JetBlue Airways Corporation (JBLU) Earnings Call Transcript & Summary

Great. For our transportation content on day 3, very happy to have with us JetBlue, and from JetBlue, Ursula Hurley, EVP and CFO, so thanks so much for being here.

Really excited to be here in Laguna in supporting Morgan Stanley. It's fantastic to be in Laguna on a Friday in September. I'm here with my team. I have Jose Caiado and Scott Park from Investor Relations.

Great. A special thank you to JetBlue for being here because I think you probably have more on your plate than any other executive that's been here at the Laguna conference over the last 3 days. So maybe I'll just kick off by asking you, how's life? I mean, it's hard enough to run an airline business. And in addition to that, you have a pretty big acquisition to swallow and you have the NEA and you're launching transatlantic service and so many more initiatives. So A, do you sleep? And B, how do you spend your time between these initiatives?

Yes. So thanks for the question. It's obviously been a really exciting 12 months for JetBlue, and essentially, we've got a lot going on, to your point. It's been a lot of fun. We're very fortunate to have an outstanding team who has been executing across the board. The #1 priority has been operational stability and getting the business back to profitability. And then, obviously, we have been successful in the Spirit transaction thus far, which is really exciting, and will set JetBlue up for long-term success. So yes, I get some sleep. I'm spending the majority of my time with the business, helping us get back to profitability. And obviously, the investor lens and time I've been spending with investors over the last 3, 4 months has been significant. And I really enjoyed that part of the process. So it basically comes down to execution for us, executing on the organic growth plan over the next 12 to 18 months and then also in the background executing on a potential integration process.

Got it. Congratulations on bagging Spirit. Obviously, a really big deal for you guys, both literally and figuratively. I actually can't ask you any specifics of the deal, so I can just ask you, at a high level, how is it going? Can you just give us an update on where we stand right now?

Sure. Like I said, we're really excited. And the pursuit of Spirit was really driven by -- this will help JetBlue accelerate our organic growth plan, and it will catapult JetBlue to be the #5 carrier in the U.S., and we'll be able to better compete against the legacies. And we believe that our product offering across the board, whether it be extremely price-sensitive customers or customers who prefer an elevated experience like Mint, is going to bring -- we will be able to bring that to a broader customer base. So we're excited. The next step is that Spirit actually filed the proxy statement this past Monday. And the shareholder vote for the Spirit and JetBlue deal is scheduled for October 19. And the record date for the shareholder base is set at September 12. So that's the next big meaningful milestone. What's also happening in the background is that we are progressing the regulatory path and laying out our high-level case to the regulatory authorities. So that has been progressing. And then the third component that is in process is the internal team has been spending a significant amount of time standing up the potential integration management office. Obviously, we're pending shareholder approval in mid-October, but there's a lot of work around initial thoughts on integration and learning a lot of lessons from the mergers that have happened in this space historically.

Great. So let's shift gears and just talk about the demand environment right now because, obviously, that's probably #1 on top of airline management minds. It's been crazy 3 years, but it's also been a pretty crazy 2022, but we did have a very, very robust late spring, early summer. So can you just help us understand kind of what the late summer and the handoff in the fall has been like for JetBlue?

Right. So demand continues to be really strong. So JetBlue is typically July and August heavy leisure travel, right? And so you can expect us to perform exceptionally well in those months. What we've been surprised about is that September is looking just as strong as July and August in terms of the unit revenue performance. So this morning, we actually improved our RASM guidance for the quarter by 2 points. So the midpoint went from 21% to 23%. And that's really driven by the continued strength that we're seeing from a load factor perspective, from a fare perspective throughout the month of September. October is also looking really well, really strong as well. So no slowdown in demand yet. I think everyone is waiting for the shoe to drop, but we think that some of these contributors could be -- some folks just got priced out through the summer, right? And so they're continuing to travel in the September timeframe. Also with more work flexibility, we're seeing folks take longer weekend trips and also business travel is starting to come back again. We saw that pre-summer, took a little bit of a hiatus during the summer, and now we're seeing that ramp back up again. So those are really the contributors, we believe, to the strength that we're seeing throughout the quarter.

Got it. Can I follow up on the corporate point because we heard from Southwest yesterday who said that something very similar. They had strong July and then there is a drop off in August and then a rebound again in September. So you saw something similar?

Yes. So we saw a sequential 10-point improvement from Q1 to Q2 in terms of business travel. And so we've seen about 80% recovery. Naturally during the summer timeframe, you see business travel scale back, but we're seeing that come back again in September. And especially in places like New York, there's a lot more organizations that are actually bringing crew back to the office. And hopefully, it's real this time. And so we're seeing some of that business travel come back. And the positioning of JetBlue with the Northeast Alliance in Boston and New York is really going to help us further catapult our business traffic.

Got it. I'll come to NEA in just a second. But one of the most exciting organic stories within JetBlue is transatlantic, obviously, you launched new transatlantic service a few months ago. How is that ramping? Where are you from a slot perspective? And kind of what's the next steps to grow that out?

Sure. So launching London was really -- because we wanted to continue to be relevant to our customers in Boston and New York. And so London was the #1 destination that we didn't yet serve that our current customers wanted to go to. And so we launched last summer, JFK to London. This summer, we've thus far launched Boston to Gatwick. In a few weeks, we're launching Boston, Heathrow. And then we actually got access to an incremental slot at Heathrow. And so we'll be launching additional service out of New York in October. So we're really excited. We actually evolved the Mint product offering. So it's an elevated level above what we offer today on transcon, all access seating and a fabulous JetBlue experience. And so the customer response has been exceptional. Loads have been good. Fares has been good. I think Robbie and I were chatting before this, and he wants to go to London, and he's like, Ursula, there's no seats available, which is a good thing. So we're really, really pleased with the launch and the response that we're seeing from both sides of the pond. The original business case assumed it was heavy origination from the Northeast, but we're actually seeing an increased origination from the London side, which is really, really great and helpful. So all in all, really pleased, excited. We do have more LR aircraft on order. So you can expect us to continue to launch incremental European destinations in the near future.

Great. That sounds really exciting. Obviously, Heathrow Airport has been the center of a lot of headlines with the operational challenges over the summer. Has that impacted you guys at all?

The team did a fabulous job. I mean, just as a reminder, our London capacity is less than 1% of our total network. So from a scale perspective, it's rather small. We were disappointed in the rationing that Heathrow had to go through, but the team did an amazing job working through it and ensuring that our customers were impacted at a very minimal level.

Got it. A real area of strength for the entire industry, including you guys, has been premium mix. You referenced Mint. I think you said on the 2Q call that Mint was back to 2019 levels from a load factor perspective, but that you were also cautiously optimistic about the fall. You sound a lot better than cautiously optimistic. So what is that premium ramp look like for this year?

Yes. So we see across the entirety of the JetBlue network, there's strength everywhere. However, the 2 standouts are transcon flying and that's really driven by the Mint performance and the demand for that product offering. And the second area of strength throughout the network is Latin. So visiting friends and family. And so those have been 2 themes that have continued to shine through as we've navigated through COVID. And so specific to Mint, this premium leisure traveler continues to perform very, very well and respond really well to the Mint product offering. And so we're extremely pleased. I think, if my network team was in the room, they would be asking for a plethora of more Mint airplanes in order to continue to grow that market because it performs exceptionally well. So we're no longer cautiously optimistic as we head into the September and October timeframe.

And just on that point, just given the strength in premium across the industry and the success of the Mint product, have you considered rolling that out on a more widespread basis across the domestic network?

Yes. I mean, the product response has been exceptionally well since we launched it years back. And that's really why we evolved the transatlantic product. So we evolved Mint to be even better than the current product. And we're not trying to cannibalize, but going to Europe, obviously, customer expectations are slightly higher than going transcontinental. So we continue to evolve the product. I think as we, obviously, in the next 18 months, we're not in a position to place any incremental fleet orders, right? But when we do successfully purchase Spirit, we will optimize both fleets, right? We both have meaningful order books. And so Mint continues to perform really well, and there could be an opportunity to continue to grow that market when we combine the 2 companies' order books.

Got it. Let's talk about NEA because that's clearly benefited you kind of both defending and growing share, especially in Northeast connectivity, to international as well. Can you just give us an update there? And kind of how does that play out in terms of expansion? Where are you from an approval basis? And kind of how does that ramp over '23?

Sure. So the whole purpose of the NEA was to create a third competitor in the Northeast. You've got 2 dominant carriers with Delta and United, who compete very effectively for business traffic. And given the Northeast airports tend to be slot constrained, we decided to join forces with American to create a competitive third force, right? So the goal is to create and provide customers more options in terms of flights and routes and destinations. And so historically, JetBlue's mix of leisure and business has been 80-20. And we're trying to evolve that with the combination with American. And so we're continuing -- we are still ramping up the initiative. Business travel continues to come back, right, which is going to be a tailwind for JetBlue in the future. We are working -- we continue to work on customer seamlessness. So ensuring that you, whether you book on JetBlue or American, can smoothly fly either airlines. So seamlessness is a big focus. The challenging part is that the costs associated with the Northeast Alliance are already baked into our cost structure, right? So the majority of the costs are rents and landing fees. There's some infrastructure investment to ensure the seamlessness that I discussed. And so those are baked into the cost base, but the revenue is still ramping up. And so we're extremely pleased with what we're seeing. But as business travel comes back and as the New York recovery continues to come back, we believe that this is going to be a meaningful tailwind for JetBlue in the quarters to come. In terms of you asked about where are we from a regulatory process. So we are going to court in regards to the NEA. Our trial starts on September 27. That will be a 3-week process. We feel extremely confident in our case because we have been bringing consumer benefits to the Northeast. There's data points that show that and prove that. And so we feel extremely confident as we work through that trial. We hope to have a resolution on that trial by the end of the year. But it's full force. We're ramping it up and we're competing. And like I said, we're bringing consumer benefits to those in the Northeast.

Got it. Last question on the top line. I think one of the areas of growth for you guys that probably gets overlooked pretty often is travel products. It's been a real success story for you the last -- during the pandemic. Again, what's the new opportunity there? Are you seeing any of that momentum come off? Or is that accelerating going forward?

Yes. So those of you who aren't aware, so we have a subsidiary called JetBlue Travel Products. And essentially, we want to bring a holistic package to our customers, right? We want to be able to provide you hotels and concierge service and rental cars. And so this is a business that is making significant financial traction. So our commitment is to deliver close to $100 million in EBIT this year. So it's very quickly growing. We're excited about it. We have not seen a step back in demand. We're really excited about joining forces with Spirit because that will broaden our customer base and give things like JetBlue Travel Products as well as our loyalty program, the opportunity to catapult growth even further. So all in all, extremely pleased with JetBlue Travel Products. And if you haven't used Travel Products, I strongly recommend it.

I love the pitch there. So let's move on from top line to the operational reliability and the cost structure. Obviously, and then I brought this up to every single airline, and operational challenges across the industry, where are you guys right now? It seems like the entire industry seems to have got a little bit of a handle on it on late summer. Does it feel like that's a new normal and you guys collectively are passed it? Or are there more risk there?

Yes. So back in April, we had some operational challenges, and we didn't deliver what our customers expected from JetBlue, right? We pride ourselves on customer service and the product offering and the overarching experience. And so what we did back in April is we decided to meaningfully scale back our growth trajectory for the year. So originally, we were anticipating growing about 13% and we scaled that back to about 3%. So significant step back. And we did that to set ourselves up for success heading into the summer. So we continue to hire. We navigated through the summer very well. We're actually pleased with the performance. Our completion factor significantly improved as we navigated through the June, July, August time period. However, we're still operating in a pretty fragile environment, right? We have constraints when it comes to pilots. There are ATC challenges throughout the network. And so there is a meaningful amount of investment that we made as we navigated through the summer in terms of crew to ensure that we could deliver what our customers expect for us. So going forward, we're going to have to find the sweet spot operationally and financially to ensure we can continue to deliver. So when I look at the fourth quarter and weeks like Thanksgiving and Christmas and New Years are really important to leisure travel company like JetBlue, we're going to have to protect those from a crew perspective, and that's going to take a certain level of investment. I think that we are taking a step back. We're very proud that we ripped the band-aid off back in April, and we're able to execute flawlessly. I think some of our peers struggled throughout and handled it very differently. But all in all, we're pleased with how the summer performed, and we're looking to set ourselves up for success. As we continue to bring capacity back in the fourth quarter, we are going to have a capacity level above 2019. And so we've got to make sure that we protect the operation to ensure we deliver for our customers.

Got it. You mentioned pilots and crews. You also mentioned ATC. So it's very clear that for you as an industry, some of these bottlenecks are within your control and some of them are not. So it's kind of, A, how much visibility do you have into that improvement? What's the timeline? Like do you feel like this is going to be resolved in 2023. And specifically on the pilots, can you give us an update on kind of where you are in terms of availability and what you need?

Sure. What's really unique about this past summer is that all of us airlines were constrained from a growth perspective because of pilots, and it was probably one of the most robust demand environments that we had seen, right? And so that naturally has elevated fares, right? And as I mentioned earlier, that probably created some folks to spill into travel in the fall time frame. The pilot landscape continues to evolve, right? Like before the summer, we had training throughput challenges, right? We didn't have enough trainers, we didn't have enough check airmen and we have since worked through that. And so the training pipeline and the time it takes from a pilot to get from the beginning to the line has meaningfully improved, which is good. Attrition is elevated, right? But it's somewhat steady, and we are working through recruiting. And so that process is going well. We feel good about the pool. I do think as an industry, we will all continue to be constrained as we look to 2023 capacity levels. So I envision utilization compared to 2019 slightly being down. But we feel much better about the throughput and the process, and it's continuing to just get as many people in the door as possible so that we can get utilization levels back up to 2019.

Got it. But things like ATC and like airport construction and such, I mean, there's nothing we can do about it right?

Right. Yes. And that's why I mentioned like this -- it is this fragile environment. And so we need to find a sweet spot about how much we're going to invest to protect the operation given the things that are out of our control, right? So we're significantly carrying more pilots today than compared to 2019, even though our capacity level is still equivalent to 2019. And so we've got to find a way and a balance from a reasonable cost perspective to protect, but also to deliver on the controllable cost expectations that folks like yourselves have.

Got it. Another bottleneck has been the fleet and availability of new aircraft. Can you just remind us on what your fleet plans are kind of when you expect to get through the modernization and what the '23 plan is?

Sure. So we've completely transitioned to only take delivery of next-gen technology. So we're taking NEO aircraft, as well as A220 aircraft. We're expected contractually to receive 13 airplanes this year, and then we have a meaningful step-up next year, and we move to a time period where we're taking 30 shelves per year. And that's really because we're going through a replacement phase for our E190 airplanes. The OEMs continue to struggle in terms of manpower as well as supply chain challenges. And so we have seen delivery delays across the board. Some of them are a few months, some of them are a little longer. We are managing through that. We're working with the OEMs as closely as possible, and we're trying to be flexible in terms of our planning assumption. So I think this is going to be a challenge that's going to persist as we move into 2023 as well.

Got it. Switching gears a little bit. Can we talk about the balance sheet? Obviously, again, with so much on your plate, balance sheet and liquidity management is also a priority for you. As CFO, kind of where do you see your liquidity situation right now? What are your contingencies in case like the macro deteriorates massively?

Yes. So we entered COVID with one of the best balance sheets in the industry, and we're really proud of that. And we navigated very well throughout COVID, and we actually started already to delever. And so I feel good about the current state. We had a meaningfully sized unencumbered asset base to the tune of $11 billion, which the majority of that is helping support the Spirit transaction. We still do have a meaningful unencumbered base if we were to hit a challenging time period. I feel good about the leverage that we'll peak at when we do combine with Spirit. It's about 3.5x, which is still below the median of the industry. And then the combined companies are going to generate meaningful cash. And so the goal very quickly will be to start to delever as soon as possible and get the balance sheet back to pre-COVID type metrics.

Got it. So maybe I should have actually asked it at the start. But from where you're sitting right now, I mean, does it feel like travelers just is completely insulated end market from what's going on in the macro? Or do you feel like there are signs and if you have the data that shows you a low-end customer -- consumer versus high-end consumer, are you seeing any cracks in the macro in the data you see?

So we continue to see strong demand across the various customer types. We also continue to see really strong credit card spend on our co-brand card. And so -- however, we always remain cautious, right? That's my job is to manage risk. And so we all sit here today, and I truly believe our message is consistent with the peers like demand is strong. And it continues to be strong through September and October. And so we don't see any data points yet that would say otherwise. Obviously, there are things going on secular to us. And unfortunately, it looks like our industry is being penalized when you look at stock prices today. So we'll have to see how that plays out. But as of right now, we don't see anything, but we're going to remain cautious as we head through the end of the year.

Got it. Any questions from the audience for Ursula? Again, I think you're nailing every response. We have a question there. I'll get a mic to you, sir.

You may already seeing strength from the other side of the pond coming to the U.S. from U.K. That's not being affected at all by currency changes? And to the extent that you have other international travel, any effect from FX changes with U.S. dollar being so strong?

Yes. Not yet. Not yet is the short answer. We continue to see stronger demand from that side of the pond than we originally thought and planned for. So we'll have to see how that shines through over the next handful of months just given the currency dichotomy at the moment.

Any other questions? Okay, I want to ask you about ESG because even though you have so much on your plate in the short term, you guys have bigger eyes on the ball for like long-term initiatives. I think, JetBlue Ventures has been one of the most active out there in terms of making long-term kind of almost moonshot like investments. So can you just kind of unpack that a little bit kind of how does JetBlue Ventures work? What are some of the exciting opportunities looking at between eVTOL and kind of other growth areas? And also kind of ESG side, kind of what are your Net Zero targets and kind of how you will comment on that?

Yes. So ESG continues to be a meaningful priority for JetBlue even as we navigated through COVID. And we want to continue to lead in this space, quite frankly. And we've made some really aggressive public commitments. By 2030, we've committed to fly 10% of our fuel using SAF, and we've committed to reduce seat emissions by 25%. And we also committed to move our ground equipment -- 50% of our ground equipment to electric. So we've made meaningful targets to show how important this space is to JetBlue. We do have what's called JTV, JetBlue Tech Ventures. They live in Silicon Valley. And their mission is to invest in start-up organizations that could disrupt the travel ribbon, right? And one of those areas at the moment is eVTOL. And so one of the investments we made was in Joby. And Joby recently went public, and we're very excited about that investment and what they're going to bring to the space. We are very focused right now on SAF, right? And our commitments around SAF, I chair our SAF group internally to ensure that we're making strides in this space and putting more contracts in place to attain that 10% target that we set out there by 2030. And so while I acknowledge that there could be technologies like eVTOL that could evolve the space in the years to come, we believe that SAF is the most immediate focus in order to make strides within the industry. So ESG is going to continue to be front and center for JetBlue. I think, I was personally surprised at how important this lens was as we've navigated through the Spirit deal with investors. This was a meaningful part of the conversation when I think of passive managers, as well as index funds. And we're proud of the strides that we've made, and I truly believe that, that made a meaningful impact as we navigated through the Spirit deal with investors. So it's going to continue to be a priority for investors and for JetBlue.

Got it. So just to wrap this conversation up, between all of the idiosyncratic opportunities and actions you have in your plate versus what's happening in the macro, where do you think you have like a clean runway ahead versus where do you think you have like blind spots or risks going?

So with everything we have on our plate right now, execution is the key. So #1, we have to deliver and get the business back to profitability here in the third quarter and the fourth quarter. That's a commitment, that's #1 priority for us, and we need to deliver on that. The way in which we get there might evolve, right, or is evolving, the demand environment continues to be really strong. Oil continues to tick up. And we do continue to see cost pressures, right, just given the fragility of the environment around us. And so -- but profitability is front and center in the priority. In terms of 2023, we want to create a path and a plan to get much closer to 2019 profitability levels. And as I mentioned, the next priority is making sure that we stand up a really effective integration management office to ensure that we're successful in combining with Spirit because, all in all, short-term execution, as well as the long-term deal in terms of Spirit, are both going to deliver meaningful shareholder value.

Got it. So much going on at JetBlue. We're going to be tracking updates. Ursula, thanks so much for joining us, and good luck for the next few months.

Thank you for having me.

Thank you.

Everyone, have a good weekend.