JetBlue Airways Corporation (JBLU) Earnings Call Transcript & Summary

Okay. We're going with our next session with JetBlue. Really happy to have Robin Hayes, CEO; and Ursula Hurley, the CFO. Robin is going to start with some comments, and then we will get right into questions. But first, I need you to admit one thing.

Yes?

All of this and postponing now seems all so you didn't want to mess with our conference.

That's exactly right. Yes. I know we could come.

There you go. Perfect.

Although I remember when you used to have it at Fordham Law School, nice event. Anyway, hello everyone. I hope everyone is looking forward to the Memorial Day weekend. It's coming up. Great to see everyone in person. That's always exciting. And I just wanted to touch on a couple of topics before we start, just to preempt some of Scott's questions. But just in the room from JetBlue also we have Ursula, we have Joe over there, my friend from Investor Relations; and then Scott also Investor Relations. Scott does all the real work on behalf of all of it, but appreciate what you do, Scott. And I mean, just to touch very -- and sorry, I forgot my lawyer friends at the back who are here to keep an eye on me, but Jessica and Rich. And they're our antitrust counsel from Shearman & Sterling. But really excited to be here. Obviously, it continues to be sort of a challenging year for the industry. So we're pleased with the progress that we've made since the April operational challenges we had. We brought down the schedule for the rest of the year significantly. And we are starting to see the benefits of some of the changes that we have made. Look, I think the industry remains fragile in a number of respects. But I think the good news is we're sort of slowly digging out of it. We did improve our revenue guide for the quarter this year. We had originally guided 11% to 16%, and we're now expecting it to be at the top end of that, so 16% or higher. And so I think that talks to some of the continued revenue strength that we see as we head into the back half of the quarter. And there's no doubt, as we said on our earnings call in April that the operational challenges we had in the first 2 to 3 weeks of April definitely had an impact on revenue into May. So that's really all I was going to mention, no not really. But then maybe -- and by the way, that remains an absolute focus right now. Like we've got to -- key to all of our plans, key to any airline is running a safe and reliable operation. And it's -- we can sit and look at everyone else and say we've all got similar challenges. But as a leadership team, our job is to make sure that what we're doing from JetBlue is addressing some of the issues that we've seen.

Before you go to the next topic, maybe just quickly, do you want to just touch on that reliability and sort of where you were in April and early May and where you are now?

Yes, we've seen significant increases in completion factor, significant increases on time performance. We do operate in very congested airspace. And so we can't do -- I mean, last Sunday when we had thunder storms over 100 miles west of Kennedy, we got hit with a 2- to 3-hour ground delay program. So you can't really do much about that. But what we've got to do is manage the things that we can control. And so completion factor significantly up on -- time performance improving. And actually, today, it's the highest flight count in our system now till the end of summer. And so we've continued to distress the rest of the summer to make it as operable as we can. So on to the other matter I wanted to mention is just where we are with our proposal to buy Spirit. We're very excited about the opportunity to create a truly national, high-quality, low-fare challenger to the legacy airline, really taking our organic plan and accelerating it by several years. I do want to just address a couple of the points of misinformation that have been really put out there by Spirit. I mean, first of all, we are very serious about this. This is actually something that we have been thinking about for a long time. As you know, we looked to acquire Virgin America several years ago. We were unsuccessful. But that was something that we then continued to look at the landscape. And we saw an opportunity with Spirit really to create this national low-fare challenger. So we studied that hard. We did a lot of work at that back in 2019, going into early 2020. Then COVID came obviously, and it would have been a wrong time to pursue that. But it's something that we have been thinking about a long time, and we're excited about the opportunity. I think our concerns have been well documented. We clearly have a superior financial offer. It's an all-cash offer. We've removed today the market decline condition. I think that's the technical term, Ursula, based on investor feedback. We've continued to have a lot of conversations with Spirit shareholders and to make sure that the strength of the offer is understood. And I think the other benefit, as we've gone through the conversations with Spirit shareholders last couple of weeks, is just the regulatory picture is much better understood. Spirit came out of the gate very quickly saying, our deal with Frontier is a slam dunk and this can't happen. And I think the reality is, for anyone who's been through a regulatory process, it's never that simple. Both transactions will get a significant amount of regulatory scrutiny. I don't see either of them closing this year. We should expect, particularly under this administration for a very robust review. Both transactions may well end up in front of a judge and not be settled by DOJ at all. But I think that our conviction and our confidence on the regulatory side is really predicated, first of all, on the JetBlue effect, which is documented and proven. And if you don't take my word for it, take the Department of Justice's word for it because now in the complaint they filed against the NEA, they talk persuasively about the JetBlue effect and our disruptive impact on fares. And so when JetBlue flies a market, it's not just people that fly JetBlue that gets a better prices, everyone flying on every airline gets a price. Because the truth is the legacy airlines match us, and we've seen that time and time again. And so the JetBlue effect is over 3x more impactful than the ultra-low-cost carrier effect in reducing fares across the industry. Secondly, about half of JetBlue customers are buying on price today. They buy JetBlue because on a particular market, we offer the cheapest choice. And so we are very familiar with carrying a significant number of customers who are buying on price. And thirdly, we came forward with a very significant package of divestitures. We understand that the ultra-low-cost carrier segment presents an important option for customers. And so we wanted to make sure -- and it's a very vibrant sector. You've got Frontier, you've got Avelo, you've got Breeze, you've got Sun Country, a number of airlines that are growing quickly. And so the ability to divest in the Northeast, for example, all of the gates and slots that we would be inheriting for Spirit to make sure that from an ultra-low-cost carrier competition perspective, there are still lots of market entry. So when I take about -- when I take JetBlue's commitment to low fares, when I take the JetBlue effect and the impact we have on the industry, and I take the fact that ultra-low-cost carrier segment is alive and well, and we would make a very clear divestiture commitment. That creates a much broader and compelling regulatory story than the more narrow Spirit Frontier transaction. So what's going on with all of this? Why have we had no more traction? Look, we have a very entrenched Board. We have a Board that Spirit [indiscernible] the deal that they wanted to do. It's quite clear from the proxy. They spent a lot of time on it. The process has not been equitable. Ask yourself, why was the market check not done at the beginning of this process. That's, by the way, what happened with Virgin America in Alaska, that's how we got involved because Virgin America basically reached out as part of that sort of -- is there -- are there other potential bidders here, to compare us and Delta as the same or equivalent in terms of options is clearly misleading. In terms of due diligence, it was much more limited. We had fraction -- access to a fraction of the documents that you would expect in this type of transaction. And really no feedback. Just here's a couple of take-it or leave-it provisions that even if you agree to this, your offer is really probably still not going to be superior because of the concerns on the financial side. And these were provisions that we couldn't reasonably agree to. And again, no negotiation or attempt to try to come to an agreement. And I think when I compare the amount of effort that was put into our process is, frankly, about 10% of the effort that was put into negotiating a deal with Frontier was afforded us. I think we could have a deal by now. And so I think from a governance point of view, a lot of concerns, which are recognized by many long-term shareholders in Spirit as well. So I've been in the industry over 30 years, I've not seen anything like it. And when you talk to a lot of people who have been in the industry a long time, a lot of analysts, a lot of people in the antitrust space, both look at this and say, well, you know what, it's not going to be easy in either case, but there's a path to getting both of these deals done. So we are very committed. We've launched our tender offer. We're engaging with Spirit shareholders. We've met with ISS and Glass Lewis, and we're going to continue to press the case to Spirit shareholders that we believe our offer is far superior than what's on the table. And I caught the last comments on the really interesting labor section earlier. And I think a lot of the advantages that ultra-low-cost carriers have had historically is they paid their people less. And that's going to change. In a world where you've got a shortage of pilots -- by the way, JetBlue is one of the first airlines to recognize this. And we can agree, to disagree how big the shortage is, but the reality is we're seeing more attrition. We're seeing fewer pilots coming -- industry -- that industry needs. You -- the labor rates are going to converge, they are. And that's a reality. And so to a have basic synergy case, not really assuming I can grow these high growth rates and really not have any significant labor increases. I mean that's just not real world. It's not going to happen. And so I think that's another reason why our offer is cash. It's here, it's now. And if you want to take that cash and invest in Frontier or invest in JetBlue or invest in Jets ETF? Fill your boots. Go at it. But it's just the conviction we have that we will get this done. And by the way, in case we don't get it done, we've offered a reverse breakup fee. And again, Frontier have offered nothing. And so to me, when you've got 2 deals that -- both are going to face a lot of regulatory scrutiny, both have a chance of not happening, which, in my view, is similar and the view of many people is fairly low, but it's there in both cases, we're offering some downside protection and Frontier is not. And it's surprising to me that, that is still the case. Anyway, that was more than 5 minutes, you were going to give me, Scott, but I probably hopefully answered all your questions. That's maybe just kind of set out a few thoughts.

That's perfect. And lots to talk about. You sort of finished on pilots, and so maybe we'll just start there. So we heard from last panel, how important it is to get pilots on board and get them on board early? What progress have you made on that front?

Yes. So I couldn't agree more. I mean the role that pilots and all of our crew members play in our industry, it's the key to how successful we are. I'm always proud of the relationship JetBlue's had with its people. I think it's a culture that we are very -- after 20, 21 years, we're very protective of. We couldn't certainly have got through COVID or being where we are without the support of all of our crews, including our pilots. And we actually just opened up our CBA quite recently. But I think we're concerned about making sure that we have the pilots that we need to fly the operation. As I say, from a pay point of view, our pay rates are really at or -- we just did a 3% increase linked to an NEA settlement that we did. Our pilot pay rates are really now equivalent to the legacy airlines. And so the market is going to adjust again. I mean it's absolutely the case. I think it's going to adjust quite quickly. I met people talking to me a year ago, saying, well, we think it's just kind of cost of living going forward, that's not going to happen. And so we are obviously anxious to kind of get through the process. I mean there's a process to it, right. Both sides have to agree at the end of the day, but we're certainly keen to get through it as expeditiously as we can.

Okay. Let's get to the tender offer, the proxy. What insight do you have from shareholders that you want to share? And then separately, you said you've been meeting with ISS and the other proxy advisory companies, when are they going to put out their recommendation? And how are you feeling about what they're ultimately going to come into?

Ursula?

Yes. So thanks for the question. We've been extremely pleased with the initial feedback that we've been receiving over the last few weeks. We did meet with ISS and Glass Lewis this week. Obviously, given the vote is currently scheduled for June 10, we expect that they will expedite their reports. So they haven't given us an exact date, but you should probably expect sometime after Labor Day. The commentary and feedback has been very positive. As Robin mentioned, the focus has really been on the regulatory side. And once you dig a couple of levers deeper, you start to understand that both of these deals have quite similar regulatory paths. And when, on top of that, you layer in clearly superior financial offer that we've laid on the table, we continue to feel very confident in the momentum that we've gained thus far and the feedback that we're receiving from Spirit shareholders.

And Robin, what if -- and I'm sure you love the hypotheticals, but if June 10 doesn't go your way, what is the path forward on this transaction from there? Is there a path forward?

Yes. I mean, obviously, I'll keep thoughts private in certain areas, but I'll say this. I mean at the end of the day, we were doing this because we felt it was a tremendous way to accelerate our organic plan and to bring more low fares and better service to more customers, more quickly and bring the JetBlue effect into more markets. If we are unsuccessful, which we don't anticipate to be the case. But if we were, then we would go back to our organic plan because I think it's something that we felt very comfortable with, and we will continue to execute to.

Is there something specific about accelerating that plan with Spirit where it couldn't be with somebody else?

Well, I mean, we don't -- I'm not going to -- again, I'm -- some things are best left as a secret. But when we did the work on this pre-COVID, I think the opportunity with Spirit is the one -- it's the common fleet type and the benefits of a common fleet type are even more pronounced in a world where you're seeing increased pilot attrition because as you have trip more pilots as you hire more pilots it -- because these guys know it creates more seat changes and more training events that you have to work through. And from a geography point of view, we felt it was the most compelling option. So it's the only thing we're focused on right now. And if it doesn't happen, then again, we will go back to the organic plan.

Okay. So let's spend some time on the regulatory side because I think that's been a big focus. So just I understand, you're not trying to say that you have an easier regulatory path than then. You're saying, we both have an equally challenged or similarly challenged regulatory path but we're offering significant more. So it's worth -- even if it's a little bit more regulatory risk, it's worth 50% more?

Yes. Look, Spirit came out of the gate and basically was saying the Frontier deal was a slam dunk, and this can't happen. Neither of those are true. I think we've taken a much more pragmatic response say, look, both deals are going to get a lot of scrutiny. And both deals may end up in litigation if you can't reach an agreement with the Department of Justice on the issue. The Department of Justice views JetBlue as a good actor, read the complaint that they made on the NEA. It talks a lot about the disruptive effect of JetBlue, and the concern that they have raised in the NEA is would that be lost because of the partnership with American. It's not fundamentally something wrong with JetBlue. So again, we think we have a very compelling story because this will create a bigger JetBlue to create more better pricing actions of the legacy airlines in more markets. Look, what's happened to Boston Laguardia shuttle these days. Look, what's happened to London fares. I mean the time and again when JetBlue steps into a market, there's a market-wide positive impact. So we are confident in our case. We would not have entered into this if we didn't feel confident. Spirit have said, well, why did they wait 7 weeks? You know what we were doing in that 7 weeks? We were running all the economic analysis again. We were crunching all of the fare data to make sure the JetBlue effect was real and current. We are looking at every way upside down, inside out to make sure that everything we believe back in 2019 was still the case. And only then when we were convinced with our regulatory counsel and other experts that we consulted to with our data that we felt we had a very viable part did we make our offer. And the fact it's being characterized as a spoiler offer couldn't be more disingenuous or incorrect. And at some point, there'll be plenty of documents to substantiate what I've been saying.

So Spirit would say, okay, let's start with NEA, right? If it gets approved, then it's a de facto merger that's been approved. So there's no one that'll let another one happen. Or if it's black, they're going to be emboldened and say, well, we're not going to -- if we want to prove that there's no well proven actual merger. So they're saying, either way, right, the NEA makes it difficult. So what's...

Well, again, I think if you have an entrenched Board that's trying to protect a big deal that they've already agreed, then what are the kind of things that we can thaw? The NEA is a complete red herring. First of all, the NEA is already delivering consumer benefits in the Northeast that we're seeing today. And I don't have time to list all of those, but they're very pervasive. And everywhere I turn, I get thank God, there's more JetBlue flights in New York, and we're already seeing the impact of that. Secondly -- so the benefit is there. Secondly, we made a full upfront divestiture commitment. When's the last time, Scott, an airline deal in the U.S., do you remember an airline coming in and say, you know what, we're just going to make that offer now. So every single gate or slot in the NEA airports that is -- Spirit has today, we will divest that. And so in terms of the amount of ultra-low-cost carrier capacity coming into the Northeast, it's going to be unchanged by the NEA. Thirdly, the NEA is going to be done. We have a court case in September, again, with a complaint. Spirit is saying that the DOJ is suing JetBlue as if we're the bad debtor. The concern that DOJ has, basically, is there a risk that JetBlue will change because of this partnership with American. And we have all sorts of arguments and data to show why that isn't the case. So we're going to go to court. We're going to win the NEA case because we've got top lawyers like Rich and Jessica, they're back to make sure we do that. Plus, we have a very compelling story. And at that point, we've won the NEA case. And so it's -- we've won it because it's pro-competitive. Let's say, as much as I wouldn't like to think about it, there's a scenario where we lose the NEA case. And it's struck down by the judge. The NEA has gone away. So again, yet another kind of sound bite that someone can throw out, but you kind of -- you go one level below the surface, and there's really no substance to the argument.

Okay. Now the other main argument from them would be, hey, what you're going to do is you're going to take seats out of planes and ultimately, you're going to raise fares, raise fares from where Spirit fares are today.

So again, I'd look at it more broadly. So first of all, I look at the JetBlue effect, which means we bring low fares to everybody and not just when you fly JetBlue. Secondly, half our customers today are buying -- flying JetBlue purely on price, and we compete with the ultra-low-cost carriers on many markets. Thirdly, the ultra-low -- we've talked about divestitures, which will -- and the vibrant ultra-low-cost carrier segment. So a lot of that capacity, if not all of that capacity, is going to get backfilled by ultra-low-cost carriers. And again, this seats on an airplane thing is a complete red herring. I mean we've got [indiscernible] that have 100 seats on them. We're replacing them with 220s with 140 seats on, right? All of our order book are 321s with 200 seats on. We don't have any 319s, 320s in our order book. So we're getting bigger airplanes with more seats on. And so when take the JetBlue effect, when I take the divestitures, the vibrant ultra-low-cost carrier segment, I think it is a much broader consumer story for lower fares on 2 ultra-low-cost carriers combining. Because when ultra-low-cost carries come on a route, for the most part, the legacy airlines will ignore them, or they would not respond to them to the same degree as you and everyone else knows. And so again, you can pick sound bite say, well, there's less seats. But again, that really means you're not looking at the facts and how these things really will get determined.

And so what are the next things for you to do between now and June 10. Obviously, investor engagement, are we at a sort of best and final offer that you want -- or anything else you want to say between -- what else can you, say, I guess, between now and June 10?

Well, it's hard to put a best and final offer in front of someone that doesn't want to negotiate with you. So I think the -- what we really want to do is bring Spirit back to the table. Let's have a -- just put a fraction of the effort into it that you put into the Spirit-Frontier transaction. We've already said that we'll go back to 33 if it's process where there's engagement. Let's talk about divestitures. We put something out there that we think is very compelling. We don't think we need to do more than that. But again, we are more than willing to talk. We just want have a good faith negotiation on these items. We clearly have a superior financial offer that I don't think anyone can dispute. I think we've demonstrated to Spirit shareholders, the regulatory path is not as clear cut as Spirit had made out by saying, well, this deal can get done by the end of the year on this one. They're already backing off the end of the year thing, by the way. And we want to just have a proper good faith negotiation.

They're here today.

Sorry?

They're here today.

Yes. Well, so are we.

Do you have any -- is there any sense that there's a potential for that sort of good faith negotiation over the next 2 weeks?

Well, I think they seem to be very dug into the entrenched position they've taken. I mean even this week saying if it doesn't work, they're going to go back to the organic plan. I mean it's -- we have a very strong offer. Maybe there's someone -- I mean like if you're about maximizing value, you really should take a much broader view and not just run off and do a deal with someone that you used to know. And frankly, for those of the industry, finding one person who thinks that Spirit has got the better end of this deal with Frontier. I mean, I just haven't met anybody. And so again, I think that talks to the fact that there's real value here for Spirit shareholders by taking a step back, looking -- thinking through the process, and let's have a proper engagement. We didn't want to do this. We did not want to do this. We've all got better things we can do. But unfortunately, the process led us to this.

Right. It's a cash offer. So maybe the Spirit shareholders don't care, but the JetBlue shareholders will care. Like let's talk about like let's think positive. Let's think about a combined JetBlue-Spirit. Walk us through some of the synergy ideas and what you think this combined business ultimately looks like in '24, '25?

Yes. I think that a lot of the long-term investors in JetBlue. They're in JetBlue because they like the organic story. And I think there was a bit of sticker shot when we came out and announced this because it's like, wow, that's not what we were expecting. But when you ask sort of break it down and you talk about this is really a way of us accelerating the organic plan, I think people start to see the strategy and the opportunity, know the ability to have access to more great airplanes. We've got order book, so do Spirit, access with data and infrastructure, asset to a tremendous workforce. We're really excited about making the Spirit team members come as part of JetBlue. And really just, as I said, accelerating the JetBlue brand, accelerating the organic plan. It's going to -- and the synergies as you know -- again, we've done a lot of work on integration. We've got people who have done this before. We'll be incredibly thoughtful about doing that really well, learning from what others have been through. But the synergies start very quickly because, of course, you can start selling the 2 airlines together, connecting itineraries, even if you're selling them as 2 separate brands for a while until you've got the seniority list integration, you've got the single ASC, and you've been through the fleet modification plan. It's going to be a game changer. I mean, look, take a step back. I've been pretty active on competition policy in the U.S. for a long time. I led the charge against the legacy airlines on the open skies issues. And so it is a game changer that have a bigger JetBlue that can offer people a great service, still do it with low fares and create that price discipline in the market. And I think that's something our shareholders, that's something our communities, that's something our crew members are all going to be excited about.

Okay. Maybe let's just do 2 or 3 minutes actually on the business today, if we can. So the high end of the revenue guidance are a little higher. I'm guessing that maybe with the start to the quarter, still unprofitable, but -- correct me if I'm wrong, but maybe give us some color about like what you're seeing from like a June profitability -- or expectation for June profitability, you still expect profitability in third quarter? Anything you want to talk about there?

Yes. So just to recap what Robin relayed earlier, we had an operational setback in the first 3 weeks of April. We had a completion factor of about 90%. The first 3 weeks in May, we're actually trending towards 98%. So we took a big step back in April in terms of our full year capacity growth. We shaved that back by about 10 points for the remainder of the year. And we're already starting to see the fruits of labor around that, just given the improved operation. In terms of revenue, the demand environment continues to be exceptionally strong. We did actually guide revenue up 11% to 16% back on the April earnings call. And so today, as Scott mentioned, we highlighted that we're going to be 16-plus percent, at 16% or above. For June, our RASM is projected to be above 20%. So that just really speaks to the strength of the environment that we're seeing. In terms of profitability, given the April operational challenges, we did not expect to be profitable on a quarterly basis. However, the demand environment continues to be really strong. And our goal is to get June to profitability and then that to continue through the rest of the year.

And then anything from like the full year guide or the implied second half guide that you gave us a month or so ago that changes positively/negatively from...

Yes. I guess given the April operational challenges, we did meaningfully scale back capacity. In the second half of the year, our capacity will be up low single digits. That's the expectation. We continue to feel great about the summer. We are cautious about the fall. So just given the macro landscape that we're sitting in, in oil, we continue to be cautious about the fall. So right now, based on what we know, we feel very confident in the low single-digit capacity outlook in the back half of the year as well as continued momentum on the cost structure as well and the improvement.

Is that fall comment a leisure comment or a lack of a [indiscernible].

Just a general, I think it's lack of visibility at this point, naturally, which would be the case in this typical time frame. And then just the macro and what's happening around us, right, think of oil, think of inflationary pressures. Is there going to be a step back in terms of demand based on what we are seeing through the summer. But we haven't seen anything yet. It's just a blanket, cautious about the fall.

Yes. I mean those of us who have been in this industry a long time, unfortunately, when you see some of the things that we see, it has inevitably led to some kind of downturn or revenue softness. And so I think we just need to be cautious about the last quarter of the year. And I certainly don't want to be up here making promises. I'd rather under promise and over deliver. Summer will be strong, no doubt, but let's wait and see how the back end of the year [indiscernible].

And then last thing really quick. I've asked everybody sort of best guess capacity growth next year and then CASM up or down next year?

Yes. Well, hopefully, next year, we're comping to 2022 instead of year over four.

You'll now turn year over four now.

Listen, I think the environment that we're in, in terms of pilot availability and capacity is going to continue to limit all of us carriers. So our utilization this year is down 15% to 20% in the back half of the year. We expect to be in an environment next year where we're not back up at 2019 utilization levels. So I would assume JetBlue gets back to its original mid- to high single-digit growth rate as we look out to 2023. Our goal on the unit cost performance is to get that down to flattish. I think the caveat there is how the labor environment evolves and hence, the pilot panel that we heard from right before ours. So I think that's the caveat around the longer-term unit costs.

Flat '23 versus '22?

Flat. So in terms of flattish, yes.

Yes. Okay. Okay. We're going to have to wrap there. Thank you, guys, so much.

Thank you.

Thank you.