JETBLUE-AIRWAYS Earningcall Transcript Of Q2 of 2024
George, our president; and Ursula Hurley, our chief financial officer. During today's call, we'll make forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding our third quarter and full year 2024 financial outlook and our future results of operations and financial position, including long-term financial targets, industry and market trends, expectations with respect to tailwinds and headwinds, our ability to achieve operational and financial targets, our strategy, plans for future operations and associated impacts on our business. All such forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or revised in these statements. Please refer to our most recent earnings release as well as our fiscal year 2023 10-K and other filings for a more detailed discussion of risks and uncertainties that could cause the actual results to differ materially from those contained in our forward-looking statements. The statements made during this call are made only as of the date of the call. And other than as may be required by law, we undertake no obligation to update the information. Investors should not place undue reliance on these forward-looking statements. Also during the course of our call, we may discuss certain non-GAAP financial measures. For an explanation of these non-GAAP measures and a reconciliation of corresponding GAAP measures, please refer to our earnings release, a copy of which is available at our website and on sec.gov. And now I'd like to turn the call over to Joanna Geraghty, JetBlue's CEO. Joanna Geraghty -- Chief Executive Officer Thank you, Koosh. Good morning, everyone, and thanks for joining our second quarter 2024 earnings call. Operator Please standby. We are experiencing a technical difficulty. Once again, we ask that you please stand by. [Technical difficulty] Joanna Geraghty -- Chief Executive Officer Good morning. So some technical difficulties. Apparently, our cost pillar is in full swing. We've only paid the phone bill for one of our conference rooms in the office. So I will start over. Good morning, everyone, and thank you for joining our second quarter 2024 earnings call. I'm happy to report that we generated adjusted $34 million of pre-tax income for the second quarter. This performance would not be possible without our 23,000 crew members, and I would like to thank them for delivering a safe and reliable operation and for living our JetBlue values every day. Turning to Slide 4 for a few remarks on our second quarter performance. Our team has been hard at work ensuring we deliver the best experience from our customers over the busy summer travel season. As part of our refocused long-term strategy, which I will touch on later in my remarks, we've made significant investments to improve our reliability and deliver more of our customers to their destinations on time despite summer challenges from weather and persistent air traffic control staffing issues. Though we still have room to improve, we are off to a solid start. And for the first six months of the year, we have exceeded our 2023 performance for key operational metrics. This improvement helped us beat or exceed our second quarter guidance ranges. In addition to reliability, our second quarter performance was aided by continued strength in our premium product offerings with even more space unit revenue, up double digits year over year. We are also pleased with the progress of our $300 million, realized approximately $140 million of top-line benefit in the first half of this year. We also delivered strong progress from our cost savings programs in the second quarter, while fuel prices continued to moderate and as a result, we were able to keep costs low in order to generate a positive pre-tax profit for the quarter. Moving to Slides 5 through 7. As I mentioned last quarter, even as we were implementing these near-term performance improvement initiatives, our full new leadership team coalesce around refining our long-term strategy. And we are now pleased to share additional details with you with more announcements still to come in the second half of the year. Our plan is rooted in a thorough analysis of the near and longer-term competitive landscape as well as extensive customer research. As a result, we feel confident in our refocused strategy, which we are calling JetForward and are confident it's the right framework to position JetBlue for success. JetForward at its core is a back to basic strategy to be loved and to be profitable again in order to deliver value to our customers, our crew members and our owners. This framework is designed to enhance our inherent strengths and effectively overcome the current challenges of our business and industry. Our challenges are clear, the Pratt & Whitney engine-related aircraft groundings, which are significantly impeding our growth rate and pressuring our profitability as well as industrywide cost inflation and persistent air traffic control issues, all of which are headwinds we are working hard to overcome. At the end of the day, our revenue growth has not been enough to outpace our cost challenges and we need to fix that, which is why the goal of our strategy is set a foundation to lead us back to generating positive operating margin in the near term and driving sustainable earnings over the long term. We believe achieving these targets and executing on our strategy will be rooted in enhancing our strengths and focusing on what we can control. We have high-value geographies, a unique culture with a trusted brand, a low cost structure and a differentiated product and service that has set JetBlue apart from its peers, all of which we believe can be enhanced to drive even more value and delivering that value is our ultimate goal. Turning to Slide 8. We expect JetForward to deliver an incremental $800 million to $900 million of EBIT contribution in 2027 versus year-end 2024, helping to guide our path back to sustained profitability. We expect to realize this benefit evenly over 2025 to 2027, with incremental upside beyond 2027 as several underlying initiatives ramp to their full potential. The $800 million to $900 million of EBIT contribution in 2027 is in addition to the $300 million of revenue initiatives we've already announced for 2024. We plan to turbocharge our strengths with four priority moves, which you can see on Slide 9, all designed to drive our path forward. They are: number one, delivering reliable and caring service; number two, building the best East Coast leisure network; number three, offering products and perks that customers value; and number four, a secure financial future, enabled by maintaining our cost advantage and restoring our balance sheet. These four moves may sound familiar, given we began actioning on them back in the first quarter. And we've already seen encouraging results from several underlying initiatives in the first half of the year. In particular, our investments to deliver reliable service are showing early indications of driving value across the airline. Operational reliability is essential to the success of our strategy, and it's a top priority for our customers. We've lagged our peers in on-time performance, partially driven by our high concentration of flying in some of the most crowded air spaces in the world and our outsized exposure to air traffic control issues. While we are always working to improve on-time performance and recognizing the reality of our particular airspace, we are aiming to significantly improve our relative ranking in the coming years. This will be a multiyear initiative with many phases of investment, and we've already begun taking action on optimizing the operability of our fleet, delivering a reliable product and service and providing a consistent customer experience. Initiatives we rolled out this year include adding more scheduled time for maintenance, scheduling greater buffers for VFR flights and introducing new tools such as automated turn tracking and enhanced customer-facing self-service and disruption management tools. We expect that over time, these investments will improve customer satisfaction and save on costs, helping to contribute about $100 million of incremental EBIT in 2027. Next, we are refocusing our network to build the best East Coast leisure network. Our network sits in some of the most valuable geographies in the world. We have a leading position in three of the five largest markets on the East Coast, including New York City, which is the highest GDP-producing metro area in the United States. We've already taken significant action in the first half of the year to refocus our network around our core strengths in these geographies: leisure, VFR and transcon, especially along the East Coast and in Puerto Rico, where JetBlue is a household name for many customers. As we've emphasized, our actions are guided by our focus on profitability and we expect these changes will drive close to $175 million of incremental EBIT contribution in 2027. Marty will provide more specifics on our actions. JetBlue has a long history as a beloved brand in our core geographies. Our attractive value proposition, offering an affordable, yet differentiated experience is well known by customers. We recognize that to be profitable and loved, we need to meet the evolving preferences of our customers, including an increased desire for premium experiences. Our strategy is more focused than ever on offering customers the products and the perks they value today. We believe that delivering on that brand promise will also enable us to ensure our customers feel rewarded for their loyalty. This, in turn, would help us specifically expand our share of premium customers. Customers who want a higher quality experience but may feel forgotten by our competitors. In addition to the product changes we've already implemented this year, including adding new loyalty partners and products and enhancing our Blue Basic offering, we plan to announce additional exciting improvements to our product later this year. So stay tuned. While the financial benefits of our product changes will take time to realize, we expect them to contribute over $400 million of incremental EBIT benefit in 2027, with additional upside into the remainder of the decade. Finally, touching on our last priority move, a secure financial future. While we believe this will be an output of our efforts, we must also better manage what is in our control and this starts with maintaining our cost advantage. It is imperative we keep our costs low, so we can continue offering customers the most value when they fly. However, our Pratt & Whitney GTF engines continue to challenge our ability to plan our business over the long term. And we now expect aircraft on the ground to significantly increase in 2025. Ursula will provide more detail on this. In order to be profitable in this uncertain environment, we must transform our cost base in an aggressive manner, similar to the approach we've taken with our network changes. We'll be biased toward action in making bold decisions required to get our business back to profitability. And through investments in data science and staffing optimization, we expect cost savings will contribute about $175 million worth of incremental EBIT through 2027. Restoring our balance sheet health is also critical to a secure financial future and returning to profitable growth. We simply cannot continue to invest in capital-intensive assets that must be financed upon delivery and that are subsequently unable to produce a return because they have to be parked due to required maintenance and lengthy wait times. With that in mind, we've come to an agreement with Airbus to defer 44 A321neo aircraft, which are the fleet most impacted by the Pratt & Whitney GTF issues. This will reduce our upcoming capital expenditures by $3 billion, helping us to improve our free cash flow outlook and restore our balance sheet health. While many parts of our business will be evolving with JetForward, maintaining our unique culture is core to its success. In the second quarter, we checked in with our entire organization through a pulse survey, which showed a number of improvements that indicate crew members are optimistic about our refreshed strategy. Our people are critical to the execution of our strategy, and we will continue investing in them to ensure our success. As we navigate through the remainder of 2024 and beyond, you can expect a number of additional announcements that will help fill in the remaining gaps in our strategy, and we will regularly share updates on the progress toward our $800 million to $900 million EBIT target. With that, over to Marty to provide more detail on our commercial progress. Martin J. St. George -- President Thank you, Joanna. I would like to extend the thanks to our crew members for their service and dedication at JetBlue. The amount of change we've implemented in my first six months has been significant. And I appreciate crew members for supporting our rollout of JetForward. At the beginning of this year, we announced a package of initiatives that we expected to drive $300 million of incremental revenue in 2024. We are pleased with the progress of those initiatives thus far and remain on track to achieve the $300 million this year. These initiatives captured an additional $100 million of revenue in the second quarter and have now generated a total of $140 million of top-line benefit in the first half of 2024. With JetForward, we will continue this high rate of activity and progress through 2027 and beyond. While the JetForward priority moves included -- include the 2024 revenue initiatives, the $100 million to $900 million in EBIT, we expect JetForward to generate in 2025 through 2027. It's entirely incremental to the $300 million we announced earlier this year. Refocusing our network is one of the key priority moves of Jet Forward. And as Joanna mentioned, we've made significant network changes this year and support of building the best East Coast leisure network, which we expect will drive about $175 million of incremental EBIT uplift between 2025 and 2027. So far in 2024, we've announced four tranches of network changes, collectively driving 15 Blue City closures and over 50 route closures and redeploys. Every route end station needs to earn its way into our network and our push for profitability has lessened our patients for underperforming routes. Our focus now is squarely on what we call our core franchises. These have long been the profit engine for JetBlue: Leisure, VFR and transcon routes, two from our core East Coast geographies that know and love JetBlue, like New York, New England, Florida and Puerto Rico and the Caribbean. Our value proposition resonates well with customers in these geographies, given our long history serving those areas and deep entrenchment on the East Coast. Many of the changes we made to our network are driven by the stronger recovery and quicker ramp of leisure travel. As a result, and specifically in New York, we've shifted capacity out of corporate-focused routes and into leisure and VFR routes. In New England, we remain committed to being the number one value carrier serving leisure and business customers alike and continuing to grow our presence across the region. Across our other core geographies, such as Florida and the Caribbean, our strategy remains the same. We'll continue to invest in high-value leisure destinations and expand our product offering to ensure our customer value proposition remains attractive to the full spectrum of leisure customers. For example, we recently announced adding a complementary carry-on bag to our Blue Basic offering for travel beginning September 6. Our change to Blue Basic have allowed us to remain competitive. And since launching about a month ago, we've seen promising early results. Not only is this a meaningful addition to the value proposition of our most affordable fare option, we believe it's a necessary step on our path to profitability. Stay tuned in 2024 for additional announcements on JetForward's plan to offer more products and perks at our customers value, including enhancements to our premium offerings. Shifting to our second quarter performance on Slide 11. Second quarter capacity finished down 2.7%, higher than the midpoint of our revised guidance of down 3%. Completion factor was 98.8% for the quarter, one full point better than 2023, driven by our investments in reliability and better managing weather-related disruptions. Revenue was down 6.9%, beating the midpoint of our revised guidance by about one point. This was supported by strength in our premium offerings with even more space RASM continue to grow double digits and net unit revenue growth, up low single digits on about 30% more capacity. We saw troughs performing slightly better than expectations with peaks in line and in month bookings improving over the course of the quarter. Unit revenues remain challenged in our Latin leisure markets, where industry supply increases continue to weigh in performance. However, as you look to the third quarter, we are optimistic about the capacity evolution we have seen take shape since the start of the year. As competitive capacity in our overlap markets has come down modestly and is now two points lower than the second quarter. As we predicted, it's still elevated compared to demand growth, but it is coming more into balance. We are also taking self-help measures and reducing trough capacity to better match supply and demand. As we've optimized our network to focus more on our core leisure geographies, our exposure to leisure travel has increased, prompting us to adjust capacity to a seasonality curve with more pronounced peaks and troughs than we've historically flown. Accordingly, we've reduced trough flying throughout the second half of 2024, but most significantly in September, where we are scheduled to fly about 10% fewer ASMs year over year. We are also reducing aircraft utilization during peak months as part of our efforts to improve reliability. As a result of these efforts, we expect third quarter capacity to be down 6% to down 3% year over year. Our capacity contraction provides a constructive backdrop for unit revenue to improve year over year. And we forecast year-over-year revenue growth to be down 5.5% to down 1.5% in the third quarter. At the midpoint of our ranges, we are expecting positive year-over-year RASM and healthy sequential improvement. We expect our unit revenue trajectory will be supported by competitive capacity improvements in our Latin leisure markets, the continued ramp of our revenue initiatives and the lapping of the wind down of the Northeast Alliance in the third quarter of 2023. For the full year, we expect revenue growth to be down 6% to down 4% on 5% to 2.5% less capacity. In closing, with JetForward, we built a solid strategic framework that we are focused on and excited about. And though we see initial improvements to our business as a result of the strategy, there is still work to do to deliver on our multiyear targets, including ensuring our crew members understand how pivotal they are to its success. Our product is not truly differentiated without the incredible service they provide our customers. And I want to thank them again for their service to JetBlue, especially as they support JetForward's path to profitability. With that, over to you, Ursula. Ursula Hurley -- Chief Financial Officer Thank you, Marty, and thanks again to our members for helping to deliver a profitable second quarter. We delivered on our targets this quarter with revenue beating the midpoint of our original and revised guidance ranges and CASM ex outperforming the low end of our revised range, which was half a point better than our original guidance. While we generated $34 million of adjusted pre-tax profit for the quarter, it won't be enough to offset projected losses generated in the other three quarters, and we remain steadfast in our urgency to return to full year profitability. With JetForward, we are setting our financial priorities for the coming years with the goal to restore profitability as soon as possible. A secure financial future, one of our four priority moves is underpinned by sustaining our cost advantage, driving operating margin improvement, restoring our balance sheet health and practicing capital discipline so we can generate positive free cash flow. We are taking steps to achieve each of these priorities and meeting our $800 million to $900 million EBIT target will be key to our strategy's success and overcoming our challenges. Before I get into the details from the quarter, I want to provide an update on the status of our Pratt & Whitney GTF engines. We take full responsibility for addressing and overcoming challenges within our control, and we recognize the need to address and plan for even those outside of our control like weather and ATC staffing. The magnitude and multitude of availability challenges we are experiencing with the GTF engine are something we are working hard to mitigate. But they continue to have a significant impact on our business and on our long-term planning ability. In addition to powder metal-related inspections, challenging our engine availability, we've experienced a number of other unscheduled engine maintenance visits that are resulting in GTF engines coming off wing much sooner than anticipated, some after just a year of flying. In fact, a majority of the 11 average aircraft grounded this year are due to inspections outside of powder metal. Based on the latest numbers provided by Pratt & Whitney, we are now expecting the average number of grounded aircraft in 2025 to be in the mid- to high teens with greater uncertainty in 2026 and beyond. This will drive roughly flat year-over-year capacity in 2025. In order to reach flat growth, we'll need to continue investing to extend the lives of our A320 fleet. While it comes at a cost to buy out leases and extend the lives of aircraft, the return profile is more attractive than investing in new aircraft. At this stage, we simply can't afford to continue taking delivery of costly new aircraft that may need to be parked due to engine availability issues, especially if we must raise financing to support these deliveries. Our focus going forward will be on driving greater returns from our existing asset base so we can improve our free cash flow outlook. As a result, we've come to an agreement with Airbus to defer 44 A321neo aircraft from our current order book to 2030 and beyond. Reducing our 2025 to 2029 planned capital expenditures by approximately $3 billion and reducing Airbus aircraft commitments over the next five years from $5.3 billion to approximately $2.3 billion. This, along with the capital-light extension of approximately 30 A320s and allows us to efficiently reduce our capital expenditures and get us closer to our free cash flow goals. Turning to the second quarter cost performance on Slide 13. Our investments in reliability resulted in solid operational performance, allowing us to complete more flights than planned and helping to spread our fixed costs over more capacity. Second quarter CASM ex-fuel grew 3.7% year over year, beating our revised guidance midpoint by more than two points, driven by one point of incremental cost savings from our structural cost program, one point from completion of additional flights and operational efficiencies and a timing shift of expenses to the second half of the year. Our current cost savings programs are on track to hit our previously communicated targets of $175 million to $200 million for our structural cost program and $100 million of cost avoidance from our fleet modernization program. Our structural cost program realized an additional $45 million of benefit this quarter, resulting in cumulative realized benefits of $145 million. When this program hit full run rate expected at the end of this year, we'll transition our focus to a cost transformation program as part of Jet Forward, which I will touch on shortly. Through our fleet modernization program, we've avoided $83 million of costs to date due to continued optimization of engine maintenance. This program will continue until our E190s are fully retired in 2025. We also benefited from the moderation of fuel prices over the quarter as we saw an $0.18 decline in fuel prices between mid-April and the end of the quarter. We remain opportunistic with our fuel hedging strategy and as a result, we have entered into hedges for 20% of our volume in the third quarter and 20% in the fourth quarter. In the third quarter, we expect CASM ex-fuel to grow 6% to 8%, primarily resulting from wage rate step-ups in our labor agreements impacting CASM ex-fuel by two points in each the third and fourth quarter and a shift of expenses from the first half of the -- into the second half worth an additional half a point of impact to each quarter. Since we communicated our initial full year CASM ex-fuel guidance of mid- to high single digits in January. We've faced several headwinds, including the change in Pratt & Whitney compensation recognition, a reduction in scheduled trough capacity and unplanned investments in the extension of our A320 fleet. All of which pressured our unit cost by two and a half points for the full year. Despite these challenges, we've solidly executed on our controllable costs and we expect to maintain our guidance of mid- to high single digits with CASM ex-fuel up 6.5% to 8.5%. Now turning to Slide 14. As we implement our four priority moves, we believe sustaining our cost advantage, especially when faced with flat growth in 2025 is imperative to our success. It's important we make transformational changes to the way we plan our business, and we're taking it back to basics with our approach as we ask ourselves, how would we structure JetBlue today if we were just starting an airline. We will evaluate all cost categories, though we see specific opportunity in data science-driven planning optimization and better aligning our business to peaks and troughs. The focus of our structural cost program has evolved over the years. Our 2018 program drove savings from business partner contracts while our current program focuses on enterprisewide efficiencies. Jet Forwards cost transformation will focus on implementing next-generation technology across the airline and we'll continue to build on the learnings from our past structural cost programs to sustain our cost advantage and transform our cost structure. We forecast this transformation will add about $175 million to EBIT in 2027 through cost savings, and we look forward to revealing more of our long-term plan for cost over the next few quarters. Transitioning now to fleet and our balance sheet. Slide 15 provides an update on our fleet plans. In the second quarter, we took delivery of six aircraft, and we expect to take delivery of six aircraft in the third quarter, driving $365 million of forecasted capex for the third quarter. For the full year, we plan to take a total of 27 deliveries and expect full year capital expenditures to remain around $1.6 billion. As announced this quarter, we are deferring 44 A321neos into 2030 and beyond that were previously scheduled to be delivered between 2025 and 2029. We now expect to take 60 deliveries during that time frame, down from 104 previously with 56 of the remaining deliveries being A220. We continue to prioritize reinvesting in our current asset base and to date, have successfully extended the lives of 12 A320s of the 30 aircraft we have been evaluating. These aircraft will remain in our fleet and provide capacity backfill, particularly in 2025 when we expect the remaining E90s will officially leave the fleet and when Pratt & Whitney related availability challenges increase. Moving to Slide 16, we ended the second quarter with $1.6 billion in liquidity, excluding our $600 million undrawn credit facility. Year to date, we have secured $1.3 billion in committed financing to support our capital expenditures. We continuously seek opportunities to strengthen our liquidity position in order to fund our capex needs for the next 12 to 18 months, refinance our short-term debt maturities, including addressing as quickly as possible our convertible notes that will become current in April of 2025 and to generally provide us with additional liquidity and which will better position us to execute our strategy discussed today. An example of our strength and liquidity is the amendment and extension of our revolving credit facility, which will now mature in 2029. In addition, we may opportunistically execute on future financing transactions, including in the capital and syndicated loan markets, which may be structured to be secured by a portion of our unencumbered assets, which are currently valued at approximately $11 billion. Our most significant unencumbered asset is our customer loyalty program, which is valued at about half of our current unencumbered asset base. Of course, any future financings are subject to market conditions, and there is no guarantee we will be able to execute on them. Before I hand it back to Joanna to close out the call, I would emphasize how focused we are on making year-over-year margin improvement and getting back to positive operating margin again. Through JetForward, we believe we have a clear and actionable strategy to deliver $800 million to $900 million of incremental EBIT in 2027 and and a strong foundation off of which we can return to our historical earnings power. Joanna, over to you. Joanna Geraghty -- Chief Executive Officer Thank you, Ursula, and thank you all for joining us. I want to close by reiterating our commitment to building value for our owners, starting with a return to profitability. I'd like to thank the team for all of the good work behind the JetForward Plan. We have been and are taking aggressive action on every front, and strongly believe that the focus of our attention has to be on the execution of JetForward. Given this and coupled with the longer-term planning uncertainties from the Pratt & Whitney engine issues, we've decided to communicate more about our strategy now rather than hold an investor day in the fall. Our team is fully committed to ongoing outreach and two-way communication with all of you. And we look forward to continuing to discuss our plans as we roll out additional strategic initiatives through the remainder of the year. With clarity on our path forward, we are energized and moving forward with resolve and determination. I'm incredibly confident in the outlook of our business as we turbocharge our strengths and execute on our four priority moves to return JetBlue to profitability and deliver for all of our stakeholders. Thank you. And with that, we will take your questions. Operator Questions & Answers: |
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