Q4 2003 JetBlue Airways Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning everybody, and welcome to JetBlue's fourth quarter and year-end 2003 earnings conference call. Today's comments will be followed by a question-and-answer session. (OPERATOR INSTRUCTIONS) We have on the call today David Neeleman, JetBlue's Chief Executive Officer, and John Owen, the company's Chief Financial Officer. At a reminder, this call contains statements of a forward-looking nature which represent management's beliefs and assumptions concerning future events. Forward-looking statements involve risks, uncertainties and assumptions, and are based on information currently available.

Actual results may differ materially from those expressed in the forward-looking statements due to many factors, including, without limitation, potential hostilities in the Middle East or other regions, the Company's ability to implement its growth strategy, and its dependence on the New York market, its fixed obligations, and its limited operating history, seasonal fluctuations in its operating results, increases in maintenance costs, fuel prices, and interest rates, the Company's competitive environment, its reliance on sole suppliers, government regulation, it's failure to properly integrate LiveTV or enforce its patents, its ability to hire qualified personnel, the loss of key personnel, and potential problems with the workforce, including work stoppages and continuing changes in the airline industry following the September 11th terrorist attacks, and the increased risk of future attacks, the potential risk with delivery, placing into service and integration into its operations of the EMBRAER 190 aircraft, as well as the potential liability relating to the company's handling of customer data.

Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings including, but not limited to, the Company's annual report on Form 10-K and quarterly report on form 10-Q. At this time, I'd like to turn the call over to David Neeleman for opening remarks.

DAVID NEELEMAN, CEO, JETBLUE AIRWAYS: Thank you very much. Welcome everyone to our fourth-quarter conference call. We appreciate everyone being with us today. I want to touch initially on our '03 results just briefly, and talk about them for a second, and then we'll talk a little bit about the fourth quarter. Then I want to spend most of the time talking about '04, obviously. First of all, we are obviously very pleased with '03. With our operating margin at 16.9 percent, we are very proud of that. '03 had a lot of milestones in it. Obviously, our fleet grew from 37 aircraft to 53 aircraft. We upped our daily departures from 168 at the end of 2002 to over 220 today. We fly about 30,000 customers every single day.

We've become the largest airline at JFK Airport as measured by passengers carried, and I mentioned that we have for the year a 16.9 percent operating margin. Obviously, stellar results in a difficult year. While we had a significant amount of growth, obviously, during that year. So we are happy with that. I guess a month or so ago, we gave guidance a couple months ago. We gave guidance on the fourth quarter where we lowered our previously stated margin expectations. At that time, we said that our margins were coming somewhere between 13 and 14 percent.

I wanted to talk a little bit about the fourth quarter and the events that caused us to do that. First of all, the softness was almost exclusively in the West. We had a significant amount, the highest percentage of our business we've ever had in the West. We had about 59 percent of our total ASMs which were in the West. The business looked great going through October. Beginning of November, we started to see a pretty good decline in average fares. Some load factor, but mainly it was in average fares.

So we realize that the projections that we had for that period of time wasn't going to be, wasn't going to hold up. I think there was a couple of reasons for that obviously there was some competitive pressure; I think you had America West starting their nonstop flights to LAX, and there was some lowering of fares obviously. But also we had a 46 percent growth in the West year-over-year, and that's a significant amount. Probably a little bit too much capacity going into the off-season. We are always pretty good at meeting capacity with demand for seasonal fluctuations, we do that really well in Florida, never had to do that in the West before.

As we look to the summer, and as we add our Summer frequencies we will have to take a look at next fourth-quarter and first-quarter and make those adjustments. I think we have learned something from that. I think the thing that really pleased us in the fourth quarter was that Song had a lot of promotional activity, they had a lot of excitement and a lot of advertising in New York, a store in SoHo and all kinds of things going on. The effect that Song had on us in the fourth quarter to our South business, it was minimal, can't say it didn't affect us at all, obviously it did have some effect but it was minimal. We are happy about that. Our customers are loyal to JetBlue. We have a frequency advantage in those markets, and we have a product advantage and I will talk a bit more about that a little later, but I just wanted to walk you through a little bit of, we got to talk a lot about competitive situations today. I wanted to spend just a minute on Song for second.

We've done some analysis on Song and their cost, their state of cost and their DOT costs and done a bit of analysis on that, I just wanted to share a few thoughts with you on that. We don't have their load factor information for prior to September, and obviously September was not a good month for them and they have said that. So obviously those load factors have improved from that time. I think important if you look at the September numbers you see a wide gap in load factor disparity. For example, JFK, Fort Lauderdale they had a 54 percent load factor, we had an 84 percent load factor. West Palm Beach they were at 33, we were at 84, at JFK we were MCO which is Orlando, 57 to our 75, and so on. There are a lot of examples that way.

Obviously they had a bigger airplane and didn't even have the same number of people on a flight than we had. As you go forward and you look at the economics of what they are trying to accomplish, we would assume over time that we would if we were flying the same numbers of people on the same flights, say that they had an average of 130 people on an airplane and we had 130 people on an airplane, that would give us an 83 percent load factor compared to their 65 percent load factor. So what they tried to accomplish by lowering their CASM obviously was by putting more seats in an airplane. But that increases their trip costs, and as we look at the difference we think the trip cost difference, that is what it costs us to fly a plane from New York down to Florida is almost 40 percent less than what it costs them.

To the extent that we have the same numbers of people on a flight which wasn't the case in the latest numbers we have, then we can make money and do really well and obviously that would be a very difficult thing for them to do, sometimes it is harder when you have a bigger airplane to have the kinds of frequencies. Plus the flexibility of them being able to (technical difficulty) out of those markets and the off-season and bring in a smaller airplane is obviously limited when you have only one type of airplane with 199 seats on it.

And then going into the first quarter we are seeing the same things, certainly we have some softness in the first quarter related to the two-for-one and other things that are going on in the market which I will touch on in a minute. As for the south markets and what is affected with Song, actually in January we were we expect to be over our projections to the South. And the shortfall really is almost exclusively related to the East-West traffic again in January. So that is a little bit about Song and obviously there are other things to talk about so we can move on to the next thing. On January 7th, American Airlines announced a two-for-one special the day we announced Boston service, and perhaps it was timed for that event.

As we've analyzed this it's real interesting and I have been in this low fare business for a long time and I have had a lot of competitive responses. Traditionally it's been let's just match the fares because if we match the fares because nobody would fly on that other airline if they could flight on American or Delta. And then there was okay, we will match the fares and we will give you triple miles, that was kind of the next thing. We will use the power of frequent flyer miles, but in this case obviously it's gone beyond that, in that somebody can fly two round trips from New York to Florida. Which if you look at it in regular frequent-flier mile terms is about 4000 miles; if you go 1000 miles down and back twice. They are getting an award that is as much as 15 times miles that they've earned. So you have gone from triple miles to 15 times. That is obviously an unprecedented program that's been offered in the industry, and one wouldn't think that it is sustainable. That's an awful lot of seats to be giving away, or necessarily can be improved on. I guess the next thing would be just fly us once to Florida and we will give you a free ticket worldwide but that would seem to be a more difficult thing to do.

Just to summarize the effects on the -- and this is just kind of best guess, and John Owen will give you better margin guidance than what I am going to give you here. But keeping in mind that over 50 percent of our ASMs are still East-West, that business was already going to be down anyways, the two-for-one special that was put out by American and matched by Delta and United came on and is in effect for the whole month. And the fact that the East-West traffic is in off season, when we look at the effects of that we are looking, we had our original budget and then what we are looking at now based on what our January revenues are and how February is shaping up in March, of about three percentage points on margin is what John will give you the guidance on lower than what our budget was, which would still give us the highest margins projected in the industry.

And so I think considering all of that, we are very pleased at the fact that we have a great brand. We have lots of loyal customers, we have lots of people that just love flying on JetBlue, and they just keep coming back and buying tickets on us. I think certainly could have …