JetBlue Airways Corporation (JBLU) Q2 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the JetBlue Airways Second Quarter 2013 Earnings Conference Call. My name is Hope, and I will be your operator for today's call. We have on the call today Dave Barger, JetBlue's CEO; and Mark Powers, JetBlue's CFO; also on the call for Q&A is Robin Hayes, JetBlue's Chief Commercial Officer. [Operator Instructions] Please note that this conference is being recorded. As a reminder, this call includes forward-looking statements about future events. Actual results may differ materially from those expressed in the forward-looking statements due to many factors and, therefore, investors should not place undue reliance on these statements. For additional information concerning factors that could cause results to differ from the forward-looking statements, please refer to the company's annual and periodic reports filed with the Securities and Exchange Commission. This call also references non-GAAP results. You can find the reconciliation of these non-GAAP results in JetBlue's earnings press release on the Investor Relations section of the company's website at jetblue.com. I will now turn the call over to Dave Barger. Mr. Barger, you may begin.

Thank you very much, Hope. And good morning, everyone, and thank you for joining us. This morning, we reported second quarter net income of $36 million or $0.11 per diluted share, our 13th consecutive quarter of profitability. Operating margin was 7.6%, a decrease of 2.6 points compared to last year. Second quarter results were below those of a year ago driven primarily by continued maintenance cost pressures and a sluggish economic environment. In addition, the timing of the Easter and Passover holidays had a significant impact on year-over-year unit revenue comparisons. Given our strong leisure franchise in the Northeast of Florida and the Caribbean, we estimate the shift of the Easter and Passover holidays from April last year into March this year reduced second quarter year-over-year PRASM by approximately 2 points. Despite this headwind, we generated record revenues and held load factor relatively flat while growing capacity approximately 8%, demonstrating the underlying strength of our business. Throughout the quarter, we remained focused on our #1 priority, running a safe, reliable airline. In addition, we continued to remain focused on delivering excellent service to our customers through our industry-leading product and culture. We believe our strong brand and differentiated product continue to generate a price premium versus our competitors in many of our key markets. As a testament to the exceptional service provided by our crew members, we recently earned our ninth consecutive J.D. Power & Associates award in airline customer satisfaction among low-cost carriers. I would like to congratulate our 15,000 crew members for this remarkable achievement, and thank them for their continued hard work during the quarter running a safe, reliable operation. Although the yield environment was somewhat sluggish during the quarter, jet fuel prices declined as we experienced a tighter correlation between revenue and fuel. However, on a historical basis, fuel prices remained very high. Thus, we have remained keenly focused on running an efficient operation. Our crew members, again, do an excellent job operating in a highly congested airspace in the Northeast, where we have nearly 80% of our operations. As Mark will discuss in greater detail, maintenance cost continue to drive the majority of our second quarter nonfuel unit cost inflation. To that end, we are pleased to have recently finalized a flight hour-based agreement with General Electric to service our E190 engines. Moving forward, we believe this agreement will help us smooth out and better predict future-related expense. Cost discipline is a critical element of our success, particularly with respect to our network strategy in high-value geography. As we successfully execute on our Boston growth strategy and margins expand, we expect our growth rate in Boston to moderate over the next few years. Similar to Boston, we are pleased with the margin improvement we are seeing in San Juan as we add capacity. As we discussed in detail at our Analyst Day earlier this year, we are also excited about ROIC-accretive opportunities in our focus city of Fort Lauderdale. We have been very successful in Fort Lauderdale as we have grown our Latin American footprint. South Florida's large population and diverse demographic have driven significant leisure and business traffic. We believe there are many Latin American markets with tremendous growth potential currently underserved by other airlines. Given the enplanement cost advantage of Fort Lauderdale-Hollywood International Airport over Miami International Airport and our superior product offering, we believe we are positioned well to grow profitably in Fort Lauderdale and improve returns over the long-term. Before closing, I'd like to provide a brief update on a few exciting initiatives underway, designed to help us improve ROIC by growing profitably and achieving our goal to meet and exceed industry PRASM. We believe long-term customer loyalty plays a key part in helping us achieve our goals. Over the past several years, we've made a number of changes designed to enhance TrueBlue, our loyalty program. Most recently, we announced that points earned by members never expire. We believe our loyalty program has a potential to be a source of significant value, both from a core revenue and ancillary revenue perspective. If a JetBlue customer who is not a member today becomes a TrueBlue member, their annual value to us, as measured by revenue, increases by about 2.5x. Today, only about 1/3 of our customers are TrueBlue members. So, we are very excited about this opportunity. Another area of significant focus for JetBlue has been improving unit revenue performance in our transcon network. In the coming weeks, we plan to unveil more detail regarding our premium transcon product, which is scheduled to debut next year on specially configured Airbus A321 aircraft in our JFK to San Francisco and JFK Los Angeles markets. We believe this will be a best-in-class product offering that will revolutionize the transcon premium experience and help us narrow the RASM gap versus our peers in these lucrative markets. Finally, I'd like to provide an update on our plans to launch broadband in-flight connectivity. In partnership with ViaSat, Live TV completed its first Ka-band installation on a JetBlue A320 and conducted the first flight in June. We are currently awaiting Supplemental Type Certification from the FAA and expect to proceed with fleet-wide installation soon thereafter. In closing, we believe the third quarter is shaping up to be a strong quarter. We have significant revenue opportunities in front of us this year. Based on our current revenue outlook, we expect margins to improve in the second half of the year as we continue to execute our network strategy and contain costs. We also plan to continue improving the balance sheet and make prudent investments in the business. We believe we can improve profitability by serving underserved customers through our competitive advantages, a differentiated product and culture with a competitive cost structure serving high-value geography. At the same time, we remain committed to generating free cash flow and improving returns by at least 1 percentage point per year for the foreseeable future. And with that, I'd like to turn the call over to Mark for a more detailed review of our financial results.

Thank you, Dave. Good morning, everyone. And thank you, again, for joining us today. This morning, we reported second quarter operating income of $102 million, that's a decrease of $28 million compared to the second quarter 2012. Second quarter year-over-year Passenger unit revenues decreased by 3.3% on a capacity increase of 7.8%. A soft yield environment contributed to a 1.3% decline in year-over-year fares. The good news is that we were able to stimulate traffic as second quarter load factors remained relatively flat year-over-year. Year-over-year passenger unit revenue or PRASM fell by 9% in April, increased by 1% in May and was relatively flat in June. Our June PRASM was negatively impacted, as previously discussed, by a 1-month non -- one-time, rather noncash adjustment of approximately $5 million related to the change in expiration policy for TrueBlue points. Although we were pleased with the performance of our network overall, as other carriers have noted in their own second quarter calls, second quarter demand environment was somewhat sluggish. We continue to drive healthy volumes, but at lower yields compared to last year. Our airline partnership strategy continued to deliver strong revenue growth during the quarter. We recently announced our intent to expand our partnership agreement with Emirates to bilateral codeshare, a significant milestone. Today, we are also pleased to announce that we have evolved our one-way codeshare agreement with South African Airways into a two-way codeshare. As of the end of the quarter, we had partnership agreements in place with 24 airlines around the world. Ancillary revenue also continued to perform very, very well. Second quarter ancillary revenue per customer was up 4% versus last year to $21. We continue to see growth in high-margin passenger driven-ancillary items such as Even More and TrueBlue. Our Even More offering remains on track to generate approximately $165 million this year. In addition, we recently increased our phone reservation fee and modified our change fees to an innovative tier structure. Our research shows that customers do not factor change fees into their purchase decisions. For this reason, we believe we can raise change fees without negatively impacting our brand. We expect total ancillary revenues in 2013 to increase about 15% year-over-year. Moving to costs. Quarterly operating expenses increased 7.5% year-over-year or $86 million. Fuel, of course, remains our largest expense, comprising nearly 40% of the total. We continue to maintain a fuel hedge portfolio as a form of insurance. In the second quarter, we hedged approximately 17% of our fuel consumption. Additionally, fixed forward price agreements or FFPs covered approximately 21% of our second quarter consumption. Including the impact of fuel hedging FFPs and taxes, our fuel in the second quarter was $3.06. For the third quarter, we've hedged approximately 30% of anticipated jet fuel requirements. Additionally, FFPs cover approximately 14% of our projected fuel consumption for the quarter at an average price of $2.95. The underlying details of our FFP and hedge positions as of July 26 are more specifically detailed in our investor update, which will be filed with the SEC later today. Including the impact of hedges and taxes, we're estimating a third quarter fuel price of $3.10 per gallon and a full-year price of $3.13. Excluding fuel and profit-sharing, year-over-year second quarter unit costs increased by 3.3%. This is at the lower end of our guidance for the quarter. The primary driver of the year-over-year increase was, as Dave mentioned, maintenance expense. As discussed in some detail on our last earnings call, we decided to accelerate performance restorations on our E190 engines, resulting in higher maintenance expense during the first half of this year. These engine restorations were also intended to help address several noncore peripheral engine issues so as to improve operational reliability and extend time on wing. These actions are already having their intended positive impact on operational reliability. We expect year-over-year maintenance cost growth to lessen in the second half of the year. Again, as Dave noted, we recently signed a flight-hour agreement with General Electric for engine maintenance on our E190 fleet, which is intended to smooth out future maintenance expense. Other operating expense increased more than expected during the quarter due to 2 items: first, recall we had expected a roughly $8 million benefit in other operating expenses in the second quarter related to the sale of LiveTV's ground spectrum license, which we wrote down in the third quarter of 2010. After additional charges in connection with the sale and disposition of that license, the net gain we recorded in other operating expense was $3 million; second, we recorded a liability in other operating expense during the quarter related to the pilot pay dispute we previously disclosed. The damages phase of this proceeding recently began. The claimants have not yet specified the amount of damages they are seeking, and there are many variables still to be determined by the arbitrator. We recorded a $3 million liability in other operating expenses during the second quarter, which represents our current estimate of potential damages based on our assessment of the arbitrator's ruling and subject to any defenses. Of course, any final judgment could materially differ. Moving below the line. Nonoperating expenses were roughly $4 million higher than we had anticipated due to 2 items: one, we recorded a $2 million write-off related to refinancing of our hangar and training facility in Orlando; and two, we had a noncash fuel hedging ineffectiveness loss of approximately $2 million. Moving to the balance sheet. We ended the second quarter with unrestricted cash and short-term investments of approximately $867 million or 17% of trailing 12-months revenue. Not included in this cash balance is our line of credit with Morgan Stanley for $200 million and our revolving credit facility of $350 million. During the second quarter, we made debt and capital lease payments of approximately $145 million. Third quarter scheduled principal payments from debt and capital leases are expected to be $70 million and roughly $185 million for the fourth quarter, both very, very manageable. With strong cash from operations and manageable capital commitments and debt maturities for the remainder of the year, we believe JetBlue is positioned to maintain strong liquidity throughout the rest of 2013 and generate positive free cash flow. We expect to end the year with a cash as a percentage of trailing 12-months revenue of roughly 15%. Turning to capital expenditures and the fleet. JetBlue ended the quarter with 186 aircraft, including 127 A320s, 59 E190s. For the remainder of 2013, we expect to take delivery of 3 A320s, 4 A321s and 1 E190. We estimate third quarter capital expenditures of about $95 million, $20 million for aircraft and $75 million for non-aircraft-related expenses. We estimate full year CapEx of approximately $645 million, of which $65 million relates to LiveTV. As to capacity. We expect to increase third-quarter ASMs between 3.5% and 5.5% year-over-year. We expect 2013 full-year ASMs to increase between 5.5% and 7.5% year-over-year. This is slightly lower than our previous guidance, reflecting targeted capacity cuts during shoulder travel periods in the third and fourth quarters. As to revenue. While we experienced some yield softness during the second quarter, we were encouraged by recent demand trends that we are seeing for the peak summer travel season, typically JetBlue's strongest period of the year. Both yields and load factor are up year-over-year. We currently expect July PRASM to increase approximately 4%. While of course we have limited visibility, August is also shaping up similar to July. As to the CASM or cost outlook, we expect third quarter CASM, excluding fuel and profit-sharing, to be up between 3% and 5%. For the full year 2013, we are forecasting CASM, again, excluding fuel and profit-sharing, to be up between 2.5% and 4.5% versus 2012. This is slightly higher than previous guidance due to, in large part, the reduction in ASMs, as previously mentioned, resulting from our third and fourth quarter capacity cuts. We believe maintenance unit cost will rise approximately 20% for the full year, accounting for roughly 2/3 of the full-year CASM Ex-Fuel profit-sharing increase. We project CASM all-in will be up between 1% and 3% for the third quarter and up between 0.5% and 1.5% for the full year. In closing, I'd like to thank our customers and investors for their business and support and our crew members for their hard work in running a safe operation and delivering outstanding customer service. Terrific work on J.D. Power #9. And with that, we are happy to take your questions.

[Operator Instructions] Your first question comes from the line of John Godyn, Morgan Stanley.

Dave, you've mentioned this improving ROIC target a few times now. I was hoping you could just give us a sense for maybe the range around it, what would drive outperformance or underperformance versus that target outside of macro? What's on your mind as kind of key drivers there over the next few years?

Sure, John. Thanks, and again, as we highlighted in Analyst Day and on both calls this year, we're still -- as we're marching forward, our goal is to improve ROIC by at least 1 point on a year-over-year basis as we go into the future. It's quite simple as we take a look at, certainly what we've utilized with the balance sheet in the past, but also revenue and cost. I mean, as we look at, again, expanding those margins from a revenue perspective, core revenue, the ancillary revenue piece of it as well, the cost side of the house, and, again, it's no surprise with the maintenance burden that we had in the first half of this year, I feel very good about what's in place with the power-by-the-hour agreement with General Electric. And certainly using the balance sheet prudently as well. So that's how we're looking at running the business, John, and, again, nothing has changed. Appreciate the question.

Your next question comes from the line of David Fintzen with Barclays.

Question, I guess, for Dave or Robin. Just on the RASM trend that you're seeing and some of those comments around economic softness, I'm just curious if any geographies kind of stand out, and I'm even thinking, transcon with some of the competitive capacity coming in and even Virgin sort of indirectly coming in, in Newark. So I was just curious kind of -- within the network, are you seeing sort of some divergences in areas?

David, I'll take that. It's Robin. No, I mean, I think when we look back at the quarter, I think the revenue story was very much defined by April, where I think we saw much a bigger Easter and Passover shift throughout the network. So we had a very strong March. Conversely, April was a month where we had significant negative RASM. May and June, I would -- we were up sort of flat to low-single digits. June was a little bit masked with the TrueBlue accounting adjustment of $5 million. Otherwise, I think we would have hit 1%, that wasn't in our Q2 guidance originally we thought that was something that was going to happen in Q3. So I've described sort of overall demand in quarter 2 as kind of okay, sluggish, certainly, not a strong as going into the quarter. But when I then look ahead into quarter 3, very pleased with the summer. We're adding about 7% capacity into the July and August months, and we're seeing close to mid-single digits in terms of RASM growth. Areas that are performing really well, Latin America, the Caribbean is performing strongly, very pleased with what we're seeing on Florida, particularly out of New York. Certainly, if you look at Boston, some of the transcons out of Boston have seen some additional capacity come in. So that's been a little bit more challenging. But again, even if we look into the summer, we're seeing some nice traction there. And then, September, though we're not guiding to September, we will, I think, benefit from a very modest increase in capacity.

Right. And just a follow-up on that, on some of your shoulder capacity adjustments, is that something that you can think we can kind of start to carry forward into '14 as maybe a more tactical approach to the shoulder periods? Or is that just something -- as you sort of getting into September, you just want to start to phase in for this year? How should we think about that going forward?

Sure. We've always made those adjustments. I mean, in previous years, we've sort of tended to add a little bit of capacity as we've gone into the year. This year, as we got into quarter 2, we look to that and said there's an opportunity I think to trim, I see that as a natural part of the pruning. If you look back over the last 3 years, we've actually, probably added more capacity into September, any other month as we de-peak the airline. So we look at September, as we've done a lot of work to kind of build capacity in September, flatten the network. And so, not necessarily looking to build September as aggressively as we have done in previous years. But again, if you go back to the original capacity guidance we gave at right at the outset of the year, we are now really just falling back to what we had said at the beginning. I wouldn't read anything into 2014 other than we have the ability to prudently tweak our network based on what we see as we go into the year.

Your next question is from the line of Michael Linenberg with Deutsche Bank.

Just 2 questions here. I just -- I want to go back when you guys reported December quarter results, when you gave the 2013 guidance. Your capacity guidance at the time was 5.5% to 7.5%. I know you bumped it up and now you're bumping it back. But at that point, the CASM Ex-Fuel guidance was a bit lower for 2013, I think it was 1% to 3%. So we're back to the same capacity growth level, but now it looks like it's about 150 basis points worse and I just -- I didn't know if that was all because of the maintenance or all because of the engines on the 190. I mean, is there something else that's driving the cost pressures? What else may be driving that?

That's it. You broke it there. It was the maintenance. And as you know, as we entered into this year, we were maintaining a sort of lower year-over-year maintenance profile. And as the events of the first quarter transpired, it became very, very clear, as I mentioned, that we needed to get ahead proactively of the E190 CF34 maintenance. And that's it.

Okay, okay. That’s good. That's helpful. And then just my second question, I want to go back, Dave, on the opening remarks, you talked about -- you mentioned margins expanding in Boston and seeing margin improvement in San Juan. And I wasn't -- I don't know if that was specific to the June quarter, but within the context of your overall margins being down close to 250 basis points, if we saw expansion in Boston and maybe the Caribbean, was New York under pressure? I mean, where was the shortfall in the quarter on profitability? Was it increased competition in transcons or maybe another part of your network? What may have been lagging relative to Boston and the Caribbean?

Sure, Mike. My comments, by the way, on both those focus cities are longer-term, if you will. Over the course of the year and as we're looking into the future. But when you get into the first half of this year, listen, the margin degradation that we experienced in the second quarter, as a team we're disappointed with that margin degradation. And when you start to take a look at, for 14 years, we understand the Easter, Passover shift, that's obviously a piece of it. We did have a more sluggish economic backdrop, I think, in terms of travel that others saw as well. And then it's -- if I may, when we think about even the first half of the year, and I'm not throwing the Sandy card, but there's still impact, overhang from the hurricane that was in our backyard in the August timeframe, and that carried into the February Presidents weekend, and hey, people are still just moving back into their houses in the New York Metropolitan area, as we all know. So as we look at specific to Boston now and then a very similar with San Juan. The investments in Boston, just last week, we opened our 49th nonstop market out of Boston Logan Airport, the most prolific service ever that Boston has experienced in terms of nonstop seats. That was to Houston Hobby Airport right on the backside of Philadelphia. This investment that we're seeing that drives relevance in Boston, as we look at margin expansions in our core business, very, very positive. Likewise, down in San Juan, it's -- again, Boston, no secret, we're looking at Boston, 150 as an internal goal, flights per day. San Juan, as we move it into Terminal A, that relevance, especially the investments that we've made, as we're lapping same-store sales on a year-over-year basis, very, very positive. And so there's been encouraging in the Caribbean, but I'll tell you what, our focus in San Juan, Mike, we're very, very pleased with what that means into the future for margin expansion out of that focus city.

Your next question is from the line Savi Syth from Raymond James. Savanthi Syth - Raymond James & Associates, Inc., Research Division: Just on your expansion out of Fort Lauderdale, I was wondering if you could -- how much of your growth is going to be driven by growing out of Fort Lauderdale? And just contrast, how you built out Boston with how you might grow out of Fort Lauderdale?

Just if I may, and I'll key Robin up for additional color. I think what's really important, to also just provide some visibility. The investment that's taking place at Fort Lauderdale-Hollywood International Airport, I'll tell you what, there's not a lot of investment around the country that can really outpace what's happening at that airport. It's a $2 billion that Broward County is investing in that airport. It's a second runway, now where else is a real runway? It was a shorter runway. And so when you think about commercial air operations, the work that's taking place, by the way, over a railroad track, I mean, this is not easy stuff that's taking place down there. The land side improvements, including the terminals, the expansion in the terminals, our strategic move over to Terminal 3 adjacent to Terminal 4 in that geography, the federal inspection sites. So I just wanted to add that backdrop when you think about the demographic in that area in the investment that's taking place, and we really want to say thank you to Kent George and the people down at Broward County for that investment. Robin, little color in terms of Lauderdale versus, say, Boston?

Sure. I think a couple of differences between the sort of investment curve in Boston and Fort Lauderdale. I mean, as we said before, those are the 2 markets that we continue to prioritize for growth. So and if you look at our network, where our network growth is, it's really out those 2 markets. The rest of the network is either flat or close to flat. When we think about the characteristics and differences between those 2 markets, first of all, Fort Lauderdale was already much bigger and a more mature part of that network when we sort of made this decision to accelerate the growth. So it started from a point of greater maturity and profitability than Boston did when we started. And secondly, if we look at the markets that we are ramping up and growing out of Fort Lauderdale, a lot of it is touching Latin America and the Caribbean, which are markets that have historically, and you've heard us say this before, ramp up much more quickly than Boston. So when we look at Boston, San Juan and Fort Lauderdale, all of which have been the 3 focus cities so we have invested the most in the last 3 years, Boston was the greatest challenge just because when we started growing it into the business travel market, we knew those are markets that take out longer to ramp up. And so, we look at Fort Lauderdale and we don't see anything like the investment challenge that we saw in Boston back in the '09, '10 period. We don't believe that the investment need in Fort Lauderdale will be anything like that. Savanthi Syth - Raymond James & Associates, Inc., Research Division: Got it. And just if I may follow up on your comment about that pilot expense that you took. Is that just a retroactive impact or is there going to be an impact to the kind of the forward pilot costs from that arbitration?

If I -- can I give you a little bit of color, Savi, on that, as just a little bit of context? We have disclosed in our SEC filings that the arbitration relates to an interpretation of the pilot employment agreement. Specifically in '07, when we issued across-the-board market raises to our pilots, we gave some pilots, specifically the E190, our first officers, a raise of approximately 27% to bring them to a peer-competitive salary. The gist of this, this arbitration is other pilots who did not receive the same amount of raise claimed that they were entitled to the same percentage increase. We are just now starting the damages phase. It's really too soon to say what this number -- the calculation is very complex and there's a lot of variables involved here. By the way, the claimants have not yet articulated the damages that they're seeking. Given the individualized nature of each pilot's compensation, we believe there's a lot of variables that remain to be determined, including the size of the group, what the valid claim and what elements of pay could be included in any damages, if any. So it really, really, really is quite soon to sort of give any more guidance on the impact of when and how much -- we could actually be having this same conversation next year. Again, I think that we have recorded, as I noted in my remarks, $3 million in other operating expenses, which represents our current estimate of potential damages. But it's arbitration, the outcome is very uncertain. Savanthi Syth - Raymond James & Associates, Inc., Research Division: If I may, just to ask, so how do you come up with the $3 million?

We actually applied the rigor of ASC 4 50, which as you know from -- is a fairly rigorous process.

Your next question is from the line of Duane Pfennigwerth from Evercore.

Can you talk a little bit about the return on your investment in slots out of LaGuardia and DCA? By our math, about half of the markets that passed kind of the 1-year mark that you've talked about of market maturity were out of these markets, and are you seeing the benefit of -- from maturation that you expected?

So I just turned the mic off when I should have been turning it on, but that's not because I didn't want to speak with you. Good morning. We're very pleased with what we're seeing. I mean, certainly, the maturation in DCA was aided by our decision to reallocate our Florida flying from Dulles into DCA. So we already had a presence in the area. And the LaGuardia-Florida markets have always performed well. We continue to outperform our competitors from a RASM point of view from the New York Metro area to most of the markets that we fly to, Florida, and we've been able to continue that and certainly the expanded portfolio of slots at LaGuardia has also helped that.

Okay. And then I just want to ask about Seattle-Anchorage as well. I mean, did serving that markets help or hurt your stated desire to increase returns for the airline this quarter?

No, it absolutely helped it, because we had, as I sort of explained before, we had an asset in Seattle, an aircraft that really was ineffectively just night stopping there. And instead of just having an asset sitting on the ground, not producing any returns, we actually created a round-trip to a market where fares have historically been very high. The returns are good. It's a seasonal service. So when we look at the sort of the revenue that our market generates versus the costs of adding that capacity given that the aircraft was there, so it really is just fuel, marginal cost of carriage and crew costs, very, very happy with it.

Your next question comes from the line of Jamie Baker from JPMorgan. Jamie N. Baker - JP Morgan Chase & Co, Research Division: It's a little unusual to see capacity and CASM both rising simultaneously, particularly for a more mature airline. And of course, I'm sensitive to some of the maintenance issues and seniority pressures as well. But I guess, it still calls into question whether you're really achieving many economies of scale. I mean, I remember ValuJet, managers had to build their own desks. You go to visit RyanAir, you need sunglasses in the office, because there are no blinds on the windows. And I realize those airline business plans are somewhat different than yours. I guess, I just don't understand why there's so much cost creep at JetBlue and, here's the sensitive issue, do you need to rethink the no furlough policy?

Jamie, by the way, as we look at that as well, hey, as we're adding aircraft, what's happening with our CASM trend. By the way, it's not just the Ex-Fuel and the profit-sharing CASM, the-all in CASM, that's why we're just so hyper-focused on things like Sharklets on the A320 fleet, the retrofit. But I mean, specific to no furlough, absolutely not. I mean, this is part of our success over the course of 14 years, and when we think about the direct relationship, our model and the importance of that model, and people will try to work into, what's the cost of that and what do you gain as a result of it. But there's not one discussion that's taken place as a result of what's happening with our CASM creep, I mean, look at the no furlough policy, there -- and again, it's a -- I just can't tell you how important the direct relationship is also -- we talked about even things like Net Promoter Score, what that means to RASM and J.D. Power, 9 years in a row, some people will say, it's like, what's the benefit of it? The benefit is attracting that higher-yielding loyal customer long term. So no move at all on no furlough.

Your next question is from the line of Hunter Keay with Wolfe Research.

This is actually Jared Shojaian for Hunter. Dave, you talked a little bit about how your product and your brand is helping you drive a price premium. And I know in the past, you've talked about how Net Promoter Score has a positive correlation with RASM, and so I get that. But have you seen any evidence that shows Net Promoter Score is also correlated with ROIC? Because if I just look at some of the other airlines, Allegiant and Spirit, they generally have a lot of customer complaints, so presumably they have a lower NPS core, yet they also do the higher ROICs in the industry. So I guess that's the question, have you seen any evidence that higher NPS also leads to higher ROIC not just RASM?

Sure. Thanks, Jared. I think our -- listen, the headline for us is, there are room for multiple models in the airline business. And when we started flying in New York back in 2000, we never decided, we weren't going to be the next ValuJet. We weren't the next, if you will, super discount carrier. And so, as you mentioned other brands and their ROIC metrics, hey, there's plenty of room for brands like that. On the other end of the spectrum, when we think about the network carriers, by the way, all the product -- what's happened with bankruptcies and mergers, they've got a different model, right, in terms of whatever the math is, right, 17% of the customers drive 49% of the revenue or whatever the math is, and so we're seeing as a younger brand, also into our 14th year this middle space, this sweet spot that we talked about at Analyst Day, you bet. I mean, when we look at our independence and our successful growth as a young company, we're still purchasing our aircraft, we're still acquiring our network, and that is -- that's always going to have an impact on our return on invested capital. As we're not leasing a used aircraft out in the marketplace as an example. It's a -- when we see the product, the ability to take Boston to the largest size that Logan Airport has ever seen for one carrier is unprecedented. What we've seen in the New York Metro, the 5 airports that we fly to here today is unprecedented. When we see the loyalty that we see between the Northeast and Florida as the largest carrier, unprecedented. Airlines in the past, the ability to go into markets like San Juan, Puerto Rico, where people would say, it's all leisure, it's all discretionary. And as we're growing profitably in that part of the world, unprecedented. But closer [ph] this, Jared, the reason we're putting in the premier product on the transcons into those big markets is we know that from an NPS perspective, we are below our peers when it comes to -- it's a RASM disadvantage. And so we know we're missing out on those customers. We also know that because we don't have WiFi in the aircraft, we're missing out on those customers. It's the #1 squawk that we get from those customers who are road warriors that flies all the time out of, say, Boston and New York. So you bet there's a correlation. And I think closing, there's room for more than 2 models in the industry landscape. And I think that we're proving that.

Great. Thanks for that color, Dave, appreciate it. And then I guess, Mark, just one last one for you. I mean, you mentioned in your prepared remarks that from the internal analysis, you believe you're able to increase change fees without hurting the brand. Can you just help us understand, like, what goes into that analysis? And I'm curious why that would differ from, say, charging for a first checked bag?

I'll defer that, if you don't mind, to Robin Hayes.

Sure. I'll take that. In terms of change fees, we don't believe that change fees are material to the decision to purchase a ticket. So when we research our customers, the size of a change fee or the rules around the change fee are -- it features pretty low. And so we've always sort of taken a -- from a commercial perspective, a view on change fees that we want to be competitive with the majority of the market. When -- what Mark was referring to is, when we made the recent restructuring of our change fees a couple of months ago, we actually took the advantage of more than 60 days out, actually lowering the change fee from $100 to $75. And then within a 60-day period, again, subject to where the fare was, but for most customers, increasing it from $100 to $150. We believe that's a reasonable thing to do because customers who are changing early, it's much easier for us to sell that -- resell that seat and resell that inventory. And so actually, it makes sense for customers and it makes sense for us, coupled with the fact that we don't overbook as well. And so, it's important that we don't have that as a lever that some of the other airlines have. So change fees, why change fee didn't do first bag, because first bag is very material in a customer's decision to book. We see the majority of our customers now pricing a decision around the first bag into the fare they pay. That is why markets like New York and Florida, we significantly out RASM some of our competitors who do have a first bag fee, because in essence, we're capturing it in the fare. And so we believe that, in that way, the first bag argument isn't necessarily a purely -- it's necessarily accretive, a combination of getting in the fare and some of the operational benefits that go with not having a first bag fee. I hope that answers the question.

Your next question is from the line of Dan McKenzie with Buckingham Research.

A couple of quick questions here, and I guess, my first question is just really housecleaning. Regarding the fleet-wide installation of broadband, will the cost be expensed as incurred or capitalized?

It will probably be capitalized, and it can't be capitalized fast enough, we can't wait for this product to get out here.

Okay. Good. And then secondly, I'm wondering if you can talk a little bit more about Emirates. Where are we at in the DOT review? And if approved, what's the ramp-up period? And then I guess, just in general, what are your expectations? And are there plans to convert other partners to do a to a two-way codeshare relationship as well?

The question about Emirates, we're still in the DOT review period, Dan. We expect to get that approval pretty in the near term. So, fingers crossed. Then the ramp-up is going to be pretty quickly done after that. I mean, we're ready to go. And then, obviously announcing the second one today with South African Airways, two-way code. And again, where we see a sizable benefit of moving from one- to two-way code that can justify some of the additional complexity that goes with it from a JetBlue perspective, one-way versus two-way, then absolutely, we'll continue to add partners.

Your next question comes from the line of Glenn Engel, Bank of America.

Does your guidance include any pay increase yet for the pilots? I thought you said that your pilots were low versus others. And 2, on the cost side, again, it's been several years where the costs continue to grow faster than the industry. When do you expect your costs to start doing better relative to the industry?

With respect to wages, pilot wages in particular, again, as you know, we tend to be competitive so that we can attract and retain the best pilots. And I think, as we may have discussed in prior calls and conferences, the whole assessment of wages is probably something that will be a very ripe conversation in 2014. And part of the discussion is, of course, it's not just W-2 to W-2 as we look at other airlines. And so it's going to be a very robust and healthy conversation with our Pilot Values Committees and individual pilots. So our guidance does not include any of that sort of adjustment through the end of this year.

And on the cost side in general?

On the cost side in general, there's a lot of really interesting things going on. Apart from the sort of the wages side of it, of moving the entire, I think, maintenance platform to a flight-hour-type of basis, so not only are we going to have more predictable costs, but certainly, you won't see a lot of -- a repeat of the sort of events that you saw this year. We have, obviously, engines on the E190, but there's a lot of component work in the sales and that sort of thing, on the balance of the E190 and some portions of the A320s that we want to include in the flight-hour platform. Fourth quarter this year, we start the delivery of, what I think is really going to be a very, very fundamental CASM driver, that is the A321. We're extremely excited about that. We have, actually, all 8 Airbuses being delivered hereafter, includes Sharklets, and we continue to work diligently with Airbus on a transaction that would provide us the ability to retrofit all of our A320s with Sharklets, that is every bid up, on range roots, a 3% gas, good guy. And then as we start to get closer to 18, the transformational thing right -- on fleet in particular is the advent the NEO, which is probably every bit of '14.

I guess what I'm trying to come from, really though is, I look in the first half, your margins were down a couple of points, the industries were up 1.5 points. You touched on earlier, your PRASM was up less than the industry because you're growing so quickly, but your CASM was up more than the industry. When do you think we can start seeing reversal of that where your CASM starts -- the growth starts leading to CASM doing somewhat better than the industry and the PRASM starts -- stops underperforming the industry?

As we build our 5-year model, we're building precisely for that, with caveat pilot wage issues. But as we are truly building our 5-year model, that is exactly what we're building. Again, I would repeat Dave's comments though, which is that, the first half margin contraction, particularly as we look at the other airlines this quarter, is highly disappointing.

If I may, too, Glenn, just a couple of thoughts here right because I was asked earlier in the call as well regarding cost creep, right, you Jamie, both and others, right? I have highlighted this at Analyst Day and whether investors are potential investors and there's nobody at this company that talks about this issue more than Mark Powers. And as we talked about -- as we're growing and as we're becoming more efficient, your last question, the above the line the PRASM, as I look at A for A industry performance and how we're doing with a simplified model and the ability to really be rewarded with the investments that we've made and we continue to make in Boston, in places like Kennedy Airport as we're building out our own terminal, the ROIC question on the first part of the call, with our own cash as opposed to port's cash, as you start taking to look at down into Florida, Fort Lauderdale 100, that relevance, what's happening in San Juan, the Long Beach terminal, the premium product, lots of opportunities to really harvest not only core revenue, but I think some real exciting items in ancillary revenue. And as we go below the line, from a cost perspective, it's a -- there's -- as we look at the ability to use automation in our SOC, we have that project well underway, whether it's how we dispatch, whether it's how we crew, whether it's how we service recover, I'll tell you, I don't know how many days we lived in ground delay programs or grown stops over the last 90 days in New York, but we have to be better than others in terms of how we navigate this airspace. And I believe that we are. When I take a look at what's happening with RNAV and RNP, and by the way, things like airport not of the future but of today, the ability to use technology to streamline the airport environment and then that cost curve, listen, we get it. And we know that there is -- this is really probably the one challenge that we have to, hey let's sort of take in ASMs, let's continue to bend that cost curve. And this team is focused on it, Glenn.

Your next question comes from the line of Bob McAdoo from Imperial Capital.

I got climbed on a little late, so you may have already covered it, but can you tell us kind of what the next steps are and the timing and status and whatever of the whole in-flight WiFi project? I know it's an important piece of what you need to get done, I'm just trying to figure out how long, where are you, how long is that going to take?

No, I'll let take that, Bob, it's Robin, and good morning. And by the way, Dan, a slight correction to an answer that I gave you earlier, I'd said that we haven't received Emirates approval from the DOT. We actually received that on the 24th of July, so my apologies. And so we are now obviously able to move. We still are waiting for UAE and Italian authorities' approval, but so my apologies for giving an incorrect answer on that. In terms of WiFi, we're very excited. The flight testing went very well. We are currently waiting for a Supplemental Type Certificate to be granted by the FAA. That application was put in, in early July and it's normally a 30-day review cycle. Once we have that, that's very, very important milestone in this program. It's our intent then to fly a 3 aircraft round for 90-day period to just further test and refine the system. And once everything -- once we are reassured that those tests are done and everything is working as it should, we will then move to a fairly significant rollout across -- initially the A320 fleet and then the 190 fleet.

If I may as well, Bob, thanks for that question as well because as we add more color on to Fly-Fi, really Robin and the LiveTV team working with ViaSat. We were on that aircraft on the ground just a couple of weeks ago and utilizing the on-ground experience, which is deficient compared to the in-air experience. Really exciting when we look at the competitive landscape. And hopefully, we'll have an opportunity for analysts and also investors to experience it, right, as we get into the September timeframe, we've got the airplanes, hopefully we're through the FTC process and experience it and come up and try to really, really ping this thing hard as customers are going to do. They're expecting that. And I'll tell you what, it's well worth the wait, we believe, in terms of what's happening with the broadband experience. Really appreciate the question, Bob.

So should we think mid next year, it will be half done, mostly done, if everything goes according to Hoyle, how quickly can we start to see that you think?

Well, it's the -- the 3 aircraft later this year, but I think it's -- and again, it's not as we've really given a whole lot of color into 2014, but the 320 fleet is going to go through first. The EMBRAER fleet, right now will follow. But I think what we're going to see is maybe an opportunity to even try to advance that to the left. And so, listen, there's -- we're not going to let a lot of grass grow under this. I mean, the installation and, hopefully, with what we're doing with the 320 fleet, simultaneously, we'll be installing the Sharklets on the retrofit basis under the 320s as well. So it can be really efficient in terms of that mod line. But again, later this year, we'll have more color and, certainly, as we close the year and give color on 2014.

Mr. Barger, we have no further questions at this time.

Great. Hope, if I may, just -- thank you so much for all the analysts and others joining us this morning for our second quarter call. I would like to close this call on behalf of the JetBlue leadership team to thank our front-line crew members, 15,000 strong, J.D. Power 9 years in a row, simply unprecedented and doing that in the most congested airspace not just in the United States but the world, really. So hats off to our crew members. We look forward to talking to all of you as we close the third quarter in the October timeframe. Thank you. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.