JetBlue Airways Corp (JBLU) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the JetBlue Airways third quarter 2013 earnings conference call.

My name is Terese, and I will be your operator for today's call.

We have on the call today Dave Barger, JetBlue's CEO; and Mark Powers, JetBlue's CFO; and also on the call for Q&A is Robin Hayes, JetBlue's Chief Commercial Officer.

(Operator Instructions)

Please note that this conference call is being recorded.

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

Actual results may differ materially from those expressed in the forward-looking statements due to many factors, and therefore, investors should not place undue reliance on these statements.

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

This call also references non-GAAP results.

You can find the reconciliation of these non-GAAP results in JetBlue's earnings press release on the Investor Relations section of the Company's website at www.jetblue.com.

I will now turn the call over to Dave Barger.

Mr. Barger, you may begin.

Thank you Terese.

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

We are very pleased to report our highest ever quarterly income of $71 million or $0.21 per diluted share.

This marks our 14th consecutive quarter of profitability.

Operating margin was 10.5%, an increase of 1.9 points compared to last year.

Total revenues grew by 10.4% year-over-year as we saw a healthy demand environment and strong revenue performance throughout our network.

We generated record revenues and achieved year-over-year improvements in yield, fare and load factor while growing capacity 5.1%.

We ended the quarter with $954 million in cash and short-term investments.

These strong results reflect the success of our network strategy and high-value geography and are focused on offering customers a differentiated product while maintaining competitive cost.

Of course, running a safe, reliable operation with high-quality customer service is the best way to improve profitability in a consistent and sustainable fashion.

Although we faced operational challenges during the peak summer travel period, we're very focused on improving our operational performance going forward.

I would like to thank our 15,000 crew members for their hard work and continued dedication to serving our 30 million annual customers.

The combination of our unparalleled JetBlue experience and strong brand once again allowed JetBlue to generate a revenue premium versus our competitors in many of our key markets.

As Mark will discuss in greater detail, maintenance costs continued to drive the majority of our third-quarter non-fuel unit cost inflation.

While we faced significant cost challenges this year, we recognize maintaining a relative unit cost advantage versus the legacy carriers is critical to profitable, sustainable growth.

To that end, we have several structural cost initiatives underway aimed at lowering unit cost over the long run and improving margins.

These initiatives include the Sharklet retrofit on our current Airbus A320 fleet which is scheduled to commence in early 2015.

We expect installations to be completed on up to 110 A320 aircraft by the end of 2017.

We believe this improvement will help us better manage our largest and most unpredictable cost by providing up to 3% in fuel savings.

In addition, this morning we announced a significant changes to our fleet plan which we believe will further significantly change our cost dynamic over the long run.

As part of this effort, we have deferred 24 Embraer 190 aircraft, converted 18 A320 delivery positions to A321s and ordered 15 additional A321 CO current engine option aircraft.

We believe these actions will enable JetBlue to better match capacity with demand throughout our network and lower cost.

While the 100 seat Embraer E190 is critical to our continued success in Boston and San Juan, we believe these key markets can be addressed with our current fleet of 60 E190s.

As our network matures, we believe larger gauge aircraft will allow us to better serve high-density markets and more effectively use our valuable airport slot portfolio in New York.

These fleet changes provide greater network flexibility and will help us effectively manage our growth, particularly in Fort Lauderdale Hollywood International Airport.

As Mark will discuss in more detail, we anticipate the A321 single class configuration will also help us manage costs going forward.

The A321 configured with 190 seats is expected to have 10% to 15% lower unit cost than the150 seat A320 aircraft that it will replace in the order book.

We believe this fleet restructuring will result in better returns for our shareholders as we defer capital investment over the near term.

We recently took delivery of our first Airbus A321 aircraft.

As previously announced, a sub fleet of A321s will power Mint, our premium offering on the New York to Los Angeles and New York to San Francisco markets.

We believe the combination of price and product quality, including an unparalleled in-flight experience with the longest lie-flat beds and the only private suites in domestic business class will make Mint a terrific success.

We believe Mint, together with broadband in-flight connectivity, will help grow JetBlue's overall revenue performance in these lucrative transcontinental markets.

We are on track to launch Fly-Fi, our broadband in-flight connectivity product next month.

Fly-Fi is expected to deliver speeds of up to 12 megabytes per second per device, significantly faster than any other in-flight connectivity product available today in the US domestic market.

We believe this will become a game changer for the in-flight Wi-Fi experience.

As we continue our efforts to be more responsive to our customers and become the leading carrier in the markets we serve, we recently enhanced our TrueBlue loyalty program with family pooling.

JetBlue's the only major US carrier to allow customers to earn and use points as a group for free.

Members will be able to allocate all or a portion of their individual TrueBlue points into a group account.

We believe the family pooling feature along with no points expiration introduced last quarter will help drive customer loyalty and improve margins.

In closing, we are very pleased with our strong third-quarter results.

While we expect 2013 will be one of JetBlue's most profitable years ever, we have a number of initiatives under way designed to help build a long-term sustainable franchise for all of our stakeholders.

We believe our unique business model will continue to generate improving and sustainable returns for our shareholders over the long term.

As we build on our strategy to serve customers with a differentiated product and a competitive cost structure in our high-value geography, we remain committed to generating free cash flow and improving our return on invested capital metrics by 1 percentage point per year on average for the foreseeable future.

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, thank you for joining us today.

I apologize for the slightly weak voice.

Note to self, when visiting Minnesota, take a coat.

We are so pleased to report third-quarter operating income today of $152 million.

This is an increase of 35% compared to the third quarter 2012.

These results are a credit to our 15,000 crew members who do a great job taking care of our customers.

Third-quarter year-over-year passenger unit revenues or PRASM increased by 5.4% on a capacity increase of [5.1%].

A solid demand and yield environment contributed to our record quarterly average fare of $164, that is a year-over-year increase of 6.5%.

Although we saw strength throughout our network during the quarter, yield and unit revenues in Latin America and the Caribbean markets out-paced our system average.

We continue to be very pleased with our success in this important region.

Today we announced daily service from Fort Lauderdale Hollywood focus cities to Montego Bay, Jamaica and Punta Cana Dominican Republic beginning in May 2014.

Boston short hauls also continued to perform well as we build relevance and increase corporate travel penetration.

To that end, we recently announced three times daily service from Detroit and Boston commencing March 2014.

We are now relevant to roughly 65% of Boston customers.

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

Increased relevance has been an important driver of our strong revenue performance in Boston.

We also continue to be very pleased with our revenue performance in our hometown of New York.

We recently celebrated the fifth anniversary of our award-winning Terminal 5 at JFK airport.

Construction of T5i, our international expansion at JFK, is on track and is scheduled to open by 2015.

Year-over-year PRASM increased by 5% in July, 3% in August and 9% in September.

Demand during the peak summer travel season was solid.

September benefited from strong close in demand and strength in Boston short hail business markets, reflecting the success of our efforts over the past years to de-seasonalize the network and increase corporate travel.

With respect to ancillary revenue, ancillary revenue per customer was up 11% versus last year to $21.

That is a quarterly record.

Our Even More offering was once again a significant driver of ancillary revenue growth and remains on track to generate approximately $165 million of revenue this year.

Total ancillary revenues in 2013 are expected to increase about 15% year over year.

Moving to costs.

Quarterly operating expenses increased 8.1% year-over-year or $95 million.

Fuel of course remains our largest expense comprising nearly 40% of the total.

We continue to maintain a fuel hedge portfolio in the form of insurance.

In the third quarter, we hedged approximately 29% of our fuel consumption.

Additionally, fixed forward price agreements or FFPs cover approximately 14% of our third-quarter fuel consumption for a total of 43%.

Including the impact of fuel hedging, FFPs and taxes, our fuel price in the third quarter was $3.14 per gallon.

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

Additionally, FFPs cover proximally 12% of our projected fuel consumption.

The underlying details of our FFP and hedge positions as of October 24 are more specifically described in our investor update which will be filed with the SEC later today.

Impact [A].

The impact of hedges and taxes -- including the impact, rather, of hedges and taxes, we're estimating fourth quarter fuel price of $3.03 per gallon and full-year fuel of $3.13.

Excluding fuel and profit sharing, year-over-year third-quarter unit cost increased by 4.9%.

The primary driver of the year-over-year increase was maintenance expense, which accounted for proximally 50% of the increase.

As discussed on prior earnings calls, we face greater maintenance cost pressures this year related to the aging of our E190 fleet and the CF34 engine.

Although maintenance expense has been a source of significant cost pressure this year, we expect to see year-over-year maintenance cost inflation slow in the fourth quarter.

Also contributing to the year-over-year increase in third-quarter unit costs were airport rents and landing fees which increased 9.6% year-over-year on a unit cost basis.

This was driven in large part by higher airport rents in several of our key focus cities as we assumed a larger portion of that airport's total costs with corresponding decreases in competitive capacity.

Moving to the balance sheet.

We ended the third quarter with unrestricted cash and short-term investments of approximately $954 million or 18% of trailing [trove] revenue.

Not included our cash balance is our line of credit with Morgan Stanley of $200 million and our revolving credit facility of $350 million.

During the third quarter, we made debt and capital lease payments of approximately $70 million.

Fourth quarter scheduled principal payments from debt and capital leases are expected to be $185 million.

We also plan to redeem approximately $52 million of our 5.5% convertible bonds in December.

With strong cash from operations and manageable capital commitments and debt maturities through the rest of the year, we believe JetBlue's position to maintain strong liquidity through the fourth quarter and generate positive free cash flow.

We expect to end the year with cash as a percentage of trailing 12 revenue of roughly 15%.

Strong cash from operations has enabled us to reduce outstanding debt and as a result decrease financial risk.

Since 2008, we have paid down approximately $700 million in adjusted net debt while growing our fleet 35%.

S&P recently recognize the impact of these and other efforts by upgrading JetBlue's corporate rating one notch to single B.

Looking ahead to 2014, we have roughly $600 million of debt maturities that we plan to refinance or retire.

We recently closed a private placement EETC for $226 million, with the funding date in March 2014, which coincides with the final maturity of JetBlue's 2004-1 EETC which will release 13 aircraft.

With this transaction, we have taken a portion of the interest rate risk off the table while using existing unencumbered collateral.

We believe this provides financial flexibility with our new deliveries.

With respect to CapEx in fleet, JetBlue ended the quarter with 189 aircraft including 130 A320s and 59 E190s.

Earlier this month, we took delivery of our very first A321, and we expect to take delivery of one E190 and three additional A320s before the end of the year.

We estimate fourth-quarter capital expenditures of about $275 million, $200 million for aircraft and $75 million for non-aircraft related expenditures.

We estimate full-year CapEx of approximately $630 million of which approximately $60 million relates to LiveTV.

As Dave mentioned, in addition to the A320 Sharklet retrofit, we announced several significant changes to our fleet plans this morning which we believe will allow JetBlue to better match capacity with customer demand.

We are essentially, one, converting 18 future A320 deliveries -- let me say that again, A320 delivery positions to A321s; two, deferring 24 E190s and, three, taking delivery of 15 additional A321s in the near term.

JetBlue plans to optimize the E190 fleet to approximately 60 aircraft.

We would like to thank Embraer in particular for being a strategic partner in reaching this agreement and helping JetBlue achieve our network and financial goals.

The changes we announced this morning reduced our aircraft purchase obligations by roughly $200 million through 2016.

The A321s are very attractive because they allow us to more efficiently serve high-density markets, particularly those to Florida and the Caribbean.

We believe the A321 is well-suited for these markets because we expect to achieve similar revenue at lower unit cost than the A320.

The A321 will also allow us to optimize our lucrative slot portfolio in New York.

In addition, we expect the A321s to help us better manage costs over the long run.

Specifically, the A321 aircraft and single class configuration are expected to benefit from a 10% to 15% CASM advantage versus our A320 aircraft.

These cost savings are driven in large part by a 10% to 15% fuel efficiency advantage.

We also announced plans to purchase 20 additional A321neo aircraft.

The aircraft, which we expect to begin delivering in 2018, will give us the flexibility to replace older and less fuel-efficient A320s in the future.

Additionally, aircraft equipped with the new engine option are expected to benefit from a 12% to 15% fuel savings relative to the current A320 aircraft.

Specific fleet changes are more specifically outlined in the press release we issued this morning.

Moving to capacity, we expect to increase fourth-quarter capacity, fourth-quarter ASMs between 7% to 9% year-over-year.

Approximately one-third of this increase is due to our reduced flying as a result of Hurricane Sandy in the fourth quarter of 2012.

We expect 2013 full year ASMs to increase between 5.5% and 7.5% year-over-year, unchanged from previous guidance.

Turning to revenue outlook.

Bookings are shaping up well from both a yield and load factor perspective.

We are seeing significant strength during the peak Thanksgiving holiday period.

While still very early, the first look at December holiday period is shaping up nicely as well.

Note, as we move through the last three months of the year, there are several items impacting year-over-year unit revenue comparisons.

Recall October PRASM last year included a 2 point benefit related to Hurricane Sandy as we were able to reaccommodate customers and recapture revenue while reducing ASM in the last few days of the month.

We currently expect October PRASM to increase by approximately 4% year-over-year including this 2 point headwind.

Moving onto November, the comps get easier due to the significant demand challenges we faced in the wake of Hurricane Sandy last year.

However, because the Sunday and Monday following Thanksgiving, two of our highest revenue days of the year, fall in December this year, we expect November year-over-year PRASM comparisons to be negatively impacted by the calendar shift.

Therefore, November is a difficult months to forecast.

As to the CASM outlook, keep in mind last year's fourth quarter CASM was negatively impacted by flight cancellations related to Sandy, resulting in a CASM tailwind in the fourth quarter this year due to higher ASMs.

We expect fourth quarter CASM excluding fuel and profit sharing to be between negative 0.5% and positive 1.5%.

For the full year 2013, we are forecasting CASM, excluding fuel and profit sharing, to be up between 2.5% to 4.5% versus 2012.

Maintenance costs are expected to be approximately two thirds of the full year CASM ex fuel profit sharing increase.

We project CASM all in will be between negative 1% and positive 1% for the fourth quarter and up between 1% and 3% for the full year.

In closing, we are very pleased with our performance.

Our initiatives to increase revenues continue to gain terrific traction.

On the cost side, we recognize that we clearly have were work to do both from a structural and a tactical perspective The fleet-related actions today are another of many steps in that direction.

We are also focused on improving our productivity and running a reliable operation which we believe will help further reduce costs.

I would like to thank our crew members for making our strong third-quarter result possible, continue to be impressed every day by the work you do in delivering the JetBlue experience to our 30 million annual passengers.

With that Terese, Dave, Robin and I are happy to take questions.

(Operator Instructions)

Mike Linenberg, Deutsche Bank.

I have two questions.

Mark, I want to go back to the deferrals of the Embraer 190s, and of course, there's some additions of some A321s.

You mentioned that through 2016, you would see a benefit of I think $200 million on the CapEx side, I guess it is presumably between now and 2016.

Can you give us the base, what the number is, where it is and what it is going to?

In terms of number of aircraft deliveries, I think it is probably in the press release, but I would say going through 2014, 2015 and 2016 really quick, --

I mean the base of CapEx.

I believe also -- when we do file our10-Q, this will also be disclosed.

It does increase our CapEx by $1.8 billion.

Let me put that in perspective.

Most of that $1.8 billion occurs post 2018.

Even if you look at the exhibit on the press release today, you will see that with -- essentially the deferral of the E190s offsets the 15 incremental classic or CEO additions.

So post 18 with -- which is when the Neos start delivering, that is when we have the additional -- the Neos that we are ordering today coupled then with the scheduled delivery starting in 2020 of the Embraer aircraft.

Great.

My second question this is probably for Dave and/or Robin.

When we think about capacity growth next year, maybe an early read on what you think, what that number will be and then how the Fort Lauderdale ramp up fits into that.

Dave, I know I have seen some of your tweets, Fort Lauderdale 100, and I think today, what are you at?

40 to 45 departures or so?

That 100, does that figure into next year's ASM growth plan?

Anything on that would be great.

Good morning Michael.

Obviously we will not provide guidance on what our growth is looking like in 2014.

That said, we remain committed to something that looks like, again, mid-single digits plus in terms of growth on a year-over-year basis on ASMs.

That is what we have been saying over the last several years.

We have been demonstrating that, if you look at this year's capacity, for the full year.

As you look at 2014 and beyond, I think that will give you a feel for our continued focus on that growth level.

Specific to Fort Lauderdale, interesting of Fort Lauderdale Hollywood International airport in the [Dana] area, it is a lot of fun spending time down there.

We were as low as the high 40s over the course of the summertime frame or as high as the mid-60s going into the winter schedule that is currently published.

When we look at Fort Lauderdale Hollywood International airport and its growth plan with FLL 100, today's announcements are indicative of what we're doing.

When we start to take a look at connecting the dots with Montego Bay with Punta Cana, cities that we currently fly very efficient, as we have added service into Columbia, into Costa Rica, throughout the Caribbean.

By the way, as we are adding service into the United States, hooking up places like Worcester in central Mass.

We think when we are looking at focusing our growth pattern on South Florida, we think a lot about what we did up in Boston, but it is a different type of schedule.

We are committed to it, we are going to grow it, we are going to move briskly, and Mike, I think we are sharing as well.

I just cannot think of another airport in the United States where $2.3 billion worth of investment is taking place with the expansion of the southern runway, with a new international arrivals of facility, with air side improvements in addition to the runway and landside improvements.

The cost for employment to use that airport relative to Miami, was a superior experience.

It is just not even close.

We are really -- these aircraft next year, again, we are still building Boston, we're still building South Florida, and cannot be more excited than what we're looking at doing with Fort Lauderdale 100.

John Godyn, Morgan Stanley.

Dave and Mark, I was hoping to follow up on the Mint service that is coming in 2014.

And I was hoping that, not for the purposes of guidance or anything, but I was hoping you could offer a simple framework for thinking about how what that is going to hit the numbers, what are the main moving parts?

I have to imagine that CASM ex fuel, it is a little bit of a mix negative in that sense.

Is it accretive to PRASM, is it margin accretive, how are you thinking about the spool time there?

Of course it's a market that you have a presence in.

Has there been any response already?

Is there anything that you could tell us as we look out to 2014 and start to think about modeling this?

Good morning John.

Couple of comments, and I will queue Robin up for additional color.

Again, keep in mind that Mint between Kennedy Airport and LAX in SFO, that service really commences into Southern California in the mid-year, June of 2014.

We are still a fair piece away from actually that making its way into the landscape in any meaningful way with its numbers.

All that said, prior to today's announcement, 11 of 30 A321s are dedicated to the Mint product, so it will be exclusive Mint between -- again, that experience between JFK and LAX in San Francisco.

Why are we doing it?

We're doing it because as we have shared in the past, as recent as our investor day earlier this year, we were lagging when we look at our net promoter score, which is a direct relationship to unit revenues in the transcontinental markets.

And not just because of the lack of a premium experience, I'm not going to use the word cabin, a premium expense, but because we also did not have Wi-Fi.

The Wi-Fi, and I will queue you up Robin at this point, that issue combined with Mint as it makes its way into Southern California earlier, northern California later into 2014, 2015 because of aircraft deliveries, there's no doubt it will have a higher cost structure on those aircraft no doubt, but we're doing it because we absolutely see a very nice improvement from unit revenue.

Robin, additional color?

Thank you Dave.

Good morning John.

If I remind you what we shared at our investor update in terms of a commitment to get to industry PRASM while growing, one of the areas where we shared where we underperformed industry was in Transcon.

As Dave said, a large part of that was not having access to the paid -- stress the word paid -- premium markets, particularly in very rich and very deep markets like New York, LA, San Francisco.

We think by developing a Mint product, first we will have access to that.

Secondly, when we look at the Transcon pricing environment today, and I don't want to get into what I think competitors may or may not do because I do not know, people are clearly overpaying for what they get.

I think our ability to come in and disrupt that market, create a much lower price point, significantly expand the premium market, I think it is so core to what we do today and so core to who we are, so I have no doubt it will be successful in doing that and we will see significant RASM bump because of it.

In terms of thinking about the cost on the margin side as well, think that we have 320s flying today.

With the 321, we already touched on the very low incremental cost for 321 versus 320.

The incremental cost of flying a 321 in that market versus a 320, when we think about the significant revenue enhancement we're going to get for that extra experience -- wouldn't use the word cabin -- when you throw those together, you see that it is going to be very accretive to earnings.

That's very helpful color.

Dave, you mentioned that before today's announcement, there were 11 A321s dedicated to Mint, and I couldn't help but notice that in some of Mark's comments, he was very specific on some of the A321 operating stats in single class configuration.

Should we be pursuing this fleet reorg here a little bit in the context of a continued expansion of Mint service across your aircraft types?

Are we laying the foundation for that?

Not necessarily at all, John.

I think we'll look at, again, markets in the world where a customer actually pays for a premium experience, we know for sure that there is two that we fly, and that is Southern California, northern California, so LAX and San Francisco specifically.

We are going to be very focused on rolling that product out, and who knows if there is additional opportunities as we have shared most recently as we were traveling -- listen, we will take a look at that.

As you know, as we were up in Boston recently, we're a large operation of Boston.

We're as high as 116 trips, 52 nonstop city pairs.

There is already quite a bit of interest in that product up there.

This transaction, the transactions that we are announcing today, the fleet issues, I will tell you just a comment on this core product, again, I stay away from the word coach.

The core experience 321, think high-density Northeast down to Florida, the Caribbean, let alone allowing us the opportunity to have the geography to also offer Mint on 11 of those aircraft.

This is a perfect aircraft for high-density markets and to better utilize our slot portfolio up in the Northeast, specifically in New York.

That is behind the additional A321 at this point in time.

David Fintzen, Barclays.

Another question to follow up on a couple of the previous questions around fleet.

When we are looking at this revised order book over the next couple of years, feels like obviously a shell count is lower.

But if we take the current utilization, it feels like ASM production out of this fleet, this revised fleet should be about the same as what we were thinking.

And it seems like you are set up for the 7% to 8% ASM growth range over the next couple of years.

Is that the right -- I know you do not want to have explicit guidance, but is that the right way to think about it, or is there something underneath in terms of 320s coming out that is changing that we are not entirely seeing?

You broke the code.

There is nothing else coming out.

We do have, just a footnote, we do have the flexibility to return some aircraft.

Actually throughout this entire period from 16 all the way through 24.

The dynamic of the ability to respond better to what Robin and that team want to do in terms of capacity remains there.

Having said that, as you know, the lease rate, the lease return and the lease markets are pretty favorable to airlines right now.

That helps.

Maybe a quick follow up on -- you guys have done some really tactical adjustments to September holding capacity flat.

I know October, there is a lot to weed through in terms of Sandy impact.

It just looks like in the schedule, some of that continues, and I am curious how that experiment n September played out relative to your expectations and how much of that can we expect to see carry forward?

Hello David, it is Robin.

I'll take that.

If we think about September, I think we have shared that you have got to remember the September before showed some very big increases on the year before.

To a certain extent, I think it was just about getting September back in line.

I look at September 13, look at September 11 and really think about that over two years.

For October, November, December, our capacity does look quite choppy.

I think part of that is to do with the Sandy hangover which Mark talked about which certainly took a slug of AFMs out.

And even into December, you are seeing significant passenger increase in December versus November.

You've got to remember, as Mark touched on, two of our peak days of flying move from November into December which has a big impact on capacity.

And then we also have these 321s coming into the fleet right at the end of the year that will be flying over the peak holiday period as well.

So both of those I think go to quality of those ASMs that you are seeing in December is extremely high.

So really that was a September phenomenon, and it is a little bit back to more normal scheduling with all the caveats of the calendar moving around?

Yes.

Jamie Baker, JPMorgan.

Dave, when I look at the other US names that I follow, it is comparatively easy to pick out what the drivers of margin improvement are going to be in 2014.

You've got momentum at Delta, potential for some margin recovery at United depending on your field of view, you can see a nice tailwind at Airways.

It is not clear to me where the 2014 drivers are for JetBlue.

First, what confidence do you have that you can break out of the 7% operating margin range next year where you've basically been for three years now?

Second, what should we expect those drivers to be?

Sharklets are 2015, the E190 changes don't seem to impact next year, higher density 321s probably help on the margin.

How should we be thinking about the incremental drivers in 2014?

Good morning Jamie.

I think it's a -- first of all as I look at this year, and granted we are obviously talking about Q3 today, but I look at this year as a tale of two semesters.

The first half of the year it was disappointing.

As we look at cost challenges specific to the CF34, that is how we started the year, then we had a Presidents' weekend that didn't materialize at all as we are closing out the second quarter -- a sluggish first quarter, excuse me.

The sluggish second quarter as we are traveling the pack when we are talk about operating margins.

Then I think as you look at the operating margin in this quarter, as we are looking at the strength that Robin talked about, with the bookings early for December, but the bookings going into Q4, I think that continues as we move into 2014.

What are the levers?

I think the levers continue to be -- when we look at first of all the network, it is maturing of the places like Boston.

We are very pleased with year-over-year performance as we look at the investments that we have made in places like Boston.

Just going down the coast, New York continues to perform quite well for us even though there is quite a bit of OAL activity taking place in New York.

When we look at Florida, this investment not just when we think about South Florida, the investment -- by the way, we are doing that off of a very profitable base unlike what we had in Boston where we had to build really a corporate network to support what we are doing in Boston.

First time ever for business wires in a place like Boston.

What we are seeing in terms of Latin America is it's lapping on a year-over-year performance.

I think one is the maturity of markets.

By the way in Q3, 4% of our markets were open less than a year.

When we think about that on a year-over-year basis, we have learned a lot about, again, new markets.

So we move into things like ancillary revenues.

And we saw an ancillary revenue number in the $21 range in terms of per customer, the ability to improve on the ancillary revenue initiative, Jamie.

Again, whether it is the Even More offering, whether is what we end up doing with Fly-Fi, driving loyalty in core fares let alone whatever we end up doing with Wi-Fi offerings.

So think again the levers on the ancillaries, including things like package travel, and also highlight the partnership traffic.

These are significant when we think about airlines like Turkish, airlines like JAL, airlines like Emirates adding service into places like Boston and I'm sure more.

The two way codeshare that is in place with Emirates and more being announced in the near future.

I think there is plenty of levers that we are quite confident that we take a look at improving our margins on a year-over-year basis and staying there.

This is before we get below the line with things like the cost issues, with maintenance.

You are right, the Sharklets aren't going to play out for a couple of years.

321s will not play out for a couple of years, but we also have some very exciting initiatives and within the airline as well to become more efficient as we look at our system operation center in the airports.

Back over to you, Jamie.

Dave, as a follow up to John's question earlier, in the event that you do decide to roll Mint beyond 11 aircraft, how much out of service time would you expect to be required for retrofit?

I assume the 11 Mint planes come directly from the factory that way?

Jamie, let me let Robin talk about that a little bit.

Jamie, what we would do is as we think about the 321s and the book we have, we will just convert the 321s that are scheduled for delivery after these 11, converting those as they come out of the factory from what we call high density to the low density is very straightforward, so they arrive in service in the configuration that we want.

Savanthi Syth, Raymond James.

Just a few small follow up questions really.

In the A321, are the first 11 A321s all going to be with the Mint configuration?

The first four are actually coming in high density, and then the 11 thereafter will be coming in the low density configuration.

Is the pilot wage rate, is there difference between A320 and A321, or are they the same?

No, the same.

My last quick follow up question was on the pilot arbitration issue, is there any update there?

Actually, I think we pretty much said it all last quarter.

Not much to add.

Lawyers are still engaged in substantial motion practice on the various elements of the damages phase where they seem to be fully ensconced in the damages phase, and more to follow I guess.

Duane Pfennigwerth, Evercore.

Most of my questions have been asked, just a couple quick ones here.

Can you repeat what you said about November, and historically how much is Thanksgiving return travel worth to the month?

Hello, I will take that -- Robin, good morning.

We haven't actually -- some other carriers do this -- we do not actually break out the value of the Thanksgiving return.

Although we are not specifically guiding, let me use some kind of words to try to help with how we're looking at November and December.

A bit more color on November, there is clearly a good guy -- I think I recollect last year, we said around a $25 million revenue hit to November because of Sandy.

I don't think we converted that to a PRASM number, but I guess you can back into that.

The -- 2 of our top 10 revenue days are the Sunday and Monday after Thanksgiving.

Both of those slide into December, so as I think about November, it is choppy and I guess not terribly exciting as we think about revenue when we look at those two things combined.

When we look at December though, the combination of the Thanksgiving return and the holiday period which is a traditional period of strength for JetBlue.

As we look at those now, and of course the weather can always throw a spanner in the works in December, but as we look at those now, December is looking extremely strong.

Hunter Keay, Wolfe Research.

Dave, did I hear you add the words on average when you said you are looking for ROIC improvement of 1 percentage point per year?

I think that is new.

I think before you just said you are going to improve your return on invested capital by 1 percentage point per year.

Is that a change?

Are you going to hit it this year?

It is early in the year.

By the way, let's go back to wordsmithing, Hunter.

There, as we have said on a year-over-year basis improving our ROIC by 1 point on average on a year-over-year basis.

That has been very specific.

Regarding the air, listen, we are sitting here closing out October moving into November.

It is early.

There is no doubt additional color, I gave it earlier on the call.

Not pleased regarding what transpired with maintenance cost tied onto the Embraer or not having the Presidents' Day weekend, so the tale of two semesters.

Weak disappointment in the first half of the year and then strength into the second half of the year.

Again, this goal remains very much bedrock in terms of how we are running the Company, how we are allocating capital, how we are driving executive compensation.

No wordsmithing, this is how we are running the business.

I wasn't -- to be clear Dave, I wasn't trying to get cute with words.

It just seemed like it was a different thing that I haven't heard from you guys before, and I thought maybe the implication was that you were not going to get there this year.

And it is not that early in the year I would say.

It is November, and I think we should have a pretty good picture as to whether that is going to happen right now.

I guess the follow-up question is, if you are not going to hit the rolling target of 1 percentage point expansion, why are you ordering aircraft?

I know you are deferring in the near term, but what hurdle rate has been hit to justify another $1.8 billion of capital committed?

Again as we I think explained earlier, and even into -- you take a look at some of the documents, first of all, a lot of those numbers, Hunter, when you take a look at the A321 and the Neo platform, those airplanes are 2018 and beyond.

But when we think about the ability to be in the order book for a very popular aircraft and power plant, it is very important for us to be out there.

I think of that first of all, the $1.8 billion, I would really draw your attention more to what has happened over the course of the next three years, as Mark commented, about $200 million less of CapEx.

As we are talking about what we believe is the right sizing of the Embraer fleet.

Again, we are very appreciative of Embraer and helping us build a place like Boston to the largest level that an airline has ever had in Boston, using those aircraft across the Caribbean.

Then when you take a look at opportunities to grow Fort Lauderdale Hollywood International airport specifically with the addition of these current engine options, and again later today, we will show you the years in which these aircraft are being delivered in 2015, 2016 and 2017, we think this is the right decision for us.

There is a -- we are really pleased with not just 321s and even right sizing the 320s because of some conversion, right sizing the 190s, but also the Sharklet retrofit.

This is a big deal in terms of retrofitting over 100 of our aircraft.

We're seeing performance today that is north of 3% fuel savings.

Hunter, as I look at how we are building the Company, we think this is absolutely the right move on behalf of the shareholders.

Dan McKenzie, Buckingham Research.

A couple questions here.

Number one, Mark can you talk about the relationship with ViaSat and whether or not there is an economic component tied to that partnership?

There is nothing new to announce.

The relationship with I think ViaSat we described in our sourcing agreements, and that is pretty much what it is right now.

Okay.

Secondly, I guess you referenced corporate revenues in the commentary, and I wonder if you can elaborate a little bit further specifically how you are measuring the corporate revenues, what benchmark you are using and what the goals are and essentially what initiatives are under way currently to help drive those results?

Robin, you want to take that?

Yes.

Thank you Dan.

It is actually a good timing.

We are on the back last Tuesday, and Dennis Corrigan and I and other spent some time up in Boston with our sales team and over 20 corporate travel managers of our largest corporates in Boston really hearing from them directly what are some of the things we need to be talking about in the next 12 to18 months as we develop this business stream.

Things like as we've added network relevance in Boston, we're up to about 70% now with the announcement of Detroit.

As we think about some of the enhancements we have to the TrueBlue program in the last 12 months, whether that be introduction of Mosaic, whether that be the removal of expiry on points and finally the ability for families to pool points.

We continue to expand the number of corporate agreements we have contracted directly with corporate, we have some things we will be announcing next year in terms of small, medium corporate space that we think is going to give us more traction there.

We're very pleased with the progress that we are making.

I talked a little bit about Boston, but we do also have corporate business elsewhere across our network, and we are seeing good growth in all of those, but particularly in Boston where we fly to Florida way nonstop more than any other carrier out there.

Glenn Engel, Bank of America.

Couple data questions and follow-up on costs.

On the data side, can you tell us what the ROIC is in the trailing 12 months and what the operating cash flow is in the third quarter?

A bigger question is, this I think will be closed your fifth year where your costs are growing more than the industry as a whole.

When do you start seeing your cost growing, starting to gain ground again versus the industry?

Looking quickly at the script, we did mention the cash from operations -- is that in the script, did we talk about third quarter cash from operations?

I think I may have mentioned it.

We will look for that while we are doing it.

We have not announced and probably won't until at least the end of the year where we are with respect to ROIC.

I think it was a policy decision we made which is I would be in a never-ending ROIC tracking game.

We will be announcing that at the end of the year.

For sure, I think Dave said it very well earlier, some of the cost issues that we have had this year really are -- we're not really pleased about it at all.

For sure it had a negative impact on ROIC, and just to focus on maintenance for example, we got on top of that.

All of our risks to exposure on maintenance we're diligently working to cover with flat hour agreements.

Just beyond not only the flat hour agreement with GEOs CF34, but we're looking to better manage the aging of our fleet through flight agreements covering heavy maintenance and the 30 3K motors and other key components of the maintenance world.

More to follow on that next year, but for sure as I indicated, the pace of that cost inflation on maintenance, keeping in mind it is only 15% of total CASM ex anyway, so we expect that to Abate as I think we have mentioned in prior things.

I think finally we also, Dave also mentioned something -- more to follow, and I don't think we're in the to position to speak as United did earlier this week, but I think there are some really exciting opportunities in terms of cost control just by looking at our operating performance.

With the pilot pay increase and installing Wi-Fi and the premium cabins, wouldn't that all make it very difficult to have your cost below the rate of inflation next year?

No, when I said inflation, I said the maintenance cost year-over-year cost inflation rate.

And I'm thinking overall cost inflation.

For sure we have some headwinds next year Absolutely, we are committed to paying our pilot peer wages, and there is no doubt that we lag that.

We are in process of ongoing conversations with our pilot groups on that particular topic.

Probably premature to talk where our thinking is right now on the pilot pay.

That is probably a conversation it's best to have with our pilots first than on an earnings call, but for sure that will be a source of headwind next year.

The whole Mint thing is other than seats and some of the training and product, I am not viewing that as candidly, it is not in my top five of headwinds as I think about next year.

I would caution just a little bit of in the interest of disclosure, our benefits this year have been really, if you will, very good in terms of claims and whatnot.

Our People Department converted us wisely to a new plan.

I do not know the dynamics of deductibles and where people are filing, we may see a bit of an increase on benefits in fourth quarter this year, but I am not really expecting anything else.

Helane Becker, Cowen.

I just have one question because most of them have been answered.

On total health care costs for 2014, as you think about guidance for cost, total unit cost for next year, how should we think about health care cost with all the changes in the rules and regulations?

As I just said, I think we got ahead of it last year, so don't expect this big astronomical change year-over-year credit to our team.

We made the change early.

There it is.

Do you have any concerns about finding pilots with the new change in the rules, the 1500 hour rule that reduces the pilot application pool?

No.

You want to take that?

I would be more than happy to.

Good morning Helane.

We believe that really when we look at attraction of pilots, we don't believe that is an issue.

As we look at longer-term, and again, Mark commented on it, then you look at retaining pilots.

That is the issue.

I think we are well-positioned.

Again, it is the number of applicants that we are seeing and prospective applicants, we feel good about that.

We just want to make sure that we are retaining the pilot workforce.

Do you have an estimate, Dave, for what it takes to make Captain.

at JetBlue?

Is that number of years?

Yes it.

Sorry about that.

It is roughly six, six and half years is the timeframe right in terms of upgrading into the left seat.

Again, it is not -- so much of it's lifestyle, do you want to live on base, do you want to be on reserve and what have you.

It can happen a little bit earlier, some people do it later.

I would just think that six or six and half years and new equipment would be a big attraction in terms of retaining.

There is no doubt.

And of course at the end of the day, it is job security, it's quality-of-life, it's compensation and it is benefits.

As Mark mentioned, ongoing conversations with our pilots that will certainly continue to have and then share with a larger audience when appropriate.

Bob McAdoo, Imperial Capital.

Can you go back over what the spool-ip period is for putting Fly-Fi on?

Good morning Bob, Robin will TF a little bit.

You've been living with LiveTV, but it is very nice to have our first A320 through the supplemental type certification process as well.

Robin as you move -- that was really the heavy lift on the A320.

Robin?

Thank you for the question Bob.

We're in the very final stages of testing now.

We believe we are literally just a few weeks away from our commercial launch.

We already have one aircraft fitted out that is flying around in our network at the moment as a test.

We will then start the rollout later this year.

The aim is to complete the A320 fleet next year, which is 2014, and the E190 is running about nine months behind that currently.

So mid 2015 kind of thing?

Yes.

Mid to late 2015 for the whole fleet.

85% of our ASM will be covered by the end of next year.

Thomas Kim, Goldman Sachs.

Can you give us an idea of initial interest in the Mint service in terms of forward bookings?

Robin, it's still a long way out, but initial interest?

Sure.

We only put four days on [sal] originally because it was very much a test launch, we had our introductory fare.

Those went very quickly.

I think we may have a still seats left, but not many.

Then because it is so far out obviously, and then when we load the schedule of coming up in November into next summer, at that point, that is when we will put more of the Mint product on sale.

But again, it is very early.

The people buying this earlier really are sort of curious about the product wanting to try, it is obvious fairly late booking market.

Certainly appreciate the color.

A minor question, with regard to the deferral and the E190, was there any additional cost incurred?

Would it have been booked already or should we anticipate it could cost in Q4?

The terms of that are confidential, but they were reflective of great relationship we have with Embraer.

That deferral, did that happen in Q4 or Q3?

We literally signed it a couple of days ago.

If anything happens, we would see a potentially in Q4.

It wouldn't have been reflected last quarter.

Thank you.

Thank you, Mr. Barger we have no further questions at this time.

Thank you so much Terese.

I appreciate that.

I would like to thank everyone for joining us today on this conference call regarding our third-quarter earnings, specifically I'd like to thank our 15,000 crew members.

This was the highest ever quarterly income that we have seen, and also our 14th consecutive quarter of profitability.

Thank you so much for delivering the JetBlue experience.

We will talk to you again next quarter.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.