Analysts Criticize JetBlue Expansion Plan

The tarnish on JetBlue's reputation comes just as a few money-losing carriers are gaining favor on Wall Street thanks to shrinking costs, increased demand for air travel and rising fares.

As the U.S. airline industry unraveled over the past five years, JetBlue Airways Corp. proved that a carrier with the right mix of low overhead, cheap fares and distinguished service could succeed during a punishing downturn.

The outlook for most big airlines is still pretty grim, with Delta Air Lines Inc. and Northwest Airlines Corp. in bankruptcy, and the rest unlikely to show a profit in 2006. What has changed, though, is that investors now lump JetBlue among the lackluster.

The tarnish on JetBlue's reputation comes just as a few money-losing carriers, such as AMR Corp.'s American Airlines and Continental Airlines Inc., are gaining favor on Wall Street thanks to shrinking costs, increased demand for air travel and rising fares.

Analysts agree that JetBlue's problems stem from an aggressive expansion plan that has run into headwinds, such as high fuel prices, fierce competition and some bad decisions when choosing new markets. Several have placed a "sell" or equivalent rating on the company's stock.

"Since we're not making money, I think there is skepticism that is out there and it is legitimate skepticism," said John Owen, JetBlue's chief financial officer.

While 2006 is expected to be an unprofitable year for six-year-old JetBlue, the discount carrier aims to minimize the red ink by flying more short-haul routes (to save on fuel), serving airports with fewer rivals and raising fares.

CEO David Neeleman said another option on the table is to scale back JetBlue's rapid growth plan, which includes orders for more than 180 new planes worth approximately $7.5 billion.

JetBlue, which recorded its first-ever quarterly loss of $42 million in the October-December period, is expected to report a loss of almost $33 million for the first quarter, according a survey of analysts by Thomson Financial.

The underlying challenges at JetBlue may not be a big deal to customers - its planes were 83 percent full on average in February despite having the worst on-time performance among U.S. airlines - but the story is different on Wall Street.

The company's stock price, which climbed above $30 in March 2003, is now trading near the bottom of its 52-week range of $9.65-$16.85. Shares of JetBlue, which were split three-for-two on Dec. 23, closed at $10.94 Wednesday on the Nasdaq stock market. In contrast, AMR closed at $28.10, near the top of its 52-week range of $9.80 to $29.14.

While other airlines are shrinking their overall flying capacity in the U.S., JetBlue's expansion calls for nearly tripling its fleet by 2011.

In the fourth quarter, JetBlue's seat capacity climbed 25 percent from the year before, and the company has acknowledged that a glut of empty seats to and from the hypercompetitive Florida market has made it difficult to increase fares.

Furthermore, JetBlue's non-fuel-related costs are rising sharply while most of the industry's are only increasing modestly, and in some cases falling. Even before the price of jet fuel marched up to almost $2 a gallon, or roughly 20 percent above year ago levels, JetBlue's costs for terminal leases, aircraft maintenance and pilot training were advancing.

For example, in the fourth quarter of 2005, JetBlue's maintenance costs rose 40 percent, compared with a 2 percent increase at Fort Worth, Texas-based American. JetBlue's aircraft rent climbed roughly 14 percent, compared with a decline of 3 percent at American.

"When you take a legacy carrier with all the inefficiencies that they have collected over decades of operation, it's really easy to cut costs," Owen said. "We started with low costs and our goal is to keep them as low as we can."

JetBlue's per-seat flying costs are still some of the lowest in the industry, but the trend is moving in the wrong direction, analysts said.

"The decision to grow as rapidly as they have, and simultaneously induct a new fleet type - the Embraer 190 - has caused them to incur substantial ... costs for training, development and support," said Robert W. Mann, a Port Washington, N.Y.-based airline consultant. By contrast, low-fare leader Southwest Airline Co.'s entire fleet is made up of Boeing Co. aircraft.

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