JetBlue Airways Corp (JBLU) 2017 Q2 法說會逐字稿

Good morning.

My name is Pasha, and I would like to welcome everyone to the JetBlue Airways Second Quarter 2017 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, David Fintzen.

Please go ahead.

Thank you, Pasha.

Good morning, everyone, and thanks for joining us our second quarter 2017 earnings call.

This morning, we issued our earnings release, our investor update and a presentation that we will reference during this call.

All those documents are available on our website at investor.jetblue.com and have been filed with the SEC.

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 Steve Priest, our EVP and Chief Financial Officer.

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-Q 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 Robin Hayes, JetBlue's President and CEO.

Thanks, Dave, and good morning, and thank you all for joining us.

I'd like to start, if I may, on slide 4 of our presentation.

During the second quarter we continued to take action to sustain our above average pretax margins and work towards our goal of superior margins.

We are confident that we have a model that combines low fares and great service in a way that will enable us to achieve our goals.

We are intently focused on executing initiatives we have underway to drive margin improvements and shareholder value.

During the second quarter, we reported operating income of $354 million, a pretax margin of 18%, and earnings per share of $0.64.

Our financial performance in the second quarter demonstrates that the actions that we are taking on both the revenue and cost side are working.

The RASM impact from capacity changes, pricing and ancillary initiatives is exceeding our expectations.

Also, we are making progress with our structural cost program.

At the same time, it's been a very challenging summer operationally in the Northeast as those of you who live in this part of the country may know firsthand.

In the second quarter, runway construction in both Boston and JFK compounded the impact of weather on a higher-than-normal number of air traffic control delays.

We've seen an increase in ATC programs continuing into the third quarter and have taken actions to help mitigate the operational impact, including adjusting peak schedules in the third quarter at short notice.

We remain committed to our margin goals and have taken quick action to counter the near-term operating issues we've just described.

We are incorporating the impact to date in our third quarter guidance.

Marty and Steve will add some details.

I'd like to thank our crew members for their outstanding efforts to serve our customers in a very challenging operational environment.

Moving on to Slide 5 and highlights from the second quarter.

Our second quarter RASM performance showed strong sequential improvement over the first quarter, a result of the quick actions we took earlier in the year and ongoing efforts from our commercial team.

On the cost side, we are making good progress on our structural cost program, which is pivotal to reaching our goal of superior margins.

To date, we have achieved approximately $45 million in annual run rate savings.

We are on track to execute our $250 million to $300 million target by 2020.

We continue to execute on our targeted, disciplined growth in our focus cities.

We are balancing our pace of accretive growth with our margin commitment to maximize shareholder value.

Boston, in combination with our New York franchise, demonstrates that building market relevance produces superior margins.

In Fort Lauderdale, second quarter RASM growth outperformed the system despite competitive capacity pressures.

We believe our service and product continues to resonate with the South Florida market and differentiates us from our low-cost competitors.

Mint continues to prove itself as a RASM margin builder.

Earlier this month, we began selling tickets on 3 newly converted Mint routes, completing the full list of routes we announced a year ago.

We've added a new one to the list, with Boston to Las Vegas service converting to Mint next January.

Our Fort Lauderdale Mint markets, which commenced in the second quarter, are off to a great start.

In our hometown of New York, we're working to improve the airport experience for our customers and the economics for our shareholders.

One example is the request for qualifications we released last week to developers.

Under our lease with the Port Authority, we have the exclusive rights through to the mid-2020s to develop the former T6 site.

Aligned with Governor Cuomo's vision plan for JFK, we plan to lead the development of the Terminal 6 site and possibly Terminal 7.

Our aim is to create a world-class customer experience while maintaining our cost advantage and maximizing value of our airport assets.

We look forward to working with the developer community, the Port Authority, and possibly other airlines to strengthen our leadership position at JFK, which has been a critical part of our success in New York City.

We're leaving no stone unturned, fine-tuning our commercial strategy, reviewing the fleet, managing short-term operational risks, improving our costs, just to name some examples.

These efforts are helping position JetBlue to meet our margin commitments to our shareholders.

Once again, I'd like to pause and offer a very special thanks to our crew members for all their hard work during the unusually challenging summer.

Marty, over to you.

Thank you, Robin.

Good morning, everyone, and thanks for joining us.

We continue to balance our margin commitments with our growth rate, focusing on creating shareholder value.

The capacity adjustments we made earlier this year, along with yield and ancillary initiatives, are showing in our RASM performance.

We're pleased with the sequential improvement that we saw in the second quarter.

The demand environment remained solid and supported a domestic fare increase earlier in July.

If I could point you to Slide 7, our growth strategy remains targeted on margin accretive opportunities in our focus cities, particularly in Boston and Fort Lauderdale.

Approximately 97% of our growth in the past 5 years has been in our 6 focus cities, and 92% has been in New York, Boston and Fort Lauderdale.

Our strategy of targeted growth continues as we work towards 200 daily departures from Boston and 140 from Fort Lauderdale.

New routes, or those under a year old, are expected to contribute approximately 3.5% of ASMs in the second half versus 4.5% in the first half of the year.

For the third quarter, we plan to grow capacity between 6.5% and 7.5%.

As Robin mentioned, in recent weeks, we reduced third quarter capacity by 0.5 point to help mitigate the impact of ATC programs.

For the full year, we are now planning to grow capacity between 5.5% and 6.5%, on the low end of our prior 5.5% to 7.5% guidance.

Fuel prices may have retreated, but our capacity growth rate in 2017 is now 3 points below 2016.

In addition, it's worth noting that our 2016 capacity growth rate was lower than 2015.

We're laser-focused on balancing supply and demand in the off-peak months and we plan to adjust the network to achieve our margin commitments.

Moving on to Slide 8 and an update on the network.

International RASM outperformed in the second quarter, a trend that looks to carry into the third.

We have seen broad strength throughout our Caribbean and Latin America markets, but most visibly in markets where we adjusted capacity over the last year.

In Puerto Rico, although the economy remains weak, our RASM trends are encouraging.

We've also seen a very nice turnaround in Colombia.

Within our domestic network, transcon, particularly Mint, and our Boston business markets remained notably strong.

One area of RASM weakness, which isn't new, is the Northeast to Florida market.

These markets, in particular Newark where we have already made capacity reductions, continue to digest elevated competitive capacity growth.

We are closely monitoring the Newark to Florida market, as we are again seeing 2-digit walk-up fares from legacy competitors.

While year-over-year trends have been weaker, our Northeast to Florida markets continue to produce very strong margins.

Boston was again our highest margin focus city in the second quarter.

It continues to be a perfect fit for our combination of low fares and high service.

The unique geographic location of Boston makes it ideal for our point-to-point strategy.

We have seen corporate traffic continue to grow.

We introduced our service from Boston to LaGuardia and Atlanta in 2016 and 2017, in response to corporate customer demand, and both routes are exceeding our expectations.

We look forward to adding Mint service from Boston to Las Vegas, San Diego and Seattle, further introducing our premium cabin to existing routes.

Mint, as Robin mentioned, continues to be a margin and RASM builder.

We now have daily Mint service in New York, Boston and Fort Lauderdale connecting to our focus city in Los Angeles as well as San Francisco.

The 4 New York and Boston Mint routes are among our most profitable markets.

In the second quarter, we raised Mint fares for the 14th time, which demonstrates both the outstanding value proposition and continued strong customer demand.

By year-end, we are scheduled to have 31 Mint aircraft on 9 daily markets.

Mint aircraft, which includes both Mint and core seats, should contribute 16% of seat miles by the fourth quarter of 2017, up from 12% in the second quarter.

We are thrilled with how Fort Lauderdale has developed in the second quarter, where year-over-year RASM outperformed the system by nearly 5 points.

This is a solid achievement considering that we continue to build our franchise in the face of competitive capacity.

We continue to build both the breadth and depth of our service in Fort Lauderdale.

The mix of traffic in South Florida and the strategic location fits our low-cost and high-service model perfectly.

We see great margin growth potential in the years to come.

Our new Mint service in Fort Lauderdale is off to an outstanding start, with RASM up over 20% year-over-year.

The addition of Mint and Fort Lauderdale routes further differentiates JetBlue from our low-cost and legacy competition in South Florida and grows our RASM premium relative to other airlines.

Turning to Slide 9 and the revenue outlook.

Second quarter RASM grew 7% year-over-year or 3.25% excluding the impact of holidays, co-brand incentives, and a lower completion factor.

Our outlook improved throughout the quarter as the impact of our capacity, yield and ancillary initiatives exceeded our expectations.

Looking into the third quarter, we expect RASM to range between minus 0.5% and positive 2.5%.

Our RASM guide now includes 0.5 point of RASM impact from the challenging operational environment in the Northeast.

Underlying demand trends alone would point to a guidance range of 0% to 3%.

Summer demand remains solid, and we continue to see the benefits of revenue management and capacity adjustments as we move towards the off-peak month of September.

We're pleased with the progress we're making in RASM and the development of our network.

Both are important efforts as we work towards superior margins.

I also want to thank our amazing crew members, both in the field and the support centers, for all of their hard work.

And with that, I'll turn the call over to Steve.

Thank you, Marty and Robin.

Good morning, everyone, and thanks for joining us.

We have been very engaged with the investor community in the past few months, and we hope you've come to recognize that we have enormous energy at JetBlue around our cost initiatives.

In addition, we are pleased that we have been able to make good progress towards building a best-in-class finance team.

Achieving our goal of superior margins requires that we execute with intensity and focus, and we couldn't be happier with the crew member support and the organization that we are putting behind our efforts.

I'll start on Slide 11 with some highlights for the quarter.

Pretax margin was 18%, up 40 basis points year-over-year on strong RASM performance as discussed by Marty, and the placement of Easter helping year-over-year comparison.

RASM growth was partially offset by high fuel prices and expected pressures from maintenance and labor costs.

Our operating income is $354 million, up 13% year-over-year, and our net income for the quarter was $211 million.

EPS was $0.64 per basic and diluted share.

Profit sharing accrued in the quarter was $18 million.

Net income was positively impacted by a lower effective tax rate.

We now expect a 38% effective tax rate for the full year.

I'll now move on to Slide 12.

For the second quarter, CASM Ex-Fuel grew 5.1% year-over-year.

Unit cost growth was driven by expected inflationary pressures in maintenance and labor as well as a stage length decline of 2.6%.

Unit maintenance costs increased as a result of the timing of heavy checks and escalating rates in our current maintenance contracts.

Unit labor costs were impacted by an increase in base pay for the vast majority of our crewmembers that was effective early 2017.

Completion factor was 0.9 points lower than our forecast due to a challenging operating environment in the Northeast.

We estimate that the lower completion factor in the second quarter impacted our CASM Ex-Fuel by approximately 0.5 point.

For the third quarter, we expect CASM Ex-Fuel growth to increase between 1.5% and 3.5%.

As Robin and Marty mentioned, we've proactively adjusted schedules, which raises our third quarter CASM Ex-Fuel by 0.5 point due to lower ASMs.

Unit labor costs, combined with a 2.3% reduction in stage length are the primary drivers for our third quarter CASM Ex-Fuel growth.

We are closely watching the operational impact of ATC programs, which have an impact on our capacity and the potential for incremental costs through labor and interrupted trip expenses.

For the full year cost outlook, we are narrowing the original range and expect that CASM Ex-Fuel to grow between 2% and 3.5%.

We expect to see incremental unit cost due to lower capacity growth and higher profit sharing expense, which is largely driven by the lower fuel price environment.

Moving on to Slide 13.

My #1 business priority is our cost structure, which is one of our major efforts underway to achieve superior margins.

We're now 6 months into the program, and we are pleased with our progress.

We continue to expect cost savings between $250 million and $300 million and anticipate to have a full initiative in place by the end of 2019.

To date, we've achieved $45 million in annual run rate savings.

We've made good progress both in technical operations and corporate.

We are setting the foundation for more cost efficient distribution with new agreements and new tools.

We believe that technical operations or maintenance is our largest opportunity.

We expect to achieve cost savings from renegotiating maintenance agreements that we entered into when we were a younger airline, and from introducing technology that will allow us to optimize our spending.

There is an immense amount of work underway in order to achieve our cost savings through these tasks.

We've invested in tools that allow our crewmembers to be more efficient and effective.

For example, we recently just launched our long-term maintenance planning tool, and next month, we will begin to deploy mobility tools to all front-line tech-ops crewmembers.

We have a range of efforts underway to address the 85% of our total tech-ops spend that is with external partners.

We are committed to implementing our tech-ops initiatives thoughtfully and into our safety management system protocol.

The second largest pillar is in corporate.

We've now achieved $13 million in annual savings through a rigorous approach to sourcing.

We currently have a significant number of corporate contracts under negotiation.

The third pillar is airports.

We have transformed our lobbies in 6 of our key airports and are on track to have completed 12 by year-end.

We estimate that self-service technology will be available to over 60% of our customers.

One of the key benefits of this initiative is that the technology rollout will enable our crewmembers to focus on what they do best, serving our customers.

The fourth pillar is distribution.

We've made great progress setting the foundation for more cost-efficient distribution with new agreements with our passenger sales and servicing business partner, GDSs, online travel agencies, and new tools in our customer service centers.

We have reduced rates and lowered distribution costs whilst maintaining flexibility.

Achieving the lowest cost of distribution in each of our channels is critical to our success.

As a maturing low-cost airline, we are well aware that we must demonstrate we can hold CASM Ex-Fuel flat while, like some of our peers, decrease unit costs as we grow.

We remain confident we can achieve flat to 1% compounded annual growth rate for CASM Ex-Fuel from 2018 to 2020.

I'll now move on to Slide 14.

We ended the second quarter with 233 aircraft.

We are looking hard at the current and future fleet through our margin lens as we assess what makes sense in the context of our overall strategy.

We plan to update the market on our progress by year-end.

This quarter, we purchased 3 new aircraft with cash and bought 1 aircraft out of operating lease in early April.

We have a total of 107 unencumbered aircraft.

Moving on to Slide 15.

We were delighted with the rating upgrade we received by Moody's last month, from Ba3 to Ba1 with stable outlook.

It's encouraging that the rating agencies are beginning to acknowledge a balance sheet that already exhibits investment-grade metrics.

Our strong balance sheet is the result of the hard work of my predecessors, which allows us to both deploy capital efficiently and provide return to our shareholders.

We have $130 million remaining on our current $500 million authorization to repurchase shares, and we will continue to be opportunistic.

Our adjusted debt-to-cap ratio at the end of the quarter was 33%, comfortably within our target range of 30% to 40%.

We expect to fund aircraft purchases for the remainder of the year using a mix of cash and debt.

We lowered our guide for annual CapEx to a range of $1.2 billion to $1.3 billion.

For the third quarter, the CapEx spend is expected to be between $245 million and $320 million.

We continue to expect our medium-term CapEx to average $1.1 billion in 2017 through 2020, unchanged from last quarter.

I would like to add my thanks to our crewmembers for their hard work during the summer season.

We are proud of our accomplishments as an airline that is recognized for great product and outstanding customer service.

We continue with our strategy of margin improvement, targeted growth and accretive use of capital, and we are on the right path to create long-term shareholder value.

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

Thanks, everyone.

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

Please go ahead with the instructions.

Operator, Pasha, please go ahead with the instructions for Q&A.

(Operator Instructions) And your first question is from the line of Michael Linenberg with Deutsche Bank.

I have 2 questions here.

Robin, you talked about your position with T6 and also having the ability to develop potentially T7.

Just based on your slot portfolio at Kennedy, your current terminal is sufficiently large that you can basically fly all of your current flights with your current slot portfolio.

Is that right, or do you need more space?

Hi, Mike.

It's, yes, Robin.

Good morning.

Thanks for the question.

I'm actually going to ask Steve to answer that because this is a project he's been very closely working on.

Good morning, Michael.

How are you?

In terms of the existing slot portfolio, you're correct.

The T5 and T5i that we expanded relatively recently provides great infrastructure for our customers and we have enough gate space at the moment.

The RFQ, if you like, or the Request for Qualifications, which we sent out last week, really provides JetBlue for a great opportunity to secure our future in New York.

New York, as you know, is our largest focus city, and we see this opportunity as great for our customers, company and shareholders.

The key reason we're going forward with this is that we have exclusive rights to develop the T6 space.

It's valuable prime real estate, as you know, in an incredibly congested airport.

So it's very early days in the process, and this is really about securing our long-term future and doing it in a way that's very accretive and doing it in partnership with other organizations.

Okay, great, then that's helpful.

And then just my second question.

Your A321neos, when would be the first time when you could take delivery of the LR version, assuming that you exercise that option?

What year would that be?

And at what point do you actually have to exercise that option for the long-range version?

Is that sometime later this year?

Is that early 2018?

I'm just getting a sense on the timing on that long-range airplane?

Hi, Michael.

It's Steve again.

I'm happy to pick that one up.

When we did our negotiations and secured deals with Airbus around the NEO portfolio, we built a lot of flexibility into that, and we have conversion rights, as you're aware, for the LR.

The LR would be an aircraft that's available towards the end of 2019 and we're still assessing that at the moment.

In terms of optionality, if we did indeed decide to do any conversion rights within the -- to the LR, we would have the opportunity to do that in terms of contractual rights toward the end of this year.

But it's very -- again, it's very early days.

No decisions have been made yet, and any decision to switch any neos to LRs will be based on a margin assessment, and we're going through that analysis at the moment.

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

The question, I guess, for Steve, just on cost.

I know you gave us a lot of color in your prepared remarks.

But as capacity growth has moderated and Ex-Fuel CASM pressures have built, it's still not clear to me if you've made any underlying progress relative to what the full year cost goal initially was.

I know -- I mean, I know you have made progress.

You said the $45 million, negative impact to profit-sharing, reduced capacity and so forth.

But what's not clear is whether these trends are tracking ahead of or behind the initial plan.

Any color on that?

Yes, Jamie.

Good morning, Jamie.

How are you?

The way I would describe this is that we are on track.

Despite the fact that we have continued to reduce capacity, we are very, very focused on delivery of our structural cost program.

And as Robin alluded to, we're going into every stone, turning every stone to go forward with it.

One of the headwinds that we had during this year was the stage length reduction, and despite the challenges that we've alluded to in the second quarter, despite the reduced ASMs, despite the stage length reduction, our real focus on our cost base has meant that we've been able to sustain the guides that we've gone forward with, albeit a relatively short movement in our overall CASM guide for the year.

So I'm very enthused.

I'm very confident with the progress that we're making.

As I mentioned, we've already secured $45 million associated with the annual run rate around the structured cost program.

There's great engagement from our crewmembers, and we're certainly on the right path.

Okay, that helps.

I appreciate it.

And, Marty, if I may, and I may be mistaken on this.

You referred to LAX as a focus city.

Maybe you've used this term before and I just kind of missed it, or maybe you just sort of meant LA as in, I don't know, LA Basin, something like that.

Did you mean to imply a shift in strategy, given what seems to be an ongoing and incrementally worsening industry battle at LAX?

Hi, Jamie.

Yes, that's my mistake.

We view the LA Basin as a focus city.

And I will also mention that we've talked about Mint as an important pillar of our West Coast strategy, and I think I mentioned that in the context of the Mint services to and from LAX.

But no, we view the Basin overall, obviously with Long Beach as the focal point.

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

Regarding ATC issues in the New York area, and I assume that's JFK, can you just talk a little bit more about what you're seeing there?

And if you have any idea of what the root causes of that might be, specifically into the third quarter here?

Thanks, Duane.

I'll take that.

It's Robin.

Good morning.

Look, everyone knows that ATC programs have always been a way of life in the Northeast.

We went into this year with a great deal of planning because we had major runway closures through to June in both Boston and JFK, and we have -- had some experience on that 2 years ago when one of the JFK runways was closed.

I think that what we've experienced, though, is a significant increase in the number of ATC programs.

To kind of give you a sense of the magnitude of it, if we go back from January through to the middle of July, it's about a week ago, when we pulled all this data together, then we had seen a 75% increase in programs in JFK and a 130% increase in programs in Boston.

Now, when we got the runway back in Boston, Boston has kind of returned to a sort of a fairly normal operating structure, but we continue to see elevated air traffic control programs at JFK.

So again, then take the sort of middle of June to middle of July, and more sort of recent data set.

And we've seen GDP programs in JFK on nearly 2 days out of every 3, and that compares to last year in the same period where we saw GDP programs on average just over 1 day in nearly 3.

So we've nearly seen a doubling of GDP programs and we've also seen those programs start earlier in the day and last for longer.

And I think the operating challenge that that gives us, Duane, is that if we then end up in a program where we're canceling flights and that we are running 3 to 4 hours late, that also has a knock-on effect into the next morning, because then you come up against scheduling, crew and maintenance blocks.

So that's kind of the size of the challenge that we faced.

And so in terms of what we've done about it, we did make a very unusual decision, I think, to reduce some capacity into Q3, a very short notice, to bring some relief to allow our recovery times to improve.

We've also focused on what we can control, so a lot of work going on in terms of our own JetBlue on-time performance program, which we've had going since last November.

And we continue to partner with partners like the FAA in terms of what we can do in the short term to better understand why these programs have been put in place and what we can do to mitigate them.

And then in the longer term, we are the biggest -- well, everyone's -- a lot of big advocates for ATC reform.

We are extremely passionate about it because I think that if you think about where we fly in our geography, it's extremely critical that we improve the efficiency of the system.

And also, one of our -- Jeff Martin sits on the NextGen NAC, and we're very active at the NAC in working some of the Northeast corridors and some of the Northeast routes in terms of getting more efficient approaches into some of these large airports.

So apologies for the long answer because I figured that it would come up in the call, and it may come up several times.

I kind of wanted to take you behind that a little bit.

In terms of what's specifically causing it, I don't want to dodge your question but we've been doing a lot of work on this and that's sort of a dialogue I think we are best to continue with the FAA and other partners right now.

Okay.

Thanks for that detailed response.

And just for my follow-up, on other revenue growth, which was quite strong, can you quantify the credit card incentive fee?

And the real question is, is this really one time in nature?

Or might you have incentive fee payments in the future?

Hi, Duane.

It's Marty.

I'd love to get into more detail, but unfortunately because of the confidentiality of the contract, unfortunately, I can't get into it.

I think the most important point here is we are extremely happy with how the credit card is performing right now and the progress we're making towards the incremental earning commitment of $60 million in 2019.

We think the credit card portfolio is still underdeveloped.

We think there is a lot of upside.

Barclays has been an outstanding partner, and I think that's reflected in the payment we received.

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

First, I want to start off congratulating Ursula on her promotion to VP.

I'm sure she'll do a great job.

Can you give an update on the cabin refresh and where you sit there?

Thanks, Kevin.

Thanks for your comments on Ursula.

I couldn't agree more with you.

Steve, would you take that?

Yes, of course.

Good morning, Kevin.

Steve here.

We don't have any new updates on that one, Kevin.

As I alluded to on Investor Day and last quarter, we expect to kick off the A320 program at the end of the summer, so we're pressing ahead and no further updates at this time.

Okay.

And similar statement about the pilot contract?

Yes.

In a nutshell, Kevin, no real updates.

I mean, the only, I think, development that's happened since we last spoke is that ALPA has filed and requested mediation.

That is a process that is overseen by the NMB, and we're working through that now and we continue to work in good faith with ALPA and now with the NMB to close the contract for all of our pilots.

If I could squeeze one more in here.

On the T6, T7, would you need more customs facilities in those terminals or would you be able to use T5?

I understand that's a decent chunk of the expenses, creating some of that operations.

Kevin, Steve here again.

I'll pick that one up.

As I said earlier with a question Michael raised, it's very, very early days.

We're just at the Request for Qualifications stage and there's no specific plans as yet.

We're talking about something that would be coming to fruition in the middle of the next decade.

So no plans as yet, but obviously as things progress, we'll continue to keep the market informed.

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

Maybe for Steve.

Obviously, on the GDS contract, renegotiation.

Can you remind us, do you have partial content agreement with the GDS providers?

Is that something you just got?

Is that what you meant by maintaining flexibility?

And if not, what did you mean by that comment, in general, about maintaining flexibility?

Hey, Hunter.

It's Marty.

I'll take that one.

We are currently under a full content agreement with our GDS partners.

I can't go into a lot of detail as far as what changes have happened recently, but I think it's important to say that we continue to work toward the distribution goal that we laid out on Investor Day late last year, and we're very, very happy with the progress we've made.

Okay.

Maybe I'll follow up with you a little bit later on because I want to ask another one.

The double-digits fare, I think, Marty, you said -- I think you said double-digit fares out of Newark by legacies.

Is that what you said?

Yes.

Okay.

Can you -- presumably, I would imagine that's probably price matching by them on ULCCs and not proactive undercutting or discounting?

Can you, first of all, validate that statement, and second of all, maybe give me a better overview of sort of what you're seeing in that market and what you think is driving that?

And just any color on that comment would be helpful.

Thanks.

I don't want to get into the play-by-play as far as who filed what fares when.

I think the most important thing I can note is that these are markets that had -- did not have double-digit walk-up fares a year ago this quarter, and this quarter they do.

Certainly, there have been a lot of changes in Newark with respect to competitive capacity.

We added some capacity.

We actually took a lot of capacity out.

But I think in the spirit of making sure we give the best guidance we can, I think it's certainly something we felt was worth noting.

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

Robin, I just want to ask about the right set of margin comps as you guys look to deliver, I guess, superior or better-than-average margins.

Is it right to include the network carriers there?

And I bring that up, just commenting that maybe one of them is having some challenges calculating margins themselves.

But wouldn't you rather put the set of carriers more on the low fare side or the point-to-point networks?

Yes, no, thanks for the question, and I'll probably just repeat what I said on the last call where we really kind of expressed the view about sustaining above-average industry margins with a goal to achieve superior margins.

And when we think about superior margins, I think the set there is really that sort of low-cost set, so excluding the legacy airlines.

So I think how we're evolving our company is from a world where we can sort of move from those above-average industry margins into the goal of superior margins.

And I think that that's really about maintaining the revenue trajectory, that's very important, that sort of balanced accretive growth, and then execution of the structural cost program.

Okay, I appreciate that.

And I guess for my follow-up then, it looks like you're set to grow seat count by about 7% next year.

And I know -- I think it was Steve or Marty mentioned that we might have an update on the fleet schedule sometime later this year.

But I guess just how flexible are you guys looking out there that you could dial up or down utilization if you had to, or maybe move some delivery slots to meet those margin goals, if revenue is tracking a little bit below plan?

Thanks, Brandon.

It's Steve.

I'll pick that up.

I think we've proven the case, Brandon -- I'll pivot to 3 specific points.

Number 1, we have a lot of flexibility in the order book.

I mentioned this on the last quarter call.

We ended up deferring aircraft, and we retained significant flexibility in the order book.

The second point is at the early start of the year when we started to see a little bit of revenue weakness, we pulled down some capacity at very short notice and made, along with the great revenue initiatives that we drove forward, then we made great progress.

And then more recently, as we sort of face these air-traffic control challenges, we've actually pulled down some capacity in Q3.

So I think that really shows our discipline and our focus and our ability to act quickly as a company to any changes in the environment, and we will continue to do that.

So we don't specifically go into further guides with regards to '18 at this point.

But I just want to ensure that when the market is clear that we will react when we need to.

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

I have a two-part clarification question on the Mint set.

Just firstly, it seems the year-over-year improvement that you're seeing on the new Mint routes, where the RASM on those aircrafts or those routes at least seem to be, the improvements seem to be better than the transcon from New York and Boston routes, maybe is that correct?

And secondly, is the incremental contribution to either RASM, system RASM or overall profitability similar to the New York transcon routes?

Because I know there was a buildup of capacity on those routes as well, and I'm guessing the fares on those markets are higher.

I'm just trying to understand kind of the incremental contribution that comes from these new routes.

Okay, thanks, Savi.

Could you actually -- I'm not sure I fully heard it because you're very, very faint.

If could you just repeat that and I'll try to make sure I don't miss any of it.

Could you speak up a little?

That's much better.

Okay.

So basically it seems like the kind of unit revenue improvement you're seeing on the -- the new Mint routes might even be better than what you saw in the kind of transcon New York-Boston routes.

But then secondly, I'm just trying to understand the New York-Boston kind of transcon routes, you had a lot of capacity buildup and they were kind of higher revenue markets.

So I'm just wondering if the contribution from the newer markets are going to be similar to the overall system RASM or system profitability or -- on a kind of a route basis, or if it might be kind of at a lower level but still very profitable?

Okay, Savi, thank you so much.

I'm sorry I made you repeat that.

I just wanted to make sure I gave you a full answer.

First thing is I think if you look at the experience that we've had on our Mint conversions, when we've taken a route that was all core and converted it to Mint, in the first 6 to 9 months, we had a bit of a hockey stick experience where the new product comes in.

It generally is received very well and we see a big RASM boost at the beginning.

And I think the -- certainly if you look at the New York routes, we've seen that not quite hockey stick shape but we've certainly seen RASM growth in the Mint cabin in year 2 and year 3. So we're very happy about the trajectory.

I think it's fair to say that if you look at airplanes 1 through 4 versus airplanes 27 to 31, 1 through 4 will ultimately be more profit accretive than 27 to 31, or we would have done the last one first.

We're very excited about the portfolio as it exists right now.

We continue to show some great fare growth.

We've actually been pointing to some numbers recently just showing how sort of year 2 and year 3 fare growth has been, both in the Mint cabin and on the entire airplane, and the number has been outstanding.

So we're very optimistic about what we're seeing in Fort Lauderdale.

That's helpful, Marty.

And then maybe if I can ask just a follow-up on Fort Lauderdale.

Spirit had a lot of kind of problems over there in the second quarter and maybe continuing.

Are you seeing any benefit there?

It doesn't seem like maybe the same customer, but do you see any kind of benefit from the book-away they're seeing at Spirit?

I can't speak to whether we're seeing book-aways or not.

I will point back to one of the comments I made in the prepared remarks about how well Fort Lauderdale RASM growth was versus system average.

We've had some very good progress in Fort Lauderdale, so it continues to be a very important part of our network.

I think I'd go back to one of the points we've made many times, which is the value of diversification.

We're not just focused on 1 or 2 focus cities.

We've got 3 cities that are receiving a lot of growth and we think that's an important part of the business model.

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

Marty, a question for you.

Can you just provide a bridge between 2Q and 3Q RASM, essentially the couple of factors driving you from up 3.25% to the 1% to 2% midpoint of the guide?

And then maybe an early read on the trajectory post-summer, just given some of your comments that you made before about 4Q dynamics sort of lapping in places like Cuba, Puerto Rico, et cetera?

Hi, Rajeev.

So first of all, we're actually very happy with the progression we're seeing in RASM between second quarter and third quarter.

It may not look that way on the surface, but let's just start with our core underlying demand right now is strong, and the 0% to 3% guide I think is reflective of that.

I think if you look at the progression from second quarter to third quarter, we had a pretty significant comp change in third quarter versus second.

So I think if you normalize for that, you can understand why we're as bullish as we are.

With respect to fourth quarter, it's too early for us really to guide that.

We just don't have enough visibility, and I think we'd be misleading at this point.

And there's a lot of puts and takes in fourth quarter.

We do lap some of the efforts of last year, things like adding Cuba, adding Newark, which is on the good side.

We also have a -- we just don't have that much visibility in the environment right now, so I think I would be misleading right now if I said any more.

Robin, Steve, coming back to labor, and on pilots, in particular.

One of your peers is dealing with disruption presumably around wage levels and pending contract discussions.

Is that something you're observing or concerned about?

And -- that's the core of it.

No, I appreciate the question.

We've certainly not experienced any of that at all.

In fact, just the opposite.

If you think through the amount of operational challenges that we've dealt with, our pilot team have been incredible leaders to help us navigate through that and help our customers through that.

It is very difficult when you get to the end of the day and you have dozens of significantly delayed flights because we've been in 3- to 4-hour programs all day, and I actually would like to thank all of our pilots and all of our crewmembers who have worked through that.

And we are very focused now on working to a positive outcome and getting a contract agreed.

We're in mediation, but it doesn't change our effort and energy on this.

And we -- right now, we're just focused on getting through the rest of what's going to be a very busy summer.

Next question is from the line of Helane Becker with Cowen & Company.

Just a couple of questions.

Robin, as you think about the air traffic control situation and you look ahead to 2018, do you anticipate having to adjust the schedule again?

Are you going to plan differently for next year given what you know about the delays getting worse rather than getting better?

Are you more -- especially given reauthorization, right, comes at the end of the quarter, and there is some talk in Washington about letting, I don't know, letting the government shut down, I guess?

Thanks, Helane.

Well, I'll avoid the questions on the government shutdown, if that's okay.

Look, we always -- we've always got down an immense amount of planning around the peak seasons.

And whilst we're right now focused on the summer, we already have a team of people in ops planning and analysis thinking through what this means for next summer.

And we've had runway closures to deal with in JFK and Boston.

We've had gate constraints in Fort Lauderdale we've been working through.

So it's a very dynamic and challenging set of events that we're dealing with.

But absolutely, it's critical that we plan this airline for success and operability.

And if, as a result of what we've been through this summer, we need to take a different approach to next summer, we'll do that.

Because ultimately, our commitment is to deliver customers safely on time to where they want to get to, and it's also the most cost-effective way of running an operation.

Because when you run late, with the immense amount of GDP -- air control programs that we've seen, it drives a lot of operational costs into the business in terms of overtime and premium pay for crewmembers.

And so we want to plan for success into summer 2018.

We did a lot of planning coming into 2017 but we did not model -- I'll be frank, we did not model a nearly doubling of GDP programs once we had the runways back.

Right.

Got you.

And then just 2 other small questions and they're really more clarification points.

When -- I think, Steve, you mentioned no real change in CapEx, and I guess that presupposes no decision on T6 or T7 in the short term, that would be in addition to whatever CapEx you have over the next few years, right?

Yes, Helane.

Thank you very much for the question.

It doesn't include any on T5, T6.

But as I -- sorry, T6, T7.

But as I mentioned, firstly, this is something that's going to be looking out the next decade.

The second question is I fully expect to go through partnership.

So we spent a lot of time building the strength in the balance sheet at JetBlue and being very, very focused on our capital allocation, and we're not about to start changing that.

And part of the RFQ was just to really start looking at partners who can bring some financing to the party.

So, A, it's not in the guide but I wouldn't expect it to be.

And again, we're at the very, very early stages of this initiative and we're not expecting JetBlue to sort of finance the lion's share of it.

Right, got you.

And can you say what your mix of business versus leisure traffic is?

Hey, Helane, it's Marty.

It has not changed dramatically systemwide.

Our percentage of business traffic is in the 20s, and -- think of it more like 20-80, more or less.

Again, there are a lot of different ways to define business, whether it's purpose, whether it's what fare you purchase, et cetera.

But in general, we look at 20-80 as that mix.

Obviously, it's higher in Boston but still well under 50% business.

Right, and it would be higher on Mint.

Even in Boston, we still have a very, very strong leisure franchise.

The next question is from the line of Joseph DeNardi with Stifel.

So I guess, Steve or Marty, most other airlines, I think everybody except Southwest, provides a disclosure as to how much of the other revenue line comes from selling miles to third parties.

So can we expect that you guys are working with Barclays to provide better disclosures?

Or is that not in your plans?

I mean, we haven't sort of gone into that sort of deal, Joe, at the moment.

It's something that I wouldn't mind taking offline and I'll let you have a conversation with David about that.

But we currently don't get into that sort of level of disclosure, but we'll certainly take a look at it and we'll get back to you.

Okay.

And then United indicated on their call that they think the difference between their card economics and American's is worth about 1.5 points of margin.

Essentially, they're selling their miles at a lower price.

Have you done any work to assess how much of a detriment to your margins you think there is, given the gap between what you're earning and what Alaska is earning?

Hi, Joe, it's Marty.

I'll make 2 comments.

First of all, obviously, when United made that comment, they had the benefit of having someone there who knew both contracts, which we actually don't have that benefit.

So I don't think anyone walked in immediately and thought we have a major deficit.

The second thing I'll say is we absolutely see our program as being relatively undeveloped versus a lot of our competitors.

TrueBlue itself is really only about 5 or 6 years old.

I think the benefits that we've seen from moving over to Barclays and the incredible growth rate we've seen from them, I think is indicative of the fact that it's not a mature program.

I think that we see that as a great opportunity for us.

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

Marty, is the solid demand environment tied more to reconfigured flying in the RASM weak markets?

Or has there been an inflection in either leisure or corporate demand, I guess, as you look at the -- kind of the core underlying demand trends?

And then just related to that, what conservatism, if any, have you baked into the third quarter revenue outlook for hurricane season here, just given JetBlue's disproportionate exposure to the Florida market?

Hi, Dan.

Thanks for the questions.

First of all, as far as color around the demand environment we're seeing, I don't think we look at this as seeing it unusually strong in either business or leisure.

If you look at the areas of strength that we're seeing, certainly Boston business being 1, but again, even Boston business is less than 50% business revenue.

There are multiple routes.

I'll pick one out just randomly.

Boston-Buffalo, we think Boston-Buffalo is less than 40% business, so even business routes have a lot of leisure on them.

And certainly, in this period, the strength we're seeing in transcon, again, across the entire airplane, not just on the Mint-configured airplanes, is certainly a good indication of good leisure demand.

With respect to hurricane season, through our normal planning process, we go through the normal experience of expecting what our completion factor will be with respect to normal storm patterns.

We did not put anything in there for incremental storm patterns over what we've seen over the last several years, though.

I don't know, if you have weather forecasts that we don't, we'd love to hear it though.

And then just a second question here.

Steve, I wonder if you can update us on the return of capital metrics.

What did you spend on the stock buyback program in the second quarter?

Where does it stand?

And what's the appetite to follow-up with additional returns of capital?

Is it even reasonable to assume there's going to be more returns of capital to come?

Thanks, Dan.

Great question.

We have -- in the first half of the year, we've undertaken $250 million of accelerated share repurchase.

The latest one that we did, the $150 million, completes this week.

We have been very, very happy with the progress that we've been making on capital allocation made so far.

And as I mentioned in the prepared comments, we will continue to be opportunistic.

We still have $130 million of the original $500 million authorization left from the board.

And we'll be sure to update you when we have any specific plans going forward.

(Operator Instructions) Your next question is from the line of Darryl Genovesi with UBS.

Steve, if I look at your CASM guidance for the full year now that we've got the benefit of the first half being behind us and your third quarter guidance as well, it would appear to imply, at least at the midpoint of slowdown to about flat unit cost on a year-over-year basis in the fourth quarter.

And I think you still have a pretty big labor headwind in Q4.

So just if you could give me a little bit of help trying to bridge the difference between the growth that you're seeing in the third quarter and that flat outlook for Q4, that would be helpful.

Yes, of course, no problem.

I think with regards to Q4, we -- you're right in terms of a slowing down of the CASM.

I'd put this down to sort of 3 specific items.

Number 1, we have got higher ASMs in the back end of the year.

Secondly, we start to cycle off the lowest stage length environment that we particularly saw in the first half of the year and that rolled into the quarter 3.

And then, needless to say, as we have been and we continue to mature through the year, we are incredibly focused on our cost base and the continued delivery of the structured cost program.

So I'm very pleased with the progress we've been making so far this year, and those are the factors really that will help give a little bit of color to the back end of the year and are included in our full year CASM guide.

Okay.

And then if I could also ask you one on CapEx, I suppose.

If I take your CapEx guidance, your longer-term CapEx guidance for $1.1 billion, even though that's less than what you're spending today, it would still seem to imply that the capital base, after accounting for your depreciation, your capital base is still growing at something like 10% a year.

Is that the type of outlook that we should be thinking about?

And if so, assuming that you'd like for your returns to at least hold, if not expand, longer term, how do you get to a 10% plus EBIT growth outlook to go along with that?

I mean, we've talked extensively about the fact that we were very successful in 2016 at driving above average industry margins, and we'll continue to focus on that to morph into superior margins.

In order to do that, that gives us the permission to grow.

And that gives us the permission to go out and grow the fleet and bring the aircraft in, which ultimately drives the CapEx.

If we do not continue to drive the margins and drive towards superior margins, then we will start using some of that flexibility we have in the fleet.

So, for me, the whole thing's linked, Darryl.

It's ultimately around the margins that we drive and then the appropriate capital allocation based on the growth that supports that.

And as I mentioned earlier on the call, we have flexibility in the fleet and we also will look flexibly at the growth as we go forward.

So the $1.1 billion guide is predicated on the existing order book.

We will continue to go forward with that, obviously with some non-aircraft CapEx as well.

But I'm very happy with the progress that we're making.

I'm very happy with the margins that we're going forward with.

And as you surely will be aware, we trimmed the longer-term CapEx perspective on the last call and we've guided down a little bit for 2017 today.

So I'm happy with where we're going on that.

And, Pasha, that concludes our second quarter 2017 conference call.

Thanks for joining us, everyone.

Have a great day.

And again, that will conclude today's conference.

Thank you for your participation.