JetBlue Nosedives on Analyst Report

Updated from 1:50 p.m. EST

Wall Street's love affair with JetBlue (JBLU) centers on the notion that the carrier's fast growth will mimic Southwest's (LUV) success. But according to J.P. Morgan, JetBlue's rapid expansion comes at the expense of profits.

On Thursday, J.P. Morgan analyst Jamie Baker cut his 2004 earnings-per-share estimate to 84 cents, matching his 2003 EPS estimate, while telling investors the carrier is expanding too fast, too soon. Investor reaction was strong, and JetBlue's stock closed down $3.25, or 11.2%, at $25.67 on 12.3 million shares traded, well past its average daily volume of 2.8 million.

"We no longer believe JetBlue is capable of earnings growth in 2004, despite a planned 37% increase in capacity," said Baker in his research note. "With EPS growth not anticipated until the final quarter of this year, we are reiterating our underweight rating, despite shares having lost 38% from their October highs."

Baker's revised estimates came after the analyst took a long hard look at JetBlue's Dec. 4 warning that fourth-quarter operating margins would come in between 13% and 14%, lower than the 16% to 17% it previously expected. JetBlue CEO David Neeleman said the lowered guidance was "due to capacity additions resulting in lower average fares, particularly in our western markets."

But according to Baker's research, Neeleman's comments were open to interpretation. The analyst said the only carrier expanding capacity in JetBlue's western markets was JetBlue. Baker said JetBlue boosted capacity 61% in the third quarter, while rivals lowered their capacity by 9%. In the fourth quarter, Baker said JetBlue's capacity rose 49%, while the competition was unchanged.

And with rivals gearing up to expand capacity even more in 2004, Baker thinks JetBlue's operating margins, which were above 20% in the third quarter, could face even more pressure. Already rivals like AMR (AMR) unit American Airlines are offering two-for-one sales on JetBlue's routes and boosting capacity to keep market share, reduce pricing power and further weaken revenue.

Not So Quiet on the Western Front JetBlue blamed capacity increases for slumping operating margins in the fourth quarter, but J.P. Morgan says JetBlue was the source of those capacity increases. Below is a look at how JetBlue's rivals have adjusted capacity, or plan to, in western routes that JetBlue serves.
Market*	Capacity Change by Rivals
	4Q03	1Q04	2Q04
New York to Salt Lake City	-14%	-16%	-3%
Boston to Denver	-14	14	9
New York to San Francisco	-12	12	32
San Francisco to Washington	-12	2	10
Los Angeles to Salt Lake City	-12	-12	-5
New York to Denver	-10	4	5
Los Angeles to Las Vegas	-10	10	14
New York to Seattle	-9	3	11
New York to Las Vegas	-6	21	17
Los Angeles to San Francisco	-5	3	4
Boston to Los Angeles	-4	37	71
New York to San Diego	1	40	33
New York to Los Angeles	2	15	15
Los Angeles to Washington	9	22	13
Los Angeles to South Florida	28	23	36
* -- excludes Atlanta markets, where JetBlue stopped flying on Dec. 4. Source: J.P. Morgan estimates