JetBlue Airways Corporation (JBLU) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Karina, I would like to welcome everyone to the JetBlue Airways’ First Quarter 2018 Earnings Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the call over to JetBlue's Director of Investor Relations, David Fintzen. Please go ahead.

Thanks, Karina. Good morning, everyone. Thanks for joining us for our first quarter 2018 earnings call. This morning, we issued our earnings release, our investor update and a presentation that we'll reference during this call. All of those documents are available on our website at investor.jetblue.com, and have been filed with the SEC. Joining me here in New York to discuss our results are Robin Hayes, our President and CEO; Marty St. George, EVP, Commercial and Planning; and Steve Priest, our EVP and Chief Financial Officer. This morning's 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 forward-looking statements, please refer to our press release, 10-Q and other reports filed with the SEC. Also, during the course of our call, we may discuss several non-GAAP financial measures. For a reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release, a copy of which is available on our website. And now I'd like to turn the call over to Robin Hayes, JetBlue's President and CEO.

Good morning, and thank you for joining us. This morning, we reported our results for the first quarter of 2018. I'll start with our thank you to our nearly 22,000 crew members who continue to take care of our customers and produce solid financial results for our owners. You have once again done an exceptional job safely managing through the many most storms that hit in the Northeast during the first quarter and into early April. We've all been keeping the family and friends of Jennifer Riordan in our thoughts and prayers. And our hearts go out to our colleagues and friends at Southwest Airlines. Southwest is a great airline. And like ours, their amazing team wakes up every day committed to the safety of their customers and of each other. As an industry, U.S. airlines have made immense strides in safety over the last decades, and this will continue to be our primary focus. Now starting on Slide 4 of our presentation. This morning, we reported first quarter operating income of $128 million, a pretax margin of 6.3% and earnings per share of $0.27. We are making good progress on our many building blocks. These are commercial and cost initiatives that we believe will take us from about – from above average industry margins today to our goal of superior goal of superior margins and drive value for our owners. One of the highlights of the first quarter was our strong RASM performance, driven by the combination of revenue management initiatives, ongoing ancillary growth and strong demand in our network. We have cost benefited from an earlier holiday shift this year and that benefit were reversed in the second quarter. Looking at our first quarter performance together with our second quarter RASM guidance. We believe the first half of 2017 demonstrates our ability to increase unit revenue as we grow. Our unit cost performance was impacted by a very eventful winter season, which resulted in more weather-related cancels and plans. Despite losing approximately 1% of our capacity due to lower completion factor, we managed our cost with discipline and ended the quarter at the midpoint of our guidance. We continue to make good progress in our – growing our relevance. Our New York franchise remains exceptional strong, and we're committed to capitalize on our leadership position in Boston and Fort Lauderdale. We also keep building our margin accretive transcon market, and we will play on our strength as a preferred airline for coast-to-coast travel with new to transcon flying from the LA Basin to be announced soon. Our Latin and Caribbean region exceeded our expectations driven by both leisure and visiting friends and relatives of – customers. In Puerto Rico, we continue to see demand recovering as expected, and we anticipate our capacity, measured by the number of departures, to reach pre-hurricane levels starting this summer. Our response in Puerto Rico also speaks to our governance of environmental and social risk and business continuity. This is an important part of our strategy to managed external pressures such as natural disasters. Yesterday, we released our second environmental and social governance report, which introduces our climate scenario planning. We remain focused on growing ancillary revenue both through existing and new capital wise efforts. We’re executing a companywide digital transformation strategy to support ancillary growth opportunities and lower distribution costs. In 2018, we expect to keep enhancing our digital platform as well as providing new tools for our customers contact centers. In recent months, we've added web and mobile service capabilities in addition to airport lobby investments that are designed to improve the experience for our customers. We anticipate rolling our further changes to our website throughout the year that will better merchandise our current Travel Products. We believe our investments in self-service tools and innovative technology will help us improve our customer service, empower our crew members and reduce costs. We are very excited to announce that we have appointed Andres Barry the President of our new subsidiary, JetBlue Travel Products, which includes our vacation business. This is an important long-term, capital-light effort to expand the JetBlue brand more broadly into the travel and hospitality sector. We expect Andres to play a critical role in driving innovation and capitalizing the unpacked potential of this non-air ancillary and Travel Products business. Innovation is in our DNA. And as we build our platform for future growth, we are embracing hospitality as part of the travel experience for our customers. For example, we are pioneered in trialing advanced biometrics technology, which we biometrics technology, which we believe will improve the airport experience and is in part of an industry effort to enhance security. In addition, as this technology space evolve around us, we are investing in the future by our JetBlue tech ventures subsidiary. We continue to make progress in our structural cost program in the first quarter as part of our journey to superior margins. We are delighted to sign a multiengine agreement with Pratt & Whitney for the purchase of maintenance of Neo engines for our existing aircraft order book. Over time, this agreement will bring the latest engine technology to a sizable portion of our future fleet, contribute to our ongoing structural cost efforts beyond 2020 and lower our fuel consumption. This milestone is yet another example of the collaboration and maturity of the teams to JetBlue working together to achieve our common goals. Steve will provide added details in a moment. I'd like to thank again our crew members for bringing our mission to life, empowering a successful first quarter despite the weather challenges. We will keep working to innovate as we put in place of the building blocks that we believe will increase profitability and create long-term shareholder value. Marty, over to you.

Thank you Robin. I'll start with our capacity outlook on Slide 6. We continue to target mid- to high single-digit capacity growth over the next few years and expect to be within that range again in 2018. Our plan schedule growth for the year remains between 6% and 6.5%. From a modeling point of view, we expect 2018 flown ASM growth to be higher, between 6.5% and 8.5%. Recall that as we move through 2018, we will lapse the lower completion factor that resulted from ATC challenges and the hurricane in the second half of 2017. In the first quarter, winter storms reduced loan capacity growth by just over one point versus our prior guidance and resulted in capacity growth below the low end of our initial guidance. For the second quarter, we expect to grow capacity between 5% and 7% year-over-year. New markets, all those less than one year's old are just 2% available seat miles. Our growth remains targeted at Boston and Fort Lauderdale and skew is towards adding frequencies on existing routes. We believe our ongoing network investments in these focus cities continue to build our relevance for our leisure and business customers, underpinning solid RASM growth and supporting our margin commitments . Our summer capacity plan is driven by up gauging markets through the addition of 200-seat all core A321s. The 200-seat aircraft has allowed us to expand margins and keep fares low in New York leisure markets. And we expect to do the same in Boston. New A321 deliveries have allowed us to build margins in both the Mint and all-core configuration. Beyond our upgauging in Boston, we continue to build towards our goal of 200 flights a day. The city has proven to be a perfect fit for our low cost point-to-point model. In early May, we'll add Minneapolis service as we aim to further grow our relevance and utility for our business customers. In Fort Lauderdale, we have added new destination in frequencies to existing markets as we work towards our goal of 140 flights a day. First quarter RASM outperformed the system by over six points, the fourth consecutive quarter of RASM outperformance. We continue to see the maturation of past growth and the benefits of increasing network relevance in the South Florida market. Calendar placement of holiday clearly helped, but based on forward bookings, we expect this trend of RASM outperformance to continue. Mint markets in Fort Lauderdale are also performing extremely well and an example of how we have bought a differentiated low cost model to South Florida. Our ability to grow our relevance in Boston and Fort Lauderdale depends on having the infrastructure in place to support this growth. To that end, we recently executed an agreement with Massport that will bring our total number of gates uploading to 30 by 2021. JetBlue supports Massport plans to modernize Logan Airport, to improve customer experience and add needed capacity in a cost-effective way. In the first quarter, we also executed an agreement with the Broad County aviation department that will add five gates in Fort Lauderdale. This is the first in a series of anticipated gate additions that will enable us to approach 145 flights a day. We are excited to continue working with the airport authority on our plans to construct additional gates. In addition to the renovations in Terminal 3 to improve the customer experience. Our transcon franchise continues to perform well both in Mint and non-Mint markets. Our most mature Mint routes again saw RASM outperformance system in the first quarter. Newly converted Mint markets such as New York to Seattle are ramping up as expected. We anticipate our Mint aircraft to contribute 20% of our total ASM to the second quarter and 20% for the year. Finally, our Latin and Caribbean region, which includes Puerto Rico, was the brightest spot in our network during the first quarter. As Robin mentioned, this region have the highest year-over-year RASM growth across our network during the quarter, and Puerto Rico is recovering as expected. We are pleased that the Department of Transportation recently awarded JetBlue additional Havana flying, which we can service from Boston and added frequencies to Fort Lauderdale. These routes add to our strong and growing franchise in Cuba and Caribbean. Turning to Slide 7 and the revenue outlook. First quarter RASM growth exceeded our expectations at 6.1%, above our guidance range from early March. This result included a net two point benefit from calendar replacement and a one point positive impact from weather-related lower completion factor, as most name don’t occurred during off-peak days of the week. Since the end of 2017, demand has strengthened across our network, and we saw further closing strength to end the quarter. Closing pricing has been particularly strong in peak travel period particularly in spring break weeks. Demand and pricing in off-peak weeks are solid, although not showing the same strength as the peak periods. Looking into the second quarter of 2018, we expect year-over-year RASM to range between minus 3% and flat. This includes 2.5 points of negative impact from holiday travel shifting into the first quarter as well as lapping a 1.25 point benefit that occurred in second quarter 2017 from completion factor and co-brand incentive payments. We expect demand and closing pricing to remain strong. However, the second quarter this year will have more of a trough period particularly in May. We're optimistic that as we approach June and the early summer peak, pricing strength will again exceed expectation similar to what we saw during the recent spring break weeks. We think that looking at first half RASM is more helpful in understanding current demand trends. Slide 8 shows our RASM growth by half with first half 2018 trends continuing to show strength on a half-by-half basis. We are pleased with our RASM evolution since 2016. Our RASM performance over the past couple of years has been driven by our focus on maximizing margin, successfully implementing revenue initiatives and actively addressing capacity to manage change in demand trends and fluctuating oil prices. The improving trends demonstrate we are executing and delivering on our revenue strategies that we laid out in our 2014 Investor Day. We introduced Mint in our transcon markets and further booked our relevance to corporate customers by adding key destinations from Boston. We are thrilled that Mint was awarded the Best Business Class in North America by TripAdvisor, which speaks highly of our products and hospitality service in key transcon rates. We moved our co-brand credit card from American Express to Barclays, and our portfolio of customers using our co-branded cards more than doubled in size less than two years, exceeding our initial expectations. More recently, in 2017, we refined our fare options, driving extraordinary growth at our ancillary revenues per customer. As Robin mentioned, we are currently enhancing our website to optimize our digital distribution platform. We expect the growth rate of employees per customer to be more typical this year as we got lapping some initiatives implemented last year. We remain excited about the network and the ancillary revenue opportunities ahead. Before I turn it over to Steve, I'd like to thank our crew members for their hard work. I believe that as we grow, our culture continues to power our strategy and allow us to deliver outstanding hospitality to our customers, while also increasing our margins. Steve, over to you.

Thank you, Marty. Good morning, and thank you for joining us. I'll start on Slide 10 with some highlights from the first quarter. Revenue was $1.8 billion, up 9.6% year-over-year. Pretax margin was 6.3%, down 1.3 percentage points from the first quarter of last year, essentially due to higher fuel prices. EPS is $0.27 to diluted share. This quarter, our solid revenue performance and cost management efforts were partially offset by increasing fuel prices. Despite our fuel driven margin compression, a lower tax rate and our balance approach to capital allocation contributed to EPS growth. Our effective tax rate this quarter was 20%, lower than expected due to the refinement of the estimates related to last year's tax reform. We continue to expect that our effective tax rate to range between 24% and 26%. Moving to Slide 11 in unit costs. Our first quarter CASM Ex-Fuel increased 3.1% year-over-year, and despite the operational pressures from the eventful winter season, we were in line with the midpoint of our quarter's guidance. We continue to focus on managing our costs and delivered against our initial commitments. For the second quarter of 2018, we expect that CASM Ex-Fuel to range between 2% and 4%, driven by timing of maintenance expenses and previously expected inflationary pressures from business partners. Given our ongoing cost reduction efforts from progress in our structural cost initiatives, we continue to track towards our negative 1% to positive 1% CASM Ex-Fuel guidance for the full year. Turning to Slide 12. We continue to expect CASM Ex-Fuel growth to reflect down during the second half of the year as you make further progress in our structural cost program. This is the result of maintenance, sourcing, airports and distribution initiatives put in place over the last 16 months. Our CASM Ex-Fuel growth in the first half is expected to be between 2% and 4%, above our prior guidance due to lower completion factor in the first quarter. For the second half, we expect CASM Ex-Fuel to decline in the range of negative 4% to negative 2%. As a reminder, the 2017 comparison includes higher unit costs due to hurricanes and the one-time bonus we paid to our crew members at the year-end as a result of tax reform. Thus, we anticipate the underlying CASM Ex-Fuel growth for 2018 to flow to a range between minus 0.5% and 1.5% for the second half of this year. Our progress in structural cost gives us confidence that we will achieve our CASM Ex-Fuel commitments in the second half coming and from 2018 through 2020. We expect this year's inflection and our cost trends to put us on a path to unit cost declines in the years to come. Moving to Slide 13 on an update on our structural cost program. We're delighted that at the end of March, we closed a 15-year deal with our business partner, Pratt & Whitney, for the purchase of maintenance of NEO engines. The deal covers engines and spares for the 45 aircraft on order, which didn't have a prior selection. It also advises contractual terms and engines for the 40 aircraft already under contract. Our negotiations include the full cost of engines, parts and ongoing maintenance. This achievement is the result of hard work across JetBlue teams for many, many months. A minor portion of the expected savings from this agreement is included in our three-year program. Most of the savings will extend well beyond 2020 as we take delivery of our first 30 NEO aircraft in 2019 and an additional 13 during 2020. This deal is, of course, just one part of the broader efforts in tech ops, and our work from the V2500 engine RFP continues. We are currently reviewing responses and making progress towards selecting the right business partner. Our efforts pillar is another area where we made steady progress this quarter. We finished deploying self-service technologies in four additional lobbies and are on track to have 24 completed by the year-end. These investments will further improve crew member productivity and allow us to focus on hospitality. We will provide our regular half-year update on the stretch of cost program in July. We continue to expect that this three-year effort will result in run rate savings of between $250 million and $300 million by 2020. Turning to fleet on Slide 14. This quarter, we purchased two additional A321 through cash for a total fleet of 245 aircraft. We expect to increase our total fleet to 253 by the year-end. Our A320 cabin restarting program is an important milestone in April with a certification and return to service for the first aircraft, and the second one is scheduled to enter modifications shortly. The restart program is a key contributor to our unit cost goals, and we anticipate that it will allow us to grow our capacity and the capital efficient in customer-focused manner. We've also made good progress of our fleet review, including evaluation of options for existing E190 fleet and the A321 LR. We have no news to share today, but we remain focused on achieving the best outcome for our crew members, customers and owners. Our CapEx guidance for 2018 remains between $900 million and $1.1 billion composed of up to $900 million on aircraft and the remainder in non-aircraft spent. Turning to Slide 15. One of the guiding principles for our capital allocation is to maintain our strong balance sheet, targeting investment grade financial metrics and appropriate liquidity. We believe that strong balance sheets allows us to be flexible to the cycle, allocate capital to best and highest use and underpin long-term value creation. Over the last year, we targeted our capital deployment growing our fleet, reinvesting in high incremental return projects such as Cabin Restyling as well as returning cash to our owners. We ended the first quarter with adjusted debt-to-cap ratio of 28% and cash and investments of approximately 11% for trailing 12 months of revenue. During the first quarter, we repaid $59 million in debt and bought out one additional lease aircraft. In 2018, we expect to raise debt to maintain an optimal liquidity and capital structure. We also anticipate that we will continue to return excess capital to our owners opportunistically. This quarter, we executed $125 million in share repurchases with $625 million remaining from the total amount authorized by the board. I'll close with one more thank you to all of our crew members for their hard work and their nonstop support to the operation during an eventful winter. We are one team and are making great progress in our commitment to our owners. We are firmly committed to delivering the JetBlue experience to our customers and ensuring that our commercial strategy, our cost reduction efforts and our long-term investments will result in superior margins. We will now take your questions.

Thanks, everyone. Karina, we're now ready for the question-and-answer session with the analysts. Please go ahead with the instructions.

[Operator Instructions] Your first question is from Savi Syth with Raymond James. Please go ahead.

Hey, good morning. I was wondering if I could ask a question on the fleet side. I know you've kind of taken a bit longer to do the E190 evaluation and understand that the C Series. But I was kind of wondering from a JetBlue model perspective, it this kind of a wholly-owned or third-party regional might be a solution that gives you a flexibility to kind of address those business markets and then kind of switch kind of main operations to kind of a single fleet size? I was wondering if there is JetBlue model that might not work.

Savi, I'll pick up of the initial view just in terms of giving you some initial comments on the fleet review, and then I'll pass it over to Robin for his perspective on the regional side of things. We are very pleased with the progress we're continuing to make on the fleet evaluation. As we said previously, we're not going to rush to any conclusion in this changing and evolving OEM landscape. We've completed a hell of a lot great work and we made great progress. And we'll obviously make any fleet decision with a view of continuing to maximize shareholder value and driving towards superior margins. The one thing I would add, and I know I've said this before, is the 100-fleet platform and particularly as it stands at this point in time that you're to place that role, really displays an important role in our Boston network strategy where our margins continue to be very close to the A320s. But that's an overall perspective about the fleet review. But I'll hand it over to Robin to see if he's got any perspective on the other side of the question.

Good morning, Savi. It's Robin, and thank you for the question. Look, as we think about this and we're thinking about this very much in terms of JetBlue, I think the announcement we made yesterday with JetSuite, for example, JetSuiteX in terms of our kind of Codesharing and building our region to sort of some of the higher margin into West, into California market, I think shows that we look at the space very differently. And we look for ways to access it in a way maybe to how other airlines do it. But in terms of airplanes like the 190 and the 190 replacement, those very much would be JetBlue airplane.

And if I may follow-up, Robin, thanks for bringing the JetSuite, just kind of curious how big the opportunity that is. It seems somewhat small right now but maybe might long taking a longer-term JetBlue plan?

Yes, thanks. We're very excited about the opportunity. You're right, it's small now, so is JetBlue and we started nearly 20 years ago. And we, obviously, with our partners, Qatar Airways, a significant amount of investment in that business to allow it to grow. And again, when we think about how we can compete and how we can compete profitably, then how do we kind of access that sort of semiprivate highly value market. How do we take advantage of new opportunities? And so we very much see JetSuite in that light, and it's more today, but we believe it's a great product. It's a great operation. It will grow and that will benefit both our customers and, ultimately, our shareholders.

Okay, great. Thank you.

Your next question is from Brandon Oglenski with Barclays. Please go ahead.

Hi, good morning everyone and thanks for taking my question. Steve, can you remind us what the long-term CASM goal as we get out of 2019 and 2020 and whether or not you guys factored in the pilot deal for that goal.

Good morning, Brandon and thanks for the question. We've talked about in terms of the strategy going forward. It's a zero to one CASM CAGR over the 2018 to 2020 period. So 2018, 2019, 2020. And it does indeed include a pilot deal.

Okay. And just a point of clarification, the back half of this year, though, you're not assuming any new labor contracts, right?

We haven't made any specific comments or predictions around the specific pilot deal. The guide that we've given excludes any alpha deal, and we continue to negotiate good safety to alpha at the table, and I'm looking forward to moving forward with those contracts in due course.

Okay, appreciate that. And then just lastly. So as you look at that cost outlook in the back half of the year and into 2019, what was – is the V2500 engine contract the biggest driver of optimism that cost can be down? Or is it a combination of the A320 densification project as well? Can you just give us some idea of magnitude in this?

Yes, Brandon, there's no silver bullet here. I think what I'm most pleased about is the fact that we've got engaged across all four pillars of the structural cost program. As a reminder, the back end of 2016, when we did in the Investor Day, we talked about four pillars: tech ops, corporate, airports and distribution. We are making good progress across all of those four pillars. The largest pillar of the four is in the tech ops space. We have, as I mentioned in my prepared comments, executed the near deal, which I'm extremely happy about. We, obviously, have the V25 RFP we're working through. We are also currently working through the RFP on the heavy maintenance of our airframes as well, in addition to the other pillars. So all of those different initiatives are contributing to the structural cost program. In addition to your point, which is the importance of the restarting program, again, very pleased the first aircraft has gone into the shop, come out ahead of schedule, actually, and in terms of the timing and back into service. So both the structural cost program in alignment with the restyling effort that puts an extra 8% of seats on each and every one of our 130 A320 aircrafts will help us achieve and contribute to our 0 to 1 CASM commitment through 2020.

Thank you.

You next question is from Helane Becker with Cowen. Please go ahead.

It’s Helane Becker. Sorry, I didn’t changed my name. Thank you for the time guys. A quick question on the maintenance cost. So as we think about the fleet changing this year and when we think about rent, depreciation and maintenance, first quarter rent and maintenance came down. Is that a trend that's going to continue going forward for the rest of this year as we think about that? Should we expect that?

Thanks again, Helane, for the question. I will reflect on the two horse of that. So on the rent side of things, we have been so opportunistic about looking at the best deployments of capital as I have talked about with the balanced capital allocation strategy. And we, obviously, have a number of leased aircraft in the JetBlue fleet. And thinking through the lens of the shareholder returns, we are continuing to take the opportunity to buy some of those leases out. So when you look at the sort of depreciation line versus the aircraft rental line, you'll see sort of a move between those two lines, but that as we've gone forward continue to reduce of the rent side of things. In terms of maintenance cost, there's a whole host, as I mentioned, of initiatives that we're working through with Jeff, Martin, Tony and the rest of the leadership in tech ops, making some great progress as we go forward with that. Again there is no one such as silver bullet. And there – with regards to Brandon’s question, I have covered off some of the most significant changes, specifically pertaining to quarter two because I am sure this question will come and I want to address it now, is that we did have a movement of some maintenance costs between Q1 and Q2. So about half a point of costs pertaining to maintenance shifted from Q1 to Q2. So that’s why we amended our CASM guidance for Q2 on the call today. But I think of the first half is exactly right way we set it would be three months ago. So that really hopefully gives you an overview about where we are with maintenance and how that pertains the guide that we put out this morning.

That’s great. That’s very helpful. And then I think you guys had a – as my follow up question, I think you had an announcement earlier today or maybe late yesterday on the first pilot group coming out of the Orlando base. I think that’s where you’re training facility is. Could you just update us on how that’s going and your expectations for that?

Yeah, I will take that, Helane. Thank you for the question and good morning. Now, I mean this is a very innovative program. It’s called our gateway select program. And as we think about the pilot supply challenges into the future, which we believe are real, then we got to make sure that we, like other airlines, can secure that supply. And so this program was put in place really to allow pilots who didn't have an experience to learn to fly at a lower cost than they would before. The first six have got to the point now where they are about to embark on their 1500 hours of flight experience as flight instructors, which is mandated by the FAA on one task completed. We think that it will be about two years. They will be back and ready to resume their career in the wide fleet of JetBlue airplane and we are very, very excited about that and we continue to hire pilots very successfully through this program.

Great, thank you. I appreciate the time.

Your next question is from Jamie Baker with JP Morgan. Please go ahead.

Hey, good morning everybody. Can you hear me?

Hi, Jamie. How are your phone issues?

Just getting better by the day apparently. Hey, Marty, let me start off with you and in nonstop markets where you compete directly against an airline that offers basic economy, are RASM trends behaving any differently than in other markets? I mean, I think the impact of basic economy is fairly evident on the bottom line of the airlines that offer it, which not clear to me is what impact it's having on guys like JetBlue that don’t offer it? Any difference in RASM trends?

Yeah, hi, Jamie. Thanks for the question. That’s a great question. It’s something we’re watching very, very closely. And I think it’s fair to say we’re really not seeing any significant difference in RASM trends and basic economy market versus non-basic economy markets. I think it’s important to note that we have been competing with ULCCs probably more aggressive than anybody. And we are watching the market extremely closely and obviously this is the place where we’re paying a lot of attention, but we’re really not seeing the trend that you’re asking about.

Yeah, okay. I appreciate it. And Rob, I am sensitive to your aversion to your negotiate in public, but I do have a question about the pilot. If you look at recent contracts in an effort to assess where the market is, are there any work rules or efficiencies that you don’t already enjoy for example I think you’re already using a preferential bidding system. So that doesn’t represent an incremental opportunity. I am basically just trying to assess whether the pilot contract is simply a wage exercise or if there is potentially some of sort of flexibility or efficiency that the airline might pick up along the way?

Well, Jamie, first of all, I'm happy you've got your phones back, secondly I am a little bit sad that we don’t get a chance to issue a happy birthday on the call this year. But thirdly, you answered a question that I am not going to negotiate in public. We had the last mediation session in April. You know I think that went well. We made progress. We have another one coming up in May. I think both negotiating teams are working very hard to get this done. It is our first contract. So it does include everything from pay and benefits and workloads and that’s probably as much as I should say on that right now, but thanks for the question.

Let me sneak in a third then. You have mentioned LA Basin is the basis for some new routes. Does that imply new routes from existing airports in the Basin or did you use the word basin to imply potentially new airports such as, I don't know, John Wayne?

Well, Jamie, you were listening. I'm very, very impressed. Look, I'm not going to say too much now. I'm actually heading out there tomorrow with a team. I think that it’s important as we think about drive to superior margins that the network is an important part of ours and it’s important that we focus on our strengths and adjusting the hardworking. And so you will be hearing more in that very, very soon.

Excellent, and thanks for the kind words. I appreciate it, Robin. Bye-bye.

Your next question is from Michael Linenberg with Deutsche Bank. Please go ahead.

Hey, just a couple here. Hey just a follow up on you know your Codeshare with JetSuiteX. I did see, it looks like that you’re invested some more money into that business. I am curious where that percentage is? How much you have invested? And at this point is it being marked on the balance sheet as an investment or you know accounting for it under the equity method? And is that – are we going to see that run through your P&L? Anything like color that would be great. Thanks.

I am going to just let the CFO answer that, Michael.

Okay.

Hi, Michael. Good morning. It's covered in non-equity side of things, as you questioned. And we have approximately 10% of shareholding in the business. So they are the two perspectives in terms of the question you asked.

Oh, Steve, what was the percentage? Did you say 10%?

Yes.

Okay, so you’re at 10%. And then back to Robin on JetSuiteX, you have talked about Codesharing with this business and I think that they publicly said that they’re goal is to get to 100 airplanes by 2022. Should we presume that you’re going to be Codesharing with a regional operator with a 100 airplanes by 2022? Or is it you’re going to pick and choose which markets you want to tie up with them?

Yeah, I think a lot of that is sort of in our future and that we’re working through. I think we look at – we always look at opportunities and when we think about the semiprivate market, the ability to fly between two FBOs and a great product to the competitive fair, we think that that is a market that is – have a lot of growth potential, and we clearly want to be part of that. And by – we are very kind of ambitious about where we think that can get to otherwise we would not had made the investment in JetSuite. And we'll just watch the space. I mean, I think we're make taking a measured approach to growth. As they grow, then the growth has to earn its way into the network just like it has to its way into our network. But when you look at the customer experience, when you look at the customer MPS data, when you look at the level of customer satisfaction and repeat purchase, I would say once someone has tried that experience, they really don't want to go back. And so it's exciting for us to be a partner with them.

Great Robin. If I could just ask a follow-up on the ancillary. You talked a lot about that in your opening remarks, and you just brought on Andres Barry to spearhead that effort. Can you give us a sense of what your ancillary is for passenger today because it's hard to discern from the public docs what that number is and where you want it to go next three years or so?

Yes thanks Michael for the question. In terms of the number per customer, it's about $30.

Okay.

And when we think about where it can go, I think we've got a track record on revenue initiatives, and so we need to – part of our journey on superior margins is continuing to find new level so that we can develop. And I think I've been pleased with our ancillary growth over the last several years. We've seen a good CAGR on that project, on that revenue stream of about 20%. But I think we can do better. I think we can do more. And so by creating a subsidiary, putting a leader in charge of it, creating focus around that, I mean, to give you one interesting staff is that we have all these customers flying JetBlue today for the most part. A relatively low percentage of those by a vacation or other product willing to JetBlue. And so – but one, when they do, they then have a 38% CAGR sort of growth to then come back and by the same location from us. And we've seen that over a sustainable five- or six-year period. So once they purchase, their ability to repurchase is double in terms of that non-air revenue. So we see it is a very long term – we see it as a way to, if you like, accelerate ancillary revenue growth over time. And potentially also, you're using our brand, leveraging our strong brand into a new ancillary revenue streams that we don't do it today but do it in a very capital-light way. Just to make it clear, we're not buying hotels. We're not doing any sort of capital-intensive work. This is very capital-light investment.

Great. Thanks Robin.

Your next question is from Hunter Keay with Wolfe Research. Please go ahead.

Hey thank you everybody. Good morning.

Hello, Hunter.

How are you doing Robin?

Good, I’m delighted.

Good. Hey, so outside of just the seasonality issues, what are some of the similarities and maybe some of the subtle differences that you guys see with transcontinental and transatlantic service?

Hey Hunter it’s Marty. Thanks for the question. I mean you certainly mentioned two of them. I think the third one that’s very important is that for some very important transcontinental markets, premium products is extremely important to the revenue stream. Certainly, I think if we did not have the success that we've had with our Mint product, it would be a much more difficult conversation for us to talk about the concepts of transatlantic. There are certainly many months of the year where our high quality premium product is extremely important for success. The second thing I will say is the – with respect to the difference between the markets, certainly, we're respectful of the fact that there are different competitive environment, but what we like about the transatlantic is something that, I think, the founders of JetBlue liked 20 years ago, which is its market with high spirits and not great service. It's certainly in the premium cabin especially and we think that could be a great opportunity for us, much like it was in the transcontinental markets four years ago.

Thanks Marty. And then probably one for your Robin, I know you guys are disappointed with the FAA decision to unionize. But I think curious to know why you think that happened. I mean, your pay was competitive. It seems like your forums will be heard, but 66% yes vote is a decent maturity. I'm kind of curious to know what your opinions as to this sort of what went wrong? Where was the disconnect? Is it a cultural issue? And just why you think they decided that they needed to be organized?

No. Thanks for the question, Hunter. I could have given you the very long version and I and I probably want to do justice to a shortened version. But I did spend quite a bit of time out without in flight crew members with Johanna. So definitely, definitely heard a lot of the concerns that they had. I think, first one, in terms of everything that we agree on whether you voted for union representation or didn’t is that everyone loves this company and believes in our culture and believes in our value of caring. And I think that a lot of it came down to just individual crew members preferring to have a certainty of a contract in terms of what’s in it versus the traditional model which has been sort of an intuitive one over the many years where we’ve adjusted today and we changed workloads. And I think that was just some nervousness about not having that documented, not having something that you can rely on. But I did meet a single in flight crew member on the campaign trail who wasn’t amazingly committed to this company didn’t share in the importance of our culture as one of our main competitive levers.

Thanks, Robin.

Your next question is from Kevin Crissey with Citigroup. Please go ahead.

Forgive me if I missed it. Have you announced a replacement on the board for Dave Checketts yet?

Hi, Kevin, no, you haven’t missed it. It’s Robin, by the way. Good morning. How are you?

Good morning.

No, super appreciative for everything Dave has done over the years. I mean, I personally benefited from a lot of counsel from him, and we continue to look at the composition of the board with the eye of good governance and also driving long-term shareholder value.

Okay. And maybe you could – maybe this is for Marty. Marty, if we think about Boston and the competition there and maybe you could talk about the difference that you’re seeing in the leisure market versus the business market. I know you had great deal of success growing the business markets there. But if maybe you could talk about recent trends or maybe you can’t.

Hi, Kevin. Thank you. No, we certainly can. We’re very confident with the position in Boston. We’re the largest airline up there. Again, as we’ve said multiple times, we have a business model that is built for a low-cost point-to-point services versus the overwhelming majority of our competitors really in the country who have really fundamentally built on hub and spoke. We have that most in our sub-destination. We absolutely have the best product and brand than any airlines. We actually provide our own services versus one of other competitors, actually most of our competitors who have a good amount of outsourced regional flying. With respect to our results that we’re doing business in leisure, our business strength is really, really strong up there. We have seen a lot of capacity come under leisure. I think if there’s any where we’ve seen RASM go down it’s been a leisure. But we’ve been competing in the leisure market from the very first day as JetBlue. This is not very new to us, and we’re very confident of our success of there.

Terrific. Thank you so much.

Your next question is from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Thanks. Good morning. I may have missed it, but did you give an update on your plan and when you need to make that fleet decision if you made that fleet decision.

Hello, Duane Steve here. How you are? You didn’t miss anything, Duane. We didn’t give a specific update in the prepared comments. We haven’t made any announcements in terms of our requirements if we choose to convert an existing A321 Neo to an A321 Neo-LR. We have to give Airbus approximately two years notice of doing that. One of the way it’s the conversion not incremental aircraft. And I also want to reiterate to the Dallas community that the reason we would do this is aligned to the Boston and New York strategy where we see Mint to be phenomenally successful. Marty commented earlier about higher fares, lower service, and we see an opportunity there. But it’s really around making sure that we continue to penetrate the Boston and New York business markets where we’ve done a nice job over the previous years of doing that. So that’s where we are. And as soon as we have anything to announce, by the way, then we’ll obviously let you guys know.

So there's sort of an unlimited views of that. It could be two years from now that you tell us or next week?

Yes, I mean, there is no sort of specific timing. It's just evolving three-year notice in terms of when we go and when we do that. So yes, it's not a specific point in time.

Okay. And then on the fleet review and perhaps kicking tires on other fleet types in a smaller jet category, can you just talk generally about sort of the upper limit on CapEx for JetBlue or maybe the plans relative to the billion this year, how we should be thinking about that on the 2019 or 2020 basis? Thanks for taking the questions.

Not at all, not at all. So we laid out our overall CapEx guide as a $1.1 billion average from 2017 through 2020. That is the guide that we continue to go forward with. We haven't made any specific decisions with regards to the E190 whether we will continue to be taking the fleet or whether we replace it with something else. And so that $1.1 billion pertains to our existing order book and a continued investment in non-fleet CapEx to help us drive the structural cost program and capital-light opportunities to drive better experience for our customers, our crew members and ultimately our owners.

So sorry, just a follow-up there. If you do decide on a new aircraft type, that will be incremental to the existing CapEx guide to that you put forward?

Yes, indeed, it would be.

Okay, thank you.

Your next question is from Rajeev Lalwani with Morgan Stanley. Please go ahead.

Thanks, gentlemen. Thanks for the time. Marty, actually a few questions for you. Earlier, you talked about Puerto Rico as a market sort of coming back online followed by the middle of the year. Do you see that as having a positive or negative or neutral impact to the Caribbean and Florida overall? Said another way, is the absence of Puerto Rico maybe some other markets in Caribbean are contributing to the strength that you've seen in those markets? Or is it just something else?

Hi, Rajeev. Thanks for the question. As we said that the Latin and Caribbean region is the RASM superstar for us and what we've seen so far. Frankly, I don't really think there's a big connection between the strength we seen in the rest of the Caribbean and what the changes have been in Puerto Rico. Certainly, our Puerto Rico strength has come from an explosion in the visiting friends in relative market, as Robin alluded to in his prepared remarks. And I think it's back to what we said in the end of 2017 and I think in October conference call, customers will find the beach. The true, like truly leisure beach traffic in Puerto Rico was never that bigger percentage to what we carried and it certainly, has gone down since the hurricane. But overall, our lack of our strength has been very, very positive development for us.

Okay. And then on basic economy, just coming back to your response to Jamie's question earlier. Do I take out to mean that there isn't much of an interest in implementing the product, I mean Alaska announced it yesterday and throughout some pretty meaningful numbers? Would love just to get your perspective on that.

I thank for asking. We're confident looking for ways to optimize our offering. If you go back to the fare option platform that we launched after our 2014 Investor Day, we've made multiple changes how we have packaged and sold our product to try to make sure we continue to outstanding RASM performance that we've had in last several years. I think it's fair to say looking at the answer I gave to Jamie, we don't see a boring platform of challenges to our revenue model on base economy. But I would also say, if we get to the point we decide that is a RASM of all thing for us to do, we have a great platform, we do it.

Okay. And then if I can sneak in a last quick one. Marty, I think you've made some comments about assuming, and correct me, if I'm wrong, about assuming improving trends on the closing side, demand accelerating due to the quarter, et cetera. Can you just clarify what you meant there? I just want to make sure I understand whether or not you assuming demand trends just continued to improve throughout the quarter.

Yes. I mean, if you look at the demand environment, as we see it right now, we're very happy with what we're seeing. I think we've all seen some fare increases over the last few weeks. Certainly, the last two quarters, we saw both quarters, fourth quarter 2017 and the first quarter 2018 closed some really nice close-in strength. So we're really, from our model, we don't really see any reason for that to change. We're seeing competitive capacity picked on a little bit. Overall, we're very bullish for what we're seeing for the demand environment right now.

Thank you.

Your next question is from Darryl Genovesi with UBS. Please go ahead.

Thanks. Steve, just a clarifying question. When you were going through the second half CASM outlook, you gave a negative 0.5%, negative 2% number, which seems to dovetail with your full year guide. But then I thought you said a negative 1.5% to plus 1.5% number for something else in the second half. What was that?

No, the underlying – so we are guiding negative 2% to negative 4% for the second half of year. But then when you take into account cycling across the significant hurricanes and the bonus that we gave throughout the $1000 crew member bonus of that we gave as a result of tax reform, when you adjust that, it goes to a minus 0.5% to plus 1.5%. So that's the underlying H2 perspective.

Understood. And then I guess I just wanted to ask you a little bit more on the fleet. JetBlue is about 18 years old. When I go back and I look historically relatively on growth-oriented airlines and their CASM trajectory, it will often start to – some of the CASM growth will start to flatten out around the time that the airline start retiring airplanes. And so I think the oldest aircraft in your fleet now about 18 years old. Are you thinking that you get 25 years out of them or are you going to start cutting them up at 20?

Great question. Yes, I mean, there's no reason. We're very, very happy with the fleet that makes in the vast majority of our fleet, the 245aircraft we have, 195 of those are in the Airbus network – the great work cost us. They are good for us and there's no reason to think as to why they wouldn't take us though like to 25 years. But on the fleet side, we got obviously continue to review that both from a margin standpoint, from a fuel efficiency standpoint, from CASM X in our maintenance. And that's why we're go through the overall fleet review at the moment that we do. Very happy with the existing Airbus fleet that we have today.

I mean, I think Darryl, it’s Robin. If I can add just an additional point on that, I think when you look at some of the heavier maintenance cost you see other older airplanes, a lot of that link to the engine costs, the kind of go to their later ship visit. I mean, that's what really drive some of the ongoing maintenance cost. I think a fair opportunity for us being out with the V2500 RFP at the moment because we're able to reset that cost into the future, and that also gives us confidence that we can cost-effectively fly their plans for the period of time that Steve talked about.

Perfect. Thanks a lot gentlemen.

All right. Thank you.

And your next question comes from the line of Joseph DeNardi with Stifel. Joseph your line is open.

Marty, I'm wondering if you could just talk about Mint in the context of how cyclical you're expecting it to be over the cycle. I think some of your LPC peers look at those type of products as things to have what – when the economy do it but not very good when the economy rolls over. So can you just provide your perspective on how you see that paving over cycle?

Hi Jo, thanks for the question. Great question and it's certainly something we spent a lot of time talking about. The one point I'll say is we're fully net. We haven't seen a down cycle yet. But I will say that Mint's been wildly above our expectation. And I think one of the big reasons for that has been our pricing strategy. We still have fair in the mid-three digits at the bottom end. And although we have had significant RASM improvement in Mint over the last three or four years, we think that we can play at all elements of the price spectrum. Certainly, if you look at who we're carrying on the airplanes, we have a very strong core of high-end leisure customers and even the recession, those tend to be customers are good. And I think when the traditional legacy way of pricing those markets, which is really higher fares or upgrades, that's a market that's much tougher for them to access than under our sort of everyday low pricing strategy.

Got it, okay. And then, Marty, another one for just on the credit card. You're one of the few airlines maybe the its only U.S. airline that switch partners recently. It seems like it blend seamlessly for you guys. I think some airlines are worried that they would lose customers during that transition. So I'm just wondering if you could speak to what your experience has been switching from AmEx to Barclays and maybe what that talking about looking at kind of the flexibility you have going forward.

Well, interesting question. I mean, first of all, we were very grateful to American Express for many years of service and they were very, very good partners during the transition. I think the relationship between AmEx and Barclays made this much easier then it could have been. The second thing I'll say is we're very lucky that winning bidder in our RFP, Barclays, also have a lot of experience in converting portfolios. So I'd say from our perspective, it was almost seamless transition. Barclays has been extremely effective in converting less of accounts, adding new accounts. They've been an outstanding partner. I will say the only downside so far has been those definitely accounting difference when you switch partners versus when you re-up your current partner. We talked about that a little bit I think two or three calls ago. But again, that's more of timing issue than an actual underlying revenue. We've already taken our guidance up once as far as the results from the credit card. We're not switching guidance right now. But I'll say the partnership has been fantastic and there's nothing but absolute, absolute satisfaction with Barclays.

All right. And that concludes our first quarter 2018 conference call. Thanks for joining us. Have a great day.

That concludes today's conference call. You may now disconnect.