JetBlue Airways Corp (JBLU) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the JetBlue Airways second quarter 2012 earnings conference call.

Today's call is being recorded.

We have on the call today, Dave Barger, JetBlue's CEO; and Mark Powers, Jet Blue's CFO.

Also on the call for Q&A is Robin Hayes, JetBlue's Chief Commercial Officer.

As a reminder, this morning's call includes forward-looking statements about future events.

Actual results may differ materially from those expressed in the forward-looking statements due to many factors.

And therefore, investors should not pay undue reliance on these statements.

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

I would now like to turn the call over to your host, Dave Barger.

Please go ahead, sir.

Thank you, John.

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

This morning we are pleased to report record second quarter net income of $52 million or $0.16 per diluted share, an improvement of $27 million compared to the second quarter of 2011.

This marks our ninth consecutive quarter of profitability.

We achieved a 10.2% operating margin, a 2.7 point improvement over last year.

We're particularly pleased with the margin expansion we were able to achieve, as we generated record revenues, evidence that our network strategy is working.

JetBlue ended the quarter with approximately $1.2 billion in unrestricted cash and short-term investments, or 25% of trailing 12 months revenue.

Due to our strong liquidity position, we were able to strengthen our balance sheet during the quarter by reducing debt, including approximately $170 million in debt prepayments.

These results would not have been possible without the hard work and dedication of JetBlue's 14,000 crew members, who deliver an unrivaled customer experience to our customers each day.

As a testament to our high quality product and the experience that our crew members deliver to our customers, we recently earned the highest customer service ranking among low-cost carriers by J.D. Power and Associates for the eighth consecutive year.

We are very pleased to be honored with this award, along with some of the most respected brands in the world.

I would like to congratulate our crew members for this remarkable achievement, and thank them for their continued excellent work in running a safe, reliable operation.

Demand trends remain solid throughout the quarter, as we saw strength in all regions.

Our year-over-year PRASM growth of 6% exceeded our expectations, with strong traffic in the second half of June.

During the quarter, East coast short-haul markets, specifically our business markets from Boston, continued to outperform the rest of our network from a unit revenue growth perspective.

We were very pleased with our results in Boston, as new markets mature and our share of business traffic increases, resulting in improved profitability.

Customer response to our growth in both new and existing business markets within our network continues to serve JetBlue very well.

Bolstering the success, we recently announced plans to introduce a new tier within our TrueBlue Frequent Flier program called TrueBlue Mosaic, which will recognize and reward our most frequent and high-value customers.

We believe the program's enhancements, including even more speed and dedicated 24-hour customer service lines, will help us strengthen and deepen our relationship with our customers.

We continue to profitably grow in the Caribbean and Latin America, an area of significant focus for JetBlue.

We recently announced plans to begin our third Colombian route, with nonstop service to Cartagena, Colombia from JFK later this year, pending government approval.

We also announced plans to begin serving Samana, our sixth destination in the Dominican Republic, as well as Grand Cayman in the Cayman Islands, JetBlue's 23rd Caribbean destination.

Both pending receipt of government approval.

During the quarter, we announced three new interline partnership agreements with Air China, the LOT Polish Airlines, and Turkish Airlines.

And just yesterday, we announced a partnership with Cathay Pacific, our 21st partner.

We have been very pleased with the growth, the trajectory of our partnership traffic, and remain on track with our target of adding between seven and nine total interline agreements in 2012.

During the quarter, we deepened several of our existing partnerships.

We recently began providing reciprocal frequent flier mileage benefits with Emirates, with whom we have a one-way code share agreement.

We also began handling Hawaiian Airlines flights at our JFK terminal, and have plans to begin servicing Aer Lingus' operations from JFK Terminal 5 to Dublin and Shannon in early 2013.

These relationships not only bring incremental traffic and improved facility utilization for JetBlue, but also generate high margin ancillary revenue through airport concessions.

As we grow, we believe continued focus and discipline around cost is critical to our success.

Mark will discuss our cost performance in detail.

However, I would like to highlight some of the steps we have recently taken to help reduce our largest expense which, of course, is fuel.

JetBlue is the first FAA certified A320 carrier in the United States to use satellite-based special Required Navigation Performance with Authorization Required, also known as RNPAR approaches, at two of JFK's prime and most used runways, runway 13 left and 13 right.

The unique procedures associated with this technology allow for shorter flight times, and reduce greenhouse emissions.

We estimate this could result in fuel savings of approximately 3,000 gallons per day.

Additionally, we continue to look for ways to improve operational efficiency on the ground.

To that end, we recently announced plans to construct a new international arrival facility at our JFK Terminal 5. A new federal inspection site to handle United States customs and immigration checks will be constructed, eliminating the need for JetBlue international arrivals that don't pre-clear customs to be processed at JFK Terminal 4.

With approximately 20% of our JFK flights serving international destinations, we believe consolidation of flight operations in Terminal 5 will allow us to save nearly the equivalent of one aircraft through less time spent taxiing from Terminal 4 to Terminal 5. In addition, we believe these new facilities will improve the overall experience for our international customers, and further strengthen JetBlue's competitive advantage as a carrier of choice for airline partnerships at JFK.

We intend to break ground on this project in a few weeks, and hope to welcome our first customers in early 2015.

In closing, I would like to once again, thank our 14,000 crew members for their excellent work during the quarter, in helping us achieve record second quarter profitability.

We believe that our stand-alone path of organic growth, through the combination of an award winning customer service and product offering, a low cost structure, a strong balance sheet, and a profitable network positions us well.

We remain committed to profitable growth, generating free cash flow, improving margins, and delivering improved returns for our owners.

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

Thank you, Dave.

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

Today, we reported the best second quarter performance in our history, with operating income of $130 million.

This $44 million year-over-year improvement in operating income was driven primarily by $126 million of higher revenue, offset by higher operating expenses of $82 million, as prices remained relatively flat year-over-year.

Specifically as to revenue, once again, JetBlue outperformed the A4A domestic industry average during the quarter, as second quarter year-over-year passenger unit revenues increased 6%.

This passenger unit revenue growth is impressive, given our 5% capacity growth during the same period.

Yield improvements help drive the quarter's solid revenue performance, as did load factor improvements of 3.8 points.

Additionally, our average one-way fare increased 1% year-over-year to $160.

Passenger unit revenue was up April 9%, May 3%, and June 6%.

June PRASM results in particular exceeded expectations as Dave noted, primarily driven by close-in demand strength towards the end of the month.

In addition, nearly 1 point of January's year-over-year PRASM improvements was driven by flight cancellations, resulting from the FAA air traffic control outage and severe thunderstorms in the Northeast during the weekend of June 22.

Since we generally have a strong ability to recapture revenue when we cancel flights by reaccommodating customers on other flights, these types of events typically have a positive impact on PRASM.

As to ancillary revenues, contributing to record second quarter revenue performance was a 10% increase in overall ancillary revenue.

During the second quarter, ancillary revenue per passenger was about $20.

Recall, ancillary revenues, measured as the combination of ancillary revenue reported in passenger revenue, such as Even More and other revenue.

We continue to be pleased with strong customer response to our Even More offering.

This is on track to generate nearly $150 million this year.

We have made significant progress on the E190 Even More seat retrofits previously announced.

We expect to begin selling this additional inventory in early August.

Other revenue growth has been trending slightly lower than passenger revenue growth, primarily due to three key factors.

One, we postponed regularly scheduled American Express co-branded card acquisition campaign during the second quarter, resulting in lower marketing fees.

Two, aircraft lease rental income was lower than expected, due to the sale of two E190s previously leased to a third-party airline.

The sale by the way, resulted in a gain of approximately $2 million recorded in other operating expense.

And third, the termination of LiveTV's contract with AirTran.

Turning to costs, quarterly operating expenses increased 8% year-over-year, or $82 million.

While fuel prices declined year-over-year, fuel remains approximately 40% of our total operating expense.

As such, we continue to employ a variety of operating procedures and techniques to conserve fuel.

Our young, fuel-efficient fleet with an average age of 6.3 years, positions us well in this regard.

We also continue to hedge fuel, as a form of insurance against sudden price spikes.

To this end, in the second quarter, we hedged approximately 27% of our fuel consumption.

We recorded a $1 million loss related to fuel hedges settled during the quarter, bringing our year-to-date hedging gains to $8 million.

In addition, we recorded a mark-to-market non cash loss of $4 million in non-operating expenses, due to the decreased value of WTI crude oil hedges, which we de-designated at the end of 2011 due to the deteriorating price correlation between WTI and jet fuel.

Including the impact of fuel hedging, taxes, our fuel price in the second quarter was $3.22 per gallon.

We have hedged 27% of our anticipated jet fuel requirements for both the third and fourth quarters.

In addition to fuel hedging, we have recently begun managing fuel volatility through Fixed Forward Price agreements, or FFPs, which are essential forward contracts for the delivery at specific locations of physical jet fuel.

These FFPs continue -- currently cover approximately 18% of our projected fuel consumption for the remainder of the year, at an average price of $2.94 per gallon.

The underlying details of the FFPs and our hedge positions as of last Friday, July 20, will be more specifically detailed in our Investor Update which will be filed later today.

Brent crude, based on the forward curve as of last Friday, July 20, is averaging about $109 per barrel for the full-year 2012, and the crude to heating oil crack is averaging about $15 a barrel.

Based on these curves, including the impact of hedges, FFPs, and taxes, we are estimating a third quarter fuel price of $3.13 per gallon, and a full-year per gallon price of $3.18.

Excluding fuel, year-over-year second quarter unit costs increased by 5.6%.

The majority of this year-over-year increase was driven by maintenance expense, which increased 50% year-over-year on a unit cost basis.

As we have discussed on prior calls, this increase was primarily driven by the aging of a cluster of our A320s delivered in the mid 2000.

Additionally, as our fleet ages, repairs have become more costly, particularly engine repairs.

To put in this context, however, please note maintenance expense comprised only 7% of overall second quarter CASM.

That said, we have taken several actions designed to manage our maintenance costs.

First, in an effort to address future hourly maintenance rates, we sold six older A320 spare engines during the second quarter, and replaced them with new engines purchased at the end of 2011 and earlier this year.

By the way, we recorded a gain of $8 million in connection with these engine sales.

This gain was recorded in other operating expenses.

We may continue to opportunistically bend the engine maintenance cost curve by selling other older engines in the future.

Second, we have negotiated a long-term flight hour maintenance agreement covering the E190 engines.

The terms of which, we believe should lead to smoother, more predictable maintenance expense in the future on this CF34 fleet.

Third, we are pleased to report progress in our negotiations to obtain replacement flight hour agreements in the aftermath of the Aveos liquidation that occurred in the first quarter.

We expect the agreements to be in place by the end of the third quarter, thereby minimizing the duration of the impact of this event.

In the mean time, of course, we'll continue to pay higher rates on the related aircraft component repairs.

I should note the other significant driver of the second quarter 5.6% year-over-year ex-fuel CASM growth was profit sharing.

This increased approximately $7 million year-over-year.

Recall, profit sharing is calculated, as the greater of 15% of pretax income, or 5% of eligible wage dollars.

As to the balance sheet, as Dave noted, we ended the quarter with unrestricted cash and short-term investments of approximately $1.2 billion, excuse me.

Not included in this balance is an undrawn corporate fuel purchasing line we have with American Express, of up of to $125 million.

Also not included in this balance, is a new line of credit with Morgan Stanley for up to $100 million secured by a portion of our short-term investments.

During the second quarter, we took several steps to further strengthen the balance sheet.

Specifically, we made debt and capital lease payments of approximately $220 million, including approximately $170 million in debt prepayments.

These were secured by five A320 aircraft, as well as the two E190s sold during the quarter.

The A320 aircraft are now completely unencumbered, bringing our current unencumbered A320 aircraft to seven, up from one at the beginning of the year.

We recorded a $2 million gain in non-operating income related to these debt prepayments.

The interest rate on this retired debt was significantly higher than our weighted average cost of debt.

Further, we expect to benefit from future lower interest expense of approximately $6 million per year.

We believe these debt payments are consistent with our goal to increase returns on invested capital by at least 1 point per year.

We remain on track to achieve this goal.

We lowered our overall debt balance in excess of $100 million during the second quarter, while purchasing three additional aircraft.

Despite making more than $200 million in debt and capital lease payments, we ended the quarter with virtually no change to our cash balance.

Since the end of 2010, we have lowered our total debt balance by approximately $140 million, while taking 15 additional aircraft.

Debt payments for the rest of the year remain very manageable.

We expect to meet them from cash from operations.

Third quarter scheduled principal payments on debt and capital leases are expected to be only around $45 million.

As to CapEx and fleet, during the second quarter JetBlue took delivery of two A320s and one E190, bringing our total fleet size to 175 aircraft.

For the remainder of 2012, we expect to take four A320s and one E190.

We are currently evaluating financing options for these remaining aircraft deliveries, again with a focus on ROIC and managing our weighted average cost of debt.

In the second quarter, we spent approximately $125 million in aircraft CapEx, and $35 million in non aircraft CapEx, while generating approximately $200 million in operating cash flow.

We estimate capital expenditures of about $120 million in the third quarter, $180 million in the fourth, and $650 million for the full-year.

With manageable debt maturities and capital commitments for the remainder of the year, JetBlue is well-positioned in 2012 to generate positive free cash flow and maintain strong liquidity.

We expect to end the year with cash, as a percentage of trailing-12 revenue, in the range of 23% to 25%.

Turning to capacity, we expect to increase third quarter ASMs between 7% and 9% year-over-year.

As in previous quarters, most of this growth is driven by our focus on the Caribbean and Latin America, which we expect to be up approximately 10% year-over-year.

Boston capacity will be up approximately 7% year-over-year.

Our full-year ASMs are expected to increase between 6.5% and 8.5%.

This is up slightly from previous guidance due to, one, higher than expected completion factor during the first half of the year.

And two, additional flying in our business markets during September and October.

That said, Airbus has indicated possible manufacturing delays which could impact our four remaining 2012 deliveries in our capacity guidance.

Turning to the revenue outlook, as in the past, while visibility generally remains somewhat limited, we are pleased with the forward bookings.

We expect this solid demand environment to continue through the third quarter.

We currently expect July PRASM to be up between 3% to 4% year-over-year.

Consistent with our current revenue guidance practice, we are not providing specific guidance for August on today's call.

Recall, however, two events in August 2011 that will impact year-over-year comparisons.

One, we benefited from the several week lapse of the federal excise tax.

And two, we canceled approximately 1,400 flights as a result of Hurricane Irene.

Together, these two items increased August PRASM last year by approximately 3 points.

Despite more challenging comparisons, we believe the network changes made in markets such as San Juan and Boston will continue to produce solid revenue results.

Finally, with respect to CASM outlook, for the third quarter we expect ex-fuel CASM to increase between 4.5% and 6.5% year-over-year.

Maintenance and profit sharing expense accounted for most of the expected increase.

Our full-year ex-fuel CASM guidance is between 2.5% and 4.5%.

This is versus the 3% to 5% previously provided.

We project all-in CASM to increase between 1% and 3% year-over-year, for both the third and the full year -- third quarter and the full year.

In closing, JetBlue had a really strong second quarter.

We continued to grow and to do so profitably, thanks in large part to the outstanding efforts of our crew members.

As our markets mature, we continue to develop high quality, high margin revenue opportunities, while making balance sheet improvements increasing -- and increasing operational efficiencies.

We believe we are well-positioned to generate appropriate returns for our shareholders.

And with that, John, Dave, Robin, and I are happy to take questions.

Thank you.

(Operator Instructions).

And we do have a question from Hunter Keay from Wolfe Trahan.

Please go ahead.

Hi, good morning, everyone.

So Mark or Dave, I would love to get your thoughts on maybe some 2013 commentary on capacity and CASM.

You're taking 9 planes next year including, barring any kind of Airbus delays as you mentioned Mark, including I think 4 A321s.

So, which are obviously larger gauge.

So I am wondering if there is a -- is it fair to think that capacity could maybe hit something close to a double-digit rate on a year-over-year basis?

And if so, is it possible that we look at sort of a decline in year-over-year CASM ex fuel given that potential growth rate?

Hi, Hunter.

First of all, I note that the deliveries next year are basically back-end loaded, including notably the A321s.

So, I think they're all mainly concentrated in the fourth quarter or so.

So it, that probably gives you a little bit of guidance as to what the -- what the CASM -- the ASM picture is going to be in that period of time.

Again, and I'm looking also at Robin Hayes.

But the balance between capacity and market demand is something that we are very careful to measure between.

And that capacity coming in next year is paced to respond to what we believe, particularly with the A321s, our market demand, which, by the way will be a terrific airplane for some of our high-density routes from New York to Florida and the Caribbean, as an instance.

High market demand there.

So, I think there's appropriate match of that, and this increase of capacity.

Robin, do you want to add anything else to that?

No.

Thanks, Mark, and good morning, Hunter.

I would quickly say that we talked before about sort of long-term projected growth rate in the sort of mid single digits.

And while we're not specifically guiding for 2013, I am not looking at 2013, being a significant outlier to a long-term assumption.

Okay.

That's really helpful.

Thanks to both of you.

And Dave, one for you.

As you have turned more towards the ROIC conversation, which again people appreciate, I can absolutely tell that you that unequivocally, Dave, has there been any discussion of this, in the Board meetings, including this as a component in variable comp at the executive level?

Or is that something that maybe you should think about longer term?

Has it been -- longer term -- has it been discussed at all?

Oh, yes, it has been discussed.

I think we've been transparent about that, where we had our Investor Day, and all of you were present, as well.

And so, as we have our current goals that are in there, we just wanted to maintain them for a couple of years, so we had some continuity when you start talking about things like ex-fuel CASM, and you start looking at operating margin.

By the way, a commentary on a customer goal, as well, which you wrote about, which we think is very important with net promoter score also, but is part of the conversations.

And, I wouldn't be surprised that it makes its way into goals, as well.

Specifically, it is in a couple of the key leaders goals, including mine, right, and Mark's.

So, there's plenty of visibility on it, within the leadership team and also across the board.

Okay.

Thanks, Dave.

Thanks, Hunter.

Our next question is from Michael Linenberg.

Please go ahead.

Yes, good morning, everyone.

Two questions here.

Mark, you talked about return on invested capital and the improvement.

I think you indicated, you were well on to your way of achieving your 1 point goal for this year.

Where, just to give us -- to put some context around it, based on how you define it, what was the base number at year-end 2011?

So, anticipating that question, we will actually, in the -- on our website today, be including our definition of ROIC.

I know there's a whole variety of ROIC types of definitions running around amongst the airlines, but that will be included.

Great.

But at Investor Day, we announced that year-end ROIC was 4%, applying this formula, which, again, for your convenience will be included on our investor section of JetBlue.com today.

Okay, great, much appreciated.

And then just my second question, and I guess this is to either Robin or Dave.

Can you just give us a mix of your -- of where your capacity split is now?

I mean, you have a lot coming on in Boston and the Caribbean.

Or maybe give us, what the mix should look like at year-end 2012 versus year-end 2011?

Because there has been a lot of growth, but it's been very much targeted in, really, in the international markets.

Sure, Michael, I'll do that.

In terms of how it's split, I think we have been fairly consistent in the last couple of years.

And roughly speaking, that we end up with a third into the Florida area, a third into Latin America, then sort of the rest is a mixture of short haul east and west coast, and transcon.

And that really hasn't changed that much.

I mean, and as a percentage, transcon continues to edge down slightly, as we kind of focus growth mainly in two markets, which is Boston and the Caribbean and Latin America from a number of different points in the US, and I think you are going to see that continue.

We grew Boston this year.

We grew Caribbean and Latin America this year.

The new markets that we have announced through the end of this year, very much in that footprint as well, although we also did add Florida to Providence, from both Orlando and Ft Lauderdale.

And no surprises, I mean think it's going to continue to be very much as we've told you it is going to be, as we think about next year, as well, which is continuing to grow our Business, travel footprint out of Boston, and continue to grow into the Caribbean and Latin American market from a number of US focuses.

Okay, thanks.

Our next question is from Jamie Baker.

Please go ahead.

Good morning, gentlemen.

David, I'm curious if JetBlue has received it's NDA from American?

And if so if you could comment on any terms or conditions that the NDA might place on you?

Jamie, really not going to offer any color, in terms of that topic that American has talked about.

Right?

So, as we take a look at -- again, we've been very forthright about our stand-alone plan, organic growth, our own people, our own airplanes, right?

So I mean, that has been the case since we started, continues to be the case today.

Right?

So, we'll see what happens, as the months play out.

Sure.

It was precisely because of your view, that I thought you might be willing to comment on the merits of the NDA.

But that's okay.

Skipping to the second question, you want to add 7 to 9 interline partners.

You talk about increased passengers, better use of (technical difficulties) facilities, better margin.

But could you put actual dollar figures around that, how much financial benefit was there in the second quarter?

Or better yet, what is your sort of targeted benefit for 2013, when some of your more recent agreements have time to mature?

Jamie, a little bit of breakup, but I think I have it.

Robin, feel free to offer some commentary.

So yes, we're on track for the 7 to 9 interline partners.

And again, interline for us, I mean it's quite a bit different, it's considerably different than interline of the past, when we look at some of the sector and these partnerships that we have.

And so we are not going to get inside specific commentary regarding, now 21 partners, of the number of customers, the revenue commentary.

But it's -- I'll tell you, across Kennedy, certainly across Boston and other locations, as well, it's been very helpful to us.

Robin, we just announced Cathay Pacific yesterday as well.

Additional commentary?

Good morning, Jamie.

I mean, sort of our last public statements on this, were the ones that we shared at the Investor Day.

And this is something we are coming to maybe update annually, when we speak to the analysts and investors, and probably not get too much into a quarterly dialogue on it.

Well, just a quick follow-up.

I mean, if 21 partners currently, I am just trying to figure out whether that's risen to a sufficient level of materiality that in your monthly RASM as you forecast RASM out there, there could actually be some material forecast errors?

Since after all, you probably don't have -- maybe you do, but you don't have interline models.

You don't know Cathay bookings, all that kind of stuff.

I'm just trying to figure out whether this is going to cause RASM deviation in your guidance, that's all.

I think, you -- the, our ability to continue to produce strong RASM results is predicated on a number of things.

I look at mainly what we are doing in Boston and Caribbean and Latin America, and the rest of the network, as the most important parts of that

Sure.

But certainly, the -- what are we are doing in terms of the partnership, interline, and code shares is growing very nicely and it is going to continue to grow.

Okay, excellent.

Thanks, appreciate it.

Thanks, Jamie.

Our next question is from Duane Pfennigwerth.

Please go ahead.

Hi, good morning.

Good morning.

I wanted to ask you about your comps for August and September.

It sounds like you think the August comparison is tougher.

Optically, it looks like September is tough, as well.

In the past, you indicated a greater ability to drive unit revenue improvement in the shoulder periods, but wondering if we may be round tripping some of those efforts from last year?

Any comments you have, would be helpful.

Good morning, Duane.

I think July and August, you just touched on this, historically, very strong months for JetBlue, continues to be a very strong and sort of a demand pattern that we understand very well, being primarily leisure and visiting friends and family.

I think as we look at September and October, historically weaker months for JetBlue.

What we have continued to see over the last few years is our ability to fill in those troughs with a more sort of high percentage of business travel, particularly what we're doing in Boston.

And I think that's going to continue.

Now clearly, we are lapping against harder and harder comps, but we still think there is some significant head room in the ability to fill in the troughs, and out perform our traditional stronger months in the peak.

Thank you for that.

And can you say if there are any other gains embedded in your cost guidance for the rest of the year, aircraft sale gains?

None that I know of.

As I think I indicated, I will opportunistically look for occasions to do that, particularly, if it -- as we did in the past, helps us bend some of the maintenance cost curves, and better manage our fleet expenses moving forward.

But there's nothing -- so we had a flurry of activity the last week of the quarter, and so pretty much cleaned up our transactions.

Thanks.

And then just lastly, wonder, as you look at the world, could you give us your idea of, sort of total capacity and competing capacity in the second half, maybe 3Q, 4Q?

And how that compares to what you saw in the second quarter?

Thanks for taking the questions.

Yes.

No, certainly I think we'll probably be more focused on Quarter Three.

It's always tricky sort of looking two quarters out, because you do find that there tends to be a lot of changes.

But if we think about third quarter over second quarter, I actually think it could be marginally better, in terms of total seats in JetBlue markets.

But I think it's not really significant enough to draw any attention.

I think we're still seeing positive competitive reductions in like markets like Boston, and to some degree, Florida.

I think Caribbean and Latin America has stabilized more somewhat.

So I don't think -- I would sort of characterize it, as we're not thinking about Q3 being too much different from Q2, in terms of overall competitive capacity.

Thank you.

Thanks, Duane.

Our next question is from David Fintzen.

Please go ahead.

Hi, good morning, everyone.

Maybe a first one for Robin.

I am curious, the June walk-up demand being better than you thought, could you just give some color on, was that business, was that leisure, was -- what kind of geography, New York or Boston?

And then most importantly, did that carry into July, or was that just something of a one-off towards the end of June?

No.

Of course, I think we saw the late strength in June, really across both our business and leisure segments.

I think the business month tends to book late, and so that was a nice surprise to the upside.

On the leisure side, I think we were pleasantly surprised in amount of last-minute leisure bookings, heading into the summer.

Also, I would just draw your attention to the comment made on the script as well, that there was also part of the upside was driven by the storm here in the Northeast and the FAA fire at the facility in New Jersey towards the end of June.

So, for transparency, that was part of the upside.

But notwithstanding that, we did see a nice bump into June.

Obviously, we're setting guidance in July, later in the month because we provided it on the earnings call, as opposed to when we issue traffic.

And so, the numbers firmed up to a higher degree than when we set guidance on a -- with the traffic release.

Right.

Okay.

And then, just thinking through your business leisure traffic mix in Boston versus New York, I mean is there a way to quantify -- maybe near relative to where you think the industry is at?

Sort of your business and leisure mix in Boston, I mean how -- is it more normal, relative to the industry?

And then, the reason I'm asking here, should we be, to the extent demand starts to slow and we start seeing economic softening, should we be thinking -- is there enough business travel in Boston, that it's a little bit different relationship with the industry in a slowing economic environment than we have seen in the past?

No, I think we still feel that the business market in Boston continues to perform.

We really haven't seen any slowing.

We are still in a phase where we are winning new corporate accounts, and winning new business.

So we're very much in that sort of acquisition part of the cycle, rather than just in a mature phase where we're trying to maintain existing accounts.

So I still think -- I think there's still upside.

And in addition, I think we're a brand that does well in the downturn.

I mean, there is a retreat to the value segment, when the economy gets tougher.

We saw that back in 2008, 2009.

And I think we're going to continue to see that here, if that happens.

But again, I would point to the very diversified market we have in Boston is business and leisure, and the ability for one to support the other, if one starts to slightly underperform.

And do you think in -- just the first part of that, do you think in Boston, you are sort of -- is it typical for the industry?

Is it still a little bit more leisure heavy than the average industry?

Is there any -- just a sense of weighting, anything you can provide?

Yes, Dave, good morning, Dave.

When I think -- a couple days ago, being up in Boston with Global Business Travel Association, right.

I mean it's the largest gathering of corporate travel managers, and they happened to be in to Boston this year.

And with our relevance that we have up there, the newest service being Dallas/Fort Worth.

The diversity of the Boston economy, when you start looking at businesses, inside of businesses, whether it's technology, whether it's educational, whether it's financial, the strength of the economy in places like Boston.

As we are latticing in partners like Japan Airlines, with their first 787 ever, right?

Flying from Tokyo into places like Logan airport and connecting to our traffic, right, to the earlier question that we had on partnerships, really significant relevance that we have going on up there, plus our own growth in the business market.

So, I think the only additional comment that I would offer, in addition to Robin is just, you are going to have the seasonality.

This time of year, many people are out in the Cape, right?

They are in Nantucket, and the Vineyard, right?

So, traditional seasonality, but business is alive and well, up in Boston.

Just one other final point, I do think to Dave's point, we are -- we do look at the Boston and the New England economy as sort of doing, one of the areas in the corporate travel segment as probably doing better than a lot of parts of the rest of the US.

And so I think the geography is also kind to us, as well.

Okay, that's -- appreciate the color.

Thanks, Dave.

Our next question is from John Godyn.

Please go ahead.

Thanks everyone for taking my question.

I just wanted to follow up on some of the PRASM and demand commentary we are hearing.

I understand that June benefited from one-timers.

The 3% to 4% in July though, were there any negative one-time timers that weighed that result down, just so we sort of know what the core number would have been?

Southwest referenced the placement of July 4th in the month.

I don't know if that hit you, if there was anything else that would you note?

No, not really.

I mean, just going back to the strengthening in June, I think part of the reason was linked to the -- where July 4th came.

So I think, back to my comment earlier about some of the leisure strength there.

But, no, in July, there is no sort of -- there is no one-offs, there's no surprises lurking in there.

I think it's a core sort of demand issue.

Okay.

And you were helpful in that you highlighted some one-timers in August, and quantified them at 3 points.

Is that the same impact in September as well?

Because, of course, the FAA tax holiday, and I think some of the hurricane hit that number, too.

And are there any other one-timers that you would highlight, like holiday placement, anything like that in September?

Just so that, we kind of understand what the clean trend might look like?

John, I'll jump in on that.

This is Dave, good morning.

It's the better part of that impact, with the excise tax, as well as Hurricane Irene was in August.

And so that, there's still an impact into September.

Labor Day is a little bit different this year, year-over-year.

A little bit of impact, but it's definitely less than the 3 points that Mark had in the script.

Okay, that's helpful.

And then just last question, on just overall demand trends.

Dave and Mark, I heard you use the word solid a lot to describe demand.

Last quarter, you were using words like strong a lot.

I might be reading too much into this.

Solid feels a little bit less exciting than strong.

Are you seeing macro weigh on anything on the margin?

Or am I reading too much into the commentary that I'm hearing?

Yes, John, probably reading a little bit too much into it.

But it is fascinating, because at our weekly commercial discussion, and I know that many of our leaders listen to the earnings call.

We talk a lot about, what's the word?

What's the difference between solid and strong?

They are really synonymous.

I think you're reading too much into it.

We are really seeing solid revenue trends across our network right now.

And I'm personally, I think we all are, really looking forward to seeing what happens in September because of the investment we've made, the latticing, if you will, in the business markets, as well.

We talk about Boston, but I mean, Reagan National at 10 a day between Boston and BCA, these are significant investments.

So, very excited.

But, reading a little bit too much into it, John.

Okay.

Thanks, a lot.

Thanks.

Next question is from Glenn Engel.

Please go ahead.

A question on cost, and a question on revenue.

On the cost side, can you talk about how much the Aveos problems cost you in the second quarter, and the impact in the third?

Yes.

I think what I will say, you recall last quarter's call.

I indicated that this was probably a double-digit problem.

I think with the progress that we have made, in terms of our negotiations, the problem itself is now downsized to a single digit number.

And knock wood, we will have this thing cured, with alternate sources of flight hours supply by the end of this third quarter.

So, single-digit hit over two quarters?

Since the -- during the duration of their liquidation.

Yes.

Second question I have is on the RASM side for Robin.

One, it seems like there's a fair amount of transcon capacity being added this summer.

Are you seeing that market lag?

And two, ceding back to the last question, I know your July is what would you expect.

But was the first week of July, given the July 4th holiday, noticeably weaker than what you expect the full month to be, in terms of year-over-year gains?

Let me -- in terms of -- let me answer the second part of your question first, Glenn, and good morning.

No, not really.

I think we've seen pretty much the same strength throughout all of July.

So, not the first week.

In terms of the first part of your question, you're correct, I think transcon is one of the areas where we have seen capacity creep back in.

Not necessarily a concern during the summer peak months, because it tends to do well.

There is plenty of demand at higher fares.

I think it will be interesting to see, what starts happening in some of the shoulder and trough months, and whether that capacity stays in or starts to come out again.

Thank you very much.

Thanks, Glenn.

Next question is from Kevin Crissey.

Please go ahead.

Good morning.

What's your -- I guess this is probably for Mark.

What's your weighted average cost of capital roughly?

I'm hesitant to mention what I think the cost of capital is.

Happy to talk about our cost of debt, which is all-in, with attendant fees, 4.5%.

I think it would divine a somebody a lot smarter than I, in this low-interest rate environment to try to figure out what the appropriate risk-free rate is for you or your clients.

So I will let - I will defer to you in terms of the pricing of the equity side.

I mean, I guess what I'm getting at, do you believe that your return on invested capital, your 4% is meaningfully below where it should be, to be generating return?

Well, you are asking a CFO.

Of course, I do.

And that's why we're vigorously working to close that gap in two ways.

Number one, obviously working on bettering our margins, and secondly, reducing our invested capital.

I mean, I understand that.

I just, when I say what, so why is 1% -- maybe it's just a matter of that's all that you're able to do.

But when I look at, you are growing, and you're growing faster than GDP.

And if there is a meaningful gap between your cost of capital and your return on capital, a 1% improvement per year, if say, that the gap is 4%, it is going to be four years.

There is probably not many analysts out here who have numbers four years out, that we feel particularly able to rely on.

And so therefore, it becomes questionable, as to whether you close that gap entirely?

Well, I hope we can overdeliver for sure.

But, you will recall this is a commitment we made it to Street earlier this year during the Analyst Day.

Yes.

Session.

And trust me, I'm mindful of the overall gap between, whatever that cost of capital and our actual ROIC may be.

So, we're clearly going to try to exceed expectations on that number.

But at the time, when we made the commitment to you and others on the street, that was the number that we felt comfortable with.

Keep in mind as well that, that is the number that is not adjusted for fuel.

Okay, thank you.

Thank you.

Next question is from Savi Syth.

Please go ahead.

Just looking at the load factor in second quarter, it seems much higher than what we've seen historically for a second quarter.

And then looking at yield, it looked like the yield growth has moderated from what we have seen in the past several quarters.

I was wondering if there was a -- kind of a mix issue that resulted in that, or why that might be?

No, every time we kind of plan ahead, we're always looking at how do we optimize both yield and volume for RASM.

There's a couple of different levers that we can pull.

I think what you saw in the last quarter is up primarily, driven [that] through load factor ads, because when we looked at what we saw last year, we saw the opportunity to do that.

Now you also will note there has been a general slowing of industry fare increases.

We have kind of gone into the year.

So, you have definitely seen that slow down.

And there was a fairly broad based price increase that took effect, in sort of a fairly elongated process last week, sort of three days, but that's slowed down.

So, I think we looked at the opportunity as, yes, there were some yield increases but it was primarily load factor driven.

What I would say, if those came together, those would allow us to deliver another quarter of industry-leading RASM performance.

That makes sense.

And my second question, kind of two parts, and relates to -- I think the fare increases have been driven by just the kind of the rise in fuel prices.

As you see fuel kind of having pulled back, and now at this level, one is, at what point do we start to see unit revenue growth really kind of start to flatten out and maybe even decline, or will we that?

And the second part is, have you done any kind of changes in how you think of capacity as a response, or have you seen any competitors change in capacity as a response?

Obviously, where we see competitive capacity changes, not entirely clear what's on their mind or wrong to speculate.

I think in terms of JetBlue, no, not really.

I mean, fuel really isn't a guide for us on capacity.

We really look at our core demand, and what we're trying to achieve in each market.

As we said, we've added slightly into September, October trough.

We have been very encouraged by what we've seen in some of the other trough months for business demand in Boston, also some of our other non-Boston business travel markets.

And so we just tweaked September-October a little bit, in order to add more profitable flying, but really no major change.

And in terms of fuel, again, I think the fare environment is much more driven by just core supply and demand issues, and not necessarily one too much about fuel.

And if I can add, I don't think that we are -- just because fuel has been flat quarter over quarter, I don't think we're prepared to take a victory lap at JetBlue, or as an industry.

If you look at it from a little bit longer historical perspective, fuel still remains high.

So it's -- it's no cause to celebrate great -- the resurgence of lower fuel prices.

And it's still also very volatile.

I mean, our Brent index, from last Friday has changed $5.

So it's still at a very strange world, when it comes to fuel out there.

So if you don't see fare increases though, do at some point, even the margin might expand, do we see unit revenue become flattish to maybe even declining year-over-year?

I mean, one can't know for sure what's going to happen in the future, but that's not something I foresee or expect.

All right, great, thank you.

Thanks, Savi.

Next question is from Ray Neidl.

Please go ahead.

Yes, just to clarify a couple of things.

Your heavy growth in Boston and the Caribbean is really what's driving the Company's growth.

And I'm just wondering if, when American reorganizes and comes back, a lot of those markets were American markets before.

If they come back with a lower cost structure, one, do you see tougher competition in these growth markets that you're going into, or are you too well established already?

Number two, will you still have a cost advantage, and basically do you see that as a threat?

And tied in with that, I just wanted to clarify what you said before, is there's no talks going on with American right now about a partnership, or codesharing is or things like that.

Good morning, Ray.

Along those lines -- well, first of all, when you start talking about, well, your last question, right?

I mean, American is a partner of ours.

We have discussions with all of our partners, right?

And so when you get into specifics of discussions, we're not going to disclose those, right?

But as right now, what we have is feed to their international markets from our domestic market, right?

And we are very pleased with what we're seeing with that partnership.

When you get inside your comments about Boston and the Caribbean, are we concerned -- always concerned about the competitive landscape, right?

And so whether that's American, a reorganized American, or you name it, in terms of that landscape or other focus cities across our network.

And so, all that said, and it's really tied into an earlier question, regarding growth.

Our growth has been very targeted underneath a headline of return on invested capital to seize upon opportunities that we've really earned, I believe, with specifically in Boston, we're now 100 a day and growing.

And the support of Massport to allow that growth.

This relevant, other airlines closing crew bases, moving their regional flying totally out of that market.

We are affecting change there in a significant way.

And the Caribbean is very similar, our 23rd destination announced with Grand Cayman.

And when we look at our relevance, San Juan, we just moved into Terminal A, a building that literally was six years ago, construction commenced down in San Juan, and our entire operation, right now about 40 departures a day, I believe the summer number is 38, departing out of terminal A. So, you bet, we're going to capitalize on that.

But always, always, ears are open, and eyes are also looking at the landscape, from the standpoint of competitive pressures, right?

That's the landscape we live in.

Okay, that sounds logical.

Tied in with that, your key base still remains JFK, and you did talk about the terminal expansion of Terminal 5, I guess over Terminal 6. What is the plan for that?

Are you going to cover all the land on Terminal 6, build additional gates, besides an international customs center?

Is that going to be for JetBlue growth at JFK, or is it going to be primarily for some of your partners?

Well, I think really what we're doing with Terminal 5, that footprint with this additional expansion, and the use of our capital in terms of investing and building that facility, we're going to -- we plan to move our operation, our international arrivals from Terminal 4 into Terminal 5 with the expansion.

By the way, we believe this is much more cost effective, even though Terminal 4 has been terrific for us.

But it's no secret, with the growth that's happening over there.

And we believe that we get at least one aircraft out of it at the end of the day, because we're not towing aircraft back and forth.

And then we also have an in-facility transfer of our own customers and additional customers.

So, Hawaiian is in there today.

That's not international.

Aer Lingus will be moving in, in Q1.

That won't be international either, because they will be pre-cleared.

But it's nice to have optionality for new partners, as well as for our own expansion happening at Kennedy.

At Kennedy, we have our focus cities, but Kennedy is our home base of operations.

It's very important to us.

Okay.

And then lastly, you sound very optimistic about the third quarter.

Does that include post Labor Day and the fall season?

I know it's too early to really look out to see what demand is, but the economy seems to be weakening by the day as we move into the fall.

And basically, have you had any signs yet of what the demand might be post-Labor Day?

No, I think our visibility, as we said before, just tends to be a couple of months out.

I think -- we've been here before though.

If the economy does take a turn for the worst, I think we've shown during 2008, 2009 that JetBlue can sail through that with great success.

There is a retreat for brands that offer value if that happens.

And I think we have a geography in part of the country that is likely to weather that better than most.

And so, no, we still feel very good.

And don't forget, our strategy is a little different.

We are in a phase of growth, particularly with the corporates where we are, acquiring new accounts, we are building new business, we are stealing share from our competitors.

So I think the opportunity for us to grow through that is significant.

Great.

Thank you.

Thanks, Ray.

Your last question is from Helane Becker.

Please go ahead.

Thanks, operator, for getting my question in.

Most of them have been asked and answered, but two, I think these are pretty easy.

On the unit cost growth, can you say how much of that is the higher than what you would have previously expected maintenance cost, because of Aveos going away?

And can you say how much of it is related to the length of haul getting shorter, with some of these new routes coming out of Boston and the Caribbean?

I can certainly address on the maintenance side.

We are looking at as much as 50% of the ex-fuel CASM increases attributable to maintenance costs.

As I have said, we have already guided, our guidance is already included sort of on the way high side of the Aveos bad guy.

And that will probably get a little bit better, as we move forward and work through that.

I would also remind you that another key element of CASM ex fuel is sort of, if you will, a high-class problem, at least for those crew members on the phone, and that's profit sharing.

I'm not really in a position to -- not because it's not a legitimate cause, but I haven't done that calculation lately, because I don't think the length of haul is actually that much anyway.

So it's pretty immaterial.

So it's relatively the same on a year-over-year basis, right?

So and the mix is the same, with the 190's and the 320's as well.

So it won't be route driven.

Okay.

So it's mostly -- so there is no way you can say, what unit cost would have been had your maintenance provider not gone away?

Like what the increase would have been?

We can back into that number, but again, we have sort of guided full year impact of a single digit million dollar impact.

Got you, okay.

Well, that's fine.

Which, again, in the whole context of all of our costs is probably not terribly material.

In the full flavor of total CASM.

No, but I would have expected the CASM not to increase as much, given the increasing capacity, right?

You would have expected unit cost or CASM ex fuel to come down.

Right.

Again, as I know you have modeled, don't forget, a big chunk of this CASM maintenance increase is not because of Aveos, but it's because of the general aging of the fleet.

And the fact that at least on the CF34 until now, we did not have those engine repairs covered by a flight hour agreement, which as of July 1 we will have.

Okay.

So, yes, for the second half that gets a little bit better.

Well, thanks.

That's much appreciated.

And really, all my other questions have been asked and answered.

Thank you.

Thanks, Helane.

John, I believe that's the end of the questions, correct?

Yes, it is.

Great.

Thanks so much, John.

For those of you dialing in today to our earnings call, we appreciate it very much.

And, of course, in closing, to our 14,000 crew members, thanks for a terrific quarter, and thank you for delivering a safe, reliable operation, and from J.D. Power, eight in a row.

We look forward to talking to all of you, next quarter.

Thank you.

Have a great day.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating, you may now disconnect.