JetBlue Airways Corp (JBLU) 2014 Q1 法說會逐字稿

Good morning.

My name is Lindsay, and I would like to welcome everyone to the JetBlue Airways first-quarter 2014 earnings conference call.

As a reminder, today's call is being recorded.

(Operator Instructions)

I would now like to turn the call over to JetBlue's Director of Investor Relations, Lisa Reifer.

Please go ahead.

Thanks, Lindsay.

Good morning, everyone, and thanks for joining us for our first-quarter 2014 earnings call.

Joining us here in New York to discuss our results are Dave Barger, our CEO; Robin Hayes, our President; and Mark Powers, our CFO.

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 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 our press release, 10-K and other reports filed with the SEC.

Also, during the course of our call, we may discuss several non-GAAP financial measures.

For a reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release, a copy of which is available on our website.

And now, I'd like to turn the call over to Dave Barger, JetBlue's CEO.

Thank you very much, Lisa.

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

This morning we reported first-quarter net income of $4 million or $0.01 per diluted share.

Operating margin was 3.1%, a decrease of 1.4 points compared to last year.

Severe winter weather in the Northeast reduced first-quarter operating income by approximately $35 million.

During the quarter, we canceled 4,100 flights.

To put that in perspective, we canceled nearly twice as many flights in the first quarter as we canceled in all of 2013.

With 80% of our flights concentrated in the Northeast, we are disproportionately impacted by weather in this region.

While we recognize we can't beat Mother Nature, we know we need to operate more reliably and efficiently.

Having the majority of our airlines based in highly congested airspace clearly comes with inherent costs and challenges, which is why our focus on, on-time departures and operational reliability is imperative.

We know that improvements in reliability will lead to both better cost performance and improved revenue performance.

Even with the winter weather challenges, first-quarter revenue performance was solid, as total revenues increased 3.8% year over year.

We generated record first-quarter revenues and achieved year over year improvements in yield and fare, while growing capacity 2.7%, demonstrating the core strength of our business.

Also contributing to year over year revenue growth was record quarterly ancillary revenue per customer of $24.

This is up 9% year over year, and we see continued opportunity moving forward to generate high-margin ancillary revenues.

Total operating expenses increased 5.5% year over year, primarily due to salaries, wages and benefits.

As discussed on prior calls, we expect additional cost pressures related to pilot compensation.

We also saw increased pressure on other operating expenses during the quarter due to additional weather-related expenses.

Although the first quarter presented operational challenges, we remain focused on running a safe airline and delivering excellent service to our customers.

I'd like to take this opportunity to thank our 15,500 crew members for all their hard work running a safe operation during the quarter.

As we look forward, we remain on track to meet our return on invested capital goal of 7% this year.

We believe we have the right plan in place to do so.

There are three key components of our plan to improve ROIC: cost control, revenue enhancements and balance sheet improvements.

Specifically, we intend to hold our invested capital base relatively flat in 2014 as we expand margins through comfortable growth in Boston, Fort Lauderdale-Hollywood and the Caribbean and Latin America.

We believe a maturing network, new product offerings such as Fly-Fi, together with ancillary revenue initiatives, will further improve our margin performance.

Maintaining a relative cost advantage to our network carrier competitors is critical to our ability to offer an industry-leading product at a reasonable fare.

Although we faced weather-related cost challenges in the first quarter, we believe we have opportunities to further improve our cost execution and discipline.

Over the longer term, we expect A321 aircraft and the Sharklet retrofit of our A320 fleet will help re-shape our cost dynamic.

Initial results on our first A321s in service are validating the CASM benefits, with savings of 10% to 15% relative to our current A320 fleet.

In addition, we currently have eight A320 aircraft with Sharklets installed, and we are seeing roughly a 3% to 4% improvement in fuel efficiency on trans-continental routes.

Finally, with respect to the balance sheet, we remain committed to prudent capital deployment, and plan to continue to pay down debt and purchase aircraft and other assets with cash, which will help improve ROIC.

While our plans to generate ROIC of 7% in 2014 do not include the benefit of the sale of our wholly-owned subsidiary LiveTV, we believe this sale, which is expected to be complete this summer, will lower unit costs and reduce capital expenditures.

In addition, we plan to use a portion of the proceeds from the sale to pre-pay between $200 million and $300 million of debt in 2014.

Importantly, our agreement with LiveTV preserves JetBlue's access to the most innovative in-flight entertainment and connectivity platform.

We are on track to complete installations of Fly-Fi, JetBlue's leading in-flight connectivity product, on our airbus A320 fleet by the end of 2014.

With 36 aircraft equipped with Fly-Fi today, initial customer feedback has been very positive.

On certain long-haul flights, over 80% of customers are connecting to Fly-Fi.

We believe offering true broadband speeds in-flight will be a key differentiator for JetBlue, particularly in long-haul markets.

We expect to share more details about our plans to monetize Fly-Fi later this year.

Earlier this week, we received the results in the pilot union election.

By a margin of 74% to 26%, JetBlue pilots elected to be represented by the Airline Pilots Association.

While I am personally disappointed in this result, JetBlue respects the right of pilots to unionize.

We see no material change to our outlook as a result of this election.

In closing, despite a challenging weather environment last quarter and a disappointing pilot election result, we are enthused about the future.

We are confident in our plan to focus on cost control, maximizing revenue and strengthening the balance sheet.

We expect margins to improve throughout the year as we execute our network strategy and contain costs while continuing to make ROIC-accretive investments in the business.

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

Thank you, Dave.

Good morning, everyone, and thank you again for taking the time to join us today.

This morning we reported first-quarter operating income of $41 million, a decrease of $18 million compared to the first quarter of 2013.

Severe weather in the Northeast reduced first-quarter revenues by approximately $50 million.

In addition to the roughly 1,800 flights canceled during winter storm Hercules in January, subsequent winter storms caused a significant number of additional flight cancellations, with respect to revenue.

First-quarter PRASM increased approximately 1% year over year.

Year over year passenger unit revenue increased in January by 6%, increased in February by 7% and declined in March by 8%.

As discussed on our January call, March year over year unit revenue comparisons were negatively impacted by the shift in the Easter and Passover holidays.

This holiday shift impacted March year over year PRASM by approximately 7 to 8 points.

In addition, we faced tough year over year comparisons in March this year due to an exceptionally strong March last year.

Given our strong leader franchise in the Northeast and Florida and Caribbean, we have historically outperformed peers during the Easter Passover travel periods.

For the same reason we saw a March PRASM headwind, we anticipate an April PRASM tailwind.

With respect to networks and partnerships, we continue to be pleased with the revenue performance throughout our network.

During the first quarter, we acquired 12 slot pairs at Reagan Washington National Airport, DCA.

This is an airport we have worked tirelessly to gain access to for more than a decade.

Reagan National is a high-fare market with a demographic very well-suited to our brand and business model.

To help support our growth at Reagan National, to up to 30 daily departures by year-end, we plan to eliminate trans-con flying from Washington Dulles and to close several other routes.

Airline partnerships continued to generate high-margin revenue and expand the scope of our network.

Partnership bookings generated approximately $120 million of revenues in 2013, of which approximately $50 million was incremental.

We expect incremental revenue through partnerships bookings to grow between 50% to 60% in 2014, driven by new partnerships, as well as a deepening of our existing partnerships.

The impact of our partnership agreement on our new Boston-Detroit service is a great example of how effective our partnership portfolio has become.

We currently carry on average 30 customers connecting with our airline partners a day between Boston and Detroit.

We expect this figure to grow significantly by year-end, with respect to ancillary revenue.

Total ancillary revenues in the first quarter increased by roughly 9% year over year to $175 million.

Although we voluntarily waived more customer change fees during the first quarter due to winter weather, resulting in lower change-fee revenue, we continue to see growth in high-margin passenger-driven ancillary items.

Our Even More offering remains on track to generate approximately $190 million this year.

During the first quarter, we began adjusting Even More pricing by the time of departure and aircraft route to optimize revenue performance.

We expect to continue tweaking Even More pricing as the year progresses.

Our recently announced TrueBlue Mosaic status match for members of other carrier loyalty programs nicely illustrates our efforts to improve revenues by attracting those customers underserved by other carriers.

In conjunction with this match, we also offer the Mosaic Challenge to allow any customer -- not just those with status on another carrier -- to fly their way up to Mosaic at a quarter of the qualification criteria.

As a result, we [spent] thousands of new Mosaic members, who on average generate 10 times more revenue annually than a typical TrueBlue member without the Mosaic status.

We expect total ancillary revenues in 2014 to increase between 10% to 15% year over year, driven primarily by even more and higher TrueBlue-related revenues.

Turning to costs: fuel, of course, remains our largest expense, comprising approximately 35% of the total.

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

The first quarter, we hedged approximately 16% of our fuel consumption.

Additionally, fixed forward price agreements, or FFPs, covered approximately 8% of our first-quarter fuel consumption.

Including the impact of the fuel hedging, FFPs and taxes, our fuel price in the first quarter was $3.14, down 4.4% year over year.

We have currently covered approximately 23% of our remaining full-year 2014 fuel consumption, using a combination of hedges and FFPs.

More specific details regarding our hedge positions are set forth in the Investor Update which was filed with the SEC and is made available on the Investor Relations section of JetBlue's website prior to the start of today's call.

Excluding the fuel and profit sharing, year over year first-quarter unit costs increased by 6.3%.

Winter weather reduced our first-quarter planned year over year ASM growth by approximately 4 percentage points, pressuring unit costs.

Excluding the impact of these flight cancellations, we estimate year over year ex-fuel costs would have increased to only 2.3%.

In addition to first-quarter cost pressures caused by capacity reductions, we also faced increased costs associated with the winter storms.

To look more specifically at a few items on income statement: one, salaries, wages and benefits were up approximately 15% on the unit cost basis, the largest rise of our year over year increase in non-fuel unit costs.

Recall we recently increased our pilot pay base rate, and have hired additional pilots to help mitigate the impact of FAR 117, which is the FAA 's new regulations regarding pilot flight time and duty rules.

In addition, we incurred higher-than-expected overtime expense during the first quarter related, of course, to the winter storms.

We expect salary cost pressures to ease somewhat in the second half of the year as we adapt and optimize operations pursuant to FAR 117.

For the full year, we expect salaries and wages and benefits, excluding profit sharing, to drive approximately 60% of our increase in non-fuel unit costs.

Other operating expenses were up 11% year over year on a unit cost basis.

This increase was higher than expected due to additional weather-related costs such as de-icing.

Moving to the balance sheet: we ended the quarter with approximately $771 million in cash and short-term investments.

In addition, JetBlue maintains $550 million of undrawn credit lines and 21 unencumbered aircraft.

We expect to end the year with cash as a percentage of trailing 12 months of approximately 10%.

As Dave mentioned, we plan to use a portion of the net proceeds from the pending sale of our wholly owned subsidiary LiveTV to pre-pay debt.

Please note that all guidance today assumes LiveTV remains a subsidiary of JetBlue throughout the year.

We plan to update CapEx and cost guidance after the LiveTV transaction closes sometime mid-year.

Both CapEx and cost guidance will have a positive financial impact on JetBlue, CapEx and fleet.

JetBlue ended the quarter with 195 aircraft, including 130 A320s, 5 A321s and 60 E190s.

For the full-year 2014, we're forecasting aircraft CapEx of approximately $600 million.

Effectively managing the invested capital base is a key driver for ROIC improvement.

Our goal is to keep the level of invested capital relatively flat as we grow the airline.

Turning to capacity: We plan to grow second-quarter ASMs between 5.5% and 7.5% year over year.

This increase is driven largely by our growth in the Caribbean and Latin America, which we expect to be up approximately 20% year over year.

For the full year, capacity is expected to increase between 4% and 6% year over year, which is 1 point lower than prior guidance.

Most of this decrease is driven by the re-allocation of long-haul trans-con flying from Washington Dulles to support new short-haul service at Reagan National DCA.

Turning to the revenue outlook: we currently expect April PRASM to be up between 9.5% and 10.5%.

Recall there is roughly a 7-point tailwind in April due to the Easter and Passover holiday shift into April this year.

While we have limited visibility, May bookings currently look solid.

We currently expect May PRASM to be in the mid-single-digits year over year.

Moving to the cost outlook: excluding fuel and profit-sharing, CASM in the second quarter is expected to increase between 4.5% and 6.5% year over year.

We expect salaries, wages and benefits and other operating expenses to be the two largest drivers of the second-quarter year over year ex-fuel CASM growth.

Salary, wages and benefits, excluding profit-sharing, are expected to compromise (sic - "comprise") 40% of this second-quarter increase.

With respect to other operating expenses, we expect year over year comparisons to be negatively impacted by the $3 million gain we recorded during the second quarter of 2013 in connection with the sale of LiveTV's spectrum license.

We also expect to incur additional expense related to Ka-band installs during the second quarter of this year.

Finally, we expect sales and marketing expenses to be higher in the second quarter, due to our new advertising a marketing campaign in this quarter.

Excluding fuel and profit-sharing, CASM in 2014 is expected to increase between 3.5% and 5.5% year over year.

We expect approximately 1.5 points of this year over year unit cost increase to be largely denominator-driven.

That is, by capacity reductions resulting from the reallocation of aircraft and longer-haul routes to support new service in Washington Reagan, and first-quarter weather-related cancellations.

Finally, in conclusion, our key focus for the remainder of 2014 is cost control, revenue enhancements and balance sheet improvements.

Several key longer-term strategic initiatives, including Sharklets in the A321s, are well-underway.

While the first quarter was certainly challenging, we are committed to our ROIC goal of 7%.

We believe generating an ROIC of 7% by the end of 2014 is attainable.

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

Lindsay?

Lindsay, we are now ready for the Q&A session with the analysts.

Can you please give the instructions?

Thank you.

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

(Operator Instructions)

Jamie Baker, JPMorgan.

Good morning, everybody.

Good morning.

Dave, if one listens to the manufacturers -- and of course there are always talking their own book -- but it sounds as if they are applying considerable pitches on the wide-body side.

And wide-bodies are something that you have been willing to discuss in the past.

I was hoping that we could get you on record and just get an update as to how those campaigns might be proceeding.

And more importantly, do your ROIC targets longer-term and the progression of ROIC performance leave room for a potential third aircraft type?

Or is it academic?

Would ROIC temporarily be disrupted in the event that you choose to go with a third model?

Thanks, Jamie, and good morning.

I appreciate the question.

I think, first of all, just transparency: we're absolutely focused on implementation of the 321 fleet.

We're focused on the implementation of the Mint experience.

That is a big stretch for our Company.

5 A321s here today, 83 on order.

And so that's the near- and the medium-term focus.

Wide bodies I have certainly talked about in the past, that at some point I believe that there may be a place for larger aircraft within JetBlue.

But transparency again, Jamie.

We have -- when I think about your word -- campaigns with manufacturers -- that has not transpired in any way at all in our Company at this point in time.

Do we get pitched?

Sure, we get pitched along those lines.

And when I think about the ROIC trends, as we commented about, despite a really tough first quarter, the 7% by year-end and that progression, on average 1 point per year.

That's closer to the nearer-term, and I honestly don't know that I have even seen a study that talks about disruption or improvement of ROIC tied into wide bodies at this point, Jamie.

So hopefully that helps you with where we're at in our maturity curve.

Yes, that's excellent.

I really appreciate it.

Thanks a lot.

You got it.

Thank you, Jamie.

Michael Linenberg, Deutsche Bank.

Yes, good morning, everyone.

Just a couple here.

Dave, when I think about your pilot costs, I think it's about 10% of total costs.

And now that they've elected to unionize, it does seem like that, that cost item is now a bit of a question mark.

And so how do you think about growth and CapEx?

And it would seem, given the uncertainty around what it will cost to operate aircraft down the road, if there were any discussions for a 78 or an A350, once you put those on the back burner until you get the pilot situation figured out.

How do you think about that?

Sure.

Good morning, Michael.

Likewise, appreciate the question.

It's, again, just to reiterate: disappointed not only with the results, but certainly the statement by the pilots regarding third-party representation.

Continue to absolutely to be of the opinion that the relationship that we have with our crew members and what we previously had with our pilots -- this direct relationship is the best path forward.

I just do -- back to my statement: we see no material change for our outlook as a result of this election.

And that's exactly where I will take you back to, Jamie.

This investment that we've made with our pilots, the $145 million that we've talked about previously this year over the next three years.

At our lifecycle, the ability to attract and retain -- which we have not had absolutely no issues with at all from the standpoint of the pilot pipeline, it's a -- when you start to take a look at on standard with Airline Pilots Association, it's a 32-month timeframe to negotiate a collective bargaining agreement.

So I really, again: very disappointed with the pilots.

I think predictability now in terms of wage costs -- salaries specifically -- and benefits and quality of life with our pilots, I think now is very predictable.

And to tell you the truth, it's easier for us to now manage that cost.

And again, I really think it was a short-term decision by our pilot group.

Okay.

And then just on the second question, maybe this is to Mark.

LiveTV, Mark, you said sometime in the middle part of the year.

Anything more definitive on when the deal closes?

Why would it take so long?

And then, the $400 million of gross proceeds: how should we think about net proceeds?

What's the text piece?

Is it big?

Is it -- how do we, you know -- rough numbers --?

So I'm getting the -- people here are agreeing with you [bringing] it up.

And I couldn't be more eager to get this thing closed.

There's some governmental things, SEC and anti-trust issues.

So it's literally -- the timeline is driven by approvals, not by the business parties.

Talent and JetBlue are ready, willing and eager to go.

$400 million is the gross.

Net would be -- it pains me to say this -- bankruptcies and other small costs.

So order of magnitude still will be well-north of $300 million.

Okay.

And as Dave mentioned, the use of proceeds will -- the Treasury team is actually targeting $200 million to $300 million of debt -- might even be floating-rate debt.

Welcome your thoughts on the Fed in terms of the floating environment.

But clearly interest expense reduction and de-risking the balance sheet is probably good for equity holders.

And again, the balance of that -- we are continuing to purchase shares related to -- roughly about 8 million shares or so, as I think the current program related to the -- not further diluting our shareholder base in connection with options in [RSCs] and whatnot granted to our crew members.

Okay, great.

That -- depending upon the share prices, say, a $70 million-plus additional use of proceeds.

Okay, great.

Thanks, Mark.

Thank you.

Duane Pfennigwerth, Evercore.

Hi, thanks, good morning.

Good morning.

Just want to follow up.

When would you expect to reach a new collective bargaining agreement?

That typically can be a year or multi-year process.

How are you thinking about that internally?

You know, Duane -- by the way, nice to see you on the train the other day.

And I tell you, it's probably the best question for the Airline Pilots Association.

We're focused on running the business.

And I think we have made significant investment in the pilot career.

If you look on average, it takes 32 months for the Airline Pilots Association, historically, to close out an initial collective bargaining agreement.

And I wouldn't be surprised all that you'll hear a different answer from the Airline Pilots Association.

Thanks, and same to you.

On the competitive environment, wonder if you could just give us your view of OA competitive capacity in the June quarter, and how that looked versus the March quarter?

Thanks for taking the questions.

Okay, thanks, Duane.

And Robin is chomping at the bit here to get his voice heard.

Mr. Hayes?

Thanks, Duane, for the question.

As we look out over -- if we look back onto quarter one and then into quarter two and quarter three, we look at it in terms of the year-on-year [CD] increases.

And we're seeing about around a 2%, 2.5% increase in competitive capacity.

The source of that varies a little bit.

So in quarter one we were cycling against quite a bit of trans-con increases versus last year, which cycles out into quarter two, quarter three.

And then in quarter two, quarter three we are seeing a little bit more competitive capacity coming into the Caribbean and Latin America markets.

But overall, it sort of stays at a 2%, 2.5% level for the rest of the year, as best as we can see.

Thank you.

Thanks, Duane.

I hope you talk to Secretary Fox about investment in NextGen as well during your visit.

So again, nice to see you.

Thanks, Dave.

Dan McKenzie, Buckingham Research.

Good morning.

I'm wondering if you can help us peel back the onion on the PRASM gains that you're reporting here.

Obviously we get the Easter shift, so I'm not asking to comment on that.

But what percent of the PRASM improvement is being driven by gains in corporate share, gains in partnership bookings?

And what's the goal from here?

Hi, Dan, it's Robin.

Are you referring to the Q2 guidance that we offered?

Yes, correct.

Yes.

I think the story in April -- and this was mentioned in the script -- but the story in April really is something we see every year.

Where probably much more than anyone else, we see a big swing from the month where the Easter Passover holiday is situated.

So some of the leisure business, we saw significant uptick in April.

As we look into May, Mark talked about mid-single-digit gains that -- as we're looking now.

Again, that's fairly consistent with -- there's been a lot of noise in the first quarter.

We had the storms, which actually had a positive impact on PRASM.

February was very strong, because last February was weak with the family hangover presence, the presence weekend, which a lot of school districts in 2013 took down.

And we saw the impact of that.

And then March and April, the story is really just the shift of the holiday.

May is probably the first clean comparison that we've had as we got into the year, where we haven't had some of underlying noise.

And June is very early -- obviously a lot more margin of error around June.

But right now June also looks in the mid-single-digit type PRASM range.

Got it.

So if I peel back the onion on that mid-single-digits, is that all just network maturation?

That's, of course, is one of the key points that you highlighted in your script, to drive that revenue improvement.

Or is there some revenue benefit from the Mosaic challenge?

Is there -- if it's hard to speak about the second quarter, maybe even just what you saw in the first quarter here.

Sure.

No, Dan, I think we're really seeing the revenue strength across the board.

If we look at Boston, we slowed down the growth there a little bit this year versus last year.

We're definitely seeing some of the maturation benefits there.

We continue to grow the cabin in Latin America market the most aggressively.

But that's also the markets that ramp up most quickly.

And so we continue to enjoy really much better results than we expect as we enter some of these markets.

And then I think things like the Mosaic, the growth in TrueBlue -- what that's really enabling us is powering a lot of the ancillary revenue growth that we're seeing, growth above and beyond that sort of natural increase in passengers.

Okay, thanks, Robin.

Appreciate it.

Thanks, Dan.

Glenn Engel, Bank of America.

Good morning.

A couple questions, please.

One, when you talked about the pilots earlier in the year, you talked about an agreement that raises pay not just this year, but in subsequent years as well.

Does that change with the union vote?

Or are they still scheduled to get those increases anyhow?

I would speculate: I think that the gains that we outlined, the three-year gains, will remain in place.

And you will recall, they're front-end loaded, so they decline in the next two years.

And maintenance costs was a nice drop for the first time.

I guess in the last two quarters, it's come down quite a bit.

Is this a new lower level for maintenance?

Or are we just in a little lull period here and it should pick back up as the year progresses?

Well, obviously, as you quickly identified, last year was a miserable comp, right?

This was a huge spike, so that spike is down.

What was driving a lot of -- and part of it was because we have now flight hour agreements and [now] more of that type of environment around maintenance.

So you won't see the repeat as I promised, I hope, of the types of levels we had last year.

But the other piece of the first-quarter guidance was, we were flying less and therefore burning less hours in the cycles.

And so some of that maintenance is not for gone, it will just be shifted to the right.

Okay, thank you very much.

Thanks, Glenn.

Good talking to you.

David Fintzen, Barclays.

Good morning.

Question for Mark, and building a little bit on Glenn's question.

When we look out beyond 2014 -- and obviously, you mentioned a lot of components around fleet and pilot utilization once you get through some of the regulatory changes.

Should we be thinking about CASM ex-fuel growing sub-inflation post-2014 as the new run rate?

Or is there enough labor cost inflation beyond, that even hitting that would be a little bit tough?

I don't like to speculate beyond 2014.

So my ironic response is: you're asking the CFO -- of course I want it to go close to inflation.

And certainly that's, beyond in 2014, how I'm going to try to, if you will, impress the costs on the budget.

Having said that, it's clearly -- in 2014, it will be the story of salaries, wages and benefits.

And that will be the thing that we do need to ferret out.

I would also say with in 2014, David, that we should hopefully, by the end of -- by the third and fourth quarter, as we better understand the vagaries of FAR 117, we should start to see a lot more softening on the salaries, wages and benefits.

Beyond that though, of course, some of the really good guys, beyond the pilot thing, is LiveTV.

Again, I really cannot wait to be able to announce the completion of that transaction.

And then really highlight the net CASM benefit of that transaction to JetBlue.

The other thing is, we will continue to install Sharklets as quickly as possible.

So you will start to see, beyond 2014, the impact of Sharklets and the impact of higher density A321s.

So again, I don't want to promise inflation to you.

But that certainly is, as I work with the team and try to manage costs thereafter, that is certainly the goal.

Okay.

That's very helpful.

And then just a quick one for Robin.

On the National to Charleston and Hartford, I know you're talking four flights a day.

It's small.

I'm just a little surprised -- I think it was in Dave's prepared comments, mentioned DCAs fits JetBlue's brand.

In what's becoming a very fragmented Washington, is that the kind of strategy that you think the brand works?

Or of those place-holders until some more typical leisure routes can be filled back in?

I'm just curious how to think about National going forward.

Thanks, Dave.

When you're talking about fragmented, you mean politics or the airline industry?

(laugher) The airline industry might be more fragmented than the politics in DC.

Because there's actually at third party in airlines in DC.

Yes, mostly I'm just checking.

No, look.

We have been absolutely delighted with what we've been seeing in DCA.

We need to remember: this was the whole point that Dave was making very publicly in the lead-up to our request, that divestitures condition of the USA-AA merger.

These are markets that had been, with some very high fares, underserved.

Customers in the Washington metro area have suffered for years.

And for us to go in and with our better product, offer a lower fare, stimulate demand, stimulate new markets, I think that is the territory that we do the best in.

And so we see that in Latin America, we've seen that in the Caribbean, we've seen that many years ago in Boston.

And now we've seen that into the DC market.

So we looked to the market that had the really high fares and we felt that we could lower, stimulate.

And we're pleased with what we've seen.

We have some more markets that we will start later this year, and those will be announced in the next couple months.

Okay.

All right, that's helpful, I appreciate all the color.

Thanks, everyone.

Thanks, David.

John Godyn, Morgan Stanley.

Thanks a lot for taking my question.

I wanted to ask a little bit about the seat count on the aircraft that JetBlue flies.

We've seen all lot of airlines out there, almost one after another, dramatically improve profitability by adding seats.

Slimline seats -- they talk about the incremental revenue and incremental cost benefits and how the payback periods are extremely quick.

And we haven't really seen JetBlue revisit the aircraft configuration as a tool for improving the profitability in as aggressive of a way.

I'm just curious, Dave or Mark, if you could speak to that topic.

Good morning, John.

We'll let Robin jump in on that from the standpoint of just the configuration of the fleet.

I know that this has been brought up over the last several years on these calls.

Robin?

This is something we look at over time.

And we made some adjustments to the 190 a couple of years ago, where we re-allocated a couple of rows into Even More and reduced the seat pitch.

We hung it on the aircraft.

I think one of the challenges that we have that's different to the others is -- that makes the switch hard.

Remember, JetBlue -- we used to have 162 seats on the 320.

We went to 150 because we saw it as a better profit maximization tool.

We have a couple of things we have to think about.

First of all, we are going to generate $190 million from Even More revenue this year.

And that flows straight to the bottom line.

So as you add seats and reduce seat pitch, you will lose some or all of your Even More product.

And then secondly, we have the issue where if we add a single extra customer [seat], then we significantly increase our in-flight costs.

Because we have to add a flight attendant.

So when we compare those hard costs and the pure margin we get from Even More, and we compare that to chasing the lowest fares with some incremental seats, it's hard to make the case to add seats.

Having said that, we continue to look at that.

And if we believe that becomes the right thing to do from a profit maximization perspective, then we're open to that.

Got it.

And there's a broader question there, too.

At what point is it time to look at the play books of some of the other ultra-low-cost carriers?

And I fully appreciate that JetBlue has more of a hybrid strategy.

But at what point do we look at those play books and maybe borrow a page or two out of those play books more aggressively than we have in the past?

John, I think, headline again -- it's our path about we firmly believe there's three models in the airline industry.

And so the network carriers, they live in the alliance world -- the super-discounters, as you talked about.

And I'd like to think that -- there's underserved customers, by the way, in both of those models, with where we live.

And admittedly, we look at the play books from afar from both of those models and see what makes sense for us.

And again, whether that -- you start to get inside of the low-[club], the configuration on the aircraft, the ancillary revenue stream -- which I'm very excited about in terms of what we talked about in the past, with Datalex and IBM and our booking flow.

But please don't think that we don't take a -- with a very respectful look at both of these models and what makes sense for our brand.

And I think you're seeing -- again, we continue to be quite forthright regarding a third model out there in the airline industry.

If I can just [give him] my comments, Dave.

I do that -- because it is a good question and it's the heart of our model.

I do think that it went a little bit unnoticed, but we look at the investment that we've made in our partnership with Datalex to be very significant in this area, in what it's going to enable us to do the future.

We've also made some significant investments in Mosaic and actually [Blue Base] to really create a larger group of customers who are flying us more frequently.

And those bring a lot more value to us, just because of the amount they spend, the amount of trips they're taking.

But again, going back to Datalex, our ability to create a retail merchandising capability that's greatly superior to what we have today to create bundled offerings, which aren't necessarily going to look like the low-cost [does].

But certainly will allow us to monetize not just some of the product offerings we have today, but maybe take advantage of things that we don't today.

We asked a lot about the first bag fee.

Our hesitance around that in the past has been, we believe that in many of our markets, we get a significant [set] premium because we don't charge a bag fee.

And customers certainly take that into the fare.

But in a world where we can start to give customers bundled offerings and choices, that allows us to, if you like, protect the fare, where we're seeing in the fare.

But maybe go after opportunities like first bag, where today we don't do that.

I think the investment in Datalex we're going to start seeing into the early part of next year allows us to do that.

So I'm very excited about what that's going to drive.

And I anticipate and believe that's going to allow us to significantly enhance some of our ancillary offerings, particularly around things like first bag, into next year.

Great, thanks a lot.

Thanks, John.

Helane Becker, Cowen.

Thanks very much, operator.

Hi, everybody, thanks for the time.

I just have two questions.

One is, as I look at the guidance for the second quarter with respect to the -- and actually, really more the full year -- how does the capacity for the A321s come in so that we should think about third and fourth quarter, in terms of the percent that the A321s will represent in the system?

Hi, Helane.

The A321s will be -- we have one on property at the moment.

In fact, we have two of our A321s aren't flying, waiting for an STC.

Good news is, we just got that this morning.

So that's really encouraging.

We have another A321 that will be here later this year.

The rest of the -- one of the ones we have not flying today, and the remaining eight are all our Mint aircraft.

Those will be re-deployed onto the trans-con mid-markets.

So by the end of this year, it's 14 of 190 -- 14 of our 203, 204 aircraft will be Mint.

You can see that it's still a relatively small proportion of our total capacity of 321s.

But that will grow very quickly over the next few years.

Got you.

Okay, and then -- I'm sorry.

No, that's fine.

I was simply saying after the Mint deliveries, then we're back on the high-density airplanes.

We'll use --

Okay, I was going to ask that.

Thanks.

And then, the other question I had is, with respect to your philosophy on fuel hedging, I think it's always been to reduce volatility or to manage the volatility of the field price.

And fuel seeming to be a little less volatile, do you have a thought about changing your thoughts about hedging, actually?

No.

In fact, I should also note that if you will look at, again, the current positions that the Treasury team have put on -- it's set forth in the Investor Update that was filed this morning.

You can see that the positions of the prices are not terribly aggressive.

They're also generally in the money as we sit today.

And I think the lesson is, the minute that you start to get complacent with the narrow band and then Mr. Putin does something in the Ukraine, and then you're glad you did it.

So God forbid something bad doesn't happen.

We hope that these things work out well.

But it is a level of security that I think we're very comfortable with.

But we haven't done the big 80%, 90% type of big bets.

We're not betting the ranch on fuel.

So again, we're keeping -- the FFP s are obviously just pre-purchases, and the current ranges are set forth in terms of the 15% to 17% in the next three months.

We think that's fairly conservative.

Okay.

And then, can I just ask a Boston-related question?

I think there was a time when you guys talked about every time you added a city out of Boston, it added relevance to the whole network.

And I was just kind of wondering how that was developing this year.

Because it looks like you're adding less.

Boston right now, the focus is more on DCA, which is fine.

But I was just wondering how that was developing.

No, we're very pleased with how Boston is developing and we are still committed to taking out up to 150 flights a day.

We are about to take on some more real estate gate space in Terminal C, which allows the future growth there.

Our partnership portfolio in Boston is building very strongly.

We touched on earlier just on the most recent addition, Detroit, how important partnership traffic is to Boston.

And we have other airlines like Turkish that are about to start that will provide some additional lift.

But very pleased with Boston.

There's a lot of good traction in the corporate market up there.

And we're going to continue to grow that.

It's really -- the focus this year -- DCA obviously was an opportunity that came about that we took advantage of.

And as we look at our growth plans, the parties remain Boston, and also the Caribbean and Latin America over the next few years.

Great.

Thank you for your help.

Thanks, Helane.

Savi Syth, Raymond James.

Good morning.

Good morning.

Maybe you're not ready to talk about this, but on the LiveTV, I was curious what the investment has been in LiveTV up to this point.

And then also, what the benefit to CASM ex would be, either magnitude-wise, or is that just lower overhead?

Well, as to the latter question, we'll detail that more carefully as we close the transaction.

So stay tuned for that, Savi.

All right.

In terms of more details.

And also more details on the capital expenditures that we'll be saving moving forward, as well.

And then, in terms of the investment, of course, it was purchased -- what, nine, ten years ago, Dave?

Three to four?

It was three or four?

The investment was $40 million of cash and I think assumption of about a like number of notes.

And during the interim, we have largely been funding the R&D and other development work of LiveTV.

So the basis in the property is obviously then going to be much higher than the initial $80 million of investment that we have in it.

While we were owning it, it's hard to say what would be a good payback.

Because we were of course enjoying the benefits of a really nicely priced LiveTV feature and product that I would argue has been core to the brand.

And by the way, that's not going anywhere.

We've managed to structure long-term agreements that will preserve our access to both KAA and the TV and the satellite radio, and developments to those items hereafter.

So it's not going away.

We do get to make sure that we preserve that good brand contribution.

But that's -- I think that's kind of it.

Got it.

Thanks, Mark, for that detail.

Thanks.

And then just on Fort Lauderdale, I just had a question.

You had Southwest talking about growing international.

And at least until the Houston gates come online, Fort Lauderdale is the area of focus.

I'm wondering what you've seen there from Southwest.

And maybe potential impacts that you may see with their targeted growth in international.

No, Fort Lauderdale growth is well underway for us.

We have a great partnership with BCAD and the airport in Fort Lauderdale-Hollywood as we come to connect Terminal 4 and Terminal 3 up together.

I think the Southwest plan is much longer-term, just because the facility doesn't exist over there, it has to be built.

I think we'll be way underway.

And if you just look at the size of the market out of South Florida, and you bring Miami into that, and you look at the amount of opportunity that exists there and the high fares that exist out of that airport into many of these markets, I think we're going to continue to be extremely successful.

And I'm not concerned about what Southwest plans may or may not be at all.

That's helpful.

If I may sneak in one last thing, Robin, how is Mint booking up versus expectations?

Early days -- because obviously the market tends to book fairly late.

But I think a lot of our early bookings are for the people who are [infused] as to -- as the product.

But we're very happy with it.

As a reminder, when we went into this product, we weren't aiming at the corporate market at all.

It was much more in terms of the more medium-sized companies and leisure flyers.

I think if there's anything that surprised us, it's how much interest there has been from the corporate market, which wasn't certainly something we expected going into it.

Got it.

All right, thanks so much.

Savi, thank you.

Hunter Keay, Wolf Research.

Hi.

Thank you very much for taking my question.

Can you guys share with us what the payback period assumption is for the purchase of the DCA slots?

And any high-level assumptions that went into that decision-making process, like maybe a conclusion of an NPV process or something like that?

(inaudible)

Mark, sorry, it was: did you guys do an NPV analysis on the DCA slot acquisition?

And if so, could you share some of the end-thoughts or the conclusions from that?

No, actually I'm not going to answer that question.

But I will tell you, Scott Larsen and his team put together a very rigorous analysis of that, which is absolutely critical in terms of pricing the bid.

So all I can do is share with you that the analysis was really robust -- long-term, as well.

Any comments on the payback period?

[I'm pretty sure I don't know].

I don't think we --

No, we don't think we want to do that --

We don't comment on that.

Okay, no problem.

And curious to think about Mint from a CASM perspective.

How should I think about the impact of CASM ex-fuel on a fully annualized basis, from the impact of Mint?

Obviously you guys believe the product is going to be margin-accretive, and I appreciate that.

But just in terms of the impact of CASM ex-fuel, how should I think about it annually going forward?

Thank you.

I think you can look at -- and I'll let Robin chime in here.

But Mint is an interesting little beast, right?

It's got a great premium feature.

It is by definition going to be more expensive, both in terms of geography spent on the airplane in terms of the [low-cut], as well as the product we're providing the customer.

Frankly, I will tell you the interesting thing about Mint is, it really is optimized because of the A321 configuration.

And so we think it will be optimized, particularly relative to using an A320 airplane.

But it will clearly be slightly ahead of cost just in terms of the geography on the airplane and the -- but likewise, we're anticipating some of the types of success we've seen other airlines use in trans-con markets, in terms of resident premium.

Robin?

No, I don't really have much to add.

I mean, just keeping things in perspective.

So we will by the end of the year have eight Mint aircraft delivered on a total fleet of just over 200.

If we look at where most of the benefit sits, it's really -- we talked about this on one of the previous Investor Days.

It's the -- we do very well from a unit revenue perspective.

Most of our network trans-con has been one of the spots where we have been significantly behind.

And when you break that out, it's the lack of access to that premium market that we have been suffering from.

So we see this as a very accretive opportunity in the two markets that we're signed, to change that, make a significant change to our trans-con profitability in those two markets.

And I think that's something that we're looking forward to getting, starting here on June 15.

Thank you.

Thanks, Hunter.

Kevin Crissey, Skyline Research.

Good morning, thank you.

On LiveTV, can you just talk to the way that the service is -- how you're going to pay for the service in the future?

Is it on an aircraft basis?

Is on a seat basis?

Is it by share of revenue?

Can you describe to us the structure of that arrangement?

Thanks.

Thank you, Kevin.

I don't think we're actually going to talk about that.

Clearly, that's a competitive feature.

We still own LiveTV, by the way.

And we are in the process of negotiating with -- or LiveTV is in the process of negotiating with other potential customers.

So in terms of the details of the LiveTV JetBlue model, I think we, to the extent that we can, we will keep it confidential.

Although in the context of talking about CASM, moving forward, we will talk in very high dollars about what the CASM will be, moving forward, without breaking down how it's paid.

Okay.

It's just challenging for us to know whether you got -- my initial sense was, it was a good price, based on profitability.

But you certainly could -- quote -- overpay for the service and get more up front, right?

So it's hard for us to assess without understanding any of that.

That's --

I would just assure that was a well-negotiated transaction that -- and the other complication you're going to have is that [here before those states LiveTV] have on a consolidated basis been offset, right?

So there's been little visibility moving -- in the past.

We're very happy on a standalone basis with the fee arrangement that we have post- close have arranged for [LiveTV].

Okay, thanks.

Look forward to more details.

Thanks, Kevin.

Take care.

Joe DiNardi, Stifel.

Good morning.

Good morning.

A question on the ROIC goal for the year.

I think obviously first-quarter margins were under pressure here, and the cost guidance for second quarter implies that it might continue a little bit.

I'm just curious what margin for the full year you think you need to hit the ROIC goal, assuming whatever plans you have for the capital side of the equation?

And how much easier the LiveTV transaction makes that?

First of all, I would also again remind you -- I think we said this.

Dave, you may have mentioned this as well, that we were not -- we did not include or bake in the positive impact of the LiveTV transaction in the 7% goal.

And so that I view as upside to that result.

And I don't know if -- what margin you expect to see onto -- to hit 7%, but I would say just as you think about modeling it, assume the denominator invested capital will be flat.

Okay.

I think I just gave you a road map.

Can I as well -- can I just -- I have one point of clarity around some of the cost guidance in Q2, as well.

Because this does -- as you relate back to Hercules, I think one of the things that we took a decision to do when we got into the Hercules [i-well] and the impact on FAR 117, we did bring forward some pilot and in-flight crew recruitment that was scheduled a bit later in the year, to bring that forward to de-risk the summer a little bit.

So you are seeing some of those costs into quarter two.

But in terms of do we end the year with additional people, that it was more just a timing issue to do with the summer.

I know we do believe with some of the thunderstorms and weather events we get here in the Northeast into the summer, we did need to -- and the impact of the new FAR 117 rules -- we did need to de-risk that a little bit.

So I just wanted to provide some clarity on some of that Q2 cost cutting.

Okay, yes, that's very helpful.

And then if you guys could just give us an update on the initial feedback you're getting on Fly-Fi, in terms of take rates or just customer experience, that would be helpful.

Sure.

I'm happy to do that.

So we have 36 aircraft installed.

I don't -- obviously, everyone is impatient to get the whole fleet installed so we can start promoting and advertising it, and customers can bank on it.

What I would tell you, with the exception of one flight that Dave talked didn't work, we are seeing really good customer feedback.

In fact, on some of the trans-con flying, we've had flights with excess of over 100 customers connected simultaneously.

And I think there's no doubt that the product that LiveTV [invites that] have developed is a game-changer, in terms of the in-cabin experience.

And we're going to detail -- at the moment, we're focused on the rollout and just ironing out some of the TV bugs.

We're still going through a process of upgrading the software to make it a little bit more stable.

But as we then move into the second half of the year, our focus moves to the -- how do we then create a stronger monetization event around Wi-Fi.

But couldn't be happier, and just frustrated that we can't get the fleet installed more quickly.

But we're rolling out three or four 320s a week, which isn't a bad pace.

Okay, thank you.

Thanks, Joe.

Thanks.

That concludes our first-quarter 2014 conference call.

We'll talk to you again in three months with our second-quarter call.

Thanks for joining us, and have a great day.

Again, that will conclude today's conference.

Thank you for your participation.