer demand on a particular route rather than length of haul.

This initiative is on track to generate an incremental $10 million in the second half of this year.

Improving economic conditions are clearly having a positive impact on demand for air travel as total revenues were up 16.4% versus last year and unit revenues for the quarter were up 10.4%.

Second quarter revenue performance exceeded our expectations as a stronger fare environment contributed to significant year-over-year revenue gains even as capacity increased 5.5% during the quarter.

We had an average one-way fare of $139, a 10% improvement over last year, reflecting the improving demand environment as well as our ability to attract and retain higher yielding customers.

Revenue results demonstrate that our network strategy is working.

With a low-cost structure we have continued to successfully expand our network footprint in two important growth regions, Boston and the Caribbean, Latin America.

Since 2005 we have increased available fees in Boston by over 300%.

We are now the largest carrier in Boston in terms of seats offering 77 daily flights to 33 designations.

As we expand in Boston with new cities and increased frequencies we've become more relevant to business as well as leisure customers.

As part of this effort we plan to begin service from Boston to Sarasota and to Phoenix in the fall, further solidifying our position as the largest carrier in Boston.

Schedule optimization along with a re-vamp more meaningful TrueBlue program have helped us build and grow a loyal base of Boston business customers.

We believe we are well positioned as Logan Airports leading carrier and we expect to continue to benefit from competitive capacity trends.

We expect competitive capacity in our Boston markets to be relatively flat year-over-year in the third quarter of 2010.

Our Caribbean and Latin America markets also continue to perform well.

We continue to see solid year-over-year RASM improvement even as we grow in this key region.

By the end of this year we expect roughly 20% of our capacity will be in the Caribbean and Latin America.

While growth this year is targeted in Boston the Caribbean, we continue to leverage our you unique position as New York's true hometown airline and monetize our highly valuable slot portfolio at JFK Airport through airline partnerships.

During the second quarter, we began connecting customers on South African Airways.

And today we're pleased to announce a new partnership with EL AL Israel Airlines, our sixth Interline partner.

Customers will be able to purchase a single itinerary for travel on flights of both carriers in one simple transaction enjoying seamless connections at JFK between over 50 JetBlue cities and 38 cities in the LL network..

With 70 international flag carriers operating at JFK, we continue to pursue additional partnerships to flow incremental passengers and revenue through our network.

Earlier this week we launched our Commercial Agreement with American Airlines.

Customers can now purchase flights in non-overlapping markets from JFK and Boston through travel agencies, American Airlines ticket counters or by calling American Airlines reservations.

In addition, we announced plans for our frequent flyer reciprocity with the American Airlines Advantage program later this year.

This element of our partnership with American renders our agreement and even more valuable product offering for customers of both airlines.

Turning to the fleet.

We're committed to modest aircraft capital expenditures in 2010, and we remain on track to generate positive free cash flow in 2010 as well.

We took delivery of two Embraer 190 aircraft during the second quarter and we plan to take delivery of two more E-190s in the second half of the year, all of which were or will be financed with Brazil Export Financing.

Last quarter we announced plans to lease seven previously owned A320 aircraft this year, that number is now six.

We expect to take delivery of three A320s in the third quarter and three A320s in the fourth quarter.

With these deliveries we expect to end 2010 with a fleet of 161 aircraft.

As discussed on prior calls, the bulk of our 2010 ASM growth is being driven by our expansion in Boston and the Caribbean.

The rest of the network is shrinking in 2010 on a year-over-year basis.

For the third quarter, we expect our ASM growth to be up between 6% and 8%, and we expect our fourth quarter capacity to be up between 9% and 11%.

For the full year we expect our capacity to increase between 6% and 8%, unexchanged changed from previous guidance.

Before closing, I'd like to provide an update on the rehabilitation of JFKs principal runway, 13 right, 31 left, which was successfully completed last month.

Service on the newly repaved bay runway began on June 29, two days ahead of schedule.

Thanks to diligent construction management by the Port Authority of New York and New Jersey, and excellent cooperation between the FAA and the largest airlines operating at JFK, the project did not significantly impact our operations in any way during the four-month closure.

We are pleased the project is behind us and we continue to work with all stakeholders to ensure the traffic flow procedures used during the construction period continue into the future.

Most notably, the departure of metering process has proven to reduce taxi times and fuel burn.

In closing, I'd like to once again thank our 12,500 crew members for all their hard work.

We face significant challenges in the first half of the year.

With the transition to Sabre substantially complete, and the JFK runway closure behind us, we are pleased to report a return to profitability in the second quarter.

We expect to sustain this momentum for the rest of the year as the revenue environment continues to improve, cost pressures ease and we execute on our network strategy.

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

Thank you, Dave.

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

I join Dave and the entire management team in thanking our crew members for their hard work in taking care of the 65,000 customers that fly with us every day.

We're pleased to report a return to profitability with our highest ever quarterly operating income of $94 million, representing a year-over-year improvement of $18 million.

These results were driven by a $132 million increase in revenue, offset by $114 million increase in operating expense, including $43 million of higher fuel expense.

Passenger unit revenues for the quarter increased 11.7%, compared to a year ago.

A significant improvement from the 4.9% increase in the first quarter.

Yield during the second quarter was up 8.2%, and load factor was up 2.5 points on 5.5% more capacity.

These results were better than the guidance that we provided in April as demand gained momentum throughout the quarter pushing fares higher, particularly with transcon markets which accounted for approximately 30% of our capacity.

We also saw significant improvement in both yield and load factor on our East coast short-haul markets such as Boston-Raleigh and Bothell-Chicago, reflecting the schedule adjustments we made to better accommodate business traffic on those routes as well as better access to our inventory through the GDS channel.

Throughout the quarter we benefited from revenue initiatives enable by Sabre including higher yielding business traffic through the GDS channel and enhanced pricing capabilities.

Monthly year-over-year PRASM growth accelerated throughout the quarter with PRASM up by 5% in April, 13% in May and 18% in June.

We were especially encouraged by our revenue performance during the quarter, given JetBlue Airways limited exposure to the rapidly rebounding premium and international traffic.

To put this in perspective, our second quarter PRASM was up 5.3%, compared to 2008 when the demand environment was still relatively strong.

Turning to ancillary revenue performance for the quarter, we continued to voluntarily waive certain change fees for our customers in connection with the transition of Sabre resulting in lower change fee revenue.

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

Shifting to costs, fuel remains the most significant costs comprising one-third of total operating expenses in the second quarter.

Including the impact of fuel hedging, JetBlue paid 12.3% more for jet fuel in the second quarter than last year.

The good news is, that we have one of the most fuel efficient fleets among the major US carriers.

In addition we continue to actively manage our fuel hedge portfolio to help manage the price volatility.

For the third quarter of 2010 we've hedged approximately 47% of our anticipated jet fuel requirements using swap arrangements, costless collars and caps.

For the fourth quarter, approximately 46% of our projected fuel consumption is hedged, and we have crude oil caps in place through the end of 2011.

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

We're planning on a price of $2.27 per gallon in the third quarter and $2.28 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 July 16 and exclude transportation and deplane fees.

Excluding fuel, second quarter unit costs rose 8.2% year-over-year.

These results were significantly better than our expectations as outlined in the guidance we've provided last quarter.

Sales and marketing expense increased about 7% per ASM year-over-year, due to more bookings through the GDS channel.

These bookings however come at a significant yield premium.

Other operating expenses increased 29% per ASM in part, due in part to $11 million in tax incentives which were credited to other operating expenses during the second quarter of last year, negatively impacting year-over-year comparisons.

In addition, other operating expenses increased as a result of ongoing IT infrastructure projects.

We also incurred about $2 million in one-time expenses related to Sabre.

Moving below the line, interest expense decreased 11.2% year-over-year, or $6 million, due to lower interest rates and lower principal balances.

At the same time, interest income and other decreased by $8 million, primarily due to a $6 million gain recorded in 2009 related to the valuation of our auction rate securities.

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

During the second quarter we made approximately $70 million in debt and capital lease payments.

I'm pleased to report that earlier this month, UBS re-purchased $49 million of our auction rate securities at par.

We used the proceeds from the sale to repay the remaining balance of the $40 million loan from UBS, which was secured by the re-purchased auction rate securities, resulting in a $9 million net cash gain.

As a result of this transaction, which is not yet reflected in our balance sheet, we no longer hold any auction rate securities.

Our scheduled principle payments from debt and capital leases are expected to be very manageable $75 million in the third quarter, and $130 million for the remainder of the year.

Turning to the fleet, JetBlue ended the quarter with 153 aircraft.

With regard to CapEx, we spent approximately $25 million in non-aircraft CapEx during the second quarter, $3 million of which was related to the implementation of Sabre.

We estimate capital expenditures of about $100 million in the third quarter and $360 million for the full year, $215 million of which relates to aircraft.

With minimal debt maturities and capital commitments for the rest of the year we remain on track 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 are encouraged by the improving revenue environment and the success of our initiatives to track higher yielding customers, including schedule optimization, enhanced pricing capabilities and better connectivity with GDS.

We expect recent booking trends to continue through July and August, with strong yields and load factor.

Keep in mind however that we face a more difficult year-over-year PRASM comparison in July and August than we did in June as we begin to lap the economic recovery.

Based on the data collected thus far we currently expect July PRASM to be up about 15% year-over-year.

We have limited visibility beyond August and September is historically a seasonally weak month for JetBlue as schools reopen and the summer travel period ends.

That said, we expect to continue to benefit from an improving demand environment, yield improvements related to Sabre and an increasing mix of business customers, particularly in Boston.

While ancillary revenues have lagged a bit in the first half of this year as we transition to Sabre, we plan to announce an exciting improvement to the JetBlue experience in the coming months.

The first of which is designed to make our EML program even more attractive to business customers.

Beginning September 1, we plan to offer pre-boarding to all EML customers.

In addition, we continue to make further enhancements to our TrueBlue loyalty program, including our recently announced Shop True program, enabling TrueBlue members to earn points with over 800 retailers.

We expect total ancillary revenues to increase 10% year-over-year in 2010.

For the third quarter, we expect PRASM to increase between 12% and 15% and RASM to increase between 11% and 14%.

We expect the strong revenue momentum to continue into the fourth quarter.

We also expect to benefit from the maturation of new markets as they become a smaller percentage of our overall network.

In the fourth quarter we expect about 3% of our ASMs will be in markets open less than 12 months, compared to about 8% of our ASMs in the fourth quarter of 2009.

We currently expect full year PRASM to increase between 9% and 12% year-over-year and RASM to increase between 8% and 11% year-over-year.

We continue to work hard at running an efficient operation and maintaining our low cost culture.

We've worked diligently to prudently invest in our future and to mitigate risk while doing so.

With our conversion to an improved reservation system almost complete and as modification to pilot work rules begin to increase labor efficiencies, I'm pleased to report that most of cost pressure for 2010 is behind us.

We expect X fuel CASM trends to improve significantly as we move through the second half of this year.

However, we do expect some cost pressure from higher revenue related costs and additional profit sharing expense.

Due to stronger than expected second quarter results, and improved outlook for the full year we now expect an additional $15 million in profit sharing expense for the full year, negatively impacting our full year X fuel CASM by about a percentage point.

For the third quarter, we expect X fuel CASM to be up between 2% and 4% and for the fourth quarter we expect X fuel CASM to be relatively flat on a year-over-year basis.

As a result we expect an X fuel CASM increase of 4% to 6% for the full year.

Excluding the increased profit sharing expense our expected full year X fuel CASM increase would be 3% to 5% consistent with our previously guidance.

Fuel prices have come down since last quarter, as a result our CASM outlook for the third quarter and full year has improved.

We currently expect CASM to increase 3% to 5% in the third quarter and 6% to 8% for the full year.

In closing we are optimistic about the future.

We continue to make prudent investments in our business and we believe that we are well-positioned to drive profitable growth in returns for our shareholders, with a strong financial [fination], an award-winning product and brand, and most importantly, outstanding crew members.

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

Thank you.

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

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

(Operator Instructions).

Our first question comes from Bill Greene from Morgan Stanley.

Yes.

Hi there, good morning.

I wonder if we could talk a little bit about the code share with American, and just sort of how you sort of reconcile that with your brand?

Because they have obviously a bit of a different brand.

And there are even things like the ancillaries, right they charge first bag, you don't.

So how does that all come together?

Good morning, Bill, just a clarification.

What we have right now with American Airlines is an interline agreement, and so that's not unlike really what we announced this morning, our most recent interline agreement with LL.

So this just kicked in to sales this week, and we'll start to see how it matures over the course of the year.

So just a clarification on it, we know that there are two separate products, JetBlue Airways and American Airlines.

Follow-up Bill?

Well I just kind of wanted to sort of think about - - do you, even though it's just sort of an interline, when you do, I guess people will be able to fly JetBlue and earn American miles, Advantage miles that is.

So does that create any sort of expectation on the part of either you're customers or their customers that the products will be more closely aligned and more similar?

Or you think it's just really just, no, if you book on them you can get some miles on JetBlue, or vice versa?

Well I think it's, again, it's what I see is the affirmation of what we're doing in New York and also Boston.

It's also, I think an affirmation of the investments that we've made, the new terminal, Sabre.

And so really interline, two distinct products.

And even as reciprocity takes place with TrueBlue and with American's Advantage program later this year, it's still going to be pretty distinct.

And I think what it allows us to do though is really start to identify behavior, and what's happening with JetBlue customers and American customers, not unlike what we've seen with our - - whether it's say, Aer Lingus, our first interline customer.

So at this point in time I think we're being very clear, very distinct products, we haven't made decisions to, to further that.

I mean, you mentioned code share, you know people talk about alliances.

At this point in time, interline, interline relationship.

Okay.

And just a quick question, sort of asked this before but I'm just curious as to your thoughts now.

On LiveTV we've got wireless rolling out across the fleets of various airlines.

It would seem to me that a spin out or a sale of that subsidiary would lose value as these wireless opportunities or offerings progress through the industry, because it would just seem to me that that would be sort of an alternative form of inflight entertainment for a lot of folks.

How do you think about kind of the timing there?

And do you sort of see it the same way?

Or do you think, no, it's sort of a core part and maybe me don't need to spin it out?

Yes.

I mean, it's, I mean, I appreciate the question, because it's been a while since we've had questions on LiveTV.

And I think just to be transparent, we look at LiveTV wholly-owned subsidiaries something that is very, very important to JetBlue and core to us as we go forward.

I think when we were open about opportunities, what makes sense in the marketplace with LiveTV, keep in mind that the times were a little bit different two years ago as oil was running, the economy was on its heels, etc.

So I think that wholly-owned subsidiary that we want to maximize if you will to JetBlue's benefit at this point in time.

And not in the marketplace in terms of looking for opportunities to sell a subsidiary.

I think with regard to wireless as well, Bill, we're pretty pleased that, we're a follower, if you will, with wireless.

Now the brand,- - the heritage of JetBlue has been inflight entertainment since day one, and I think we are second to none with 140 channels of inflight entertainment, TV as well as satellite as well as first run movies.

And I'm saying that mainly because we believe that the, the small amount of customers who are willing to purchase the products that are available on the marketplace today, and also with the, the identity of those products as separate from the airline, is distinctly different than something that we want to pursue.

And oh, by the way our route network is pretty significantly offshore these days into the Caribbean and Latin America as well.

So the ability to touch that route system with that new technology, that's really how we're looking at really WiFi and how we can utilize LiveTVs expertise to our benefit into the future.

Thanks for the time.

Yes, thanks, Bill.

Our next question comes from Michael Linenberg from Deutsche Bank.

Yes, good morning, everyone.

Good morning, Michael.

Couple questions here.

Just maybe this actually does follow-on some of the stuff that Bill brought up, but sort of looking at the relationship with American on sort, from a different perspective.

How do you - - I know American at least publically has said that they would like to - - expand the partnership with you, and maybe even ultimately invite you into one world.

How, how do you manage that given, given your relationship with Latansa?

And of course Latansa sits on your board.

- - at what point does that become a challenge, or maybe - - at present it's starting to become a challenge?

Can you give us your thoughts on that, that would be great.

Sure, Michael.

And, again, good morning to you.

I think that the headline I would share is really one of, our business plan is one of open architecture.

So there's open architecture and there are other carriers in the world who also have, they've moved through - - open architecture as opposed to becoming aligned.

I think what's so different is granted, I have a point of view from New York, but I think as the largest carrier at Kennedy, the largest domestic airline in New York and now Boston, what we're offering other airlines is an opportunity from a connectivity standpoint or a network standpoint is better than any other network in the world, if you will, because of the New York marketplace.

And so with with American as we look at again interline relationship at this point, I think as we start to see some of the numbers, some of the behaviors, who's connecting over at Kennedy to go to - - pick a city, Buenos Aires, Tokyo, or London, or Madrid, we'll see what that portends into the future.

With regard to Latansa, again, Latansa just under 17% share ownership.

Let's face it, large, large player within the Star Alliance.

And do we have good debate?

You bet we do.

- - as a team in terms of what's best for our shareholders, and again this affirmation of open architecture across Kennedy has been supported by our board, Michael.

So we're really excited about what the second half of year is really looking like with these relationships.

And I would imagine more as well for example, EL AL being announced today.

David, do you have an estimate of, of the potential contribution?

I think American on their call yesterday said that their relationship with you is worth - - maybe a few million dollars but they could see it grow.

When you think about American and what you're doing with Latansa, Aer Lingus, EL AL, South African, - - what, are we looking at tens of millions of dollars of incremental revenue here?

I mean, how should we think about that?

Yes.

I won't, I won't place color in terms of numbers on any of the relationships really for, for competitive reasons Mike.

But it's, as we're looking at, I mean, fair to say that we're dedicating significant time and attention to this product offering, open architecture, across our management team because we think that it's, it's quite lucrative.

So - - these numbers from what they could mean today and then growing into the future, I mean, it's, the ability to start to see trial for customers who are making these trips today, but they're not thinking about connecting over JFK.

What that means for things like short-haul markets across New York for us as an example - - coming in from upstate New York, or the Carolinas, or Virginia, or.

This is real positive for our brands, so it's, I won't put a size to it, Mike, but it's, it's something that we've been working years, terminal five, additional real estate at Kennedy, that we've worked with the Port Authority underneath terminal six and the Sabre investment that we've been working years to start to harvest, and we're real excited about it.

Okay, good.

And just my second question, - - your predecessor was quoted and this now goes back a few years, that - -, if, if unions ended up at the property at JetBlue that he, - - maybe personally or even the Company, - - would have viewed that as a failure in its relationship with employees.

What, what's the Company's current view, do you share that?

And with the recent changes in - - allowing, I guess - - making it a bit easier for unions to organize at railroads and airlines per the NNB change, - - are you hearing anything?

Or what, what can you do?

What can you tell your employees to manage through this?

Well, our communication to our crew members, I word for employees is no different than what it's been for ten years.

And that is we believe a direct relationship is best for our Company from the standpoint of long-term sustainable growth.

So that hasn't changed.

Despite what transpired with the NNB, the Railroad Labor Act and all the noise in Washington earlier this year and that which is now statute, as of June 30.

We did join the ETAs litigation contesting the NNB rule change and we've been very open about that.

Historically, I think, Mike, that - - this is something that's very near and dear to me.

I do think that crew members, employees at other organizations, seek representation.

And if that's the case that's as a result of the management's team's failures.

I've believed that for ten years and at the same time, I believe that it's incumbent upon the collaboration across the Company, 12,500 strong, to continue to educate our frontline crew members on what representation means to them.

In terms of our growth plan, in terms of the ability to move with alacrity in an industry that heretofore has really been, it's an industry that moves rather slow in that - - really educate yourself in terms of what collective bargaining means.

When you start talking about quality of life, compensation, benefit increases, traditionally how long it takes to effect those type of changes as well.

And - - when companies can say that they have a no furlough clause as an example, and I think that we've been pretty good delivering on our word when the economy was pretty tough last year, or oil was very tough two years ago.

So Mike, nothing's changed, but I'll be real honest, this is, this is very near and dear to not just me but to the leadership team at JetBlue, and we think in the best interest of our crew members, a direct relationship.

Great.

Very good and great quarter.

Thank you.

Thanks, Mike.

Our next question comes from Will Randow from Citigroup.

Good morning, Dave, Ed and, I assume, Mark.

Good morning.

Good morning.

Couple questions, the first one is on your guidance.

It looks like in terms of the fourth quarter, you're padding in a little bit of conservatism.

How should we think about that considering that you've, you've blown away your RASM guidance in the first half, you've come in at the low end in terms of unit costs of fuel.

If you can just give me some color on that?

Sure, Will, again, good morning.

It's by the way just a comment on the second quarter, not only did we have the shift of Easter into Q1, plus Sabre, and then really it was nice to see the robust demand into Q2.

So our map in terms of how we provide guidance, and I would like to think that we're a Company that's very transparent when it comes to guidance, is no different in the second quarter, now granted we were on, we were below our guidance expectations, than the math is no different than how we run the formula into Q4.

Now all that said, it's interesting that you're commentaries are maybe conservatism, because we're growing 6 to 8% this year, that guidance is unchanged, but 9% to 11%.

Literally, a significant amount of growth is taking place into the third quarter, into the fourth quarter as well.

So - - as we take a look at our number, it's, we actually feel good about that number, but it's not one that we think is, is conservative by any stretch.

Follow-up, Will?

Yes.

In terms of how should we think about your, unit cost growth X fuels moderating?

How should we think about capacity growth as unit cost as we annualize our models going into 2011?

Yes, with I don't think we're quite prepared to give guidance on 2011 yet.

But I think directionally you could think about it from - - the, the growth in third quarter and then into fourth quarter, so what guided to is 2% to 4% increase in the third quarter, and relatively flat for the fourth quarter.

Okay.

That's kind of what I'd be thinking about.

Okay.

Well, thank you and great quarter.

Thanks, Will.

Thank you.

Our next question comes from Duane Pfennigwerth from Raymond James

Thanks, good morning.

Good morning.

So it looks to us like September's schedule indicate a bit of acceleration in capacity growth both on a one-year and a two-year basis.

I just wanted to check with you, does that makes sense to you as well?

And could you help us understand where that capacity growth is occurring and how you manage that in a month like September?

Sure, Duane, good morning.

I think the headline that I would really share with you is, is our commitment in Boston is very significant.

I mean, when we look at ASMs up on a year-over-year basis of 30% becoming more relevant to the business flyer, and that's a large part of what's really driving what's happening in September.

To a lesser extent across the rest of the system, but we used to be into what's considered business markets but X frequencies on day two of the week, day three of the week.

As we're adding not just the frequencies back in by day of week but also the frequencies into markets like Chicago, into places like Raleigh, into places like Charlotte, and what we're seeing is, and again, the core business time of the year will kick in after Labor Day.

We're feeling real good about our investment in Boston.

And, but you're right, September is traditionally been more of a trough period for the airline, but we're starting to see some visibility into the fall.

And actually we're starting to see some - - some pretty good traction as we're going into the fall.

So we'd like to think that our investments, by the way not just frequency, the TrueBlue program, the GDS displays for the business customer as well, in Boston and other other locations is really helping some of these trough periods.

Okay, thanks.

And then just as a follow-up, with respect to Sabre.

When do you think that would be stable enough to, to stop refunding the change fees and when can we actually think about new products or new ancillary opportunities - - And just along those lines you've had some time to measure the impact in some competitive markets with respect to a bag fee, are you closer to that or further from that based on the data that you've seen?

Yes, Duane, I think what we've seen regarding kind of the labor of fees is that that's already started to moderate to some extent.

And just to be clear, it's not that we're waiving all fees, it's - - we want to make sure that our customers are treated well and if they're not, they're compensated accordingly.

And so some of that waiver is just from a customer commitment standpoint.

- - the system is stable, I think that some of the issues that we've had have dealt more with - - hold times, handle times, that kind of thing, which as crew members become more familiar with the system those will moderate as well.

Regarding ancillary opportunities, we continue to be focused currently on making sure that the, the existing experience is the best experience.

I think we, we kind of foreshadowed maybe some changes to our EML program which we think will attract more EML customers and probably additional ancillary revenues there.

I'd be looking at - - maybe our next phase as being, maybe working a little bit more on our, on our Get-a- ways program and our vacation packaging.

- - nothing that's going to significantly impact this year, probably even the first half of next year from that regard, but probably later into 2011.

Anything you want to add, Dave?

That's good.

Thanks.

Thanks, Duane.

Our next question comes from Gary Chase from Barclays Capital.

Good morning, everybody.

Good morning.

Wanted to ask two questions on the, on the revenue side if I could.

First, I wondered if the guidance included some anticipated - - build in terms of contribution from Sabre and some of the commercial agreements that you're talking about?

Or whether we would view that as, as upside against this outlook that you've provided?

Yes, good morning, good morning, Gary.

I think that clearly as we're looking at our growth into the, our PRASM growth into the second half of the year, there's several things that are in play.

The build of Sabre, absolutely, and what we're starting to see from Sabre, GDS penetration, etc., partnerships.

Now six of the partnerships that are in place, so that's part of the assumptions as we go forward.

I think as well, is the maturing markets that we're seeing.

Ed in his comments mentioned on a year-over-year basis that - - we're down in terms of the percent of ASMs dedicated into the new markets as well.

And I think - - I think it's significant to highlight that regionally, we're seeing some, we're seeing nice traction across the route network, but specifically, in the transcons.

And when you start to take a look at Q3 into Q4 and - - the percent of ASMs tied into the transcons.

That's the flavor of what's really adding the assumptions if you will, that are driving our guidance, our PRASM guidance, from a, for the full year.

Follow-up?

Yes.

And then I wanted to ask, you Dave, or Ed, - - about just performance in Boston.

I mean obviously when you've got new capacity like that, it takes a little bit of time to spool up.

I'm wondering as you adjust for that as best you can, how Boston is looking and give us a sense, - - when that's more full up and more mature, what kind of level that can be contributing on relative to the rest of system?

You know, Gary, I couldn't be more pleased with what's happening in Boston.

Just over six years ago we weren't in Boston and we're now the largest carrier based on seats in and out of Boston.

By the way that's excluding partnerships such as with Cape Air, such as with Aer Lingus, such as with Latansa, now American.

And so very, very pleased with what we're seeing in Boston.

By the way, on the, from the standpoint of our ground infrastructure, partnering and working with Mass Port, with enhancements on the ground, additional gates, infrastructure supporting us.

I think what we're seeing too is the brand and the relevance of the brand, not just the leisure customer but to the business flyer as well.

I mean, the financial community's up in Boston, the college students up in Boston, it's, and everything in between, I mean, it's been very, very positive.

And we start to take a look at adding markets later this year such as (inaudible), with seven frequencies a day into Boston.

You start to take a look at those prices today, the type of aircraft that's plying the skies on that route today.

I mean those are markets that we think are going to mature very, very quickly.

And so just another comment, and Ed see if you want to add anything to it.

What's nice about Boston too is that in years prior I think there was commentary that JetBlue was so much focused on New York, and it's not just New York.

It's New York, it's Boston, it's now Washington, it's Orlando, it's Ft.

Lauderdale, it's the Caribbean, it's the West Coast as well, so diversity as well.

Ed, thoughts on Boston?

The only thing I want to add is that Boston really gives us an opportunity to work in a true business market and offer a business product.

So very excited about the growth and just the business travel up there.

Are the RASM results there, though, I guess is what I'm driving at - - just as much.

I mean are you seeing the kind of revenue generation that is consistent with - - what you can generate say in JFK?

I'll tell you, Gary, the RASM results are there and exceeding expectations.

And and I'll be real candid, when other airlines are closing their crew bases up in Boston, you bet we're going to take advantage of that.

And I think there were some commentary regarding our growth several months ago as we were looking at the year.

But so much of it was tied, it's very specific, it's Boston and it's the Caribbean and Latin America for good reason, because of what we're seeing.

Thank you.

Thanks.

Thanks Gary.

Our next question comes from Hunter Keay from Stifel Nicolaus.

Thanks very much, guys.

Congratulations.

Thanks, good morning, Hunter.

Good morning.

I cut out for a minute and I missed a couple questions, so forgive me if I repeat it.

But, Dave, you mentioned in your prepared comments something about an increasingly loyal customer base which kind of intriguing me.

What metric are you using when you refer to that?

And maybe is it one that you care to share with us?

Well, I think it's what we see is the, the relevance of the TrueBlue program, the growth of TrueBlue and you know our membership.

We've talked in the past that - - this number is now is 7 million and strong, 7 million and growing.

But I think it's the repeat business that we're seeing with these customers as well, Hunter.

And we may be the only airline, we may not, I'm not sure, that surveys, customers after every flight.

And we have some pretty good intelligence if you will regarding what our customers are telling us, the repeat flyer, why they're flying us.

So - - I think that really at the end of the day that's what drives the commentary behind loyalty but it's that repeat business.

Got it.

Okay.

And AMR yesterday reported some, some fairly soft results in the Caribbean.

It's probably fair to assume, correct me if I'm wrong, that you're probably taking a lit of marketshare from them down there.

If that's the case I'm curious to know how that might play in with the ramping interline agreement?

Is there going to be a little more incentive for you guys maybe not to compete with them directly head-to-head so much anymore?

How should we think about that?

I think it's fair to say, again, we have an interline relationship and the day of the announcement we're staunch competitors.

And so, I mean, that's how we look at the world, that's how we're making our business decisions and so specific to, specific to the Caribbean, there's an awful lot of complexity that's taking place down there.

Also with the Flag Airline, or airlines of countries that are home-based, down in the Caribbean as well.

So take Jamaica as an example, Hunter.

I mean, this is an airline, the Flag Airline of Jamaica, now with Caribbean Airlines and not too long ago was 15 aircraft that's now six aircraft, flying the skies in routes that they've been flying for years previously.

So there's an awful lot of opportunity that's taking place in down in the Caribbean not just with what's happening with American-based flag carriers.

And - - as we take a look at our product, our fare, frequency, just a commentary on frequency.

Jamaica hasn't been opened well right about at 16 months now in Jamaica.

It started with one frequency, we're now six.

The commonwealth of Puerto Rico is 30 frequencies.

Over the course of the summer timeframe in three locations.

The Dominican Republic, four locations and over 20 frequencies in the summer timeframe.

So we're not just doing it like from a focus city, it's corridor network.

Okay.

I appreciate that.

Thank you very much.

Thanks, Hunter.

Our next question comes from Glenn Ingall from Bank of America-Merrill Lynch.

You talked a little bit about the transcon, but can you give any numbers on how much the transcon outperformed?

And I would assume that given the strength of business versus leisure that go through some of the other operations like Caribbean and Florida, whether they outperformed or underperformed the system?

And finally, just similarly, just the non-New York flying, how is that doing in terms of rate improvement versus the New York flying?

Good morning, Glenn.

Good morning.

Good morning.

I won't go into specific numbers for obvious reasons from a competitive perspective.

But to add color, now granted when we go into the second quarter, and - - Easter was in the first quarter, so traditionally very strong North-South traffic is, is somewhat embedded in the first quarter.

Very pleased with transcon.

I think that there's a rationality with pricing when you look at a year-over-year basis, by our competitors.

And I think that we've right-sized our product as well so we're seeing strength in all transcon markets.

By the way we're also seeing strength in some of our shorter-haul markets on the East Coast and the West Coast.

I think that's real positive as well.

It's not to say that we're not pleased with Florida and/or the Caribbean or Latin American.

It's just that the seasonality in Q2 is a little bit different than I think what we've seen with the other major aspects of our route network.

The non-New York flying, again, as the question earlier from Gary, very, very favorable results that we're seeing in Boston.

We're very excited about adding into the Washington area, not just to Dulles and BWI, but what we believe will be a quick maturation process down at DCA.

Orlando, Florida, the Caribbean, has been very strong traditionally for us.

And we believe that that will do nothing but get stronger.

That's why we announced the opening of Hartford, Connecticut November 17, down to locations in Florida.

Follow-up, Glenn?

No, that's okay.

Thanks.

Great.

Thanks.

Our next question comes from Bob Mcadoo from Avondale Partners.

Hi, guys.

Just back on the American Airlines relationship, just trying to make sure I understand what's going on.

Is that, can we think about that as being the same kind of an interline relationship that all kinds of carriers used to have, 15, 20 years ago and where you file a joint fare, and the joint, I mean, the relationship and the bag switching and all that is no different than American has with United or anybody else with the exception of this additional piece on, on frequent flyer?

Is that the way we should think about what this relationship really is as compared to other relationships that other people have?

Good morning, Bob.

I think it is fair to characterize the relationship as that.

I think you mentioned it, what's different is the really the frequent flyer aspects of reciprocity that was announced earlier this week as well.

And and I think, that's the commercial side of the agreement today.

Now granted we also announced slot swaps between both companies, with DCA and with JFK, actually at the end of the first quarter.

But think about this as traditional interline at this point in time.

Okay.

And then as apart of that piece, I didn't actually get an understanding, there was an earlier question about what happens since you don't charge for bags and American does, what happens to a customer who's in that, who's making that transition, do they or don't they pay for bags?

Yes, it's, I think it's fair to say that - - again, very distinct products.

And so I mean, as you're purchasing an itinerary, and keep in mind that what we're seeing is 12 international markets with American Airlines, and they have a different protocol on international markets when charging for bags, than their domestic protocol, so this is 18 JetBlue Airways cities and 12 international markets.

And they don't charge for their international bags in those markets, Bob.

Okay.

That makes sense then.

Great.

Have a good day.

Our next question comes from Dan McKenzie with Hudson Securities.

Hi, good morning.

Thanks, guys.

Good morning.

In the past you've gone out of your way to characterize JetBlue as a leisure airline, but it's really as much a business product.

However, from what I can tell, JetBlue really hasn't marketed its product in a meaningful way to major corporate institutions either in New York or Boston.

So I guess I'm hoping first you can clarify my understanding with initiatives underway and then talk about how material incremental business wins could be to your revenue outlook?

Dan, I think that we've, it's fair to say that we want to diversify the customer base.

And traditionally we've talked about 15% to 20% of our customers traveling on business, usually small business customers as opposed to the corporate guy or gal - - through a, through a corporate agreement, and investments such as Sabre, penetration of the GDSs into corporations, adding frequency, locations like Boston Logan Airport, and again, take New York.

I mean, Kennedy, I think New York's Kennedy airport is a great experience but there are other business travelers who prefer La Guardia or who prefer Newark, and I get that.

So I think what we're doing is it's a very conscious effort to be more relevant to business customers but not at the expense of our leisure traffic, not at the expense of our BFR traffic.

And last year in the midst of this recession what we saw was tremendous trial by corporations, by a large and small corporations who were looking for better travel value.

And we saw a lot of trial and I think the last year was, was very positive for JetBlue because once we see a customer fly on us, they realize that it's a quiet aircraft, it's a new aircraft.

You can watch CNN as well as the cartoon channel.

So it's a very nice business proposition and so think of this as diversifying our customer base because we really weren't relevant to the business flyer.

Yes, okay.

But no real initiatives underway at this point for potential upside down the road if I kind of interpret your remarks here?

You know, Dan, it's more directional.

- - we're not looking at premium cabins, we're not looking at stratifying our TrueBlue program.

- - it's all open to what happens into the future based on customer behaviors, but that's not where we're putting our efforts.

I got it.

Second question here, if I'm not mistaken, JFK ranks number one in the country for delays.

I'm wondering to what extent delays are impacting costs in the third quarter?

And then what initiatives JetBlue is undertaking with the FAA to fix the issue?

And I guess whether the FAA is even interested in fixing the issue?

Well, couple thoughts.

One is, statistics are pretty interesting, in the second quarter across our airline even with the bay runway under construction, we actually saw improvement in arrival 14 performance, across our airline which by definition with 50% of our ASMs roughly in and out of Kennedy, has to include Kennedy, Dan.

So April, May, and June were up significantly across our airline anywhere from 7% to 10% on a system-wide basis, so positive.

I think the protocol, the lessons learns and by the way, you're right, the New York Airports, including La Guardia, including Newark, tend to end up at the bottom of the list in terms of the DOT results.

And we're real excited about some of the protocol, lessons learned with procedures that took place during the construction process.

I think that most recently down in Atlanta, or possibly Washington, you and I were sharing some thoughts about things like departure metering and using winter operations protocol to move airplanes from the gate to the runway, all carriers, but certainly the large carriers at JFK.

That was very, very positive, in terms of out-to-off times, predictability for an arrival gate, fuel burn, so I think things like that, things like really taking a look at the New York airspace as independent airports with La Guardia, with Teterboro, with Newark, with JFK.

So the uncoupling and the support that we're seeing with the FAA of that as well.

And of course, this is in advance of things such as the tools that are available really today, but here shortly with next gen as well, Dan, so I think we're real excited about what we saw.

This project with the Port Authority, with the FAA, with the large carriers operated in the JFK, it was, it was a - - forgive me, it was a non-event in terms of, really to, to the traveling public.

There were a couple of tough days, it was incredible how well that happened.

My closing thoughts too.

I think that Administrator Babbitt is committed to, listen, let's start to roll out these initiatives that will make sense in New York, right, because we have demonstrated the fact that people will cooperate and collaborate up here as well.

Okay.

Great.

Thanks a lot.

I appreciate this.

Our next question comes from Helane Becker from Dahlman Rose.

Thanks very much, operator.

Thanks, Dave, for taking my call.

Just my question.

Two questions.

One, have you or is it too really to tell, have you looked at the overlap between your TrueBlue frequent flyers and American Advantage members to determine what your potential benefit is there?

Helane, good morning.

I think it's probably fair to say it's a little bit early, mainly because we're just rolling this out.

Now all that said, we know that our frequent flyer base is pretty significant here in obviously our numbers are much smaller than an American Airline but significant here in New York.

But historically, American very significant too with the New York presence with the Advantage program and their history.

So that again, I think is part of the reason why we wanted to announce a reciprocity, or the start of reciprocity later this year.

Because it's going to be another reason why somebody's going to look to connect over Kennedy as opposed to maybe connect over a Newark, or over a Dulles, or some other location, some other gateway.

So we think that's going to be pretty positive, can't give you a number yet, though.

Okay.

Thanks Great.

Sure.

My other question is with respect, It's probably more for Ed, actually.

With respect to the 16% increase in salaries, what percent of that is related to the profit sharing?

The actual increase for, its fairly flat on profit sharing.

The profit sharing will show up more, the $15 million increase ,will show up more in the third and fourth quarter.

Okay.

Great.

Thanks very much.

Have a nice day.

You too, Helane.

Thank you.

This concludes - - I apologize we have a next question from Jim Hagan from [Shelane] Securities.

Good morning.

I'll keep this short.

Good morning, Jim.

Morning.

Did you receive an Aviation Security Infrastructure fee refund in the quarter?

No, we didn't.

Okay.

Great.

Thank you very much.

Yes.

Thank you.

And with this we conclude the session, the question with investors and analysts.

We would like to turn it over to Dave Barger for closing remarks.

Great.

Thank you very much, Hilda.

I'd like to thank everybody for joining us for our second quarter call.

We look forward to talking to you in approximately 90 days.

Have a great day.

Thank you.

Thank you.

Ladies and gentlemen, this concludes your conference call.

You may now disconnect.