JetBlue Airways Corp (JBLU) 2019 Q2 法說會逐字稿

Good morning. My name is Jerome. I would like to welcome everyone to the JetBlue Airways Second 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.

Thanks, Jerome. Good morning, everyone, and thanks for joining us for our second 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 those documents are available on our website at investor.jetblue.com and have been filed with the SEC.

Joining me here in New York to discuss our results are Robin Hayes, our Chief Executive Officer; Joanna Geraghty, our President and Chief Operating Officer; and Steve Priest, our EVP, Chief Financial Officer. Also joining us for Q&A are Scott Laurence, Head of Revenue and Planning; and Dave Clark, VP of Sales and Revenue Management.

This morning's call includes forward-looking statements about future events. Actual results may differ materially from those expressed in the forward-looking statements due to many factors, and therefore, investors should not place undue reliance on those -- on these statements. For additional information concerning factors that could cause the 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

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of their hard work, JetBlue is consistently recognized as one of the best airlines in the world. Earlier this month, JetBlue was named #1 Domestic Airline by Travel and Leisure and last month was the Highest Ranked U.S. Airline at the World Airline Awards at the Paris Air Show.

Before moving to our presentation, we'd also like to take a moment to acknowledge and thank Marty St. George, who departed JetBlue last month after 13 years and who has made a lasting contribution to our company. We all wish Marty all the best. Would also like to welcome Teri McClure to our Board, who joins us after a distinguished career at UPS. We believe she is a great addition to the Board, and we look forward to working together.

Now let's start on Slide 4 of our presentation. Our second quarter adjusted pretax income was $238 million or adjusted pretax -- our adjusted pretax margin was 11.3% and our adjusted earnings per share was $0.60. This quarter, our financial performance was impacted positively by the calendar placement of Easter and Passover holidays, a strong closing revenue environment and solid progress in our unit costs.

In the second quarter, we continue to move towards our EPS goals in 2020 with steady progress on each of the 5 building blocks we laid out in our Investor Day last October. Our ancillary initiatives and network reallocation efforts contributed to RASM and we are pleased that we saw an improved revenue environment compared to earlier this year.

On the cost side, we reached another important milestone and signed a long-term V2500 engine maintenance agreement for our A320 family. This accomplishment contributes to our now $257 million in 2020 run rate savings from our Structural Cost Program. This quarter, we also made progress in positioning JetBlue to thrive beyond 2020, with 2 important changes to our order book. First, we converted 13 existing A321neo orders to the XLR version, scheduled for delivery in 2023 and beyond. The XLR will allow us to expand our relevance in Boston and New York by adding additional destinations in Europe. The XLR adds to our 13 LR aircraft on order, which supports our service to Europe starting in 2021. Secondly, we converted 10 A220 options to firm orders. As we previously said, we believe the A220 will be a game-changing aircraft for JetBlue.

As we work towards our 220 goals, we will inevitably face challenges, and we will continue to take quick action on what we can control. In June, leisure bookings in Punta Cana were impacted by local events. I'm proud of the team for making quick capacity adjustments to mitigate temporary headwinds to RASM. Thanks to their efforts. We are sustaining the progress we made from our longer-term commercial initiatives, and we are pleased to see RASM accelerating in most of our network into the second half of 2019.

On the fleet side, we finally received our first A321neo in June following a 4-month delay. Our teams have been adjusting our schedule and working closely with Airbus to uphold our original capacity plans as much as possible. Airbus recently communicated that additional delay for our NEO deliveries will impact 2020. We now anticipate that 2020 capacity growth will be lower than we expected by just over 2 points. Despite the NEO headwinds, we may -- we remain confident in our ability to achieve our $2.50 to $3 earnings per share by 2020.

Looking to the second half of 2019, we expect solid margin expansion and EPS growth. This is an important inflection point in our margins as revenue, fleet and cost initiatives continue to ramp.

I'm very pleased that after recently conducting a deep review about 5 building blocks by our teams, we are confident with the progress we are making towards our 2020 financial goals. We are working together as a team, and we are laser-focused on creating value for all of our stakeholders, customers, crew members and our owners.

Before turning the call over to Joanna, I'd like to again thank our amazing crew members for supporting our operation and safely delivering our customers to their destinations during the ongoing summer season.

Joanna, over to you.

Thank you, Robin. I'll start with our capacity outlook on Slide 6. During the second quarter, our capacity grew 5.9%, slightly above the midpoint of our guidance range of 4.5% to 6.5%. This was due to a solid completion factor in the quarter, despite runway construction in Fort Lauderdale and JFK and smaller projects elsewhere in our network. For the third quarter of 2019, we expect capacity growth between 3% and 5%, which is unusually low for JetBlue. Our slower capacity growth this quarter reflects tactical cuts we announced earlier this year to mitigate softer RASM trends in trough periods. Our lower capacity also reflects the additional NEO delays communicated by Airbus.

We plan capacity growth between 5.5% and 6.5% for the full year 2019. We are taking actions to mitigate the delays by adjusting utilization of our existing fleet and the timing of our A320 restyling program. Our delivery stream remains fluid, and we expect to continue adjusting our schedules as needed.

Moving to our network. We continue to grow our relevance in our focus cities. We recently announced our intention to fly nonstop between JFK and 2 new international routes, Guadeloupe and San Jos?, Costa Rica. These new routes add to our JFK-Guayaquil service announced earlier this year, as we further build on our VFR and leisure strength.

In Boston, we are adjusting our network and expanding our markets. We recently announced plans to relocate our Houston operation from Hobby to Intercontinental Airport in October, following feedback from our corporate customers in Boston and New York. This fall, our planned growth in Boston will come mainly in the shape of increased frequencies to business-heavy markets, such as Washington National and Newark. We are also adding capacity in strong leisure markets, such as Northeast to Florida.

We saw overall strength in our transcon and mid-markets during the second quarter. We are pleased with our Northeast to Florida markets and the performance of Fort Lauderdale even with the challenges we mentioned in the Caribbean region. We continue to see the revenue benefits of our growing relevance in Fort Lauderdale, and we look forward to further expanding our network in this growing focus city.

As Robin mentioned, leisure bookings to Punta Cana were disrupted recently. We believe the situation is temporary and isolated almost entirely to the leisure market segments. We are making tactical redeployments accordingly to match shifting demand. We have seen stronger bookings to other Caribbean destinations as many customers are rebooking their travel. After a period of significant cancellations, we are encouraged that bookings to Punta Cana are now outpacing cancellations in July, and we expect the market will fully recover.

Turning to Slide 7 and the revenue outlook. Our second quarter RASM increased 3.1% above the midpoint of our original range of 1% to 4%. RASM trends accelerated over the quarter, recovering from a soft first half of April. Boosts in booking trends, in particular, improved and peaks were strong. The impact of lower demand in Punta Cana was a RASM headwind of approximately 0.1 points to the second quarter. As a reminder, the holiday calendar placement was a tailwind of 2.25 points to RASM.

Looking into the third quarter, we expect RASM growth between positive 0.5% and positive 3.5% year-over-year. Third quarter guidance includes our expectation for continued close-in strength. We expect the benefits of our network reallocation efforts to continue to ramp, and we are pleased with the ancillary changes we implemented last year. Our guidance includes an expected headwind, largely from Punta Cana, of approximately 0.75 point.

I would like to add my thanks to our crew members across JetBlue for a solid operation during the quarter and for living the JetBlue values every day.

With that, I will turn the call over to Steve.

Thank you, Joanna. I'll start from Slide 9 with some highlights in the second quarter. Revenue was $2.1 billion, up 9% year-over-year. Adjusted pretax margin was 11.3%, up 3.2 points from the second quarter of last year. This was driven by calendar placements that benefited revenue growth, the generally improved revenue environment and progress in our cost control. We reported a $0.59 GAAP EPS per diluted share. Adjusted EPS was $0.60 per diluted share. Our adjusted effective tax rate this quarter was 24%. We continue to expect our effective tax rate to be approximately 26% for 2019.

Moving to Slide 10. During the second quarter, CASM ex-fuel increased 1.8% year-over-year, near the low end of our guidance range of 1.5% to 3.5%. CASM ex-fuel growth was helped by ongoing Structural Cost Program benefits, but also benefited from the timing shift of marketing and other expenses. For the third quarter, we expect CASM ex-fuel growth to range between 0.5% and 2.5%.

The 3 factors what we expect will impact our CASM ex-fuel growth this quarter include: firstly, maintenance and marketing expenses shifted into the third quarter from earlier in the year. This is a headwind of approximately 1.5 points to the quarter. Secondly, as Joanna mentioned, we expect 4% capacity growth this quarter, an unusually low growth rate for JetBlue. Lower capacity growth is driven by our decision earlier in the year to moderate off-peak capacity to support our RASM and protect our margin as well as by a small impact from the NEO delays.

Finally, our planned prudent effect did see some heightened impact from JFK runway construction during the third quarter. Taking a step back, when I look at our third quarter costs in combination with our capacity growth and our performance in the first half, we have clearly put JetBlue on a much improved cost trajectory.

Moving to Slide 11 and some context on our longer-term unit cost trends. From a full year perspective, we are sitting exactly where we need to be in terms of CASM ex-fuel and are right on track to hit our annual guide. First half CASM ex-fuel growth was 1.4%, below the lower end of our guidance range of 1.5% to 3.5%. This was the result of the growing benefits of the Structural Cost Program initiatives, but the first half also benefited from approximately 1 point of expenses shifting to the second half and particularly into the third quarter.

The combination of timing and lower capacity adds 1 point of unit cost growth in the second half. We now anticipate our CASM ex-fuel for this period to range between minus 0.5% from positive 1.5%. We have narrowed our annual CASM ex-fuel guidance to 0.5% to 1.5% from our prior guide of 0% to 2%. As we look at the remainder of 2019, further NEO delays would add some pressure to CASM ex-fuel. As in past years, our team will continue to identify additional opportunities to offset the impact of any changes to our annual capacity plans in our unit costs.

Looking into 2020, we expect some pressure on unit costs due to the lower capacity plans resulting from the NEO delays. Fortunately, we've had enough notice to incorporate a new delivery schedule into our 2020 planning process. At this point, we expect very limited impact to our EPS guidance.

We anticipate to remain within our 2020 guidance of minus 2.5% to minus 0.5% CASM ex-fuel growth for the year. Furthermore, we remain confident in achieving our 0% to 1% CASM CAGR through 2020. We will continue to work with Airbus to determine the timing for NEO deliveries as the delivery schedule evolves.

Moving to Slide 12 for an update on our Structural Cost Program. We have made significant progress during the past 6 months. We are pleased to report that we have now achieved $257 million in run rate savings by 2020, up from the $199 million we called out in January. We recently signed a long-term engine maintenance agreement with our business partner, MTU. This agreement carries over half of the V2500 engines supporting our Airbus CO fleet. This deal, along with other engine initiatives serving smarter parts, has been an important contributor to our cost goals for 2020. The team has also made significant progress with a long-term deal that covers our remaining fleet of engines.

We're nearing the end of our 3-year asset to deliver run rate savings between $250 million and $300 million by 2020. Similar to our progress in tech ops, over the past few months, we continue to renegotiate multi-year agreements with business partners in all of our pillars, not only addressing near-term challenges, but also mitigating cost growth over the next decade.

We are seeing tangible benefits with technology and an increase in productivity in our front-line operation and support centers. Our Structural Cost Program has become a new way of life to JetBlue and our intention is to keep our cost growth at a flattish rate over next decade.

Turning to Slide 13. We ended the second quarter with 254 aircraft, having received our first A321neo last month, and we expect 5 more deliveries this year. We originally anticipated 13 NEOs in 2019, and we now expect a maximum of 6 deliveries. We've included our updated order book in our presentation and investor update reflecting the NEO delays and the recent fleet transactions mentioned by Robin.

As of today, we have reached our 28 A320s. The compensation in NEO delays and to minimize the impact of our capacity growth, we have adjusted our restarting program, shifting some aircrafts from 2019 into 2020. We expect to accelerate the program next year to remain on track to complete our fleet of A320 aircraft by the end of 2020.

We slightly narrowed our CapEx range for 2019, which is now between $1.2 billion and $1.35 billion. Given the recent changes to our expected delivery stream, we have lowered our 2020 CapEx to a range of $1.25 billion to $1.45 billion. We continue to expect the minimal impact to CapEx from the conversion to the LR and XLR versions, and this is included in our current guidance.

Turning to Slide 14. Our balance sheet remains one of the strongest in the industry, and we continue to have investment-grade metrics, with a debt-to-cap ratio of 27%. We expect to maintain a balanced approach to capital allocation, with a focus on making accretive investments in aircraft and opportunistic share repurchases. During the second quarter, we repaid $49 million in debt and executed share repurchases for $125 million. We closed the quarter with $909 million in cash, cash equivalents and short-term investments equating to 11.4% of trailing 12-month revenue.

Before moving to Q&A, I'd like to highlight that I appreciate the timing shifts in a quarter to mask our progress at some point. I'm thrilled with how the organization is coming together on cost control, and I'm confident that we are on tracking to our full year plan. We have narrowed our 2019 CASM ex-fuel guide and we are exactly where we needed to be into our cost progression towards the annual goal we established back in January.

As we move into the second half of 2019, I'm very pleased with how we're executing our plan, and I can see our progress towards our 2020 goal of $2.50 to $3 of earnings per share. We are seeing the benefits of our Structural Cost Program through the organization adding to our network, reallocation, fleet and commercial building blocks.

Thanks to all of our crew members in our support centers and front-line operations for their continued support in executing our plan and setting JetBlue up for success in 2020 and beyond.

We will now take your questions.

Thanks, everyone. Jerome, we're ready for the question-and-answer session with the analysts. Please go ahead with the instructions.

(Operator Instructions) Our first question comes from Hunter Keay with Wolfe Research.

Can you give us a little more color on the 321neo delays and any -- sort of what's happening there? And any indication to how quickly Airbus may be able to catch up that would provide a little positive surprise as you think about 2020?

Hunter, it's Steve here. Thank you for the questions. I have to say, just a macro level, we're very disappointed with the continued delays to our A321neo program, as a result of the Airbus production issues, including a further delay that we've received in the last 1.5 weeks. Just to shed some more context. In 2019, we were due to receive 13 shelves. And as we said in our prepared remarks and the presentation, we will now receive a maximum of 6. In 2020, we're due to receive 15. And now we expect to receive 14.

Obviously, the capacity is back-end loaded, and we don't have the full year benefits that flow through 2020 from the 2019 shelves. The good news is that we are working exclusively with Airbus to work through these production challenges, and getting an understanding from what they are, and working together as a team. And I'm also pleased to say, having got an early heads-up in terms of where these deliveries are, both we remain on track with our cost commitments in 2019, as we've taken some tactical opportunities to tweak the restyling program to manage the capacity challenge in 2019. And we got ahead of the impact for the capacity, around 2 points for 2020, to ensure that we remain intact with our EPS commitments, the $2.50 to $3 for 2020. So it's a disappointing situation for us, but we're ahead of it. We're working with Airbus, and we've got a good plan going forward.

Okay. Steve, and then another one for you on the new agreement with MTU. Was -- I'm a little surprised to see you go with the incumbent given how strongly you discussed the maintenance headwinds that you guys have seen in the past. Can you give us a little bit of color on how this agreement came to be? And anything you want to share with us in terms of maybe pricing concessions you got or the degree of magnitude of -- really the deal relative to your baseline expectations?

Again, great question. Just to be very clear, they are not our incumbent. We have 2 other business partners that are currently doing the maintenance on our V2500 engines. Just for the audience on the call, to give you some flavor around our V2500 fleet, these are the engines that power our Airbus current engine options, which covers the A320s and the A321s. We have about 400 of those engines in the fleet. That fleet is bifurcated between something called pre-select engines and SelectOnes. The pre-select are the older engines and SelectOnes are the newer engines. And as the deal that we have secured with our partner, MTU, that we're delighted with, and we're delighted with the partnership, cover the older engines, the pre-select engines, which is just over half of those 400 engines.

Our target has always been to make sure that from a cost per maintenance event is in line with the market. And I'm confident not only through this deal, but also with the rest of our engine deal that we will aim to get completed by the end of the year that we're making great progress on is to ensure that the cost per maintenance event for JetBlue is in line with the market. I'm obviously not going to get into any specific details about the commercial arrangements, except that we have been very diligent about the process we've gone through. We've taken the required amount of time to make sure we've got the very best deal for JetBlue. And I'm very happy to be partnering with MTU again. And we're very pleased with the future partnership as we go forward with the maintenance on those engines.

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

You cited strength in closing yields is benefiting the second quarter continuing into the third. You called out the transcon. Would you associate this simply with further recovery from the first quarter trough? Or are we actually now punching in to positive year-on-year territory? I'm just trying to square the current trends with the pressures that we saw last winter.

Sure. Jamie, thanks. So I'd describe it as current positive trending. If you look at what we're seeing, tremendous transcon strengths, some of the things that we predicted back in March associated with the challenges in the transcon markets, those were temporary as we saw it and the market. Market has strengthened during the second quarter. In Q2, there were quite a number of low tactical fares and those exited the market during the quarter. So we continue to see that strong demand in our transcon markets into the 3Q. And this region is now a tailwind for us. The other area of strength really is the Northeast Florida strengths, both in yield and load factor, also are very strong for us.

Great color. And second question, probably for Steve or Robin. Back to costs. You're clearly quite close to achieving the mid-range of the $250 million to $300 million target. But despite this, your margin gap to peers isn't really showing much momentum, if any. I'm not beating you up on this necessarily. But could you articulate what will potentially close the margin gap from here? I mean, I know the 220 should help. I know you're bullish on loyalty, despite being a smaller operator. The cost performance has been strong, everybody has acknowledged that. But if that doesn't result in margin gap closure, again, relative basis, what will?

Jamie, Steve here. I'll take that one up. As I said, I'm delighted with the progress we've continued to make on the Structural Cost Program, and thank you for recognizing that progress across the JetBlue organization. I would point you to our Investor Day presentation back in October of last year and the core 5 building blocks that we have, which will drive us towards this margin contraction with -- in comparison to the years back. It's not just about the Structural Cost Program, but the work that we've been doing on the network reallocation is obviously bringing dividends. The Fare Options process that we're going to be launching as we come into 2020, we're excited about and that's going to drive forward. We're making significant progress with the fleet dynamics with regards to the restyling and the NEOs that will come into the fleet. And I've talked about the costs, and obviously, we've got capital allocation.

The other thing I would like to point you to is, the predominant benefits that we think about with regards to the building blocks refer to CASMx and RASM. And there's another area that we believe is not fully recognized in terms of the opportunity and that's around fuel efficiency. That's also going to, again, manifest itself through both the network and the fleet building blocks, as we have the restyling I've mentioned, the A320 -- A321 growth on a proportional basis because as those shelves come in, and obviously the benefits of the NEO. That benefit of the -- of fuel efficiency should lead to around 3 points of efficiency in the 2020 plan. And I'll give you some perspective that each point equates to about $0.05 of EPS. So we've got a great plan ahead of us, we are executing, and the 2020 building blocks will ensure that we drive forward with margin accretion as we go forward.

Your next question comes from Rajeev Lalwani with Morgan Stanley.

I had a question on RASM. As you think about next year in hitting some of your targets as you mentioned just now, Steve, that's a big part of now hitting the $2.50 to $3. I mean, how do you get there, low single-digit or mid-single digit RASM, if we're going to have an industry environment where capacity growth, assuming the MAX gets normalized, that's maybe double or triple what we're seeing today. And if you layer that in with Marty's departure, I mean, one could be a bit more concerned with being able to hit those top line targets. So just trying to get some comfort there.

Thanks, Rajeev. It's Robin. I'll respond to your question about Marty and then I'll allow the team to address your comment more specifically because I think we have some revenue initiatives that Steve's already outlined that are unique to us. But look, I mean, we miss Marty a lot after 13 years, but I think one of Marty's greatest legacies was building a great talent bench underneath him. So we now have -- obviously, we made -- Joanna's been in the seat over a year. We have leaders, like Scott Laurence and Dave Clark, who are here and were part of that team. And so I'm very confident that -- as much as we will miss Marty, we're not going to skip a beat in terms of our ability to execute on these commercial initiatives. So having mentioned those individuals, I'm now going to hand them over to you to talk about some of the revenue items you raised.

So maybe if I could just pick up. I think I would describe JetBlue's revenue framework as one of momentum. We outlined a series of building blocks at our Investor Day equating to between $350 million and $400 million of revenue by 2020. And we're really at the front half of those initiatives. They are broken down into several categories. Network, we've made a number of network changes. The Long Beach redeployment. We had a series of changes last fall into earlier this year around optimizing our network. We just announced a series of additional changes. We expect $100 million to $120 million of run rate benefit associated with those changes by 2020. And those changes largely benefit some of our key points of strength. So Boston, Fort Lauderdale, and then adjusting Long Beach into a -- into our point of strength around transcon.

We also have a series of initiatives around the product offering. So Fare Options 2.0, that has not happened yet. So we have that to look forward to. And then if you look at the ancillary changes that we made last year, we're very pleased with the development that we're seeing associated with our ancillary changes. This quarter alone, ancillary revenue was up 15% per customer year-over-year. We're now at $33 a customer, an all-time high for JetBlue. If you look at the drivers behind that bag fees, up 15% year-over-year, change fees even more space continue to grow into the double digits. Loyalty, I know, we've spoken about that. But we think there's tremendous upside for loyalty, growing at a rate of 24% year-over-year. So as you look at these revenue building blocks, we're very energized by what the future holds.

That's helpful. And then, Robin, one for you, specifically. And there's obviously lots of discussion around the $2.50 to $3, and you're obviously well on your way to meeting that range. But what happens if you don't use start evaluating strategic alternatives? I mean, that's certainly something that investors are talking about. I'd love to just get your thoughts on sort of Plan B even if you may not want to go there.

Yes. No, we're very focused on the $2.50 to $3. We're making great progress. In fact, we just did a fairly significant review internally where we went through each of these items. We updated macro assumptions. And when you talk about some of the initiatives that got outlined and then Steve talked about the sort of fuel efficiency, which we don't think is in most people's forecasts, I mean, we are confident that the plan we have in place will get us to $2.50 to $3. And we're focused on that and we're not distracted by anything else.

Your next question comes from Savanthi Syth with Raymond James.

Just I had a couple of clarifying questions. Just on the restyling, I know you had previously thought you'd get about 60 done this year. I was wondering what the new plan was? And also just on the 2020 deliveries, the total 14, does that include 14 plus the 7 that's pushed out from this deal or just 14 total? And what I'm trying to get at is, as you kind of look at 2020 capacity growth, does the 2 points -- do you make up for the 2 points? Or does kind of the 2-point pressure means that you probably be growing at the lower half of that kind of mid- to high single-digit range versus upper half previously?

Great. I'll take the first half on restyling, and then I'll flip it over to Steve to give you a little more color on the NEOs. So the program is on track for completion through the end of 2020. We would expect just about 50 this year. With some of the NEO delays, we've made tactical adjustments to our restyling campaign, so that we could save some of the ASMs associated with restyling to make up for the loss for the NEO delays. We've completed 28 NEOs -- sorry, 28 restyled aircraft to date. The customer results are fantastic. We're seeing about a 7-point increase in Net Promoter Score versus the A320s that have not been restyled. So we think the program is great. It's well on track to complete by the end of 2020, and we are very excited by the initial results of the first 28. Steve, over to you for the NEO.

Savi, yes, let me just give you a little bit of clarity. So originally when we talked about that at Investor Day, we were under the -- we assumed we would receive 15 A321 NEOs in 2020, but now it's 14. On the face of it, you might think, well, that's not significant. And what's really driving the capacity reduction is the fact that we had assumed 13 shelves in 2019 and that was pretty much back-end loaded, and now that's a maximum of 6. So when you get the full year impact of those, it has about a 2-point reduction in our original capacity assumptions for 2020. To sort of give you a bit of a sense of that, we were sort of in that higher end of our mid- to high single-digit capacity growth assumption for 2020. And with that 2-point reduction, we saw just under the midpoint of that mid- to high single-digit growth. So that gives you a sort of sense in terms of the impact of the shelves and the impact on our capacity in 2020.

That's helpful. And then just on -- just a follow-up on that. So when you think about kind of the benefit -- actually, just a follow-up on the kind of the stage length side of things. It looks like for the full year it increased about 1 point, and then looks like 3Q is only up 1. So it seems like the stage length is increasing. Is that -- are we kind of assuming kind of a higher stage length year for next year as well because it seems like we are exiting the year with a pretty high stage length growth.

No, I wouldn't assume a higher stage length growth for next year.

Your next question comes from Helane Becker with Cowen.

I just have 2 questions. One, with all of the demonstrations that are going on in Puerto Rico, I was just kind of wondering if you could talk about how that's impacting, if at all, your business? And the second question I had was with respect to the competitive situation in Boston. I was kind of wondering if you could just address that a little bit. It seems like there's been a big increase in competitive capacity growth, and I'm just kind of wondering how you're handling that? So those are my questions.

Right. Thanks, Helane. As far as San Juan is concerned, we're obviously monitoring the situation very closely. As of today, we have not seen any material financial impact, and we are very committed to Puerto Rico. It's a great focus city for JetBlue.

Shifting to your question on Boston. Maybe I'll address it in 2 parts. First, just what we're seeing in terms of the JetBlue experience in Boston and then I'll address the capacity point you raised. We are very profitable in Boston, solid. We are committed to winning in Boston. We've built a network in Boston based on carrying customers where they want to go. We are focused on local customers where we see a very clear first-choice preference for JetBlue. We've got the best people, the best product and a point-to-point model that is just perfect for the Boston geography. We are investing in meaningful ways in our Boston franchise. We've started with a strong leisure franchise. We continue to maintain this and have now grown a great business franchise. If you take a look at what we're doing up there, we've got 15 daily departures between Boston and DCA. We've hourly departures across our New York City area airports. We're reallocating flights to important business markets that our customers have told us they want to fly to. Transcon is performing very well. We're launching Europe in 2021 to deliver European relevance to our Boston customers. We have a strong loyal base of corporate customers. We're investing with Massport. They are a great business partner for JetBlue. Bottom line, it's solidly profitable, with great growth potential. And we are all very energized here with regard to Boston performance.

With regard to your capacity point, I'd describe it as puts and takes. Some competitors are adding capacity, others are pulling capacity. While the net capacity does accelerate a bit in Q4, it's still well within the range of what we have historically seen in Boston, so we are quite comfortable with it.

Your next question comes from Duane Pfennigwerth with Evercore.

Not sure if Scott is on the line or who wants to comment, but wonder if you could talk a little bit about changes you're seeing in the booking curve. Further out, it feels like there's good availability of very low fares. Close-in things feel pretty tight. So do you find that you start a month down in RASM and make it up close-in? And do you feel like monthly revenue production is more reliant on close-in yield strength versus earlier in the year or this time last year?

Duane, thanks for the question. And this is Dave Clark. I'll take this one. We're seeing good strength throughout the booking curve. We're certainly in some periods very intentionally getting ahead of a bit farther away where we think we have ability to gain because we've had a lower load factor and some empty seats. But then looking very clearly to making sure that we have the right pricing and inventory in place for that close-in yield strength. So really trying to optimize the whole range of the booking curve based on the latest customer behavior we're seeing.

So you wouldn't say from an industry perspective that we're more reliant on close-in yield strength?

We've seen a little movement in that direction over the past sort of year or 2, but nothing too large.

Okay. And then sorry to stumble on the same issue again, but why would NEO delays cause you to slow the A320 restyle? It seems, intuitively, it would -- you would want to accelerate it.

Yes. So I mean, at the end of the day, we know that the benefit of the ASMs we had for the NEOs outweighs the number of seats we're adding for the restyling campaign. So by slowing that, we're able to get 150 seats of A320s flying around. The incremental 12 seats just isn't enough to make up for the loss in ASMs associated with the NEO delays.

Okay. So the pacing on the restyle is not changing? Or are you slowing the restyle also?

So we've always communicated that the restyling campaign will be done by the end of 2020. We've just adjusted the timing within the restyling campaigns that we can ensure that we can offset the ASM impact from NEOs -- from the NEO delays.

Okay. And then just lastly, 2 points lower capacity next year on NEO delays. 2 points lower than what?

I'll take that. It's Robin. 2 points lower than our guide that we gave at our Investor Day. So if you recall in October 2018, we laid out a very comprehensive plan through 2020 that includes our capacity assumptions, our fleet assumptions, our CASM guide and targets, et cetera. So we're just referring back to what we laid out Investor Day.

Which was high single digits? Or what was that -- what did you say then?

It was at the upper end of our mid- to high single-digit sweet spot. Because -- as we always talk at JetBlue, in terms of ensuring that we maintain our continued growth in margins and on our point about relevance and our focuses, the sweet spot of our growth is mid- to high single digits. For 2020, we had -- in the Investor Day in 2018, we talked about being at the upper end of that. And now with these changes to the NEO deliveries, it's more soft, towards the midpoint of that range.

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

So maybe a quick modeling one for Steve. Could you just maybe walk us through some of the puts and takes? Assuming you guys hit the midpoint of your third quarter CASMx guidance, what are the swing factors in the fourth quarter that could get us maybe closer to the bottom end or higher end of that 2019 CASMx guide?

No problem. Catie, maybe I can just give a little bit around the timing because as I mentioned in my preferred comments, I mean, prepared comments, yes, you've got a sense of a little bit of movement. So the first thing I'd like to say is, I'm obviously delighted with the progress we've made in addressing our cost structure. As we mentioned on previous calls, our CASM progression is often a little choppy on a quarter-to-quarter basis. So with regards to H1, and I think this is personal, because it does impact 3 and 4, so to give you some visibility. In half 1, we printed 1.4% CASMx growth, which was below the low end of our guide. Obviously, with the strong traction from the Structural Cost Program, but we had a 1-point timing benefit. If you take that half 1 timing benefit, it reverses in the second half. Around 2/3 of it impacts Q3 and about 1/3 of it goes into Q4. And of that 1 point, around half of it is maintenance timing. And as a reminder, we are on a time and material contract for the V2500 engine, so you're going to have some timing. About 0.25 point is on marketing spend and the remainder is the mix of other spend items, including IT spend. So that explains the half 1 to half 2 and the split between Q3 and Q4.

I think while that sort of then reflects with regards to Q4, we obviously have a situation where we don't have the pilot contract that we've already cycled through. We have a much lower timing impact that we had in Q3. The structural compact -- the Structural Cost Program continues to ramp into Q4, and we have much more normalized JetBlue capacity growth in Q4. So that's why you sort of see the timing shift into H2. It's more impactful in Q3 but less impacted in Q4. And we don't have some of those natural headwinds that we were experiencing in Q3 flowing through to Q4. Hopefully, Catie, now that gets into the essence of the question that you're raising.

Yes, sure. No, that's all really helpful. I guess I'm just also wondering if there's anything in the Structural Cost Program or other things we're looking at that may be could go a little better or maybe not? It might just swing you a little bit on where you end up on the full year. Anything like that we should be aware of?

Yes. I mean, the point I would refer you to is, it's now in our full-year CASM guide and we've done that intentionally because of the progress that we've continued to make on the Structural Cost Program. We have over 160 initiatives that we have either executed or we're working through. There is 110 of those that we've actually done. We're working on the remaining 50 and there will be undoubtedly more to come. So great progress is getting made. And so we've made very clear -- we've clearly put our guide out there that you can refer to for the rest of the year.

Okay. Great. And maybe there is one quick on Fare Options 2.0 here. So I know you're saying that that should get rolled out a little bit as we've kind go into 2020. Do you have any thoughts on when maybe we'll see the testing programs, when the initial rollout is? Just any updates on timing that would be great.

Yes. Sure. So just a reminder, we believe, we'll see about $125 million to $175 million RASM benefit steady-state. That steady-state will occur sort of the end of 2020 into 2021. We're currently tracking to launch Fare Options towards the end of 2019 and we're working on the communication plan. As we speak around what -- how we will roll that out and how we will communicate out the various elements of Fare Options in advance of what actually gets loaded onto our website.

Your next question comes from Darryl Genovesi with Vertical Research Partners.

Steve, you took 200 basis points out of your 2020 capacity plan, but you still maintained your negative 0.5% to negative 2.5% CASMx guide. Would you just comment on, given how far out into the future that is, what is the CASMx impact that you would attribute to the capacity reduction? And then assuming that that's a significant number, where are you running ahead of plan to offset that?

Darryl, good to hear from you. Just to give you some sort of context on the macroeconomics, 2 points of capacity is circa like 1 point of CASM within the year. So that sort of gives you a little bit of pressure. As I mentioned in my prepared remarks, whilst we're disappointed in the delays, because we've got our line of sight on it, it enable us to get some visibility and gives us time to get our fixed cost structure and starts sort of addressing that. So -- and as I mentioned earlier, we've continued to make very steady and good progress on our Structural Cost Program with the 160 initiatives going forward. So there's always going to be puts and takes in the industry, there's always going to be changes to capacity, but we're ruthlessly focused on the execution of our $2.50 to $3 EPS target for 2020, and we'll manage that accordingly.

Great. And then, Joanna, can you just provide an update on the loyalty component of your commercial building blocks that you had laid out at the Investor Day last year? Just wondering, how you see that plan unfolding? I think you had like $40 million in there. So just wondering how you see that number today? And what, if any, are the kind of moving pieces in your forecast there?

Yes. So there's a number of initiatives around loyalty. We've obviously seen strong performance. It's actually growing faster than ancillaries as a whole. And that's largely due to our co-brand card with Barclays. We're extremely happy with that relationship. I think as I mentioned, it's growing 24%. There's a number of tactical initiatives that we're focused on, largely around due to mass statement credits. That will show up on the booking flow, pre-populating applications in different channels, looking at additional earn and burn opportunities to increase the utility of the program. We've also recently announced a new VP of Loyalty, and there is a tremendous opportunity here, we believe, to really increase the value of this program in terms of both its utility but also just overall value to JetBlue. It's a very immature program relative to other carriers. And when you think about upside in our plan, this is where I would view the upside being.

Your next question comes from Mike Linenberg with Deutsche Bank.

Robin, just a clarification. I think I thought I heard you say that RASM trends are accelerating from most of your network in the second half of 2019. And when I look at the guide versus what you did in the second quarter, maybe it doesn't seem to be the case, but then you may have been referencing RASM on an absolute basis. Did I mishear you on that?

Sure. Mike, thanks for the question. This is Dave Clark. If you look at our all-in RASM and you clean it up for the holiday placement and then compare the second quarter to the third quarter, we feel good about the acceleration we're seeing sequentially.

Okay. That's helpful. And then, Dave, actually to you or Scott, my second question. When I see you call out of a market, like JFK, Charlotte, and I think, over the years, we've seen you call out other sort of New York to medium-size business-type markets, I think Columbus is another that I can think of, the question is, is that a market where you may still be able to generate a profit, but because of the slot constraints at Kennedy, it's far more -- makes much more sense for JetBlue to target, I don't know, Guadeloupe or San Jos?, Costa Rica, using a bigger airplane? Just thoughts on that. What drove that decision?

Sure, Mike. It's Scott. I -- listen, I think a couple of things about that. The first is, at something like JFK to Charlotte, they -- the routes that we cancel are performing below system average. And that was a good example of one. The other piece was, we took that and given limited gate space in Charlotte, we buttressed the Boston schedule and added the frequency there. In JFK, we clearly do have slot of constraints and we are optimizing those and continue to optimize those in anticipation of operating to Europe soon as well. So -- look, it's not a matter, in some cases, of huge loss making; it's a matter of optimization.

If I could just add, I think one of the things that I think you're seeing is that we are taking action when we see soft spots in the network. Whether it was some of the changes to Long Beach or network optimization 1.0 or network optimization 2.0, the team is being proactive and making network adjustments as needed.

The next question comes from Brandon Oglenski with Barclays.

Steve, I'm sorry if you've answered this to Darryl's question, but I just wanted to come back to the 2020 CASMx guide of down 50 bps to $2.50. With capacity growth coming in a little bit lower, and I think you said you're going to move around the restyling program, but still have it completed by the end of the year, I guess, what's changed on the cost side that you still feel confident in that range?

I think, Brandon, it's -- if you look in the rearview mirror, and I think, okay, so I'm trying to give you some sort of proof points in terms of where we are. And I'm particularly focused on Q3 to give you some sort of sense of where the progress we're making. We're currently growing Q3 at 4% capacity, which is below the mid -- of the mid- to high single-digit capacity growth. We've got 1 point of pilot contract headwind in the quarter, and we have 1.5 points of timing that's moved from the first half into Q3, and we're printing a midpoint of 1.5% CASM. This is clearly a result of cost efficiencies driven by the Structural Cost Program. And it's clearly progress across the whole of JetBlue in terms of how we're driving the support.

So we have a momentum case. As I mentioned earlier, there are always going to be puts and takes in the industry, and Joanna referred to the capacity changes that we make. We have to react in an appropriate way to take this forward. Since we launched the Structural Cost Program at the end of 2016, we have taken capacity down 4x proactively because of what we've seen in the market. So this is not unusual for us. Again, we're getting a early heads-up on this, so it enables us to think about our planning process for 2020. And as I said, we are absolutely focused on delivering our commitment through the $2.50 to $3 of EPS for 2020, and that's how we're taking this forward.

Okay. Appreciate that, Steve. And then Joanna, if you don't mind, you guys haven't launched Fare Options 2.0, but I'm assuming that it's going to come with a more ancillary focused fare at the low end, I would guess. My question would be, as you face more and more competition with basic economy fares in the market, do you feel that's actually limited your revenue production this year in any way, just because, you have to compete at those lower fare levels, but can't necessarily recoup at all?

Yes. I mean, we're excited about what Fare Options 2.0 is going to bring. I can't speak to whether or not have we had it in place earlier, whether there would be differences in how customers purchase fares. I think at the end of the day, we know it will provide us with an opportunity to better compete at both ends of the spectrum. It gives additional options for customers, whether you're extremely price-sensitive, or whether you're somebody who wants a more inclusive offering. We have markets today where ULCC carriers are in, and we think that this will provide options to some customers that might not have necessarily considered JetBlue, because on an OTA, when the fares are displayed, our fare shows up as higher because it's an all-inclusive offering. So whether that contributed to loss of revenue is anybody's guess. I think we're excited about where it's going to take us for the future. And I think the good news is, unlike most carriers that have already launched basic economy and are sort of seeing the results, we still have all of this ahead of us.

Your next question comes from Joe Caiado with Cr?dit Suisse.

Robin, big-picture question that I'd love to get your thoughts on. As a U.S. operator of Airbus aircraft, soon to be an all-Airbus operator, what is your position or your view on the potential for the U.S. to impose tariffs on European aircraft, potentially as early as this summer, after we get a WTO ruling? I mean, what recourse is available to JetBlue in that case? Would you have to just take all of your Airbus aircraft from Alabama maybe? Or would you just have to pay the tariffs and therefore higher prices for the aircraft?

Thanks for the question, Joe. And actually, we did actually testified on this issue against the proposed tariffs. I mean, there clearly needs to be a settlement here between the U.S. and Europe because this will end up in a tit for tat that will be bad for both Airbus, bad for Boeing and bad for all operators. And so we're confident that eventually that will get resolved. Right now, I think, it's not helpful speculating as to how likely that is. But it will be devastating for the whole airline industry, whether you're a Boeing or Airbus operator, if tariffs get proposed.

It certainly would. I appreciate your insight there, Robin. Just maybe a quick follow-up on the NEO delays, and I know that your Transatlantic launch is still a few years away. But right now, is there any reason to think that the planned launch in 2021 would be impacted by those delays, maybe get pushed to the right a bit? Or do you think you'll all be caught up on deliveries by then?

We don't anticipate any impact to our 2021 European plans with the NEO delays.

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

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