JetBlue Airways Corp (JBLU) 2019 Q1 法說會逐字稿

Good morning. My name is Tammy. And I would like to welcome, everyone, to the JetBlue Airways First Quarter 2019 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, sir.

Thanks, Tammy. Good morning, everyone, and thanks for joining us for our first quarter 2019 earnings call. This morning, we issued our earnings release, our investor update and a presentation that we will 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. George, our Chief Commercial Officer; Steve Priest, our EVP, Chief Financial Officer; 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 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'll turn the call over to Robin.

Thanks, Dave. Good morning, and thank you, everyone, for joining us. I'd like to start with my thanks to our more than 22,000 crew members across our network. We are very proud of our team and the work they do every day to deliver the JetBlue experience. Our customers notice and recognize the work of our crew members. And as a result, JetBlue was awarded top honors as the Best Regional Business Class and Passenger Comfort in North America by TripAdvisor. We were also delighted that JetBlue was awarded a top spot amongst America's best employers by Forbes.

Starting on Slide 4 of our presentation. Our first quarter adjusted pretax income was $70 million. Our adjusted pretax margin was 3.7%, and our adjusted earnings per share was $0.16.

This quarter, our financial performance was impacted by the calendar placement of Easter and Passover holidays, the increased cost of the pilot contract and, as we disclosed in March, a softer revenue environment than initially expected.

In recent years, we have repeatedly demonstrated our ability to adapt to the changing revenue environment. To date, 2019 is proving to be no different. In early March, we highlighted some specific pressure points in our network as well as a softening in overall trough demand. To mitigate that headwind, we responded very quickly. We lowered our schedule capacity growth for the third year in a row to the lowest annual rate since the 2009 recession. We believe we have seen the bottom of the softening RASM environment. Based on current bookings, we are cautiously optimistic about trends improving. In our industry, there are many factors which we cannot control, such as fuel prices and GDP. But there are plenty of areas that we do control at JetBlue, and we're excited by our progress to continue to position our company to thrive.

We believe we will successfully execute our 5 building blocks laid out in our Investor Day, and we remain committed to our goal, delivering earnings per share between $2.50 and $3 by 2020. We also continue to expect margin expansion in 2019 and to further expand our margins in 2020.

We are making steady progress in each of our 5 building blocks to deliver our 2020 EPS goals. Our network reallocations and our ancillary revenue initiatives are ramping as expected. We're getting ready to rollout Fare Options 2.0 by the end of 2019. We are very pleased with our progress in our Structural Cost Program, which allowed us to deliver our CASM ex-fuel guidance during 2018 and in the first quarter of this year.

Furthermore, today, we remain on track to deliver our annual cost goals once again in 2019 despite lower capacity growth. On our fleet building block, we are pleased with the customer response to our growing fleet of restyled A320s. We are incorporating the latest in-flight entertainment technology in the second phase of this program. We are scheduled to take our first A321neo. In addition to bringing an enhanced customer experience, the NEO should deliver fuel savings and offer range capabilities. As an example, we recently announced flights from New York to Guayaquil, Ecuador. Beyond executing our 5 building blocks, we cannot be more excited about our work to position JetBlue for success beyond 2020.

Next year, we anticipate the first delivery of our margin accretive A220s. We believe this will be a game-changing aircraft to help us further reduce our unit costs, improve our margins and increase our EPS. As announced 2 weeks ago, we recently converted 13 A321s in our order book to A321LRs. We expect to begin our European service by adding London from Boston and New York starting in 2021.

Other beyond 2020 project include a new digital platform aimed to enhancing functionality and the customer experience, incentivizing self-service and reducing transactional costs. In our airports, we are testing biometrics at Boston, JFK, DCA and Fort Lauderdale. Currently, approximately 50 international flights per week are boarded using this cutting-edge technology in partnership with CBP and the TSA.

We are currently developing the next generation of a new customer relationship management platform. We also invested in our partner, gladly, to provide our crew members with a platform that aggregates all touch points with our customers under a single view, increasing efficiency and service levels as we grow.

We have talked about our progress in securing and developing valuable real estate in our network. This includes our plans to redevelop terminal 6 and 7 at JFK and our work to ensure we have the right infrastructure in Boston, Fort Lauderdale and Orlando to support our growth.

To that end, tomorrow we are breaking ground on an expansion of our training facilities in Orlando. This investment, which will include facilities for additional flight simulators, will support our growth into our third decade of operations.

As you can see, our work today not only helps drive our commitment to delivering our EPS goals by 2020 but also strengthens our position for success into the next decade.

Before turning the call over to Marty, I'd like to, again, thank our crew members to delivering a differentiated experience, helping us improve our operational and financial performance and delivering our goals. Marty?

Thank you, Robin. I'll start with our capacity outlook on Slide 6. During the first quarter, our flown capacity growth was 10.1%, well above the upper end of our guidance range of 7.5% to 9.5%. This was due to strong completion factor in the quarter. This quarter, we had fewer cancellations resulting from a lower number of significant winter storms than we expected in our original guidance from January.

From the second quarter 2019, we expect capacity growth between 4.5% and 6.5%. For the full year, we continue to plan capacity growth between 4.5% and 6.5%. This annual growth rate is the updated guidance from early March when we lowered our annual capacity by 0.5 point to mitigate softer RASM trends. As discussed in March, our capacity reduction for 2019 are focused on addressing specific points of softness in our network. These changes included reallocations in the Caribbean to Puerto Rico. More broadly, we made tactical reductions in underperforming markets to address offpeak softness, mainly in the form of day-of-week adjustments. Regarding other types of network, during the first quarter, we took another step in our efforts to reach our goal of 200 flights per day in Boston. Beginning this summer, we intend to deepen our schedules to increase relevance, offering hourly service to Washington, DC and the New York Metro area.

We believe this move will benefit both leisure and business customers as we expect to fly to more nonstop destinations, operate more flights and serve more customers than any other airline in Boston.

We are delighted that for the eighth consecutive quarter, Fort Lauderdale RASM growth outpaced our system average as we expand our domestic and international markets. Our unique model allows us to grow this key focus city and appeals to both leisure and corporate customers to recognize the value of our differentiated products and service.

The success of our Mint franchise out of Fort Lauderdale is just one more example of our ability to offer a superior product at lower fares.

Turning to Slide 7 and the revenue outlook. Our first quarter RASM declined 3.1%. We are disappointed with our RASM performance relative to our original guidance from January. But we are happy to see where we closed the quarter relative to our updated guidance from early March.

Considering the puts and takes this quarter, our clean RASM growth was equal to approximately 0.7% year-over-year. Our RASM was impacted by 3 drivers. This year's holiday calendar placement, completion factor and certain areas of softness we observed during the trough periods.

Regarding the calendar, this year's Easter/Passover placement was a headwind of 2.25 points to first quarter RASM. With respect to completion factor, this quarter we had a headwind to RASM from fewer cancellations. In contrast, recall that in the first quarter of 2018, RASM was positively impacted by a tailwind from low completion factor that resulted from a very active winter. The combined impact of these 2 opposite completion factor scenarios in our operation is equal to a net headwind of 1.5 points to the first quarter of 2019.

Finally, during the first quarter, we saw a few areas of softness in our network that accounted for most of our 2-point RASM guide down in early March.

Looking into the second quarter of 2019, we expect RASM growth between positive 1% and positive 4% year-over-year. Our guidance included the 2.25 point positive impact of the holiday calendar shift in the second quarter. With regards to RASM highlights by market, we expect continued pressure from elevated capacity in our Florida to Latin and Caribbean markets. We expect to see continued demand softness in Haiti following the April peak. However, bookings do appear to be recovering. Conversely, Puerto Rico recovery continues to exceed our expectations. We are seeing signs of pricing improvement for closing bookings in transcon. We are pleased with the developments and anticipate continued positive momentum in this franchise as we move closer to the summer peak season. March RASM showed clear signs of a weaker trough, which extended into the first half of April. The April peak, however, is showing the strength we had expected. And very early looks at May and June point to sequential RASM acceleration. We will continue to monitor the trough months and closing trends for the second quarter, and we are cautiously optimistic about the RASM outlook for the third quarter.

We remain focused on improving our RASM by executing our ancillary plans. In the first quarter, we surpassed $33 in ancillary revenues per customer, an increase of 12% per customer relative to the first quarter of 2019. We are pleased with the early results from our network reallocation efforts and continue to work to rollout Fare Options 2.0 by year-end.

I would like to add my own thanks to our crew members across JetBlue for their hard work during the winter season and for delivering outstanding service to our customers.

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

Thank you, Marty. Good morning, everyone, and thank you for joining us. I'll start on Slide 9 with some highlights from the first quarter. Revenue was $1.9 billion, up 6.7% year-over-year. Adjusted pretax margin was 3.7%, down 2.7 points from the first quarter of last year, mainly due to calendar placement that impacted revenues and increased cost of the pilot contract. We reported a $0.14 GAAP EPS per diluted share. Adjusted EPS was $0.16 per diluted share. Our adjusted effective tax rate this quarter was 28%, and we continue to expect our effective tax rate to be approximately 26% for 2019.

Moving to Slide 10. During the first quarter, CASM ex-fuel increased 0.9% year-over-year, below the low end of our guidance of 1.5% to 3.5%. This includes the benefit of approximately 0.75 points of improved completion factor during the quarter and represents a unique cost increase below the midpoint of our guidance range.

For the second quarter, we expect CASM ex-fuel growth to range between 1.5% and 3.5%. As a reminder, both our first quarter and second quarter guidance includes an approximate 3 percentage points increase from our pilot contract signed last August. This quarter, we adopted new lease accounting standards and restated results back to 2017. The appendix section of this presentation includes details of the accounting changes to our income statement and balance sheet.

Moving to Slide 11. We could not be prouder of the hard work across JetBlue to deliver on our commitments to hit our goals. We are encouraged by the CASM ex-fuel progress we made in the first quarter and the progression we anticipate for the rest of the year. In the first half, we will continue to digest our first pilot contract. And despite our capacity reduction from early March, our guidance range remains between 0% and 2%. During the first quarter of 2019, we made good progress in the distribution pillar of the Structural Cost Program, signing an LOI with Sabre to update and upgrade our CSS system. In the second half of 2019, we continue to expect to see the benefits from the Structural Cost Program compounding, in addition to the impact of our A320 fleet restyling efforts.

With regards to our recent capacity reduction from early March, recall that in 2018, we successfully mitigated added unit cost pressures from 3 capacity reductions and executed our cost goals according to plan, even exceeding our initial expectations. As we move throughout 2019, we expect to find additional opportunities to offset unexpected pressure in unit costs keeping to our guidance for 2019 and 2020.

Turning to Slide 12. During the first quarter, we had no aircraft deliveries. And hence, we continued to have 253 aircraft in our fleet. We expect our first A321neo to be delivered shortly, and it will enter into service during the third quarter. For the remainder of the year, we continue to expect a minimum of 6 NEO deliveries. We're excited about incorporating the NEO into our fleet, given the increasing fuel efficiency by at least 15% compared to our existing fleet of aircraft.

As of today, we have restyled 19 A320s and remain on track to complete our fleet by 2020. The same year, we anticipate receiving our first A220. We are thrilled about our plans to convert 13 A321neo aircraft from our order book to LRs and start serving our first European destination for our Northeast focus which is in 2021. The LR delivers wide-body economics on a narrowbody platform, and we believe it will be an EPS accretive way to further increase relevance to our customers.

We look forward to incorporating these aircraft into our fleet without impacting our CASM ex-fuel guide or our financial commitments. We anticipate the impact to CapEx from the conversion will be minor and is included in our guidance. This recent update to the fleet plan is part of JetBlue's vision to continue to improve its earnings per share beyond 2020.

Our CapEx guide for 2019 remains unchanged between $1.2 billion and $1.4 billion. As well as our 2020 guidance expected between $1.5 billion and $1.7 billion.

Our CapEx continues to focus on return accretive aircraft purchase in addition to our restyling efforts.

Turning to Slide 13. We continue to have one of the strongest balance sheets in our industry with investment grade metrics. This allows us to maintain a balanced approach to capital allocation. In the first quarter, we repaid $133 million in debt, bringing us to a total of 113 unencumbered aircraft in the fleet. We closed the quarter with $876 million in cash, cash equivalents and short-term investments, or 11.3% of trailing 12-month revenue.

During the first quarter, we executed share repurchases for $125 million as part of the share buyback program authorized by the Board, and we have a remaining balance of $250 million under authorization. We will continue to be opportunistic and maintain a balanced approach in our capital allocation, including returns to our owners. As a result of changes in the evaluation methodology of our aircraft leases, associated with the new lease accounting standards, our current adjusted debt-to-cap ratio is now equal to 28%. This is down from 29% at the end of the last quarter, calculated under the new standard. Before we turn to the Q&A session, I would like to add my thanks to all of our crew members in our front-line operation and support centers for their continued work and executing our plan and helping us create value for all of our stakeholders. We will now take your questions.

Thanks, everyone. Tammy, we're now 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 with Morgan Stanley.

Robin, first, a question for you. On the entry into the transatlantic market and if you combine that with your exposure to Lat Am and Caribbean, how do you get comfortable and how do you get the Board comfortable that the investment community isn't going to look at you like a C carrier and start derating your valuation?

Thanks, Rajeev. No. I mean -- so right now about 30% of our capacity is exposed to International markets, about 70% domestic. I would say one of the most successful things we've done at JetBlue over the years is to diversify our network, and that's certainly been very helpful when we're seeing the growth in Boston.

And then when we think about London and the opportunity that presents is really about making our focus cities in New York and Boston more relevant. It's by adding the next market that we don't fly too and adding them so that we can fly to them and serve our customers. So we fit much more in terms of developing the majority of our focus city markets and just flying to different geographies. And so I think the investment community should feel good that we are taking a very measured approach to growth and that we are focusing on the markets where we can drive the highest returns out of New York and Boston.

And then Steve, a question for you on the CASM side You've obviously done a pretty good job so far. Now as we look forward and lap the pilot deal, what's going to be the cadence on unit cost? I'm trying to assess the potential for you to sort to be consistently declining as opposed to sort of flat or up a bit?

Rajeev, and thank you very much for the question. I have to say, I'm very, very pleased with the progress that we not only made in terms of CASM progression in 2018 but as you can see, the progress we've made in quarter 1. Admittedly, the completion factor helped, but we printed -- even if you include the completion factor, we printed at the low end of the guide for Q1.

As you'll recall, we did layout our CASM plan in January, and we broke that down by half. And we're very comfortable about reiterating that plan for 2Q. As we've mentioned, we do cycle over the pilot deal as we get into the second half of this year, and we do expect CASM ex-growth to turn negative at the midpoint of the guide, as we sort of go forward. And this actually includes the impact of the 0.5 point reduction capacity that we talked about. So I'm very happy with the progression that we're seeing. You'll continue to see an inflection point in the second half of the year, and this is very, very important to us as we continue to execute on our cost goals as part of the $2.50 to $3 EPS target that we have to 2020.

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

Just on the full year capacity. It looks like it implies about below 4%, about 3.5% in the second half versus about 8% growth in the first half. Any feel for cadence by quarter?

And I guess, related -- just a follow-up to Rajeev, the same with the sort of down CASM in the back half. On that 3.5% growth rate, could you put a finer point on cadence by quarter?

Duane, it's Marty. I'll take the first half of that, and I'll let Steve take the CASM comment. So yes, we definitely have a capacity plan in 2019 that does decelerate in the second half of the year. I don't have a number in the 3s, I have a number in the 4s. But notwithstanding that is how we're seeing the year play out, mostly based on delivery schedules. As you know, and as we've already announced, we had some changes to our original 321neo schedule. So it's not what we'd originally expected when we were planning out the year. But again, I think Airbus has reacted well, and we look forward to taking the NEO very, very soon. Steve, on the costs.

Duane, as again, just reiterate what I said to Rajeev. I'm very comfortable with the progress we're making. We purposely have been very transparent ever since that we went through the October Investor Day in terms of laying out our cost guidance for 2019 and 2020 and even to a greater detail, sort of half by half as we did in 2018 and 2019.

And in respective of the lower capacity environment, we remain committed to the guide that we got out there. The way I would sort of think about timing. We won't, at this stage, breakout quarter 3 and quarter 4. As we've historically talked about, you do sometimes get a little bit choppiness particularly maintenance cost between irrespective quarters and that's why we've laid the halves out. But if you're sort of thinking about your modeling, you should think about 3Q being pretty similar on a broad perspective to Q4.

And then Robin, I think, a portion of the attribution when you took down 1Q RASM guidance was sort of softer macro or the economy. I wondered if you just update us or mark-to-market those reviews on what your business is telling you about the economy as we sit here today?

Sure, thanks, Duane. I think, again, to going back to early March. I think we called out a couple of things. We called out a couple of markets where we were seeing very low walk-up fares. We called out transcon. We called out South Florida to the Caribbean. And as we anticipated, some of those fares have now come out. And then we also saw some, what we described as broad-based economic softness across everywhere else. And I think what was uncertain to us at the time was it sort of shutdown related or was it something more broader than that. I think I'm very pleased to see that as we look forward the -- some of the normality of those walk-up fares is restored and we continue to see very good closing strength as well. And so I'm cautiously optimistic, and we kind of hopefully that is behind us, and we can be more optimistic about month ahead.

And if I could sneak one last one in. Can you update us on how many of the A320s will -- are restyled today? And what that sort of percentage looks like as we roll through the year?

I'm going to hand over to Joanna, Duane because she's been running that.

Sure, Duane. So we're up 19 this year. It's tracking nicely. Just a reminder that our restyling is coupled with our heavy check so that we're as efficient as we can be. We'll be completing our full restyling campaign by the end of 2020.

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

First question for anyone that wants to take it, and the topic is loyalty. You had a slide on the topic at Investor Day. I didn't consider it real core thrust from that event. But I do think to say -- I do think it's safe to say that at the industry level it's a growing value driver. It's something that investors increasingly care about. You obviously are aware of Delta's progress, United's ambitions and so forth. Now when I think about the value drivers for the issuing banks, so cardmember wealth and spend, the breadth of the underlying airline network, the share volume of card transactions, this seems like a competitive area where the big 3 are going to increasingly dominate at the expense of smaller operators like JetBlue. Why am I wrong?

Jamie, it's Marty, I'll take that one. Thanks for the question. So I'll start by one of the comments we've made in the prepared remarks, which is our ancillary per customer this quarter was up 12% year-over-year and the loyalty contribution of that was well above 12%. So we love the trajectory we're on right now. We've talked about the benefits we've gotten from going from AmEx to Barclays and very happy with that partnership. That being the case, the bar keeps going up. And we and Barclay's both fully agree that this is something that is a great opportunity for both of us.

I actually feel like the details of the contract that we have at Barclays has the 2 companies interest aligned very, very closely. And I think there's a lot of upside there. It's worth remembering that TrueBlue was still a relatively young program compared to others. And I think it's honestly why we've had more than doubling of the portfolio since we transitioned. And that being the case, I think the opportunity for us is to continue to increase the value proposition of the TrueBlue point in general. And frankly, I'll point that 2 events that have done that, I've got -- we've got -- we have a partner Hawaiian, who's flying from Boston to Honolulu with a reciprocal royalty arrangement with JetBlue. And then I have to point out the flying to London and then wherever else, we're flying in Europe. Those 2 things are significant help in trying to improve the value proposition of JetBlue.

I will also say that, and I'm not going to call specific airlines, but if you look at the value proposition of every deemed point at JetBlue versus certainly one of our biggest competitors, we gave a lot of utility to customers and that's why customers are flocking with those credit cards. But, again, I think you're making a key point, and it's one that we talk about internally constantly, which is we never ever, ever stop raising the bar for more. And I think given the starting point we're at, I think that JetBlue, TrueBlue versus the mature program, I think we actually have more potential than some of our competitors.

Excellent. Solid answer, Marty. And second, just a small issue related to guidance. I've attributed the 300 basis point TRASM range to be reflective of one, a more leisure-oriented and therefore, potentially pick -- fickle passenger base, I'm not saying pickle, it's fickle and two, systems that at least historically where perhaps not the most cutting-edge. When I think about further corporate penetration, particularly, the London flying, is it fair to ask whether you migrate to that industry standard 200 basis point range? And if so, when, small?

Honestly, I -- we are less than 2 years into guiding about a quarter like this. And the one thing I'll say about JetBlue is, although we are a relatively established carrier, we still take a lot of bookings very close in, even though we're very heavily leisure. I mean, right now for May, we basically have half of May on the books, and we're a week away from the start of the month. June, we have less than 1/3 on the books.

The most important thing for us is that the number that we give you is a number that is not going to result in misses or misleading. I mean frankly, when we get to the point where if our booking curve changes, it becomes more predictable. I'd love to have a smaller range, but the important thing is we want to make sure we meet our commitments. So I'll never say never, but based on our history at least for the 5 or 6 quarters we've been doing this, I think we're actually pretty good at it. But I do appreciate that range when we have so little on the books.

And Jamie, before you sign off, I think you're going to have a very busy day on Thursday with a number of other earnings calls. But I hope I wish you a very happy birthday, anyway.

Keeping the JetBlue tradition alive. Thank you, Robin. I appreciate that.

Your next question comes from the line of Catherine O'Brien with Goldman Sachs.

So with respect to your cost guidance, I just want to confirm that any start-up costs related to the transatlantic service, I mean airport costs or ETOPS are baked into that flat to up 1% CAGR. And if so, were those costs always contemplating the guidance? Or have you found additional cost savings to fund those?

Catherine, I'll pick that up. Yes. Those costs are certainly included in our guide, and we will consistently do that. The progression we have continued to make on our Structural Cost Program, the structure of the company means that we are permanently looking at these things. So there's ebbs and flows in terms of our cost structure as we go forward. So some of the incremental costs associated with this are obviously being contemplated and incorporated in the guidance. So we're very happy with where we stand on that.

One quick follow-up to that one, Steve. Could you just give us the number for the update on where you are in the run rate for $250 million to $300 million? I believe, at year-end, you're at $199 million.

Yes. Very happy to do that. Just as a reminder, for everybody, the cadence that we have in terms of the detail on the Structural Cost Program is Q2 and Q4, where we get into quite a lot of detail. So the next detailed update will be in July. But I'm very pleased to say our run rate for 2020 is currently sitting at $224 million. We continue to make terrific progress. And I think this quarter, I would define as being very focused around our sourcing efforts.

One of the biggest sourcing contracts that we drove forward during the quarter was with our partner Sabre as we concluded the CSS RFP. So very happy with the continued progress on the accounting standard $224 million.

Congratulations on that. And maybe just one quick one for Marty. So at the midpoint, your guidance implies acceleration from the March quarter, even excluding that impact of Easter. What's driving that? Is that all the turnaround of the transcon? Or that -- the 50% and 1/3 of bookings you have in April and May are just that much better than what you saw in the March quarter? Any color there would be really helpful?

Cate, thanks for the question. Yes. I think the fundamental issue it goes back to what we had said earlier about what we saw in the first quarter and going into the second is that it's very heavily sort of peak versus trough-related. It's actually -- the environment feels kind of like it did in the first half of 2017, where we had really solid results in peaks, but a little more challenged in the troughs. And I think part of the acceleration is the fact that third quarter does have, on a relative basis -- excuse me, second quarter has on a relative basis a few more peak days. And the second thing is, we talked earlier -- actually, in the late 2018 about the initiatives we were undertaking, whether it's fee changes, network changes, et cetera. And those do fold in as the year goes forward. So I think that from a progression perspective, this is sort of what we hoped for during the year, other than that blip sort of between end of February until the middle of April. But based on what we're seeing in the books right now, we're cautiously optimistic about what's going forward.

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

Robin, in your prepared remarks, I know you talked about the focus on margins. And obviously, we agree that to hit your EPS guide for next year, you do need to see continued improvement. But you didn't mention putting building blocks in place on the ancillary side. And I think you guys have really highlighted that you've been using traction there. So do you just feel like you're leaving money on the table right now with how you're transacting with your customers? Or does this go back to that loyalty discussion?

No. Thanks, Brandon. I think -- again, we won't go into all the building blocks now because we've talked about them before. But I think that we continue to feel very confident about the revenue trajectory of JetBlue, both from a flown perspective and ancillary and Marty has already touched on that. I think Marty gave an answer already, which I wholeheartedly agree with that. Our opportunity on loyalty is that we're coming from a point where we've been behind everybody else. And so we are seeing a lot of strong growth in that area. Also, we've created longer-term new ancillary revenue streams. We've created a JetBlue Travel Product subsidiary, which is now up and running in Fort Lauderdale. And we're very excited about where that will last to grow longer term. We've created a -- we've curated a very strong brand in the leisure travel industry, and we need to do more to monetize that. Marty talked about Fare Options later in the year as well. So we're excited about that.

And then really, the thing that we -- that challenged us over the years and I'm delighted to see how much progress we are starting to make is on the cost side. We've let margin on the table over the years because we've done a nice job on the revenue side, but we've also seen high unit cost growth. And so that is what we are all about. And I think putting those things together will allow us to drive those superior margins into 2020 and beyond.

Okay. And I guess, along those lines, on the Structural Cost Program. It sounds like you've achieved a lot of the run rate that you were setting out to initially at least, Steve. What are the priorities as you look into the back half of the year? Is this really just the restyling and the A321 growth that's going to drive unit economics favorably for you?

Brandon. I have to say the journey continues. We have executed and continue to execute over 160 separate initiatives that are impacting our CASM ex at JetBlue. And the journey is not complete yet and candidly, the journey will never be over. We made commitments to our owners that we will have flattish CASM not only through 2020, but beyond.

And so when we're executing these contracts, we're looking through 2 lenses. Number one, how do we make sure that we continue the trajectory in the short term and deliver the $2.50 to $3 in 2020. But also at the same time, resetting the cost trajectory for JetBlue as we enter the next decade. And I'll give you some key examples. As I've -- there's no secret as far as my primary focus at JetBlue in terms of our business priority, the Structural Cost Program is my #1 priority from business standpoint. And one of the largest areas that we have at JetBlue, around strategic cost is around maintenance. So we will continue to focus, along with some of the initiatives as we progress through the year. But as ever, we will put the finishing touches to the larger maintenance agreements as we progress through this next quarter and the remaining half of 2019.

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

I just -- I want to follow-up on Catie O'Brien's question. Steve, just on the cost next year, in addition to ETOPS and startup, you're inducting the A220s. Is the plan to directly expense those costs? Or you -- will you -- or will some or all of them be capitalized? And then what's the underlying -- can you remind us what the capacity growth is planned for 2020?

Michael, Steve here. We will take the usual approach, which is when we have costs associated with start-up with the likes of the A220 coming to the fleet or the LR, it primarily will be an expense item that sits in the P&L. Obviously, whether it's CapEx involved like the purchase of aircraft and engines, they will obviously be capitalized. But primarily, this will be sort of an expense item. With regards to the capacity that we laid out in 2020, we laid out the guide both from a 2019 and 2020 perspective, when we went through the Investor Day, back in August. And note that capacity guide ensures that we get to a CASM level of between minus 0.5% and minus 2.5% from a CASM standpoint. So -- and the A220, as I mentioned before, our first aircraft comes in at the back end of 2020. So it's rather de minimis in terms of the overall capacity guide for 2020.

Okay. Great. Very good. And just the second question to Marty, I know you sort of still call Long Beach out as either a focus city or market that where you lead in. But are we at a point now where your revenue generation at LAX is either equal to or greater than Long Beach as we look into 2019?

Mike, thanks for the question. We specifically called out L.A. Basin as our focal point in the basin and I think it's because of the benefits we're getting from our franchise, not just at Long Beach, but also at LAX and even at Burbank, where we've added some additional transcon services. So from that perspective, Mint has been widely successful at LAX. And I think the public data shows that. I actually haven't done the math as far as where the LAX total revenue is generating more. But I'd say somewhere in my head, I'm pretty sure it does. But again, we don't even really look at it that way. And frankly, it's sort of a -- it's a basin level conversation for us.

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

Can you talk about the JFK terminal project completion and the objectives for that?

Kevin, Steve here. I'll pick that up. I think, the way I would describe the JFK terminal project is, making sure that JetBlue has the right facilities for growth as we go through the next decade. This is a long-term perspective for JetBlue. And if you think about some of the potential challenges for growth in some of the key urban areas across the United States, gate access, terminal access is something that is obviously critical to the ongoing growth. And I'm delighted that my predecessor did a extremely good job in terms of securing rights around JFK. I'm also delighted that the Governor of New York decided to back the JetBlue proposal for development of terminal 6 and terminal 7 in addition to our award-winning terminal 5 at JFK. So we're excited about the prospect.

The other key thing that we've made sure that we've done going forward is that we're doing this in partnerships. So we will not be using JetBlue's balance sheet in terms of the funding, et cetera, to make this happen. We would be doing this in partnership with JFK Millennium Partners, and we couldn't be happier with the team that we're working with. But again, this is not something that you should be thinking about between now and the end of this decade. It's a long-term perspective, and it's something that will ensure we've got the right access for JetBlue as we migrate to the next decade.

Perfect. And then just if we could switch over to maybe the -- Robin, you were discussing the -- I know if it's vacations now at this point or -- can you talk about where the system stand and the status and your progression on the cross-sell of other products? I know you touched on it, but maybe you could go into a little more as to where we're heading on that?

Sure. No. Thanks, Kevin. Yes. We've -- as you know, we've hired a new president of JetBlue Travel Products, Andres Barry, and he's now built his team. They are based down in Fort Lauderdale. We had went through a number of challenges last year with the website. I'm very pleased to say that those are behind us, and we are starting to see that business grow very significantly. And in addition, Andres and his team is thinking about new opportunities in the travel space and is sort of very asset-light way where we see opportunities to continue to grow on a high margin ancillary revenue.

As I've said before, given that we have a leisure network between -- only between -- only 1% to 2% of customers flying on JetBlue are buying some additional travel-related product. And so we think that's a very big opportunity for us. The acquisition cost of these customers is very de minimis because they're flying with us anyway. And the investments that we're making into this business are relatively modest compared to our sort of overall CapEx. So it's very asset light. So as we said, fairly modest in the next couple of years, but something that will continue to grow. And when we think about EPS growth beyond 2020, will be a much more significant part of our ability to sustain that EPS growth.

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

This is Matt on for Savi. I was wondering if I could talk about your longer-term capacity growth given the outlook of the lower end of that mid- to high-single-digit range you previously provided? Where is the likely mix of both stage engage in 2019 and 2020? And should we expect the market focus to be similar in 2020 as it was in 2019?

Matt, it's Marty. As far as long-term guide, we don't guide more than a quarter at a time other than the annual guide we gave with a lot of color in it. And mid- to high single-digits is where we are and where we've been. We're going to move around that range based on our margin goals. And I think if you look at what we've done in 2019, you've seen us do that.

Notwithstanding what we've seen as far as fuel, we run this place with sort of a, I call it, higher fuel cost mentality. And we were not going to -- and I used this line before, you don't cheer for balls and strikes in the game. And there's a lot of volatility, a lot of volatility in fuel right now that we're trying not to get too hung up on.

I think we're very comfortable that the guide that we've laid out, that mid- to high single-digit number, that's what works best for JetBlue. And I've been here for 13 years. I was here we're growing in the 20s. That's very, very challenging for us as far as maintaining the quality and maintaining our equipment to our shareholders. So I think what you see right now, I think, is what we think is best for JetBlue and what I think is best for JetBlue in the long term.

With respect to -- I think for stage versus gauge that moves back and forth year-to-year. This year is a little bit heavier on stage, mostly because of the redeployment of Long Beach short halls into transcon. But that's going to move going forward. I wouldn't look at that as a long-term predictor. I want to make that clear because this is not necessarily a long-term trend.

Okay. Great. Appreciate the clarification there. And going back again longer-term growth. Can you talk about operational considerations and implications of soon operating multiples, sub fleets, particularly starting in 2021, if I'm not getting ahead of myself here, transitioning from the E190 to the A220 as well as having a second Mint configuration?

Yes. This is Joanna. So we currently have obviously the 190 and the 320, there are -- and the 321. There are different performance standards within even those fleets. So we're confident that we can manage multiple sub fleets and then obviously working on the plan to exit out of the E190 and then transition into the A220 over the next year or so. So we're confident with the transition plans that we have and...

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

I just want to follow-up on Mike's question. You compared the startup costs with the LR to the 220. I thought you excluded some of the A220 costs from that 0 to 1 CAGR. Just to be clear, I know you said you had expenses, Steve, I want to make sure you're going to include that in the CAGR target? And while you're talking about the CAGR target, can you also tell me what's going on with these pilot CBA implementation costs you're excluding to?

Hunter, good to hear from you. So let me just be really, really clear about our 0 to 1 guide. We specifically talked about the E190 transition to the A220, has been outside of our 0 to 1 CAGR, when we announced that at the Investor Day in 2016. And so there were some relatively de minimis transition costs as we run out of the E190 or projecting to get the E190 into 220s, which had a pretty de minimis small impact in the 2020 guide. So that's really, really clear.

When it comes to the LR. Any operating costs associated with the LR and the transition to those are -- that may come in during 2020 are included in the 0 to 1 guide. So there will be no further impact on the 0 to 1 outside of the previous guidance we gave with regards to the E190 to the 220 transition. So hopefully that's clear. We've said that consistently ever since the end of 2016, and that message certainly has not changed to any of our investors. And we are absolutely committed to the 0 to 1, and I'm very happy with the progress.

With regards to your second question. Obviously, there was 2 key items with regard to the pilot negotiation and agreement that we went forward with that changed the sort of one-off transition costs. The first one was with regards to the signature of the program and a signing bonus. The second item was the IT cost associated with the transition, to go from the direct relationship to the new agreement going forward. Those are relatively de minimis amount that we're just getting marched up this quarter that was aligned to the final elements of the IT transition. So that's what that relates to. But it's incredibly de minimis and that really sort of -- it puts a barrier around the one-off costs associated with the transition with regards to the pilot's agreement.

So hopefully, those 2 items are very clear, and I'm pleased to follow up if those -- if you don't have clarity on those 2 items.

Yes. No. Steve, it's great. Thank you very much. And then maybe this is one for you, Robin. It looks like you guys added the longer-term EPS target to the proxy as part of your long-term comp payout. I know that the answer to this is both are important, I know that. But is it fair to assume that maybe the EPS target has slightly sort of pulled ahead of the CASM ex target in terms of your driving priorities like if you're forced to make a decision to sacrifice, say, one over the other, is it fair to assume that EPS is maybe sort of pulled ahead a little bit of the CASM ex?

No. I think -- I mean, I view our CASM ex performance as integral and central to achieving our EPS goals. I mean, they are one and the same. We -- to accomplish $2.50 to $3, we laid out 5 building blocks and there were some revenue initiatives in there and also the importance of the Structural Cost Program. I think we made 2 changes to the bonus structure this year. So, for example, our sort of annual management bonus, we have now moved the last year -- the combination of margin and ex-fuel CASM was 50% of that management bonus. From this year going forward, it's actually 67%. So it's 2/3. The other one that we're measuring is customer satisfaction. So that is -- takes the -- so we have now, going forward, 1/3 on margin, 1/3 on ex-fuel CASM and 1/3 on CASM NPS. So again that outweighs the importance of both margin and ex fuel CASM. And then part of the loans -- LTIP incentive, and we were getting this question at the Analyst Day, going forward, we've made the change. So for those leaders like me and others who are part of the LTIP that measured going forward on both ROIC and EPS so that the compensation of the leadership team is directly aligned to those goals. And then also we will continue to track that. But I think we had that question, and I think we've closed the loop on that to make sure the incentive of the leisure team is aligned with those EPS goals.

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

I just have 2 questions. One is, can you just talk about what you're seeing in Puerto Rico specifically? Has the market recovered there now? And I know you talked about some weakness in Florida, the Caribbean. But I'm wondering if you could speak about PR specifically?

And then the other question I have is with respect to your balance sheet goals I think Steve, you said that you were at 28% debt to cap at the end of the quarter. So what's the goal for that? And if you're there, any plans to increase the existing share repurchase program?

Helane, it's Marty. I'll take the first question on Puerto Rico. And actually, I'll start talking about the Caribbean overall. We specifically have dealt Puerto Rico because the trends there are different than we're seeing in the rest of the Caribbean. And obviously because of the storms there's a lot of noise in there. I think even if you look on a year or 2 basis, Puerto Rico is now larger than it was 2 years ago and producing some solid RASM growth over that time period.

We have seen the change in the complexion of the customers. It's a little bit more VFR focused. But frankly, we've had a good holiday -- excuse me, a good vacation season, really sort of October, November, the last few really big hotels opened. So it's been a nice mix there.

And I do want to mention that after the storms, obviously had a big impact. We have had several hundred crew members down there. It's been tough overall. But we are very, very bullish on Puerto Rico, just like we were before the storms, and we look forward to future growth there.

Helane, Steve here. I just want to give a little bit of color because there is some noise in terms of the adjusted debt to cap this quarter as we adopted the lease accounting change. So just to make sure that we brought as much transparency as possible. We did restate our results back to 2017, under the new accounting rules. And for those of you that want to get into any of the detail, as a reminder, in appendix B of the earnings deck, we've laid out all the details for you.

So pertaining specific to your question, Helane, our debt to cap -- our adjusted debt to cap is roughly about 5 points lower than it was under the old accounting rule, and that's primarily as a result of our leased aircraft. We have 42 leased aircraft at JetBlue. And while they were traditionally done with the old rule of thumb of 7x the annual lease payment and the change is fundamentally attributed to 3 specific areas around the aircraft leases. One is the length of the remaining aircraft leases that we have. Secondly, is the interest rate that one discounts on. And third is, probably the most materializing is when we do the present value calculation. It's done off the cash lease payment rather than the expense line on the P&L. And therefore, where you've had the high to low payment on the lease, then that obviously benefits our adjusted debt to cap. So that's why, the old -- under the new accounting method, it would have gone from 29% at the end of last quarter to 28% at the end of this quarter.

I suppose, in terms of what does this mean for us going forward? I'm incredibly comfortable with our balance sheet. We have one of the strongest balance sheets in the industry. I'm very, very pleased with our price to capital allocation. And frankly, we are running a balance sheet with investment grade metrics. And we're not going to change our approach to capital allocation just because of a restatement associated with accounting change. So very happy with where we are. We'll continue to take a balanced approach, and we'll continue to either look at where we spend our CapEx and how we proactively return capital to our owners as we did in quarter 1.

Tammy, we'll take one more question from the analysts.

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

Just first one here is on the transatlantic flight. Could you kind of walk us through some of the key milestones that you'll be looking to hit over the next 2 years as you work to ramp that service?

Sure, it's Robin. I'd say that -- I'll keep it really tight because of time. So the aircraft are coming in 2021. We've executed that amendment with Airbus. The item that is on the critical path before that, which is we're very focused on, is the ability to fly extended range operations across the Atlantic. In other words, ETOPS certification. So we have a whole team set up around that. And we are very confident that we will be able to hit those time lines. We have a lot of people in our company who have had similar experience with other airlines. And really those are the big lift items. In terms of everything else, in terms of the product and the schedule and working through with the different London airports that we are considering. That is all in hand and easily will be accomplished ahead of that 2021 time line.

Okay. That's fantastic. And then just one last follow-up on that, if I could, Robin. I guess as you think about sort of your next round of negotiations from a labor perspective and your ongoing negotiations with your flight attendants. Are there any sort of concessions or changes that need to be made in terms of how your labor agreements work with regard to the transatlantic flying? Anything that may be in new contracts, if you're flying over to Europe that sort of wasn't in there before?

I'll pass over to Joanna.

Sure. Thanks. So obviously negotiations are ongoing. They're quite productive. Our first contract for pilots took about 4 years. We expect in-flights to be in similar range, 3 to 4 years and the teams will continue to work on the various work rules and different provisions under the contract.

And that concludes our first quarter 2019 conference call. Thanks for joining us. Have a great day.

And again, that will conclude today's conference call. Thank you for your participation.