JetBlue Airways Corporation (JBLU) Earnings Call Transcript & Summary

Good morning. My name is Myra. I would like to welcome everyone to the JetBlue Airway's presentation as part of JP Morgan Industrials Conference. As a reminder, today's call is being recorded. I would now like to turn the call over to JetBlue's Vice President of Investor Relations, David Fintzen. Please go ahead.

Thanks, Myra. Good morning, everyone, and thanks for joining us at the JP Morgan Industrials Conference. Yesterday morning, we issued a presentation we'll reference during this webcast, and that's available on our website at investorjetblue.com. And has been filed with the SEC. Joining me here in New York are Robin Hayes, our Chief Executive Officer; Steve Priest, our Chief Financial Officer; and Dave Clark, our Vice President of Sales and Revenue Management. Before I hand it over to Robin, just disclaimer. This morning's webcast includes forward-looking statements about future events. Actual results may differ materially from those expressed in the forward-looking statements due to many factors and, therefore, investors should not place undue reliance on these statements. For additional information concerning factors that could cause results to differ from the forward-looking statements, please refer to our press release, annual report on Form 10-K and other reports filed with the SEC. Also, during the course of this webcast, 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 the presentation, a copy of which is available on our website. And so with that disclaimer, I'll turn it over to Robin for the presentation.

Thanks, Dave -- I'm sorry, Dave, cut me off. Thanks, Dave, and good morning, everyone, and thanks to everyone listening on the webcast. First of all, let me start out with a huge thank you to our amazing crewmembers out there in the operation. I'm so proud of your professionalism and humanity and taking care of our customers, particularly over the last few weeks. To start, I just want to stress and remind everyone that our priority is looking after the safety and health about our customers and crewmembers. We are taking all measures necessary to protect them, and we are following closely the directives from the CDC. I want to remind everyone listening that it's safe to fly. We have taken measures to ensure our aircraft and airports are clean. We've adjusted service routines where we need to. And I will also remind everyone that our aircraft are equipped with hospital-grade filters. Our crewmembers are also trained to handle any issues that arise and are supported by a well-trained medical team on the ground. With that, I'd like to start with the 8-K that we filed as a presentation on our Investor Relations website yesterday. I'd like to, over the next 10, 15 minutes or so, go through some thoughts around the current environment and talk about the actions that we're taking to protect JetBlue. I'll go through the -- and provide a overview of the strength of our balance sheet and also to remind everyone that everything we're doing to create long-term shareholder value for our owners of JetBlue. I think it goes without saying, we're navigating right now in very uncertain times. But I'd also remind everyone and point out that the leadership team of JetBlue is extremely experienced at navigating these types of events. We've been through the first Gulf War, we've been through 9/11, and we've been through the 2008, 2009 financial crisis. All of these have bought great degrees of volatility. This will not be the last time either that the airline industry goes through the challenges that we face in front of us. JetBlue, though, is better positioned to withstand something like this than we ever have been before. We spent the last 10 years building the balance sheet and getting ready for an event like this. We're taking action, we're looking at all sorts of scenarios, and I feel very comfortable about where we are with our liquidity and the strength of our balance sheet and margins. I'm also very proud of the conservative way that we have managed our business, protecting our crewmembers, our customers and the financial health of JetBlue. So I would like to start on Slide 4 of the presentation. Over the last couple of weeks, the demand environment has deteriorated significantly. In fact, when I look at how the demand has deteriorated the last couple of weeks, it appears to be worse than what we saw after 9/11. Given the uncertainty of the impact, the speed of events and the dynamic nature of what's going on, JetBlue has withdrawn the first quarter and full year 2020 guidance. We think it's prudent holding off issuing new guidance until the situation stabilizes, which it hasn't yet. As you'd expect, managing our business, considering a scenario when revenues are down is something that is very important. Until late February, we were feeling very good. In fact, we were tracking towards the higher end of our monthly and annual EPS guide, even before we took account of a lower fuel. Until late February, we were very pleased with our prior RASM trends for Q1. And in fact, we were tracking to the midpoint of our original guidance of 0% to 3%, even with higher completion factor due to the good weather. CASM ex-fuel also benefited from this higher completion factor and the many initiatives that we've talked about before, and we have delivered on a very solid operation for the first 2 months of the year. In fact, we were #5 out of 10 in the country on-time and #1 for completion factor. However, all that changed very, very dramatically in late February. When this event started or when we started to see that JetBlue are -- on the 25th of February. Our first quarter was booked at 87%, and our second quarter was booked to 22%. Since then, we've seen a very significant and dramatic decline in forward bookings. Given these trends, we announced yesterday that we expected the negative impact to our Q1 RASM to be at least 6 points. Current trends remain very fluid, and we would expect to see these tying into Q2. I'd like to talk about some of the actions that we're taking, though, to address this. We've already announced an initial 5% capacity reduction, which took effect immediately through to early May. We're also reducing CapEx and suspending all future share repurchases. We've acted quickly to reduce operating costs. And we are working with over 150 of our business partners at both reducing costs and delaying payment terms. We're also reviewing aircraft maintenance costs, given that we expect lower utilization over the coming months. We've already launched voluntary time-off scheme across JetBlue, and the leadership team of JetBlue is taking a temporary pay cut until we work through this. We're going to -- leaving no stone unturned as we navigate this once-in-a-decade demand short. We're also watching the capacity environment very, very closely, and we won't hesitate to take future actions. The goal right now is to protect revenue and preserve liquidity. If this becomes a prolonged event. We expect an update of our first quarter ahead of our next earnings call in April. Moving on to Slide 5 now. We have one of the strongest balance sheets in the industry. At the close of Friday last week, we had about $1.2 billion in cash and cash equivalents. Our cash position is significantly above our liquidity target of 2% to 12% of full year 2019. As we close 2019, just a reminder, our adjusted debt-to-cap ratio was 34%, and well within our target 30% to 40%. As we close 2019, our adjusted net debt to EBITDA was 0.9x, amongst the lowest in our peer group. We also have access to additional sources of capital should we need them. We have an undrawn revolver commitment of $550 million, and 34% of our fleet is unencumbered, very, very different to when we went through this in 2008 and 2009. Our priority remains, as I said earlier, the safety of our crewmembers and customers as well as the financial safety of JetBlue, which involves us managing our business to preserve liquidity. Moving on to Slide 6 now. I'd like to take a step back and highlight the progress that we've made in reducing our debt. We're positioned than any time we have been in our 20-year history. We manage our company conservatively in how we think about both balance sheet and liquidity. I've also been delighted with the improvements to our credit rating, a rating that has continued to be raised by 3 rating agencies, including a recent update by Fitch in the last month. Our credit rating has improved 4 notches. The fact that our credit rating has improved 4 notches speaks highly for the prudent philosophy behind managing our fortress balance sheet. On to Slide 7. Whilst, of course, everyone is focused on the short term, we're also pleased with all the actions we're taking to deliver on our longer-term commitments to shareholder value. This uncertainty, although when we face it now looks daunting, it will pass. And we remain very confident in our future. Of course, we're managing all the scenarios in the short term, but we're continuing to work to create shareholder value in the long term. We have our 5 -- we have our plan with our 5 building blocks, and our crewmembers are still focused on executing those. The dollar contribution of these building blocks will, of course, be affected in the near term by what we're going through now. But we continue to execute our revenue building blocks of network reallocation and product. The revenue environment is evolving quickly, but we still expect initiatives that will add incremental revenue to our P&L, which we originally said was around $250 million in 2020. We're very pleased with the progress we're making in the cost building block. At the last earnings call, we announced $314 million from our structural cost program, above our original target of $250 million to $300 million. I'm pleased that we executed this program during the solid macroeconomic backdrop because it's helping us to prepare for what's in front of us today. In terms of fleet and capital allocation, we originally guided 3% efficiency improvement in 2020 from both restyling and the efficiency of the NEOs. This environment underscores the importance of improving our margins in good times. Executing on these building blocks will continue to help us protect margins and deliver on our financial health. Moving on to Slide 8 -- moving on to Slide 9, I'm sorry, which is our plan beyond 2020. As I say, right now, the main focus is managing the near term and the impact of the coronavirus. But we're also building out the next 3-year plan, and we're excited about what we see. Our aim is to continue to grow EPS and deliver on superior margins. Key areas of this would include adding more relevance to our largest focus cities, investing in our new and fuel-efficient fleet and adding debt and breadth of our schedules in our network. We're also making great progress in our areas of loyalty and JetBlue travel products, and would be showing more details of those in the future. Costs, managing external spend, increasing productivity, leveraging technology should allow us to sustain a 0% to 1% CASM ex-fuel goal over the cycle. In closing, I believe the industry environment highlights the importance of executing our long-term plan to strengthen our margins and balance sheet. I want to emphasize, again, our fortress balance sheet and liquidity position, which will allow us to withstand the current demand environment. We remain focused on safety and taking actions to manage the near-term challenges and the headwinds that we face. And we will stay flexible as the impact of the coronavirus unfolds. Again, most importantly of all, a shout out and a thank you to our 23,000 crewmembers who are going to work today and delivering the JetBlue experience, inspiring humanity, which has never been more important than in our 20 years of history. I'd also like to thank our owners and investors for your support as we've gone through this. With that, Steve, Dave and I are happy to take your questions, Jamie.

Thanks, Robin. Myra, could you open Jamie and Mark's line to start the Q&A.

This is Jamie. Can you hear me?

We can indeed Jamie.

We can.

That's great. And to think, I actually had my own line muted all this time. I didn't realize that was unnecessary. That's good because the dogs have been barking in the background. So a question for Steve. For years, and this predates your time at the company, JetBlue had a cost problem. It was the primary area of pushback from investors during those times that we were recommending the stock. The question that I'm getting from investors today, it's twofold: one, does the current environment in any way, challenge the structural cost story post-virus after we get through this; and second, while JetBlue has proven, finally, that it really can control costs, and we've given you a lot of credit for that, why should we be confident that -- you're able to control costs while growing, why should we be confident that you know how to control costs when shrinking?

Jamie, you broke up for a moment, so I thought you went back on mute. We heard, to the point where you said, I'm getting two questions from...

Okay. Yes. The first part of the question, Steve, does the current environment, in any way, challenge the structural cost story post-virus? And second, while you've proven you're adapt -- highly adept at cost control while growing, why should we be confident that you know how to control CASM when shrinking?

So Jamie, I'm sorry to do this. We -- I heard the back end of your question, which was if you're -- we're confident about managing CASM when you're growing, and what about when you're shrinking, but we didn't hear the first part of your question.

Is it -- why don't you just tell me the name of the movie you'd like to hear. The question is, does the current environment challenge the structural cost story post-virus? Did you get that? Wow, you guys there. Now I don't hear anything.

[Technical Difficulty] time and being incredibly focused on that. And that's exactly what we have been doing over the last 2 years. And just to reemphasize, to all of the listeners on the webcast, we outperformed the whole of the rest of the industry for the year-on-year cost performance in 2019. To the contrary, in terms of your question, Jamie, this is the time where one doubles down on the cost structure because we are going to this with a position of strength, but it's more important than ever that we are very aggressive in terms of our cost structure. And as Robin pointed out, in terms of his prepared remarks, particularly pertaining to liquidity, one of the biggest drivers on that is our focus on our operating costs. With an enormous focus on discretionary spend. And as he alluded to, we are double downing on our external spend with our business planners. We spend over $2 billion on that every year. The labor cost that we have across JetBlue in terms of our higher benefits for our crewmembers, both in our front-line and support, we continue to focus on how we double down on the technology and drive productivity in our business. And also the voluntary time off programs as we go through this. I'm very thankful to all of our crewmembers for the work they've done over the last 2 years that really put us in that position of strength. And I have no doubt that we will continue the momentum that we started going into this situation, and we'll come out the other side in a continued position of strength around our CASM ex aspirations.

Steve, what's your current estimate in terms of the percent of revenue, not traffic, but revenue coming from corporate flyers? I'm asking because the debate is whether JetBlue might be better positioned than some of your higher cost competitors, given that it appears consumers can be price stimulated to overcome their reversion to air travel.

[Audio Gap] then we can provide that to the team.

Sure. And Mark, are you able to jump in here?

JetBlue team, can you hear me? I think we're having some telephonic difficulties. Well, we were 2 for 2 and number 3 is not working so well.

I fired some questions off to David. Hey, David, check your emails, curious that Mark and I keep cutting on and off, but I did shoot a couple of investor questions over to you.

[Audio Gap] And your second question, what's your estimate in terms of the percent of revenue coming from corporate flyers, asking because the debate is whether JetBlue is actually better positioned than some of your higher cost competitors, given it appears consumers can be price stimulated to overcome their reversion of commercial air travel. Maybe I'll turn that over to Dave Clark to talk a little bit about our business leisure mix and positioning there?

Sure. Thanks for the question. In general, JetBlue's about 80% leisure, about 20% business. This environment in the past few weeks have been very dynamic and has been changed somewhat week to week. At the beginning, we were seeing actually a larger impact to leisure business. But in the past week with many corporate events being canceled, many big conventions being canceled and the change to a number of corporate travel policies, we've seen the business side come down and roughly match for us the same pressure we're feeling on leisure. So we'll see how this moves going forward. But as of the latest, the 2 market segments were about roughly equally impacted for us.

I'll move on to your third email question. And this one was, one of your competitors this morning suggested they'd emerge from the downturn with higher margins than they went in with in part because of idle fleet time gave them time to accelerate some aircraft initiatives. You obviously don't have as much of a complex. As complex of a fleet, is there any silver lining in terms of reducing near-term capacity? Anything you can do to further strengthen your structural margins? Or is this really just an exercise in hunkering down in the proverbial bunker?

I'll pick that one up, Jamie. I think what I would say is, again, recommitting this to the -- our position of strength, and we are acting decisively. So you saw us come out immediately with capacity reductions with regards to April. We are monitoring this on a day-to-day basis. And the key thing for us is that when we think about capacity, we do this in good time associated with crew scheduling to make sure that we continue to think about the associated costs in JetBlue. And then obviously, how that obviously turns into margins going forward. So I think going into this with regard to the fleet that we have, the margins that we've -- have continued to drive momentum with coming into this event. The key -- one of the key levers we have is capacity and aircraft utilization that Dave and the team are looking extensively at. And the other thing I would say is, from the cost side, I talked about going into this, again, with a position of strength and then coming out the other side. So as I sort of see this, I'm not sure about the timing of this event. But I see this as a sort of a blip in terms of the horizon of how we're going to come out the other side and continue the momentum that we laid out at our 2018 Investor Day, about making sure that we progress above-average industry margins and ultimately towards superior margins going forward.

Okay. Thanks, Steve, I'll go on to the next one. Not as much -- Jamie's question, not as familiar with the pilot contract, obviously, sensitive to labor at the moment. Are there any contractual impediments to reducing the headcount?

I'll take that one. We've been very aggressive at going out with voluntary time-off. And I'm optimistic that we can -- even with the future capacity cuts, achieve this through voluntary means. That is our preference and our goal. And we've already, for example, had a very significant interest and in-flight for voluntary time-off. So that's what we're focused on right now. In terms of the contractual provision of our pilot contract, then we do have the ability to do that if we want, but our preference is to try and accomplish this all through voluntary means.

Okay. Thanks, Robin. Next question's about loyalty. So Jamie's question is having -- does having a smaller loyalty program puts you at a disadvantage, should you need to pursue afford mileage sale?

I'll take that again. First of all, I'm very pleased with how fast our loyalty program has grown over the last years. I mean, the credit card -- the new credit card agreement that we put in place, plus our continued focus on business and corporate travelers, has been really important. I think relative to the size and the program of our airline, clearly, that is an option, but we have a whole number of liquidity levers that I would look at that we could go to before we got to the concept of buying point board. We have a very strong balance sheet. And thankfully, that gives us a lot of options.

Okay. Great. Moving on to the next one. Situation is fluid, and we're in the early innings. Should investors be thinking at all about further industry consolidation? Or would that be a waste of time? That's for Robin.

No, I think the -- this event is very similar to 9/11 in terms of the psychology of what's driving it. It's a fear-based event. The economics of the industry, just literally a few weeks ago, were very strong. I mean we talked about how strong our Q1 was, and I think other airlines are making similar comments. So whilst there is obviously a very significant impact that we're looking at, I think the fundamentals of the industry, particularly in the U.S., are good. So I don't know if this changes at all the landscape. Some of our, I think, well flagged concerns on lack of competitiveness of the industry in certain areas will apply again once we are through this. So I'm not sure if it makes a big difference to the M&A environment. I will say all the work that we and the U.S. industry have done in the last 10 years, I think will mean the U.S. industry is positioned well out of this. Clearly, I think we're all expecting a number of other international airlines not to make it through this.

Okay. Great. I'll keep moving here. And then at what point do you potentially lean in on OEMs to adjust the delivery schedule? Steve?

I think, again, I'll pick this one up. We already are sort of leaning into our OEM partners as we are with our other business partners to have extensive discussions. We enjoyed great relations with a significant number of our business planners across JetBlue. We are -- it's not just about the sort of delivery stream, but it's also about deposits that you sort of plant in the aircraft as you go forward. We obviously have our restarting initiative. So we're going deep on all of those and have an extensive discussions with our partners as we go through that. If we end up in a position where we end up talking about deferrals or anything, then we'll be the -- well, obviously, disclose that to the market. But we're just working through all that at the moment.

Guys, it's Jamie. I think the phones are working now. Is that accurate? Apparently not.

Maybe, Jamie, you continue to send the e-mails if that works?

Maybe while we wait, Dave, do you want to add a little -- just color on some of what we're seeing in the near-term demand environment, that's been a question, obviously, we've been getting yesterday and through the morning?

Sure. Thanks Dave. The near-term demand environment remains very fluid, as mentioned in our materials from yesterday. We haven't seen stability yet. So difficult to say sort of how deep or how long it will go. But we are seeing some trends. I mentioned earlier, we're now seeing leisure business impacted about equally. Initially, we're seeing it more in leisure where those have evened up in the past week. We are seeing the most challenging trends for close in travel. So for travel for March or travel for this week or next, is we're seeing the biggest challenges in terms of high refunds compared to normal as well as lower new bookings compared to normal. It eases a bit as we get into April, May and beyond, but it's certainly a challenge for all future booking periods. And then in terms of geography, it's very broad-based. We're seeing significant impact in all segments of our network. In terms of what's relatively working better, our short-haul markets are a bit stronger as well as our visiting friends and relatives market from the Caribbeans, which tend to book a bit closer in. In terms of what's relatively the most challenged, we're seeing transcon markets and sort of long haul of that nature being the most challenged.

Thanks, Dave. I'll move on to Jamie's next one, which is we have a "ton of co-chair partners just over 50." In fact, without naming names, do they all make it? Maybe Robin, you want to talk a little bit about just how we -- how our strategy around partners and then maybe comment on Jamie's question.

Yes. No. Thanks. I still remember, Jamie, commenting a few years ago that JetBlue may be was the only airline that put out press releases to interline partnerships. So I think we did stop that, Jamie. But we do have over 50 interline and co-chair partners, and that's been a very helpful form of revenue diversification over the years. I think compared to other airlines and most of our competitors, we're a lot less dependent on it than others. And so should any of our partners be a casualty as a result of this, and we certainly hope not, then it wouldn't really have a material impact on JetBlue. And our liability to that would be extremely limited.

It's Jamie, if you can hear me. I think that's great. Sorry for the telephonic challenges. We are at the end of this session right now. Just wanted to wish you good luck with all of your one-on-ones today, and I hope everybody comes back at the top of the hour for spirit. Thank you, Robin and team.

Thank you very much, Jamie. Bye-bye.

Thank you. Bye-bye.

Again, that will conclude today's conference. Thank you for your participation.