JetBlue Airways Corp (JBLU) 2018 Q2 法說會逐字稿

Good day.

My name is Jay.

I would like to welcome everyone to JetBlue Airways Second Quarter 2018 Earnings Conference Call.

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

(Operator Instructions)

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

Please go ahead.

Thanks, Jay.

Good morning, everyone.

Thanks for joining us for our second quarter 2018 earnings call.

This morning, we issued our earnings release, our investor update and a presentation that we'll 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 Chief Executive Officer; Joanna Geraghty, our President and Chief Operating Officer; Marty St.

George, EVP, Commercial and Planning; and Steve Priest, EVP and CFO.

This morning's call includes forward-looking statements about future events.

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

For additional information concerning factors that could cause the 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 -- JetBlue's CEO.

Hi there, everyone.

Good morning, and thank you for joining us.

This morning, we reported our results for the second quarter of 2018.

I'll start with a thank you to our 22,000 crewmembers to everything you do to deliver an outstanding JetBlue experience to our customers.

I'd also like to welcome Joanna Geraghty to her first earnings call, since her promotion to President and Chief Operating Officer.

Joanna has been leading over 15,000 crewmembers from the customer experience team of JetBlue for the past 4 years and has been with us since 2005.

She will now be leading the full operation and will also oversee the commercial team led by Marty.

The recent changes in our leadership team are aimed at further improving our day-to-day operations and advancing on our journey to superior margins.

I'd like to start on Slide 4 of the presentation.

This morning, we reported adjusted second quarter operating income of $175 million, adjusted pretax margin of 8.2% and adjusted earnings per share of $0.38.

Our financial performance was impacted by the holiday calendar, but more importantly by fuel prices that increased over 40% year-over-year.

I was particularly happy to see our CASM ex-fuel growth come in below the low end of our guidance range.

Controlling on our costs is even more critical amongst increasing oil prices.

The team is focused on mitigating the impact of higher fuel in order to stabilize and improve our margins.

We believe even modest slowing in our third quarter RASM growth is not acceptable in a rising fuel environment.

We are planning a series of adjustments to both capacity and our ancillary revenues to take effect over the coming months.

We steadily slowed capacity growth over the past 2 years as oil prices have moved higher, and we are further slowing capacity growth for the full quarter by 2 points.

Excluding the impact of hurricanes last year, our underlying growth is roughly 5.7% year-over-year, at the lower end of our mid- to high single-digit range we've targeted over the medium term.

We are currently factoring higher fuel prices into our preliminary capacity planning for 2019.

Long-term success of JetBlue requires not only adjusting to changing conditions, but also executing on the many things we control.

At our Investor Day in early October, we plan to talk about the building blocks we have underway to improve our relative margins.

The industry backdrop will fluctuate as it always has, but we believe executing on our building blocks should put us on the path to higher absolute margins and returns for years to come.

We talk about superior margins, but our efforts should translate into improving returns.

Fleet is an example where we can improve margins and returns in tandem.

We are delighted with the outcome of the 190 fleet review and our selection of the Airbus A220-300.

We believe it will be return and EPS accretive in the next decade, as it replaces a portion of our invested capital with more productive assets.

We're confident in the up-gauging economics of the new aircraft and in our ability to drive higher earnings from the A220s early in the next decade.

This adds momentum to the margin benefits we expect from restyling our 320s and growing our Airbus 321 fleet.

Beyond fleet, we have several initiatives aimed at improving how we operate today, either strengthening our revenue or lowering our costs.

One of the building blocks we plan to talk about in October include changes in our network, and how we can evolve or mature our focus cities.

For example, we believe the recent reallocation of intra-West flying to transcon markets will ultimately add about -- will ultimately add between $30 million to $40 million in incremental run rate earnings.

We also plan to talk about the opportunities we see to further grow our ancillary revenue.

We have a series of initiatives underway encompassing co-brand and loyalty, the next phase of fare options and segmentation and longer-term travel products.

We have been pleased to see improvements in our operation as a result of our on-time performance initiatives and the investments we made to mitigate ATC challenges in the Northeast.

We've seen a nearly 10-point improvement in DOT A14 from May through present compared to the last year for the same period.

These efforts have yielded visible benefits in our operation, which have improved RASM and reduced CASM.

We're making good progress in our structural cost program.

And Steve, this quarter, will provide a detailed update.

We're looking forward to the inflection in our unit cost that begins in the second half of this year.

We signed 2 important Tech Ops maintenance deals for the existing fleet, which support a safe and reliable operation in a more cost-effective way.

Our size and our balance sheet are enabling us to reshape our cost structure, resulting in multiyear run rate savings across the organization.

Last year, we completed an organizational review of our Support Centers -- I'm sorry, last week, we completed an organizational review of our Support Centers that will take effect through the summer.

We have an ambitious vision, and we're setting up a structure to help us accomplish our plan and meet our commitment to controlling our costs.

These things are never easy, but they are important and vital to protect the future of JetBlue.

Before I pass the call to Marty, I'd like to again thank our crewmembers in both the operation and Support Centers for their hard work during the quarter.

Marty, over to you.

Thank you, Robin.

I'll start with the capacity outlook on Slide 6. We continue to adjust our capacity to target a mid- to high single-digit growth rate.

As Robin said, we have moved towards the lower end of the range and are taking a number of actions to adjust to higher oil prices.

We are updating our 2018 capacity guidance, including a 2-point reduction to our fourth quarter growth that will run through our schedules over the upcoming days.

We anticipate that those reductions will be aimed at off-peak flying throughout the network.

In addition to addressing higher fuel prices, we are constantly reviewing underperforming flying in our network.

Effective this fall, we will play to our strength in coast-to-coast travel with redeployments from our L.A. Basin focus city to transcontinental markets.

Our team has the mandate to close poorly performing routes, adjust frequencies and off-peak flying, and look for areas where we can shift low margin flying to better opportunities.

We closed the second quarter of 2018 with our flown capacity at 6.3%, slightly above the midpoint of our range.

This was driven by higher than expected completion factor from an improved operation and helped by favorable weather in the Northeast.

With about half of the summer behind us, we are starting to see the benefits of our investments to mitigate the ATC challenges of last year.

As we move into the second half of 2018, we recognize there is a lot of noise from the impact of hurricanes last year.

Our schedule-to-schedule capacity helps inform our growth rationale in light of higher fuel prices.

For the third quarter, we expect schedule-to-schedule growth of approximately 5.5%.

This translates to flown capacity guidance of between 7.5% and 9.5%, considering the loss exempt due to hurricanes last year.

For clarity, we have included a table summarizing the financial impact from hurricanes in the appendix of our presentation.

To provide some context by region, our Latin and Caribbean franchise continues to show strength, driven by both VFR and leisure markets.

Haiti, which accounts for approximately 1% of our capacity, is a small headwind to RASM in July.

Bookings to the island were down 67% year-over-year during the first 2 weeks following the outbreak of civil unrest.

We see bookings rebounding already, and we expect that demand will recover and the negative impact is expected to be less than 0.25 point to the quarter.

But a lot of that RASM again outperformed the network this quarter by approximately 3 points.

This is the fifth consecutive quarter of out performance as we grow frequencies and destinations.

Our Mint service out of Fort Lauderdale is performing extremely well.

We believe that our value proposition, which caters to a broad range of customers, allows us to differentiate ourselves from both our low-cost and legacy competitors.

Lastly, our transcon franchise is also performing well in both Mint and non-Mint markets.

As Robin mentioned, we estimate that our network reallocations out of intra-West flying will drive between $30 million and $40 million of earnings improvement with meaningful benefits starting in the first quarter of 2019.

Every aircraft in every market must earn its way into the network.

We expect to continue optimizing how we deploy capacity across the network to support our margin commitments, especially as fuel prices continue to increase.

One advantage we have is a relatively underdeveloped network in 2 primary focus cities.

Our market share in Boston and Fort Lauderdale is approximately 30% and 25%, respectively.

Clearly, we believe we have a lot of room to keep growing our relevance for our leisure and business customers, promoting RASM growth and margins.

Turning to Slide 7, and the revenue outlook.

Second quarter came in slightly better than expected at negative 1.2%.

We have a solid close to June.

As a reminder, second quarter RASM included 2.5 points of negative impact from holiday travel that shifted from the second quarter to the first.

Last quarter, we also lapped a 1.25-point benefit that occurred in the second quarter of '17 from completion factor and co-branded incentive payments.

Our RASM during the first half of 2018, which was equal to 2.2% year-over-year, demonstrates our ability to increase unit revenues as we grow.

Looking into the third quarter, we expect year-over-year RASM growth to be between flat and plus 3%.

RASM continues to be driven by close-in bookings, and we've seen strength throughout July.

Our ticketing revenue trends are carrying over from the second into the third quarter.

We continued to see strengths in our New York to Florida markets as well as in transcon and the Caribbean and Latin regions.

At a focus city level, on balance, we are not seeing any significant changes in trend from the first half to the third quarter.

We have seen modest softening in San Juan coming into the summer.

And we've already made capacity adjustments to address the recent trend.

A deceleration of RASM we are seeing in the third quarter is a result of slowing ancillary per customer trends.

The transition to our new vacation platform has been more challenging than anticipated and has cascaded into other initiatives.

This is approximately a 1 point headwind to the third quarter.

To mitigate the impact, we are moving forward with a series of ancillary adjustments that are independent of the platform change.

At our Investor Day in early October, we will provide an update on our long-term ancillary plan and other projects we have underway, as well as details around our capacity planning for 2019.

Before I turn it over to Steve, I would like to add my thanks to all of our crewmembers for their hard work.

We are excited about our value proposition and the investments we are making in our product and in our network.

I believe that our take on a low-cost model will create long-term value for our customers and our owners.

Steve, over to you.

Thank you, Marty.

Good morning, and thank you for joining us.

I'll start on Slide 9 with some highlights from the second quarter.

Revenue is $1.9 billion, up 5% year-over-year.

Adjusted pretax margin was 8.2%, down 9.5 percentage points from the second quarter of last year due to higher fuel prices and the effect of holiday calendar placements that shifted revenues from the second quarter into the first quarter.

Adjusted EPS was $0.38 per diluted share.

Our effective tax rate this quarter was 26%.

We expect our effective tax rate to range between 25% and 26% for the full year of 2018.

We reported a $0.38 GAAP EPS loss, including a $319 million noncash impairment charge on the E190 fleet . As a result of the impairment and transition plan to the A220, we will have a very manageable $1.4 million per year of accelerated depreciation expense for the E190 and is now in our cost guidance.

As Robin mentioned, we are focused on executing our long-term plan as we adjust to higher oil prices.

Our aim is to stabilize and ultimately improve our margins.

The actions we are taking include ancillary as well as capacity adjustments.

There is an impact on CASM from slowing our growth.

Our rule of thumb is roughly 50% of CASM, ex-fuel is fixed and the rest is variable.

The team is working to mitigate the 2018 CASM ex-fuel pressure, and we are on track for an inflection in our unit cost trends in the second half and on track to achieve our original 2018 cost guidance of negative 1 to 1%.

We are fully committed as a leadership team to our 0 to 1 CASM CAGR goal through 2020.

Moving to Slide 10.

CASM ex-fuel increased 1.9% year-over-year in the second quarter, beating our guidance.

The main drivers were the timing of expenses from the second to the third quarter and better-than-expected completion factor resulting in improved operational performance and reduced ATC delays.

Looking to third quarter of 2018, we expect that CASM ex-fuel growth to range between 1% and 3%.

The progression in our CASM ex-fuel trends is impacted by the shift of expenses from the second quarter and previous reductions to capacity growth.

We've carried some but not all of the operational improvement from the second quarter into our third quarter guidance.

Turning to Slide 11.

We've been pleased with our cost performance thus far in 2018 and are on track with our original guidance of minus 1% to plus 1% even with slower capacity growth.

CASM ex-fuel growth for the first half of 2018 was 2.5%, near the lower end of our guidance.

We continue to expect CASM ex-fuel growth to reflect during the second half of this year with the benefits of structural cost initiatives put in place over the 6 -- last 16 months ramp up.

Second half year-over-year comparisons are impacted by hurricanes and ATC challenges of last year, and the onetime bonus we paid to our crewmembers at the year-end results of tax reform.

A simple way to see our inflection in our cost trends is to look at the year over 2-year growth.

The left-hand side of Slide 12 shows the improving cost trend that we expect in the third and again in the fourth quarters of 2018.

For the second half, we now expect CASM ex-fuel to decline in the range of negative 3.5% to negative 1.5%, slightly higher than the prior guide.

The main drivers being slower capacity growth in the second half as well as time of expenses from the first half to the second half, particularly into the third quarter.

We anticipate the underlying CASM ex-fuel growth for 2018 to slow to a range of between flat and 2% for the second half of this year.

Our full year CASM ex-fuel guide remains unchanged at minus 1% to plus 1%.

Moving to Slide 12, on our progress report on structural cost program.

We have now achieved $154 million in run rate savings by 2020, up from $90 million we called out 2 quarters ago.

Our continued progress in restructuring our costs is pivotal to hitting our CASM ex-fuel commitments in the second half of 2018 and through 2020.

We continue to expect our 3-year efforts will result in run rate savings between $250 million and $300 million.

Our work is progressing on every front.

Starting with our corporate pillar.

The past year, we drove significant cost savings by identifying opportunities in our business partner spend across the organization, through more of a sourcing effort.

Last week, we also completed a Support Center review that will streamline how support teams work and improve our effectiveness, allowing us to better deliver on our strategic plans.

In our airports pillar, we are restructuring critical business partner operations across our airports.

We conducted a comprehensive review of our footprint through the network and are making further changes that will reduce costs, while maintaining outstanding customer service.

We are also on track to complete 24 self-service lobbies by the year-end, reinforcing the benefits of up-gauging aircraft as we grow the number of customers in our airports.

In the distribution pillar, we have several projects underway to ensure our customers can self-serve using our websites and app as well as to transform our customer Support Centers.

We're making progress in shifting customers to lowest cost and most-appropriate distribution and support channel.

We've partnered with Gladly to help us transform our customer Support Centers through new technology.

We've tried to be an investor in Gladly through our JetBlue Tech Venture subsidiary.

We have recently implemented a new tool to consolidate all the ways customers reach us into one channel, levering technology to reduce costs and make our customer communications more efficient.

We have also made progress on our RFP through our PSS system, in order to incorporate the latest generation technology, scalability and functionality to fit our needs as a larger and more complex airline.

Finally, in our Tech Ops pillar, we signed a long-term 10-year contract for heavy maintenance of our A320s, and continue working through selected business partner for the maintenance of our V2500 engines.

We believe that this contract, similar to our recent deal with Pratt & Whitney, will help us achieve significant savings into the next decade as we reset the maintenance cost for our largest fleet.

With our fleet review completed, we also signed an enhanced LLP engine coverage agreement to drive additional savings in our E190 fleet.

Turning to Slide 13.

We continue to reshape our fleet that constitutes the majority of our asset base and critical to improving returns.

Two weeks ago, we announced the outcome of our E190 fleet review and transition plan, including a signed MOU for the purchase of 60 A220 aircraft starting in 2020 through 2025.

We've made further progress with our A320 Cabin Restyling program and expect to see the benefits of our unit cost growth as the number of restyled aircraft increases through 2020.

This quarter, we also purchased 2 additional all-core A321s with cash for a total fleet of 247 aircraft.

We now have 23 all-core and 34 Mint A321 aircraft, which are great margin builders for JetBlue.

Our CapEx guidance for 2018 is between $900 million and $1.1 billion, composed of up to $850 million to $1 billion in aircraft and remained unchanged for non-aircraft spend.

The recent A220 order added incremental aircraft CapEx, included added PDP.

We believe that the additional CapEx is very manageable and will support our network strategy, how we set our cost base and further improve our margin.

Turning to Slide 14.

Our strong balance sheet and investment grade metrics allow us to invest in value-accretive projects and continue to be opportunistic with share repurchase, returning excess capital to our owners.

Earlier this quarter, we executed an additional $125 million in share repurchases, with $500 million remaining from the total amount authorized by the board.

Our priorities remain to invest in margin and return accretive projects.

We believe our E190 fleet transition plan and the A320 restyling program are among our best and highest uses of capital.

This quarter, we repaid $66 million in debt and raised nearly $280 million in secured aircraft debt.

We closed the quarter with an adjusted debt to cap ratio of 31.3%, and our cash and investments were approximately 12.6% of trailing 12-month revenue.

Lastly, we continued our policy of opportunistic hedging to help protect our margin given the current environment.

This quarter, we executed hedges of approximately 7.5% of our expected fuel consumption of the second half of 2018, in line with prior hedging positions.

I'll close with one last thank you to all of our crewmembers for their hard work and continued support to make JetBlue stronger and more profitable.

We're adjusting to higher oil, and see great momentum from our revenue and cost initiatives across the organization.

We are confident that our efforts will create value for our stakeholders over the next few years.

We will now take your questions.

Thanks, everyone.

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

Please go ahead with the instructions.

(Operator Instructions) Our first question comes from the line of Rajeev Lalwani from Morgan Stanley.

Just like a question on the capacity side.

Marty, I think you were talking about making adjustments because of higher oil going forward, but then you're also reaffirming the mid- to high single-digits growth.

So can you just reconcile how you're thinking about that going forward?

It seems like you might revisit at mid- to high single digits going into next year.

Thanks for the question.

I think -- let's talk strategically and tactically.

We've said for the last several years that mid- to high single digits is the right range for us taking into account our current size, cost structure, et cetera.

I think, if you go back to -- I actually go back to 2015, when oil hit its bottom.

Since 2015, we've been pretty aggressive at continuing to reduce our growth rate as oil prices have gone up.

With the data that we've given you for the rest of 2018 and in fact what we're saying is we're pretty close to the bottom end of that range.

And I think, you should look at that mid- to high single digit as a sort of bracketing where we expect that growth to be.

Very helpful.

And then in terms of, Marty, the accelerating RASM environment that you've been highlighting.

What do you attribute that to?

Is it fuel pass-through?

Do you see demand accelerating?

Is it particular markets?

Just some thoughts here would be great.

Well, with respect to what we're seeing on the revenue front, and we are absolutely seeing close-in strengths, for close-in bookings.

I think, if you -- there's been some discussion as far as how much of this may have been impacted by easy comps last year from ULCC, the fare environment we had last summer.

But frankly, we're seeing in both ULCC and in non-ULCC markets.

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

I'm just wondering if you can -- I appreciate all the detail on the CASMx that you have, but wondering if you could help me walk through it a little bit.

I'm just looking at the sequential trend from 3Q to 4Q.

And I know there is like 1 point of items that shifted from the first half that probably doesn't show up in 4Q, and 4Q, I know, has about a couple of points of easier comp from the tax bonuses.

Does the remaining swing from kind of the 3Q to 4Q, that you're expecting there, could you explain like what really is helping to shore that up?

Because that seems like a pretty big swing and is it all kind of the structural program or am I missing something in that swing?

Savi, it's Steve here.

I don't say I'm pleased with the underlying CASMx performance.

Not certainly as we think going forward, but in terms of what we delivered in Q2 and half 1. Just to give you some flavor, your question on Q3 CASM.

As a reminder, we have 0.5 point of sales and marketing spend shifted from Q2 to Q3.

And we called out back in Q1 0.5 point of maintenance cost that transferred from Q1 to Q3.

I think, the other thing you've got to keep in mind is that we're maintaining our full year CASM guide, even that we pulled 1.4 points of capacity from Q3, and we've just announced a subsequent 2 points of capacity reduction in Q4.

The continual evolution of the structural cost program and the ramp of the $154 million for 2020 that we announced this morning is seeing the inflection points as we drive towards the second half of the year.

So you're right, as we pulled out in the prepared remarks, there is some underlying comps.

But I'm very, very pleased not only with the progress we've made in the early part of the year, but the continued declines you're going to see in CASM as we migrate to the second half of the year.

Steve, sorry, just to clarify.

I was kind of considering the swing from 3Q to 4Q.

That seems like a quite good improvement.

And I know there's about 3 of those that I can point to.

Is the rest all coming from the structural program, just showing up in 4Q more so?

That's correct.

We -- as we start lapping through some of the structural cost initiatives that we've been driving forward, that's the -- that's really helping with our inflection point.

All right.

Great.

And if I can follow-up on the ancillary platform conversion.

I may not have been aware of it.

Could you just elaborate a little bit on that and maybe if you can the ancillary changes in the coming weeks?

Thanks, Savi.

It's Marty.

I'll take that one.

Yes, I think if you go back to the announcement we made earlier in the year of setting up JetBlue Travel Products as a subsidiary, I think there was a sign of the excitement we have about travel products as being highly accretive product line for us.

One of the things we identified very early on was that our historical white-labeled platform was not going to let us do everything we wanted to do with respect to effectively selling and merchandising all these products.

In addition, we were not satisfied with our ability to cross-sell on jetblue.com itself, products like rental cars, hotels, et cetera.

So in the middle of the second quarter, we went to a new platform that's more fully integrated with jetblue.com.

We did forecast some teething pains.

I'd say they went longer than we expected it to.

We have a long punch list of issues and fixes.

And I think we're well along the way where we wanted to be.

But our expectations are very high, and we think that this is going to be a very important source of accretion for us going forward.

And we will have more talk about at our Investor Day about some of the paths for that.

Our next question comes from the line of Michael Linenberg from Deutsche Bank.

Two questions here, actually.

Just the $30 million to $40 million of profit improvement moving out of the intra-West to the transcon is -- so presumably that obviously -- well, not obviously, does that include the foregone losses that are tied to the intra-West flying, number 1, and sort of 1 -- that's 1A.

1B would be, then the new stuff that you're doing, if you didn't include the losses, what would be the underlying drive -- profitability driver of that?

Okay.

I'm not sure I understood the second question.

Let me take the first one.

Yes, that is a net number.

So it's the benefit from a loss avoidance for the intra-West.

And I think it's not the news both from us and the industry that the intra-West market is unusually soft.

But the net benefit includes the upside of putting those aircraft into the destination markets where they're going to.

And again, having said that, that really kicks in first quarter as far as the net benefit, mostly because of the new flying ends up in ramp a little bit.

We make the change in September and going forward.

Okay.

And yes, Marty, does that answer kind of the second piece, sorry for the -- confusing way that I asked it.

And then just to Steve, on your CapEx, the guide for the year, it's still a gap of about $200 million.

And I know, as we're moving through the year, what's the difference between the bid ask there?

I know that timing is probably part of that, but it's still a pretty wide gap.

It's 20% of the base.

What -- are you going to take more airplanes a little bit sooner or is it timing of predelivery deposits?

I would figure that gap would have narrowed by now.

So Mike, again, I'll try and sort of answer the question.

We increased our CapEx guide by $100 million as a midpoint when we announced the fleet order.

So we have PDPs associated with the 60 A220s that we ordered.

The other aspect is our non-aircraft CapEx.

Obviously, the vast majority of our CapEx guide is associated with the fleet.

But obviously, we also have additional non-aircraft CapEx, but we have not changed the guide associated with that.

And then obviously, the underlying guide was just applicable to our existing order book, which, for this year, is pretty much back-ended.

So I'm not clear if that fully answers your question, but as a matter of that, our guide increased by $100 million, it's CapEx for fleet and non-fleet, and it's a little back-ended because of delivery schedule.

Okay.

And maybe I was getting at the fact I know because of the delays with aircraft deliveries from the OEMs, I guess, it's been harder for people to kind of nail down what their CapEx is actually going to be for the year-end, hence, the wide range.

Maybe that's what's going on?

No.

And to be very candid, we've had good timing and delivery schedule from our OEMs, and we haven't seen any sort of delays to aircraft deliveries this year.

So the range is pretty much where it was other than the A220s.

So nothing really to see from our perspective for the CapEx guide this year.

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

Robin, on the relative margin emphasis, that was the backbone of one of United's turnaround efforts at one point.

And it, frankly, didn't work out particularly well for them.

They've backed away from it since that time.

Personally, I found it somewhat refreshing that Delta, just a few weeks ago, started putting greater emphasis on expanding margins from current levels.

And most of the investor feedback that I received on that has been favorable.

I get that the relative margin story is the fairly easy one to convey, particularly with employees, I suppose.

But it's not clear to me that it's actually the best message for your investors.

Have you given any recent thought to this?

No.

Thanks, Jamie.

And I think that, if I just go back a couple of years, and when we were talking about sort of our margin performance, our first priority really was to get to above average industry margins.

And that's what we've been over the last couple of years focusing on.

It is very disappointing to me and the team here that as a result of the latest quarter within our deck that we've actually fallen below that because that is an absolute focus.

And I don't think that we should be using higher oil prices as an excuse.

So our commitment to execute to our goal of superior margins, which is still a relative measure, then that is where we are.

Right now, we are very focused on that.

That is about a number of revenue catalysts, some of which you will see over the coming months and some of which we'll share as we get into Investor Day.

It's about investing on our -- it's about continuing to execute on our structural cost program.

And we are very -- we are looking at how airlines are guiding and setting up targets.

We've -- it's obviously -- we've noticed some have moved to an EPS guide, and that's something that we'll come back to.

Because at the end of the day, we want to drive great absolute margins, and we want to make sure when we compare relative to others that we are delivering superior margins because that's how we make ourselves both an investable business and an investable company within that sector.

Well as a follow-up to that, Robin.

On a high level, what's the point of growth in the first place?

I mean, if I look at pretax income over the last 3 years, it's down by about 1/3, the stock is down about the same thing, capacity is up 20%.

I mean, it seems like the more you grow, the less you earn.

And I would totally understand it if you were still in the start-up phase.

But can you just explain, again, how you justify continued growth of any level?

And have you ever even contemplated a no-growth outcome?

Or is it simply too ingrained in your DNA at this point?

No.

Thanks, Jamie.

No, I mean, I think what I'd say, that growth has been very, very focused.

And we've been prepared to adjust when we need to take that capacity down.

The first half of this year, we grew less than industry, and we've taken 2 points out of quarter 4, and we haven't hesitated to do that.

So we're not -- we've not weighted capacity for the sake of capacity.

What I'd point out though, and you understand the network business extremely well, our 2 projects for growth over the last few years have been Boston and Fort Lauderdale.

They've actually been a source of RASM strength for us, and they are markets where we are relatively underweighted in terms of our share.

And so we have not got to that point on the S-curve yet, where we're growing them and we're getting diminished returns.

And so that's -- we view our growth as very focused, very accretive.

I think, we would say, and I'll just say that we have actually done well in terms of the unit revenue performance over the years with our growth rate, but we've underdelivered on cost.

And that's what we are focused through our structural cost program because I couldn't agree with that comment I just made myself more (inaudible).

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

You may not be in a position to guide to '19 CASM, specifically, but I wonder if you could just remind us to the quantification of the tailwinds that you expect.

One, from fleet refresh.

And two, from the structural cost progress, which you've cited.

If we add those up, could that be a couple of points of tailwind or offset next year?

Duane, it's Steve here.

I suppose when we think about 2019, we are approaching 2019 with a cautious view on capacity.

And as Robin alluded to, we're showing that this year, and we're continuing to adjust as required.

We do expect to give further color at our Investor Day in October on how 2019 and 2020 will fit into our CASM commitments.

But I think, you're right.

The 2 biggest tailwinds that we have, number 1 is the structural cost program, which we are making significant progress with and making good strides with that as we talked about this morning.

The second one is the fleet restyling on the A320 fleet.

As a reminder, we have 130 A320s.

We're going through the restyling effort.

We're happy with the progress we're making so far, both from an economic standpoint and from a customer NPS standpoint.

And the results have been very good.

And we're getting to the point where we're ready to ramp up the mob line.

So we remain confident that program will continue to ramp and complete by the end of 2020, and that will also be another great tailwind for us along with the structural cost program.

Okay.

And then with respect to the PSS system RFP that you mentioned, can you just expand on what you hope to accomplish with that?

What functionality do you lack today?

What's the economic opportunity there?

No.

It's alright Duane, I think the RFP is really to cover a number of items.

Number 1, as we've gone through the structural cost program, we are very, very keen to test the market, go through an RFP process to make sure that we get best-in-class economics to support our structural cost program.

Secondly, as we think about customer self-service and customer flow, again, to drive efficiencies and customer satisfaction, we need to again think about what's the best-in-class system to support that.

And then thirdly, thinking about the right systems to support our revenue ancillaries, opportunities and also with regards to making the lives of our crewmembers easier when they're supporting our customers going forward.

So it's a holistic approach to make sure that the end of this process, we have best-in-class economics, best-in-class systems, and the flexibility with these platforms to grow expeditiously and efficiently as the changing economic and external environment changes so we can drive it forward.

So we're very excited to be going through this process.

And as we reach to the latter stage of that, we'll, obviously, give you guys further updates as we go forward.

Our next question comes from the line of Brandon Oglenski from Barclays.

Steve, I just wanted to reconcile that 0 to 1% CAGR you have on the CASM outlook through 2020.

If I'm not mistaken, I think that excludes the cost of the A220 transition that you guys highlighted, I think, 1 week or 2 ago.

And I think it also excludes an impact from a new pilot deal, right, as well as accelerated depreciation on the E190's.

So I don't mean this to be a pointed question, but I guess, when we look back 2 years from now, are we going to be looking at a 2020 CAGR and CASM that will be above that range because of these items, and we just never really see cost come out of the network?

So great question, Brandon.

Let me just give some real clarity on this.

The 0 to 1% CAGR covers the 2018 to 2020 period with a 2017 base.

That excludes the fleet deal, but includes an ALPA deal.

So when we talked earlier about tailwinds and headwinds, we, obviously, got the tailwind associated with the structural cost program.

We've got the restyling of the A320s.

But we've got headwinds of the ALPA deal.

That is all included in the 0 to 1% CAGR.

The fleet deal, the E190, as we've been talking about for the last 18 months, was explicitly excluded from 0 to 1%.

Now in terms of what the impacts of that are.

Number 1, we, as we reported on our earnings today, took an impairment on the E190s.

And so the accelerated depreciation associated with the E190s is pretty de minimis.

And we are not changing the guide in any way associated with that.

The cash transition costs associated with bringing the A220s into the fleet, we talked about on our fleet update call 2 weeks ago, which equates to about 25 basis points.

So when you look at all of the economics and you look at our commitments, the only thing that is explicitly excluded from the 0 to 1% guide is the 25 basis points associated with the cash costs for the A220 transition.

Hopefully, Brandon, that gives you some clarity with regards to your question.

No, it definitely does.

And then on the maintenance side, because you've called out the existing fleet, the A320 engine contract as being pretty sizable headwind in the last couple of years.

And when we benchmark your maintenance cost consulting carriers that appears to be such.

But it does also seem to be taking time to get a new contract in place.

Can you just speak to, does that mean it's more difficulty to get the savings you initially expected?

Or should we still be thinking that's probably the largest driver of cost savings in the next few years?

I think, what I want to make sure that the whole investment community understands is that we are resetting the cost structure for JetBlue and the margins assumptions for JetBlue in the medium to long term.

These are significant negotiations and significant deals that we're doing with business partners.

So if you think about the work we've done over the last 6 months with regards to looking at the NEO engine deals for that 85 NEO aircraft, we thought very long and hard about the E190 replacement and thought about how that implication played into that.

We've also looked at the LLP costs associated with the existing E190 fleet and making sure that we played that into the mix as well to make sure that we got the very best deals for JetBlue and also the best deals for our owners.

The V2500 engine deal is yet another pillar of the Tech Ops initiatives that we're working through.

And again, I can't reiterate just how strategic this is, and how much work is going into this.

So we are being very, very measured and very thoughtful about how we work through these initiatives and how they are linked and how they impact each other.

And so we will absolutely not rush one individual deal to the detriment of the overall structural cost program or the long-term cost savings trajectory for JetBlue.

So hopefully, that gives you some context about how we're thinking about the sequencing and how disciplined we are about the negotiations and the approach to these very important items.

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

The capacity cuts that you guys announced for this year, were these reductions to stuff that was in the prior year schedule or are they just contemplated adds that you're scrapping?

I'm asking that in the context of your fuel gallon consumption for 2018 actually going up from a few months ago despite the lower capacity.

I'm just trying to reconcile all this stuff.

Hunter, it's Marty.

Thanks for the question.

With respect to where the cuts are going to be, it's going to be very biased towards off-peak flying on either multifrequency markets.

It's -- I wouldn't say that there's any sort of pattern as far as whether it's new routes or old routes.

I'd call this normal course of business as we go through capacity adjustments.

Okay.

And as it relates to the gallon consumption, was that just sort of like a miss forecast or something?

Or is there, I mean, more idling?

I mean, like how are you -- how does that factor in?

(inaudible), it's Steve here.

Just to give you some perspective.

We saw overlap in the ATC in the hurricanes of last year.

And specifically with regards to the economics around the fuel burn.

I'll get Dave to follow you with some specific details.

But you should think about the fact that we're lapping those 2 specific items from last year.

Hunter, can I dive in for a second?

Hunter, if your question is, are we cutting capacity that's already loaded, was that what you meant?

Yes.

I'm listening -- okay.

Everything we're cutting is -- what we're cutting is already loaded, yes.

So I don't think I fully understood, but yes, let me -- I want to clarify that.

Got it.

Okay.

Yes, I'm sorry, I can be long-winded.

That's perfect.

And then, Rob, how do you think about M&A, either through the lens of sale or an acquisition?

And how does the long-term CASM CAGR target factor into your view on any dealmaking?

No.

Thanks, Hunter.

I appreciate the question.

I mean, we are 100% focused on our organic plan.

As Steve said, we're about not just resetting the cost structure of JetBlue over the next 3 years, but setting it for the next decade.

The fleet deal is an extremely important part of that.

So that's how we're setting up and running this company.

We believe that, that drives a path to superior margins and our shareholder returns that will be very rewarding.

And so we are focused on that, and we're not distracted by anything else.

Our next question comes from the line of Jack Atkins from Stephens.

Marty, just going back to an earlier question on some of the ancillary revenue initiatives that you guys plan to roll in over the next few months.

Could you just expand on that for a moment because I didn't sort of get a clear picture on what exactly you all plan to sort of move forward with on the ancillary side that maybe we're not currently aware of today?

Just some more color on that particular part of the revenue story would be helpful.

Jack, thanks for the question.

Obviously, anything with respect to changes in pricing over the future is really not something I can get into detail about.

I want to sort of bring it back to the higher level, which is to the extent that we saw a shortage in ancillary tied to the vacations platform cut over, that's, obviously, something we want to find a way to make up in other places.

But I really can't get into any more detail about what we should see going forward until we announce.

Okay, okay.

And then, I guess, Marty, the next one is for you as well.

When you think about the average fuel cost per gallon in the second quarter, looking at that on a 2-year stack basis, I believe it's up 59% year-over-year -- 59% versus 2016 levels.

How much of that rise in fuel prices do you think you guys have been able to recover so far through higher fares?

And just sort of a follow-up to that.

What do you think is really holding the industry back from really raising fares at a more rapid pace to really offset these fuel prices that we've been seeing moving up over the last couple of years?

Well, 2 good questions.

I mean, first of all, with respect to the recapture of the current fuel increase, I actually don't have it over 2 years.

I would say, over the last -- this most recent run, we're well under 50% as far as our recapture.

And frankly, that's why we're taking some of the actions we talked about on this call with respect to ancillary changes and capacity cuts.

To ladder up to your bigger question, which is about the industry and how the industry would get there.

That's - for mine -- is much bigger than mine.

All I can control is what JetBlue does, and we've -- as I've said on these calls many times, we do our own thing.

But the right thing for us to do is to make these adjustments, including the capacity cuts in the fourth quarter and that's the path we're following going forward.

We take our commitments on margin very, very seriously and that's why we've taken the actions that we've talked about today.

Our next question comes from the line of Kevin Crissey from Citigroup.

On 2019, can you talk about what capacity growth would come solely from the Cabin Restyling, assuming you kept it on current pace?

Obviously, you have some flexibility there.

But just trying to understand what your base growth rate would be just simply from the additional seats.

Kevin, Steve here.

We -- as I said to the earlier question, we expect to give further color sort of at Investor Day in October.

If you look back at our Investor Day in 2016, we talked about the ramp of the restyling program.

So in the interim, I'd refer you to those materials.

But we will be giving more color as we get into the Investor Day about some of those component parts and how the ramp increases.

Okay.

And I don't really want to do seeing is there's been pressure on the call.

But going back to CASMx, what I'm struggling with, and I think a lot of investors are looking at JetBlue and saying, "If they hit a better CASM story, they're really good at RASM, and this would be quite easy for the long side.

They have concerns on the CASMx." When I look at it, I say, some of it has to do, in my view, on kind of backloading some of the maintenance expense on some of the aircraft.

What I struggle with though is that I don't understand why they weren't better CASMx years in their early days.

So maybe you could provide broad -- or maybe, it's Robin, could provide long-term view on CASMx?

And why it wasn't really good early?

I get why there has been pressure on the maintenance, particularly, the Tech Ops lines in recent years.

We want to get a sense for what other areas does JetBlue have CASMx challenges?

Thanks, Kevin.

I'll jump on that one, and maybe have your thoughts as well having worked through in the past.

But we're very focused on the future.

We are doing a number of things.

I mean, the support review we did last week had an impact on a significant number of people, who've been here a long time, these things are never easy.

But I think shows our absolute commitment to changing the way that we think about cost, changing the way that our owners think about costs.

We want to be an airline that becomes very reliable and very consistent in delivering year-after-year strong unit cost performance.

And we know we haven't done that in the past, and we're going about fixing it.

Now as you and others know, when you benchmark us, the maintenance cost is an area where we significantly underperform, not that there aren't other areas of opportunity, and Steve highlighted some of those and what we're doing about it, but maintenance is an area where we have had some big gaps.

These are long-term complex contracts that you have to work through.

We've been knocking them over one at a time.

Steve talked about the update to the E190 LLP stacks in the call earlier.

We talked about at the NEO engine deal, which would be kicked in for the most part post-2020, but again, it's going to be a good guide as we look beyond 2020.

Now we are focused on the V2500, and we continue to do that.

And I think also taking advantage as we grow of our increased leverage, taking advantage of our balance sheet strength as we grow, things that we didn't necessarily have in the early years.

Our next question comes from the line of Andrew Didora from Bank of America.

Marty, I just had one question here.

I'm just trying to understand your 3Q revenue guide a little bit more.

I guess if I take out the 1-point impact from the travel platform in 3Q, your core is still up around 2.5% at the midpoint, which is basically unchanged from your core 2Q performance.

So if close-in is getting better, your scheduled capacity is not that different 2Q to 3Q, why is core RASM not better?

Does it just have to do with maybe some Jewish holiday shift in September or is it really just conservatism at this point in time?

Thanks, Andrew.

And yes, we did -- I did call up a couple of other pieces.

Start with we're lapping hurricanes from last year, which was 0.2 point good guide.

We also talked about Haiti.

Yom Kippur, that's at least 0.1 point guide for us.

So there's another 0.5 point in there right off the bat.

So I do see sequential improvement when you strip out all those things.

Obviously, we like it to be better.

And frankly, that's why we're coming for the initiatives that we just talked about earlier in the call.

Our next question comes from the line of Helane Becker from Cowen.

Just a couple of questions.

One, the -- can you say the improvement you've seen in your net promotor score?

I think, Steve or Marty you referred to it earlier, in the presentation.

I'm just wondering if you can just mention the improvement.

Two, you talked about your traffic control delays last year, and we're just coming up on that, now this summer.

I'm wondering if you've seen improvement there?

And if you're -- have talked to the FAA and getting ready heading into August?

And then finally, I think you guys invested in ClimaCell technology.

And so I'm wondering if that's going to help you with respect to weather and how that adjusts your cost structure, if at all?

Great.

Thanks, Helane.

I think -- this is Joanna, I'll take that one.

So first in terms of the net promoter score increase.

I think, you're referring to the impact of the A320 restyling and what that's having on our net promoter score numbers.

We're seeing an in excess of 5-point improvement in NPS with regard to the customer experience in the Restyle Cabins.

So that's all positive news and trending in the right direction.

With regard to ATC delays and operational performance, obviously, where we find our network footprint is the most probably challenged one in the industry given the congestion and delays in the New York and Boston airspace.

Our focus is on what we can control, and I think we're pleased with the performance that we've seen in the first half of the summer.

Obviously, we're focused on running an efficient operation and continuing to make improvements.

We have made a number of tactical and focused investments to improve our performance, being mindful of our cost commitments and keeping an eye on margins.

I think, we -- Robin mentioned nearly 10-point improvement in A14.

So trending in the right direction, but we still have half of summer ahead of us, and if you are living in New York this week, you will see the volatile weather outside for the next few days.

And with regard to your last question, ClimaCell, yes, we are an investor in ClimaCell.

We are very excited about the real-time weather data that ClimaCell can bring to the table.

And we are currently working with them on a number of prototypes, but it's a little too early to tell where this could all go.

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

Marty, correct me, if I missed this.

But the 1-point RASM headwind in third quarter.

Should we expect that to continue into fourth quarter or do some of these initiatives that you're rolling out offset that?

Joe, thanks for asking.

Thanks for the question.

Obviously, we're not guiding fourth quarter yet.

But I will say that all the initiatives that we talked about, whether it's capacity cuts, ancillary changes, I think it's all part of the full tapestry of what we want to do to make sure we make our margin commitments.

So we'll have more to say about fourth quarter as we get closer in.

But I'll just sort of ladder up and say, at a high level, we take the commitment very seriously on margin, and this is all part of making sure we accomplish that.

Just to be clear on vacations.

I'd say last week or 2 weeks, we are seeing recovery as a -- by team, IT and our business partner have addressed a lot of the issues.

So it's absolutely on the right path.

Okay, okay.

And then Marty, I think you mentioned -- I think you described the inter-Cal market as unnecessarily or unusually soft.

Can you just provide your perspective on why that is?

I could speak for JetBlue.

And frankly, we had great aspirations for what we wanted to do on Long Beach.

It did include international expansion.

And from our perspective, the rejection of FIS facility at the airport was really the -- a deciding factor for our decision at Long Beach.

We had full capacity into the intra-West market, and it is a very tough yield environment.

And frankly, as sort of the number 5 player, there just was not really a place for us.

I wish things had worked out with the airport for what we have originally laid out.

We thought it was great for the citizens of the Basin to get lower fares into Mexico.

But unfortunately, it didn't work out.

So we just have to move on.

That concludes our second quarter 2018 conference call.

Thanks for joining us.

Have a great day.

And again, that will conclude today's conference.

Thank you for your participation.