Jetblue Airways Corp Q1 FY2022 Earnings Call

Good morning. My name is Lee, your operator today. I would like to welcome everyone to the JetBlue Airways' First Quarter 2022 Earnings Conference Call. As a reminder, today's call is being recorded. I would now like to turn the call over to JetBlue's Director of Investor Relations, Joe Caiado. Please go ahead, sir.

Thanks, Lee. Good morning, everyone. Thanks for joining us for our first 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. 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 risk factors 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 outcome of any discussions between JetBlue and Spirit Airlines with respect to a possible transaction, including the possibility that the parties will not agree to pursue a business combination transaction, the conditions to the completion of the possible transaction and the possibility that JetBlue may be unable to achieve synergies and operating efficiencies within the expected time frames or at all and to successfully integrate Spirit's operations with those of JetBlue. 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 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 CEO.

Thanks, Joe. Good morning, everyone. I'd like to begin on Slide 5 of our earnings presentation. I'll start by thanking our more than 23,000 crew members for their continued dedication to caring for our customers and their unwavering focus on running a safe operation even as we work through recent challenges. We realize these difficulties have an impact on our customers and crew members, and we know that we haven't lived up to their expectations in recent weeks. But we are taking swift and significant actions to get the operation back on track in the near term and deliver the JetBlue experience that our customers love and expect while not losing sight of our longer-term strategic initiatives. As you will see in our updated guidance, these actions will have a short-term impact on margin, but it's the right thing to do to build the confidence of our customers and crew members and set ourselves up for success as we look to maintain our revenue and cost momentum beyond the summer. Our first quarter results were characterized by very strong demand acceleration with revenue coming in more than 6 points ahead of our initial view in January. We delivered positive year-over-three revenue growth in the month of March as we exited the quarter with tremendous revenue momentum, driven by very strong underlying travel demand across all of our core segments. Unfortunately, a complement of events resulted in a temporary operational setback here in April that has significantly impacted our second quarter outlook. As you will recall, last month at an investor conference, we discussed our plans to moderate our capacity plan for the year in light of rising fuel prices and building more operational resilience. We continue to experience elevated levels of pilot attrition and training pressures. This was further compounded by unprecedented levels of weather and ATC disruption in April, resulting in a 90% completion factor, 9 points lower than our historical average. To help restore our operational reliability, we are reducing our capacity growth even further as we plan more conservatively for the summer and make investments to derisk the operation. These actions will create more resiliency in the operation and set us up for better May and an even better June and strong summer peak. While our return to profitability has likely been pushed out by a quarter, we're confident that this reset puts us on the right path. Before we get into the results for the quarter, I'd like to make a brief comment regarding our proposal to acquire Spirit. We are very pleased by the determination of the Spirit Board that our offer could reasonably lead to a superior proposal in recognition of the compelling value for all stakeholders that JetBlue has offered. We will respect the confidential nature of the process as we engage with Spirit under the terms of their current merger agreement with Frontier and have nothing further to add on this topic beyond what we outlined in our conference call a few weeks ago. Please keep in mind that the outlook and forecast that we discussed on this call have been prepared without taking into account or consideration a possible transaction with Spirit. We remain focused on the operation as we look to capitalize on the very robust demand environment ahead of us, while continuing to execute on our strategic initiatives so that we are well positioned to return to profitability in the back half of the year and deliver value for our owners, customers, crew members, and communities over the long term. Now let's turn to our quarterly results, starting on Slide 6. For the first quarter, we reported an adjusted loss per share of $0.80. We experienced a remarkable V-shaped recovery following the Omicron wave, hitting a new daily sales record along the way. This demand momentum positions us incredibly well to recapture the recent run-up in fuel prices and we're excited for the strong summer travel period ahead of us. As we strive to provide the high-quality service that our customers have come to expect from us, we're taking proactive measures to invest in and improve our operational performance, as Joanna will discuss. We're also maintaining our summer hiring pace despite the reduced capacity outlook. And in partnership with New York Mayor Eric Adams, we hosted over 1,200 candidates at our hugely successful JFK hiring event last month as we work together to revitalize our hometown economies and vibrant tourism industry. All of this is reflected in our second quarter and revised full-year outlook. Moving to Slide 7. Despite the current operating and fuel environment, we are seeing underlying momentum of our path to transforming JetBlue's structural profitability. We are making great progress on many of our longer-term initiatives in 2022 and these will be meaningful drivers of our earnings growth in coming years. Our ability to grow in high-value geographies, bringing more value to customers and promote competition would not be possible without the Northeast alliance with American Airlines. We are now operating more flights out of the New York metro area today than ever before with plans to increase service up to 300 flights per day. This compares to an average of roughly 200 flights per day pre-pandemic. And in the process, we are creating 5,000 high-quality jobs in our hometown of New York to support this growth. I will note that given what we have experienced during April, our intention is to treat the ramp-up to 300 flights per day in New York very conservatively and to ensure we have more capacity to recover quickly from weather events. I'm also pleased with the strong execution of our ancillary revenue strategy, which continues to provide customers with additional value and choice while driving strong unit revenue performance. On the loyalty front, the team continues to enhance the value proposition through our award-winning TrueBlue program by adding earning and redemption opportunities for our customers. And last but certainly not least, I'm always impressed by our JetBlue Travel Products team, as they doubled their revenue growth in Q1 compared with the first quarter of 2019. The business is scaling very nicely and remains on track to hit $100 million in run-rate EBIT contribution this year. Notwithstanding some of the short-term investments we have outlined here, our business model thrives when we keep costs low, which is the other key lever to restoring our profitability. The volatile fuel environment and the investments we are making in our operations only serve to highlight the urgency with which we need to manage our controllable costs and drive productivity. Having said that, it is important to note that the operational disruption in April really masks the underlying progress we are seeing in our CASM ex-fuel performance in Q2, which is actually trending in the right direction after adjusting for the short-term headwinds as Ursula will discuss further shortly. In the first quarter, we exercised and accelerated 30 A220 options to support the exit of our 190 fleet by 2026, and our fleet modernization program is key to driving a more efficient cost structure, while also supporting JetBlue's path towards net zero. And given our reduced capacity outlook, we are also exploring the potential to further accelerate the retirement of some of our older aircraft. We're looking forward to sharing more detail with you at our Investor Day next month on all of the work our team is doing to position JetBlue for success as we look to strengthen our earnings power in the coming years and deliver value for our owners. Turning to Slide 8. The work is never done on ensuring our long-term sustainability. And we recently announced another deal for SAF supply with Aemetis. As part of our objective to be at the forefront of innovation and help decarbonize aviation, our JetBlue Tech Ventures subsidiary has made further investments in 2 additional start-ups. Electric Power Systems is a leading provider of aerospace battery systems and Air Company is working on carbon capture and conversion technologies. We've also invested in the TPG Rise Climate fund as a limited partner focusing on decarbonizing transportation. All of this great work would not be possible without our crew members, and we continue to invest in protecting the sustainability of our talent pipeline as well. Our JetBlue Foundation, which supports aviation-related STEM programs recently awarded grants to 10 charitable organizations to help increase advocacy for inclusion, gender, and racial parity within STEM and aviation. In conclusion, we absolutely recognize the short-term margin impact of the April disruption and the operational investments we are making for spring and summer, but they are essential to restore all of our customers' confidence and drive the higher revenue mix enabled by the NEA through the better schedules and benefits that will appeal to corporate and high-value leisure customers. I'll close with another thank you to our crew members. I'm always amazed and inspired by your resilience and hard work taking care of our customers and, of course, each other. With that, over to you, Joanna.

Thank you, Robin. I'd also like to thank our crew members for always supporting each other and caring for our customers, especially when the operation experiences significant stress as we have seen this month. Severe weather compounded by ATC challenges, particularly across Florida and the Northeast have had an outsized impact on our operation, where 95% of our daily flights operate. Despite being well on track with our summer operational preparation, we have reevaluated our capacity planning assumptions for the summer in light of these challenges. Turning to capacity on Slide 10. We began adjusting May capacity last month and we are continuing these adjustments into the summer and the second half of the year as we focus on building a more operable and resilient schedule that takes into consideration the reality of the operating environment, including elevated pilot attrition, pilot training delays stemming from disruptions to planned training schedules due to Omicron, business partner staffing shortages and ATC staffing shortages. In addition to our capacity adjustments, we are redoubling our efforts to bring the JetBlue experience back to our customers and our crew members. This includes maintaining our hiring pace for the summer despite the lower capacity outlook, getting ahead of supply chain pressures by pre-purchasing key supplies and additional ground equipment for our airport and technical operations teams. Making infrastructure investments throughout our network, such as redeveloping the south lobby at JFK to support additional customers and COVID documentation checks, as well as additional gate hold seating and improvements to the roadway to better manage congestion during peak times. We are also investing in additional checking kiosks as well as investing in additional resources for our crew members to better support them with hotels and transportation when there is bad weather, and flights are disrupted. Finally, as our capacity has come down, we are investing in more spare aircraft and dedicated maintenance lines to provide our maintenance teams with additional touch time with aircraft. We believe our operational investments and capacity reductions will improve our operational performance in the coming months, while we continue to fly a record number of customers. For the first quarter of 2022, our capacity declined 0.3% year over three as we proactively trimmed our schedules throughout the quarter in response to rising fuel prices and operational challenges and we have now made additional cuts to make our operation more resilient. For the second quarter, we expect capacity to increase in a range between 0% to 3% year over three, the first quarter since 2020 that we expect to operate at levels above 2019, a significant milestone in our recovery. We recently launched 3 new BlueCities in the first quarter, including Puerto Vallarta, Kansas City, and Milwaukee. Later this quarter, we plan to launch service to Asheville, as well as our inaugural Canadian BlueCity, Vancouver. Our transatlantic service continues to perform very well, and we are excited to begin service to London from Boston this summer, with Gatwick service beginning in July, followed by Heathrow in August. For the full year 2022, we are now planning to grow capacity between 0% and 5% versus 2019 to reflect our more conservative planning assumptions. Turning to corporate travel. This continues to be a positive momentum story as business bookings have recovered to approximately 75% of 2019 levels as we exited the first quarter compared to roughly half at the end of last year. We expect a continued acceleration in Q2 and beyond, especially as we drive improvements in our operation. We are leveraging the NEA to grow our airline for both leisure and corporate travelers with a much enhanced network and schedule driving a competitive value proposition for customers. As we execute our near-term plan, we will monitor the demand and fuel environment closely, and we will remain nimble with our capacity with the ultimate goal of returning to profitability in the second half of the year. Turning to Slide 11. During the first quarter, our revenue declined 7.2% year over three, which came in more than 6 points higher versus our original forecast in late January. We initially anticipated a step function increase in demand following President's Day weekend as case counts dropped, and we are very pleased to see pent-up demand materialize beyond our expectations. Load factors improved meaningfully from an average of 62% in the month of January to 80% in March. And in April, our loads are now tracking in the mid-80s. As we bring new crew members into the operation, we are building towards right-sized staffing levels and restoring efficiency and productivity levels over the long term. For the second quarter of 2022, we expect revenue to increase between 11% and 16% year over three. This includes up to a 4-point revenue impact from the operational disruption. And despite the meaningful impact to the quarter and the year, we are set to generate our best quarterly revenue results in the second quarter and are positioned to accelerate this momentum through the summer. In fact, looking beyond the near-term headwinds, we anticipate June RASM to be approximately 20% year over three, and we expect June to be a nicely profitable month as we head into the peak summer. I am pleased to see the record demand for travel on JetBlue all across our network, further fueled by the continued execution of our commercial initiatives. Based on our revised capacity plan, roughly 80% of our flights touch the Northeast as we continue to build out our Northeast alliance. Through the growth enabled by the NEA, we can continue to do what we do best, bring down airfares in underserved and overpriced markets and deliver better service to more communities. Loyalty continues to perform exceptionally well, and we achieved another month of record acquisitions and spend on our co-brand credit cards. We've also expanded Elite Loyalty Perks to TrueBlue Mosaic and AAdvantage members starting on March 23. In addition to space available extra-legroom seats, we are rewarding our most loyal customers with 2 complementary checked bags and same-day confirmed changes. This is on top of reciprocal Elite benefits launched earlier in the quarter. Our suite of ancillary products is resonating well with our customers who are finding great value and choices with our different options. I'm pleased with the ongoing execution as we generated an ancillary revenue per customer increase of 70% in the first quarter year over three. Our segmented offering is also helping to shift the mix of our customers, driving a benefit for JetBlue. We are seeing acceleration across all customer segments and outstanding performance in the premium leisure category, in particular. In close, thanks again to our crew members for your patience and perseverance in helping JetBlue manage through challenging circumstances. I remain excited about our long-term trajectory and look forward to sharing more at Investor Day next month. Now I'll turn the call over to you, Ursula.

Thank you, Joanna. I would also like to add my thanks to our crew members for their dedication to taking care of our customers and each other. They have laid the groundwork and are executing every day to position JetBlue to deliver for all of our stakeholders. I'll start on Slide 13 with a brief overview of our financial results for the quarter. Revenue was $1.7 billion, down 7.2% year over three. Cost per available seat mile was up 17.5% year over three. CASM ex-fuel was up 13.9% year over three, and GAAP loss per share was $0.79 and adjusted loss per share was $0.80. We are extremely pleased with the demand and revenue momentum, which accelerated throughout the quarter and resulted in first quarter revenue that was roughly 6 points ahead of our original January guidance. I am also pleased that we executed within the range of our original cost guide despite abnormally elevated winter weather events. Looking ahead, as Joanna noted, we are reducing our full-year capacity growth outlook to a range of 0% to 5% as we work to restore operational reliability and as we remain mindful of elevated fuel prices in the back half of the year. That said, the strength in bookings is driving revenue in the second quarter that is expected to be up 10% to 15% year over three, which will set a new high watermark for quarterly revenue in JetBlue's history. Despite the dramatic spike in fuel prices, we have been able to recapture nearly all of the cost increase. Turning to Slide 14. During the first quarter, CASM ex-fuel increased 13.9% versus 2019, in line with our original guidance. As a reminder, incentives and premium pay tied to the Omicron and weather disruptions were worth roughly 3 points of CASM ex-fuel in the first quarter. For the second quarter, we are forecasting CASM ex-fuel to increase 15% to 17%. The sequential increase versus Q1 reflects some inefficient closing capacity reductions in Q2, frontline premium and incentive pay to support the operation, ramp-up costs as we maintain our hiring pace for the summer and our recently signed deal with ALPA. If we adjust for the cost impact of the operational disruptions in April, our Q2 CASM ex-fuel would have been approximately 10%, demonstrating solid underlying improvement as we started to see progress in areas such as maintenance. All in, the April disruption impacted our pretax margin in the second quarter by approximately 6 percentage points and keeps us at a loss for the quarter. That said, we expect to be solidly profitable for the month of June as we exit the quarter with strong momentum. Looking ahead, as we build a more resilient operation and reach a more optimal staffing level, we expect to gain further efficiencies and productivity after the summer, meaning we won't need to rely as much on things like premium and incentive pay, driving continued CASM ex-fuel improvement as we move through the remainder of the year. While the operational disruption in April has delayed our return to solid pretax profitability, we are investing meaningfully this summer to restore operational performance and we believe we are on a path to building back our margins and creating value for our owners through strong revenue growth, disciplined cost control and a methodical approach to capacity decisions. As always, we'll continue to be nimble and adjust course as needed. We are very excited about the deliveries of next-generation fuel-efficient aircraft as we embark on a multiyear fleet modernization program. As a reminder, the A220s are 35% to 40% more fuel-efficient per seat compared to the E190s they are replacing. While the A321neos are 15% to 20% more fuel efficient versus our A321s. Moving to Slide 15. We now expect our full-year capacity to increase in the range of 0% to 5%, approximately 10 points lower at the midpoint versus our prior forecast. We are reducing capacity as we work to overcome operational challenges, which are driving incremental costs through premiums and incentives on top of people-related ramp-up costs. Following this sizable reduction, we now expect CASM ex-fuel for the full year 2022 to increase in the range of 10% to 15% versus 2019, compared with our initial expectations for an increase of 1% to 5%. The difference between our previous full year CASM ex-fuel midpoint to the new guidance midpoint, a 10-point difference breaks down as follows: 6 points driven by the capacity reduction. A total of 3 points from the spring operational challenges and the investments we're making for the summer, as previously outlined by Joanna and 1 point from inflationary pressures from pilots and our business partners. A slower growth rate creates a number of opportunities and additional cost levers that we can pull, including optimizing maintenance spend, accelerating aircraft retirements and cutting discretionary spend across the entire organization. We believe we're taking the right actions to get back on track and fortify our long-term value creation framework, which we are excited to share more about at our Investor Day next month, along with the details on the next phase of our structural cost initiatives. Turning to capital allocation on Slide 16. In the first quarter, we continued to make progress on our balance sheet while investing in our fleet and maintaining a strong liquidity position. During the first quarter, we paid down approximately $83 million of debt, and we funded approximately $160 million in capital expenditures. At the end of March, our adjusted debt to cap was 54%, and we closed the quarter with liquidity of $2.9 billion or 36% of 2019 revenue. Turning to the fleet. I'd like to highlight our recent revision to our aircraft order book. I'm pleased to have a revised agreement with Airbus in place, as we exercised and accelerated 30 A220 options for delivery starting in 2022 through 2026. These 30 A220s will ultimately replace our 30 owned E190s and allow us to fully exit the E190 fleet by the end of 2026, driving a meaningful CASM tailwind and providing a solid platform for margin expansion and earnings growth. For the full year 2022, our CapEx forecast remains at approximately $1 billion, mainly for aircraft, which we intend to fund with cash. In closing, we've recognized that we've had to pivot this year as we need to get our operations back on track and regain our customers and crew members' trust. While this means lower utilization and productivity levels versus our original plan, we can now take advantage of the reduced growth outlook to pursue further structural opportunities such as further optimizing our maintenance spend and reevaluating accelerated aircraft retirements. As we think beyond 2022, we're looking forward to our Investor Day next month where we'll provide you with a framework for JetBlue's long-term earnings power and deepen some of our key strategic initiatives that will drive out our out-year financial targets and create value for our owners as we look to expand our margins beyond pre-pandemic levels in the coming years. I'll close with another thank you to our crew members for their resilience and hard work in managing through all the challenges that come our way. With that, we will now take your questions.

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

Your first question comes from the line of Catherine O'Brien from Goldman Sachs.

So just thinking about some of the staffing issues, it sounds like there's some short-term headwinds given the industry is facing tied to Omicron training delays and just being at max training throughput, but then there's also elevated attrition in addition to staffing issues at airports, air traffic control, which aren't directly under JetBlue's control. Can you just walk us through when you see each of those buckets, the shorter and long-term issues within JetBlue's labor force and then throughout the more general travel infrastructure? When do you see those easing? And I guess, what can you do today to influence the pace of those getting back on track? I know you laid out some operational boosters that you're going through for the summer, but just like specifically on hiring and getting staffing back up.

Sure. Thanks, Catherine, for the question. So the teams have done a fantastic job across all of our work groups really ramping up hiring for the last year. If you recall, we ramped capacity faster than any other airline last summer. We've had a couple of challenges across the industry, whether it's the Delta variant, Omicron that have created a level of volatility across the industry. What we're striving for is to find a place where the operation is more reliable and where there's a certain degree of certainty that we can plan around. Getting ahead of many of these staffing issues is critical because there is a long lead time for some of the roles. So I fully expect our airports team, our in-flight team and our technical operations teams to be fully staffed as we step into the summertime and into a more, I think, normal course of business, where we see, I think, meaningful pressures, and it's something I think everybody is seeing across the industry is on the pilot front. We are seeing elevated attrition levels with pilots. And so we've ramped up to max capacity there. We will catch up on some of the training delays, but we have to plan for a world where we just have elevated pilot attrition and adjust our training plans and adjust our simulator capacity, et cetera, et cetera, to just speak to this kind of new world where pilots are just going to be a bit more challenging from a hiring and in retention perspective. We continue to have a very strong pipeline. We built out a number of pilot gateways years ago, recognizing that this potentially could be a problem down the road. We have great retention among the pilots that come through our gateway programs. But at the end of the day, given the legacy carriers have accelerated retirements through COVID of pilots, there’s just, I think, a challenge the whole industry is facing right now in terms of pilot hiring, and it will be facing, I think, for the foreseeable future. With regard to the external factors, I cannot speak to when we think the FAA is going to be fully staffed. We've obviously seen acute pressures down in the Jacksonville center in Florida. But I think everybody around the United States is looking at these talent challenges. I think on the good news front, we've got a great pipeline, people like working here, and we're going to continue to double down on our culture. And I'm making sure that JetBlue continues to be a preferred airline employer.

Okay. Great. And then maybe just one on the June. You gave us June RASM up 20%, showing some nice acceleration over the course of the quarter there. I guess just given the cuts you've had to make, do you feel more confident than in a normal year about that June number, just given some of the close-in cuts? Like can you just maybe give us an update? I know book and curve got really short and varying COVID, sounds like we're moving back to normalization. So just maybe like your confidence level and anything that might make you more confident on June than in a normal year?

Sure. Yes. I mean, we are extremely confident about the revenue landscape right now. We are seeing extremely robust demand across our leisure segment. Premium domestic is extremely strong, Mint. Q1 Mint was 6 points better than core. Our VFR markets are performing exceptionally well. So we're very, very bullish on the revenue front, both from a total revenue but also from a unit revenue perspective. We're yielding up in a meaningful way, fares and yields are now above 2019 levels, and we do expect June and the summer to be very strong.

And your next question comes from the line of Duane Pfennigwerth from Evercore.

Duane here. Robin, I appreciate the brief intro comments, but when do you expect to hear a response from Spirit? What have you learned so far since unveiling this to the world? And what do you think is taking so long?

Thanks, Duane. In terms of any questions you may have about the timeline, I would suggest that you address those to Spirit. And I'm not really going to comment any more at this stage other than that our team is working very diligently and very hard to move things along as quickly as possible.

Okay. Fair enough. And then sorry to go here, but just on the growth takedown, this feels surprisingly unsurprising. Many investors believe that the implied growth acceleration you were guiding to felt ambitious aggressive last quarter. Multiple large carriers saw this coming last year and took their growth rates down kind of proactively, yet JetBlue expressed a lot of confidence just last quarter, just on this call 3 months ago that you could hire, and you could sort of pull off the summer. So what specifically broke down here in just 3 months' time? Or was this just a forecasting problem?

Yes. I believe we have achieved outstanding revenue performance over the past year. If we maintain this growth trajectory, we can continue to see exceptional revenue results. There is clearly no issue with demand. We prepared well for the summer, but several factors early this year impacted us. Pilot training delays due to Omicron in January were one factor. In March, we announced a plan to reduce capacity going into May and beyond. Naturally, we would have preferred to address these challenges more swiftly. However, in this unpredictable environment with emerging variants and industry-wide attrition issues, I think we've adapted well to adjust our capacity according to our resources and the situation. No one could have predicted the significant air traffic control delays in Florida in April, which reached 115 hours that month compared to 22 hours in 2019. These are difficult times, and we are making responsible decisions by reducing capacity to better align with our resources and the external circumstances.

I think, Duane, let me expand on that because it's a good question. We made a change in May that we announced in early March, and at that time, we indicated it would carry on into the summer. What you're seeing today stems from a couple of factors. Firstly, we wanted to be clear and transparent with investors about our outlook for the rest of the year, particularly as airlines continue to cut schedules every weekend, making the situation quite unpredictable. Our goal is to set the stage for the remainder of the year. Some might say we're being overly cautious as we enter the summer, but this is a deliberate choice because we understand the importance of driving margins, delivering benefits from the NEA, and maintaining our position as the preferred airline in the Northeast for premium leisure and leisure travel. We recognize the necessity of providing a stable operation, and we've grown increasingly concerned about external constraints we might face this summer based on the developments we observed in April. Hence, we aim to respond quickly and decisively to those challenges.

Listen, I appreciate the thoughts. And maybe just one last follow-up. I hear you on attrition, right? It's something we've been hearing about for a long time, over a year, right? It's not a new issue. It's something we've been hearing about for over a year. To what extent is staff productivity surprising you? If you could just comment on that.

Maybe I'll offer a broad comment and Ursula can chime in. We need to get to a more stable environment to start seeing productivity settle in. When you're hiring to just backfill the person who left a month before, that's not a great place to be in. And so our focus is on driving stability across the operation. And at that point, we're confident that we will start seeing some of the productivity that we need to see going forward. So I think back half of the year, as we stabilize, I think we're cautiously optimistic that we'll be in a better place.

Yes. I would just add, Duane, like coming into this year, we were very focused on a growth track and driving productivity and utilization ramp up throughout the year. Given the pivot and the reduction in capacity on a full-year basis means that we're going to have significantly lower aircraft utilization and essentially a delay in the productivity benefit. We do expect, once we get to that optimal staffing level to see productivity improvement in the fourth quarter. However, in addition with the capacity reduction, it also means that we can take advantage of other structural initiatives such as replanning maintenance and also looking at potentially accelerating incremental aircraft retirements. And so those are some structural cost areas that we're now very acutely focused on to ensure that we can deliver on a cost discipline not only this year, but as we enter 2023.

Your next question comes from the line of Mike Linenberg from Deutsche Bank.

Robin, I believe you mentioned on CNBC this morning that it would take $270 million to fix operations. However, I also saw a headline stating it would be $180 million. Is one of these figures from 2022 and the other a longer-term estimate? Could you clarify the several hundred million dollars in costs to fix operations and provide the time frame for this?

I didn't do a CNBC interview this morning, Mike; that's scheduled for this afternoon. I participated in a couple of other interviews that relate to the three points of CASM headwinds that Ursula mentioned. First, there's the cost associated with the disruptions in April, which led to a significant number of canceled flights. Those flights were not fully operational, creating a considerable CASM headwind. Additionally, to recover from various weather events, we incurred a substantial amount in premium pay, which accounts for about half of the three points of CASM you referred to. The remaining portion stems from our cautious approach for the rest of the spring and summer. For instance, despite a significant reduction in capacity, we're keeping our current hiring plans in place and adding more resilience and redundancy to the JFK operation. These factors contribute to the other 1.5 points of the three points of CASM, which represent the remaining half.

That's helpful. I want to revisit the issue of attrition. Historically, JetBlue has been seen as a destination for airline professionals. However, it now seems that for some, it may just be a stepping stone. What can be done about this? Is this a long-term change, or is it just a matter of offering more money to pilots? You're a growth carrier, which typically attracts pilots, but right now you can't grow. Is this going to be a short-term issue over the next six months, or is it a more structural problem that could last for several years, where you'll always be trying to catch up to attract the talent that used to be drawn to you?

Thanks, Mike. Really appreciate the question. So it's not an issue of attraction. We have a strong pipeline, particularly on pilots, they like coming here. And the issue becomes obviously time to upgrade. It becomes pay. If you want to fly wide bodies, there might be different paths that you want to take, but we remain a very attractive carrier. We need to plan for elevated levels of attrition, recognizing that there may be some pilots that choose to leave near 0 to 4 because of a different life choice but then we also do a great job retaining pilots as well. And so it's a bit of a mixed bag. We've got a number that's stable and we have a number that leave. We need to plan our training and our simulator capacity for an elevated level of attrition, but we also need to ensure that those who come and want to stay at a carrier like JetBlue stay, which many of them are. We have these gateway programs, which are fantastic. They bring crew members in from JetBlue's family members, friends, et cetera. We've been doing this for several years now. We're now generating a decent size number of pilots coming through those pipelines that have a real stickiness to JetBlue, our culture and the type of organization that we are. Attrition is very low among those cohorts. And so we are looking at continuing to increase the number of folks that come through there. But I think the industry as a whole, is looking at what do we do about the pilot shortage of legacy carrier retirements accelerated this pilot shortage issue by a few years. It could very well lead to lower aggregate capacity growth over the next couple of years. But we are pivoting our philosophy around how do we build a model where we have elevated attrition where we have the gateways that crew members and their family members and other aspiring pilots come through, and they want to stay at JetBlue and then continuing to build out partnerships with other carriers, feeder carriers around the United States.

The other thing I'd like to add to that, Mike, is that I think the other structural change you're going to see is that the pay rates for pilots across all of the large airlines will start to converge. And I think we're already seeing that. I think you're going to continue to see that. I think that is something that could be around for a number of years.

Your next question comes from the line of Savi Syth from Raymond James.

If I could follow up on Mike and Catie's question, regarding your capacity growth plans for the next few years, how many pilots do you expect to hire? How many of those will come from your internal programs? Additionally, Robin, about your pay rate question, does that imply that the gap between your unit costs and those of legacy carriers will begin to close, considering there is currently a significant difference between your low-cost carrier band and the legacy carrier pay band?

I don't believe this will pose a significant challenge for JetBlue. Our pay rates were already quite similar, and with our recent adjustment, you will see that our fleet pay rates are comparable to many legacy carriers. This comment is more directed at other airlines with lower pay rates that will likely need to increase them, in my view. Regarding future pay rates, we will elaborate at Investor Day on our multiyear strategy. We plan to take a cautious approach concerning pilot attrition until we gain more clarity on its duration. Fortunately, JetBlue has been running our gateway program for several years, which has been effectively producing a substantial number of pilots. We are not starting from scratch as we were last year; we have confidence that as we continue to recruit through these programs, we will attract pilots who have typically viewed JetBlue as a destination carrier. This is our perspective for the coming years. In my view, access to pilots will be the key factor influencing industry growth in the next few years.

That's helpful. Joanna, I want to follow up on the ATC-related issues. I'm trying to understand that Florida has experienced significant capacity increases over the last several years, accelerating recently. Is this primarily a staffing issue that needs to be addressed, or is Florida's airspace becoming congested like it is in the Northeast? I'm curious if there’s a fundamental change occurring in Florida or if it's just an issue that needs attention.

Yes. I know you're in Florida, and it seems that everyone is there right now. This may just be a temporary issue related to the capacity in that area. Once international travel increases and COVID-related document checks are lifted, we anticipate a rebalancing of capacity to other leisure destinations outside of Florida. Additionally, there is a seasonal winter-summer aspect at play. However, we also need to consider the ongoing structural issues with SAA ATC staffing, which we've discussed before. April was particularly challenging. Looking at JetBlue's network, 45% of our flights operate in Florida. Therefore, it makes sense that with a key ATC center understaffed by around 50% and the high volume of flights in that area, we would experience significant delays for carriers with a large presence in Florida. We hope that the capacity situation will improve in the short term as carriers adjust their networks and COVID document checks are removed. However, the FAA staffing shortage could be a longer-term issue that we need to monitor closely.

Your next question comes from the line of Conor Cunningham from MKM Partners.

I believe investors are discussing the difference between structural and temporary issues. I'm trying to understand what the long-term utilization rate of the airline will be moving forward. Given the various challenges you face, why shouldn't we assume it will be difficult for you to return to 12 hours of flying per day? Can you address utilization in relation to hiring challenges and your increased operations in tougher airports like New York? Your insights on this would be appreciated.

Conor, thanks for the question. As I mentioned, at the beginning of the year, we were acutely focused and on a growth track with high utilization. And given the meaningful step back, due to the challenges that we've seen in April, utilization is going to be down double digits throughout the remainder of this year. And I also think as we think about 2023 capacity most likely will be below our original anticipated capacity growth. And one of the structural levers I highlighted was taking another look at aircraft retirements in light of the lower utilization levels. And can we have the ability to drive some structural cost savings that, quite frankly, some of our peers were able to take advantage of in retiring fleets throughout COVID. So that's an opportunity that we're looking at given this reset and the lower utilization levels that we'll expect this year as well as into next year, given the constraints.

That's helpful. Your headcount has actually increased quite a bit in the first quarter. It seems your capacity is in line and I realize you mentioned the productivity discussion earlier. I'm trying to determine when we should expect the gap between capacity and headcount to widen further in the short term, but then gradually improve. Will this peak in the third quarter, or should we anticipate that it will remain elevated through the pandemic and into next year?

Yes. I would expect us to see a level of staffing stability and operational stability, and that will drive productivity in the fourth quarter. So we're making investments in the short term in order to continue hiring and staffing through the summer, and we believe that we'll bring a level of resiliency to the operation, and we'll be at optimal staffing levels in order to get that productivity in the fourth quarter.

I'd like to mention that while our overall capacity remains unchanged, there has been an increase in engagement at the stage level. For instance, we're seeing more 321s and the redesigned 320s, both of which require four in-flight crew members. Additionally, there has been a significant rise in customer support and reservations, which is largely due to the increased volume of calls related to disruptions. These two factors are significantly contributing to the rise in headcount.

Your next question comes from the line of Helane Becker from Cowen.

Robin, you actually just partly answered my question about bigger aircraft. How can you accelerate delivery of bigger aircraft to alleviate some of your staffing issues, especially with pilots? And then my other question is related to scaling up to 300 flights in the New York area. Can this air traffic control system handle that level of airport utilization? And I know you said you would be more conservative, but how should we think about getting there from here?

Thanks, Helane. Regarding your first question, we currently do not have plans to accelerate the delivery of any more airplanes. We recently discussed the 220s, and this adjustment allows us to explore retirement opportunities for some of our older aircraft. While I acknowledge that aircraft utilization may need to be lower than historically, this lower utilization also creates the chance to retire planes, especially as we face structurally lower growth due to pilot supply. In terms of growth in New York, we've made adjustments in Newark, which has led to reduced flying in and out of that airport. From a JFK and LaGuardia standpoint, the limitations of slotted airports make changes more difficult. As a result of these capacity adjustments, we have a slightly reduced dependency in New York airspace compared to before.

And your next question comes from the line of Jamie Baker from JPMorgan.

Without commenting on the deal specifically, just given the first half challenges, do you stand by the leverage recovery guidance that you gave us when you announced the bid? The stand-alone outlook is obviously worse. So just trying to quantify the need to potentially issue equity.

The original plan for the Spirit offer remains a full cash offer. While we've adjusted our full year profitability projections downwards, we still maintain a strong balance sheet, and our offer remains unchanged. Our leverage for 2022 is now expected to be slightly above 1x, which marks a slight deviation from what we presented a few weeks ago, primarily due to the recent step back in April.

And second, and specifically to Robin, look, 2007 was a different era for the industry for JetBlue. The constitution of JetBlue's Board is different today, but it's worth noting there's precedent for senior leaders being let go when operations have suffered. How would you characterize your recent conversations with the Board? Could you say how much that time has been split between discussing the merger and discussing the operational challenges?

First of all, Jamie, I want to wish you a very happy birthday week. The operational concerns are important to all of us, including the leadership team, the Board, and our crew members. We operate in one of the most congested areas in the country, and we need to improve our management of that. As you know, with weather changes, flights can get canceled and there can be ATC delays. We are making significant investments to enhance our operations. The shift we are announcing, which includes reducing capacity this summer and investing in staffing, is intended to help us achieve a better and more stable operation. While we cannot control the weather, we aim to manage everything else as effectively as possible. Restoring our operational performance is currently the top priority for me, the leadership team, and the Board because it is crucial for margin recovery. Although we did experience a setback in the second quarter, a stable operation is essential for improving cost performance and revenue, and that is our focus.

Okay, Robin, I appreciate that. Also worth noting that I share my birthday with the Piedmont hub in Charlotte, proving that there's always an aviation angle.

Your next question comes from the line of Dan McKenzie from Seaport Global.

A couple of questions here. Profitability in the back half of the year. I'm just wondering if you can elaborate on how we get there. Is it being driven by premium revenue, corporate demand? So is there some revenue acceleration from here? Or how much of the profitability is just tied to better utilization?

As mentioned, the revenue and demand environment remains exceptionally strong. We are anticipating profitability as early as June, primarily due to a current RASM increase of about 20%. As we progress through the year, especially in the third quarter, we expect demand to remain very robust. In the second half of this year, we will also see a four-point sequential improvement from a CASM ex-fuel standpoint. We aim to achieve greater efficiencies, particularly in maintenance and productivity, in the fourth quarter. That outlines our roadmap, and I will now turn it over to Dave for more detail on the top line.

Sure. Dan, thanks for the question. Just a little bit more color on the revenue. In addition to the really strong demand environment we're seeing, we have a couple of other factors that will improve as we go through the year. First, just a reminder that we had a 4-point revenue headwind this quarter from the operational disruptions that should not continue past Q2. And then the NEA is off to a great start in ramping up well. We expect that to continue throughout the year. So we expect to have additional revenue acceleration as the NEA performs better and better.

Okay. Looking at the bigger picture for those investors with a long-term perspective, you have a lot of patients. Referring back to the PowerPoint, what is the strategy and timeline for achieving the goal of expanding margins beyond 2019, specifically the target of $2.50 to $3 per share? How much corporate travel needs to return? What level of growth is necessary? Are new revenue or cost initiatives required to address some of the challenges we are currently facing?

Yes. I'll provide a high-level overview. First, it's a great lead-in to Investor Day, where we will outline our multiyear plan. I think 2023 will be the first year we compare against the previous year instead of 2019, marking a new start. On the revenue front, we have discussed several catalysts, and we have strong revenue initiatives that are gaining traction. Without the four points of headwind from the significant operational disruptions mentioned earlier, our top range for the quarter would be 20 points. While we acknowledge the impact of weather events, Joanna noted that in Florida, for instance, we spent over 115 hours in ground stop or delay programs during the first 20 days of April, compared to just 22 hours in 2019, indicating a far greater impact. However, we believe we will navigate these challenges and have already seen an improved traffic control situation in the last ten days of April, which is encouraging and we hope will continue. Dave discussed the revenue ramp-up from NEA and the growth of JetBlue travel products. On the cost side, we are making significant progress on the underlying cost initiatives we’ve previously mentioned, and we will provide more details at Investor Day. We have also completed work on a new multiyear structural cost program in collaboration with external partners, which we'll also outline at Investor Day. There is ongoing and accelerating revenue momentum, and once we move past some of the current noise in this year's performance—which I know complicates modeling—we expect the acceleration in revenue and our structural cost initiatives to support our optimistic objectives.

Asked and answered, but one for Robin I guess, when I look at this kind of short-term cuts to capacity just seemed like these operational problems. When I think about kind of longer term, how much does M&A actually attempt to solve this labor issue as opposed to just accelerating the growth of the airline? Interested to get your thoughts there.

No, thanks, Andrew. I believe you're correct. Some of what we're currently experiencing is our effort to significantly reduce risk for the summer. We can discuss the extent to which we should do this, but we understand the need for conservative planning. For context, this is the first time in JetBlue's history that June block hours or available seat miles will be significantly lower than in April. April and June are generally the strongest months we have in the second quarter, so this is a substantial shift. Looking at the long term, I do think the pilot supply challenge will limit capacity in the U.S. for some time. Regarding mergers and acquisitions, we believe that the JetBlue and Spirit merger presents an opportunity to enhance and expedite our organic growth plan, bringing in a substantial number of pilots to create more growth opportunities and potentially reduce attrition. For airlines aiming to focus on organic growth—which we have done for many years—I see this being more difficult in the coming years due to the pilot supply situation.

Your next question comes from the line of Chris Stathoulopoulos from Susquehanna International.

So I realize that there's a lot going on here, the NEA, the potential Spirit deal. But CASM ex has been a key area of focus and for some pushback on JetBlue since the structural cost program was first communicated in, I believe, 2014. And I guess the moving parts of the 10% to 15% CASM ex-guide. But on your Spirit call, you indicated that you would not expect that to go lower, I think, on what was a 60% to 70% larger base due to certain dissynergies. And I realize you can't comment on Spirit here, but directionally, how should we think about your core exit rate for CASM this year? And again, this is probably more suitable for Investor Day, but at a high level, what should we put in the structural versus temporary cost buckets at this point?

Chris. So when you look at the 2022 CASM ex forecast, if you take the midpoint of 12.5%, we essentially have 4 points of nonrecurring investment. And one of those was driven by the Omicron hit to Q1 of this year. And then the remaining 3 that we've highlighted here today in regards to the investments in the spring and summer operations. So those are nonrecurring, and you should expect those to fall away as we enter 2023. So then that brings you down and essentially, as a reminder, you have 3 years of inflationary pressures across the business when you look at labor and business partner spend. But even outside of that, we have incremental costs that we need to offset. And as Robin mentioned, we are looking at structural levers given the reduction in capacity. So think of reflowing through your maintenance plan and investment levels. Think of how we can optimize our maintenance spend, accelerate aircraft retirements and cut discretionary spend across the entire organization. We believe we're taking the right actions to get back on track and fortify our long-term value creation framework, which we are excited to share more about at our Investor Day next month, along with the details on the next phase of our structural cost initiatives.

Okay. If I could get one more in on the corporate side, based on any survey work or other data that you're looking at, what does your mix of users look like now versus pre-pandemic? Are you seeing a shift in, say, your mix of finance, consulting in pharma or health care now versus 2019? And what should we think about in terms of that mix for your 2022 guide?

Thanks, Chris, for the question. This is Dave. One of the great stories over Q1 has seen the corporate customer come back and we've seen that mix really start to return back to what we've seen before the pandemic. So lots of growth in the consulting sectors, finance sectors, education. So we're really back now pretty close to where we were pre-pandemic, which is terrific and has really helped fuel that growth from corporate recovery was about 50% for us as we exited 2021, and it was at 75% as we exited Q1. So really good growth in return back to our historical mix.

We will take one final question from the analysts.

Wonderful. Your last question comes from the line of Scott Group from Wolfe Research.

Can you discuss your exposure to New York Jet and whether there is any possibility to reduce that? Or do you believe this situation is temporary and will resolve itself over time?

Yes, I appreciate the question. Our exposure to New York in the second quarter was about $0.06 to $0.07 in relation to our fuel price. Since we adjusted fuel pricing, the New York Harbor Index has significantly decreased compared to a month ago. However, generally speaking, the impact was minimal, around $0.06 to $0.07 for the quarter.

Okay. Looking ahead to next year, if you've reduced capacity by 10 points this year, would you aim for a 10-point capacity growth next year? Also, if you do achieve growth next year, do you anticipate that CASM will decrease in 2023?

I mean, first of all, I don't think it's realistic to take the 10% of capacity this year and add it into next year because, again, it's not aircraft or fleet or demand that is driving that change that we would normally say, well, when the demand comes back, you ramp it up. We know demand is exceptionally strong. It's really sort of pilot supply. And until we see a different trajectory in terms of attrition and sort of the number of pilots being produced in the U.S., we need to take a more prudent approach. And so I think you'll see that from us at Investor Day. And in terms of multiyear CASM outlook, the way I think about it is strip out the onetime CASM numbers that we've seen here due to sort of exceptional circumstances. If you really go and look at that then that cumulative number is sort of 3 years of inflationary pressure and everything else that you see us, and other airlines talk about. And then as we exit into '23, then we have the benefit of the structural cost initiatives that are unfortunately masked by some of the issues we've seen in Q2. You have some new initiatives that we'll be talking to you about. And then we have the ability on the maintenance and retirement side to retire some of our sort of more costly older airplanes. I think all of that comes together to drive a CASM outlook. When I look back at 2018 and 2020 and getting back to sort of the cost discipline. Now I think the difference between then and now is inflationary pressure in the industry. I think we have to wait and see a little bit how that continues to play out. But we need to make sure that we're doing everything on the productivity front, everything on the maintenance front and everything else that we're doing to drive a low CASM growth outlook in the face of moderated capacity that which will go to drive margin expansion.

Thanks, everyone. That concludes our first quarter 2022 conference call. Thanks for joining us. Have a great day.

And again, ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.