No Longer an Upstart, JetBlue is Facing Turbulence

Once a darling of the airline industry, JetBlue Airways Corp. is now in a spot many industry experts once thought hardly possible: the red.

For the first time since it began flying in 2000, the Forest Hills-based airline - known for its low fares and such extras as leather seats and individual TV sets - lost money, $42 million in the last quarter of 2005, an amount larger than expected.

In reporting fourth-quarter results last month, JetBlue said that, based on current and expected fuel prices, it does not expect a profit this year. And JetBlue chairman and founder David Neeleman has said the airline needs to do a better job raising revenue while maintaining its low-fare position.

None of this sounds like the JetBlue that electrified the industry. The business now appears as turbulent as it has been for other U.S. carriers buffeted by fuel costs and competition.

As JetBlue has stubbed its toe, in the words of several analysts, questions about the airline's future have been raised.

"The bloom is off the rose in many ways," David Stempler, president of the Air Travelers Association in Washington, D.C., said of the airline. "Operationally and financially, they're like anybody else now."

Increased overhead

Indeed, JetBlue blames its problems primarily on jet fuel costs, over which it has no control other than to lock in lower prices, and it says it did not do a good job when it came to betting on fuel costs last year. It hedged only 20 percent of its fuel costs, at $29.95 a barrel. Fuel hit almost $70 a barrel.

Yet, even amid rising fuel costs and bottom-line issues, JetBlue is showing signs of maturation. "... There's little hiding the fact that over-aggressive growth, unrelenting competition, deteriorating operational integrity, earnings disappointments and - longer term - shareholder value destruction are among common trademarks of mature, hub-and-spoke multi-fleet operators," said Jamie Baker, who follows the airline industry for JP Morgan Chase in Manhattan, in an early February report.

"Against this backdrop, JetBlue appears to finally be acting like an airline, as opposed to the mythical uber profit machine some may have believed it to be. Frankly, this maturation has occurred far more quickly than we ever would have envisioned," he said.

In late February, Baker issued another report after Delta Air Lines had published its summer schedule, minus its discontinued Song brand. In that report, Baker upgraded JetBlue.

But other analysts and experts point to some of JetBlue's problems:

Its fleet of A-320 Airbus planes is growing older and will need more costly maintenance work soon.

It expanded too fast, too soon. JetBlue added routes and new aircraft at a dizzying rate. When it began operations in February 2000, JetBlue served two cities, Buffalo and Fort Lauderdale; today it serves 35 cities with more than 400 daily flights.

JetBlue was too aggressive in bringing on line new Embraer 190 airplanes it began to take delivery of in the fall. JetBlue will now fly two types of aircraft, the A-320s and E-190s. It previously only flew Airbuses.

Shares, at an all-time high of about $31 when the company went public in 2002, have fallen recently to about $11 a share. The stock closed Friday at $10.26, down 84 cents.

The major carriers, several of which fell into bankruptcy in the past few years, have largely cleaned up their balance sheets and have become tougher competitors for JetBlue and other low-cost airlines.

"The challenges JetBlue faces are some we were not able to get ahead of, including and most importantly the cost of fuel," said Jenny Dervin, JetBlue spokeswoman. "But we are completely focused and looking at 2006 and beyond, especially with our growth plans. Aircraft deliveries [of E-190s] are still coming in."

JetBlue, now the largest carrier at Kennedy Airport, has announced plans to expand to at least 10 additional cities this year, including Richmond, Va.; Austin, Texas; Portland, Maine; and Hamilton in Bermuda, using some of the 10 new E-190s it has received from manufacturer Embraer of Brazil. JetBlue has about 7,984 full-time employees.

Enhancing bread-and-butter

The airline continues to build on its reputation for amenities and facilities. It is spending nearly $800 million to construct a 635,000-square-foot terminal at Kennedy, attached to the historic TWA building, to be completed in 2009. It has introduced XM Satellite Radio in its airplanes, and in January, began serving Dunkin' Donuts coffee aboard all flights. And fares haven't skyrocketed: The New York to Fort Lauderdale fare that was $91 one-way in 2000 is $100 today, the airline says.

JetBlue has firm orders for 100 E-190s and options to buy another 101. The E-190s seat 100 passengers, have a range of about 2,000 miles and will allow JetBlue to serve smaller markets in the Midwest and South, where airport runways tend to be shorter. JetBlue's 88 Airbus planes seat about 156 and are able to fly transcontinental flights.

The most recent U.S. Department of Transportation statistics show that in January, JetBlue's flights arrived late 29.4 percent of the time, the third consecutive month that JetBlue finished with the worst on-time arrival rate in the industry.

"We're not pleased by that at all," Dervin said. "That is one of the main areas we need to improve. This is totally unacceptable."

Dervin blamed bad weather, including the Feb. 11 blizzard, for some of the on-time problems. Additionally, she said, many of JetBlue's flights are in the heavily traveled East Coast corridor, where delays for all airlines are hardly unusual. Until three months ago, JetBlue had been in the top one-third of airlines in terms of on-time performance.

Inevitable comparisons to flash-in-the-pan airlines crop up in interviews. The skyways of the past are littered with the ruins of airlines that once held great promise, such as People Express, which offered fares discounted up to 60 percent below competitors. It folded in 1987, six years after it turned the commercial aviation industry on its head.

People Express' demise is blamed on vast over-expansion.

But analysts say JetBlue is no People Express. For one thing, they say, JetBlue is far better capitalized than People Express ever was - JetBlue's market cap is $1.97 billion, and People Express' market cap, close to its height in 1983, was $382.3 million.

And, they add, JetBlue's top executives have far more airline industry experience than did the brass at People Express. Neeleman, 46, has been in the industry for more than two decades, starting in an executive spot with Southwest Airlines, a pioneer in the low-cost carrier world.

Still, JetBlue needs to find routes that are profitable and not already cluttered with competitors, said industry expert Mike Boyd, president of The Boyd Group, airline consultants based in Colorado. And, whether it is ready or not, analysts say, JetBlue is in a different world now.



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