JetBlue Airways Corp (JBLU) Q3 2020 Earnings Call Transcript

JetBlue Airways Corp  (NASDAQ: JBLU) Q3 2020 earnings call dated Oct. 27, 2020

Corporate Participants:

David Fintzen — Vice President of Investor Relations

Robin Hayes — Chief Executive Officer

Joanna Geraghty — President and Chief Operating Officer

Steve Priest — Chief Financial Officer

Scott Laurence — Head of Revenue and Planning

Dave Clark — Vice President of Sales and Revenue Management

Analysts:

Savi Syth — Raymond James — Analyst

Hunter Keay — Wolfe Research — Analyst

Jamie Baker — J.P. Morgan — Analyst

Duane Pfennigwerth — Evercore ISI — Analyst

Catherine O’Brien — Goldman Sachs — Analyst

Joseph DeNardi — Stifel — Analyst

Brandon Oglenski — Barclays — Analyst

Mike Linenberg — Deutsche Bank — Analyst

Joe Caiado — Credit Suisse — Analyst

Andrew Didora — Bank of America — Analyst

Myles Walton — UBS — Analyst

Presentation:

Operator

Good morning. My name is Mary. I would like to welcome everyone to the JetBlue Airways’ Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would like to turn the call over to JetBlue’s Vice President of Investor Relations, David Fintzen. Please go ahead.

David Fintzen — Vice President of Investor Relations

Thanks, Mary. Good morning, everyone and thanks for joining us for our third quarter 2020 earnings call. This morning we issued our earnings release, our investor update 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.

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; and Steve Priest, our Chief Financial Officer. Also joining us for Q&A are Scott Laurence, Head of Revenue and Planning; and Dave Clark, VP of Sales and Revenue Management.

This morning’s call includes forward-looking statements about future events. Actual results may differ materially from those expressed in 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 reconciliation of these non-GAAP measures to GAAP measures, please refer to the table at the end of our earnings release, a copy of which is available on our website.

And now, I’d like to turn the call over to Robin Hayes, JetBlue’s CEO.

Robin Hayes — Chief Executive Officer

Thanks, Dave. Good morning, everyone and thank you for joining us. I’d like to start with my thanks to our crew members for their dedication to our customers. I also want to thank our crew members for their sacrifice during the most difficult period in our 20 year history. We are now over seven months into the pandemic, and day in and day out, our crew members deliver on our mission to inspire humanity. Their dedication and passion for delivering outstanding service has been truly remarkable, especially as we work to restore our customers’ confidence in air travel. We have responded to this unprecedented crisis with action leading the industry with health and safety protocols to keep our crew members and customer’s safe. We are grateful to all of our team to bring in our industry-leading safety from the Ground Up program to life every day. Our customers are recognizing their efforts and we are seeing record high customer satisfaction scores as a result of their professionalism and care.

Let’s slide — let’s turn to slide 4 of our presentation. In the third quarter, we reported an adjusted loss of $1.75 per share. Despite the ongoing demand challenges, we have worked to stabilize and protect JetBlue. Our efforts to raise liquidity, reshape our network and reduce our costs are bearing fruit and have helped us navigate the immediate crisis. We remain cautiously optimistic that we will see further steady improvement in bookings into the upcoming holiday season. We have seen signs of pent-up demand from customers who want to visit their family and friends or go on vacation. And we believe that we will remain extremely well-positioned to serve these customers as they return to air travel.

Moving now to slide 5. We are confident that our low cost, low fare leisure model with the best crew members in the industry and the brand that customers trust will all help JetBlue to emerge stronger from the crisis. Since March, we have been focused on a three-step recovery process. First, we have made great strides in reducing our cash burn. We continue to manage our daily flying and take tactical actions to ensure we generate cash as demand recovers. Secondly, to rebuild our margins, we are executing on revenue and cost initiatives. Our margin today reflect the challenging revenue environment, and in the near term, we are redeploying our aircraft to new cash accretive markets where we see demand. Further out, we are setting JetBlue up for a strong rebound, taking advantage of opportunities in our network and strengthening our focus cities to produce structurally better margins in the coming years.

Starting in the Northeast, we are building a strategic partnership with American Airlines. We believe this alliance, which is currently under regulatory review will help accelerate our recovery, preserve jobs and allows to continue our 20-year track record of disrupt in the market with low fare and great service. I’d like to pause for a moment and highlight that while we are grateful to Washington for helping to save our industry in the spring, JetBlue made a clear choice this past summer to accelerate the speed of our recovery from the crisis when we announced our exciting New York and Boston partnership with American. We’ve been working tirelessly with both DOT and DOJ. I want to thank the leadership teams of each agency for that team’s serious attention to reviewing our proposal. Getting this partnership off the ground quickly is critical to our self-help effort to expand low fares in New York and Boston and get us on the road to a faster recovery and job growth.

In other parts of our network, we are positioning JetBlue for future success at LAX and Newark, making our Transcon franchise stronger. In Fort Lauderdale, we are adding connectivity to enhance our position in South Florida and in the Latin and Caribbean region. We are looking forward to [Technical Issues] of our JetBlue Travel Products subsidiary. As demand recovers, we believe, it will give us a competitive advantage and providing a unique value offering to leisure travelers. We are looking for a trusted brand that offers flexibility and personalized experience. On the cost side, our teams are working to realign JetBlue’s cost structure to temporarily smaller revenue base. Dave will provide some early details about our efforts that we believe will help us remain true to our low-cost routes as we recover from the crisis.

Finally, in terms of balance sheet, we have successfully raised more than $4 billion since March and we have access to further capital should we need it. Naturally, we aim to be — naturally we aim to be free cash flow positive with the goal of repairing our balance sheet over the coming years. Of course, the timing will largely be a result of executing on our cost initiatives and the pace of demand returning. As we look forward to the expected recovery, we continue to work with our elected leaders to help find the best public policies and technologies that will support a safe return to travel. Rapid testing, we believe can help reopen domestic and international markets and be a critical step in balancing public health considerations while promoting an economic recovery.

The landscape continues to evolve and we are cautiously optimistic that we will see major advancements in this space in the near future. Before closing, and on behalf of all of our crew members, I would like to take a moment to thank the federal government and their advisors for their continued support. The CARES Act payroll support and loan program has helped save many jobs at JetBlue and across the country. The reality is that, we are still navigating this unprecedented crisis, and we expect demand to remain depressed for some time. We are optimistic that the leaders of our country will soon find a path to provide additional support for jobs in our industry, giving us vital time to execute our recovery plan. Thanks again to our amazing and inspiring crew members, who, despite the current hardships continue to show their dedication to safely serving our customers and taking care of each other.

Joanna, over to you.

Joanna Geraghty — President and Chief Operating Officer

Thank you, Robin. I’d like to start by expressing my profound thanks and gratitude to our crew members for their extraordinary efforts both on behalf of each other and on behalf of our customers and delivering day in and day out on the commitments we’ve made in our safety from the Ground Up program. Our crew members are the face of JetBlue. And as customers become more confident and return to air travel, we know, it will be our crew members who lead the way convincing the flying public that was the safety measures we have undertaken and observed, air travel is indeed safe for all. We continue to see new data that proves that the controlled aircraft cabin environment limits the transmission of COVID, because of, often cabin air is continuously recirculated, the top to bottom air flow patterns that avoids spreading bacteria and the hospital grade HEPA filters which remove 99.9% of particles and bacteria.

Independent research studies by Harvard, IATA and the Department of Defense to name just a few indicate that air travel is safe and the risk of contracting COVID-19 on board in aircraft particularly when wearing a mask is very low. Our customers are telling us that we are taking the right actions to keep them safe with nearly 95% of customer who have flown with us during the pandemic, saying they will fly JetBlue again in the very near future. Our net promoter scores are near an all-time high with a 10 point increase reflecting that our crew members are doing an exceptional job delivering a safe experienced during these unique times. This is simply remarkable. Customers trust JetBlue, and we remain their first airline of choice in our key markets.

That said, the lack of uniformity in foreign and US state government regulations related to quarantining present additional challenges to recovery, and we are working to support our customers to understand and comply with these rules. And for those that needed coronavirus test prior to travel, we are building partnerships to make COVID testing more accessible.

Moving to slide 7. In the third quarter, our revenue declined 76% year-over-year, a welcome improvement compared to our initial expectation. We saw a modest sequential improvement in August and September demand as new case counts decreased and quarantine restrictions in some states were eased. During the quarter, we are pleased to see states such as Connecticut and Massachusetts rollout testing options to help travelers manage through quarantine. Our Northeast geography continues to be disproportionately impacted, but we believe it will undoubtedly rebound as it always has with past challenges.

In terms of key markets, we saw relative strength in our Latin and Caribbean region especially driven by visiting friends and relatives demand. By the end of the quarter, 20 of our 35 international destinations were open to customers from the US, albeit with varying travel requirements. We expect more destinations to reopen subject to foreign government rules. Transcon demand trends modestly improved following the removal of quarantine measures from travel between New York and California. Lastly, Northeast to Florida traffic was a relative source of strength, despite the tri-state quarantine and pricing pressures from elevated industry capacity. Our planning assumption for the fourth quarter is a revenue decline of approximately 65% year-over-year. We are encouraged by customers responding positively to our promotional activity, including an early holiday sale in late September and although there is still quite a lot of uncertainty about the evolution of coronavirus, we are starting to see that booking curve extend slightly into the upcoming Thanksgiving and December holiday travel period. Booking trends remain largely close end [Phonetic] but continue to improve despite the recent rise in case counts. In terms of markets, we continue to see demand recovering quickest to Latin, Caribbean and Florida destination.

Turning to capacity on slide 8. We are managing through the volatile demand environment with a laser focus on capacity, planning our schedules a few months out and adapting it to close in trends. During the fourth — sorry, during the third quarter our flown capacity declined 58% year-over-year lower than our initial planning assumptions as we optimized flying to manage cash burn. As revenue trends improved slightly through the summer months, our system load factor increased to approximately 50% at the end of the quarter. For the fourth quarter, our current planning assumption is for capacity to decline approximately 45% year-over-year given our current expectations for improved bookings.

In the near term, we have reallocated some aircraft to new markets to capture VFR and leisure demand, helping us generate additional cash in our focus cities and in non-traditional markets for JetBlue. These include the approximate 60 routes we announced during the summer months, which we expect will contribute to our cash during this fall and into the holiday season. Our new routes are performing within expectations. To date, our new markets from Newark, particularly Transcon Mint are performing better than we anticipated. We are seeing similar results in our recently added flying in Florida, Providence and Hartford.

We are excited about our strategic partnership with American Airlines. This alliance is expected to bring more low fares to more customers, allow us to offer improved schedules, offer more options for connectivity in Boston and New York and offer an enhance loyalty program. Along those lines, we have just completed the terms of our frequent flyer agreement with American. We look forward to activating the partnership, which should help generate cash, recover faster and preserve jobs in our industry. I want to close by thanking again our incredible crew members for serving our customers with passion in everything that they do. Over to you, Steve.

Steve Priest — Chief Financial Officer

Thank you, Joanna. I’d also like to add my thanks to our crew members and leaders. I could not be prouder of their determination and efforts to keep each other and our customers safe and to ensure the financial sustainability of JetBlue.

I’ll start on slide 10 with a brief overview of our financial results for the quarter. Revenue was $492 million, down 76% year-over-year. Operating expenses were down 45% year-over-year. Excluding the benefit from CARES Act and charges related to fleet and voluntary leave programs for our crew member, operating expenses down 39% year-over-year. GAAP loss per diluted share was $1.44 and adjusted loss per diluted share was $1.75. Moving on to slide 11. Our average daily cash burn for the third quarter was $6.1 million ahead of the $7 million to $9 million range we anticipated three months ago. This was the result of a modest improvements in demand beginning in August. Variable cost savings achieved through a balanced approach to capacity and the many actions we took to minimize fixed costs across our business.

For the fourth quarter, we estimate our daily cash burn to be between $4 million and $6 million. The sequential improvement reflects our continued actions to minimize cash costs. In addition, as Joanna mentioned, we are cautiously optimistic, that the demand trends we saw in August and September will continue, and we are taking consequential capacity actions as needed to manage costs and support our revenue recovery. Where we fall within the range will again depend on the pace of the revenue recovery we see during the quarter.

At the end of September, our total liquidity included restricted and unrestricted cash with $3.1 billion or 38% of our 2019 revenue. During the quarter, we drew down $114 million from the CARES Act loan program and raised over $300 million of sale leaseback proceeds on a mix of existing and new aircraft deliveries. In addition, we refinanced our $1 billion term loan facility with two EETC transactions. We have approximately $1 billion of traditional unencumbered assets on the balance sheet excluding our loyalty program and subsidiaries. With regard to our loyalty program, we continue to explore parallel path with both US Treasury and the capital markets to raise up to $2 billion of additional liquidity.

Turning to slide 12. During the third quarter, our adjusted operating expenses declined 39% year-over-year. This excludes the payroll benefit from CARES Act of $332 million, $58 million in charges related to crew member opt-out programs, a $56 million charge related to a fleet impairment, and a $106 million charge related to the loss incurred on sale leasebacks. Since the start of COVID-19, we have offered a significant number of voluntary programs that help us preserve jobs and avoid furloughs. On a cumulative basis over 6,600 crew members have volunteered for opt-outs or extended leave programs and we continue to offer similar initiatives to help us adjust resources to support our flying. We are grateful to those crew members who stepped up to participate in these programs. Their contribution has been instrumental in preserving the financial health of JetBlue.

Our working assumption for the fourth quarter is a reduction of our total operating expenses of approximately 30% year-over-year. The sequential change is primarily due to scheduled increase in capacity to support revenue, mitigated by our continued efforts to lower fixed costs. As we navigate the current environment with a steady hand, we are shifting our work to rebuilding our margins. We are taking an aggressive approach to improving our cost structure, better aligning our fixed and variable cost base to temporary lower revenue and capacity. We believe that our work will return JetBlue to profitability with structurally better margins and our ultimate intention is to achieve superior pre-tax margins versus the industry.

We are currently working on our budget for 2021 assuming a prolonged revenue recovery. Using 2019 as a reference, our emphasis will be lowering our costs on a permanent basis reducing external spend and driving efficiency. Our recent delivery of our structural cost program gives us full confidence that we can emerge from this crisis in an even stronger cost position, which we will believe will reinforce our margin recovery as demand returns.

Moving to slide 13. In the third quarter, we took delivery of two A321neos, and in the fourth, we expect delivery of two additional A321neos and our first A220. All of our 321 deliveries in the second half of 2020 are covered by sale leasebacks. The JetBlue fleet currently stands at 265 aircraft, including a recent delivery in early October. Earlier this month, we reached the second negotiated agreement with Airbus to defer additional aircraft and associated capital expenditures over the next few years. Since the beginning of the crisis, we have reduced aircraft and non-aircraft capex by approximately $2 billion between 2020 and 2022. I would like to take this opportunity to thank Airbus for their tremendous partnership as we collectively navigate these unprecedented times for our industry.

We continue to look forward to bringing both the A321LR and the A220 into the JetBlue fleet to help execute our network strategy and rebuild our margins through their outstanding economics. We are forecasting approximately $200 million of capex spend for the remainder of 2020, the majority of which will be funded through sale leasebacks. We continue to expect our capex in 2021 to be less than $1 billion. We have laid out our revised order growth in the appendix section of our deck.

Moving to slide 14. At the end of September, our debt to cap ratio was 58%, a small increase from the prior quarter driven by sale leasebacks and the recent draw on the CARES Act loan program. Our balance sheet remains amongst the strongest in the industry and we believe that our current leverage is very manageable. Over the coming years, we intend to return our balance sheet to pre-pandemic levels while making strategic investments in our network and our fleet to accelerate our recovery efforts. We entered the crisis with a strong financial foundation and while the pandemic is proven to be a truly unprecedented downturn, we believe our efforts both past and present will enable us to recover faster and to ultimately we establish our full earnings potential. As we move towards 2021, and what appears to be a prolonged recovery, we will continue to work to protect JetBlue in the short term while positioning us for success in the years to come. I want to again thank our crew members for their relentless work and also thank our owners for their continued support.

With that, we will now take your questions.

David Fintzen — Vice President of Investor Relations

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Savi Syth with Raymond James.

Savi Syth — Raymond James — Analyst

Hey, good morning. And just on the cash burn, I was wondering, kind of, towards the end of September. I think the indication with cash burn was coming in at the lower end of guidance, is the difference that improved so much related to kind of the fare sales that you had it towards the end of September. And also just what — what’s the kind of the biggest drivers of the improvement that you’re expecting from kind of Q3 to Q4? Is that all revenue or do we see some cost benefits in there as well? Thanks.

Steve Priest — Chief Financial Officer

Good morning, Savi. Steve here. I’ll take that. I think it’s about the effect of a balanced approach. So, the $6.1 million of cash burn that we talked about Q3 was the average of the overall quarter. I think the way I would describe it is that we’re getting the balance right between our capacity, revenue and our cost structure. And the teams are doing a fantastic job, they’re dynamically managing the capacity to the demand, which is really helping our variable costs, our cost and obviously our cash burn performance. As we think about quarter 3 going into Q4, it’s a continued steady increase in demand that we are sort of forecasting as we sort of come through in terms of Q4, but it’s also the ruthless focus that we’ve had on our overall cost structure as we continue to take things down. And that’s why we are projecting sequential improvement from the $6.1 million in quarter 3, so the $4 million to $6 million that we forecast for Q4. So big thank you to our crew members. I think the work has been tremendous. And it’s a balance of both revenue and cost.

Savi Syth — Raymond James — Analyst

Makes sense. And Steve, if I might follow-up, you mentioned that the — kind of trying to monetize the loyalty or raise liquidity with the loyalty program, just wanted to clarify, I think you said, with the treasury or capital market, so if you go with the treasury, would you just swap out whatever collateral you have in there right now, or is there an opportunity to kind of get — to add [Phonetic] more financing there?

Steve Priest — Chief Financial Officer

Thank you, Savi. I think the way I would describe our approach with a very steady hand on the tiller, it’s about having flexibility. Robin, talked about the support we’ve had from the government in our prepared comments. We continue obviously to look to the federal government to wonder what’s going to happen with CARES 2, and we don’t know what the outcome of that is at the moment. We’re also not very clear ultimately what’s going to happen to the demand environment. So for me it’s about having the access to liquidity and continue to have the flexibility about what to do and when. And so we are running a parallel path both with this sort of federal government, but also looking at a public market transaction.

With regards to the government — the government loan, we do have access up to $1.9 billion. So we’ve just drawn a small sliver of that as we did at the — by the end of September with the $114 million. And so the loyalty program, if we chose to go down that route would supplement the collateral that we’ve already committed. Obviously, if we decided to go forward, I mean, we determine we need, extra liquidity and go forward in the public markets, then we’d obviously look at pledging the loyalty program in the public markets. But I think the overall message I would give the analysts in the investor community is that we’ve built flexibility, both in terms of the path we take, but also in terms of assessing whether we need the liquidity or not in terms of the provisions we put in place to go forward.

Savi Syth — Raymond James — Analyst

Got it. Thank you.

Operator

Our next question is from Hunter Keay with Wolfe Research. Your line is open.

Hunter Keay — Wolfe Research — Analyst

Good morning, everybody. Robin, I realized your own pay is not your priority right now. But how do you think, how are you and the Board thinking about what’s going to shape drivers of executive compensation over the next few years, given the prior drivers of target EPS and target ROIC are probably not appropriate for the next few years? Have you started to have those discussions yet to sort of shape what drives the variable component of comp?

Robin Hayes — Chief Executive Officer

Sure. Hi, Hunter. Good morning. Yes, I mean obviously, right now, we’re focused on the short term, as we said before and I laid out in my comments, we’ve got — we laid out a three-stage approach that’s about minimizing cash burn, we’re building margins and then repairing the balance sheet. What we try to do is ensure that executive compensation, targets aligned with our priorities as a business. So that’s what we’re focused on right now. I actually, I think margins and EPS, I mean, our goal is to get us back on track with that as soon as — as soon as possible. I think we’ve also taken a flexible approach to targets over the years, where we’ve adjusted them to reflect what is the — what are the priorities of the time. I will remind you, though, that at least for next period of time and longer if we take the government loan and the exact com is limited by the CARES Act restrictions. And so that is also something we have to be mindful of and ensure we comply with.

Hunter Keay — Wolfe Research — Analyst

Understood. And then I’m sorry for the ridiculous specificity of this follow-up. But you’re striking a tone of cautious optimism on holiday bookings. Did you write that script last week? I mean, do you — because it feels like things got maybe a little bit worse over the last few days here over the weekend, at least, is that, obviously you’ve had the opportunity to add at that of course, doing what we know, but I just want to make sure, we’re not sort of like top ticking demand commentary to set expectations for the fourth quarter that maybe things are sort of worsening a little bit around the periphery.

Robin Hayes — Chief Executive Officer

Hunter, hi, just a point of clarity, what are you looking at, when you say things got worse, so that we can just…

Hunter Keay — Wolfe Research — Analyst

I’m looking at the positivity tests in the tri-state area in New York City area, Connecticut specifically, again like, this is such a ridiculous specific question, Rob, and I now, but…

Robin Hayes — Chief Executive Officer

No, I just was making sure that you didn’t have a secret source of data that we didn’t see. No, no…

Hunter Keay — Wolfe Research — Analyst

Yeah. No, your point is taken, obviously, you’ve already answered the question. I get it. But, I just, I want to make sure that normally, you know, as of this morning, you still feel like this is realistic commentary.

Robin Hayes — Chief Executive Officer

Yeah, let me — let me say one thing, then maybe hand it over to Joanna to just add more details. I think that, what we did see, back in the summer was, as case counts got in the Sunbelt, we did see an impact on bookings, we’ve talked about that before. We haven’t seen that yet. So as case counts have started to come up around the country, we haven’t seen that yet. I think some of that is just, there has been a big pent-up demand for travel, we’re also in the Thanksgiving holiday period, that lots of students coming home and moving around Thanksgiving. And we think that traffic is going to be hold up pretty well. But as we said before, this is a non-linear recovery path. We expect it to ebb and wane. We give insight that we — that we think we see. We are pretty plugged into what’s going on in different jurisdictions around quarantines and sort of try to make a estimate around that. But as you know, Hunter, this thing can move very quickly.

I think, we have about 28 states or maybe 30 states now where the hour rate [Phonetic] is sort of at or close to about 1.2%, sorry 1.2. And we’ll see how, what that might, but right now, we’re cautiously optimistic and we continue to see that over the last several days, especially into the Thanksgiving and holiday period in December.

Hunter Keay — Wolfe Research — Analyst

Great. Thanks, Robin. Appreciate it.

Operator

Our next question comes from Jamie Baker with J.P. Morgan. Your line is open.

Jamie Baker — J.P. Morgan — Analyst

Hey, good morning, everybody. My first question is sort of a follow-up to Hunter’s. I know there is talk about New York abandoning the current quarantine structure or modifying it somehow. I’ve done a couple of quarantines myself, it’s really mostly an honor [Phonetic] system. You talked about Florida resilience. I mean, what I really care about is whether there would be a surge in bookings if New York rescinded the quarantine, your comments maybe make me think otherwise and that maybe people are just blowing off the quarantine, blowing off some of the recent headlines, any further color on that?

Robin Hayes — Chief Executive Officer

Yeah, I’ll hand you over to our quarantine expert, Joanna, Jamie, for this one.

Jamie Baker — J.P. Morgan — Analyst

Thanks, Robin.

Joanna Geraghty — President and Chief Operating Officer

Hi, Jamie. How are you doing? And maybe just to provide a little bit of color, when California came off the quarantine list, we saw upside in bookings. And so as we think about the Northeast and potential upside there, that’s how we see it. I will say that, when the quarantine are first put into place, we definitely saw more cancels and it’s slowing, but as people have adjusted to those quarantines and in the case of Connecticut, Massachusetts, with the testing out options, they understand the ability to reduce the length of the quarantine through a negative test or eliminate entirely. We’ve absolutely seen demand coming back. From our perspective, we’re spending an enormous amount of time on testing and maybe to provide a little color there. There’s a lot of talk about a vaccine. We don’t believe a vaccine is necessarily a panacea. We definitely think it’s critical to longer-term recovery, but in terms of returning to something that even looks remotely like a pre-pandemic travel level, we’re going to need to have in the short and medium term a rapid testing strategy that balances the public health considerations, economic recovery and allows countries and states to reopen or relax and eliminate. What we see is largely an effective quarantines and other travel restrictions.

So we’re spending a lot of time on that right now, we’re spending a lot of time with states and international, many of our Caribbean destinations. But we believe there is a combination of testing and longer term vaccine that will be the method by which quarantines, which we believe are largely ineffective, will be reduced or eliminated.

Jamie Baker — J.P. Morgan — Analyst

Okay, that’s helpful. Second question for Steve. On the sale leaseback activity, can you give us an idea as to the economics of the lease component, how monthly rates, when these deals compare to what you were being offered before the downturn. And also, have you thought about any sort of revised lease versus own ratio going forward, just in hopes of better variabilizing which I guess is the increasingly popular term, variabilizing your cost structure.

Steve Priest — Chief Financial Officer

Thanks, Jamie and good morning. I sort of bifurcate the sale leaseback activity in terms of the work we did on some of the older vintage aircraft, the older A320s and the newer neos that we’ve been doing sale leasebacks on. I have been pleasantly surprised, so I’m obviously not going to get into the economics on the call. But I’ve been pleasantly surprised about the transactions that we’ve managed to go forward with. We did them obviously towards the start of the last quarter and the work has been done and there was a pretty good demand for JetBlue metal. So it’s pretty pleased with where we ended up with from a source of rights perspective. And so the team and the big shots of the team that were complex transactions and the work that the teams worked through to make that happen was outstanding. With regard to your question about sale leasebacks, I’ve been very public about my views of this over the last three years, which we have lean, because of the relatively strong position that JetBlue has had, the strength of our balance sheet, the cash that we are throwing from operations, meant that for the aircraft deliveries, we generally stayed away from sale leaseback. Obviously, we are in unprecedented times, and we’ve used this as a balance to continue to generate cash for JetBlue and bring cash into the business. And so, in the short term, we have notched up our proportionality of the fleet is in the sale leaseback. But I certainly, looking forward back to pre-pandemic situation, we’re generally more geared towards the — of the ownership side of things on our fleet going forward.

Jamie Baker — J.P. Morgan — Analyst

Got it. Thank you, both. Take care.

Robin Hayes — Chief Executive Officer

Thanks, Jim.

Operator

Our next question comes from Duane Pfennigwerth with Evercore ISI. Your line is open.

Duane Pfennigwerth — Evercore ISI — Analyst

Hey, thank you. Good morning. As much as I want to ask another quarantine New York question and play out my holiday. As much as I want to ask you another quarantine question, I won’t. So, just with respect to the value of a premium cabin right now in the early stages of a recovery, if you compare like for like, say A320 high density to A321 or A321 high density to A321 with Mint, which one is more profitable? And if you had a clean slate [Phonetic] right now, would you be leaning more on density or premium?

Joanna Geraghty — President and Chief Operating Officer

I’ll take it and then ask Steve to add any color. So at this point, both are performing, about the same. We do like Mint in terms of providing the additional space and the additional opportunity for customers on longer-haul travel is performing, Transcon is actually performing pretty well relative to our other markets. Steve, do you’ve anything you’d like to add?

Steve Priest — Chief Financial Officer

I think you’ve covered it well. Clearly, customers appreciate the extra space and an excellent product that goes down mid-cabin. It’s always been extremely popular. As mentioned before, the routes on Transcon is coming back. You have to really net out the mix of routes though, because the high density, which largely go down the Caribbean are performing quite well in that region, given the strength if there’s any friends relatives traffic.

Duane Pfennigwerth — Evercore ISI — Analyst

I think you push the pause button on it, but can you just tell us how you’re thinking about the A320 refresh and where that stands today and kind of where that would be in order of your priorities when you begin to invest again?

Steve Priest — Chief Financial Officer

Hi, Duane. I’ll pick that up. It’s Steve here. We did initially put the full pause button on the 320 program. As of September we have started to back up again. It’s pretty de minimis trying to be honest, we’re still doing one shell at a time. The big thing I would say is the — the vast majority of the capital expenditure that we had around the resale program was already sunk, which sort of brought that into the fleet in terms of the extra seats [Phonetic] etc. But we’ve — obviously our customers appreciate the newer cabin as they sort of come through. So we’re sort of steadily doing one at a time as we sort of go through, has been very, very slow ramp. And then we’ll, depending on the demand environment, depending on the revenue environment will assess in 2021 when we start ramping things up again to complete the fleet.

Duane Pfennigwerth — Evercore ISI — Analyst

Okay, thank you.

Steve Priest — Chief Financial Officer

Thanks, Duane. Have a good day.

Operator

Our next question comes from Catherine O’Brien with Goldman Sachs. Your line is open.

Catherine O’Brien — Goldman Sachs — Analyst

Hey, good morning, everyone. Thanks so much for the time. So this one is for Steve, just a question on your structural cost program. I know before COVID, are you locked in above the high end of your $250 million to $300 million run rate target and now before the engine deal you’ve secured things, and, but how should we think about the incremental cost savings? We should be expecting next year versus maybe 2019 just from this program exclusively, so what are that cost savings of over $100 million — over, excuse me $300 million is flowing through in 2020 and then what will be incremental next year? Thanks.

Steve Priest — Chief Financial Officer

Thanks, Katie and good morning. First of all, I would like to say how pleased I am in terms of where we are with our continued focus on our cost structure. The structural cost program sets us up extremely well, to your point, I think for two reasons, one, it’s really embedded in the culture of cost consciousness across the whole of JetBlue. And secondly, there was a very significant number of initiatives that we’ve been able to build upon as we’ve navigated through the crisis. I think when I stand back and think about our cost structure, outside fuel, obviously the biggest cost associated with both our labor, our crew members and our business partners from an external spend perspective.

And so the way we’re thinking about this Katie is a couple of things. Number 1, taking a real sort of focus and look at taking fixed cost out of our business. And we’ve already started doing a lot of things in the short term, which will stand the test of time, so they truly will be structural as we sort of did before and building on the $320 million that we delivered coming into the 2020 year. The way we think about this, is obviously we’ll continue to use that those initiatives and additional cost savings as we go through ’21. The thing we’re thinking about is as we get at some point in 2022 and back to some sort of normality around capacity is getting back on that industry leading curve in terms of unit cost progression. We were leading consensus for the whole industry in 2020. We were top of the industry in 2019. And we’re looking forward to, at some point in 2020 to getting back on to that unit cost progression that you saw in early 2020.

Catherine O’Brien — Goldman Sachs — Analyst

Okay, got it. And then probably another one for you, Steve actually, just on the aircraft deferrals, with the neo delays over the last couple of years and then production cuts in the COVID, were any of these deferrals at the request of Airbus has been in pushed back deliveries? Or were these all pushed back at the request of JetBlue? And then should we assume that, any of that $2 billion reduction in capex is concession from delays or are those all aircraft just moving out of the period? Thanks.

Steve Priest — Chief Financial Officer

Thanks, Katie. And I’ve mentioned this in our prepared comments. I do want to again thank our partner Airbus. I think we’ve navigated this crisis together. It’s been a partnership, as we’ve had numerous discussions over the preceding months, just to keep this very simple, it’s shelves, right. We have moved over 50% of our A321 order book out of 2020 and 2022 to a point in the future, which has delivered the reduction of $2 billion-ish of capex over those two years. So it’s been a joint process, this is purely around this sort of aircraft. And I feel now that we’ve got the balance right between navigating the crisis, we saw it go through this and bringing in sort of high margins, high return aircraft to supplement the JetBlue fleet.

Catherine O’Brien — Goldman Sachs — Analyst

Okay, understood. Thank you.

Operator

Our next question comes from Joseph DeNardi from Stifel. Your line is open.

Joseph DeNardi — Stifel — Analyst

Hi, thanks. Good morning. Two easy ones from me. Steve, what level of ASMs do you think you need to fly to get CASM expect to 2019?

Steve Priest — Chief Financial Officer

Well, in terms of — it’s interesting when we sort of look at it with regards to 2022, there’s a couple of things I would say. Obviously, it depends on the demand and capacity recovery, but having deferred oversaw $2 billion — around $2 billion of deferred capex, we are expecting less growth than we had with regards to the pre-COVID environment. And so, the denominator, and obviously is going to be lower than we had expected in ’22. But in terms of our overall cost structure, the initiatives that we sort of taking going forward puts us in good shape and that’s why we’re sort of assuming that we’ll get back to sort of that level in 2022. But it’s very, very early at this point, Joe, to start sort of thinking about exactly what capacity we’re intending to fly. But this is the plan — the planning assumption that we’re working through, and we’ll continue to evolve that as we navigate through sort of 2021 and going towards that. But I remain confident in the tremendous work that the Company and our crew members are doing to wrestle with our overall cost structure to make sure we drive back to those efficiencies.

Joseph DeNardi — Stifel — Analyst

Okay. Steve, is it closer to 80% of 2019 capacity you need to get to, or is it 95%?

Steve Priest — Chief Financial Officer

I think the way I would describe it is we have anticipated, I mean, who knows what’s going to happen with the demand environment. But by the time we’re getting back into ’22, I would expect us to be nearer sort of higher end of the 2019 capacity.

Joseph DeNardi — Stifel — Analyst

Okay. And then maybe a question for Dave or Joanna, just the mix of business versus leisure from a revenue standpoint for you all, and then kind of the importance of the business traffic to your pre-COVID earnings power. Thank you.

Joanna Geraghty — President and Chief Operating Officer

Sure. So it’s largely leisure. I mean, there is very de minimis business, travel in there. And as we’ve said, since the onset of this pandemic, we do believe leisure, VFR traffic will be the sort of path to recovery out of this well before business travel. VFR tends to be quite resilient in times like this and we’re seeing that absolutely play out.

Operator

Our next question comes from Brandon Oglenski with Barclays. Your line is open.

Brandon Oglenski — Barclays — Analyst

Hey, good morning, everyone. Thanks for taking my question. Joanna, I want to come back to your response you had in one of the questions. I think you mentioned testing, do you guys think that could play a bigger role and can you be proactive in helping bridge the gap between authorities and travel restrictions? And I guess as a follow up, who is going to bear the cost of that if it is a solution?

Joanna Geraghty — President and Chief Operating Officer

Sure. So we are absolutely being proactive with regard to testing from a few angles. First, we’re actively working with governments, states — whether states or international governments. To put into place a consisting testing framework, first, that customers understand part of the challenge is, they’re all different, so that creates a level of confusion for customers. And then, ultimately that countries and states will upon providing proof of a negative test allow a customer to test out of — or reduce the length of these quarantines. Right now, as we see it, there is home testing options which we’ve announced one, and we’re working on a few others, and then also looking at pre-departure testing facilities in the airport environment. There is a number of locations that have rolled those out. We’re also exploring that. At the end of the day, we believe we need a cost effective, so very inexpensive rapid, think five minutes antigen test that can accurately detect COVID in both symptomatic and asymptomatic people.

So ideally, test that can be applied on a pre-departure basis or even one that you could use in your home, think of like a lateral flow pregnancy test that you could actually take before you leave, that you could do on your own. And I think that’s how we see kind of the future moving. In terms of who would bear the cost, obviously, it depends on whether it’s a government initiative, whether it’s an airline initiative. Right now, the cost of test — they’re all PCR tests largely are about $150 give or take, that we’re not adding any kind of revenue share or anything of that, we’re just passing on the cost of the test to customers when they purchase through both, which is our current partner. But we haven’t explored how we would cost share anything around testing. We think you need a very inexpensive $10, $15 test.

And the key here is a test that can detect COVID in asymptomatic people, right now, there are not any test out there that are antigen rapid test that can actually detect COVID in asymptomatic people. The PCR test that many of you take, that we take, that’s sort of the gold standard, that’s pretty expensive and needs to be administered by a clinician, by a doctor. We do not see that as a longer-term cost-effective solution.

Brandon Oglenski — Barclays — Analyst

Yeah, I guess you kind of answered it. But there is a lot of price elasticity there, right, if things get too expensive?

Joanna Geraghty — President and Chief Operating Officer

So, I don’t think it’s clicked [Phonetic]. So a lot of price elasticity with testing?

Brandon Oglenski — Barclays — Analyst

Yeah. I guess, on your customer base, right.

Joanna Geraghty — President and Chief Operating Officer

Yeah, I mean, I don’t think it’s something that customers necessarily are going to be willing to, it’s not something I think we envision passing on through our fair anything in that nature. This is something I think we — as we are doing right now, setting up a partnership with various companies and customers would reach out and directly procure the test from those companies and pay for it on their own.

Brandon Oglenski — Barclays — Analyst

All right. Thank you.

Operator

Our next question comes from Mike Linenberg with Deutsche Bank. Your line is open.

Mike Linenberg — Deutsche Bank — Analyst

Hey, good morning, everybody. Hey, Joanna, I thought I heard you mentioned that you had sort of finished up the work with American on the loyalty program. And I’m just curious what elements of the partnership can you rollout now before DOT, DOJ approval or can you proceed without their blessing at this point?

Joanna Geraghty — President and Chief Operating Officer

Sure. I’m going to let Scott take that one.

Scott Laurence — Head of Revenue and Planning

Hey, Mike, it’s Scott. How are you? So, again, I think we want to be respectful of the — of what we’re doing with regulators. And again, I think as we move forward with that, obviously, we’re excited about all the elements of this including frequent travel. But I think the — our focus obviously is bringing low fares and growth to the Northeast points and a faster recovery. So again, I think it’s sort of what we could do. We’re moving toward — I think a close on this and I think we’ll be in a better position to kind of move forward, more holistically. So I don’t think it’s a matter of what we can do versus what we want to do. I believe that we’re moving forward in a timeframe that allows us to kind of move in a way that makes sense.

Mike Linenberg — Deutsche Bank — Analyst

Okay, great. That’s helpful. And then just, on my second question. And Scott, this is maybe for you and/or Dave, when you look at just your yields relative to others, you guys are running a lot, a bit higher, you’ve been in positive territory for the past couple of quarters. But your loads are also lot lower and I realize that some of that may be a function of the — blocking the middle seat. And I know that, I think it was mid-October, you sort of modified that to go from blocking the middle seat to maybe booking up to I think 70% or something. And then it looks like maybe in early December that goes away. I haven’t seen anything maybe to counteract that. How should we think about though the yield trends as that lifts? Are we going to get — as we move into the fourth quarter, will we see lower yields higher, but higher loads and ultimately a better RASM there? I mean, or do you feel like maybe you’re leaving some revenue on the table because you have this middle seat block? So sort of a multi-pronged question, however, best you can answer. Thank you.

Joanna Geraghty — President and Chief Operating Officer

Sure, I’ll take it and then I’ll ask Dave or Scott to add some color. So as we’ve said since the onset, the middle seat block has largely been about rebuilding customer confidence in travel. We absolutely recognize that longer term, it’s not something that’s sustainable and that as loads come back, the cost of the middle seat block is quite expensive. And so what you’ve seen us announce through December 1 is that, we are leaving seats just below 70% and we’ll continue to increase those longer term based upon what that recent safety studies have come out saying that, the aircraft cabin is inherently safe — safer than most indoor vents. And so as we see into the holidays upside frankly as seats open up both in terms of fare, but also in terms of load.

Mike Linenberg — Deutsche Bank — Analyst

Great. Thanks, Joanna.

Joanna Geraghty — President and Chief Operating Officer

Thanks.

Operator

Our next question comes from Joe Caiado with Credit Suisse. Please go ahead.

Joe Caiado — Credit Suisse — Analyst

Hey, good morning, everyone. Thanks very much. Steve, your Q4 average daily cash burn outlook excludes any one-time costs associated with severance or employee separations related expenses, is that right? And if so, could you just tell us what those expenses are expected to be in Q4 and if you got it for 2021 as well, please?

Steve Priest — Chief Financial Officer

Hi, Joe. It’s Steve. You’re correct. It’s excluded. We actually, obviously announced a public statement and I went to it in the prepared comments. The opt-out provision that we talked about special item in Q3 [Phonetic] was $58 million. And so that is the absolute launch of what you’re going to see with regards to that in terms of what we know at the moment. Crew members have really sort of stepped up and I want to take this opportunity to thank them to support us through that. Obviously, with regards to sort of ’21, we are not still getting into any of that yet, because we don’t know what the future holds, but the lion’s share, obviously lion’s share is really have been booked in Q3.

Joe Caiado — Credit Suisse — Analyst

Got it. Thanks for clarifying that. And then just a quick follow-up, maybe for Joanna. I think as part of your revenue initiatives, you highlighted in the slide, an upgrade of the revenue management optimization system. And I’m just curious, didn’t you recently upgrade the VRM system in the last year or two? So can you describe exactly what this upgrade is and what capabilities you’re unlocking with that? Thanks for the time, everyone.

Joanna Geraghty — President and Chief Operating Officer

Sure. Dave Clark is very excited to talk about our new RM system, so I’ll pass it over to him.

Dave Clark — Vice President of Sales and Revenue Management

Sure. Thanks for the question. As mentioned, we’re in the process of upgrading to Sabre’s newest version of the revenue management system called Revenue Optimizer. We have been talking about this for a few years. This is part of our continuous improvement of revenue management tools, which was part of our 2018 investor day. It’s a more sophisticated system. We will have better abilities to forecast demand, to understand customer elasticity, things like that. Planning to cut over later this quarter and reworking the team process, the business process and the team structure to maximize the benefits of the new tools. So I’m excited later this quarter when we start using it in production.

Joe Caiado — Credit Suisse — Analyst

Thanks for the color.

Operator

Your next question is from Andrew Didora with Bank of America. Your line is open.

Andrew Didora — Bank of America — Analyst

Hi. Good morning, everyone. My first question for Robin or Joanna. Just on obviously leisure has been leading the recovery here. General consensus is that leisure continues to outperform corporate over the next few years. You clearly have this leisure-oriented network and based on your comments today, it doesn’t really seem like your Northeast flying has big of a hindrance as maybe it could be, but just when I look at your total revenue growth here, it’s been more in-line with the network carriers and your 4Q projection is similar to them as well. I guess my question is what do you think is the catalyst for JetBlue to begin to outperform on the top line? Or do you think this big fight for the leisure traveler might prevent that from happening? I would love to get your thoughts there.

Robin Hayes — Chief Executive Officer

Yeah, thanks. I’ll maybe start that and then pass over to Joanna. Look, the Northeast issue has been very, very significant. We saw in Q2 for example, and we all know this, how the Northeast was the most impacted in terms of coronavirus and I think we did a really, really good job in Q2 bringing down our opex accordingly. And as we’ve gone into Q3, we are still — whilst of course, the Northeast states have done a terrific job over the last few months on keeping the case count down, there are still — significant parts of New York that people come and visit that aren’t open. So broadway for example is shut down well into next year. So, I do think that some of the demand trends that we’ve seen into the Northeast both business and leisure, and then we also have, Joanna talked about the quarantine, then yes, compliance with the quarantine I would say is mixed at best and I’m being kind. But never it is a barrier for people to fly and we also see positive traction when states create test our exemptions for quarantine. That is a positive catalyst.

So I can’t understate, I mean, I think the team has done a terrific job mitigating the impact. We were the first airline to redeploy a large amount of new flying those 30 new routes. We’ve done it again and those act as a good mitigant. And so I think that, we will continue to do that, we will continue to manage that accordingly. But we’re going to continue, I think to see headwinds into the Northeast for the coming months. And I think as we think about Thanksgiving, we’re encouraging states to think about a testing option. I mean if people are coming back for Thanksgiving and quarantining at home, yes. But what we’re seeing now of course is virus spread in people’s homes. So I see testing either before you leave or when you get here actually could have, I think a really positive impact on public health as well as helping us. I think there were some of the demand headwinds that quarantines bring. Joanna, anything to add?

Joanna Geraghty — President and Chief Operating Officer

Yeah. I mean, I think I’ll just add leisure, VFR is what we are built to do. It’s what we were founded on and we’ve got a product, a price point, a cost structure all built for leisure and as we navigate through this crisis and see that that’s where the demand is, we are uniquely positioned to meet that demand and recover more quickly than carriers that are overly reliant on business travel.

Andrew Didora — Bank of America — Analyst

Understood. Thank you. And then my second question, just for Steve. I know you get this — you probably get this question a lot, but I just wanted to get your thoughts on where you think kind of liquidity requirements move to sort of on the back end of the pandemic. And I asked because you clearly have a couple of years’ worth of liquidity on your balance sheet right now at fourth quarter cash burn level, so just trying to get a — just trying to figure out how quickly the balance sheet can be repaired once we start to see demand recover more robustly here. Thank you.

Steve Priest — Chief Financial Officer

Thanks, Andrew and I’ll make this brief. I’ve again been delighted with the work the treasury team have done. I’ve described it before as having a steady hand on the tiller. We’ve been flexible, we’ve been measured in terms of how we’ve gone through and raise liquidity. Coming into the crisis with one of the strongest balance sheets in the industry, we kept about 10% to 12% cash of trailing 12-month revenue. I think undoubtedly, Andrew, we are in a position where the industry as a whole will be rethinking that. Going forward obviously, we’re in a once-in-a-generation pandemic but at the same time. I think those that have had stronger balance sheets like us coming into this, we’ll obviously benefit going forward.

So we’ll certainly assess that as we come out of the side. During the pandemic, as we are at the moment, having over $3 billion in the bank and sort of navigate, you have to make sure that I could sleep well at night and balance sheet repair is absolutely at the forefront of our thinking. We’ve got to get down to eliminate the cash burn, really focus on the margins, and start driving positive cash from operations. But as Robin said in his prepared comments, the balance sheet repair is right. The front of our thinking as we come out of this side of the crisis.

Andrew Didora — Bank of America — Analyst

Thank you, everyone.

Steve Priest — Chief Financial Officer

Thank you.

Operator

Our last question comes from Myles Walton from UBS. Your line is open.

Myles Walton — UBS — Analyst

Great, thanks. So the last couple of quarters — last quarter and then this upcoming quarter, you are looking at you are going to a 30% incremental drop through. And Steve, maybe just looking into ’21, is that an appropriate drop through to be looking at for operating earnings relative to revenue growth or are there other costs, perhaps, coming back to the system that you’ve may be avoided or that our cost savings that are going to be in the structural run rate?

Steve Priest — Chief Financial Officer

Hi, Myles, I think I’d start off with a couple of the headwinds of things that generally people got to sort of think about, obviously in the very, very short-term, you’re going to sort of have a bit of a peak in terms of medical cost as you sort of come out the back end of the quarter. Our people have put some certain elective procedures off etc. But the biggest too, that I think we’ve got to navigate in the sort of a major future is rents and landing fees where you think about the sort of public entities in the airports where they have less traffic going through. So that puts natural pressure on the cost structure. And in addition, as the volumes of our customers go up thinking about such as the demand as there’s cleaning services and initiatives that the industry as a whole is going to put forward. So when I think about headwinds, there are probably the couple.

In terms of the work that we’re doing, in terms of the tailwinds, that’s really, as I’ve said before in my previous answers to questions, we’ve done a tremendous job at JetBlue through the structured cost program. We’ve really taken a hammer to some of the bigger cost items. Think about engine maintenance, think about heavy maintenance, think about taking fixed cost side but also predominantly over the last few months we’ve been shifting fixed costs to variable. We’ve done some outsourcing from an airport standpoint, we’ve done some insourcing to drive millions of dollars of benefits and our tech ops organization bringing some heavy maintenance work. So, we are leaving no stone unturned to make sure we get back on to that sort of 2020 — early 2020 trajectory as we get into the sort of ’22 financial year. So, I’m pleased with the progress we’re making.

Myles Walton — UBS — Analyst

Okay, I’ll leave it at one. Thanks.

Steve Priest — Chief Financial Officer

Thank you very much, Myles.

David Fintzen — Vice President of Investor Relations

And that concludes our third quarter 2020 conference call. Thanks for joining us. Have a great day.

Operator

[Operator Closing Remarks]