JetBlue Airways Corp (JBLU) 2010 Q3 法說會逐字稿

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

Today's call is being recorded.

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

As a reminder this 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 Security and Exchanges Commission.

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

Please go ahead, sir.

Thank you, Sandra.

And good morning, everyone, and thank you for joining us.

This morning we announced record net income of $59 million for the third quarter or $0.18 per diluted share, an improvement of $44 million year-over-year.

We reported operating income of $140 million resulting in an operating margin of 13.6%, the best margin we have posted since 2004.

We believe we are on track to report one of our most profitable years ever reflecting the progress we have made to strengthen our network, maximize revenues and control costs.

I'd like to take this opportunity to thank our crew members for the remarkable job they are doing running a safe, reliable and productive high quality operation.

Our crew members should be extremely proud of their performance and we are pleased to reward them for their contribution to our financial success.

Based on our year-to-date profit, we accrued $12 million in profit sharing during the third quarter and $26 million year-to-date.

We also continue to focus on maintaining a strong liquidity position, one of the best in the industry.

We ended the quarter with roughly $1 billion of unrestricted cash and short-term investments or 25% of trailing 12 months revenue.

Given the volatility in the price of fuel and the airline industry's vulnerability to unpredictable events, we believe maintaining a strong liquidity position remains of paramount importance.

Our third quarter results were driven by a strong revenue environment and the ongoing development of our network strategy and revenue initiatives.

Quarterly revenues exceeded $1 billion for the first time in our Company's history, up 20.5% versus last year.

Unit revenues for the quarter were up 11.1% on an 8.5% increase of capacity.

Typically, an increase in capacity comes at the expense of yield, but our third quarter yield increased 11.4% year-over-year, even as average stage length increased 2%.

We have an average one-way fare of $142, an 11.6% improvement over last year.

This reflects the improving demand environment, as well as our ability to attract and retain higher yielding customers.

We are particularly pleased with our September year-over-year passenger unit revenue performance, which increased 10% on 10% more capacity.

Our domestic PRASM for September outperformed the industry, reflecting our focus on improving revenue performance during shoulder periods.

A key part of this focus has been the expansion of our network in Boston.

As we expand in Boston with new destinations and increased frequencies, we have become increasingly relevant to its business travelers.

In 2010 we will open six new destinations from Boston and increase capacity by 30% versus last year.

During the third quarter we saw a significant improvement in both yields and load factor on our east coast short haul market, such as Boston to Chicago, reflecting schedule adjustments we made to better accommodate business traffic on those routes, as well as better access to our inventory through the GDS channel.

These actions, coupled with our low-cost structure and strong brand, have enabled us to increase market share in Boston.

We expect competitive capacity in our Boston markets to be down about 2.5% year-over-year in the fourth quarter of 2010.

We continue to see tremendous additional potential in Boston.

We currently offer over 75 daily flights to 34 destinations and we plan to grow to over 100 flights per day in Boston by next summer.

As part of this effort we plan to begin service from Boston to Washington National next month and to Newark in May of next year, further solidifying our position as Boston's leading carrier.

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

In fact, unit revenue growth in the Caribbean has outpaced our system average.

During September the Caribbean Latin America was the best performing region in our network in terms of year-over-year revenue growth, even as we added significant capacity.

By the end of next year we expect roughly 23% of our capacity will be in the Caribbean and Latin America.

Our balance mix of leisure-driven markets, such as Punta Kona, and visiting friends and relatives or via far markets, such as Santa Domingo, has helped us better manage the seasonality of our business and improve overall revenue performance.

We continue to be opportunistic as competitors reduce capacity in this key region.

To that end, we recently announced new service from San Juan to Tampa and Jacksonville and we plan to begin service to the Turks and Caicos Islands from New York and Boston in February.

Another key element of our focus on improving revenue performance during off-peak periods has been to enhance our product offering for business travelers.

Last month, for example, we began offering preboarding for Even More Legroom customers.

We also continue to benefit from realtime connectivity in the GDS channel as a result of our transition to Sabre earlier this year, which has helped increase corporate travel penetration.

Complementing growth in Boston and the Caribbean is our focus on leveraging our highly valuable slot portfolio at JFK Airport and our unique position in New York, the world's largest travel market.

We plan to add our seventh interline partner at the end of this month.

With 70 international flag carriers operating at JFK, we believe we have tremendous opportunities to expand our network and provide our customers with even more choices.

Additionally, given the capacity constraints at JFK, partnerships provide an effective way for us to flow incremental passengers and revenue through our network.

A critical element of our strategic planning is a well-managed capital plan, which directly impacts our ability to generate positive free cash flow, an important driver of shareholder value.

In this regard, I'm pleased to announce further changes to our fleet plan, providing for a slower and smoother future aircraft delivery schedule.

Earlier this month we revised the terms of our aircraft purchase agreement with Airbus, deferring four aircraft from 2012 and six aircraft from 2013 all to 2016.

As a result, we have reduced our Airbus deliveries by over 40% for 2012 and 2013 and now have seven A320 deliveries scheduled for each of 2012 and '13.

In addition, we have elected to opt out of two EMBRAER 190s, previously scheduled for delivery in 2012.

These actions reduced our aircraft purchase obligations by over $500 million through 2013.

Lowering CapEx is a key component of our goal to grow on a sustainable basis and consistently generate positive free cash flow.

In connection with this recent deferral of 10 A320s, we have agreed to pay Airbus a $5 million fee, which will be recognized in other operating expenses during the fourth quarter of this year.

We believe this additional expense is more than offset by the accretive impact the deferral will have on long-term free cash flow, liquidity and profitability.

New aircraft deliveries now total nine in 2011, 11 in 2012, and 14 in 2013.

Additionally, four of our A 320 leases are scheduled to terminate in 2012 and three A 320 leases are scheduled to terminate in 2013.

In closing, I'd like to once again thank our 12,700 crew members for all of their hard work.

Our strong financial results indicate that we continue to be headed in the right direction.

We believe our unique culture and brand, coupled with our low cost structure and strong network, position us for continued success as we end 2010 and move into 2011.

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

Ed?

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 JetBlue customers day in and day out.

We are pleased to report our highest ever quarterly operating outcome of $140 million.

These results reflect a $74 million improvement versus last year and a $45 million improvement versus last quarter, despite having paid $15 million more for fuel in the third quarter than we would have paid at last year's prices.

As Dave mentioned, revenue growth was the key driver of our earnings growth during the third quarter.

Passenger unit revenues for the quarter increased 12.5% compared to a year ago.

Yield during the third quarter was up 11.4% and load factor was up 0.9 points on 8.5% more capacity.

Although our revenue performance was generally in line with our projections, the summer thunderstorm season in the northeast was less severe than usual and we canceled fewer flights.

During July and August we canceled 139 flights due to weather compared to nearly 500 weather related flight cancellations in July and August of last year.

As a result of a higher completion factor, ASMs were about 1 percentage point higher than forecast, which in turn negatively impacted unit revenues.

Throughout the quarter we saw strength in both yields and load factor across our network as we continue to benefit from an improving demand environment, an increasing mix of business customers and revenue improvements enabled by Sabre, including higher yielding business traffic through the GDS channel and enhanced pricing capabilities.

Our third quarter PRASM was up about 4% compared to 2008 when the demand environment was still relatively strong.

Turning to ancillary revenue performance for the quarter, which we measure as the combination of ancillary revenue reported in passenger revenue and those in other revenue.

Total ancillary revenue in the third quarter was about $18 per passenger, a 3% increase, year-over-year increase.

On a unit basis our total revenue did not grow as quickly as our passenger revenue.

The majority of the short fall was in change fees, which we believe reflects the impact of some customer behavioral changes.

We are pleased to continue to see strong demand in our Even More Legroom, or EML product, which is on track to generate $85 million in additional revenues this year.

In the coming months we plan to further enhance our EML product, as we remain focused on growing our revenues by increasing the variety of customized product options offered to our customers.

Fuel, of course, remains the most significant cost, comprising one-third of total operating expenses in the third quarter.

In the third quarter we hedged 49% of our PO consumption.

Including the impact of fuel hedging and taxes, our fuel price for the third quarter was $2.26 per gallon, up from $2.14 per gallon last year.

We continued to add to our fuel hedge portfolio during the third quarter.

For the fourth quarter of 2010 we have hedged approximately 43% of our anticipated jet fuel requirements using swap agreements and costless collars.

For 2011 we are hedged about 16% using primarily crude call options.

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

We're planning on a fuel price of $2.42 per gallon in the fourth quarter and $2.30 for the full year, including the impact of hedges and taxes.

As will be indicated in the investor update, these prices are based on the forward curve as of October 15th and exclude transportation end-point fees.

Excluding fuel, third quarter unit costs rose 3.4% year-over-year.

These results were in line with our expectations outlined in the guidance provided last quarter.

Other operating expenses increased 12% per ASM, with the primary drivers of the year-over-year increase.

During the quarter we announced plans to partner with ViaSat for the provision of in-flight broadband access on our aircraft using ViaSat 's KA band satellites as an alternative to slower less robust connectivity options.

As a result, we have elected to discontinue further development of in-flight connectivity by LiveTV.

In connection with this decision, we recognized a noncash impairment charge of approximately $6 million in other operating expenses related to the value of LiveTV's air to ground spectrum license.

Sales and marketing expenses increased about 13% per ASM year-over-year due to higher revenue-related costs, such as commissions and sales expense, as more bookings flowed through the GDS channel.

Interest expense decreased 10.9% year-over-year or $5 million due to lower interest rates and lower principal balances.

At the same time, interest income and other decreased by $4 million year-over-year, primarily due to the $3 million gain reported in 2009 related to the valuation of option rate securities that we owned at that time.

We ended the quarter with unrestricted cash and short-term investments of roughly $1 billion.

During the third quarter we made approximately $80 million in debt and capital lease payments.

Our scheduled principal payments from debt and capital leases are expected to be about $55 million in the fourth quarter.

Looking ahead to 2011, we expect a very manageable $185 million in debt maturities for the full year.

JetBlue ended the quarter with 157 aircraft.

We took deliver of one EMBRAER 190 aircraft during the third quarter and plan to take delivery of one E 190 in the fourth quarter, both of which are financed using Brazil Export Financing.

We also took delivery through leases of three previously owned A 320s in the third quarter and expect to take delivery also through leases of three previously owned A 320s in the fourth quarter.

With these deliveries we expect to end 2010 with a fleet of 161 aircraft comprised of 116 A 320s and 45 E190s.

We spent approximately $20 million in non-aircraft CapEx during the third quarter, $3 million of which was related to the implementation of Sabre.

We estimate capital expenditures of about $85 million in the fourth quarter, $45 million of which relates to aircraft.

For 2010 we expect total CapEx of $320 million, $205 million of which relate to aircraft.

With minimal capital commitments for the rest of the year, we remain on track to generate positive free cash flow and maintain strong liquidity.

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

As discussed on prior calls, the bulk of our 2010 capacity growth has been driven by our expansion in Boston and the Caribbean.

The rest of the network actually shrinks in 2010 on a year-over-year basis.

For the fourth quarter we expect capacity to increase between 8% and 10% year-over-year.

Looking ahead to 2011, we plan to take delivery of five E 190s and four A 320s.

We have financing in place for all of these aircraft deliveries.

We are still working through details of our capacity plans for 2011, but we expect the continuation of growth driven by Boston and the Caribbean.

At present we are not seeing any evidence of a slowdown in demand of our markets.

Further we continue to be encouraged by the success of our initiatives to improve revenue performance during shoulder periods by attracting higher yielding customers, including schedule optimization, enhanced pricing capabilities and better connectivity to the GDS.

We expect the success we've had in Boston and the Caribbean to continue, even as we add significant capacity.

Based on the data collected thus far, we currently expect October PRASM to be up about 11% year-over-year.

Prior year comparisons become more difficult in November, as we begin to lap the economic recovery.

Nevertheless, bookings for the Thanksgiving holiday look solid and the early indications for the December holiday are encouraging.

In addition, we expect to continue 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 4% 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.

For the fourth quarter we expect PRASM to increase between 12% and 15% and RASM to increase between 10% and 13% year-over-year.

Our fourth quarter and full-year revenue guidance includes approximately $10 million in passenger revenue we expect to recognize related to the expiration of TrueBlue points earned prior to the launch of our new customer loyalty program last November.

For the fourth quarter we expect ex-fuel CASM to be between 2% and 4%, up between 2% and 4% and for the full year we expect ex-fuel CASM to be up 5% to 7%, which is slightly higher than our projections last quarter.

This increase is due primarily to the $5 million fee we paid to Airbus in connection with the recent aircraft deferrals and the $6 million impairment charge related to the spectrum license owned by LiveTV.

Excluding these two items, our expected full year ex-fuel CASM increase would be 4% to 6%, consistent with previous guidance.

With the increase in fuel prices over the past few weeks, we currently expect CASM to increase 7% to 9% in the fourth quarter and for the full year.

In closing we are pleased to report all-time record quarterly revenue and income during the third quarter, reflecting the progress we are making towards our goal of achieving sustainable growth which we believe will ultimately drive shareholder returns.

With that we are happy to take your questions.

(Operator Instructions) The first question is from Michael Linenberg from Deutsche Bank.

Please go ahead.

Hi, good morning, guys.

Good quarter.

I have two questions here.

One, I want to just on your forecast for RASM for the quarter or PRASM up 12% to 15% and, Ed, you indicated that October is running up 11% and yet we know the comps get more difficult.

So what, can you give us some color?

What are you seeing?

I mean, I realize that you get the benefit of maybe a stronger holiday period where the loads are up and you are getting better fares, but are you also implicitly assuming that you are going to get pretty good uptake on that last-minute business traveler?

I mean, what you've see in September, that trend maybe continuing through the fourth quarter?

How much of that is a function of sort of putting some -- some think that that's going to materialize as we move through the quarter?

Sure.

Good morning, Mike.

Thanks for the comments.

Yes, hi, Dave.

You got it.

I think it's really the steady growth that we've been marching on in Boston and we weren't there seven years ago.

We're forecasting to be 100 trips a day next summer.

So the relevance in Boston -- by the way, the diversity of the customer base, including the business traveler which we're seeing a higher percentage of business travelers to and from Boston, with our network I think really is a result of the 190 complementing the 320 nicely.

And then the Caribbean, also.

These are markets that right now, I mean, we're forecasting them to be down on a year-over-year basis in terms of competitive ASMs.

Okay.

And so we are really seeing -- I mean, it's Boston, it's the Caribbean, Mike, it's Sabre, it's the contributions of Sabre in many different ways, whether it's the pricing, yield management, whether it is the ability to really be moving much quicker in terms of with our air price system in terms of pricing models with fare environment.

It's the maturation, fewer ASMs on a year-over-year basis that are in new markets that are less than 12 months.

The partnership traffic, as well, is kicking in and again in the prepared comments, 7th airline announcement named by the end of the month.

So it's a combination of all of the above plus we go into the strong holiday period.

Okay.

And then okay.

So my second question then, Dave, and this is maybe more of a conceptual question.

I mean, if you go back pre-Southwest/AirTran, you've always wanted to remain independent and it was interesting that post that transaction, there was a lot of talk about who's next and what people have to do.

I think you were on record very clearly saying that independence was the path for JetBlue.

The question, though, that I ask you is as we watch these major carriers come together you could argue that there's a slightly different passenger segment that at the end of the day they're going after.

It's that intercontinental business traveler.

It's being able to fly to 150 countries and thousands of destinations.

But when I think about AirTran and Southwest, I feel like the combination of that entity is much more of a competitive threat to you guys.

And I realize you have a very strong position in JFK and Boston, but with Airtran Southwest really starts to get into some of these markets that in some cases overlap with you.

And so to boil it down to one question, if I was a corporate travel manager at a Company where we represented the price business, the price-sensitive business traveler, if JetBlue came in and pitched the deal to me about breadth of coverage and service, et cetera, and then the AirTran/Southwest guys came in and talked about what they offer, I would feel like what Southwest AirTran had to offer would be superior.

And really I'm talking about network, I'm talking about the number of destinations, the density, how would you compete against that?

Or maybe it's irrelevant, maybe it's the wrong comparison.

Your thoughts on that?

Sure, Mike.

I think headline, again, we're focused on organic or natural growth.

We think and again this most recent quarter in the trend that we've seen I think speaks nicely to the success we're seeing with that.

And so when you wrap that with the open architecture, when I look at this combined entity of, as you mentioned, Southwest and AirTran, our models are so different, Mike.

This open architecture at Kennedy, 70th airline will announce our seventh partnership plus the opportunity to flow that traffic over Boston, as an example.

And so I think natural growth, organic growth plus enhancing our partnership traffic and taking advantage of that.

Again, when I look at, for example, our models, our model is this diversity across Boston, New York, Orlando, Fort Lauderdale down into the Caribbean, Transcons down to the west coast and so I think we feel very, very strong about how we're positioned truly in terms of what's happening.

And at the end of the day, Mike, consolidation at a high level is something we support.

It is stripping out some of this unnecessary capacity.

And all's you have to take a look at is micro into some markets, for example Boston to Baltimore.

And there's many markets like that.

I think now this bodes real well for the industry, but specifically for us.

Yes, yes, agreed.

Well very good and again, nice going this quarter.

Yes, thanks a lot, Mike.

Thank you.

The next question is from Bill Greene from Morgan Stanley.

Please go ahead.

Hi, good morning.

I was thinking about sort of the competitive landscape and if we look at some of the recent M&A I'm curious how you think it's going to affect your strategy.

I know you say you prefer to remain independent, but certainly those shares that have been involved in consolidation have reacted quite favorably, suggesting at least investors think it's good for the industry framework if we see more consolidation here.

So what would cause you to sort of re-evaluate that view and think differently on M&A do you think?

Good morning, Bill,.

I appreciate the question.

I think again at a high level this consolidation, as I mentioned to Mike, it is excellent in terms of stripping out some of the unnecessary capacity.

But candidly, I don't think anything has transpired that has surprised us.

And in terms of something that would jolt us to be looking differently.

And so, are we through the M&A period?

I think probably not.

Don't know what that means in terms of those who are on a line who may be interested in that.

But candidly, Bill, in terms of what we see over our ten years and the positions that we have in our network and the open architecture and, oh by the way, the implementation that we had with Sabre earlier this year that facilitates that, I think we feel real strong about it.

Ed, any comments you want to add into that?

No.

I think we have our business plan and I don't think that anything has changed our business plan as a result of the M&A activity.

I think we feel very confident.

And -- all right.

Can I just ask a second follow-up here which is on capacity.

I know it might be a little soon to sort of give much color on 2011, but we are seeing some CASM pressure here.

So how do you think about the need for growth in light of that CASM pressure?

Well, I think we -- thanks, Bill, for the question.

I think that we've been pretty clear on past calls that we're really not letting that influence our network strategy.

And really the network strategy is influencing how much we want to grow and not any CASM pressures.

So we saw an opportunity this year to grow Boston significantly and the Caribbean significantly and those were the opportunities that we directed those aircraft against.

And the way I look going forward is I think that we'll be very opportunistic with growth opportunities into the future.

Okay, thanks.

Thanks, Bill.

The next question is from Jamie Baker from JPMorgan.

Please go ahead.

Hi, good morning, everybody.

Good morning.

Good morning.

David, I'm curious.

Here's a question you probably haven't gotten yet today.

I'm curious if you and your current partners or any potential future partners have explored what would be required in constructing an air side light rail link at JFK that would permit connections between T5, 7, and 8 without requiring additional screening?

Let's see.

T5, 7, and 8 in terms of light rail.

Well, first of all, again, thanks, Jamie, for the question.

I think Kennedy -- I'm so pleased that we made the decision when we did, almost -- it's over seven years ago now with the investment in terminal 5.

Plus is we're closing out the real estate underneath terminal 6 to work with the Port Authority in terms of the former, our former home.

What we're doing with those 27 acres, specifically to a train connection and to be transparent, I don't believe there's been any discussion on a train connection between those terminals.

It's a, one regret I have is that we never, working with the Port Authority, the train went in before our terminal went in and so it was hard to change the light rail system.

But I think it's the ability to create a connection on to our partners such that is as seamless as possible, even though it's going to be across more than a couple of terminals.

So that's baggage.

That could include ramp side transfers as well.

Working with the Port Authority, the FAA and the TSA and, obviously, if you've cleared security domestically and you are on an outbound international trip, the ability to really try to streamline that experience.

So it's a -- we're working with that.

I don't see a train, but I do see something that will make the transition across Kennedy to be very effective.

Okay.

I mean there's not like a fuel depot there.

I mean I know the airport reasonably well, but I couldn't think of any infrastructure that would imperil the possible connectivity, rail or otherwise.

No.

It's really kind of interesting because T5 was truly as close to a greenfield site behind the Saarinen building, obviously TWA's home which will, by the way, open up later this year.

And then the underneath terminal 6 nothing physically prohibits at terminal 7, as obviously British Airways and their leasehold through 2015.

That's clean.

And then the former terminal 8 site, there's a lot of, it's really a brownfield site today or I should say 8 and 9 is now named number 8, but about a third of that tarmac's already been cleaned.

So it's quite clean all things considered.

Okay.

Good.

Second question, I've got to imagine that you are occasionally pitched the idea of a third fleet type for international operation.

You look at the returns that others are generating across the Atlantic.

You look at the model that Air Asia x is getting into.

I'm wondering about the JetBlue business model and if there's anything other than just maybe your own prudence that prevents you from doing something similar?

Jamie, I think it's a -- I mean, candidly in transparency, I think we're now at a point to where a big change is taking place in our Company where by the network is driving the fleet, the need for the fleet, as opposed to the other way around.

So I think now as we take a look at our commercial team and that group, Robin Hayes and his group driving the need for a different platform, that would be the driver as opposed to really being on the receiving end of a pitch from one of the large OEMs.

I think, specifically, it sure would be nice to have an airplane that had the capability to fly off the west coast down to the Caribbean nonstop.

It would sure be nice to see an A320 with winglets, because the engineering is out there as well, which I think, allows us to continue to look at what makes sense from a fleet perspective.

But we don't see a need to take the pitch from an OEM to try and fix something.

And that's what a lot of airlines tend to do.

They're trying to fix their current order book by taking airplanes they don't need.

I think we're in good position and as soon as the commercial team comes up with the idea, we'll be all ears.

Okay.

And my question wasn't specific.

I mean, perhaps Robin's wide body genes, I'm talking about Robin's prior employer, would effect that, I didn't mean specifically as a result of a pitch.

No, got you there.

I think what's really nice about what's transpired with the commercial team, Robin and team, is the international expertise experience that they have coming in from whether it's British Airways or United or wherever the case might be.

That is a really important lens to look through.

It's not unlike one of the earlier questions I think that we received regarding the consolidation of the Southwest/AirTran model.

Our network demands expertise that has the global lens to look at it and I think we're real well positioned to be real smart in that area.

Okay, excellent.

Thanks for the commentary, appreciate it.

Thanks, Jamie.

Thank you.

The next question is from Duane Pfennigwerth from Raymond James.

Please go ahead.

Hi, thanks.

Good morning.

Good morning, Duane.

Just wondered if you could quantify for us the revenue from the partnerships that you saw in the third quarter, either RASM or just total revenue.

In terms of specifically breaking out, we're not going to do that.

It's a -- grant enough.

Some of these are just also so new.

When you look at Aer Lingus has been in place for a period of time.

And we've talked fairly openly regarding seeing 100, 100 plus customers per day each way across Kennedy and Boston.

But outside of that it's been, it's very early, whether it's South African, whether it's American Airlines and the capability to sell off the websites later this year, Lufthansa So we're not going to get specific on it, Duane, but when I think about potentially what it means as we're announcing a seventh interline relationship later this month, it's playing real nicely in terms of supporting the investments that we've made previously with Sabre.

Okay, fair enough.

And just to segue there, in terms of the investment in Sabre this year, can you help us think about the size of that and specifically as it relates to the growth rate and ex-fuel CASM next year.

How much can not having a transition to Sabre help your ex-fuel cost growth moderate?

Thanks.

Yes, Duane, I think we've said that the one-time costs this year in Sabre were in about the $15 million range.

Obviously, we're going to continue to make investments into the future in Saber adding additional functionalities.

So no guidance on what we're going to do in 2011 relative to the Sabre spend, but I don't think in size to the revenue payback that the cost was all that significant or substantial.

But I guess is 6% the right way to think about next year or are some of these initiatives not likely to repeat and that growth rate should come down?

Well, we had some other onetime investments this year, as well as some kind of unusual items.

So if you think about the write-off of the spectrum license, if you think about the onetime payment from Airbus of $5 million that's going to happen in the fourth quarter and will be expensed in the fourth quarter, the investment in Sabre as well as some other things that we've invested in on the technology front, the runway closure at JFK, all those have kind of pressured the cost this year.

So I think that we'd be looking at something more in line with the back half of our year versus the front half of our year next year.

Thank you.

Thanks, Duane.

Thank you.

The next question is from Will Randow from Citi Group.

Please go ahead.

Good morning.

Good morning.,

Had a few follow on questions.

On the non-fuel cost growth in terms of 2011, how much of that's driven by labor?

And I guess how are you thinking about potential unionization of your work groups with the NMB's recent rule change?

Well, I think a lot of the first half growth in our CASM was associated with some of the labor adjustments that we made, more specifically the pilots.

I think that through -- we tend to look at our front line crew member pay as something where we want to have fair pay relative to the peer set and so we tended to look at that on an annual basis as to whether people are appropriately compensated relative to their peers.

So I don't see any big surprises going forward.

I think that we did have some things that we made up for in the first half of this year.

But I think going forward that it's probably going to be more moderate than those changes.

From a union front, Dave, do you want to address that?

Sure.

Thanks, Ed.

Thanks for the question, Will.

I think again, as we take a look at our model, a direct relationship, we don't see the benefit of having to pay a third party to speak on behalf of our workforce.

Now that said, we're certainly aware of the NMB rule change in June of this year and the move to a popular vote.

And so we're not running the Company different, Will.

I think as we look at our model, we've been very pleased with what we've seen over the first ten years.

Has there been lots of noise because of this?

Boy, no doubt in the industry, especially with our model.

We're a non-union airline.

But I think we feel very good and, again, it's quarters like this that I think reaffirm what we're doing with our organic growth, the open architecture, a direct relationship, the focus on free cash flow and balancing shareholders, customers, and crew members.

So that's kind of where we're currently placed right now, Will.

And as a follow-on, in terms of the $5 million payment to Airbus, I guess the first, is that actual cash outflow or are you just forfeiting TEPs.

And then are you comfortable with seven A320s per year in 12 and 13?

And I guess lastly, how do you think about return on invested capital in terms of providing a goal to investors given that it seems like you are becoming more focused on it?

Yes, well I think the, first of all, the Airbus payment will be a cash payment in the fourth quarter.

Secondly, I think the deferral gives us some optionality.

We talked in the script about having some lease deferrals in those same years.

So I think that we have the ability to still manage our A320 fleet growth in those years, depending on whether we decide whether we're going to extend those leases or return those aircraft.

And then on return on invested capital, I think we look at it from an industry perspective as the industry has to have a commitment to a return on invested capital metric.

I think that we're coming closer to that.

I start hearing a lot more people talk about that.

But we're not ready to give any specific number at this time.

Thanks, guys.

Thanks, Will.

Thank you.

The next question is from Glenn Engel from Bank of America Merrill Lynch.

Please go ahead.

Good morning.

Good morning, Glenn.

Question first on cost.

You mentioned you canceled a lot fewer flights, your ASMs were higher than expected, it pushed down PRASM, why didn't you see a cost surprise?

And even if I adjust for the two onetime items, it still seems like the cost in the third and the fourth quarter are a couple points higher than what you initially thought.

Where are you seeing the greater pressures?

I think, Glenn, we're probably about where we expected to be.

And we obviously had some onetime items in the spectrum write-off and the A320 deferrals, but I don't think that we've been necessarily shocked by the costs and we're relatively within our cost guidance for the full year if you adjust for those two items.

So, as we said before, we continue to make investments whether it's in crew members or whether it's in technology.

And we're just executing on a plan.

It still seems that it's coming in again higher than you thought if you took out the -- if you hadn't canceled so many -- if you cancelled a lot fewer flights this year you should have seen the CASM down versus your expectations.

So if you didn't, something must have been higher than you thought.

I don't -- again, I'm not surprised by where we ended up.

I think we, again had some onetime adjustments.

But I think we're within the guidance ranges that at least we expect.

And on the interlines, why not co-chairs?

Will there be co-chairs at some point?

Well, I think our model has really been different as we've been working with our different partners today, Glenn.

And so interline today it could lead to a one way co-chair or whatever the case might be.

Let's face it, when you start talking about co-chair, you have all kinds of workforce issues as well that are very important to work.

So I think we feel real good about where we're at with really the value of our network at Kennedy, largest domestic airline in New York, and then Boston as well.

And it is nice, too, because as we take a look at the interline, selling at inner line it's really the summer sectors as opposed to the traditional prorate when you start talking about the square root of mileage.

So I think it's -- we're real pleased with what we're seeing.

By the way, we do have one-way co-chair with lufthansa.

We've had that since we started the agreement back in November of last year.

So it's not that we don't have it, but we feel real good about what we are doing right now.

So what holds it back?

Is it your technology?

Is it just your choice or is it labor contracts at other airlines?

I think technology is really in place and I think we just want to be very thoughtful about what we are doing on a go forward basis.

By the way it's not lost on us the earlier question about the global expertise that we have on our commercial team.

Co-chair is more complex and so inner line is simplified if you will.

I think right now we're seeing the best of all worlds.

We'll see how it plays.

We've learned to never say never.

Thank you.

Sure.

Thanks a lot, Glenn.

Thank you.

The next question is from Hunter Keay from Stifel Nicolaus.

Please go ahead.

Thank you.

Good morning.

Good morning, Hunter.

Can you -- I know you are hesitant to disclose the details of this program, but maybe can you help us think about the impact at least on a year-over-year change basis for your PRASM at the All You Can Jet program had this year.

Was it a good guy, was it a bad guy, was it kind of neutral?

I think your first comment was right.

We're hesitant to disclose any details on All You Can Jet.

I can say that it does have a positive impact or we wouldn't do it, but to the significance of that impact, I don't think we would provide guidance to that.

Not even on a sort of relative to the last year not relative to your overall revenue base, just sort of relative to how we did last year directionally?

Well, we did capacity control some of that and the number that we even sell.

So I think all of that's in our guidance and has been.

So I don't think it was significant to the year-over-year.

Okay.

That's what I was looking for.

I appreciate that.

And just a little more on M&A.

I know you guys are dedicated on your standalone plan, I respect that.

But if you were to sort of run through the scenarios and think about potential M&A partners, particularly if it was carriers that are either relatively close to your size or bigger, do you think it's even remotely feasible to consider a scenario where you guys would partner up with an airline with any at all New York City presence given your domestic slot portfolio at JFK?

Hunter, I think when -- and by the way, of course, a little bit more on M&A, right, especially in what we're living in right now with what's happening around us.

The lens certainly that I look through, but the team looks through, when we look at -- and by the way, a direct relationship with our crew members that's a really important lens.

And that's -- we're certainly a different model along those lines.

So when you start to even take a look at those kind of scenarios, I mean, it's -- this is really part of the heritage in terms of organic growth, natural growth, the right partnerships.

By the way, specific to your question in terms of New York City, it's no surprise that we're partnering on an interline basis with American Airlines, right, 18 of our domestic routes to 14 of their international routes.

So we're certainly not afraid to do something right in our backyard with a quality airline like American Airlines.

They're up in Boston as well.

So it's just that we're flowing those same customers from New Orleans to Heathrow.

We're doing it a little bit differently, if you will, as opposed to maybe what the global alliances are doing or what those carriers are doing through the M&A activity.

Okay.

Thanks for the color.

Yes, thanks, Hunter.

My pleasure.

Thank you.

The next question is from Gary Chase from Barclays capital.

Please go ahead.

Good morning, everybody.

Good morning.

Hi, Gary.

Wanted to see if I could get a little bit more color on some of the revenue issues.

First, could you just -- presumably the true up on those TrueBlue expirations that you were talking about, Ed, presumably those are going to hit December, right?

They would hit December, yes.

Okay.

So there's none of that in the October comp that you just described for us?

No.

Okay.

And then I think at least most of us believe and it's pretty hard when you look at JetBlue's comps because your network has changed around, I think, quite a bit in the last few years, but it does look like you're headed into some tougher months in terms of your RASM comparisons and the 12 to 15 PRASM guide based on the October would imply a lot of acceleration, even when you ex out the mileage expiration.

Are the bookings for Thanksgiving and Christmas that much better?

And are they pointing in that direction or is there something else that gives you the confidence that those November and December numbers are going to be there?

And then, frankly, I wanted to ask the flip side of it, which was September seemed a little soft to us.

So what -- how do you think about the question in light of what you experienced in September on your own performance?

Just comment on September, Gary.

I think that it was interesting because we went through quite a bit of weather activity just as we closed the month.

We're actually quite pleased.

I mean, really, when I look at convective activity in July, August on a year-over-year basis, our on-time performance was up.

September was significantly down and then those cancellations that we did see were also later in the month pushed some of that revenue into, we believe, October into Q4.

I think again it's even more color, I think ,to the earlier question that we had on the call was what we're seeing from a revenue perspective.

Get inside Boston a little bit more.

I mean, it's an industry ASMs around us continue to move southward.

There's airlines that are closing crew bases in Boston as we're adding the frequency.

I think the beauty of the 190 as well, the ability to add frequency into the O'Hares, Pittsburgh, Charlotte, Raleighs.

And what we're seeing is we're adding capacity but load factor is up.

Yield is up.

And so just specifically into Boston, I mean, it doesn't get any better than that.

And so -- plus we're seeing the benefits of the partnership activity in New York.

We have the revenue, excuse me, the runway back.

Plus we're seeing the Caribbean maturation.

And also industry ASMs around us are down.

So I think it's -- as we look at the fourth quarter RASM, PRASM build we actually feel quite good about it.

I think the comments regarding Thanksgiving solid.

And what we're seeing the early looks, if you will, into Christmas, Hanukkah and New Year's, we feel real good about as well.

That's the color I can give you at this point, Gary.

It sounds like -- Go ahead.

Go ahead.

It sounds like you are seeing trends that are reasonably better even than what you're saw in, what you are seeing in this current period for Thanksgiving and Christmas, right?

I think it's, we use the term solid bookings in terms of the Thanksgiving timeframe.

I mean, it historically is always a very good time of year for us anyway because of the discretionary traveler that we've had historically.

Same into the Christmas timeframe.

So I don't think we are using terms that Thanksgiving is stronger than the summer traffic.

Summer was strong and solid as well.

Is that helpful?

I guess I was thinking year on year if Thanksgiving looks that much better than last year?

I really think that it's -- as we're taking a look on a year-over-year basis, it's the same in terms of traffic but the fare environment is totally different.

We are $142 in the third quarter.

Year-over-year I believe the number was $127 or $129 in Q3 of last year.

So we're seeing the same type of benefit as we go into the fourth quarter.

All right, guys.

Thank you very much.

Thanks, Gary.

Thanks a lot, Gary.

Thank you.

The next question is from Kevin Crissey from UBS.

Please go ahead.

Good morning.

Good morning.

Capacity guidance just for '11, did you give it or did you not give it?

I may have missed it.

We did not give it.

How should we think about it maybe in general and as it relates to this year or past growth or -- ?

I think it's a big issue for the industry and I just kind of want a sense of where you guys

Yes, Kevin, I think you should look at it relative to a lot of our aircraft deliveries this year have been a little later in the year, especially the six A320s that we cut that were the previously owned leases.

Yes.

So next year we're taking an additional nine aircraft.

Are those going to be received earlier or later in the year then?

I think they are kind of throughout the year.

It's, I think, a lot of the capacity that's weighted towards back half of this year plus deliveries for next year.

And I would think that our capacity growth next year as we kind of said on the call or on the, through the scripts was really it's going to be weighted, I think, at Boston and the Caribbean is where you can expect a lot of that capacity to be going.

Okay.

So kind of like you were saying on the cost side being more like the back half, maybe the growth will be more like the back half as well?

Something along those lines.

Transcon, did you mention strength or any comment on the Transcon at all?

I think Delta was saying that they saw strength our of New York, strength in Transcon, thought that was something to do with your stock being up yesterday.

And then really what I've heard from you is Caribbean and Boston.

Kevin, the Transcons were strong over the course of the summer.

They continue to be strong.

As we arrange our route network obviously the ASMs start to flow a little bit more north/south than they do east/west into Q4 and Q1.

But Transcons were strong over the course of the summer.

Not just the San Francisco's and the LAX's, I mean from Seattle down through San Diego they were strong.

By the way, it's Transcons, Boston, Caribbean, we've commented about we're seeing more of a business customer as well.

So what heretofore used to be troughs by day of week more so like in Boston and other locations.

It's been a nice mix of diversity on the revenue side.

Several different initiatives that have really been quite helpful.

Okay, terrific.

Thank you very much.

Great, thanks, Kev.

Thank you.

The next question is from Helane Becker from Dahlman Rose & Co.

Please go ahead.

Thank you very much, operator.

Hi, Dave and Ed.

Good morning, Helane.

You keep referring the business traffic and how that is helping on the revenue side.

Can you just give us a percentage maybe of what you are quantifying as business traffic now versus leisure?

We've been pretty steady in terms of 15% to 20% of our traffic in terms of core business.

I think that what's different is that number is now north of 20% and we're seeing it grow as well into Boston.

And so again, this benefit of -- we used to have one trip to between Boston and O'Hare.

And as we are adding frequency three and growing, same into Raleigh, Pittsburgh, Charlotte, business markets as well.

So seeing a higher business customer mix in Boston, which is really nice from a relevance perspective.

It's driving the opening of Reagan National Airport in Washington November 1st.

It's driving Boston to Newark in May of next year with four frequencies of high priced routes.

So I think real positive in terms of our investment with Mass Port and our crew members up at Logan.

Okay.

So as we think about the adds in aircraft that you have and some new markets you may be announcing, we should really think in terms of business markets out of Boston, primarily, and Caribbean kind of secondarily.

And then you said something that kind of interested me.

You said Newark Boston is a high fare market, which I wouldn't disagree with, but would that mean that you would go into those markets with fares that are equal to or close to where the existing fare structure is?

Well, we've traditionally -- take a look at Boston to Washington Reagan National.

Our fare structure is totally different than what used to be in place prior to our announcement.

So I think you can expect a similar philosophy from Boston down to Newark.

I think new aircraft -- again, we haven't guided, if you will, in terms of capacity next year, number of markets, but I think it's fair to say that really the lens that we're looking through tends to be Boston, but also the Caribbean, not unlike the Turks and Caicos that we're opening in the February timeframe daily out of JFK and then on weekends out of Boston.

So it's been a nice model that's been working over the last couple of years.

There will be the occasional Hartford as well.

We're opening that November 17th with service to Orlando and Fort Lauderdale.

So something that is a little bit different than say Boston Caribbean, but it fits nicely with our typology of Florida.

So that's kind of how we're looking at 2011, Helane.

Okay, great.

Thank you, Dave.

Sure, thanks.

Have a great day.

Thank you.

The next question is from Dan McKenzie from Hudson Securities.

Please go ahead.

Hi, good morning.

Good morning, Dan.

Dave, given our FAAC meeting yesterday in Los Angeles, I have a hunch your coasting on four hours of sleep or less.

So nice job on the perspective this morning.

Thanks, Dan.

Hoping I can get a little bit more on two topics and I may be kicking, hope I'm not kicking a dead horse here.

But first topic is Florida and then the second is the relationship with AMR.

But starting with Florida fist.

How is JetBlue thinking about the shift in the competitive landscape and I guess what I am getting at as JetBlue's identified early entering Fort Lauderdale as focus cities, but in light of Spirit's looming IPO and Southwest's acquisition of AirTran, the competitors in that market, of course, are changing pretty dramatically.

So I guess I'm wondering in particular one, how you are thinking about further investments in Florida, and two, how critical is Florida as a platform for growth?

Yes, Dan, nice to see you in Los Angeles as well yesterday.

Florida very important.

It's been an engine for this Company since we started the airline back in 2000, so that continues to be the case.

I think as we look at our ASMs and how we redeploy ASMs north/south, especially into the snow bird time of year, that will be the similar philosophy, same philosophy that we have had on a year-over-year basis.

So I think that when you look at Florida, of course Southwest, AirTran, Spirit, they are all large operations down in Florida, but so do we.

But it's -- we're performing well and it works real nice for not just the ability to add traffic north of Florida but also south of Florida.

And so that ties nicely into the Caribbean, Dan.

We were -- we had a ten-year celebration down in San Juan last weekend with 1,000 crew members, as we're doing that this year with our ten-year anniversary and the ability to see the traffic out of Orlando, out of Fort Lauderdale and to places like not just San Juan, [Ponte], [Auguadias], San Jose, Costa, Bogota.

It's a nice blend, if you will, in terms of relevance with what we're seeing north/south.

So it's a -- I think the M&A activity that is going on and how it impacts Florida.

My sense is it's going to some of the ASMs deployed by competitors, maybe less, because of consolidation.

And Florida will continue to be a very important focus in this Company.

Very interesting.

And I guess that leads to my second question.

With respect to JetBlue's relationship with AMR, when I look at the schedules date I'm seeing double digit growth from JetBlue into AMR markets, which suggests JetBlue is very much a tough competitor for AMR.

So it's a difficult relationship for me to reconcile and I'm wondering what additional perspective you can share about how we should think about the existing relationship and the potential looking ahead?

Well, I think it's fair to say that we remain very ardent competitors.

But at the same time, I think it's -- we're partners as well.

And so it's -- that's not surprising, I think, in the rather -- when you look through a contrarian lens.

And so I think you can really see more of that into the future as well.

What we're doing, for example, we just announced San Juan to Tampa, San Juan to Jacksonville.

We'll be over 30 departures daily off the Commonwealth of Puerto Rico next summer.

So our business plan, we're going to continue to move forward with it.

And at the same time, I think we're delighted that we can connect customers to Tokyo, to Buenos Aires, to Heathrow.

We will start to see frequent flyer reciprocity as well and the American brand in New York, in Boston, I mean, it's significant.

And it's been here for decades as well.

So I think we're real optimistic and pleased to add what we're doing on the partnership front as well, Dan.

Got it.

So if I understand correctly, more competition but also more partnership?

Yes, absolutely.

Okay.

Thanks very much.

Thanks, Dan.

Our last question will be from Steve O'Hara from Sidoti & Company.

Please go ahead.

Yes, hi, good morning.

Could you just talk briefly about -- I wasn't sure if you had given some initial cost guidance for 2011.

I think the only guidance we're going to give to '11 was some of the remarks we made before about some of the onetime costs that we saw this year.

Some of the investments that we made this year, specifically in the first half of the year.

And next year looking more moderate relative to what you're seeing in the back half of the year.

Okay.

And then you guys have talked a lot about free cash flow this year and I'm just wondering your, let's say, maybe outlook for free cash flow in the future.

Is that something that's going to kind of go away once some of these CapEx items start to pop in again.

No, we're still very committed to delivering free cash flow.

I think we said that that is our model.

We are not, I don't think we're afraid to make investments when those investments make sense, but certainly that would have to be something that we can explain to our investors.

Okay.

Thank you very much.

Thanks, Steve.

We have no further questions at this time.

This concludes our session with investors and analysts.

With that we will turn the call over to Mr.

Dave Barger for closing remarks.

Please go ahead.

Thank you very much, Sandra.

We will close and say thank you for joining us today.

Thank you to our crew members for delivering an incredible performance as well.

And we will look forward to talking to everybody in the New Year in the January timeframe.

Thanks, Sandra, have a good day..

Thank you, Mr Barger, you as well.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.