JetBlue Airways Corporation (NASDAQ:JBLU) Q4 2022 Earnings Call Transcript

JetBlue Airways Corporation (NASDAQ:JBLU) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Good morning. My name is Joanna, and I would like to welcome everyone to the JetBlue Airways Fourth Quarter 2022 Earnings Conference Call. As a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. I would now like to turn the conference over to JetBlue’s Director Assistant Treasurer and Fuel, Joe Caiado. Please go ahead.

Joe Caiado: Thanks, Joanna. Good morning, everyone, and thanks for joining us for our fourth quarter 2022 earnings call. This morning, we issued our earnings release 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. In New York to discuss our results are Robin Hayes, our Chief Executive Officer; Joanna Geraghty, our President and Chief Operating Officer; and Ursula Hurley, our Chief Financial Officer. Also joining us for Q&A are Dave Clark, Head of Revenue and Planning; and Andres Barry, President of JetBlue Travel Products. This morning’s call includes forward-looking statements about future events. All such forward-looking statements are subject to certain risks and uncertainties, and actual results may differ materially from these statements.

Please refer to our most recent earnings release and our most recent Form 10-Q or 10-K for a more detailed discussion of the risks and uncertainties that could cause the actual results to differ materially from those contained in our forward-looking statements, including, among others, the COVID-19 pandemic, fuel availability and pricing, the outcome of the lawsuit filed by the DOJ related to our Northeast Alliance and the various risks and uncertainties related to JetBlue’s acquisition of Spirit Airlines. The statements made during this call are made only as of the date of the call, and 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 and 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 CEO.

Robin Hayes: Thanks, Joe. Good morning, everyone. Greetings here from New York City, and we appreciate you joining us today. I’ll start, as always, with a huge thanks and shout-out to our 24,000 crew members. We overcame many challenges together throughout this past year, and we made tremendous progress in restoring the business coming out of the pandemic. And we’re set up to further build on that success here in 2023, with a disciplined plan to continue strengthening our foundations, both operationally and financially. While we face economic uncertainty, we remain focused on what we can control, and we are leveraging our unique value proposition of offering both great service and low fares enabled by our low-cost structure.

This will result in margin expansion and robust earnings growth. Turning now to slide 4 of our new deck template. We closed the year with significant cost and revenue momentum, resulting in an adjusted pre-tax income of $69 million for the quarter and earnings per share of $0.22. Reflecting back on the full year 2022, we made important progress in positioning JetBlue for longer term success. We hit a new record annual revenue result, a phenomenal achievement by our team, given we were only two years removed from the depths of the worst crisis in aviation history. We continue to see incredible demand for JetBlue’s differentiated product of low fares and great service, which was recently recognized by The Points Guy with an Editor’s Choice Award for Best Economy Class in the world.

We launched a new structural cost program targeting $150 million to $200 million of cost savings by the end of 2024. This program is designed to ensure that we are offsetting some of the inflationary increases in our cost structure and help us maintain a low-cost platform, allowing us to continue to offer even more lower fares. We strengthened our network and built even more relevance for our customers, by adding more service to more destinations, including significant growth out of New York, enabled by our Northeast Alliance with American Airlines, as well as building out our transatlantic service between the Northeast and London with additional frequency. We also moved into state-of-the-art wonderful new terminals at LaGuardia and Orlando and recently secured our third slot pair at London Heathrow.

Our ESG efforts continue to lead the industry. Last quarter, we announced our most aggressive emissions reduction target yet, with a plan that would effectively reduce our per seat emissions in half by 2035 compared with 2019 levels as part of our recently announced science-based target. JetBlue is the only US carrier today to be flying regular domestic flights with fuel supply by both currently available SAF producers, while supporting a portfolio of emerging suppliers with significant forward commitments. We also made great progress on our diversity, equity and inclusion goals. Our external customer research shows that JetBlue ranks number one for diversity and inclusion in accommodating travelers in our focus cities. And our Gateway Direct program open to our crew members aspiring to become pilots, people of color represent 82% of our classes.

As we look ahead to 2023, we are capitalizing on the strength of our trusted travel brand to drive record customer engagement and continued revenue momentum. We are making steady underlying progress on our long-term initiatives to structurally improve our profitability and enhance our long-term earnings power, with a low fare offering that appeals to a wide range of customers, supported by our growing traction on our cost program. This gives me great confidence that we can restore margins towards 2019 levels, as we move throughout this year. Beyond 2023, we look forward to transformational long-term value creation for all of our stakeholders with the acquisition of Spirit, which will allow us to create a truly national customer-centric, low-fare challenger to the Big Four airlines.

This will enable us to bring more of our unique value proposition to more customers across more destinations. As we said before, we continue to expect this transaction to close no later than the first half of 2024. Moving now to slide five. For the first quarter, which is a seasonally tough travel period, we projected an adjusted loss of between $0.35 and $0.45 per share. We expect continued revenue strength and execution on cost reduction efforts throughout the year, with a margin trajectory approaching pre-pandemic levels as we exit 2023, despite significantly higher labor cost and fuel prices. As a result, for the full year 2023, we expect to generate between $0.70 to $1 in adjusted earnings per share, which is inclusive of a new pilot deal that we hope will be ratified very soon.

This full year EPS guidance reflects the improvement that we expect throughout the year and highlight the run rate earnings profile of the stand-alone business into 2024, as we execute on new and existing initiatives across the business. The contribution from our Northeast Alliance will continue to ramp in 2023. We are so encouraged by the improvement in economic growth in New York as measured by GDP after lagging the rest of the country last year. At the same time, both JetBlue and industry capacity in the region recovered more quickly than the rest of the US in 2022, which provides a sequential tailwind in 2023 as that growth matures. We continue to see incredible momentum in our loyalty program, which continues to not only exceed our expectation but also hit new records.

We recently announced the evolution of our TrueBlue loyalty program, which Joanna will elaborate on shortly. With respect to our network, we are planning to take delivery of four A321LR aircraft this year to support our continued transatlantic network expansion. We are very excited to launch service to Paris this summer, marking our second transatlantic destination and our first in Continental Europe as we build customer relevance from our key focus cities. Our JetBlue Travel Products subsidiary took another fantastic step forward last year with 59% revenue growth versus 2021 and 136% revenue growth versus 2019. This progress is a result of continued product innovation across JetBlue Vacations, travel insurance and our new Paisly platform, coupled with increased customer awareness.

When we started JetBlue Travel Products, we set a target of $100 million run rate EBIT by 2022 compared to $15 million of EBIT in 2019. I am so pleased to share that we are near the $100 million, with consistent $20 million to $25 million of quarterly earnings with growing momentum into 2023. We continue to be optimistic about the growth potential of this business and aim now to roughly double our current run rate EBIT in the next three years. Finally, we continue to make strides to transform our cost footprint. We remain on track to deliver $250 million of total cost savings through 2024 with execution on our structural cost program and our fleet modernization efforts, which Ursula will touch on here very shortly with more detail. In closing, I would again like to thank our crew members for your dedication and all of your incredible hard work in 2022.

I am so optimistic about how we are positioning the business for long-term success and so proud of the role that all of you have played in that. We have a strong foundation in place to execute on our plan to structurally enhance our long-term earnings power and create value for our shareholders. With that, Joanna, over to you.

Joanna Geraghty: Thank you, Robin. I would also like to thank our team for the hard work day-in and day-out and for the incredible job in closing out the year strong. You’ve persevered and navigated through many challenges this past year from severe weather events to ATC outages, all against a backdrop of historic demand for air travel. We also made great strides this year to improve our operational reliability. Following our operational reset last spring, we made investments and embraced a more cautious operating planning philosophy, which has served us well as evidenced by our execution in the back half of the year. And I’m very pleased to report that our completion factor for the month of December was north of 98%, which puts us at the top of the industry, an incredible achievement.

Turning to slide 7. For the fourth quarter of 2022, capacity grew 2.4% year over three, in line with our initial expectations and despite severe weather across our system. Looking ahead, we continue to see results from our operational investments with strong completion factor trends as we continue to operate in a challenging ATC environment. We expect capacity to be up 5.5% to 8.5% year-over-year, both for the first quarter and for the full year 2023. Our capacity growth this year will largely come from increased utilization, which should also drive improved productivity. As always, we will remain nimble with capacity as the year progresses and take decisive action through the lens of margins. Given the continued fragility of the aviation ecosystem, we continue to plan our operation with a level of conservatism for the foreseeable future, including scheduled buffers as well as increased crew reserve levels.

Last year, our network focus was primarily centered on ramping our Northeast Alliance and delivering on its promise, bringing low fares and great service to more communities and boosting competition in the region. Growth from the NEA far outpaced overall domestic industry capacity growth, bringing enormous consumer benefits in the process as we have successfully created a true third alternative for customers in the region. And during the fourth quarter, we announced exciting news with plans to add more destinations and choice out of the Northeast as we strengthen our footprint. Looking ahead to 2023, we also plan to add service across other non-slotted focus cities where we see meaningful margin opportunities. We expect to continue restoring our Boston network and increase capacity in Florida and in San Juan.

We are also building on the success of our Mint franchise with further expansion at Los Angeles, as well as the launch of service this summer to our latest transatlantic destination and Europe’s most visited city, Paris. In the fourth quarter, revenue per available seat mile was up 16.1% year over three, slightly better than our mid-December investor update, fueled by strong close-in demand to close out the year. The robust underlying demand trends, combined with the solid execution of our commercial initiatives, drove the highest full year revenue results in our history despite operational challenges in the first half of the year. As we kick off 2023, we are pleased to see the demand environment remains strong into a seasonally trough period.

Photo by Isaac Struna on Unsplash

For the first quarter, we are forecasting revenue to increase between 28% to 32% year-over-year. Looking further ahead, we are excited to continue building on last year’s record performance as we expect another strong year of revenue growth ahead of us, underpinned by robust leisure demand and multiple network and commercial initiatives. I am pleased with the early performance of our transatlantic service, which remains ahead of our expectations. Meanwhile, our Mint cabin remains a bright spot with Mint RASM continuing to outperform core, as you would expect, and all of our A321neo deliveries this year are in the Mint configuration. We are also pleased with the early performance of the NEA. Last year, we more than tripled our number of daily flights at LaGuardia compared with pre-pandemic levels, a tremendous amount of growth in a very short period of time.

And these new markets will continue to ramp throughout 2023. We expect the earnings contribution from the NEA to increase over the coming years as this service matures. Turning to loyalty. This part of the business is performing exceptionally well and is on a very encouraging long-term trajectory. We saw yet another record in co-brand spend last month and we continue to meet our strong growth targets. Active customer engagement with our TrueBlue program is also at historic highs, reflected in the number of active cardholders and program activity. We achieved our best year ever in program enrollment, which was up 50% year-over-year while co-brand sign-ups were up 40% year-over-year. In December, we also announced the exciting new iteration of TrueBlue, which is launching later this year.

Our new program is designed to appeal to a wide variety of customers, whether you are a Mosaic member or travel just once a year. It is a truly differentiated approach to loyalty, as we give more opportunities to all customers to earn rewards faster, drive utility through more options and choice and increase their engagement with the program in TrueBlue. The evolution of our TrueBlue program, including the launch of other airline redemptions and a new credit card portfolio, also supports our evolution to a travel brand, as our customers can earn points and qualify for Mosaic when booking travel beyond just flights. This is an important driver of our multi-year journey to grow this revenue stream as a percentage of our total revenue base and close the gap to best-in-class loyalty performance.

I’ll close with another huge thanks to our crew members for going above and beyond every day no matter the circumstances. The investments we have made position us well to reliably deliver the JetBlue experience, and this year is all about execution from planning our operation, to delivering our day of performance and to executing numerous revenue initiatives. And in doing so, we will build a better and stronger JetBlue for all stakeholders. Ursula, I’ll now turn the call over to you.

Ursula Hurley: Thank you, Joanna, and good morning, everyone. Thank you for joining us. I’d also like to add my thanks to our dedicated crew members for all of their hard work in closing out the year on a strong note. We achieved another quarter of profitability as our teams delivered for our customers. At the same time, we’ve been focused on building a 2023 plan to create a stronger JetBlue for all of our stakeholders. Turning to Slide 9. Our return to profitability in the second half of 2022 was an important milestone in our recovery. We effectively navigated a very challenging year, having set ourselves up for success back in the spring with an operational reset. And we’ve seen vastly improved operational performance and reliability since then.

While we are expecting a net loss in the seasonally weaker first quarter, we’re very confident that we’re on a path to materially improve our financial performance through the remainder of 2023 and deliver a full year adjusted profit. We remain laser-focused on executing the commercial and operational initiatives Joanna outlined plus our ongoing cost discipline. We’re pleased to have reached a tentative agreement with ALPA to extend our collective bargaining agreement for two years, which our pilots are currently voting to ratify. This gives us planning certainty, and we believe this deal will ensure JetBlue remains competitive, while facilitating a smooth transition to eventual joint CBA negotiations following our acquisition of Spirit. Our 2023 outlook for CASM ex-fuel and earnings per share assumes the estimated impact of this pilot deal, which is worth approximately one point to CASM ex-fuel in the first quarter and approximately three points for the full year.

For the first quarter of 2023, we are forecasting CASM ex-fuel to increase 2% to 4% year-over-year. Our non-fuel unit costs would be up 1% to 3% year-over-year when excluding the impact from the CBA. Importantly, we are still on track to deliver on our prior goal to flat CASM ex-fuel this year when adjusting for the three-point impact of the ALPA deal. Last year, we launched a new structural cost program to help mitigate other cost headwinds and set an optimal cost foundation to support long-term margin expansion. These cost pressures are primarily related to maintenance and rents and landing fees, which are collectively worth a two-point headwind to CASM ex-fuel in 2023 on a year-over-year basis. The structural cost program is well on track to deliver roughly $70 million in cost savings this year and $150 million to $200 million of cost savings through 2024.

Our work has already delivered roughly $30 million since launch, and we expect savings to accelerate throughout 2023. Some of the most meaningful drivers of this year’s cost savings include improved productivity, optimized maintenance work scopes and enhanced productivity across work groups through our enterprise planning function. We also expect over $40 million of savings through 2023 and $75 million through 2024 from our accelerated transition from E190s to A220s. Combined, this brings total cost savings to $250 million through 2024. In addition to the higher labor costs, we’re working hard to offset cost pressures from higher rents and landing fees tied to operating and growing in high-cost terminals across our high-value geography as well as elevated maintenance activity, given the age of our fleet.

Turning to liquidity and the balance sheet on slide 10. Recall that we ended the third quarter of 2022 with $2.3 billion in liquidity. And in the fourth quarter, we paid down $114 million of debt, funded $324 million in capital expenditures and made a $272 million prepayment to Spirit’s shareholders. We also signed an agreement to become a minority investor in the new JFK Terminal 6, which closed in November. As a result, we ended the year with liquidity of $1.6 billion or 17% of trailing 12-month revenue, excluding our undrawn $600 million revolver. For 2023, we expect cash outflows related to the monthly Spirit shareholder prepayment to total approximately $130 million for the full year. We’re forecasting full year 2023 CapEx to be approximately $1.3 billion, consisting mainly of aircraft CapEx as we continue to modernize our fleet.

This forecast assumes 19 aircraft deliveries this year. It’s worth noting that much of our capacity growth this year will actually come in the form of restoring utilization. So if we do experience further aircraft delivery delays, we don’t expect such delays to drive meaningful changes to our full year capacity guidance. We remain very focused on maintaining a healthy liquidity balance. Given continued economic uncertainty and fuel price volatility, we intend to finance a portion of our aircraft deliveries this year rather than using cash. That said, our long-term balance sheet priorities remain unchanged. We plan to generate solid earnings and operating cash flow this year. And following the close of the Spirit transaction, we expect the strong pro forma cash flow profile to support a quick deleveraging of the balance sheet from what we still expect to be a very manageable level at closing.

Turning to slide 11 for a recap of our financial outlook for the first quarter and full year 2023. We have discussed most of these guidance ranges already, but I want to touch briefly on fuel, where we continue to see significant volatility in both oil and crack spreads. Last quarter, we executed some fuel hedges to protect against a spike in oil prices. As of today, we have hedged roughly 9% of our planned consumption for the first quarter of 2023 and will continue to be opportunistic going forward to help mitigate our financial risk. Given the volatility in the futures and regional markets, such as New York Harbor Jet fuel, we have decided to provide a range for our fuel price guidance moving forward. To conclude, I’d like to thank our team once again for all of your efforts to position us for long-term success.

We’re driving continued momentum from the back half of 2022, as we move into a stable and more normalized backdrop this year. I could not be more excited about the path we’ve laid out. We expect to generate our first full year of profit since the pandemic with an EPS in the range of $0.70 to $1. This guidance implies significant momentum in earnings, as our initiatives ramp and we deliver margins close to 2019 levels later this year. And we believe, our quarterly EPS run rate this year beyond Q1 is a better indication of our normalized earnings power into next year. The strong underlying revenue environment, combined with our continued execution on optimizing costs, gives me great confidence that we are on a path to generating strong margins and enhancing our earnings power.

And we will work diligently to prepare for the acquisition of Spirit, which will only build on the strong foundations that we are laying today. I truly believe we are extremely well positioned for significant long-term value creation for our owners and all of our stakeholders. With that, we will now take your questions.

Joe Caiado: Thanks, everyone. Joanna, we’re now ready for the question-and-answer session. Please go ahead with the instructions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. First question comes from Michael Linenberg at Deutsche Bank. Please go ahead.

Michael Linenberg: Hey good morning everyone. I guess two questions here, Joanna, just first to you. You talked about the NEA and you said you’re expecting another year of ramp. I think, Robin, you sort of echoed that as well. Any sort of financial details or anything that you can provide around that to give us a sense of baseline or maybe where it’s going? And if you’re loath to give us financials, anything maybe like number of passengers who connect per day between the two carriers or maybe one or two or three load factor points on your planes are tied to their American customers, et cetera. Just anything that we can sort of assess how it’s ramping? Thanks.

Joanna Geraghty: Thanks, Michael. Yeah, we’re not going to go into the financials. It’s obviously still in ramp-up, and we’re very in a very good place, given where we are in the trajectory. Maybe a couple of things worth calling out, JFK will be at combined NEA flights 290. In April, we’ll be operating 190 of those. LaGuardia will be at a combined 190. We will 52 of those, which triples our daily departures compared to 2019. And then growth, obviously, in Boston as well, will be at 220 in April from a flight departures perspective with JetBlue approaching 150. So we’re seeing the NEA very much on the correct trajectory, a strong number of connecting passengers. We can go offline with you on specifics regarding that, but we’re very pleased with the performance of the NEA and the acceleration that’s given, frankly, to our New York markets and their recovery.

Michael Linenberg: Okay, great. And then just second question to Robin. Just on sustainable aviation fuel, it does seem like that you guys have done — you’ve been actually pretty aggressive in going out and sourcing future needs. And I suspect that as we move forward, some of these benchmarks that the administration is pointing various industries toward will become mandates. And it does feel like that we can get to a point where there is very much a real shortage of SAF availability. Where are you on what you need to get to? I think it’s 10%, I think a lot of — is what the industry is aiming toward in 2030. How much of sort of where you are? And what are your thoughts on that about potentially leading to a shortage where carriers will have to rethink about their growth plans and this may be only a few years away?

Robin Hayes: Hi, Mike, good morning. Great question, and thanks for asking it. Yeah, so to set the baseline, you’re right. The industry target in the US is 10% of SAF by 2030. It is going to require a lot of ramp up from where we are today to get there. I think that — I don’t believe that a mandate is on the horizon all required because airlines are very willing to buy this fuel. They’re very willing to make commitments. And also in the last year or two, we’ve seen a lot of willingness from corporate customers as well to participate in some of the additional cost of buying SAF, which is again, making it easier for the airlines to commit and corporate to also continue traveling. So that, together with some of the federal incentives that we saw roll out last year.

So I think everything moving in the right direction but there’s a lot more that needs to be done. As you would expect, we are in conversations with all the major producers frequently and we’re very active in acquiring SAF when we’re able to do that.

Michael Linenberg: Okay. Very good. Thank you.