JetBlue Airways Corporation (JBLU) Earnings Call Transcript & Summary

Great. So let's keep the content going on the travel and leisure conference. Welcome, everyone. Thanks for coming. For those who know me, I'm Ravi Shanker. I cover freight transportation airlines here at Morgan Stanley. I'm very happy to kick off the airlines content here with JetBlue and happy to have with us CFO, Ursula Hurley, and President, Martin St. George. Thanks so much for being here.

Good morning. Glad to be here. Good to see everyone.

So Ursula, maybe you want to just kick off by walking us through the 8-K that you guys put out this morning, a little bit of a guidance numbers update, seem pretty good...

Sure. Yes. So we did issue the 8-K. We actually are seeing really strong operational performance. So we're actually running a completion factor upwards of 99% for the first 2 months of the quarter. And that has resulted in us improving our revenue guidance by 0.5 point. And then we also improved our controllable cost guide by 0.5 point as well. So naturally, when you're running about our operation, we expected to see improvement in revenue as well as the controllable cost side. Fuel continues to be exceptionally volatile, we did decrease our fuel guide to the tune of about $0.15. I think we're pleased with what we're seeing in terms of the demand environment and everything is in line with what we expected. And like I said, running a healthy operation, the cost side of the business has performed really well.

Great. So I do have a bunch of questions on the cycle and what you're seeing out there. But maybe before that, just to set the table here, JetBlue already has been through a lot in the last kind of 20 months. So maybe for those unfamiliar with the story here in the room, maybe kind of reset the table here, kind of give us a little bit of a summary of where you are right now, kind of what's on the table, off the what the focus areas are kind of what we can look forward to over the next 12 months.

Yes. So thanks for the questions. So in light of the spirit, transaction falling to the wayside back in January. We have pivoted and we're actioning very quickly. Our #1 priority is getting this business back to sustained profitability. And so you've seen us do a couple of things thus far. Number one, we executed an aircraft deferral back in January to streamline the order book and help better set us up in terms of their growth profile to deliver consistent profitability. We also have been actioning on the network side. So we're evolving the network. We have a very high tolerance for -- and threshold for routes that are underperforming. So we've closed or will have closed 8 cities. We're expanding in different markets. We're focused on the leisure customer. We've also announced $300 million in revenue initiatives. About 2/3 of the $300 million is strictly ancillary revenue and that's progressing well, and we're actioning very well. We're pleased with the progress that we're seeing on those initiatives. And then controllable costs. This is in our DNA. It continues to be a laser focus, especially in light of us not growing we've been focused on repaying and taking out fixed cost out of the business. So we're actioning. There's going to continue to be more action to help drive this business to sustain profitability. And so that's what we've been focused on.

Got it. I'm going to come back to some of those idiosyncratic factors a little bit later on. But maybe to kick off and as you said earlier in your opening comments that demand looks pretty robust. Can you elaborate on that a little bit more, obviously, you should have a pretty good idea into what early summer looks like at this point. Very difficult comps because last year was great for the industry. So kind of what are you seeing out there in terms of the funnel and kind of early bookings and maybe some of the seasonality as well?

Well, [indiscernible] saying, we did just do a guide with, in effect, improved revenue performance for the quarter. In general, things are at or a little bit above our expectations. I think I take in a couple of pieces. I think, first of all, we are seeing strength really pretty much across the network that is reflected in the 8-K this morning, probably a little bit biased towards Florida, which is about 1/3 of our ASM. So that's been helpful for us, number one. Number two, we are starting to see competitive capacity pressure go down a little bit. And in fact, I think a couple of airlines have made comments about reductions in some of our key markets last week. So that is actually coming true. And I can't stress enough the benefit of the relatively good weather environment, air traffic control, running a good operation, it's helping us keep costs down. So overall, we're very happy with the guide that we gave today. Obviously, we have a long way to go and through a lot of the initiatives that we've talked about. I think that's clear. But first steps we're happy.

When do you start to get the first glimpses into a post-summer kind of fall by trial period, kind of in the last few years, that's usually been the little bit of a stumble industry has had kind of in going from summer to the fall. When do you get a sense of what that looks like?

So we're probably a month or 2 away before we have a good vision on that. And I think the 2 things I mentioned about that part of the area is I think it's worth noting, we have gone through, I would call it, 2.5 rounds of route changes in air traffic deployment. There will be at least one more round after this. They are very much based on seasonality, yes, so as we leave the peak summer, we'll have some [indiscernible] that's real good in the summer that will go away and then redeploy to winter destinations. They'll be closing -- there will be other markets that will be closed. So we are exercising a lot of self-help at the end of the year. As far as the industry goes, so far, knock on wood, what we're seeing in competitive capacity is trending the way we like it to. So overall, we have no reason to be pessimistic about the second half of the year. I think what we're seeing is, I think we're very happy with what we're seeing going forward.

Got it. So 2 follow-ups on that. One is on seasonality. Do you know what normal is I mean we've had -- like coming out of the pandemic, like we've had such major fluctuations and trends that we had pre-pandemic, right? You had like corporate kind of not really come back. You had massive peaks and troughs and then you have the peaks come down with the troughs also go up and then closing bookings were super strong and closing bookings fell away, do you know what normal season is...

We've heard it a little bit to the main second half of '23. I will I believe it's possible that we're coming into normalcy in 2024. But frankly, we've seen so much fluctuation in the last 3, 4 years. I would not pretend to say this is normal. Our job is to play the hands at deltas with demand and try to optimize the use of the asset as best possible.

Got it. And the second follow-up [indiscernible], Marty were on the competitive capacity. A, how much of that -- I mean, obviously, there's been a lot of focus on competitive capacity in the big domestic winning destinations and national post pandemic vendors. There's too much capacity put in and wasn't enough taken out as people started to go to other places, a, how much of that do you think was a function of this evolving seasonality where people didn't quite -- like you guys didn't quite know what the right number of capacity was. B, how much of that was going to industry bad behavior that's now getting pulled back? And what's the outlook there for normalizing demand versus supply in those markets?

I would not pretend to explain what my colleagues do from month to month. So that one, you have to ask them that question. What I would say is, at the end of the day, we're all in the same boat. We all have assets, we all need to create returns. We were looking at our performance in this region. And again, Latin America, which I think is the best example of this recently, has historically been very profitable for us. It's still profitable. What I would say is down from what we expect it to be and I think my worst nightmare would be to see my competitors saying, this is great, would you have done it any better. That's not what happened. They came out and said, we're really being stressed. And they, in fact, gave RASM guidance that -- we looked at it and said, okay, it sounds very familiar. And at the end of the day, we all have assets. We've all had investments from our investors that are -- they're giving us the money trusting us to make the most money with it. So my view of the world is you will -- I use the phrase revert to the mean because it's not really reverting to the mean per se, but you will revert to the best in ICC asset. We're doing it, and I think we're seeing our competitors do as well.

Yes. I think the key difference, and this may be me as a sell-side analyst speaking. But I think in the past, the industry would have said, hey, we have too much capacity in these areas, pay that stuff in the near term, but we'll grow at it over time. But now the industry is saying, we're actually going to pull back and take that capacity out and actually acting on it. And do you think it is going to lead to better behaviors? And is this disciplined structural kind of how do you see that kind of playing out in the coming years.

Okay. The only behavior I control is my own. So from that perspective, I do not want to speculate about what my competitors outlooks in the world are going to be and stuff like that. But I do -- fundamentally [ Van Smith ] is a very smart guy. When a lot of capacity went in, we saw prices come down, we saw margin go down. And that ultimately is not a long-term equilibrium, right? And I expect that as an industry we have the luxury, unlike our friends in the hotel world, who you're going to see later today, we have [indiscernible] hotels, so to speak. So we're going to exercise that. We were very much -- and this is before my time so I can -- I'm reporting this. We were very much frozen in place during the regulatory process with Spirit merger. So I think what people don't fully understand, when you get questions like what took you so long and it's like, "Oh no, we knew what we wanted to do." We just needed that deal to resolve itself one way or the other. And then once it's resolved like right into it.

Yes. Also following on something you said about LatAm because that appears to be probably the toughest area or maybe the most imbalanced area in the world right now probably. How does it get to that point, how does that resolve itself kind of this capacity need to come out? Do you expect a leg up in growth to fill into that capacity? Kind of how do you see LatAm in the coming months?

Well, I think, first and foremost, I think it's worth saying that we don't see it as one region because we have 2 dramatically different market presences there and performance there. And I would split between the visiting friends and relatives market and then the beach leisure market. The visiting friends and relatives market has been a very strong franchise of ours for 20 years and continues to be a strong franchise. These are the Dominican Republic, Puerto Rico, Haiti, when Haiti opens up again, which [indiscernible]. [indiscernible] that have been profitable for us, and we've got a very strong customer base that's very much a customer flying back and forth. Also extremely lucky that we have been presence in New York, South Florida, and Boston, which are the big origin markets for those. So that is actually a very reliable franchise for us. The beach market, I think, is where we had seen much more of whipsawing effect. And I think, frankly, it's partially reaction to this change in the business leisure mix where we are seeing more leisure travel [indiscernible] total. Ursula mentioned earlier, we had, I think, from 2019 to now 60% increase in Latin overall seeing that's even higher in the beach markets. And ultimately, there are not enough hotels to actually accommodate all that demand. So you can't bang your head against the wall for too long before you actually have to react to it. I believe and you can correct me if I'm wrong, I believe we're actually down in those markets like 1% or 2% in the first half of the year, right? We look at that and said no more growth. We have other places to grow. That was not the case with our competitors, but we had the negative impact of the overall dilution of the market. But again, I'm particularly [indiscernible].

Hopefully, we'll see some of that good behavior kind of [indiscernible]. First of all, you said you're focusing on the leisure markets, but obviously, you're also -- because of [indiscernible] exposure kind of default into somewhat of a corporate airline as well. What is your -- and what is your corporate mix today? What are you seeing in terms of normalization of corporate, especially in the East Coast, kind of with banking and other sectors kind of where do you see that going...

Yes. I mean -- so historically, we've been about 80% leisure, 20% business. I mean we've been pleased with what we're seeing in terms of the business travel improvement. It's just a much smaller portion of our overarching network. So while we continue to see the trends that some of the others are seeing, we just don't have as much exposure there.

Got it. And the other big trend in the industry is the premiumization of the entire industry. This is not just international and corporate. It's domestic leisure VFR as well. Obviously, you are a bit of a rare commodity in that you're -- effectively a domestic airline kind of with a premium product and Mint is a very, very well reviewed kind of a much loved product out there. What's the a, kind of [indiscernible] the premiumization is real and structural. B, kind of what can you do to expand the Mint offering across the airline.

So I'd say a couple of things. First of all, we do think this is real. And it's funny because when we first launched Mint 10 years ago, we said it was going to be 13 airplanes. And we promised the Board it would only be 13 airplanes. Now it's 52 or 53 or something like that. And I'm very happy as we've come out of COVID that product was there because it's been a shiny star for us as well as our performance. It's also one of the things that's driven a lot of the network changes that we announced in the last few months because there's a high opportunity cost of Mint airplanes and the hurdle is that the hurdle is impressive as far as where the planes need to go. Obviously, we're a couple of years into our growth in Europe. That's sort of revenue-wise trending is rise where we expect it to trend, but at the same time, we have other places that better uses the airplane. And especially with restructuring the order book that we're seeing in the next few years, it's going to put that much more pressure on making sure the Mint airplanes go and the sort of best [indiscernible]. So for example, we take 2 planes out of get work, they go into Phoenix and the winter. So on a very simple level, we have opportunities where we're very optimistic about the benefits for Mint. We're actually doing -- what's nice about it is we have -- we had tried Phoenix last year was extremely successful, which like, okay, now that's working with [indiscernible]. This year, the sort of the development market, we're looking at is San Juan. New York, San Juan if you look at the sort of the prime flight, which is the 9 a.m. out of New York and midday back, that is the best flight as far as yield that we have. So we'll see how Mint does on that. I'm very comfortable making experiments like that. I think if I look at what we -- results last year where we put the plans in the West. A, it proved that seasonal changes like that have relatively quick ramp-up because the product is so good, in my opinion. And b, that we should -- we said to the team, if you only fail one time out of 10, you're not pushing hard enough as far as taking risk as far as where we want to fly. There is, I'd say, 75% science and 25% [indiscernible] airplanes. And if you look at the published data Fort Lauderdale, Phoenix, it would not have said that will be a good market. Actually, we're seeing results that we're like, yes, that's a good market. So the beauty of the product is in the draw in itself. And I think that it's generating. Number two, I don't want to forget the fact that we've got a very robust [indiscernible] product across the entire fleet, which also is growing significantly higher. The RASM of that fleet of that cabin is higher than the rest of the airline. So it has definitely been a premium lens recovery for us. And if you look at some of the revenue initiatives we laid out, they were actually very much tied towards monetizing the [indiscernible].

Got it. That's great to hear. Just very quickly on international kind of how is that growth coming along. You're flying to Paris now. So kind of any color on Olympics demand travel kind of that you can share with us?

I would say that Europe is it's trending right where we expect to trend on revenue, I would say trending worse on costs. We're pretty candid about things like that. So we still have improvement. But again, the Mint airplane is very valuable. I'm actually very happy with the experiments we did this summer with Edinburgh and Dublin which are really strong peak, strong peak summer markets. And then we know we have people in a market so we can move the airplanes back and forth. So I think you'll continue to see us a little more agile about that going forward.

Yes. The beauty of doing with narrow-body is it's much easier to redeploy in the domestic.

Got it. So maybe kind of switching gears to base on the top line. Ursula, you mentioned earlier about, you have given up some routes kind of maybe some more routes to give up, which is not something you see from airlines often again, shows that this is an industry that is focused very much on returns and margin. And not just like a big land grab across space. Can you just talk a little more through that decision? Kind of where is the threshold? Or kind of what are you looking at before you decide that? And kind of how much more room is there for rationalizing that...

Yes. So Marty mentioned it earlier. I mean, we've gone through a couple of rounds of network changes and there's probably some more to come. I think as he also referenced, we had been in a holding pattern given the Spirit transaction. So we didn't make material network move over the last 2 years, quite frankly, because we didn't know if we're going to be a combined entity or a separate entity. And so now we're working through that. And we've found ourselves in a position where just not enough of the network is contributing from a profitability perspective. And so we have no choice but to action and put these aircraft in places that we think, are going to drive better profitability. So more to come. I think you're going to continue to see us, as Marty pointed out, like try new things, right? Like I think we're more open to seasonal service. We're obviously honing in on the leisure customer type and we're leveraging the premium type seats that we have, about 26% of the seats on our airplanes are considered like "premium" between men's and even more space. And there's probably even more opportunity there to more optimize how we're merchandising to customers. So our hurdle rates have definitely increased. We have a lower threshold for sitting things out. We've got to get the business back to making money consistently. And a big part of that is the network and the schedule and how we continue to optimize that. So more to come.

Got it. And speaking of kind of constraints or external constraints on capacity growth, ATC capacity and GTF issues. Can you address both of them? I mean last year, you saw ATC kind of force airlines to draw it on the summer schedule? Do you think we'll be in the same situation this time? Or do you think you have better staffed? And b, obviously, GTF is a very difficult situation for you and a couple of your peers. How do you see that kind of play out? What color do you have in terms of the time line for that?

Yes. So ATC was a very material challenge for us last summer just given the amount of exposure we have in the Northeast. We're very pleased that the slot waiver continues to be in place through the fall time frame. We're going to be a proponent to keep that slot labor in place even beyond the fall time frame. I'll be honest, in our -- I mentioned that we had a 99% completion factor for the first 2 months of the quarter. We're not expecting June to perform as well. We do have a level of conservatism given last June was exceptionally challenging, the last 2 weeks of June and 2023. So ATC has not materially changed staffing levels yet. We believe that this is going to be a multiyear challenge. So we have planned as best as we can. We're investing in reliability in general. And like I said, we've started to see some of that pay off, and we're going to watch the summer very closely. In terms of the GTF engine, we continue to experience that headwind, and we'll have on average 11 aircraft out of service this year due to the GTF. I do expect that to increase in 2025, the number of aircraft that JetBlue will have on the ground. So we are in a challenging place in terms of the lack of growth. And that's very unique for us coming out of COVID. One thing we are doing is we're investing and keeping our A320 aircraft in the fleet longer. So we have over 30 that we are investing in terms of maintenance overhauls to continue to keep those flying to backfill at least a portion of the capacity loss that we're seeing due to GTFs.

Got it. I'll open up to see if any questions from the audience.

Hi, guys. I'm [indiscernible] here from actually European Airlines, [indiscernible]. You mentioned for Europe that the revenue development has been roughly as you'd expect or perhaps the cost a little bit worse. I'm just wondering if you could give a bit more color on that in terms of what exactly is driving that? And actually, just a second question is from the GTF. Obviously, it's not helpful in terms of the level of growth. Just wondering, do you have a deal with Pratt & Whitney in terms of compensation for that? Does that help substantially? Or is it still kind of a pretty sizable net negative.

Sure. So I'll start with the second question first, the GTF. So we settled with Pratt & Whitney on compensation for 2023. So that was baked into our 2023 results. We are still working with Pratt & Whitney on 2024 compensation. The challenge is the accounting treatment for that is going to prevent us for taking the full benefit in the P&L, which we originally had anticipated. So we assume that all compensation from Pratt could reduce our operating expense this year. So that was baked into our full year controllable cost guide. That since has reversed. However, we're going to try to offset at least a significant portion of that. So more to come as we continue to work with Pratt on 2024 compensation. In regards to the cost on the transatlantic flying, we did the transatlantic business case prior to COVID. And what has happened since COVID is we all know our pilot pay rates have significantly increased. And quite frankly, just the overarching cost to operate and serve each customer, i.e., food and beverage, those costs has gone up as well. So we're trying to make decisions on how do we overcome some of those costs? How do we do it in a thoughtful way and that won't significantly detriment the customer experience.

Are you seeing customer elasticity on pricing at all. And obviously, the customer is also used to inflation being in the headlines, right? So can you push on RASM kind of even though this is a competitive environment?

So certainly admit, we're seeing I think the challenge in the industry is that -- if you're sitting in the premium cabin on any of the full service airlines, you've got the mix of the people -- let's talk Atlantic first and foremost. You get a mix of people paying $4,000 and you've got other people who pay $800 and upgraded. And our strategy from the beginning has been much more very, very limited upgrade. It's only [indiscernible] as you build upgrade with a limited number. And our goal is to actually price it and monetize the cabins with good price. So -- and I think when you look at the upside we've seen in premium leisure, that's been a very much a big chunk of it. So if it's Saturday night to Europe, which tends to be not a great time to do it to get business travel, we can definitely take premium leisure those slides to do very well, and we can do that through price. Second thing is, I say, the other side of elasticity, which is we did go and add in a premium [indiscernible] which most of our competitors have done. So it's to the seats that are not even more on the domestic fleet, but sort of as and when [indiscernible] the airplane. That -- and Ursula said that was a big chunk of [indiscernible] dollar revenue initiative that's actually tracking ahead of where we expected. Customers are definitely willing to pay for that experience. So I think this is our job, which is try to find the opportunities where there is value that we can give to customers that they're willing to pay for, that will hopefully be accretive for us. And the $300 million initiative this year is the first step. I think that's going to be a [indiscernible]

Any more questions from the audience? One at the back.

Can you -- it's obviously been a tough stretch for JetBlue for everyone involved customers, your employees, your stock. Just remind us where you and the Board have kind of laid out the path forward in terms of like adapting to different priorities and getting through the save mass and now you're in a different path, you got a relatively good network, like you said, you're big in Florida. Just remind us on sort of the big lessons learned and how you're pivoting the path forward to emulate others that are obviously doing much better in the industry.

Yes. So listen, we tried to place a couple of really big bets that didn't go in our favor. And I think we've shown since January that we are pivoting very quickly to action change so that we can drive profitability and more effectively compete against the peer set. I think that what's unique about JetBlue is we've got the brand, we've got really attractive real estate and we need to capitalize on that. And we're actioning across the network, the revenue initiatives, as I mentioned earlier, are kind of Phase #1. I think there's opportunities to better merchandise to our customer base. And then given in light of the headwinds, whereby which we're not growing, we've got to continue to attack the fixed cost base. And so I do believe that the business model of serving the underserved customer that doesn't get treated exceptionally well by the legacy carriers is our niche. And we can leverage that given our real estate and our brands, and we got to do that in a reliable manner. And so I hope that you've seen that since January nothing is going untouched and everything is on the table right now. We've got to get the business back to consistent profitability. But I think our benefits and what we can offer stand out and we got to better leverage that.

Any more questions? Ursula, maybe close out with some thoughts on the balance sheet and kind of what's the right level of leverage. Obviously, still a lot more wood to chop for you and therein lies the opportunity, but kind of what do you think are like cash [indiscernible]?

Yes. Listen, the balance sheet has always been a top priority of JetBlue. We came into the pandemic with the second best balance sheet in the sector. Clearly, we've been going through a challenging time. And so the priority of getting the business up to profitability and consistent profitability. It is priority #1. We've got to get to a place where we see a path to deliver free cash flow so that we can then turn around and start delevering. So in the meantime, we've got to finance the business in the most effective manner that we can. So -- we've got a very healthy unencumbered asset base, which I think is a little different from some of our peers in the sector. We still have our loyalty program that's unencumbered. We bought slot scapes and routes, brand, aircraft engines. And so that allows us flexibility to assess all markets and tap those markets in a cost-effective manner, but also building flexibility in terms of prepayment so that when we do get to free cash flow, we can start to delever. So balance sheet continues to be a very, very high priority.

Got it. I'm just going to -- we've few seconds left, so I'll just squeeze one more in. Just kind of on the cost, you mentioned $300 million in incremental revenue opportunities. It feels like you guys are taking a fresh clean sheet like the cost structure post all the distractions going away. Do you have a sense of how big that bucket is, how much low-hanging fruit kind of what's the opportunity size?

Yes, it's a good question. I mean we communicated earlier like there's about 0.5 point of controllable costs that we've taken out of the business just driven by fixed costs. And we did the voluntary opt-out program. We're revisiting our real estate footprint in places like LaGuardia and LAX given the network evolution. But this is an endless journey. Like there's still a lot more -- we have committed to have an Investor Day later this year. And so we hope to lay out a multiyear plan with targets and obviously, controllable costs are going to continue to be ever more important. We've got to maintain the benefit that we have against the legacy carriers so that we can get the business back to consistent profitability.

Got it. Exciting to have the JetBlue. I think the Investor Day is going to be a pretty key catalyst to stock. Ursula and Marty, thanks so much for joining us.

Thank you for having us, Ravi.