JetBlue flies into the red

Low-fare airline known for its amenities encounters high fuel costs and competition

March 18, 2006|By JAMES BERNSTEIN

JetBlue Airways Corp., once a darling of the airline industry, 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 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, based on current and expected fuel prices, that it does not expect a profit this year. And founder and Chairman David Neeleman has said the carrier 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, said of the airline. "Operationally and financially, they're like anybody else now."

Indeed, JetBlue blames its problems primarily on jet fuel costs, over which it has no control other than to seek 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. Jet 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 multifleet operators," Jamie Baker, who follows the airline industry for JP Morgan Chase in Manhattan, said in report last month.

"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.

Baker issued another report upgrading JetBlue after Delta Air Lines published its summer schedule, minus its discontinued Song brand.

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 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, N.Y., and Fort Lauderdale, Fla.; today, it serves 35 cities with more than 400 daily flights.

JetBlue was too aggressive in bringing online 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.

JetBlue's shares, at an all-time high of about $31 when the company went public in 2002, have fallen below $11. The stock closed yesterday at $10.27, down a penny.

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 New York's John F. Kennedy International Airport, has announced plans to expand to at least 10 more cities this year, including Richmond, Va.; Austin, Texas (only Austin service has begun); Portland, Maine; and Hamilton, 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.

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.

JetBlue needs to find routes that are profitable and not cluttered with competitors, said industry expert Mike Boyd, president of the Boyd Group, airline consultants based in Colorado.

Whether it is ready or not, analysts say, JetBlue is in a different world now.

James Bernstein writes for Newsday.

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