JetBlue Airways Corporation (JBLU) Earnings Call Transcript & Summary

Great. Welcome back, everyone, and let's keep the working and consuming outside the home track going at the Life After COVID Conference. For those of you who don't know me, I'm Ravi Shanker, Morgan Stanley's freight, transportation and airlines analyst. And sticking with the travel theme, we're very happy to have with us JetBlue and Steve Priest, CFO; as well as Andres Barry, President of JetBlue Travel Products; as well as Juan Carlos Gomez from IR that you guys know. Gentlemen, thanks much for joining us.

Great to see you, Ravi. Thanks for having us.

Great. So before we kick off the discussion, I need to point out that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you're a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representatives. And also for the investors on the call, if you have any questions to ask the management team, please submit them via the webcast and I can pass them along the team.

And with that, gentlemen, thanks again for joining us. Obviously, a very interesting and kind of important headlines in the last 24 to 48 hours. So kind of before we kick off with more of a strategic Life After COVID discussion, Steve or Andres, maybe you can kind of share your thoughts on what you've heard in the last 24 hours, kind of with the potential vaccine, 90% efficacy, which was, I think, much better than people thought. Is this the light that we need at the end of the tunnel? Kind of what are your thoughts and what are your views on the near term here?

Yes. Ravi, I would say, again, thanks again for having us this afternoon. It's always a pleasure to speak to you. Yes, I mean that was a great bit of news yesterday morning. Very encouraged with the process and the speed at which this has been sort of going forward. And so as you say, it's a nice bit of news for the industry as a whole in terms of how we're going forward. I think particularly for sort of a leisure carrier like JetBlue who is -- people -- there's a large pent-up demand for travel. People want to get out of their house. They want to start thinking about going moving again and so we are encouraged by that. The one thing I would say, I think it's generally just part of an overall layered approach that we need to think about with regards to the -- obviously, inoculation, which should sound encouraging, testing our safety from the ground up program. So we are not just leaning on a vaccine as the only solution for life, as you put it, life after COVID or the life during COVID. We certainly think about, as I say, this as a layered approach. We recently saw the Harvard study that came out. We've talked extensively about our perspective on how safe it is to fly, akin to sort of going to the supermarket or doing any other sort of day-to-day life. So we're encouraged by the news. We'll obviously stay close to the newswires as things continue to develop and see where we go forward with it, but certainly encouraging news yesterday morning.

Got it. That's very helpful. So kind of maybe talking about, again, life after COVID, can you share with us kind of, is there anything JetBlue is doing strategically from operations or customer service perspective to fundamentally change the air travel experience, both during and post-COVID?

I think the one thing about JetBlue, we're 20 years old now and I've always been excited about the way that JetBlue continues to lean in, whether it's with regards to innovation or really thinking about what customers want. But the biggest thing, I think, that when I stand back at a very macro level and think about JetBlue, it's a brand that people trust and it's all about trust. And if you're thinking about which airline you're going to fly on during this environment, which airline you're going to take your kids on, it's sort of JetBlue is almost being sort of seen as synonymous with a brand that people trust. We've actually seen probably our Net Promoter Scores get to sort of record highs. We've seen significant increases in them during COVID. We said a lot about what customers think about when they travel on JetBlue. And we've really thought long and hard about how we create that confidence for customers to travel again. So as we came into the crisis, and as you think about the things that are important to customers, be it sort of most legroom in coach, free Wi-Fi on board, sort of free snacks, et cetera, and by far, the most important thing is customer service in terms of what customers want, and that's what they rate us for. I think it's coming out of the other side, it's making sure we've got a network that people appreciate. And we have been a little nimble with the network as we've sort of gone through. We've doubled down on LAX in terms of the West Coast. We brought Newark to the forefront in terms of New York. So I think the first thing you ought to think about is the network footprint for JetBlue, which is flying where customers are and where they want to travel to and we've continued to do that. I am continuing to be excited about the offering that we have in the air and the restyled aircraft that we've recently sort of gone through over the last 12 to 18 months, so think about the world-class products that JetBlue has. So at the end of the day, I think it's continue with this methodology from safety from the ground up. This will not disappear anytime soon. I think customers will continue to want to have an airline they can trust and a product that they know can get on there, that they feel secure. So I think we'll continue to double down on that and keep an eye on what's important to customers.

Got it. You guys have one of the strongest customer loyalty programs, the most loyal customer base of any airline up there. A, do you think that, that is a strategic advantage for you as customers look to kind of travel again and kind of a way to gain share in the near term? And second, obviously, there's been this debate about industry transition from full-service airlines to kind of high-service LCCs to the ULCCs and the unbundling of the product, et cetera. Do you think any customer preference between those 3 pockets changes permanently as a result of COVID?

I think it's -- number one, it starts with trust, as I've mentioned. And then you sort of segmentation then goes down to leisure or business. And we are naturally over-indexed on leisure but we've done very well with our business franchise, particularly out of Boston and, to a slightly lesser extent, out of New York and our Mint product has continued to support that. What I like about JetBlue is that we have a nimble approach. And even with our Mint cabin, it's not just about corporate travel, it's about small, medium enterprises and it's high-end leisure. So I think when you've got a brand like JetBlue that everybody trusts and the sort of offering that we've got, we used to be asked many times by investors, what are we? We were the tweener. Where do you sit? You're not a ULCC, you're not a legacy carrier. No one asks that anymore because we actually provide the products and the services and the offering that customers actually want. So I think we're actually in the sweet spot. And beyond the brand, the brand essence that we have in JetBlue, customers are looking for great sort of value for money and basically getting low fares for a full sort of offering in terms of what JetBlue offers. And so I think that's why customers are attracted to us. And specifically with regards to your thoughts on the loyalty program, let's not forget, as we are in our infancy, to a certain degree with the loyalty program, it hasn't been around as long as some of the legacy offerings have and I'm looking forward to continue to grow that. It's been a real asset to JetBlue in terms of growing revenue stream that supports our EPS. But it's still got a way to go. And that you can certainly expect to see more from JetBlue in due course as we continue to evolve that program and continue to get stickiness from our customers.

Got it. So the messaging on trust and the brand strength comes through loud and clear. But specifically from a product and like specific service offering, how is air travel evolving? And kind of how does JetBlue, kind of what role do you play in solution? And are there any specific areas where kind of you feel like you're really taking the lead in terms of products and services that you're offering our customers?

I think we've generally done that. I mean pre-COVID, as I say, free Wi-Fi, most of legroom in coach, phenomenal service, incredible crew members who live and breathe the brand every day and support our customers with that. And so that has been what has really supported us, and we've continued to invest in product, brought new aircraft into the fleet and everything else. I think the way that we are starting to and continue to pivot, which is great to have Andres on board with their travel products, is really about personalization and merchandising, and taking that brand that I talked about that customers trust, and thinking about it from a broader travel perspective rather than just an airline. And I think that's where the one-stop shop of travel. You're not just flying with an airline, whether it's a hotel, whether it's car rental, whether it's insurance and other products that surround that. I think that's the power of the JetBlue brand. And a lot of that -- those activities are high margin, low capital. They're not as capital-intensive as airlines are. And so it's a very powerful part of the JetBlue portfolio and I'm excited to -- I am excited to have Andres on the call today, but I'm really pleased to have Andres in the leadership team because we see great potential for that business within JetBlue.

Great. That's a perfect setup, perfect segue to my next question, which is Andres, great to have you with us. Can you tell us a little more about the JetBlue Travel Products subsidiary, kind of why was it created? And kind of what's the goal of the program?

Thank you for having me, Ravi, and good to see everybody. So look, it's a lot of what we've been discussing. I think JetBlue has a 20-year track record of being a great travel experience. And that, for the most part, has manifested itself in flight. But if you take out what's actually at the essence there is, it's a brand that customers can trust. It's a brand that delivers on service. It's a brand that's there when things go sideways. It's a brand that's proactive on making the experience better. And the belief is always those gaps and those needs exist in all parts of travel, right? And so where we're seeing opportunities, especially for our most loyal customers and customers who really identify with the brand is how do we bring that experience and that level of service end to end. And this is everything from travel insurance to vacation packages to down the line where we have plans. And again, COVID slowed us a little bit down this year, but we should be in place by the end of this year and into next year to get more into short-term rentals and cruises and spaces like that where, well, we may not be providing the hard product, but we're providing the service and we're selecting the products for our customers that we think meet their standards and then ensure that they're getting good value for money in service. And so that's why we exist. And as Steve mentioned, obviously for me, financial standpoint, the economics of that business can also be attractive in terms of revenue sharing with some of our partners and when we get the right partners. But similar to the airline, we've pivoted a lot and we've seen positive customer response, right? I mean travel insurance is a product that's been around for a long time. We've pivoted and made it a little bit more -- put more benefits related to COVID. If somebody gets it, what you're actually insured against and making sure customers are taking care of. We changed the pricing and structure of the product to make sure it's relevant for customers today, and we've seen customers respond quite positively. On the safety side, in some of our biggest vacation destinations like Aruba, Cancun, Punta Cana, we actually have an insider experience, which is JetBlue Vacations crew members. Anybody that books a package, they're greeted by JetBlue Vacations crew member. And we've brought all the same safety protocols there, where actually received by somebody at the airport. The way that you arrive to the airport is handled is within our standards. We have certain standards and we make it clear on our website, which hotels we know are following similar protocols to those that we do in the air. And so we've always thought there was an opportunity to serve our customers more than just a flight. We're on a good path and happy to go deeper because the potential here is enormous. But a lot of the pivot this year has been not just on launching new products, but also in terms of how do we make the ones that we have appeal to customer safety needs and continue building the trust in JetBlue.

Got it. That's really interesting because I think 1 or 2 of the ULCC carriers kind of have a similar, kind of bundled travel model. Can you kind of elaborate a little bit more on that? Kind of how much of this was incoming from your customers who wanted that JetBlue halo around their entire vacation experience? How much of this was you kind of spotting a competitive opportunity in the market? And kind of maybe, Steve or Andres, if you can add a few bit of, not guidance or anything, but just numbers around how much do you think this can support your PRASM and your RASM over time, that would be helpful.

Yes. So a few things. I mean in terms of the opportunity, the idea that airlines sell other travel is not new. And if you were to look at just about every other airline in the world, they have some sort of partnership model that works this way. Most, it's a very small portion of the business. Where we think there's unique opportunity is our network skews a lot towards the types of destinations, which type of products would be valuable. And our customer base and when they travel on us tends to skew a lot towards like taking their big holiday or vacation. And so that's where we see a unique opportunity. Where we've -- if you look 1.5 years ago, our offering looked a lot like everybody else's. And where we've spent a lot of time building is building a unique JetBlue-stamped offering, which includes everything from like this inside experience that I mentioned. Steve talked a lot about personalizations. When we offer people products after they bought just their flight, if they want to add things later, it really is -- we've gotten it down to one-click experience where we have a pretty good sense of what car they want and we transfer all the information. So they get an e-mail later, and they're literally one click away from adding a car, and we're going to be similar with hotels and short-term rentals and other products and really getting smart about what's the relevant product set, how do we get the right data to them and how do we minimize their steps. And so it's a combination of taking greater ownership of the merchandising process to make sure we're only putting products that are relevant to customers, getting smarter, retargeting and things like that, and then also backing it up with JetBlue service, right? The typical model in this world is you buy a product, and then if you have a question, call the partner. And what we're saying is, no, no, we're slowly but surely taking over the servicing. So if there's anything that you have a question on or make a change, it's all handled through JetBlue. If you have a situation, your flight changes, we can proactively make those changes for you. And so it really is building on world-class technology to make the interaction with customers better as well as really building a service infrastructure. And that's where we're actually in-sourcing when you see most of the world outsourcing. To your point on financials, look, we -- obviously, we're in a time of a lot of uncertainty. When I joined, we had an Investor Day and we saw a path in 2022 to adding $100 million to JetBlue's bottom line. And that comes from a combination of all the different products. And there's uncertainty which products will get adopted more than others. But on the whole, the $100 million number felt like if we -- if we get even like 4% or 5% of JetBlue customer base to really invest in buying all their travel through us, we see a path to that sort of profit bottom line number. I don't know what the recovery for travel is to be certain on what 2022 is going to look like. But proportionately, if you look at the markets and where we're investing and the products that are maturing as well as the new ones that we have in the pipeline, in the proportion to that number, we still see something of that magnitude. Now I don't know how big an airline JetBlue will be in 2022 and so it's -- we'll scale from there, but it's that level. If you think about the pre-pandemic JetBlue, we saw a path to adding $100 million to the bottom line.

Got it. And also, how successful has the offering been so far? I mean do you have any numbers you can share on penetration? What percentage of customers that would have been able to access this product and actually picked it up? Has there been -- do you have Net Promoter Scores of those customers versus your regular customers?

Yes. Yes. Look, so the vacations package product has always been low single digits. And we relaunched it at the end of last year. So it looked a lot like everybody else's. We relaunched at the end of last year. And January and February, we saw record months. And then obviously, it's been tricky since. And so the 2 months from when everything went live, end of December, and kind of when the pandemic hit, we saw record months in January and February. So still a lot of room for growth but we started seeing some positive momentum, especially around the service. On things like car rental, for example, like if the ability for somebody out of the car after the purchase, not just in path, which everybody knows, but actually added after purchase one click away. We've seen it's essentially doubled the take rate for our business on that side. And so these numbers will -- it's unlikely that they'll get into like the teens or 20% or 30%. But even if we can get into like the 3% to 5%, it's -- there's a significant amount of flow to the bottom line. And then travel insurance, we've also seen some growth as we [ went ] after the product. So it's gone from very, very low single digits to kind of growing to the single digits, but the profit that come out of this is quite substantial.

Ravi, I'll just add. I think like the CFO, how I love about this, it's low capital, right, high return, bottom line with a captive audience who trust JetBlue. So it's quite the sort of sweet spot for us because we do have such a powerful brand that customers love. They just want to broaden their travel experience because of the element of trust. And so it's a nice addition to the JetBlue portfolio, and I'm really excited about it, the benefits of the accretion of that side of the business.