Facing Headwinds, JetBlue to Fly Shorter Routes in Search of Profits

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.

"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.

Prudential Equity Group analyst Bob McAdoo said he sees the potential for a "financial meltdown" at JetBlue based on an extensive analysis of the newest markets the airline has entered. The fundamental problem, according to McAdoo, is that JetBlue is taking delivery of one new plane every 10 days, but lacks enough gates at New York's John F. Kennedy International Airport - its hub - to deploy them profitably.

Instead, McAdoo hypothesizes that JetBlue has been forced to work around the constraints by flying more long-haul flights in order to minimize the number of takeoffs and landings at JFK. Trouble is, 17 of the last 20 markets JetBlue has introduced since early 2004 have been unprofitable, according to McAdoo.

While Neeleman disputes McAdoo's arithmetic, he agrees that JetBlue would be better off flying shorter routes. Aside from saving fuel, increased ticket sales would more than offset the marginally lower fares on short hops, he said.

Indeed, adjustments are underway.

Roundtrips between JFK and Long Beach, Calif. are now six daily, compared with eight last year; roundtrips between JFK and Ontario, Calif., are down to one a day from two and executives say they are planning further cuts to transcontinental service by fall.

Planes freed up from cross-country trips will mainly be redeployed for service east of the Mississippi, Neeleman said. The company recently launched service to Richmond, Va., Pittsburgh, Pa., and Jacksonville, Fla.

Neeleman regrets not protecting the company from rising oil prices by locking in long-term fuel-purchasing agreements - a strategy employed most effectively by Southwest, which remains profitable.

But he also sees a silver lining in the experience. The fuel issue exposed otherwise hidden mistakes the company had made in market selection and revenue management, and JetBlue plans to correct them.

"If we need so many cheap fares in a market to stimulate traffic during a certain part of the year, maybe we shouldn't have so many flights," he said.

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