JetBlue Airways Corp (JBLU) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the JetBlue Airways third 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, JetBlue'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 play undue reliance on these statements.

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

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

Please go ahead, sir.

Thank you, John.

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

This morning we are pleased to report another profitable quarter for JetBlue.

This marks our tenth consecutive profitable quarter.

We reported a third quarter net profit of $45 million, or $0.14 per diluted share and an operating margin of 8.6%.

Despite continued economic uncertainty, total revenues grew 9% year-over-year.

Our solid revenue performance was offset by a 10% increase in operating expenses.

JetBlue ended the quarter with approximately $1.1 billion in unrestricted cash and short term investments, or 22% of trailing 12-months revenue.

We view a strong liquidity position as paramount in this high fuel cost and uncertain economic environment.

We continue to use our strong liquidity position to make balance sheet improvements, including paying down high cost debt and paying for aircraft in cash.

These results reflect the hard work and dedication of JetBlue's 14,500 crew members in delivering an industry-leading customer experience every day.

In addition to delivering the JetBlue experience, our crew members achieved excellent operating results this quarter, evidenced by improved completion factor, on-time performance and mishandled baggage claims.

I would like to take this opportunity to thank our crew members for running a safe and reliable operation.

We are very pleased with our revenue results during the summer peak travel period.

In September, historically a seasonably week period for leisure travel, we were particularly pleased with the performance of our Boston business focus markets.

East Coast short haul markets were again the best performing part of our network on a year-over-year basis.

Our relevance in Boston continues to improve.

We measure relevance as the number of routes JetBlue serves on a non-stop basis relative to the total number of domestic and international routes flown by travelers in Boston.

Today we are relevant to about 62% of Boston's customers, an increase of 25 points since 2007.

Significantly higher than any other carrier at Logan Airport.

Relevance is particularly important as it enables increasing penetration of business travel segments.

Looking forward to 2013, we expect to continue targeted growth in Boston, adding new business markets as we build relevance to our customers in Boston.

Through our partnership with Massport, we have secured critical infrastructure necessary to execute our growth plan, including additional gates and an improved customer experience at Terminal C.

As we build our Boston network to improve our appeal to business customers, and add corporate contracts, we continue to effect competitive change.

Specifically competitive capacity in Boston decreased by about 6% in the third quarter.

We expect additional competitive reductions of about 5% during the fourth quarter.

Boston is succeeding as an important part of our network, which is currently centered on six focus cities.

In Boston, we have built an operation in which approximately 90% of our customers travel on nonstop itineraries.

This network structure in Boston historically a city not well-suited geographically to a hub and spoke structure, enables JetBlue to generate a revenue premium with lower costs than those of our legacy competitors.

For the full year, we expect Boston to contribute materially to improving JetBlue's ROIC.

Specifically, trailing 12-month pretax margins in Boston have improved by 8 points year-over-year.

We are also executing on our profitable growth strategy in the Caribbean and Latin America.

We are pleased with performance of our new services offered from Florida to the Caribbean, and our expanding intra-Caribbean service.

Bookings in Caribbean markets commencing in November are ramping in line with our expectations.

These destinations include Cartagena, Colombia, Samana in the Dominican Republic, and Grand Cayman Island in the Cayman Islands.

We recently announced a new interline agreement with Royal Air Maroc, our eighth new partnership this year, bringing our partnership total to 22.

As we have added new partnerships and deepened existing partnerships, we are pleased with the growth trajectory of our partnership portfolio, which feeds quality high margin traffic into our network.

Turning to costs.

Cost discipline remains an essential part of our success.

While Mark will discuss our cost performance in detail, I would like to highlight a few areas.

In an effort to bend unsustainable cost inflation associated with healthcare benefits, we have changed our healthcare plans for 2013.

These new plans are designed to improve the health and wellness of our crew members and their families, while better managing Company and crew member expenses.

Further, we believe our new healthcare plans will avoid approximately $90 million in new excise taxes resulting from recent federal healthcare reform between 2018 and 2023.

In addition starting next year, we expect to reduce per crew member total cost inflation by approximately three percentage points annually over the next ten years.

We continue to look for ways to improve operational and fuel efficiency also.

JetBlue is working with our industry to implement the next generation air transportation system, commonly referred to as NextGen.

An important part of NextGen is Automatic Dependent Surveillance Broadcast Out, known as ADSB Out.

This is a surveillance technology designed to improve safety and operational efficiency in air space.

Realtime GPS feeds to air traffic control of aircraft at altitude will enable greater reliability and traffic flow, particularly during irregular operations.

Thanks to our partnership with the FAA, JetBlue expects to have 35 A320 aircraft equipped with ADSB Out technology by the end of 2012, with initial testing expected by summer of 2013.

While testing on future routing is still ongoing, we anticipate that when in place, this technology will reduce average flight times on these routes between the northeast and southern Florida and near Caribbean destinations.

We also expect to improve operational efficiency and the customer experience, when the first portion of a new terminal opens in Long Beach, California in December this year.

Financed primarily by passenger facility charges, the project will include a larger and faster security checkpoint, indoor and outdoor passenger seating areas, a greatly enhanced concession program, and improved baggage claim areas.

Before closing, I would like to provide a brief update on LiveTV.

We expect LiveTV will begin installation of Wi-Fi and KA band satellite transmission equipment on the first aircraft during the first quarter next year.

As we begin rolling out in-flight broadband, customers will enjoy free base line connectivity, with the option to upgrade to a paid premium service.

We believe the unrivaled speed and reliability of our KA band product will be a competitive advantage, particularly as we expand our presence in business-focused markets.

In closing, I would like to thank our 14,500 crew members once again for their excellent work during the quarter in helping us to achieve solid profitability.

We are committed to growing on a sustainable basis and generating positive free cash flow.

We remain committed to improving ROIC by 1 percentage point per year for the foreseeable future.

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

Thanks, Dave.

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

I suspect also joining us today by phone at least is our Director of Investor Relations, Lisa [Rifer] who brought us on September 25th baby Ella, so we would like to wish them both our very, very best.

I join Dave in congratulating our crew members on a great quarter.

Today we reported our tenth consecutive quarter of profitability with operating income of $113 million.

The $5 million year-over-year improvement in operating income was driven primarily by a $113 million of higher revenue, offset by higher operating expenses of $108 million.

Third quarter year-over-year passenger unit revenues increased 1% on capacity increase of 9%.

Yield improvements helped drive the quarter's solid revenue performance as did a load factor improvement of 0.3 points.

Our average one-way fare was $154.

Passenger unit revenue was up in July by 3%.

And in August by 3%.

Passenger unit revenue in September declined by 4%.

As disclosed previously, August and September year-over-year PRASM comparisons were impacted by two items.

One, Hurricane Irene last year increased both August and September PRASM by one point.

And two, the federal excise tax holiday increased August PRASM by two points and September PRASM by one point.

Consistent with what we noted in the early part of September, we saw leisure softness throughout September.

This softness was offset to some extent by the strength in our East Coast short haul markets, particularly as Dave noted in Boston business focused markets.

Bottom line, we believe our network strategy is working as evidenced by the continuous strength in our business markets.

Total ancillary revenue in the third quarter increased 9% year-over-year to $147 million.

During the third quarter, ancillary revenue per passenger was about $19.

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

While we continue to see growth in passenger-driven ancillary revenue year-over-year, generally lower margin non-passenger-driven ancillary revenue did decline.

The Even More offering remains on track to generate approximately $150 million this year.

Customer response to this offering continues to be strong.

We completed the E190 seat retrofits previously disclosed, and started selling the additional 8 seats inventory in early August.

This change preserves competitive seat pitch without reducing the total number of seats on our E190 aircraft.

Turning to costs.

Quarterly operating expenses increased 10% year-over-year, or $108 million.

While fuel prices declined 2% year-over-year, a 9% increase in consumption resulted in a $27 million increase to fuel expense.

We believe our operating procedures and techniques to conserve fuel position, as well to manage future fuel costs.

Additionally we operate a young fuel-efficient fleet with an average age of only 6.6 years.

We continue to maintain a fuel hedge portfolio as a form of insurance against sudden spikes in fuel prices.

Specifically in the third quarter, we hedged approximately 27% of our fuel consumption.

We recorded a $2 million gain related to our fuel hedges settled during the quarter.

Bringing year-to-date fuel hedge gains to about $10 million.

Additionally fixed forward price agreements, or FFPs, covered approximately 18% of our third quarter fuel consumption.

So including the impact of fuel hedging, FFPs and taxes, our fuel price in the third quarter was $3.17.

For the fourth quarter, we have hedged approximately 27% of our anticipated jet fuel requirements.

Additionally, FFPs cover approximately 19% of our projected fuel consumption for the remainder of the year at an average jet price of $2.94.

The underlying details of our FFPs and hedge positions as of October 19 are more specifically detailed in our investor update, which will be filed with the SEC later today.

Brent crude based on the forward curve as of October 19 is averaging around 112 a barrel for the full year 2012.

And the crude to heating oil crack spread is averaging around 15 a barrel.

Based on this curve and including the impact of hedges, FFPs and taxes, we are estimating a fourth quarter fuel price of $3.25 per gallon, and a full year gallon price of $3.22.

Excluding fuel, year-over-year third quarter unit costs increased 3.7%.

This is below the guidance range we previously provided.

Consistent with prior quarters the majority of this year-over-year increase was driven by maintenance expense, which increased 33% year-over-year on a unit cost basis.

This increase is mainly attributable to more heavy maintenance checks associated with large numbers of A320 aircraft delivered in the mid-2000 range and normal aging of our fleet.

We are pleased to report in this regard that we have successfully secured replacement business partners for the maintenance services previously provided by Aveos, a supplier that liquidated in March earlier this year.

As a result, we expect a minimal increase in the rates compared to those that prevailed under our Aveos agreement.

And we expect the total impact of the Aveos liquidation on 2012 maintenance expense to be approximately $8 million, much less than previously indicated.

In addition, we are finalizing maintenance agreements for the components of our E190 Aero frames, which we believe should further contribute to a smoother, more predictable future maintenance expense.

Another significant driver of ex-fuel CASM growth during the quarter was profit sharing.

This item increased by $5 million year-over-year.

As fuel prices increased in the third quarter, and the revenue environment in September softened somewhat, third quarter profit sharing expenses decreased relative to the guidance we provided in July, driving lower than expected ex-fuel CASM.

Please recall profit sharing is calculated as the greater of 15% of pretax income, or 5% of eligible wage dollars paid to non-management crew members.

Moving below the line, non-operating expenses improved $12 million year-over-year.

Recall again two items in 2011 affect year-over-year costs.

First last year we recorded a $5 million loss related to the prepayment of a portion of our 6.75% convertible notes.

Second, last year we recorded a non-cash fuel hedging ineffectiveness loss of approximately $3 million.

Moving to the balance sheet.

We ended the quarter with unrestricted cash and short term investments of approximately $1.1 billion.

This includes $50 million drawn on our line of credit with Morgan Stanley.

It does not include our corporate cash balance of our quarterly cash balance of our corporate fuel purchasing line with American Express of $125 million, and the remaining $50 million undrawn on the Morgan line.

Our weighted average cost of debt currently stands at about 4.5%.

During the quarter we refinanced debt secured by 3 A320s, lowering future annual interest expense by approximately $1 million.

JetBlue made approximately $45 million in debt and capital lease payments during the third quarter.

This year JetBlue has made approximately $310 million of debt and capital lease principal payments, including debt prepayments.

Fourth quarter scheduled principal payments from debt and capital leases are expected to be a very manageable $55 million.

With strong cash from operations and manageable capital commitments and debt maturities for the remainder of the year, we believe JetBlue is positioned to maintain a strong liquidity balance, and generate positive free cash flow.

We expect to end the year with cash as a percentage of trailing 12-months revenue of approximately 20% to 22%.

Next year's scheduled debt maturities are approximately $390 million.

We believe achieving returns for our providers of capital is critical.

We remain focused on improving returns as that closed the gap with our cost of capital.

In this regard, we are pleased to announce our Board of Directors authorized a share repurchase program, for up to 25 million shares over a five-year period.

The primary objective of which is to offset the impact of future dilution, from crew member equity grants and our crew member stock purchase programs.

With respect to fleet and capital expenditures, JetBlue ended the quarter with a total fleet of 175 aircraft.

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

We currently intend to pay cash for the four A320s scheduled for delivery in the fourth quarter.

Again we believe this action is consistent with our goal to improve ROIC.

In the third quarter we spent approximately $40 million in aircraft CapEx and $30 million in non-aircraft CapEx, while generating operating cash flow of approximately $50 million.

We estimate capital expenditures of about $215 million in the fourth quarter, bringing the total to $635 million for the full year.

Turning to capacity.

This is of course before Hurricane Sandy.

We expect to increase fourth quarter ASMs between 5% and 7% year-over-year.

Consistent with previous quarters, we anticipate most of this growth will be driven by our focus on the Caribbean and Latin America, which is expected to be up approximately 20% year-over-year.

We anticipate Boston's capacity will increase by approximately 11% year-over-year, as we see our profitable growth strategy continue to succeed.

Full year ASMs are expected to increase 7% to 9%.

This is slightly higher than our previous guidance due to higher anticipated completion factors.

Turning to the revenue outlook.

Despite broader economic uncertainty and leisure softness in September seen across the entire industry, we are pleased with our forward bookings.

Although we have limited visibility, we see sequential improvements in October trends.

We are very pleased with the continued strength in our business markets, and expect improved trends in our leisure markets based on the forward bookings.

We currently expect October PRASM to be between -0.5% to 0.5% year-over-year.

Keep in mind PRASM in October 2011 increased 11%.

With respect to the CASM outlook for the fourth quarter, we expect ex-fuel CASM to be up between 2% to 4% from the prior year.

Again, maintenance expense accounts for approximately half of the expected increase.

We project fourth quarter CASM will be up between 2% to 4%.

We expect ex-fuel CASM for the full year to be up again between 2% to 4%, and finally we project all-in CASM for the full year to increase by 1.3% to 3.5%.

In closing, JetBlue had a solid quarter.

We continue to execute on our strategy with targeted profitable growth.

We remain committed to generating appropriate returns for our shareholders, through a sustained profitability by diversifying revenues taking a disciplined approach to our costs and capital spending, and prudent balance sheet management.

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

Operator, thank you.

John?

Thank you.

We will now begin the Q&A session.

(Operator Instructions).

Standing by for questions.

Our first question comes from Jamie Baker from JPMorgan.

Please go ahead.

Good morning, everybody.

Hey, Jamie.

David, I heard your comment in the opening remarks in regards to the 22% liquidity of percentage of trailing revenue metric.

I believe you framed it against the uncertain fuel environment.

But there are other ways that airlines can protect against earnings shocks besides just holding a lot of cash that otherwise doesn't really do anything.

Any thoughts on this?

Morning, Jamie.

Actually I think as we look at, well first of all with a fuel shock, who knows?

It has been as we have seen behavior in the fuel environment, it has actually been a good guy as we look at year-over-year in terms of Q3.

A little bit of uncertain economic environment as well, even though I think we are seeing strength going into Q4.

I think though specifically, Jamie to your question, I really think that Mark and the team have done a very nice job utilizing the balance sheet, to really when you start to take a look at paying down some of the high cost of debt, and as we close the year now with seven aircraft free and clear, and looking to pay cash for new aircraft coming into the fourth quarter.

By the way, Jamie, as we look at even things like working with the Port Authority, to use our cash portfolio to build out the Terminal 5 international expansion, so I don't think that we are an airline that is hoarding our cash, if you will, as we take a look at these type of activities including even the share of repurchase program, granted it's smaller in comparison to some, but I think quite meaningful as we look at not diluting shareholders in the future for some of our crew member activities.

So Mark, anything that you want to add to that?

No.

You are absolutely correct.

A big cash balance is for sure a drag on an ROIC target, and mindful of that again we continue to look for good opportunities to prepay debt and purchase assets, and including as Dave mentioned, the facility at the Terminal 5 that we will be building for international arrivals.

So yes, we are looking for good opportunities to use that cash, and bring the debt balance down.

Jamie, I may also add too, the ability earlier this year to purchase the slots at La Guardia and DCA.

And it is no surprise.

I mean we are a carrier that continues to be quite focused on the opportunity for additional assets, as the industry continues to look at what other carriers are doing, so slots and gates, route authorities, et cetera.

So I think we feel that we are in a very good position, but certainly using that cash balance appropriately.

Maybe that is a good segue into my second question, and Robin can weigh in if he is there.

But American operations clearly haven't been up to snuff and Virgin America continues to generate significant losses.

The former might be helping you.

The latter might hurt at least in the near term.

Any RASM color as it relates to your overlap markets of these two airlines?

Yes, hi, good morning, Jamie.

I don't think we have sort of seen a significant sort of positive impact from the operational challenges that American have had.

I think we continue to get much more benefit there just with the sort of a very strong and robust commercial partnership that we have with American.

In terms of Transcon, I do think that without kind of commenting on any carrier specifically, as we look to next year, I do think we are going to see some industry capacity reductions on Transcon.

If you look at the quarter one schedules within that capacity down, and as from a JetBlue perspective we certainly see that as an opportunity for us.

Great.

Thanks for taking my questions.

Thanks, Jamie, have a good day.

Thanks, Dave.

Our next question comes from Michael Linenberg from Deutsche Bank.

Hey, good morning, everyone.

I guess two questions here.

Dave, you talked about Boston, and I appreciate you giving us some color on the profitability.

You talked about a year-over-year improvement in pretax margin by eight points, and I recall, I believe the last commentary I want to say maybe a couple of quarters back was that Boston wasn't yet profitable, and then more recently we had heard that it was profitable so that 8 percentage point improvement, can we assume that Boston maybe went from a small loss, to now a healthy profit on a pretax basis?

Mike, again, the script specifically was trailing 12-month at the end of this quarter.

So, I am not going to go into specific with how 2011 was closing into 2012, but there has been a lot of commentary regarding Boston, with our investment which has been really significant.

I mean in the third quarter this year we are going to be just under 100 departures a day, and we are going to be as high as 109 in Q4, and there has been some commentary regarding, well nobody else has ever been able to do it in the past.

So we felt it prudent and responsible to share some additional light on the investment in Boston, how that is performing, this relevance that is taking place as well, and I tell you we are just very, very pleased with it.

When we look at over the years, the number of airplanes that we have allocated into Boston, fair to say in the first couple of years as we were ramping, Robin, like 20 to 30% annually, it takes an investment to start to pull some of that corporate base off of these other airlines, and their corporate contracts and frequent flyer programs, but we are very, very pleased how Boston is sitting today, and our plans to grow Boston in the future.

Robin, any additional color you want to add on Boston?

Thanks, Michael.

We feel very good about Boston.

I mean, whilst I know the September RASM number was a number of course that we ended up being disappointed with, frankly if we had had more exposure to the Boston market, that would have been a better result.

It was definitely the highlight for us.

And if you start looking at some of the competitive capacity trends into next year, at the moment Boston is showing in Q1 a double-digit reduction in competitive capacity.

As we look into next year, we continue to see a market in Boston that should continue to get better and better for JetBlue.

The gates in Boston, Dave, and maybe Robin on this, you mentioned that you have picked up some additional gates in Terminal C from Massport.

Where are you now, like 11 or 12, and what are you going to?

Mike, I tell you, working with Massport, and it has just been terrific over the years, and so we are currently, we have obligations on up to 25 gates at Terminal C, and I think again Massport's master plan up there, whether it is land side and air side, Terminal C over the course of the next couple of years, there is additional infrastructure being built out, and it is no secret when the size of United's footprint, in terms of what the new United if you will, that was a challenge for Massport to build some additional infrastructure over towards Terminal B. And there have been other changes at the airport.

We are committed to at least 25 gates working with Massport, and I think some additional infrastructure to improve some of the connections of the gates.

There are three current gates out there that used to be operated by another carrier.

It even goes back to the TWA days and AirTran.

So connectivity so we have a seamless operation, the ability to connect seamlessly over to Terminal E as well with the international arrivals, and departures for our partner carriers.

So feeling really good about what is taking place up in Boston.

One other comment, Mike, is we are very pleased to partner with Cape Air in Boston as well.

It is a significant part of the operation that we have in Terminal C, and we plan to have that in place on a go-forward basis.

Great.

Just a quick second on the share purchase which it's nice to see that.

Does the authorization, is that purely equity, i.e., stock, or would it potentially cover equity-linked securities?

No, just pure shares.

Okay, very good.

Thank you.

Thanks, Mike.

Our next question comes from David Fintzen from Barclays Capital.

Please go ahead.

Good morning, everyone.

Good morning.

I just wanted to circle back on some of Dave, your comments on sort of relevance in Boston.

I am actually wondering, how is your relevance in sort of the non-Boston, non-New York, kind of the outstations doing?

Are you seeing benefits from having a second destination in a Pittsburgh or wherever, or has some of the consolidation remaining on Delta and United and Southwest have six, seven, eight destinations on the map.

Does that just sort of net out?

I am just curious if there are some ancillary benefits to Boston outside, and the rest of your network?

Yes, there is, Dave.

And as I have listened to your question when you think about get inside a market like Buffalo, where we have significant service to New York and Boston, right.

So it is a business and a leisure customer.

We also have Florida service out of Buffalo, and access to Canada.

Think about places like Raleigh, Durham, and places like Jacksonville and those type of markets, or into Austin or New Orleans.

You bet we have greater relevance as we are into those markets because we are not just flying to New York.

We are not just a one-route airline from those locations into our focus cities up in the Northeast.

So there has been some great benefit to it.

And it has helped a great deal.

Have you done anything where you just sort of parse out point of sale sort of relative revenue performance on more of a point of sale basis, so that you have a sense of, are you closing more of a gap in some of the outstations versus peers, or is this something sort of analytically that you have spent time on?

Hi, David.

It is Robin.

I will take that.

Yes.

Obviously for each of our markets understand how our point of sale performance can pay at each end.

Very important for us because we are an airline that builds our network on point-to-point, and not transfer of traffic, so that point of sale performance is extremely important.

I think everything we do from an investment as we think about where we invest, where we put our sales forces, where we structure our corporate deals is really geared around Boston.

Today's point, there are some benefits that you get at the other end of the market, just by having a bigger network there, but that is not something we specifically go out and invest in.

So every time we start a new market from Boston, it is really predicated on some assumptions around our point of sale performance in Boston.

There are also some operational efficiencies clearly, in Ecuador we have our own crew members.

We are able to go from three, four, five, six, seven flights a day, the incremental cost of adding those flights we see some benefit from, but it is very much a Boston story, and it is going to be continue to be a Boston story.

Okay, great.

Appreciate that color, guys.

Thanks, David.

Our next question, comes from Duane Pfennigwerth from Evercore Partners.

Please go ahead.

Good morning.

As we think about next year 2013, I wondered if you could talk through some of the positives and negatives we should be thinking about with respect to your non-fuel cost structure?

Duane, first of all, as we look at 2013, the guidance that we provided this year for our non-fuel CASM, so ex-fuel CASM actually quite pleased with what I have seen across the Company.

Yes, we have had some challenges when we think about the liquidation, with the maintenance supplier, and the aging of the fleet.

A lot of those airplanes coming through the mid-2000 timeframe.

And we also have some benefit with, let's face it with a greater completion factor as well.

When we look at 2013, we haven't provided guidance as of this point into 2013.

There are ten aircraft that are firm right now in the skyline as we look at 2013.

Seven of those with the Airbus variety.

Four of them with the A321s, and first time ever, obviously a larger platform in 3 190s.

The same rigor and the same focus is going to take place.

By the way, from a fuel perspective, that is not your question, but you bet we want to be very much involved with really leading the charge with fuel efficiency, and so things like ADSB Out, things like the JFK RMP 13 arrivals.

Things like technique and the cockpit and on the ground and in dispatch, fuel over destination, that is 40% of our cost structure.

That said when you get inside of labor, and you start to get inside of even things like healthcare in the maintenance costs.

Mark, additional commentary on 2013, even though we are not providing guidance at this point?

Just a flavor and again let me just pick up on the maintenance side.

We do still expect to see continued year-over-year maintenance cost pressure, but I think for sure the rate over, the increased period-over-period will decline from the kind of levels you have been seeing in the 30% range of this year.

Largely A, as a result of the fact that number one, there is a big bubble of aging aircraft are sort of through us.

Number two is that we will really start to see the benefit of some of these long-term flight hour agreements.

And other actions that Rob [Marister] and his team are taking on the whole maintenance cost environment.

The other thing sort of a little bit below the line, and perhaps on the rent side, you will continue to see is a decrease in interest expense while we will increase the base of our profit-producing assets, and we noted for example in today's press release that we have been able since December 2011 to increase the number of unencumbered aircraft to seven, while decreasing our total debt balance by $213 million.

Obviously a lot of interest expense savings there.

The other thing that is embedded in the current results is on a lease renewals at sometimes half if not more of former lease rates, reflecting of course the opportunities to get some pretty good A320 lease renewals out there.

So I think you will see that and then as David mentioned, I think you will see at least a lot more effort in terms of the rate of inflation on year-over-year healthcare and other benefits.

Sounds like all tail winds, no head winds.

I didn't say that.

Dave used it that way.

I tend to look at the world with a lot of headwinds that we want to get proactive and get ahead of.

I would say, Duane, ex-fuel CASM and the focus on it, it is very much part of the culture of this Company, and as we are building our 2013 plan at this point in time, and by the way it is a five-year plan, but again really getting surgically in 2013.

You bet.

This is something that permeates across 14,500 crew members in terms of what we are doing.

Ex-fuel CASM, it is critical to the ability to for our Company to grow.

I mean period.

I mean for us to go in and offer the type of fares that we offer, we need to have a competitive ex-fuel CASM, all-in CASM, relative to the network carriers, as well as the combination of the LCCs that are out there.

Okay guys, thanks.

Okay, thanks, Duane.

Our next question cops from Hunter Keay from Wolfe Trahan, please go ahead.

Thanks.

Good morning everybody.

Robin, let's talk about ancillary for a second.

Even more products, you are going to add about $150 million, interesting what you said about the lower margin ancillary, and maybe that was Mark actually, lower margin ancillary sort of decelerating a little bit.

Can you break down what is in that $20, what is in the component?

How does that build up, and how has that changed over the last couple of years?

Yes, thanks, Hunter.

Just to clarify Mark's comment, there is a certain amount our ancillary revenue that are very linked to passenger volume, and there are those that are really are unrelated.

So some of the reductions that we have seen in some of the non-passenger related ancillary revenues are really things that we looked at, and we just decided that we didn't necessarily want to continue with, or we wanted to look at it differently.

Examples of things in there are things like, we get revenue from renting our simulators as we got busier doing our own training, there was less opportunity, LiveTV lost AirTran as a customer, and so we didn't see those revenues in this year.

We decided not to continue with a [mal] contractor we had because we thought it was impossible.

In terms of passenger revenue side, when we think about that number that you have asked, it includes all of the passenger and the non-passenger-related revenue.

So it includes things like the Even More space product, the Even More speed product that we have just started to roll out.

All of the revenues linked to change fees, baggage fees, our partnership with American Express, concession revenue, getaways revenue, charter revenue, reservation fees, some of the things I just talked about, in-flight sales, and then all of that kind of gets bundled up into an ancillary revenue per passenger number, which is the one that we quote.

So the Even More suite, would you say that is less than half of the $20 based on that?

We don't break it out, but you can kind of work it out, right, in terms of, I think we said about 150 for this year.

Okay.

That is fair, okay.

And let's talk about code-sharing too for a second.

Correct me if I am wrong, I don't think you guys two-way code-share with anyone.

First of all, is that right?

That is correct.

Okay.

So this are risks and there are benefits to two-way code sharing obviously.

There is reaccommodation risk, you have to think about lost bags, you have to think about, how they will perceive your product.

I don't think anybody is going to go on JetBlue.com to book a trip to Johannesburg.

How do you think about the benefits and the risks of code sharing two ways with a much larger carrier?

No, Hunter, it is a great question, and I think we have approached this from the beginning in terms of as we thought about partners, we wanted to do it very differently to how maybe other airlines have looked at doing it.

So we wanted to start with interline relationships.

We wanted to start with.

and we talked about how much we priced before, but you can't just look at an average prorate fare and assume that that is what we are getting.

We really design our agreements around some effective fares, so we can look at it on equivalent yield to what we would get on our own website.

That changes the economics significantly, where we saw with some of our partners interline relationships working well, and there was a benefit in moving to code share, we have migrated a number of them to one-way code, so we have five our six of our partners where we are now code sharing one-way, which is them putting their codes on us, because you are right.

To take that to the next level with two-way codes, does add some complexity.

Now there may well be some of our partners where is we look at the benefits, and move them from one-way and two-way codes.

Where despite that additional complexity, it is worth on doing.

But for now we continue to be very much focused on how do we mine the current relationships that we have got by moving them into line to one-way code.

Okay.

That is helpful.

Thanks a lot.

Thanks, everybody.

Thanks, Hunter.

Our next question comes from Glenn Engel from Bank of America.

You were kind enough to give us capacity numbers, competitive on Boston.

Can you give us a sense of what they look like transcon Florida and the Caribbean?

Third and fourth quarter?

Sure.

I will give you fourth quarter, and quarter one as we see them.

We look at seats rather than ASMs, just so you, the ASM number may be different.

We look at seats because we think that is a better measure of actual competitive available capacity.

So we look at Boston about five points down in Q4.

About 10 or 11 points in Q1 down.

I think I mentioned those numbers earlier.

As we look at the Caribbean and Latin America, about 1% to 2% down in Q4, between 5% to 6% down in Q1.

As we look at Florida, about 3% to 4% up in both quarters.

And as we look at transcon, actually up between 2% to 3% in Q4, but down just under 5% in Q1 next year.

And if Boston is doing well, and your October PRASM is flat, and running about three points less in the industry it seems, which markets are holding you back the most?

I think we have continued to see, we saw some significant yield pressure in September really across much of the leisure network.

We have added a lot of capacity into Latin America and the Caribbean.

We have talked about before how there was some significant opportunities that we have taken advantage within in San Juan and so we are definitely seeing some RASM pressure in those marks, as we cycle against very significant increases in capacity.

But once we get into December, we have really cycled through most of those big increases that we put in either late last year or earlier this year.

And the fact that the October, as Mark mentioned, the trend from September/October has improved significantly, I think means that we feel most of that yield pressure is behind us, and we feel better about what we see going forward.

So your comparisons get easier as the quarter progresses?

We have a tough comp October/November, a particularly tough comps for us.

I think the November I am trying to think what the last November number was, but I think the comp is actually higher in November than December from memory.

I think it was up to 15% in November.

So that creates some pressure and we are not guiding to November and December, but we don't, let me just say this.

We are not expecting any RASM deacceleration as we go through the quarter.

And finally if I look at fuel consumption it was up 9.4% in the third quarter, capacity up 8.6%.

Why are you becoming less fuel-efficient?

Let me look into that.

I was only speculating.

Let me drill into that and get back to you.

And there was a comment about offsetting, I'm not sure it was the three points of labor cost inflation.

Can you go over that again?

That you were trying to --

You are referring in particular I think to the attachment to the press release.

There are a couple of elements there.

The primary element I think is profit sharing.

Don't forget that is embedded in that number on that salary and wage number.

I thought Dave was making some comments at the beginning about undergoing actions to try to reduce labor cost inflation over time?

Oh, benefits.

That was the discussion of we are literally in the midst of rolling out a new benefit program that will in the long term provide increased wellness for our crew members, but at the same time really stop this insane sort of year-over-year inflationary increase on healthcare benefit cost increases.

Thank you very much.

Sure.

Thanks, Glenn.

Our next question, comes from Jim Parker from Raymond James.

Please go ahead.

Yes, good morning to all.

Good morning, Jim.

This question has probably been asked in previous calls, but I would like to revisit it and it has to do with JetBlue's capacity growth versus other leading carriers in the industry.

And of course if you look at the legacies in Southwest, it is like 80% of domestic seats, and they are not growing.

And their capacity discipline seems to be improving their profitability substantially.

So my question is, would it actually improve JetBlue's profitability to adhere to similar capacity discipline, and perhaps not grow its capacity, and the second part of that is, is there any concern on your part that your growing as a leading carrier might cause this capacity discipline to become unravelled?

Jim, good morning.

Dave.

I think we take the same approach.

As we have looked over the years, we have certainly we know what it feels like to grow too fast.

Again that is several years ago.

And the growth that we have in place right now with the 11 aircraft this year, right now we have another 10 on the skyline.

We look at this opportunity in Boston as an example.

Boston, what we are seeing with our investment in Boston and these opportunities, that they just don't come along this often.

And so we are affecting change in a meaningful way up across Boston and New England.

And so we are going to take advantage of that.

When you start to get inside of even like the slot acquisitions over at La Guardia and DCA, now some of that line was candidly funded out of JFK, and also out of Dulles, and some rationalization if you will, into those markets, but these are opportunities.

some of the NEWF line that accesses those airports, and we are interested in further access to those airports or airports like Newark.

I will tell you, you bet.

It takes aircraft deliveries to take advantage of that.

When we look at what we are doing in the Caribbean and Latin America, and there has been commentary regarding, well, how deep is that market, and I think the fourth quarter is a good example.

First ever service to Cartagena down in Columbia, hooking in Grand Cayman, as well as Samana, our sixth destination down into the Dominican Republic, never flown before in New York metropolitan area, and other markets that we are looking at, we think actually we are being quite responsible with the growth that we have in place.

And to leave something unbuilt if you will, is irresponsible.

And so the second part of your commentary regarding our growth, and again we guided to 7% to 9% over the course of the year, or some of that as a result of completion factor for the full year 2012.

I think other airlines are going through, listen, they are still on the back side of consolidation, and rationalization of their networks.

And you know who they are, in terms of all of the mergers that have taken place, which is also creating opportunities for airlines like JetBlue, as we look at landscape that was previously filled by somebody else.

And so I think we are being quite prudent and actually responsible, Jim with regard to our growth.

Thank you.

You got it, thanks.

Our next question comes from John Godyn from Morgan Stanley.

Please go ahead.

Thanks for taking my question, and congratulations to Lisa.

I just want to follow up on a few things.

Robin, I think to a question earlier in the call, you said that, did I hear you right that you are not expecting any reacceleration in PRASM from the October level?

Was that the right comment?

No, I was saying that if we look, if we think about October, we think about the quarter.

I was just suggesting that whilst we are not giving guidance, we don't expect any deacceleration of the quarter compared to October.

Okay.

I got it, thanks.

And Dave, I know that you were reluctant to talk about sort of 2013 guidance.

I think last quarter, Robin, you had suggested that 2013 capacity growth shouldn't deviate much from a mid single-digit long-term trend.

Is that still the case?

Or are macro concerns creating downside risk to that, are some of these growth opportunities creating upside risks to that?

I am just trying to put it in context to what we have heard today?

I think that is still, Robin mentioned that previously.

Mark has mentioned it.

I have mentioned it.

This is I think very rational as we are looking at 2013, John.

A lot of it has to do with, we look at these opportunities as I talked about, and yes, also have to look at where the aircraft deliveries are taking place over the course of the year as well.

I would love to have 321s come in the first quarter.

Guess what, we don't see them until late in the fourth quarter as an example.

I think it is a good way to be thinking about how we are looking at annual growth in our Company.

Okay, great.

Just a one last question.

I know comes up every so often.

So just an update would be helpful.

With the focus on business, any updated thoughts on revisiting a two-class product?

Yes, John, happy to address that.

I think as we look at most of our network, I think it really wouldn't make very much sense for us to do that.

With the Even More product, we have a product that is very equivalent to business travel markets.

We have a fare that optimates that lower than our competitors can offer, and we don't want to get in the business of just having a product there that is really full of upgrades.

We think that is a model as we look to build this airline differently, a road we want to go down.

If we look at the segment of our business where there is a paid first class market that we don't have access to, then think transcon, there is you take markets like New York, LAX, San Francisco, some of the Boston markets, there is a paid first class market there.

We don't get access to that clearly today, because we don't have a first class product.

We know from some of our customers who fly our network on transcon, they don't always fly with us because of that reason, and we would be negligent if that wasn't something that we were aware of, and thinking about.

Okay.

Great.

Thanks a lot, guys.

Thanks a lot, John.

Our next question comes from Kevin Crissey from UBS.

Please go ahead.

Good morning.

Thanks for the time.

Good morning.

I want to go back to I think Glenn Engel's question, and I think Mark you addressed the healthcare piece, but I was also confused.

I think maybe it was Dave said longer term targeting 3% per crew member.

Is that a new structural--, I am not sure if it was related to the healthcare comment, or if it was a new structural program to reduce costs?

I just wanted clarity on that one?

Sure, Kevin.

It is actually part of my script comments.

This is tied into healthcare.

The changes, in fact the comment is we are looking to bend unsustainable cost inflation.

By the way we are looking to do that by driving health and wellness right across our crew member population, and obviously making sure that people have the proper insurance in place.

Now all of that said, as we look at total cost inflation, looking to reduce that per crew member by approximately 3 percentage points annually over the next ten years, we believe that by introducing things like health reimbursement accounts, healthcare saving accounts into our portfolio, will make good sense for us.

So it is specifically tied to healthcare.

Okay, great, thanks.

And then to follow-up if I could.

Given the growth of your corporate markets, can you talk about how your distribution channels have changed, maybe your percentage of JetBlue.com versus other avenues?

Yes, Kevin, I will take that.

Good morning.

Obviously we don't give specific numbers but I will give you a flavor.

We continue to make sure that JetBlue.com and our direct channels are our primary form of distribution.

Having said that, we have seen since we have been developing this kind of corporate business our business through the corporate GDF channels increase.

We have been pleased with that, that continues to come at a yield premium compared to JetBlue.com, because the mix is different.

And then the final piece of that is the OTAs, where we really have done our best to either maintain or reduce that share of business.

That tends to really just be more of what we are selling on JetBlue.com, and as I have said before, the jury is still out long term for us, in terms of whether that is a channel where we are seeing true added value by being in.

Terrific.

Thank you.

Thanks, Kevin.

Our next question, comes from Ray Neidl from Maxim Group.

Yes, I apologize.

I got on a little late but the ROIC, you did mention that your goal was to increase it one percentage point per year.

Did you give the current ROIC for the past 12 months, and what is your goal?

No, we are not going to sort of go into the monthly or quarterly, this is where we are on ROIC.

Just to update though, from the Analyst Day last year, we said we are sitting by our calculation, which by the way is in the investor update, filed on our website.

By our calculation, last year December we were at 4, and as Dave indicated, we remain committed to improving that.

That ROIC number which by the way is not fuel adjusted by 1% per year at least on average, and I think, Dave, we also indicated that we are own track.

Okay, great.

And just generally on NextGen, it is a system I have been following.

I commend you for participating in that.

But the thing is, is that a system that is going to be far in the distance when it comes into play?

From what I understand it is still in the developmental stages, and is it worth making the investment currently to participate?

And if other airlines aren't participating, it really doesn't do a single airline much good to have that system, is that correct?

Ray, that was for the question.

Actually NextGen is now Gen.

There are aspects of NextGen that are in our portfolio at JetBlue today, so things like the RMP-13 approaches at Kennedy Airport.

Which is new by the way, and that for example is independent of equipage of other type of aircraft that are flying into Kennedy Airport.

We believe that could save as much as somewhere between 15 and 20 gallons for each arrival.

Things like the Automatic Dependent Surveillance Broadcast Out equipage that we have with 35 of our A320s in cooperation with the FAA, pioneering new routes from the northeast down to south Florida, and also down into the near Caribbean destinations.

That is real.

That is going to be taking place in early, the first semester of 2013.

There is a lot of good stuff that is happening with NextGen, not the least of which is also federal budgeting into the FAA to support further movement with NextGen.

Not just equipage, but also training, et cetera.

So appreciate the question, Ray.

It is very good for an airline that is based in the most congested air space in the world.

Great.

Thank you very much.

You got it, thank you.

Our next question, comes from Tom Kim from Goldman Sachs.

Please go ahead.

Thanks very much.

I had a quick question on the PRASM guidance of plus or minus 50 bips, which seems a little lackluster given your more, I would suggest, relatively positive commentary on your forward bookings.

Could you be conservative on your PRASM guidance?

I think just given the time of the month for October, I would say we feel very confident about that guidance number.

Okay.

And just a separate question.

With regard to your business and leisure travel mix, would you be able to just let us know where that mix might be today, whether in revenue or traffic, and where you think it might be in a couple if years, if given the good growth prospects we are seeing?

Thank you.

No, happy to.

We break out, as we think about business and leisure, most of our efforts on the business travel story are really much centered around Boston, and there what we tend to do is look at the percentages of fliers into business travel markets.

And we tend to continue to see in excess of 20% of our customer base being business travelers, and that continues to grow.

As we are thinking about our network more broadly, then we have sort of said before it is sort of in the 15% to 20% range of customers that are flying with us for business travel.

Great.

Thanks very much.

If I could just squeeze in one more question.

With regard to your international partnerships which I think is great, and the progression you are showing there is very encouraging.

Have you disclosed what sort of incremental traffic or revenue is being generated from that?

No, Tom, that is not something that we disclose.

We next expect to give an update on that at our Annual Investor Update which is going to be scheduled for early next year.

Okay.

Thanks very much.

Thank you Tom.

Dave, we have no further questions at this time.

Great.

Thank you, John.

I would like to thank everyone for joining us this morning for the overview the third quarter of 2012.

I would also like to thank our crew members for an excellent operation in the third quarter.

And of course we will look forward to talking to you early next year.

Thank you everybody.

Have a great day.

Thank you ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may have now disconnect.