JetBlue Airways Corp (JBLU) 2016 Q4 法說會逐字稿

Good morning.

My name is Latonya, and I would like to welcome everyone to the JetBlue Airways fourth-quarter 2016 earnings conference call.

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

(Operator Instructions)

I would now like to turn the conference over to JetBlue's Director of Investor Relations, David Fintzen.

Please go ahead.

Thanks, Latonya.

Good morning, everyone, and thanks for joining us for our fourth quarter 2016 earnings call.

Joining me here in New York to discuss our results are Robin Hayes, our President and CEO; Marty St.

George, EVP Commercial and Planning; and Jim Leddy, our interim CFO and Treasurer.

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 those statements.

For additional information concerning factors that could cause the 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 web I site.

And now, I'd like to turn the call over to Robin Hayes, JetBlue's President and CEO.

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

Before I start, I just wanted to say that our thoughts go out to the victims of the Fort Lauderdale Hollywood airport shooting, along with their families and friends.

I also want to commend our entire team in Fort Lauderdale for their safe handling of this very difficult situation, and for taking good care of our customers and other travelers, despite the uncertainty playing out through the event.

Our crew members and customers showed a lot of understanding, and I want to thank them for their incredible dedication.

I'd also like to commend the Airport Authority, the Broward County Aviation Department and all law enforcement and other first responders who attended the scene.

Earlier today, we reported our results for the fourth quarter and full year 2016.

In the quarter, net income was $172 million or $0.50 per diluted share.

For the year, net income was $759 million or $2.22 per diluted share.

I'd like to congratulate our 20,000 crew members on a simply outstanding 2016.

This was a year filled with many defining moments.

I'm proud of everything our crew members have done in 2016 to strengthen our Company while living our values.

It's worth taking a moment to highlight just some of the accomplishments from 2016.

Our crew members grew a network that now spans 100 cities in 22 countries.

In Boston, we surpassed 140 peak daily flights, and announced our 63rd destination, with Atlanta starting service in March.

We announced our plan to grow Boston to roughly 200 daily flights over the next several years.

In Fort Lauderdale, for the time we surpassed 100 peak daily flights on our way to our goal of 140 daily flights.

We brought Mint to Boston with great success in 2016, and expect to do the same in Fort Lauderdale where Mint service starts later this year.

It's the hard work and wonderful customer service delivered by our crew members that makes us the carrier of choice as we grow in these underserved markets.

That same dedication is why J.D. Power ranked JetBlue first in customer satisfaction among low cost carriers for the 12th straight year.

Our crew members again demonstrated their dedication and hard work in operating more of our network in complex US air space than any other airline.

The hard work culminated in 100% completion factor, and a record 14,000 peak holiday flights in December.

Our crew members begun implementing changes that we expect will improve our on-time performance the old-fashioned way, through stronger teamwork and processes, and not just padding flight [times], and we are seeing some great early results.

In our airports, our crew members deployed new self-bag tagging and self-bag drop technology, most notably in San Juan, JFK and Fort Lauderdale.

We believe these [investments] will allow us to focus on what we do best, serving our customers.

This airline was founded with a mission to bring humanity back to air travel, by delivering a better product at a lower fare, underpinned by this amazing culture and the crew members that deliver it.

We invested in that culture with hospitality training for our crew members across all of our domestic airports.

Financially, our crew members produced above average industry pre-tax margins in 2016.

As we said at Investor Day, with a focus on execution, we can deliver growth, we can invest in our culture and crew members, we can invest in that product, and we can deliver above industry financial performance.

As we look to 2017, our focus remains on execution.

As we said at Investor Day, our top priorities are implementing our structural cost program to realize the $250 million to $300 million of savings we targeted by 2020, and delivering on operational improvement.

What makes JetBlue a financial success is not just offering great products and services, it's about offering the customer a lower fare.

Low fares require that we sustain our low costs.

In 2017, we've begun executing on cost initiatives in the four broad areas that we identified at Investor Day.

It's still very early, but the team is hard at work in several areas we're looking to improve.

As we kick off 2017, our focus on cost and our operation are not short-term goals that we expect to complete in the year.

We are focused on execution to ensure as we grow, we have a strong platform to compete for many years to come.

I would like to now turn the call over to Marty, to talk about the network and revenue environment.

Thank you, Robin.

Good morning, everybody, and thanks for joining us.

Starting with the network, we are pleased with the execution of our network strategy, and the results we're seeing from our six focus cities.

In 2017, we plan to continue to invest in Boston, Fort Lauderdale, and the West Coast with a focus on sustaining above average industry margins.

Transcon markets remained extremely strong on a year-over-year basis, led by our current Mint markets.

Mint flying to New York to both Los Angeles and San Francisco continues to show better than system average [RASM] improvement, even as we approach our third year of operation.

As we said at Investor Day, we continue to see strong margin improvements in our two Boston Mint markets.

Mint continues to prove itself as a [RASM] and margin builder.

We're excited for our next Mint markets in March and May, from Fort Lauderdale to Los Angeles and San Francisco.

This August, we plan to further expand our JFK Mint services with flights to San Diego.

Our Boston focus city continues to perform exceptionally well.

We added our 62nd nonstop destination, with LaGuardia service in the fourth quarter, and continue to see benefits of greater relevance.

Boston business markets remained strong, and leisure markets are strong performers as well.

We're seeing the benefit of adding key destinations that our corporate customers have been asking us to serve.

The Boston LaGuardia service which started October 31 is developing ahead of our expectations in the first two months of operation.

We've also been pleased with the on-time performance.

Year-to-date on-time performance is close to 90% excluding extreme weather days.

Our Latin results remain mixed, but performed generally in line with the system.

The Dominican Republic remained very strong in the fourth quarter.

We've also seen RASM improvement in Colombia, as our capacity adjustments have taken effect.

However, we're still closely monitoring the economic trends in Puerto Rico, and the impacts to capacity adjustments that we've made already.

We know there's heightened focus in the market on our near-term [competitive] capacity trends, as well as how our growth is evolving.

Let me provide our perspective.

Starting competitive capacity, overall, we're not particularly concerned with the data that we see in competitive schedules, while we continue to watch the New York Metro area market to Florida, and transcon, and of course Fort Lauderdale.

In New York, the majority of the capacity growth we're seeing, both in Florida and in transcon markets is from Newark.

This is historically a very high fare airport.

It's not surprising to us that many low cost airlines, JetBlue included, added capacity to an underserved market when the slot restrictions were relaxed.

Starting in November, we've seen a less than 1 point impact on our year-over-year system RASM in the New York Florida market.

We would expect that to continue, as the market digests new capacity.

New York Florida has historically -- has been a extremely successful JetBlue market.

We see no reason that this will be different going forward.

Even with the added capacity, New York to Florida margins remained above system average.

We have not seen any impact to our JFK West Coast flying from the Newark transcon additions.

As I mentioned before, both Mint and non-Mint transcon flying remains strong.

That strength, if anything speaks to the New York to West Coast market as still being underserved.

Let me now turn to growth.

The headline is that we've slowed our growth as oil prices have rebounded, even as we have continued to grow in new markets.

New markets, which I'll define as markets less than one year old, are about 4.5% of the system seat miles for the first half of 2017, which is basically flat versus last year.

Due to timing, a portion of our growth markets, are strategic efforts that we expect to have a somewhat longer development period.

This strategic growth includes an important long-term investment in Cuba, additional inter-west flying in Long Beach, and our growth in Newark.

These investments are partially in our fourth quarter numbers, but will have a larger impact on the first quarter.

Moving to the revenue environment, in the fourth quarter top line growth was 3%.

Unit revenue declined 1.5% on capacity growth of 4.5%.

Our trends in the fourth quarter closely mirror what you've heard from the industry.

We saw improvement in close-in yields throughout the fourth quarter.

November and particularly December RASM performed substantially better than we had expected on our last earnings call.

Trends improved starting in the middle of October, and improved throughout November, into December.

Turning to our revenue guidance.

We expect January RASM to decline between 8% and 9%.

We're disappointed with how the month has performed.

However, reported RASM is not truly representative of the underlying trends.

Three major factors were impacting January.

First, the impact of winter storm Jonas last year negatively impacted the month by 2 points.

Second, is the timing of the new markets, starting in a seasonally weak period.

Third, the December and January calendar shift compressed the holiday return, and had an impact on overall demand for holiday travel.

We believe the performance that we see in January is temporary.

If you look at the middle portion of January through last weekend, and that is the cleanest portion of the month with all the changes year-over-year, [revenue] declined approximately 3%.

Beyond January, current bookings are pointing to positive RASM in peak February periods.

Our initial read on April is also encouraging.

We expect January to be by far the weakest month of the quarter, and we expect sequential improvement in RASM from the first to second quarter.

Easter falling in April this year will impact March through May comparisons.

Last year, the early Easter placement shifted about 1 point of RASM from April into March, and about 2 points of RASM from April into May.

This year, there are regions with spring breaks that have moved from March into April as well.

In closing, I'd like to echo Robin, and thank our crew members for their award-winning service and an outstanding 2016.

None of our achievements would be possible without them.

And with that, I'll turn the call over to Jim to provide further detail on our results.

Thank you, Marty and Robin.

Good morning, everybody, and thanks for joining us.

This morning, we reported fourth quarter 2016 operating income of $296 million.

Pre-tax income for the quarter was $274 million.

Operating margin was 18%, and pre-tax margin was 16.7%, down year-over-year 2.7 and 2.3 points, respectively.

As anticipated, the fourth quarter saw acceleration in our unit cost trends as capacity growth further slowed.

Excluding fuel and profit sharing, year-over-year unit costs increased 5.6%.

This was in line with our fourth quarter guidance range of 4.5% to 6.5% growth.

We ended the year with approximately $970 million in cash and short-term investments.

During the fourth quarter, we made scheduled debt and capital lease payments of $220 million.

At the close of the year, our adjusted debt to capitalization ratio was 35%.

We remain within our targeted range between 30% and 40%.

As I noted at our Investor Day in December, we expect to manage our leverage to be in the bottom half of our targeted range over the coming years.

In the fourth quarter, we repurchased 5.8 million shares for $120 million as part of our evolution to a more balanced capital allocation program.

We have $380 million remaining under the current share repurchase authorization as we discussed last December.

Turning to CapEx and fleet.

JetBlue ended 2016 with 227 aircraft including 37 A321s, 17 of which are Mint configuration.

We purchased three A321 aircraft in the fourth quarter with cash.

Over 43% of our fleet or 97 aircraft are unencumbered at the end of 2016.

We bought out the leases on nine [A320] aircraft in the fourth quarter for a total of over $150 million, and are actively looking at further buyout options.

Our 2016 transactions will drive future annual aircraft rent savings of over $18 million a year, and mitigate future return condition expense.

Aircraft leases represent a high cost of our debt, and this buyout offers an accretive use of our cash.

Turning to guidance.

This morning, we filed our investor update with the SEC, and this was made available on our Investor Relations section of JetBlue's website prior to the start of this call.

We continue to plan capacity growth of 6.5% to 8.5% for the full year of 2017.

For the first quarter, we expect capacity growth of 4.5% to 6.5%.

Planned capacity growth should be higher in the second half of 2017 given the timing of aircraft deliveries, as well as lapping the declines in stage length that began in the fourth quarter of 2016.

We expect CASM excluding fuel to grow between 1% and 3% in 2017, in line with the guidance we gave last December.

In the first quarter, we expect year-over-year CASM excluding fuel to grow between 3% and 5%.

We expect unit cost growth to again be uneven throughout the year.

We expect CASM excluding fuel growth to be higher in the first half given comparisons, slower capacity growth, and large declines in stage length.

We expect CASM ex-fuel to peak in the second quarter, and then moderate as we move through the third and fourth quarters.

Turning to fuel.

Based on the forward curve as of January 13, we expect our first quarter fuel price per gallon including the impact of hedges and taxes to be approximately $1.73 per gallon.

Our hedging positions have not materially changed.

Hedges cover about 10% of our expected 2017 fuel consumption spread evenly over the year.

We continue to expect 2017 total capital expenditures of approximately $1.2 billion to $1.4 billion, of which approximately $1.05 billion to $1.2 billion relates to aircraft, and includes ongoing efforts to purchase additional aircraft we currently have on operating lease.

For the first quarter, we expect total capital expenditures of approximately $305 million to $365 million.

In the first quarter, we expect to take delivery of three A321s, two of which will be in Mint configuration.

We have a total of 15 A321s on order for 2017, 14 of which are scheduled to be in Mint configuration.

We expect to use a mix of cash and debt financing for our 2017 orders.

In the first quarter, we expect scheduled debt payments of approximately $50 million, and have approximately $[195] million in debt payments due for the full year.

In closing, I'd like to echo Robin and Marty in thanking our crew members for all their hard work.

And with that, we are happy to take your questions.

Thanks, everyone.

Latonya, we're now ready for the question and answer session with the analysts.

Please go ahead with the instructions.

Thank you.

(Operator Instructions)

Your first question comes from the line of Michael Linenberg of Deutsche Bank.

Hey, I guess, this question is for Marty.

Two questions, actually.

Marty, on the RASM outlook for the quarter, did you -- I think you said February was going to be positive.

Did you also indicate that March is positive as well?

Or maybe I misheard.

Good morning, Michael.

Hi, Robin.

Yes.

I'm going to hand over to Marty in a second.

I just wanted to say that we appreciate the sort of description we gave for the first quarter was kind of very choppy.

So I'm actually going to ask Marty, if you don't mind, Marty, kind of take your time, and walk through that whole outlook again, if that's okay, in terms of the first quarter, and just clarify what you said in the script?

Sure.

That would be great.

Okay.

Good.

Well, let me -- let's back up, and talk about January first of all.

And I'll put some more color around the data I put in the script.

First of all, as we said, Jonas last year, was a 2 point head room right off the bat in the month.

We also in January had a 3 point calendar impact.

We talked in our last call about the impact of the compressed holiday season.

We also in January, if we look at the calendar for January, in effect last year the first two days of January were a Saturday and a Sunday, which are very peak days for us, and always peak days for us.

This year, they're a Monday and a Tuesday.

So all-in, we think the calendar impact was worth about 3 points.

And then if you look at the capacity growth, that we had talked about with respect to the investment into Newark, the inter-west flying in Cuba, those combined to be about 1 point.

So obviously, some of those go away.

The impact of the additional ASMs and the strategic routes will actually stay throughout the quarter.

With respect to February, we are right now guiding towards a positive number in February.

We're actually feeling relatively good about where we are in February -- we did not -- I'm sorry, for the peak period, excuse me, for the peak period of February.

I would say overall, if you go back actually to fourth quarter, and look at what happened with our close-in forecast for the fourth quarter, and this was not just JetBlue, this is across the industry, we saw a lot of within quarter strength.

In fact, if you compare when we had our last call, which was basically at the beginning of the quarter, look at the beat that we did, and most of the other airlines did, it really because of close-in strength.

We're starting to see that come for February as well.

We did not see that coming in for January.

With respect to March, obviously the impact of Easter moving to April is an impact.

We sort of look at March and April combined for that reason.

And for March and April combined, overall, we do continue to see the sequential improvement.

Okay.

And then, just what is the Easter impact for March this year?

I didn't think you said it.

You talked about last year, the impact.

Is it 1 point, maybe more, 2 points because of your network?

Well, let's put it this way, we look at the impact on April as being 3 points, some from March, and some from May.

Okay, that's helpful.

Just one other question.

You guys historically -- I mean, you're pretty well plugged in on kind of the whole government relations side, DC, et cetera.

Curious about, just where you are with respect to Long Beach?

When I saw that headline, I thought that that was a bit of a surprise, where the council, I guess, turned down international service from that airport.

So number one, can that be revisited or is this permanent?

Number two, what was the vote?

What were the issues?

Number three, it seemed like what you guys were planning to do was actually going to be very good for the region.

So I'm not -- I mean, I'm just curious about kind of the underlying dynamic, how that played out, and can it be changed?

Thanks, Michael, it's Robin.

I'll take that one.

Look, we are extremely disappointed.

I mean, our government affairs team and our corporate real estate team, and all of our crew members based in Long Beach have worked hard for the last couple of years to make the case to open an international FIS facility in Long Beach.

It has been a controversial issue locally, with some of the residents who live near the airport.

But we absolutely share your view, that there was a very significant economic benefit to the city of Long beach and the area to start international flying.

And indeed, the city commissioned its own economic study that kind of laid that out.

So we, this only happened this week.

We were really disappointed, surprised by the vote, and we're kind of, I think still taking stock in terms of how we go forward.

I don't rule anything in or out at this point, and watch this space, more to come.

Okay, great.

Thanks, Robin.

Thank you.

Your next question comes from the line of Dan McKenzie with Buckingham Research.

Yes, hey, good morning.

Thanks.

Marty, I guess, I didn't hear the breakout of the Fort Lauderdale airport attack, but I believe the reaccommodation probably cost JetBlue some last minute revenue.

How should we think about that impact, or is that lumped in with the severe weather?

Hi, Dan.

Thanks for the question.

Actually, we look at the impact of the weather and the impact of the reaccommodation of the shooting as basically neutral to RASM, because we unfortunately, did have to cancel a good number of flights as well.

So we didn't call it out, because it's actually neutral.

I see.

Okay.

And then, with -- I'm wondering if you could give us -- I'm kind of moving to a different topic here.

I'm wondering if you could give us some -- an update on the revenue that your airline partners helped to drive in 2016?

How many partners are we at today, and how much did they contribute?

And how do we think about the collective growth trajectory of all these partners?

I guess, if you don't want to give like a revenue growth projection, at least in terms of incoming capacity, incoming capacity from these partners this year?

Hi, Dan.

Thanks.

Well, first of all, I think we're up to 42 or 43 partners -- or 49 partners, excuse me -- I'm being told across the room right now.

I think we're very lucky that we're still -- we're an airline that's operating in some very desirable airports, first and foremost, JFK, and secondarily, Boston.

But I think the good news for us this year has been the growth we're starting to see in Fort Lauderdale.

I think we'll specifically call out the choice by our friends at Emirates, to go into Fort Lauderdale versus Miami.

I think that is a direct relationship of the [feed] opportunities that we can offer them.

Obviously, as anyone who has any [MIT] data can see, we create a lot of feed onto Emirates at both JFK and Boston, and we look forward to doing the same thing for them at Fort Lauderdale.

And can you share, can you just give us some revenue perspective, or at least what percent of the passengers from them are connecting onto JetBlue?

So I think, if you go back to the last time we updated this, it was a number in the single-digit percentage of our revenue.

It's certainly noteworthy, and we're very much appreciated, but this is a -- it's not changing dramatically.

As they continue to grow, we continue to -- we look forward for that number to go up.

And I think we're certainly optimistic with the current open skies regime, that we'll continue to see growth into our network.

But Dan, good morning.

It's Robin.

I'd just like to add, and I think what we find with the way that traffic works is that, Marty gave you an average number, but there are certain markets where it's really made the difference whether we can fly it or not.

I mean, we use the examples, Detroit Boston, because I think it's a tactical case study, a route we really struggled to justify to [start] flying.

It suffered from very high fares.

And then we come on the market, a very, very significant percentage of that traffic is fed by Emirates as a partner.

In fact, I visited Detroit to be with our crew members within the last year.

I mean, it's a very significant number, literally every flight connecting onto Emirates.

And it really enabled us to start that market, and lower fares, and offer competition.

And so, that's really the power of these partnerships, and we think it acts as a very kind of good competitive element to keep the US industry competitive, and open for access around the world.

Okay.

Thanks, guys.

Thank you.

Your next question comes from the line of Jamie Baker of JPMorgan.

The RASM guide, if you leave some wiggle room here and there, it does suggest that you may be among the very few airlines to witness a steeper first quarter decline than what you saw in the fourth quarter.

For how long would you tolerate bucking the industry trend before you took another whack at capacity?

Hi, Jamie.

It's Marty.

I mean, frankly, I think if you would have asked us that yesterday, we would be ready to announce some changes on this call.

After talking to our counsel, we realized that we should probably not get too far ahead of ourselves.

But we, I think, if you go back and look at our ASM trends over the last two or three years, as we have seen fuel go up, we have reduced our growth rate.

2015 was less -- or let's see 2016 was less than 2015, 2017 is less than 2016.

So we have reduced our growth rate.

But we're looking very closely at making more changes, in addition to the ones you've seen already in places like Puerto Rico and Colombia in reaction to the market.

So we're -- let me make it very clear.

We are on it, and we'll be announcing something soon.

Okay.

I appreciate that.

Also while I have you, Marty, you articulated that Boston margins have turned positive relative to the system ex-Boston earlier this year.

I think it was slide 29 or 30 in the November deck, though there was no scale on that, and it only ran through the second quarter.

In light of the increases in Boston in competitive capacity, and the impact of the LaGuardia service, is Boston still running at some sort of margin premium to the broader network?

Yes, and so, two comments.

First one is, we aren't really seeing any dramatic competitive moves in Boston, so I'm not sure I fully understand what you mean on the ASM front, because I don't think we've seen anything accelerate.

Maybe it moves 1 point one way or the other, but it's not really dramatic.

But absolutely from a [margin] perspective, that trend has unquestionably continued.

Got it.

Okay.

Thank you very much.

Your next question comes from the line of Savi Syth with Raymond James.

Hey, good morning.

Could you -- I was wondering on the cost side, if you were able to kind of break out for 1Q in 2017, just how much of that pressure is just coming from the wages line, wages, profit sharing line?

And then as well as the progression where, by fourth quarter, do we get to kind of flattish levels, or just kind of curious about the progression throughout the quarters?

Yes, sure, Savi.

It's Jim.

Thanks for the question.

You're exactly right about the progression.

It's kind of the exact opposite of last year.

So as we're going to start out with a lower ASM profile, and gradually build throughout the year.

So you'll see that CASM X will be front-loaded in the first half.

As I said in the prepared remarks, we expect it to then decline as we go through the year.

And the biggest, one of the biggest impact on the year is actually, as I mentioned at the Investor Day was a significant drop in stage, roughly 2.5% drop in stage length year-over-year 2017 over 2016.

And in terms of salaries and wages, the biggest impact for 2017 was about 0.5 point, which was essentially the net of the investment we made in our crew members, offset by the adjustment to our profit sharing payout model.

But other than that, we didn't -- we don't have a significant impact from that line in 2017.

That's helpful, Jim.

Just to follow up on your stage length comment, does that mean -- I wonder if you could kind of help me understand just how much that kind of drags earnings, or drags costs?

And then also, maybe what kind of a benefit it might provide on the revenue side?

Well, from a drag perspective, it's mainly on the denominator, so our absolute cost growth in 2017 is very similar to our absolute cost growth in 2016.

And so, it's driven by the strategic investments that we're making on the West Coast flying in Cuba and Boston LaGuardia.

And I'll let Marty comment on the revenue impact of that flying.

(Multiple speakers) With respect to the -- I mean, obviously, if you look at the growth markets that we talked about earlier, put north Florida aside which is sort of a system average, the Cuba markets overall, and the trends on the West Coast market, absolutely a significantly shorter RASM, excuse me, a (inaudible) shorter stage.

I think the system stage is down about 2%, which actually quarter to quarter is a pretty big move.

And Marty, maybe just so, should I expect that maybe initially because of the new market, that the benefit you get from the shorter stage line doesn't show up initially, but it should as you go out through the year?

I mean, we'll be annualizing --

I mean, on unit revenue?

I mean, given that it started basically fourth quarter, most of it started fourth quarter, we'll be annualizing it throughout the year.

All right.

Thank you.

Your next question comes from the line of Hunter Keay with Wolfe Research.

Thanks.

Good morning everybody.

Marty, you alluded to cutting Colombia and Puerto Rico, but is that just going to end up in the domestic capacity, with no change to the overall growth?

And on the RASM commentary, I can promise you that we are still all very, very confused.

I want to make sure that we're clear.

Did you say February would be up, or just the peak days in the February would be up?

And if you want to take this whole thing from the top again, I think we'd all be fine with that.

Okay.

Great.

First of all, Hunter, talking about capacity cuts, I think if you look at the cuts we made in 2016, and what we've already guided for 2017, you'd see that our overall ASM growth has reduced.

So this is not pushing on a balloon.

I think in general, we try to take a very conservative view on industry RASM.

And I think based on what we're seeing, we'll react appropriately with respect to changes in capacity.

So no, I don't think you should look at that as just moving from Latin America to domestic.

And with respect to the overall quarterly RASM.

Okay, first, let me start with a conversation about what we saw -- well, I guess I'll start with January again, just to make sure we're clear on what we saw in January.

Overall, we saw an impact in January of roughly about 3 points, and I'll go through it in detail in a second.

In fact, if you look at our --

Well, Marty, I think we get January.

I'm sorry, just to save you some time.

I think we get January.

It's the February peak stuff, and then the March, April, May, that's where it gets confusing.

I'm sorry.

(multiple speakers)

Okay, great.

Perfect.

So let's talk about the February peak.

If you think -- again, we talked about the trends that we saw in the fourth quarter, with respect to our close-in RASM strength, that we did not see during the last call.

I think we are starting to see that for the peak period of February.

We're seeing very comfortable positive RASM during the peak period.

We're still not a positive RASM during the trough period.

We definitely see it during the peak period.

With respect to March, obviously, we have an Easter impact which is a pretty big number.

The March, April period combined is also showing significant improvement versus what we saw in January.

Okay.

So 1Q is clearly going to be negative, it sounds like on a quarterly basis.

I understand you don't want to give February just yet.

But is it fair to assume that 2Q should be positive?

Hunter, I wish I could tell you.

We generally don't guide that far out, and I think we've talked in previous calls, the challenge we have with visibility.

So I wouldn't want to get too far ahead.

But I will say separately, I talked earlier about our intent to be making capacity changes a reflection of the current RASM environment.

We're going to continue to manage the Company to try to create industry-leading -- excuse me, above industry average margin.

So if that involved capacity cuts, I think you should expect to see that from us.

All right.

Marty, thanks a lot.

Thank you.

Your next question comes from the line of Helane Becker with Cowen.

Thanks, operator.

Hi, guys.

Thank you for taking my question.

So can I not talk about RASM for a minute, and actually ask about something not related to pricing?

Which is, can you update us, or is there any update since last Investor Day on the pilot contract, and whether or not you're finding it difficult to find pilots, what your attrition rate is like, and so on?

Thanks.

Hi, Helane.

It's Robin.

Good morning.

And yes, I'm very happy to give Marty a break for a couple of minutes, and talk about something else.

But we do appreciate the conversation on RASM, because we know it's an important one and we know it's important to investors, and so we're very focused on that.

In terms of the -- where we are with our pilots, no, we haven't seen any change to our sort of attrition numbers.

And we still have no issue at all in hiring pilots which is good, because we have a plan to recruit another sort of 200 to 300 pilots this year.

And we continue to make progress on the contract, negotiations continue.

As you will recall we did include our pilots in the 8% increase this year.

That was voted in, [with a] very strong majority, and we continue to make progress.

And don't want to give any prediction on when that gets finished, but just to remind you and others what we said at Investor Day, that we do believe the overall cost of the pilot contract, wherever that may end up, are baked into the sort of three year CASM guidance we provided at the Investor Day.

Okay.

And then, just a follow-up on Florida specifically.

Are you at all concerned about the competitive capacity that actually is coming into Fort Lauderdale, and to a lesser extent Orlando, and that it won't turn into another market similar to Dallas or Chicago?

Hi, Helane.

With respect to competitive capacity, I mean, competitive capacity comes and goes, and we don't really lose a lot of sleep of the ins and outs, as they come in.

Strategically, I think if you go back to what we showed in our Investor Day slides with respect to our unit revenue performance in -- excuse me, in South Florida, versus our two biggest competitors, we're very confident about our ability to compete there.

So no, I would say no, we don't really have any concern like that.

I mean, we continue to execute.

We deliver a great product, and it's reflected in the revenue results.

Okay.

Merci.

Thank you for your help.

Thank you.

Your next question comes from the line of Brandon Oglenski with Barclays.

Good morning, guys.

So I hate to do it, Marty and Robin, but I'm going to come back to RASM.

So I want to come back to Jamie's question.

Just philosophically speaking, how fast do we expect a reaction from you guys, if you're not tracking industry performance here on revenue?

And maybe Marty, not necessarily where that capacity's going to go, but overall is this something that you're going to be willing to pull the lever on pretty quickly this year?

Hey, let me take that if that's all right and then -- look, I think that we are all extremely disappointed in January.

So let's get that out there.

Let's put it on the table.

When we look ahead at the rest of the year, as we saw in the quarter, last quarter where we saw that sort of late, late strength, and I think Marty's encouraging in terms of what we think for February.

So we don't want to overreact just on one month.

Having said that, we are very conscious of our commitment on margins, and so there are things that we have identified that we need to do, that we will be taking action on in the short term.

It is our policy, as is normal not to kind of communicate that ahead of actually doing it, which is why kind of Marty hasn't been sort of more specific today, and we won't hesitate to do that.

But I would also point out that we saw some good last minute strength in quarter four.

As we look ahead, January really is a sort of very -- stands out as an anomaly of a month.

So what we have to do is get that balance right.

Okay.

I appreciate that feedback.

And Robin, looking out longer term here if, let's say you do get back to industry average here pretty quickly, can you just update for everyone on the call here, the priorities on capital allocation?

Because it looks like you should have some free cash flow above and beyond your capital budget this year.

Leverage is coming down, and relative to a lot of other equities, I think your stock valuation is pretty cheap.

So just tell us does that prioritize maybe that buyback program you have a little bit more this year, than maybe it would in a more normal period?

Yes, Jim, take that?

Yes, hey, Brendan.

Thanks for the question.

Yes, the authorized program that we talked about at Investor Day goes from, the remainder of it is from this year to 2019.

And we actually -- we absolutely have the ability to take advantage -- be opportunistic and either accelerate that.

And additionally, in the same vein, we have the ability to slow the pace in the case of macroeconomic environment change or a fuel change, et cetera.

So we absolutely can manage it that way, within the parameters of the program that we talked about.

Okay.

I guess, I was just asking more though, does it become more of a focus on the capital allocation this year, just given where your leverage profile has gone, where the stock valuation is today?

Well, it's not just this year, but it's more of a focus on our capital allocation model in general.

Because we've gotten the -- as I talked about at Investor Day, we've gotten the debt level to the range that we want it to be at, just from a cost of capital perspective, as well as from providing balance sheet strength, and providing us the ability to have -- providing us that flexibility that the strong balance sheet provides us.

So if you think about what we've been doing the past last couple years, it's been heavily more weighted capital allocation model towards prepaying debt.

A lot of the great economics that we were driving with that have shifted now towards more capital allocation, and that aligns perfectly with our announcement of the upsize program.

So just by upsizing the program, we're making that shift towards a more balanced capital allocation model.

So you're exactly right.

We are prioritizing it over prepaying debt.

Okay.

Appreciate it, guys.

Thank you.

Your next question comes from the line of Kevin Crissey with Citi.

Hey, good morning everybody, and everybody in JFK, and around the Company, I'd like to say hello to everybody.

A quick bigger picture question, followed by a RASM clarification, which I know no one's looking forward to, but actually I think it's an easy one.

When I think about your bigger picture inter-west coast flying, can you talk about what we should see in the future?

You talk about a West Coast presence.

Is that inter-west coast?

I know you've added the Long Beach flying.

Should we think about a focus city, incremental focus city out there, or is the Mint expansion and the Long Beach expansion kind of the bulk of what we're talking about there?

Yes, hi, Kevin.

Good morning, and it's -- still getting used to you being on the other end of the phone, although we do love Dave.

The -- again, disappointed in what happened in Long Beach this week with the international FIS.

That's always been an airport that we felt would benefit from that.

So we certainly, have all of that under review right now, in terms of the way forward.

Long Beach will remain a focus city.

In terms of the rest of the West Coast, the focus really is the transcon and building out the Mint expansion.

We have 14 airplanes coming for the rest of this year.

They're all Mint airplanes.

And so, that's going to allow us to continue to build that franchise, and certainly, not looking at this point to build another focus city on the West Coast.

Okay, thank you.

And the RASM clarification, maybe Marty, how much -- like if we look at this, just look on the year-over-year numbers, it looks like your comparisons gets massively easier January to February, and March is an easy comp, and then April is a really easy comp.

But how much of that is a function of 2015 having been so good, that it made 2016 look so down year-over-year, as opposed to 2016 actually being a bad outcome, if you know what I mean?

Oh no, trust me, Kevin, I know exactly what you mean, and we have been looking at a lot of these comps year-over-year too, because of the incredible tailwind we had in 2016 for performance.

And I think actually if we look at year two, it smooths things out a lot, because we are seeing a bit of that [whipsawing] up and down.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Duane Pfennigwerth of Evercore ISI.

Hey, thanks.

Just with respect to January, what's the biggest variable in the change, because I think on prior calls, it sounded like we were going to get some of that December 3 point headwind back.

What market specifically changed, or several markets changed?

And to what extent [does] your pricing in LaGuardia and Boston contributed to this 8% to 9% decline?

Hey, Duane, you were really breaking up.

I don't know if that was you or us.

Would you mind just repeating the question?

I think we have it, but I just want to be clear.

Maybe others on the call didn't hear it.

Just what changed with respect to January?

It felt like at one point, the headwind to December, the 3 points that you called out, I think you expected to get some of that back in January.

So what set of markets contributed to this 8% to 9% decline, and specifically what was the impact of your pricing in LaGuardia, Boston in that January number?

Hi, Duane.

Thanks.

I appreciate you repeating that just to make sure we answer as fully as possible.

With respect to, if there's any specific driver for February -- excuse me, for January, market specific, I think it's actually not market specific at all.

I think it almost would be helpful to explain going back into what we saw in the fourth quarter.

Again, after the earnings call, I'd peg it around October 18 or 19, we really saw an acceleration in close-in revenue performance.

And I would say, if you look at our -- the trends that we follow, and we really look at ==not just our own data, also looking at the travel industry [ACH] data, which again not totally relevant for us because we're still majority direct booked, but it's a good indicator as far as how the sector is doing -- and we really saw -- I don't want to go back and use the second derivative line, because it's actually not second derivative.

We saw a significant -- we saw a sign change as far as growth, I mean, things really moved.

And that actually continued, all the way literally until like December 22, December 23.

And then right after that, we saw things go right back to where they had been before that.

And I think that's really what impacted January.

It was really close-in yield that we did not -- that we saw in the fourth quarter, that we did not see in the first.

I mean, January, excuse me.

With respect to potential policy regulatory changes, have you guys done any analysis of what a border tax might mean for air travel, and thinking about exports credits and imports?

Is there a metaphor for airlines and passengers, and what the early potential assessments on it, from your perspective?

Hi, Duane.

This is Jim.

Your question was breaking up a little bit.

But if I repeat it, you're asking if we've started to understand the potential impacts of the various tax proposals that are out there?

Was that on passenger revenue you asked, or in general on the financial statements?

Well, border tax specifically, if you've given any thought to import versus an export for airline passenger travel?

The border tax specifically.

Yes, we've spent some time, a lot of time understanding the different proposals out there.

It's really too early to tell what ultimate scenarios will be, but we're taking a very hard look at it.

I think you're not going to get a substantive answer from really any airline at this point.

In terms of -- we're trying to look at it holistically.

We're trying to understand what could the border tax implications be on things like MROs or aircraft purchases, as well as all of the various income tax potential proposals, and trying to understand it holistically.

Thanks for the time.

Thank you.

Thank you.

Your next question comes from the line of Joseph DeNardi of Stifel.

Marty, just on the commentary around looking at capacity, I'm just trying to maybe set expectations in terms of how much flexibility you guys have this year.

Are we just talking about kind of the lower end of your full year guidance, or is it more than that?

And then, if we think about 1Q RASM coming in at like down [1.5] or [2], is that enough to take down capacity for the year?

Hi, Joe.

Let me take both of those questions sequentially.

We're not in a position to make any change to our guidance right now.

And if we do, we'll deal with that in the future.

But I want to actually go back to the point that Robin made which was, we do take seriously the commitment we made for industry average margins.

And I think we're going to have a sequential improvement throughout the quarter.

But it doesn't mean we're not going to continue to take action to make sure we continue to fulfill our commitment.

I think, Joe, just if you look back historically what we've done, we normally guide to like a 2 point range.

You've seen us sort of go above that in strong years where we've seen strength, and you've seen us actually re-guide lower when we've had years where we've removed capacity.

So I think we have shown an ability to react.

It is early enough in the year, that we do have most of the year ahead of us, as we start to think about some of the changes that we'll want to make, and some of those you'll start to see quite soon.

Okay.

Yes, that's fair.

I'm just trying to think -- that I think between the RASM guide and the commentary around maybe lowering capacity, there's some uncertainty as to what that means.

I'm just wondering if you guys can maybe put a finer point on it, but appreciate if you don't want to at this point.

Yes, we don't -- we're not ready to do that right now, but you'll start to -- for those of you that follow things on a weekly basis, you'll start to see some of that roll out.

Great.

Thank you very much.

Thank you.

Your next question comes from the line of Rajeev Lalwani of Morgan Stanley.

Hi, good morning.

Thanks for the time.

You highlighted on the RASM side, January being a bit of an anomaly, and things just getting better sequentially, as we look into 2Q.

But at the same time, you're adjusting capacity.

So are you adjusting capacity, because just the numbers that you're seeing in the next quarter or two just aren't sufficient enough, or is it more something in the back half of the year that you're seeing, that's maybe having you pause on how you're thinking about supply, if that question makes sense?

Hi, Rajeev.

I think I understand what you mean.

I'd actually go back to the point I made a little bit earlier, which is we recognize that among the levers that we control to produce the margins that we committed to, with respect to above industry average margins, capacity is a very important one.

So I think from that perspective, we'll take the action that we need to take, just to fulfill the commitment that we made last year, and reiterated on Investor Day.

I hope that answers the question.

I think that's what you meant

Yes, I guess, maybe the other way to approach it is, in the back half of the year, is there something that's going to, based on sort of the base case plan, something that you're seeing that we're not, that's going to derail sort of that improvement as we look out post January?

Nothing comes to mind, honestly to drive that.

I'm not sure.

Yes, I think, so let me just add.

It is tricky, right, because we're not coming out, and saying specifically what we really have in mind.

But clearly, there's some adjustments we need to make in the short to medium term, in order to sort of address the points Marty raised.

As we look at the back half of the year, just based on the ASMs that we guided, and our core [ASMs], you do see an acceleration of ASMs.

And so, that's something that we also need to take a good look at, to make sure given what we've seen in quarter one, is that something we still feel comfortable with in the back half of the year.

Clearly, when you make adjustments further out, you're able to capture a higher percentage of the benefit, because you can adjust -- you haven't scheduled those airplanes, you haven't scheduled those crews.

When you make more shorter term adjustments then, you already have some of those costs in the system.

So I think what Marty is saying, is we're looking at both some of the shorter term changes in some of the markets that we are really struggling to see the level of RASM performance that we think we should be achieving, and we're also taking a longer term view in terms of the overall capacity profile for the year.

And as, and when we make those adjustments, we'll update everyone accordingly.

Very helpful, Robin.

And kind of relating to that as we think about capacity adjustments, should we also consider CapEx adjustments as well, deferrals, what have you?

Hey, Rajeev.

It's Jim.

We have some flexibility on the CapEx side, in that in the $1.2 billion to $1.4 billion guide, we have roughly $100 million to $125 million in our forecast related to the aircraft lease buyouts.

We have the ability to be flexible on that.

So if it looks like from a free cash flow perspective, we need to make adjustments, we can certainly do that.

I would also remind you, the airplanes that we have coming this year, the 14 left, they're all Mint airplanes.

And so, they're an important -- the Mint part of our business continues to perform extremely well, and so those really will be -- they're sort of important.

Most those airplanes actually, if you look at our order book, they come in the last three or four months of the year.

It's roughly about one a month for the first sort of eight, nine months, and then we go two a month, for the last three or four months.

And so, a lot of that capacity actually will be felt next year rather than this year.

Very helpful.

Thank you.

Thank you.

Your last question is a follow-up from Jamie Baker of JPMorgan.

Oh hey, thanks for the follow-up, guys.

Robin, you discussed, or maybe it was Marty that discussed a reluctance to forecast far out on RASM.

But in my opinion, it may -- well, it feels more likely -- more like an inability to forecast further out potentially, I don't know, but potentially reflecting the tools that you're using.

So I wonder if you've given this any thought, because there are options out there in terms of RM technology.

There's the opportunity to pick people off from the competition.

I think what the market really needs to hear, is that in addition to potential capacity cuts, you're willing to potentially make investments in shoring up revenue management, so that you can potentially at some point forecast in a more similar fashion as does the competition.

Have you given that any thought whatsoever?

Hi, Jamie.

Thanks for the question.

I'll start by saying --

With all due respect, Marty, the question was for Robin, but I'm happy to hear from either of you.

(laughter)

So you can hear from Marty first, then you're going to hear from me, Jamie.

Thank you.

I guess, the first comment is, I think the big difference between forecasting and guiding.

We obviously have a RASM forecast, what we expect to see for the year, based on the model that we use, looking at our capacity growth, industry capacity growth, GDP, CPI, things like that.

On a macro level, we don't certainly walk into a year without a forecast.

That's not the same as being comfortable with [guidance].

Obviously, we take guidance very seriously, and we want to make sure that when we get to the point of guiding, that we've got enough visibility to make sure we'll meet or exceed that commitment.

So I would certainly not say that we don't have that.

I mean, the one thing I would I say is that -- and we talked about this on previous calls.

We do take a good chunk of our bookings close-in.

Even though we are a low cost airline and a leisure-focused airline, we've got half our bookings are coming in within the month.

So from that perspective, it doesn't take much swing to make a 1 or 2 point difference.

So from that perspective, I think the bigger question for -- to really have the security and comfort that you're talking about is, changing our booking curve, and I think that's a different exercise.

I don't know, Robin, something I missed.

No, Jamie, I appreciate the question, and we, of course, we want to be better at revenue forecasting, because it makes our job easier too.

I think Marty has pointed out -- I don't think it's a lack of investment.

Okay.

But let me say this.

The other thing that we are thinking about, and let's be transparent is, I think we get a lot of choppiness as we guide the month.

I think moving to a position where we kind of guide a quarter is kind of where we want to move, because I think it removes some of the -- as an airline that's still predominantly leisure, we're still much more dependent on the peaks and troughs of that holiday season than others.

And I also think, although we can certainly improve, I think some of our competitors have also talked about some of the challenges of forecasting revenue, even sort of beyond the current quarter.

And but yes, Iook, I take the feedback, and it's something we are spending a lot of time talking about internally, about how can we become better, and move to a point where we feel we're sort of (multiple speakers).

So if I understand correctly, you're content with your bench.

You're content with your technology.

Yes.

Okay.

That's it.

Thanks.

That concludes our fourth quarter 2016 conference call.

Thanks for joining us.

Have a great day.

Thank you.

Again, that does conclude today's conference call.

Thank you for your participation, and we ask that you please disconnect your lines at this time.