JetBlue Airways Corp (JBLU) 2018 Q3 法說會逐字稿

Good morning.

My name is James.

I would like to welcome everyone to the JetBlue Airways Third Quarter 2018 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.

Thanks, James.

Good morning, everyone, and thanks for joining us for our third 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 of 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; Marty St.

James -- Marty St.

George, EVP, Commercial and Planning; Steve Priest, our EVP and CFO; and Joanna Geraghty, our President and Chief Operating 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 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 CEO.

Good morning, everyone.

Good morning, Dave, and thanks for joining us today.

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

Before we start, as usual, I'd like to thank our 22,000 crew members across our network for their hard work delivering the JetBlue experience every day to our customers.

Starting on Slide 4 of our presentation.

Our third quarter adjusted operating income was $195 million.

Our adjusted pretax margin was 9%, and our adjusted earnings per share were $0.43.

This quarter, our financial performance was impacted by higher fuel prices, which increased approximately 37% year-over-year.

At our Investor Day, in early October, we showed our plan to help us improve our margins and achieve our 2020 EPS target of between $2.50 and $3 per share.

A higher oil environment pressures margins at least temporarily, but we have built a plan to improve our earnings by focusing on the areas we can control.

Executing that plan, we believe, will expand margins in 2019, and again, in 2020.

We've been taking actions to recapture higher fuel cost through price both with fare increases over recent months and through ancillary revenue initiatives.

During 2019, we expect to see further earnings benefit from our network reallocations as well as from our ancillary revenue initiatives.

We're already seeing the benefits of building relevance in our primary focus cities as RASM continues to show strength during the second half of the year.

At Investor Day, we talked about our expectation to add 1 to 1.5 points of RASM benefit for calendar year 2019 from both our network and product building blocks.

As we look to 2019, we plan to balance near fuel term pressure with the RASM benefit that comes from greater relevance in our focus cities.

We continue to expect capacity growth of between 5% and 7%.

Turning to our fleet and cost building blocks.

We are making investments in margin-accretive aircraft and finding ways to reduce our controllable costs to support earnings growth.

I'm particularly pleased with the progress we are making on the structural cost program in securing over $173 million in 2020 cost savings.

We're on track to hit our 2018 CASM ex-fuel guidance, despite filling capacity in the second half of the year to respond to higher fuel prices.

We're taking measurable actions as it relates to our long-term strategy through environmental, social and governance or ESG initiatives.

We are aligning our efforts to mitigate the impact of changes in the fuel market by flying more efficient aircraft and optimizing our fleet fuel consumption.

We have signed a renewable jet fuel purchase agreement for a total of 330 million gallons or about 4% of our network consumption.

We recently took delivery of an A321 aircraft that was powered with a renewable jet fuel blend.

This has given us hands-on exposure and experience with infrastructure for renewable jet fuel in the Eastern U.S., where we are the leading low-cost carrier.

We've also announced the plan -- our plan to retrofit our entire Airbus fleet with Vortex Generators to reduce noise in the communities where our customers and crew members live and work.

We estimate that this will help us address pending local regulation.

Before I pass the call over to Marty, I'm pleased with the progress we're making on our building blocks we laid out at Investor Day.

Since 2014, we have a track record of executing our plan, and through revenue initiatives and improving cost control, we have a path to increase our margins.

Although it's hard to predict the exact price of oil, I'm optimistic we will see an improvement in our absolute margins in 2019.

I feel strongly that achieving this margin expansion in 2019 is essential on our part to achieve the EPS goals we laid out in 2020.

We have the culture, the brand and the geography we need to be successful.

We believe that realizing the opportunities through our revenue performance and cost initiative will sustain high earnings growth and improve our returns for years to come.

Marty, over to you.

Thank you, Robin.

Let me start with our capacity outlook on Slide 6.

We continue to grow our capacity on the lower end of our mid- to high single-digit range.

During the third quarter, our flown ASMs grew by 8.7%, slightly above the midpoint of our guidance range of 7.5% to 9.5%.

Our scheduled capacity growth for fourth quarter is approximately 6%.

We expect flown capacity growth of 7.5% to 9.5% in the fourth quarter 2018, as we lap the 2.9 points of storm impact in fourth quarter 2017.

Our capacity in the fourth quarter includes a previously announced 2 point ASM growth reduction to mitigate the impact of higher oil.

And follows the 0.5 point reduction we made for the third quarter.

Turning to our network.

We continue to upgauge both our New York and Boston markets with our margin accretive A321 All-Core aircraft.

In Fort Lauderdale, RASM outperformed our system average for the sixth consecutive quarter as our growing relevance is translating into revenue strength.

Our transcon franchise, including both Mint and non-Mint markets, remained strong with RASM performance beating our expectation in the quarter.

Regarding our network in the Caribbean and Latin region, we made tactical adjustments to address RASM trends, and we are seeing improvement in the fourth quarter revenue trends.

A few weeks ago, we announced a series of important changes that relate to our network reallocation building block, as discussed at our Investor Day.

We're reallocating underperforming routes to our 3 primary focus cities and expect revenue benefits of $100 million to $120 million by 2020.

We have a list of opportunities to support RASM and managing growth in our primary focus cities.

As we recently announced, we will be closing 3 BlueCities, Washington Dulles, St.

Croix and Daytona Beach.

We plan to convert a fourth BlueCity, Portland, Maine to seasonal service.

And we are reducing frequencies to Mexico City from both Fort Lauderdale and Orlando.

These network changes follow our recent redeployments from Long Beach to transcon markets which we announced in April and take effect throughout the fourth quarter.

We do not take these changes lightly, as we know these relocations impact a number of our crew members.

Turning to Slide 7 and the revenue outlook.

Third quarter RASM grew 1.7%, which is above the midpoint of our updated guidance of 1% to 3%, when excluding the 4/10 of a point impact from severe weather during September.

We are pleased with our quarterly RASM, which was in line with the 2.2% achieved during the first half of the year, despite a full point of ancillary headwinds that we called out during our last earnings call.

During the quarter, we saw close-in demand trends improve across the network.

Demand in July and August were strong.

We were encouraged to see stronger offpeak demand than we saw in the first half of the year.

September started and ended extremely well, although bookings to weather-impacted destinations did slow temporarily as storms passed through.

By market, RASM was driven by strength in New York and Fort Lauderdale as well as in transcon.

We contine to see RASM pressure in Boston leisure markets and some pressure in Orlando.

We're encouraged that Boston leisure trends continue to improve sequentially.

Orlando is a highly price-elastic market with strong leisure demand and it has a history of absorbing additional capacity very well.

Our margin in Orlando remained near system average, even with high competitive capacity growth.

For the fourth quarter, we expect RASM growth between 1% and 4% year-over-year, which will represent sequential acceleration of RASM growth in the fourth quarter even with a 1 point tougher comparison.

September trends have carried into October, and bookings so far for Thanksgiving are strong, but we only have about 1/3 of December booked, trends so far are very encouraging.

In the fourth quarter, we also expect to see initial revenue benefits from our network and ancillary revenue changes launched in the third quarter.

Our West Coast network reallocation is performing according to expectations.

The ancillary changes are ramping, and are expected to attribute approximately $8 million in revenue during the fourth quarter.

Before I turn it over to Steve, I would like to add my thanks to our crew members for their hard work.

We are confident in our plan and in the investments we're making in the network to make JetBlue more relevant to our customers and more profitable for our owners.

Steve, over to you.

Thank you, Marty.

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

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

Revenue was $2 billion, up 10.5% year-over-year.

Adjusted pretax margin was 9%, down 7.3 percentage points from the third quarter of last year, mainly due to higher fuel prices.

Adjusted EPS was $0.43 per diluted share.

Our adjusted effective tax rate this quarter was 26%, and we expect our effective tax rate to be approximately 26% for the fourth quarter 2018.

We reported a $0.16 GAAP EPS, including onetime costs related to the E190 fleet transition on the pilot contract.

We are successfully managing near-term margin pressure from higher fuel through pricing, capacity and network adjustments to ramp up through the fourth quarter.

At our Investor Day earlier this month, we laid out our 5 building blocks to underpin our long-term plan to improve our margins and returns with a target of $2.50 to $3 in EPS for 2020.

Moving to Slide 10.

During the third quarter, CASM ex-fuel increased 3.2% year-over-year on the lower end of our updated guidance of 3% to 5%.

The third quarter unit costs included a 2 point headwind from the recently signed pilot contract.

Looking into the fourth quarter, we expect CASM ex-fuel growth to range between minus 3.5% to minus 1.5%, including 3 points of pressure related to the pilot deal.

We've seen a positive impact on cost from our investors -- investments in the operations.

Our one -- our on-time performance initiatives and assets to mitigate ATC challenges in the Northeast, have improved our A14 GAAP versus our peers, and are helping us to achieve our CASM targets.

And our 2 largest focus cities, New York and Boston, our A14 GAAP versus our peers have improved approximately 5 points compared to 2017.

Back in January, we laid out our 2018 cost guidance, including a second half inflection point in our underlying CASM ex-fuel growth trend.

And we'd like to say that we're on track to hit our plan, despite the added pressure from reducing our capacity in the second half.

I want to thank the teams within JetBlue that have put so much effort into finding added cost savings needed plus the lower capacity.

We will continue to find opportunities to mitigate these pressures, in addition to the savings from Structural Cost Program that build each quarter.

We continue to see sequential improvement in our underlying nonfuel costs and have made great progress during the second half of this year.

As we execute on our Structural Cost Program, we are confident we can deliver on our 2019 commitments made at Investor Day and are on track to achieve our 0-1 CASM CAGR through 2020.

Turning to Slide 11.

We are thrilled that last week, we closed our 250 aircraft delivery.

We anticipated ending 2018 with 253 aircrafts.

For reference, we have included our anticipated order book in the appendix section.

We believe our fleet is critical to improving returns.

Starting with the A320s, we expect to have 11 restyled aircraft by the year-end and anticipate to see the benefit of at least 60 additional restyled aircraft in 2019.

Next year, we expect to take our first A320neo to help us upgauge our primary focus cities.

These aircrafts have the latest technology in fuel efficiency and our new core product.

The majority of our CapEx is used to grow our fleet and enable our mid- to high single-digit growth to build relevance to our focus cities.

CapEx also helps us invest in our engines, transition out for E190 fleet and execute on our A320 restyling.

Our CapEx guidance for 2018 ranges between $1 billion and $1.2 billion, composed of up to $895 million to $1.1 billion in aircraft and the remainder for non-aircraft spend.

Turning to Slide 12.

The strength of our balance sheet allows us to invest in the business and return excess capital to our owners.

We have executed $375 million worth of share repurchase from $750 million authorization.

This quarter, we repaid $54 million in debt and raised nearly $261 million in secured aircraft debt.

We closed the quarter with an adjusted debt-to-cap ratio of 32.7% and our cash and investments of 12.6% of trailing 12-month revenue.

Lastly, we plan to continue our policy of opportunistic hedging to help protect our margins given the current oil price environment.

This quarter, we executed hedges for 7.7% of our expected fuel consumption for the rest of 2018 and 7.5% for the first half of 2019 in line with prior hedging positions.

We are excited about the opportunities in front of us to improve both margins and returns.

As we build relevance in our focus cities, it is critical that we execute on our plans to improve cost control, so we better convert growth and RASM strength into margins and EPS.

I would like to thank all of our crew members for helping us carry our momentum into the next couple of years with our 5 building blocks, and for working every day to create value for all of our stakeholders.

We will now take your questions.

Thanks, everyone.

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

Please go ahead with the instructions.

(Operator Instructions) Your first question comes from the line of Hunter Keay of Wolfe Research.

Rob, I'm not sure if you're prepared to discuss this, but be curious to know kind of what the early discussions have been like with the board, with the new additions of Ben and Sarah.

The question is really are they still sort of in information gathering mode, or are they kind of coming in and already sort of challenging some of the existing status quo?

No, good morning, Hunter.

And I appreciate the question.

No, I would say, they were both very engaged in their first board meetings.

Lots of questions, I mean, I think, you know Ben as well as I do.

He is not a shrinking violet.

And it's great to have them on the Board.

I mean, I think, we have a strong board.

We have a board that is very focused on delivering this plan.

And I think having Ben and Sarah join our board makes that even stronger.

Okay.

And then Steve, a little bit more of a follow up from the Analyst Day.

When you talked about renegotiating some of these maintenance agreements, you mentioned OEMs, but do these negotiations also involve some of your aftermarket providers.

I'm kind of curious to know, who exactly are you negotiating with?

And what are you looking to get other than just cost savings?

Thanks, Hunter.

A great question.

Yes, just to give full transparency.

As I've mentioned, when we look across our fleet, we have some newer aircraft and newer engines coming into the fleet.

But obviously we have our existing E190s and an existing fleet of -- Airbus fleet of around 190 aircraft.

When it comes to looking at both the airframe and the engine maintenance as we go forward, we have been engaging both in the market, we have been engaging both the OEMs and the MROs.

In terms of what we are looking at, it's a balanced approach.

It's not just about cost; it's about absolute quality because these assets that we go forward with have a life of around 25 years.

We have to make sure that the engineering and the maintenance from the airframes and the engines are top-notch.

Make sure that we get the right turnaround times with the said partners, because obviously the more the aircrafts are flying, the more they're driving returns and margins for JetBlue.

And so they are at the heart of a lot of what we're doing, and some of the materials we shared with you at Investor Day, we have seen significant CASM inflation pertaining to maintenance costs since 2010.

And so that is a critical and core part of the discussions and the negotiations that we're having.

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

2 questions here.

Just, I guess, to Marty with respect to the network realignment, I guess, another phase is kicking in in January of '19 or the March quarter of 2019.

Is that what's already been announced, what you -- the big press release that had a lot of the changes?

Or is there another phase subsequent to that, that we should anticipate?

Mike, thanks for the question.

No, what's kicking in, in the first half of 2019, are the things we've already announced.

So obviously, depending on seasonality, certain things make sense to do at certain times.

But when we laid out that run rate of $100 million to $120 million that was inclusive of everything that we had laid out at Investor Day.

Great.

And then just my second question to Robin.

And Robin, I think, you basically said that you are optimistic with respect to margin expansion in '19.

And I thought, I heard you qualify it by saying ex-fuel margin expansion.

How are you thinking about just overall margin expansion?

Are you cautious?

Do you think it's a reach, or am I reading too much into that?

No, just to clarify.

I wasn't saying ex-fuel, I was just sort of -- I made a comment that probably being in this industry for 30 years, you never know where fuel is going to go and there may be some extreme state.

But I'm very pleased, I mean, we've seen an uptick in fuel in the second half of the year.

I think JetBlue has been very proactive on capacity reductions.

I think we've been very proactive on fare increases.

I think we've been very proactive on ancillary revenue changes to do everything we can to mitigate the cost of higher fuel.

We don't want to use that as an excuse.

And margin expansion in 2019, even in a higher fuel environment, I'm very, very optimistic about, because we have a pathway to get there to layout the 2020 EPS goals, the 5 building blocks that we laid out.

Many of those start to kick in, in the early part of 2019.

We have the network building blocks that you just asked Marty about.

We have the structural cost program that continues to have added bite as we go through, just like we said it would.

So yes, we are very -- I am very confident, we are very confident that we will see absolute margin expansion in 2019, even if fuel was to rise from here.

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

This is actually Matt Wisniewski on for Brandon.

I was hoping you could talk about the competitiveness at high level in the largest 3 focused cities, JFK and Boston and Fort Lauderdale.

Seems like there's a decent amount of growth from some competitors in those markets?

And then as a side, could that potentially impact some of the commercial initiatives that were recently announced?

Matt, it's Marty.

I'll take that one.

So let's talk about the 3 focus cities independently.

New York, obviously, being a spot control market.

The real action we see in New York is gauge related, and we've been partaking in that pretty aggressively with the introduction of the all-core A321, highly margin accretive.

And it's been very helpful for us to continue to capture the normal day-to-day growth of a metro of 18 million people without being able to grow departures because of spot constraints.

I'll talk about Lauderdale and Boston separately.

First of all, Lauderdale obviously it's been a very competitive market for many, many years.

We have been competing against the ULCC for quite a while pretty aggressively.

I'd say, more recently, we've seen growth coming from another LCC.

I think if you look at the data that we put out in both the 2016 and the 2018 Investor Day decks, you can see that from a RASM performance and you can back into margin performance of that, we compete extremely well against those carriers.

And certainly I'd say not just on RASM, but also on margin, if you use data to back into the margin.

So we feel very confident about our short-term and long-term prospects in Fort Lauderdale.

I think if you look at the change that we announced, we have added a couple of more destinations for Fort Lauderdale through the network reallocation, and the biggest constraint we have at Fort Lauderdale right now is gate availability.

But we're very, very interested in more growth at Fort Lauderdale.

I'll take Boston next.

Boston, we've been working for many, many years with Massport to make sure that we can secure the gates we need to get to 200 flight-a-day level in Boston that we think the market requires.

And courtesy of Massport, we actually now secured gate space so we can get there.

We are very, very confident in our position in Boston right now.

I did call out that we had some RASM challenges in Boston, mostly on Boston leisure tied to growth from a legacy airline.

And frankly, if you look at our RASM results, we've seen some nice RASM acceleration in those markets over the last -- probably 2 quarters.

And then, I think if you get into first quarter 2019, the competitive capacity trend actually turns pretty nicely for us.

So we're very optimistic that we have the formula to be successful in Boston.

Given the geographic location, the market is absolutely positively made for an airline that specializes in point-to-point, has a business model that specializes in point-to-point.

You combine that with the product advantage that we have, whether it's free WiFi, LiveTV on mainline aircrafts, you name it, we're very upbeat in Boston.

Okay, great.

And as a quick follow-up, when we talk a lot about tech ops being the largest portion of the structural cost initiatives, but I noticed the second largest component, the kind of corporate portion, also has a lot of work -- maybe the most work remaining.

Can you give a quick update on that and then maybe potential timing?

Matt, Steve here.

Thank you very much for the question.

We continue to make progress on all 4 of the pillars of the structural cost program.

Following the update that we gave back at Investor Day and our 2Q earnings, we have continued to make some progress.

So the corporate pillar itself, there's obviously the support centers that support our front line crew members who support our customers.

And as you're probably aware, we went through a recent reorganization in our support centers that impacted around 10% of our crew members.

These initiatives are never easy, and these are challenges we go through those because it impacts some of our leaders and crew members, but we've gone through that.

In addition, a big part of the [POFA] initiative is associated with the sourcing.

So we have gone through a soup to nuts approach with regards to RFPs and looking at all of the $1.5 billion of third-party business partner spend that we have across JetBlue.

And we're going sector-by-sector, contract-by-contract to make sure that we go through that and drive cost savings for JetBlue.

The final item really pertains to some of our IT infrastructure, the way we have that data, the way we support the overall business and the initiatives that we have taken there.

So they are the primary 3 blocks within the corporate pillar.

And again, I'm pleased with the progress we're making, not only in the corporate initiatives but also the wider program as a whole.

And as we talked about today, we are up to $173 million of the $250 million to $300 million by 2020.

So well on track, and happy with the progress we've made.

Your next question comes from the line of Jamie Baker of JP Morgan.

First for Steve on the pilots.

Now that the ink is dry and you've got, what, I guess, about 3 or 4 months of operation, I guess, 3 months of operation under your belt, are there any inherent efficiencies that you're realizing or that you would expect to realize going forward relative to the sort of precontract construct?

Also any commentary on pilot hiring challenges?

Jamie, I'll take that one.

This is Joanna.

So in terms of efficiencies, the contract was just signed this past summer.

So we're in the process of implementing a number of the IT changes to support the work rule changes that we have ahead of us.

So we're very early in terms of that part of the process.

In terms of the pilot hiring, no, I mean, we are confident with our pilot hiring plan.

We are not seeing any challenges around the pipeline for pilots.

We actually just announced a class this week that we're hiring, so if anybody's interested on the phone, I am only kidding, but I know we're not seeing any challenges on the pilot pipeline either.

Okay, great.

And a follow up for, probably for Robin.

The topic of lifting the LaGuardia perimeter rule hasn't come up in a while.

I know at one point JetBlue was somewhat against the idea but your fleet plan has changed somewhat since then.

Any change in your personal view?

I would think that particularly given the strength of meeting the transcon that LaGuardia transcons could be potentially lucrative.

Thanks, Jamie.

No, my view hasn't changed.

I mean, just for those who don't know the perimeter rule that Jamie is referring to, it's a port rule, so it is different from the way the perimeter will work in DCA, port authority of New York and New Jersey.

And I think we've been very vocal about -- that the airports in New York work in a competitive balance, and that if you were to lift the perimeter rule at LaGuardia, there would be significantly more interest in LaGuardia to serve other markets.

And so for airlines like JetBlue that have a very small slot portfolio, we would be concerned that, that would put us at a disadvantage.

So we are open to conversation on that but we do think that any lifting of the perimeter rule will have to come with some kind of divestiture of slots to make sure LaGuardia stays with more competitive.

I would also say that with all the construction going on at both LaGuardia and JFK, LaGuardia at the moment and JFK planned, now is really not the time to be making that change.

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

Steve, I wonder if you could help us think about the unit cost progression in 2019?

Just I know in kind of the first half there's more pilot cost pressure.

And I think it gets better as you get into the second half.

But any thoughts there and how we should think about that?

I'm very pleased with the progress that we've made during '18, and how we're finishing the year as we go into '19.

I'm particularly pleased with the inflection point that we saw at the back end of '18 as we go through quarter 4, because if you think about the capacity pull that we took, both in Q3 and Q4, and you look at the original plan that we laid out back in January, we are absolutely executing to that.

And the reason I say that is that we are coming out of '18 in a strong position, as we enter into '19 with a structured cost program that continues to ramp as we go forward.

If you think about the headwinds that we have from the ALPA contract, the ALPA contract gives us a 3 point headwind in the first half of next year, but you can sort of see the guide that we gave at Investor Day in terms of the 0 to 2 so it's just a 2019 CASM, which absorbs that.

And as we still cycle through 2019, the structural cost program continues to ramp, we'll continue to have more P&L benefits associated with the structural cost program that will continue to offset the cost headwind that we have with the ALPA contract.

In addition, as I mentioned in my prepared comments, we will close 2018 with 11 restyled aircrafts, and we will be restyling up to 60 -- around 60 next year.

So again, from a tailwind perspective, it will continue to help us with our CASM progression.

So both as Robin talked about in terms of building blocks that are going to drive our margins up in 2019.

The CASM contribution -- the CASM's contribution to that will remain critical, and we're very pleased with the execution that we have seen so far with the Structural Cost Program.

And if I might ask on the fuel side, how should we think about fuel efficiency?

It seems like fuel efficiency has been pretty flat here in kind of '18, '19.

I know there's been some maybe last minute capacity arrangements that makes that a little tougher as well and storms.

How should we think about fuel efficiency?

Again, another great question.

I think, your comments are right.

It's been sort of pretty flat in terms of how we're seeing going forward.

The good news though is, you do see further fuel efficiency as we're doing more A321s into the fleet.

You're going to see some more neo aircraft coming during 2019, as we start to take deliveries of those.

And also with the restyled A320 fleet as that starts to ramp.

On an ASM basis, you're going to see more fuel efficiency going forward.

So I think the story has been sort of pretty flat, but we're confident that we'll continue to see more efficiency as we migrate and go forward through to 2019.

A follow up on that.

Should we assume that 2020 should see a bigger improvement than 2019?

Or is 2019 a big year?

I think you'll continue to see the ramp because, as we mentioned, we will have the full impact of the restyling completed.

As we go into 2020, you'll have the full year impact of the additional shelves that we're restyling in 2019.

We'll have a greater proportion of neos in the fleets at that point from the deliveries we're taking next year, a greater proportions of 321s overall.

So you will see sequential improvement in terms of the benefits, in terms of fuel consumption per ASM on an average basis as you migrate through the back of '18, through '19 and onto '20.

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

Most of my questions have been asked, but I wanted to go back to one of the charts you showed at Investor Day, showing the margin outperformance of the high density A321s, margin improvement of Mint as well as high density.

What did you intend to communicate with that slide?

And are you in any way sort of de-emphasizing premium, de-emphasizing Mint going forward?

This is Joanna.

I'll take that one.

So at Investor Day, we wanted to just illustrate how critical the A321 aircraft has been to our fleet.

It's a fantastic aircraft, both in the Mint configuration and also in the high density configuration.

We have announced and deployed the first and second phase of our Mint cities and they have done remarkably well from a margin perspective.

And now, as we look to the best and highest use of that asset, we're looking at the higher density versions and actually the margin on that in terms of where we are deploying it largely will be [on far] markets and single day flight leisure markets, the margin's actually exceeding that on our Mint route.

So it's really just a great news story all around both in the Mint configuration, but also in the all density configuration.

Okay.

So we shouldn't have interpreted that you're going to be pulling down Mint aircraft replacing it with high density, it's just a different objective?

Yes, just a different objective, and we are just trying to make sure that we put on these planes and use them in the best and highest possible way out there.

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

On the 320 restyling, given the limited number of aircraft currently restyled, are you able to sell them as a 162 seats yet or not?

Kevin, it's Marty.

Yes, we do.

We have them on closed rotations and we take them, we basically schedule them as they come out of the factory, and we are selling them with 162 seats.

Terrific.

And maybe a question for Joanna, now that you've been in your expanded role for a bit, can you talk about the changes you've been leading and how far along they are?

Or maybe how you see things changing, big picture discussion of what you see may be different in the future than maybe the way things operated in the past?

Sure.

Yes, so I mean from my perspective, there's been a few key areas that we are really drilling down on.

First, is cost.

Obviously, we are absolutely aware of our investors' views on cost, but also as we compare ourselves to other carriers, we need to start resetting our cost base for the future.

We have done I think a really good job on revenue historically and really growing RASM while also growing capacity.

And at the end of the day, we need to continue to do that.

So as you see sort of both top line and bottom line growth, we want to expand those margins.

Part of the network changes has been sort of under my leadership along with rolling out and announcing the evolution of our fair option.

So primary focus is cost, also looking at how do we continue to drive new revenue initiatives and then the third point is operational performance.

We are very mindful of the airspace we operate into and ensuring that we continue to make investments to tactically improve our operational performance in our key focus cities.

Terrific.

And if I can sneak one last one, it's real simple.

JetBlue vacations for Q4, is there anything of note in terms of pluses and minuses for RASM in Q4 as it relates to vacations?

Kevin, so we're still working on closing out some of the operational -- some of the technical issues with our platform.

We're a little bit behind in fourth quarter, but we have other parts of the revenue mix that are overperforming and that's what's created the guide that we laid out.

The most important thing for us to make sure that we're ready for the first week of January because that's by far the biggest booking week of the year.

And everything we are seeing right now makes us very confident that we're in a good spot.

I think the only thing I would add to that, Kevin, if I may because, I think, Marty made a great point about the challenges we've had with the cutover, but I feel very confident about having everything in place for a strong 2019.

As Marty says, we've got a leadership team in place now and we are working through some of those cutover issues, and so I expect 2019 to be a very strong year for vacations.

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

I guess just kind of circling back to some of the earlier questions.

I'm wondering if you can just give us some insight into what the revenue contribution is from Even More and Mint to overall results today?

So $7.7 billion in total revenue for this year.

What percent of that comes from the premium cabin?

And then I appreciate the shift to the denser aircraft, but it doesn't -- it's not like the premium cabin growth is helping here.

So I'm just wondering if you can just help us understand how you're thinking about the growth in the premium cabin space next year, so contribution today and growth next year is really what I'm trying to get at here.

We don't actually break out the Mint specifically.

We definitely break out Even More, and Even More has been a fantastic contributor for us.

It's well over $300 million right now.

I think if you look at what's happened in the most recent quarter, our Mint revenues, and again, we had a lot of growth this year in Mint, so I think it's important to make it clear I am looking at same-store sale because we can't take credit for all the new Mint routes.

But for routes that have been open at least a year, Mint revenue was up 14% and actually during that same period, Even More revenue was up 16%.

So they've actually been very nicely accretive to our results.

And I think back to the point that Joanna made earlier, what we laid out at Investor Day about the challenge of picking between high density 321s and the Mint-configured 321s is the definition of a high-class problem, and we have 2 really good uses of the airplane and our job is best and highest use, that's the most important thing for us.

I'll also mention that specifically with Mint, we're very happy with the acceptance on the new routes that we have added in, certainly that you have the secondary cities from Boston and New York, and I think that really ties to the corporate account strength that we have been able to get from having such a high-quality product.

Certainly we have a very, very good corporate account presence in Boston and a significantly improved corporate account presence in New York from corporate customers who -- travelers are sort of really desperate and angling to get on the Mint product.

And then, Marty, the growth in premium cabin, if we were just to smoosh Mint even more together, growth rate next year versus this year?

I don't want to guide that because we haven't even given the overall guidance.

But I will say, we are very optimistic about what we're seeing right now with both those.

I think it ties to one of the themes we have heard in earnings season in general, which is overall strength of the corporate market and certainly Mint and Even More are the where we are heavily exposed is a good way to that growth.

Okay.

Second question here, this is really an IT question, so I don't know if Eash is there or not, but just question really is just about challenges on implementing the IT infrastructure necessary to rollout Fare Families 2.0.

So I guess, I know it's probably a year off before you can execute on that, but I'm just wondering what some of the factors might be that could accelerate or potentially delay that rollout?

Sure.

So we have been scoping -- this is Joanna.

we have been scoping the implementation requirements for [rolling] Fare Options 2.0.

We, obviously, have several IT platforms that involve Datalex that provides the shopping platform, Sabre provides the reservation and booking platform behind it.

Those 2 systems need to speak in order for this to work.

So we've been working with both business partners in earnest for the last several months trying to make sure that all the requirements are fully outlined consistent with how we want to roll this out.

So yes, IT is a big lift here, it's the long pole in the tent, but we are confident that we are well on the path to ensuring that we can implement these changes in 2019.

And how many IT systems are involved, Joanna?

I'm not the IT expert, so I would say there's 2, at least Datalex and Sabre.

I'm sure there's a few other systems that support those systems behind the scenes, but those are the primary, I think IBM as well, those are the primary systems that are involved in making those changes.

Dan, I think, the only other thing I would add to that, although it's not directly linked to the Fare Options 2.0., we are also going through an RFP for new PFS or CFS, as we call it, because we never use the word passenger in JetBlue, we say customer, but it's the same system.

Eash and his team have done a great job over the last several years moving our dependency of that core system away from the original host that we have Datalex now for retailing.

We have the IBM, we do a lot of our self service and kiosk.

We built our own web services layer on top of that.

So all of those things mean that if we do make a decision to change CSF provider, it is nothing -- I don't want to underplay that it would be significant, but it will not be as significant as what we had to go through back in the 2010 cutover.

So we're also navigating that at the same time as this to make sure that the time line with the Fare Options rollout is not jeopardized by any potential change in the CSF.

What's the timeframe for that decision possibly in rollout, if you do make a change?

I'd say, these things kind of -- you want to get the decision as quickly as you can, but these are complex negotiations.

There's lots of -- as we saw with our E20 decision, there was a lot of value in letting it take as long as it took.

And so a certain extent, I feel the same about this.

So we're -- the teams are working through it.

I would say, we are definitely near the end of the process than the start, but I don't want to put an exact time line on it because there is still lots of conversations ahead of us with the various parties that we are talking to.

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

I think, Robin, last year, or maybe Joanna, you had just talked about operational issues and the improvement that you have seen.

And I know last year, you had cited ATC issues in New York as one of the 3rd quarter issues.

So I was wondering, if you could -- I don't know, maybe quantify the improvement on a year-on-year basis that you saw from either revenue terms or cost terms?

Sure.

So we made a number of strategic investments going into the summer to try to alleviate some of the operational concerns we had in the summer of 2017.

Those included very tactical cost conscious investments, so don't think about it as kind of spreading the creamy peanut butter over everything.

It was adding some time on West Coast Red Eyes.

We added some additional time for our technicians to have access to the aircraft to perform overnight maintenance.

We identified certain flights that had challenges with broken crew pairing.

Those are just some examples of what we did going to the summer.

And if you look at the summer, we've also been working proactively with the FAA to try to get ahead of any ATC challenges that are actually present.

I'll point out that August actually was a worse air traffic control month than what we saw in August of 2017.

And I think given some of the investments that we made, we did see some progress in terms of how JetBlue performed overall.

We've seen an improvement of about 5 points compared to where we were last year on A14, and we've also held our completion factors.

So I think all things trending in the right direction, but the reality is that JetBlue flies into the most congested airspace in The United States.

And we need to be very mindful of the types of investments that we do make because just adding blocks does not solve ATC challenges.

Robin and I were actually with the administrator last week and I think we continue to focus on infrastructure investments, next gen investments, focusing on the Northeast corridor and how we can make improvements there because obviously, JetBlue benefits significantly from that.

So a multipronged approach, but we are seeing improvements and have seen improvements this summer.

That's very helpful.

And then just on the fuel comment that was made earlier, I think 4% of fuel was, I guess, alternative, is that the right word to use?

And I'm just kind of wondering, is that a scalable number?

Can you get to something that is meaningful in terms of cost prediction using an alternative fuel or fuel blend?

Helane, thank you for the question.

I think with sustainable fuel, there are 2 sort of issues that you have to work through.

First of all, to make sure the source of the fuel is truly sustainable and something that can scale over time.

And secondly, that the cost of getting that biofuel blend is equivalent or better to what you would get through sort of normal jet purchase.

And we kind of took our time getting into this.

Sophia Mendelsohn, who is our Director of Sustainability, she really understands this space very well.

We have ended up with a business partner and a plan that we think over time can scale.

But we want to do it in a series of thoughtful steps to make sure we don't either, a, jeopardize supply, or b, create a cost to the airplane that's greater than what we would otherwise expect.

Got you.

So just to follow up briefly, is that like a 10-year thing or a 5-year thing?

How should we -- I mean, it's so small right now, but obviously, it has the potential to really be meaningful to your costs?

No, I mean, it will -- we haven't sort of shared sort of our own internal forecast of how we think that will ramp up.

But it's definitely a priority for us to increase that over time.

We are also working with the various fuel farms and infrastructure in different airports to make sure that we can supply into those as well.

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

Marty, just wondering if you can talk about demand for a second.

It would seem like the incremental revenue you're expecting from the ancillary changes would suggest that consumer behavior hasn't changed a whole lot.

So I'm wondering if you could just kind of talk to what that says about demand and should we look at that as effectively a fare increase, which would kind of mitigate further pressure on fares or do you think that, that's incremental to what you guys can do?

Joe, thanks for the question.

I mean, honestly, I think, if you look at the revenue environment we see right now, I think the entire industry is trying to react to what we're seeing as far as a run up in fuel prices.

I don't really look at the bag fee as being a sign off lack of pricing strength.

I think with what we are seeing in demand right now especially in peak periods, we are definitely seeing pricing strength.

In the third quarter, we led several fare increases that were successful in addition to changes in the ancillary world.

I don't -- my view is in the environment that the industry is in right now, we do need to recapture the impact of the fuel run up and I think if you look at the progression that we're showing right now between third quarter, you can back into the fourth quarter, which based on the guidance we gave, fuel price and RASM is sort of like 40% recapture, I think we're optimistic of good trajectory right now.

So no, I don't look at it as a substitute at all.

Yes, I guess what I was asking was it would seem like the incremental revenue you're expecting from that would suggest that demand can absorb that additional fare.

Is that what you are -- is that additional increased fare, if you want to look at it that way, is that what you're seeing?

Oh no, I definitely agree with that.

I think you're absolutely right.

And I think, it's what we are seeing in the demand environment overall and I think if you look at what we -- how we describe the more recent demand versus what we've said earlier is that, during the peak -- the 2 peak periods we're seeing acceleration.

And I think what we're more interested in is that even in the trough period, we are starting to see demand strengthen up a little bit.

So I think you're absolutely right on that.

Okay.

And then, Steve, just on the CapEx profile, I think there's some concern about what that looks like maybe beyond 2020 as the 220s start to ramp up.

So can you just talk about maybe your flexibility, whether it'd be from a referral standpoint or just aircraft, non-aircraft, about your ability to kind of manage that down if the economic environment changes?

Thank you very much for the question.

We always look to build flexibility into the future order book.

You'll recall we have moved the order book around a little bit over the last sort of 15 to 18 months.

We deferred 13 aircrafts in the early part of last year.

We then migrated through the 190 decision and we looked at the replacement aircraft as we went forward.

So it's critical for me that we maintain flexibility for every eventuality and we work very closely with the OEMs when we put these contracts together.

We have obviously outlined our CapEx guide.

We have been very transparent with the order book.

You can see that in the appendix of the materials we shared this morning.

We will and continue to maintain flexibility in terms of the delivery schedule and have a very close and symbiotic relationship with the OEMs that we deal with.

Your next question comes from the line of Susan Donofrio of Macquarie Capital.

All my questions were answered.

Great.

Thanks, Susan.

And that concludes our third 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.