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Good morning. My name is Jay. I would like to welcome everyone to JetBlue Airways Second Quarter 2018 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 like to turn the call over to JetBlue’s Director, Investors Relation, David Fintzen. Please go ahead.
Thanks, Jay. Good morning, everyone. Thanks for joining us for our second 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 those documents are available on our website at investor.jetblue.com and has been filed with the SEC.
Joining me here in New York to discuss our results are Robin Hayes, our Chief Executive Officer; Joanna Geraghty, our President and Chief Operating Officer; Marty St. George, EVP, Commercial and Planning; and Steve Priest, EVP, CFO.
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 the 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 -- JetBlue’s CEO.
Hi, there everyone. Good morning and thank you for joining us. This morning we reported our results for the second quarter of 2018. I’ll start with the thank you to our 22,000 crew members for everything you do to deliver an outstanding JetBlue experience to our customers.
I’d also like to welcome Joanna Geraghty to her first earnings call since her promotion to President and Chief Operating Officer. Joanna has been leading over 15,000 crewmembers from the customer experience team of JetBlue for the past four years and has been with us since 2005. She will now be leading the full operation and also oversee the commercial team led by Marty. The recent changes in our leadership team are aimed at further improving our day-to-day operations and advancing on our journey to superior margins.
I’d like to start on slide four of the presentation. This morning we reported adjusted second quarter operating income of $175 million, adjusted pretax margin of 8.2% and adjusted earnings per share of $0.38.
Our financial performance was impacted by the holiday calendar, but more importantly, by fuel prices that increased over 40% percent year-over-year. I was particularly happy to see our CASM ex-fuel growth come in below end of our guidance range. Controlling our costs is even more critical amongst increasing oil prices.
The team is focused on mitigating impacts of higher fuel in order to stabilize and improve our margins. We believe even modest slowing in our third quarter RASM growth is not accessible in a rising fuel environment. We are planning a series of adjustments to both capacity and our ancillary revenues to take effect over the coming months.
We’ve steadily slowed capacity growth over the past two years as oil prices have moved higher and we are further slowing capacity growth for the fourth quarter by 2 points. Excluding the impact of hurricanes last year, underlying growth is roughly 5.7% year-over-year at the lower end of our mid-to-high single-digit range we’ve targeted over the medium-term. We are currently factoring higher fuel prices into our preliminary capacity planning for 2019.
Long-term success for JetBlue requires not only adjusting to changing conditions, those are executing on the many things we control. At our Investor Day in early October, we plan to talk about the building blocks we have under way to improve our relative margins. The industry backdrop will fluctuate as it always has, but we believe executing on our building blocks should put us on the path to higher absolute margins and returns for years to come.
We talked about superior margins but our efforts should translate into improving returns. Fleet is an example where we can improve margins and returns in tandem. We’re delighted with the outcome of the E190 fleet review and our selection of the Airbus A220-300. We believe it will be returned an EPS accretive in the next decade, as it replaces a portion of our invested capital with more productive assets.
We’re confident in the up gauging economics for the new aircraft and in our ability to drive higher earnings from the A220s early in the next decade. This adds momentum to the margin benefits we expect from restarting our A320s and growing our Airbus A321 fleet.
Beyond fleet we have several initiatives aimed at improving how we operate today, either strengthening our revenue or lowering our costs. One of the building blocks we planned to talk about in October includes changes in our network and how we can evolve and mature our focus cities.
For example, we believe that our recent reallocation of intra-west flying to Transcon markets will ultimately add about -- will ultimately add between $30 million to $40 million in incremental run rate earnings.
We’ll have also have planned to talk about the opportunities we see to further grow our ancillary revenue. We have a series of initiatives underway, encompassing co-brand and loyalty, the next phase of fair options and segmentation, and longer-term travel products.
We have been pleased to see improvements in our operation, as a result of our on-time performance initiatives and the investments we made to mitigate ATC challenges in the Northeast.
We’ve seen a nearly 10 point improvement in DOT A14 from May to present compared to last year for the same period. These efforts have yielded visible benefits in our operation, which have improved RASM and reduced CASM. We’re making good progress in our Structural Cost program, and Steve, this quarter will provide a detailed update.
We’re looking for to the inflection in our unit cost that begins in the second half of this year. We signed two important tech op maintenance deals with the existing fleet which support a safe and reliable operation in a more cost effective way. Our size and our balance sheet are enabling us to reshape our cost structure, resulting in multi-year run rate savings across organization.
Last year, we completed an organizational review of our support centers, I’m sorry, last week, we completed an organizational review of our support centers that will take effect through the summer. We have an ambitious vision and we are setting up a structure to help us accomplish our plan and meet our commitment to controlling our costs. These things are never easy but they are all important and vital to protect the future of JetBlue.
Before I pass the call to Marty, I’d like to again thank our crew members in both the operation and support centers for their hard work during the quarter.
Marty, over to you.
Thank you, Robin. I’ll start with the capacity outlook on slide six. We continue to adjust our capacity to target a mid-to-high single-digit growth rate. As Robin said, we have moved towards the lower end of the range and are taking a number of actions to adjust to higher oil prices.
We are updating our 2018 capacity guidance including a 2-point reduction to our fourth quarter growth that will run through our schedules over the upcoming days. We anticipate that those reductions will be in the off-peak flying throughout the network.
In addition to addressing higher fuel prices, we are constantly reviewing underperforming fine in our network. Effective this fall, we will play to our strength in coast-to-coast travel with redeployments from our L.A. based and Focus Cities through transcontinental markets. Our team has a mandate to close poorly performing routes, adjust frequencies and off-peak flying, and look for areas where we can shift low margin flying to better opportunities.
We closed the second quarter of 2018 with our flown capacity at 6.3%, slightly above the midpoint of our range. This was driven by higher than expected completion factor from an improved operation and helped by favorable weather in the Northeast. With about half the summer behind us, we are starting to see the benefits of our investments to mitigate the ATC challenges of last year.
As we move into the second half of 2018, we recognize there’s a lot of noise from the impact of hurricanes last year. Our scheduled to scheduled capacity helps inform our growth rationale in light of higher fuel prices. For the third quarter, we expect scheduled to scheduled growth of approximately 5.5%. This translates to flown capacity guidance of between 7.5% and 9.5% considering the loss ASMs due to hurricanes last year. For clarity, we have included a table summarizing the financial impact from hurricanes in the appendix of our presentation.
To provide some context by region, our Latin and Caribbean franchise continues to show strength going by both VFR and leisure markets. Haiti which accounts for approximately 1% of our capacity is a small headwind to RASM in July. Bookings to the island were down 67% year-over-year during the first two weeks following the outbreak of civil unrest.
We see bookings rebinding already and we expect that they will recover and the negative impact is expected to be less than a 0.25 point to the quarter. But a lot of that RASM, again, outperform the network this quarter by approximately 3 points. This is the fifth consecutive quarter of outperformance as we grow frequencies and destinations.
Our Mint service at Fort Lauderdale is performing extremely well. We believe that our value proposition, which caters to a broad range of customers, allows us to differentiate ourselves from both our low-cost and legacy competitors.
Lastly, our Transcon franchise is also performing well in book Mint and non-Mint markets. As Robin mentioned, we estimate that our network reallocations out of intra-west flying will drive between $30 million and $40 million of earnings improvement with meaningful benefits starting in the first quarter of 2019.
Every aircraft and every market must earn its way into the network. We expect to continue optimizing how we deploy capacity across the network to support our margin commitments especially as fuel prices continue to increase.
One advantage we have is a relatively underdeveloped network in two primary focused cities. Our market here in Boston and Fort Lauderdale is approximately 30% and 25%, respectively. Clearly, we believe we have a lot of room to keep growing our relevance for our leisure and business customers, promoting RASM growth and margins.
Turn to slide seven and the revenue outlook. Second quarter came in slightly better than expected at negative 1.2%. We had a solid close to June. As a reminder, second quarter RASM included 2.5 points of negative impact from holiday travel that’s shifted from the second quarter to the first.
Last quarter, we also left a 1.25 point benefit that occurred in the second quarter of ‘17 from completion factor in co-brand incentive payments. Our RASM during the first half of 2018, which was equal to 2.2% year-over-year, demonstrates our ability to increase unit revenues as we grow.
Looking into the third quarter, we expect year-over-year RASM growth to be between flat and plus 3%. RASM continues to be driven by close-end bookings and we’ve seen strength throughout July. Our ticketing revenue trends are carrying over from the second quarter and to the third quarter. We continue to see strength in New York to Florida markets, as well as in Transcon and the Caribbean and Latin regions.
At a focus level, on balance, we’re not seeing any significant changes in trend from the first half to the third quarter. We have seen modest softening in San Juan coming into the summer and we have already made capacity adjustments to address the recent trend.
The deceleration in RASM we are seeing in the third quarter is a result of slowing in-flight for customer trends. The transition to a new vacation platform has been more challenging than anticipated and has cascaded into other initiatives. This is approximately a 1 point headwind to the third quarter.
To mitigate the impact, we are moving forward with a series of ancillary adjustments that are independent of the platform change. At our Investor Day in early October, we will provide an update on our long-term ancillary plan and other projects we have under way, as well as details around our capacity planning for 2019.
Before I turn it over to Steve, I would like to add my thanks to all of our crew members for their hard work. We’re excited about our value proposition and the investments we’re making in our product and in our network. I believe that our take on a low cost model will create long-term value for our customers and our owners.
Steve, over to you.
Thank you, Marty. Good morning and thank you for joining us. I’ll start on slide nine with some highlights from the second quarter. Revenue is $1.9 billion, a 5% year-over-year. Adjusted pre-tax margin was 8.2%, down 9.5 percentage points from the second quarter of last year due to higher fuel prices and the effect of holiday calendar placements shifted revenues from the second quarter into the first quarter. Adjusted EPS was $0.38 per diluted share.
Our effective tax rate this quarter was 26%. We expect our effective tax rate to range between 25% and 26% to the full year of 2018. We reported a $0.38 GAAP EPS loss, including a $319 million non-cash impairment charge on the E190 fleet. As a result of the impairments and transition plan to the A320, we will have a very manageable $1.4 million per year of accelerated depreciation expense for the E190 and is now our cost guidance.
As Robin mentioned, we are focused on executing our long-term plan as we adjust to higher oil prices. Our aim is to stabilize and ultimately improve our margins. The actions we are taking include ancillary, as well as capacity adjustments. There is an impact on CASM from slowing our growth.
Our rule of thumb is roughly 50% of CASM ex-fuel is fixed and the rest is variable. The team is working to mitigate the 2018 CASM ex-fuel pressure and we are on track for an inflection in our unit cost trends in the second half and on track to achieve our original 2018 cost guidance of negative 1 to 1%. We are fully committed as a leadership team to our zero to 1 CASM/CAGR goal through 2020.
Moving to slide 10, CASM ex-fuel increased 1.9% year-over-year in the second quarter beating our guidance. The main drivers for the timing of expenses from the second to the third quarter and better than expected completion factor resulting an improved operational performance and reduced ATC delays.
Looking into third quarter of 2018, we expect that CASM ex-fuel growth to range between 1% and 3%. The progression in our CASM ex-fuel trends is impacted by the shift of expenses from the second quarter and previous reductions to capacity growth, which carried some but not all of the operation improvement from the second quarter into our third quarter guidance.
Turning to slide 11, we’ve been pleased with our cost performance thus far in 2018 and is on track to our original guidance of minus 1 to plus 1% even with slower capacity growth. CASM ex-fuel growth for the first half of 2018 was 2.5%, near the lower end of our guidance. We continue to expect CASM ex-fuel growth to reflect during second half of this year with the benefit of structure cost initiatives, put in place over the six -- plus 16 months ramp up.
Second half year-over-year comparisons are impacted by hurricanes and ATC challenges of last year, and the one-time bonus we paid to our crewmembers at the yearend of results of Tax Reform.
A simple way to see how inflection in our cost trends is to look the year over two-year growth. The left-hand side on slide 12 shows the improving cost trend that we expect in the third quarter, and again, in the fourth quarter of 2018.
For the second half, we now expect CASM ex-fuel to decline in the range of negative 3.5 to negative 1.5, slightly higher than the prior guide. The main drivers being slower capacity growth in the second half, as well as timing of expenses from the first half to the second half, particularly into the third quarter.
We anticipate the underlying CASM ex-fuel growth for 2018 to slow to a range of between flat and 2% for the second half of this year. Our full-year CASM ex-fuel guide remains unchanged of minus 1% to plus 1%.
Moving to slide 12 and our progress report on Structural Cost program. We have now achieved $154 million in run rate savings by 2020, up from $90 million we called out two quarters ago. Our continued progress in restructuring our costs is pivotal to hitting our CASM ex-fuel commitments in the second half of 2018 and through 2020. We continue to expect our three-year efforts will result in run rate savings between $250 million and $300 million. Our work is progressing on every front.
Starting with our corporate pillar. The past year we drove significant cost savings, by identifying opportunities and our business partners spend across the organization, we move across sourcing efforts. Last week, we also completed the support center review that will streamline how support teams work and improve their effectiveness, allowing us to better deliver on our strategic plans.
In our airports pillar, we are restructuring critical business partner operations across our airports. We conducted a comprehensive review of our footprint through the network and are making further changes that will reduce costs, while maintaining outstanding customer service. We are also on track to complete 24 self-service lobbies by the year end, reinforcing the benefits of updating aircraft as we grow the number of customers in our airports.
In the distribution pillar, we have several projects underway to ensure our customers can self-serve using our website and app, as well as to transform our customer support centers. We’re making progress in shifting customers to lowest cost, the most appropriate distribution and support channel.
We’ve partnered with Gladly to help us transform our customer support centers through new technology. We try to be an investor in Gladly through our JetBlue Tech Venture subsidiary. We’ve recently implemented a new tool to consolidate all the way to customers’ reaches into one channel, allowing technology to reduce costs and make our customer communications more efficient.
We also have made progress on our RFP through our PSS system, in order to incorporate the latest generation technology, scalability and functionality to fit our needs as a larger and more complex airline.
Finally, in our Tech Ops pillar, we signed a long term 10-year contract for heavy maintenance of our A320s and continue working to select the business partner for the maintenance of our v2500 engines.
We believe that this contract is similar to our recent deal with Pratt &Whitney to help us achieve significant savings into the next decade, we -- as we reset the maintenance costs for our largest fleet. With our fleet review completed, we also signed an enhanced LLP engine coverage agreement to drive additional savings in E190 fleet.
Turning to slide 13, we continue to reshape our fleet. We constituted the majority of our asset base and critical to improving returns. Two weeks ago, we announced the outcome of our E190 fleet review and transition plan, including a signed MOU for the purchase of 60 A220 aircraft starting in 2020 through 2025.
We’ve made further progress with our A320 cabin restarting program and expect to see the benefit of our unit cost growth as a number of restart aircraft increases through 2020. This quarter, we also purchased two additional all core A321 with cash for total fleet of 247 aircrafts. We now have 23 all core and 34 Mint A321 aircrafts, which are great margin builders for JetBlue.
Our CapEx guidance for 2018 is between $900 million and $1.1 billion, composed of up to $850 million to $1 billion in aircraft and the remainder unchanged for non-aircraft spend. The recent A220 order added incremental aircraft CapEx included added PDP. We believe that the additional CapEx is very manageable and will support out network strategy, how we set our cost base and further improve our margins.
Turning to slide 14, our strong balance sheet and investment grade metrics allow us to invest in value-accretive projects and continue to be opportunistic with share repurchase returning excess capital to our owners.
Earlier this quarter, we executed an additional $125 million in share repurchase with $500 million remaining from the total amount authorized by the Board. Our priorities remain to invest in margin and return-accretive projects. We believe our E190 fleet transition plan and the A320 restarting program are among our best and highest uses of capital.
This quarter we repaid $66 million in debt and raised nearly $280 million in secured aircraft debt. We closed the quarter with an adjusted debt to cap ratio of 31.3%. And our cash in investments were approximately 12.6% of trailing 12 months revenue.
Lastly, we continued our policy of opportunistic hedging to help protect our margins given the current environment. This quarter, we executed hedges of approximately 7.5% of our expected fuel consumption over the second half of 2018, in line with prior hedging positions.
I’ll close with one last thank you to all of our crew members for their hard work and continued support to make JetBlue stronger and more profitable. We’re adjusting to higher oil and see great momentum from our revenue and cost initiatives across the organization. We are confident that our efforts will create value for our stakeholders over the next few years.
We will now take your questions.
Thanks, everyone. Jay, we’re ready for the question-and-answer session with the analysts. Please go ahead with the instructions.
Thank you. [Operator Instructions] Our first question comes from the line of Rajeev Lalwani from Morgan Stanley. Your line is open.
Hi. Good morning, gentlemen.
Good morning.
Just a question on the capacity side, Marty, I think, you were talking about making adjustments, because of higher oil going forward a bit and you’re also reaffirming the mid to high-single digits growth. So, can you just reconcile how you’re thinking about that going forward? It seems like you might revisit that mid to high-single digits coming into next year?
Hi. Thanks for the question. I think let’s talk strategically and tactically. We’ve said for the last several years that mid to high-single digits is the right range for us, taking into account our current size, cost structure, et cetera.
I think, if you go back to -- actually go back to 2015 when oil hit its bottom. Since 2015, we’ve been pretty aggressive at continuing to reduce our growth rate as oil prices have gone up. With the data that we’ve given you for the rest of 2018, in effect, we’re saying is we’re pretty close to the bottom end of that range and I think you should look at that that mid to high single-digits as a sort of bracketing where we expect our growth to be.
Very helpful. And then in terms of, Marty, the accelerating RASM environments that you’ve been highlighting. What do you attribute that? To you, is it fuel tax or do you see demand accelerating, is it particular markets? Just some thoughts there would be great.
Well, with respect to what we’re seeing on the revenue front, I mean, we are absolutely seeing closing strength, pretty well for close in bookings. I think if you -- there’s been some discussion as far as how much of this may have been impacted by easy comps last hear for ULCC, the fare environment we have last summer. But, frankly, we’re seeing in both ULCC and in non-ULCC markets.
Thank you.
Our next question comes from the line of Savi Syth from Raymond James. Your line is open.
Hey. Good morning, guys. I’m just wondering if you can -- I appreciate all the detail on the CASM ex that you have. I wonder if you could help me walk through it a little bit. I’m just looking at the sequential trends from 3Q to 4Q. And I know there’s like one point of items that shifted from the first half that probably doesn’t show up in 4Q, and 4Q, I know has got a couple of points of these. They account from the tax bonuses. The remaining swings from kind of the 3Q to 4Q, is that you’re expecting there. Could you explain like what really is helping to shore that up because that seems like a pretty big swing and is it all kind of a structural program or am I missing something in that swing?
Hi, Savi. It’s Steve here. Very nice to speak to you. I’ll say I’m pleased with the underlying CASM ex performance, not only as we think going forward, but in terms of what we delivered in Q2 and half one. Just to give you some flavor, your question on to Q3 CASM, as a reminder, we have 0.5 point of sales and marketing spend shifted from Q2 to Q3 and we called out back in Q1 a 0.5 point of maintenance cost and that transferred from Q1 to Q3.
Another thing you’ve got to keep in mind is that we’re maintaining our full year CASM guide, even that we polled 1.4 points of capacity from Q3 and we’ve just announced the subsequent 2.2 capacity reduction in Q4. The continual evolution of the Structural Cost program and the ramp for the $154 million for 2020 that we announced this morning is seeing the inflection points as we drive towards the second half of the year.
So, you’re right, as we called out in the prepared remarks, there’s an underlying comps, but I’m very, very pleased not only with the progress we’ve made in the early part of the year, but the continued declines you’re going to see in CASM as you might grow to the second half of the year.
Hey, Steve. Sorry. Just to clarify, I was kind -- I was considering the swing from 3Q to 4Q. That seems like a quite a good improvement and I know there’s about three of those that I can point to. Is the rest are coming from the structural program, just showing up in 4Q more so?
That’s correct.
Okay.
We -- as you saw that increase some of the Structural Cost initiatives that we’ve been driving for. That’s really helping with that inflection point.
Okay. Great. And if I can follow-up on that the ancillary platform conversion, I may not have been aware of it. Could you just elaborate a little bit on that and maybe if you can, the ancillary changes in the coming weeks?
Hi. Thanks, Savi. It’s Marty. I’ll take that one. Yeah. I think if you go back to the announcement we made earlier in the year of setting up JetBlue Travel Products as a subsidiary. I think it was the sign of the excitement we have about travel products as being highly accretive product line for us. One of the things we identified very early on was that our historical White Label platform was not going to let us do everything we wanted to do with respect to effectively selling and merchandising all these products.
In addition, we were not satisfied with our ability to cross-sell on jetblue.com itself, products like rental cars, hotels, et cetera. So, in the middle of the second quarter, we went to a new platform that’s more fully integrated with jetblue.com. We did forecast some teething pains. I’d say, they went longer than we expected it to.
We have a long punch list of issues and fixes and I think we’re well along the way where we wanted to be. But our expectations are very high and we think that this is going to be a very important source of accretion for us going forward and we will have more to talk about at our Investor Day about some of the paths for that.
All right. Thank you.
Our next question comes from the line of Michael Linenberg from Deutsche Bank. Your line is open.
Yeah. Two questions here, actually, just the $30 million to $40 million of profit improvement moving out of the intra-west to the Transcon. Is -- so presumably that, obviously, well, not obviously, does that include the foregone losses that are tied to the intra-west flying, number one and sort of, that’s 1A. 1B would be then the new stuff that you’re doing if you didn’t include the losses, what would be the underlying profitability driver of that?
Okay. I’m not sure I understand the second question. Let me take the first one. Yes, that is a net number.
Okay.
So it’s the benefit from loss avoidance for the intra-west and I think it’s not the news both from us and the industry that the intra-west market is unusually soft. But the net benefit includes the upside of putting those aircraft into the destination market where they’re going to and again that being said, that really kicks in in the first quarter as far as the net benefit most because the new flying ends up and ramp a little bit. We make the change in September and going forward.
Okay. Yeah. Marty, that does answer kind of the second piece. Sorry for the confusing way that I asked. And then just to Steve on your CapEx, the guide for the year, it’s still a gap of about $200 million. And I know as we’re moving through the year, what’s the difference between the bid ask there. I know the timing is probably part of that, but it’s still a pretty wide gap. It’s 20% of the base. What are you -- it’s going to take more planes a little bit sooner or is it timing of pre-delivery deposits. I would figure that gap would have narrowed by now.
So, Mike, again I’ll try and sort of answer the question. We increased our CapEx guide by $100 million in the midpoint when we announced the fleet orders. So we have PDP associated with the 60, 80, 20s that we ordered. The other aspect is our non- aircraft CapEx. Obviously, the vast majority of our CapEx guide associated with the fleet but obviously, we also have additional non-aircraft CapEx, but we have not changed the guide associated with that.
And then, obviously the underlying guide was just applicable to our existing order book, which for this year is pretty much back-ended. So I’m not clear if that fully answers your question, but as a macro level guide increase by $100 million, it’s CapEx for fleet and non-fleet and it’s sort back-ended because of delivery schedule.
Okay. And maybe I was getting at the fact that I know it because of the delays with aircraft deliveries from the OEMs. I guess it’s been harder for people to kind of nail down what their CapEx is actually going to be for the year and hence the wide range. Maybe that’s what -- what’s going on.
No. And to be very candid, we’ve had good timing and delivery schedule for our OEMs and we haven’t seen any sort of delays to aircraft deliveries this year. So the range is pretty much where it was other than the A320. So nothing really to see from our perspective for the CapEx guide this year.
Okay. Okay. Thanks, Steve. Appreciate it.
Thanks. Thanks, Michael.
Our next question comes from the line of Jamie Baker from JPMorgan. Your line is open.
Hey. Good morning, everybody.
Good morning, Jamie.
Robin, on the relative margin emphasis, that was the backbone of one of United’s turnaround efforts at one point and it frankly didn’t work out particularly well for them. They’ve backed away from it since that time. Personally, I found it somewhat refreshing that Delta, just a few weeks ago, started putting greater emphasis on expanding margins from current levels. And most of the investor feedback that I’ve received on that has been favorable. I get that the relative margin story is a fairly easy one to convey particularly with employees I suppose. But it’s not clear to me that it’s actually the best message for your investors. Have you given any recent thought to this?
Yeah. Thanks, Jamie. And I think that if I just go back a couple of years and when we were talking about sort of our margin performance. Our first priority really was to get to about average industry margins and that’s what we had in the last couple of years focusing on.
It is very disappointing to me and the team here as a result of latest quarter and the fact that we’ve actually fallen below that, because that is an absolute focus, and I don’t think that we should be using higher oil prices there as an excuse.
So our commitment to execute to our goal of superior margins, which is still a relative measure then that is where we are. Right now, we are very focused on that. That is about a number of the new catalysts, some of which you’ll see over the coming months and some of which we’ll show when we get to the Investor Day. It’s about investing on our -- it’s about continuing to execute on our Structural Cost program.
And we have very -- we are looking at how airlines are guiding and setting up targets. It’s obviously we’ve noticed some have moved to an EPS guide and that’s something that we’ll come back to.
Because at the end of the day, we want to drive great absolute margins and we want to make sure when we compare relative to others that we are delivering superior margins because that’s how we make ourselves both an investable business and an investable company within that sector.
I wanted to follow up to that, Robin, and thank you by the way. On a high level, what’s the point of growth in the first place? I mean, if I look at pre-tax income over the last three years, it’s down by about a third. The stock is down about the same thing. Capacity is up 20%. I mean, it seems like the more you grow, the less you earn. And I would totally understand it if you were still in the start-up phase. But can you just explain again how you justify continued growth of any level and have you ever even contemplated annual growth outcome or is it simply too ingrained in your DNA at this point? Thanks.
No. Thanks, Jamie. No. I mean, I think, what I say, that growth has been very, very focused and we’ve been prepared to adjust where we need payback to pass it down. In the first half of this year, we grew less the industry and we’ve taken 2 points out of quarter four, and we haven’t hesitated to do that. So we’ve not wedded capacity for the sake of capacity.
What I point out though and you understand the network business extremely well, our two projects for growth over the last two years has been Boston and Fort Lauderdale. They’ve actually been a source of random strength for us and they are markets where we are relatively underweighted in terms of our share and so we have not got to that point on the S curve yet where we’re growing them and we’re getting diminished returns.
And so, that’s --we view our growth as very focus, very accretive. I think we would say and I’ll just say that we have actually done well in terms of the unit revenue performance over the years with our growth rate, but we’ve under-delivered on costs and that’s what we are focus to our Structural Cost program, because I couldn’t agree with that comment, I just made myself more.
All right. Thanks for the color. Appreciate it.
Our next question comes from the line of Duane Pfennigwerth from Evercore ISI. Your line is open.
Hey. Thanks. You may not be in a position to guide to ‘19 CASM specifically, but I’m wondering if you could just remind us the quantification of the tailwinds that you expect. One, from fleet refresh, and two, from the Structural Cost progress, which you’ve cited, if we add those up, could that be a couple of points of tailwind or offset next year?
Hi, Duane. It’s Steve here. Hope you’re well. I suppose when we think about 2019, we are approaching 2019 with a cautious beyond capacity. And as Robin alluded to, we’ve shown that this year and we’ll continue to adjust as required. We do expect to give further color at our Investor Day in October on how 2019 and 2020 will fit into our CASM commitments.
But I think you’re right, the two biggest tailwinds that we have. Number one is to stretch across program, which we are making significant progress with and making good strides with that as we’ve talked about this morning.
The second one is the fleet restarting on the A320 fleet. As a reminder, we have 130 A320s. We’re going through the restarting effort. We’re happy with the progress we’re making so far both from an economic standpoint and from a customer MPS standpoint. The results have been very good and we’re getting to the point where we’re ready to ramp up the mob line. So, we remain confident that program will continue to ramp and complete by the end of 2020 and that will also be another great tailwind for us along with the Structural Cost program.
Okay. Thanks. And then, with respect to the PSS system or a few that you mentioned, can you just expand on what you hope to accomplish with that? What functionality do you lack today? What’s the economic opportunity there? Thanks for taking the questions.
No. It’s all right, Duane. I think the RFP is ready to cover a number of license. Number one, as we’ve gone through the Structure Cost program, we are very, very keen to test the market, go through an RFP process to make sure that we’re getting best-in-class economics as the supply Structural Cost program.
Secondly, as we think about customer self-service and customer flow, again to drive efficiencies and customer satisfaction, we need to again think about what’s the best-in-class systems to support that.
And then, thirdly, thinking about the right systems to support our revenue and service opportunities and also with regards to making the lives of our crew members easier when they’re supporting our customers going forward.
So it’s a holistic approach to make sure that the end of this process, we have best-in-class economics, best-in-class systems and the flexibility with these platforms to grow expeditiously and efficiently as the changing economic and external environment changes so we can drive it forward. So, we’re very excited to be going through this process and as we reach the latter stage of that, we’ll obviously give you guys further updates as we go forward.
Okay. Thank you.
Our next question comes from the line of Brandon Oglenski from Barclays. Your line is open.
Yeah. Thank you. Good morning, everyone. So, Steve, I just wanted to reconcile that zero to 1% CAGR you have on the CASM outlook through 2020. If I’m not mistaken, I think, that it excludes the cost of the A220 transition that you guys highlighted I think a week or two ago? And I think it also excludes an impact from a new pilot deal, right, as well as accelerated depreciation in the E190s. So, I don’t mean this to be a point of question, but I guess, when we look back two years from now, are we going to be looking at a 2020 CAGR and CASM that’s above that range because of these itemswe just never really see costs come out of the network.
So, great question, Brandon. Let me just give some real clarity on this. The zero to 1 CAGR covers the 2018 to 2020 period with a 2017 base. That excludes the fleet deal but includes on ALPA deal. So when we talked earlier about tailwinds and headwinds, we obviously got the tailwind associated with Structural Cost Program, we got the restyling of the A320s, but we’ve got headwinds of the ALPA deal. That is all included in the zero to 1 CAGR. The fleets deal, the E190 as we’ve been talking about for the last 18 months, we’ve explicitly excluded from zero to 1.
Now, in terms of what the impact is of that are, number one, we -- as we reported in our earnings today, took an impairment on the E190s and so the accelerated depreciation associated with the E190 is pretty de minimis and we are not changing the guide in anyway associated with that. The cash transition costs associated with bringing the A320s into the fleet, we talked about on our fleets update call two weeks ago which was close to about 25 basis points.
So when you look at all of the economics and you look at our commitments, the only thing that is explicitly excluded from the zero to 1 guide is the 25 basis points associated with the cash cost for the A320 transition. Hopefully, Brandon that gives you some clarity with regards to your question.
It definitely does. And then on the maintenance side because you called out the existing fleet the A320 engine contract as being pretty sizeable headwind in the last couple of years. And when we benchmark, your maintenance cost consulting carriers that appears to be such, but it does also seem to be taking time to get a new contract in place. Can you just speak to because, I mean, is it more difficult to get the savings you initially expected or should we still be thinking that’s probably the largest driver of cost savings the next few years?
I think I want to make sure that the whole investment community understands is that we are resetting the cost structure for JetBlue and the margin assumptions for JetBlue in the medium to long-term. These are significant negotiations and significant deals that we are doing with business partners.
So if you think about the work we have done over the last six months with regards to looking at the NEO engine deals for that 85 NEO aircraft, we thought very long and hard about the E190 replacement and thought how that implication played into that.
We’ve also looked to the LLP cost associated with the existing E190 fleet and making sure that we play that into the mix as well to make sure that we got the very best deals for JetBlue and also make the best deals for our owners.
The v2500 engine deal is just another pillar of the tech ops initiatives that we’re working through. And again, I can’t reiterate just how strategic this is and how much work is going into this. So we are being very, very measured and very thoughtful about how we work through these initiatives and how they are linked and how they impact each other.
And so, we will absolutely not rush one individual deal to the detriment of the overall Structural Cost program or the long-term cost savings trajectory for JetBlue. So, hopefully, that gives you some context about how we’re thinking about sequencing and how disciplined we are about the negotiations in the approach to these very important items.
Thank you, Steve.
Our next question comes from the line of Hunter Keay from Wolfe Research. Your line is open.
Hey. Thank you, guys. Good morning.
Good morning, Hunter.
Hey. So the capacity cuts you guys announced for this year, were these reductions to stuff that was in the prior year schedule or are they just contemplated as that you’re scrapping -- I’m asking that in the context of your fuel gallon consumption for 2018 actually going up from a few months ago despite the lower capacity. I’m trying to reconcile all this stuff. Thank you.
Hey, Hunter. It’s Marty. Thanks for the question. It was especially where the cuts are going to be. It’s going to be very biased towards off-peak flying on either multi-frequency markets. It’s -- I wouldn’t say there’s any sort of pattern as far as whether it’s new routes or old routes. I would call this normal course of business as we go through capacity adjustment.
Okay. And as it relates to the gallon consumption, was that just sort of like a miss forecast or something or is there -- I mean more idling? I mean like how are you -- how does that factor in?
Hi, Hunter. All good with you [ph]. It’s Steve here. Just to give you some perspective, we start overlapping the ATC and the hurricanes of last year. And specifically with regards to the economics around the fuel burn, I’ll get Dave to follow you with some specific details but you should think about the fact that we’re lapping those two specific items from last year.
Hey, Hunter.
Okay.
Can I dive in for a second, Hunter?
Yeah. Sure.
If your question is, are we cutting capacities that’s already loaded? Is that what you meant?
Yeah.
I’m listening, okay.
Yeah.
Okay. Everything we are cutting is -- what we’re cutting is already loaded, yeah. So I’ve…
Got it.
So, I don’t think you fully understood. But yeah I want to clarify that.
Okay. Yeah. I’m sorry. I can be long-winded. That’s perfect. Thanks. And then, Robin, how you think about M&A either through the lens of a sale or an acquisition and how does the long-term CASM/CAGR target factor into your view on any deal making? Thanks.
Thanks, Hunter. I appreciate the question. I mean, we are 100% focused on our organic plan. As Steve said, we are about not just re-setting the cost structure of JetBlue over the next three years but setting it for the next decade. The fleet deal is an extremely important part of that. So that’s how we’re setting up and running this company. We believe that that drives a part to superior margin and shareholder returns that will be very, very rewarding and so we are focused on that and we’re not distracted by anything else.
Thank you.
Our next question comes from the Jack Atkins from Stephens. Your line is open.
Good morning and thank you for taking my questions. So, Marty, just going back to an earlier question on some of the ancillary revenue initiatives that you guys plan to rollout over the next few months. Could you just expand on that for a moment because I didn’t sort of get a clear picture on what exactly you all plan to sort of move forward with on the ancillary side that maybe we’re not currently aware of today. Just some more color on that particular part of the revenue story would be helpful.
Hi, Jack. Thanks for the question. Obviously, anything with respect to changes in pricing over the future is really not something I can get into detail about. I want to sort of bring it back to the higher level which is to the extent that we saw a shortage and ancillary tied to the vacation platform cutover. That’s obviously something we want to find a way to make up in other places, but I really can’t get any more detail about what we should see going forward until we announce.
Okay. Okay. And then, I guess, Marty, this goes for you as well. When you think about the average fuel cost per gallon in the second quarter and look at that on a two-year stack basis, I believe it’s up 59% versus 2016 levels. How much of that rise in fuel prices you guys have been able to recover so far through higher fares? And just sort of a follow up to that, what do you think is really holding the industry back from really raising fares in a more rapid pace to really offset these fuel prices that we’ve been seeing moving up in the last couple of years?
Hi. Well, two good questions. I mean, first of all, with respect to the recapture of the current fuel increase, actually don’t have it over two years. I would say over the last this most recent one where we’re well under 50% as far as our recapture. And frankly, that’s why we’re taking some of the actions we talked about on this call with respect to ancillary changes and capacity cuts.
To ladder up to your bigger question, which is about the industry and how the industry will get there, that’s much bigger than mine. All I can control is what JetBlue does. And we’ve -- as I’ve said on these calls many times, we do our own thing. The right thing for us to do was to make these adjustments including the capacity cuts in the fourth quarter and that’s the path we’re following going forward. We take our commitments on margin very, very seriously and that’s why we’ve taken the actions that we talked about today.
Okay. Thank you.
Our next question comes from the line of Kevin Crissey from Citigroup. Your line is open.
Good morning, everybody.
Good morning, Crissey.
Thanks. On 2019, can you talk about what capacity growth would come solely from the cabin restyling assuming you kept on the current pace obviously, you have some flexibility there, but just trying to understand what your base growth rate would be just simply from the additional seats?
Hi, Kevin. It’s Steve here. I just said to the earlier question, we expect to give further color sort of Investor Day in October. If you look back our Investor Day in 2016, we talked about the ramp of the restarting program. So in the interim, I’d refer you to those materials, but we will be giving more color as we get into the Investor Day about some of those component parts and how the ramp increases.
Okay. Thanks. And I don’t really want to do this -- seeing as there’s been pressure on the call. But going back to CASM ex, what I’m struggling with and I think a lot of investors are looking at JetBlue and thing, if they had to put better a CASM story, they’re really good at RASM, this would be quite easy for the long side. They have concerns on the CASM ex. When I look at it, I say, some of it has to do in my view on kind of back loading some of the maintenance expense and some of the aircraft. What I struggle with though is that I don’t understand why there weren’t better CASM ex years in the early days. So maybe you could provide broad or maybe it’s Rob who could provide long-term view on CASM ex and why it wasn’t really good early. I get why there’s been pressure on the maintenance particularly the tech ops lines in recent years. We want to get a sense for what other areas does JetBlue have CASM ex challenges?
Thanks, Kevin. I’ll jump on that one and maybe you have your own thoughts as well having worked here in the past. But we are very focused -- we’re very focused on the future. We are doing a number of things. I mean the support review we did last week had an impact on a significant number of people who’d been over here a long time.
These things are never easy, but I think it shows our absolute commitment to changing the way that we think about costs, changing the way that our owners think about costs. We want to be an airline that becomes very reliable and very consistent in delivering year-after-year strong unit cost performance and we know we have done that in the past and we are going about fixing it.
Now as you will notice now when you benchmark us, the maintenance cost is an area where we significantly underperformed, not that there are other areas of opportunity and Steve highlighted some of those and what we’re doing about it. But maintenance is an area where we have had some big gaps. These are long-term complex contracts that you have to work through. We’ve been knocking them over one at a time.
Steve talked about the update to the E190 fleet tax in the call earlier. We talked about the NEO engine there which really kicks in for the most part post-2020. But again it’s going to be a good guide we look beyond 2020. Now, we are focused on the v2500 and we continue to do that and I think also taking advantage as we grow of our increased leverage and taking advantage of our balance sheet strength as we grow, things that we didn’t necessarily had in the earlier years.
Okay. That’s fair. Thank you.
Our next question comes from the line of Andrew Didora from Bank of America. Your line is open.
Hi. Good morning, everyone. Marty, just one question here. Just trying to understand your 3Q revenue guide a little bit more, I guess, if I take out the one point impact from the travel platform in 3Q, your core is still up around 2.5% at the midpoint which is basically unchanged from your core 2Q performance. So if CASM is getting better, your schedule capacity is not that different to 2Q to 3Q, why is core RASM not better? Does it have to do with maybe some Jewish holiday shift in September, or is it really just conservatism at this point in time? Thanks.
Hi. Hey. Thanks, Andrew. And yeah, we did -- I did call up a couple of other pieces. Start with, we’re lapping hurricane from last year which was two-tenths of a point, good guidance. We also -- we talked about Haiti. Yom Kippur, that’s at least a tenths of a point guide for us so there’s not a half point in there right off the bat. So, I do see sequential improvement when you strip on all those things. Obviously, we’d like to be better, and frankly, that’s why we’re coming for the initiatives that we just talked about earlier in the call.
Okay. Thank you.
Our next question comes from the line of Helane Becker from Cowen. Your line is open.
Thanks, Operator. Hi, everybody. Thank you so much for squishing me in here. Just a couple of questions. One, can you say the improvement you’ve seen in your Net Promoter Score, I think Steve or Marty referred to it earlier in the presentation, I’m just wondering if you can just mentioned the improvement.
Two, you talked about air traffic control delays last year and we’re just coming up on that, now this summer. I’m wondering if you’ve seen improvement there and if you’re talked to the FAA and getting ready heading into August.
And then, finally, I think you guys invested in ClimaCell technologies and I’m wondering if that’s going to help you with respect to weather and how that adjust your cost structure, if at all. Okay. That’s it. Thank you.
Great. Hi. Thanks, Helane. This is Joanna. I’ll take that one. So, first, in terms of the Net Promoter Score increase, I think you’re referring to the impact of the A320 restyling and what that’s having on our Net Promoter Score numbers. We’re seeing in excess of 5-point improvement in NPS with regard to the customer experience and the restyle cabins. So, that’s all positive news and trending in the right direction.
With regard to ATC delays and operational performance, obviously, where we fly our network footprint is the most probably challenged one in the industry, given the congestion and delays in the New York and Boston air space.
Our focus is on what we can control and I think we’re pleased with the performance that we’ve seen in the first half of the summer. Obviously, we’re focused on running an efficient operation and continuing to make improvements. We have made a number of tactical and focused investments to improve our performance, being mindful of our cost commitments and keeping an eye on margin.
I think Robin mentioned nearly 10-point improvement in A14. So, trending in the right direction but we still have half a summer ahead of us and if you are living in New York this week, you will see the volatility weather outside for the next few days.
And with regard to your last question, ClimaCell, yes, we are an investor in ClimaCell. We are very excited about the kind of real-time weather data that ClimaCell can bring to the table and we are currently working with them on a number of prototypes. But it’s a little too early to tell where this could all go.
Great. Thanks, Joanna.
Our next question comes from the line of Joseph DeNardi from Stifel. Your line is open.
Yeah. Thanks for squeezing me in, Dave. Marty, correct me if I missed this, but the 1 point RASM headwind in third quarter, should we expect that to continue in the fourth quarter or do some of these initiatives that you’re rolling out offset that?
Hey, Joe. Thanks for asking. Thanks for the question. Obviously, we’re not guiding fourth quarter yet but I will say that all the initiatives that we talked about whether it’s capacity cuts, ancillary changes, I think it’s all part of the full tapestry of what we want to do to make sure we make our marketing commitment.
So we’ll have more to say about fourth quarter as we get closer in, but I’ll just sort of ladder up and say, at a high level, we take the commitment very seriously o margin and this is all part of making sure we accomplish that.
Okay.
I will say, just to be clear on vacation. I would say, in the last week or two weeks, we are seeing recovery as our team in IT and our business partner have address a lot of the issues. So it’s absolutely on the right path.
Okay. Okay. And then Marty I think you mentioned the -- I think you described the intracal market as unnecessarily or unusually soft. Can you just provide your perspective on why that is?
I could speak for JetBlue, and frankly, we had great aspirations for what we wanted to do in Long Beach. It did include international expansion. And from our perspective, the rejection of FIS facility at the airport was really the -- a deciding factor for our decision in Long Beach.
We had put capacity into the intra-west market and it is a very tough yield environment. And frankly, sort of the number five player just was not really a place for us. I wish things had worked out with the airport for what we have originally laid out. We thought it was great for the citizens of the Basin to get lower fares into Mexico but unfortunately it didn’t work out. So we just to move on.
Thank you.
That concludes our second quarter 2018 conference call. Thanks for joining us. Have a great day.
And again that will conclude today’s conference. Thank you for participation.