JetBlue Airways Corporation (JBLU) Earnings Call Transcript & Summary

No. No, I mean, there's more than one dynamic at play as you well know, in terms of the industry, be it fuel price, be it from competition, competitive capacity, underlying demand and everything else. What we are seeing with the restyled aircraft is our Net Promoter Score is going up significantly for each of the aircraft that are coming out and with a better product with something that customers love a little more, there's a greater propensity for them to come and book JetBlue. And so we are -- when I compare a restyled aircraft to a non-restyled aircraft, be it customer feedback, but the efficiency of the aircraft, to your point, from a margin standpoint and a cost standpoint, it's great. But also, we're not seeing any discernible difference in terms of an aircraft with 162 seats on it versus 150 seats when it comes to us.

Okay. And likewise, you will have a higher proportion of A321s going forward, right?

Correct. So we have 149 aircraft on our order book. 79 of them are A321neos. All of the 320 family aircraft that we're now taking are going to be 321neos. We're going to have a subset of those going to be the LRs and XLRs, but it's all 321s. And then we have 70 A220s on order, which we're very excited about bringing into the fleet. The first of those will come into JetBlue in December of this year.

And with the A220, does that change the way you look at the network? I know you guys have reallocated some lower profit from the West Coast back into your core markets.

As I've previously said, this is a game changer for JetBlue. And when I think about all of the different initiatives that we've got going forward, this -- the A220 really, really excites me. And why is that? Well, today, we have our E190s that account for 10% of our capacity, but 20% of our cost structure. And so the A220s coming in as a one-for-one replacement for the E190s are going to significantly change the economic profile of JetBlue. And just to give you some sort of -- some high-level perspective, on a fuel burn perspective per seat, which is incredibly important from an ESG perspective, it's 40% lower, 4-0 percent lower. And from an absolute operating cost basis when you take fuel and other costs, it's 30% lower per seat. And so they're going to bring -- change the economics here. The other thing that -- and one of other key reasons we selected the A320 is the flexibility that it brings. One, you've got the flexibility with the 300 versus the 100 options, but also the aircraft can do 4 transcon. So in terms of the range of the aircraft, it gives us the ability to really look at our overall market and have the right aircraft for the right missions. And so it's not just a pure economic play. I think the A320s are going to give us the opportunity to really take another good look at our network, and it will give us more flexibility going forward. But the primary reason we brought them in is to drive the EPS margins at JetBlue.

I don't want to monopolize this. If there's questions, just please raise your hand, we'll get you a mic. But along those lines, thinking about the network, an investor that maybe doesn't own JetBlue today can say, "Well, you have Boston, Fort Lauderdale, New York, but isn't that competitively susceptible to bigger carriers being more competitive? And plus you have the strategy now to be transatlantic with the LR and XLR aircraft when they're finally built. So how do you talk about the focus of your core 3 cities and how that's going to play out in the future?

What I like about JetBlue. I think we're very, very nicely focused, but at the same time, we're nicely diversified. So we have focused cities. It's not an accident they're core focus cities, it's because we really, really focus on them in terms of their growth. And for me, when you're continuing to grow in those focused cities you grow relevance, and with relevance comes margin. We're 20 years old now, Brandon. We've been very, very used to competitive incursion as we've navigated the last 20 years. Commentators talk about Boston, they talk about Fort Lauderdale. We sort of welcome the competition, and we deal with it effectively. I think the other thing that I would say is 85% of our business is point-to-point. And so when you think about that, the geography that we have, the high-value geography that we have, really lends itself to a point-to-point business. I mean think about Boston and the geographical scope of that, it doesn't really lends itself to a hub-and-spoke-type city. And so we have continued to enjoy growth in Boston, and we'll continue to do that. I think the other thing I would say is with that relevance it becomes stickiness, and we are very, very well-loved brand up in Boston. And when you get that, you really can then really drive the ancillary benefits of that, like our loyalty program and everything that goes with it. Specifically thinking about growth for transatlantic, that is a Boston and New York story, it's not just because we want to fly to London. In Boston, we fly 40 of the top 50 routes. Of the remaining 10, 5 of them are in Europe, and by far, the biggest is London. And by adding London to the network, again, it gives us a greater level of stickiness. The corporate clients that enjoy flying JetBlue, it's another route on the network that, again, it increases our relevance in Boston, and it's something that we're very excited about putting on to the network.

You've mentioned earlier, growing, I guess, was it 6% to 8%? Is kind of the sweet spot for JetBlue. Is that more thinking from a cost perspective? Or is that taken into account what you view as the opportunity in your own network?

I think it's a balance of things. And we talk about mid- to high single digit -- and just for the investors out there, we've generally been on the lower side of that over the last few years. And we will obviously rationalize capacity when we need to, if there's any specific competitive pressure, where we're seeing margins get impacted for any reason and we've done that over the last few years. The reason I say it's a sweet spot, I think, one, it's about thinking about capital deployment and that balanced approach capital allocation, how much CapEx we've put in, and making sure we're getting the right returns on invested capital and continue to throw cash off the business. So that's one length that we sort of continue to look through. But as a growing airline and to ensure that we maintain that relevance, and we grow those focused cities and -- are we in the strongest position to work with -- work against those competitive incursions, you need to continue to build development. And that's why when you balance those 2 sides of the coin, it's about capital allocation and it's about relevance. And what we found over the last 20 years that the sweet spot of that is in the mid- to high single digit. But again, it's driven a lot by the order book that we have from time to time. But we've -- for me -- for us to sort of continue to drive, EPS and margins are the best, sort of, sweet spot for us.

Okay. Do you want to talk about capital and allocation strategy. But on -- we just had Delta up here, not that long ago, and talking about how the industry is maybe becoming less commoditized than it was in the past. And that's potentially the opportunity here for equity investors. I think JetBlue's probably had that strategy for a while with a differentiated product. How important is that to your success?

I think it's been a key aspect for us since we were founded 20 years ago. We came -- that the whole mission of our founders was around inspiring humanity in air travel. And it was a time when the industry really needed a force for good for customers. And I think that's the mantra that we've continued to live with for 20 years. And we do offer an exceptional product, an exceptional service with our 23,000 crew members, it's an amazing job day after day. And whenever I'm in New York or I'm in Boston, whether I'm at home, when I say to someone -- or someone asks what I do, and I say, I work for JetBlue, what generally comes out of their mouth is I love JetBlue. And that is because of what we deliver. And that differentiated product and service, at great fare levels, is what makes us a success. And so you will continue to see JetBlue innovate. You will continue to see JetBlue drive so great products for our customers, but you're going to continue to see JetBlue. We're closely focused on driving margins and EPS accretion. And I'm delighted with the progress we continue to make on that.

Okay. So 2021 is going to be a bigger year?

Every year, we're just sort of driving it out and driving sort of great returns for our owners.

Can we pull up question number 4, please? Question 4, please? It's on the screen. There we go. In your opinion, what should JetBlue do with excess cash? Bolt-on M&A, larger M&A, share repurchase, dividends, debt paydown, internal investment? [Voting]

Share repurchase. And Steve, can we talk about capital allocation at JetBlue?

Can I just make a point. It's fascinating to me that such a 23% of the audience is talking about debt pay down. When I look at the strength of our balance sheet, our debt-to-cap ratio is in the low 30s. It's fascinating to see that's a proof point. I'm just sort of -- it surprised me a little bit.

Well, I was going to ask you, too, about leverage. Is that something that you'd actually be willing to maybe consider taking higher?

Well, we have been -- I've been very, very public about this. I've been in the industry over 20 -- probably now 23, 24 years. It's -- I always want to make sure that we've got the right balance sheet and the right strength. And it means that myself and our crew members can sleep well at night. We've been very, very purposeful in 2 key metrics for the balance sheet: number one is liquidity, which is sort of 10% to 12% of trailing 12 months revenue: and as importantly is our debt to cap, which is 30% to 40%. I have no intention of changing the 30%, 40% because when I think about our weighted average cost of capital, when I think about the balance sheet, we think where we are, that for me is the sort of sweet spot because then it enables us to run the business effectively. We have been very, very active in terms of thinking about our owners, thinking about share repurchases. And over the last 3 years, we have undertaken about $1.4 billion in ASRs. And for me, it's about getting that capital allocation right. So where we sit at the moment in the low 30s is a good place to be. And I think looking in the rearview mirror about what we've done over the last 3 years in terms of investing in the fleet, investing in infrastructure to make sure that we can sustain our growth profile and our profitability and also going through the capital allocation strategy with regards to the share repos has been quite effective.

When -- you guys just announced an increase in ASR recently, did you not?

With the last ASR, we executed at the end of the year. So it's $160 million. The Board has approved the $800 million authorization over the next 2 years, and the first tranche of that was $160 million that we executed at the back end of last year.

Okay. But should we expect that could be pretty ratable through the next 2 years?

I never want to get ahead of myself, Brandon, and obviously, it's inappropriate for me to comment. But if I was looking at JetBlue, I would look at where our debt-to-cap ratio is, I'd look at the underlying profitability of the business and I'll look in the rearview mirror in terms of what we've been doing for the last few years, which has been a sort of a very sort of stable approach to balance capital allocation.

Sure. And maybe along those lines, can we queue up question number 5? In your opinion, what multiple of 2020 earnings should JetBlue trade? [Voting]

You guys have generally been on the lower end of airlines, which are pretty cheap stock to begin with.

We are indeed.

But you think that the more measured balance pace of the repurchase is the right direction?

Yes, I think -- and it's interesting when you think about multiples. I still find it fascinating when I think about the industry versus industrials. And when you're sort of thinking about just of a high single-digit multiple -- and I'm just waiting for the industry as a whole to get rerated, based on the cash that the industry is throwing off, the strength of the margins that are going through, the strength of the balance sheet, et cetera. Again, for me, specifically thinking about JetBlue, it's about execution. It's 100% of our execution. And we've continued to prove we can do that. The cost program and unit cost, there's a lot of nonbelievers. A couple of years ago, I can't tell you how many meetings I used to have 2 years ago, where it was like, "How the hell are you ever going to deliver this unit cost performance that you've committed to? And by the way, you've got pilot deal included in that?" And then look what we've done for the last 2 years. And similarly with the $2.50 to $3, which is incredibly important with all the building blocks, it's all around execution. And I think as we continue to execute on the plan, and as we continue to execute in 2020, you're going to continue to see the multiple go up.

Can we queue up question number six? We're almost out of time here. What do you see the most significant share price headwind facing JetBlue? Core growth, margin performance, capital deployment or execution?

Perfect question.

Yes. [Voting]

Execution is the audience here. So Steve, I got to wrap it up. It sounds like you're pretty confident in the outlook this year. And fuel prices have, obviously, come down a lot. I mean how much of that will factor into the outcome this year? Was that really not anticipated?

Yes, I mean, again, I don't want to get ahead of myself. I mean because fuel, as you know, is incredibly volatile. If you'd been asking the question a couple of months ago when some of the activities happened in Iran and it didn't spoke for too long, and it came back down again. Some of the analysts would be asking some questions about how you're going to cope with a higher fuel environment? And then, obviously, as a result of coronavirus, oil prices have come down a little bit. And then you've got the natural U.S.-China trade activities going. The core thing for me, Brandon, is focusing on what we can control. And the biggest drivers to our EPS goal for '20 -- the $2.50 to $3 is around executing on the revenue plan with the 4 areas that I've talked about: continuing our progress on the structural cost program, making sure that the fleets are driving the fuel efficiencies we've talked about and making sure that we continue that capital allocation approach. Don't forget when you do get sort of suppressed oil prices for an extended period of time, it starts to have some impact on unit revenues. So we can't forget that, but again, we're focused on what we can control, and we'll continue to navigate depending on what happens to fuel as we go forward.

Well, Steve, we really appreciate it. Thank you, again.

Thank you , Brandon. It was nice to see you.

Thank you very much for everyone in the room. Thanks.

Thanks.