Airline growing despite economy

Low-fare JetBlue is expanding routes, recording profits

January 02, 2002|By BLOOMBERG NEWS

NEW YORK - David Neeleman, chief executive of JetBlue Airways Corp., surveyed the cabin of an Airbus SAS A320 jetliner during its inaugural trip, clicked on the public address microphone near the cockpit and made a marketing pitch.

"If you like the flight today, tell your friends and family about us and we'll keep adding service," Neeleman said to 135 passengers as the aircraft cruised at 32,000 feet from Dulles International Airport outside Washington to Fort Lauderdale, Fla.

JetBlue, a New York-based, low-fare airline with 21 jet planes that flies to 18 cities in the United States, is expanding routes and posting profits in an industry facing more than $6 billion in losses last year, company officials said.

JetBlue, a private company that doesn't have to provide financial information to the public, was about an hour from filing an application with the U.S. Securities and Exchange Commission for an initial public stock offering when terrorists struck on Sept. 11, Neeleman said. The company has delayed the offering, he said.

Selling stock would allow JetBlue to grow faster and offset the costs of planned terminal renovations at John F. Kennedy International Airport, the airline's home base, said Neal Moszkowski, a partner at Soros Private Equity Partners, which owns about 27 percent of the company.

Managing growth is among the company's challenges, said Raymond Neidl, an airline analyst at ABN Amro.

"You can really kill yourself if you don't plan your expansion carefully," Neidl said. "You've got to pick profitable routes and be willing to abandon routes that aren't."

Air travel in the United States declined about 20 percent in November compared with November 2000, according to the Air Transport Association, which represents the airlines. Passenger volume at the nation's largest low-fare carrier, Southwest Airlines, fell 1 percent.

Passenger use dropped about 33 percent in September and 22 percent in October from the year before, according to association statistics.

People Express Airlines Inc., a low-fare carrier that served the New York City market in the 1980s, went out of business after a rapid expansion into hubs including Denver and Chicago.

Small carriers such as JetBlue will likely heed the People Express lesson and avoid going head-to-head with the industry giants without a clear understanding of the market and specific goals, said Jamie Baker, a UBS Warburg LLC analyst.

JetBlue and other low-fare carriers should expect increased competition from the major airlines, especially in the leisure travel market, Baker said.

"During robust economic times, the major carriers were more tolerant to sort of coexist with the low-fare airlines, but now that times are tougher, we're seeing that willingness turn into a more aggressive response by the big guys," Baker said.

Major U.S. airlines, such as UAL Corp.'s United Airlines, the second-largest carrier, reduced service about 20 percent in the weeks after Sept. 11. United, AMR Corp.'s American Airlines, the biggest carrier, and Delta Air Lines Inc., the No. 3 carrier, eliminated more than 53,000 jobs in September and October.

JetBlue, which doesn't have labor unions, hasn't cut any of its 2,100 workers, Neeleman said. It has restored three of the five flights it suspended after Sept. 11.

The company has about $120 million in cash and credit lines for growth, keeps costs low and maximizes the time its jets spend in the air, Neeleman said.

JetBlue took delivery Dec. 14 of its 21st Airbus jetliner, which cost about $48 million each. The airline has a $2.5 billion contract with Toulouse, France-based Airbus SAS, the No. 2 plane manufacturer, to buy 110 jetliners in the next decade.

Neeleman, 42, created JetBlue in 1999 with $130 million from investors such as Soros Private Equity Partners, Weston Presidio and Chase Capital Partners. A second round of private financing raised $30 million.

Weston Presidio, the San Francisco-based backer of retail ventures such as Costco Wholesale Corp., Staples Inc. and Starbucks Corp., invested in JetBlue based on its business model and management team, said Michael Lazarus, a managing partner at the investment firm and the airline's chairman. Weston Presidio, which manages about $2.4 billion of assets, holds a 20 percent stake in the company, he said.

JetBlue posted a $10.5 million third-quarter profit after accepting $6.7 million in U.S. government aid. The Air Transportation Safety and System Stabilization Act provides $15 billion in grants and loan guarantees to domestic airlines hurt financially by the terrorist attacks.

United Airlines lost $1.16 billion in the third quarter, and American Airlines $414 million in the same period.

"There are difficult times ahead in the next few years in the industry, but where there's chaos there's opportunity," Lazarus said.

People Express isn't the only small airline that has failed. Dallas-based Legend Air went out of business after it was unable to lure enough travelers to its "all first-class" seating flights. Legend used full-size jets configured to carry 56 passengers at below-market fares. The airline started April 5, 2000, and filed for bankruptcy protection that December.

JetBlue is averaging 78.9 percent capacity, or 128 passengers on each of its 162-seat jetliners.

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