Is JetBlue Back?

JetBlue (JBLU Quote - Cramer on JBLU - Stock Picks) is soaring again, but questions remain as to whether the resurgence will last.

Shares in the iconoclastic carrier rose 44% last week, following its earnings report on Tuesday. For the year, the stock is up about 16%, compared with a 12% increase in the sector-tracking Amex Airline Index.

JetBlue remains an outlier in the industry. In the eight years since its 2000 start-up, not a single competitor has matched its effort to provide actual comfort in coach class. And Wall Street has remained distant since calling off the love affair in 2003, after JetBlue shares reached an all-time high at around $31. The shares closed Friday at $6.89.

Still, even today, many observers fail to see much upside.

When Lufthansa reached agreement to buy 19% of JetBlue in December, many viewed the move as an opportunity to take advantage of the cheap dollar rather than a strategic investment, let alone a wise strategic investment.

Continental(CAL Quote - Cramer on CAL - Stock Picks) CEO Larry Kellner has also questioned the wisdom of the deal.

"We probably have dozens of models" for what might happen in the industry, he told analysts and reporters on a conference call last month. "I can assure you that the thought of [somebody] taking a 19% stake in JetBlue wasn't one of them."

Now, JetBlue and Lufthansa say they are discussing a commercial relationship. It could well resemble the newly formed Aer Lingus and JetBlue partnership, which will enable single-ticket booking for connecting flights through New York's Kennedy Airport and convenient bag transfer, to the extent that's possible at the hard-to-negotiate airport.

That's not to say that code-shares and similar relationships offer huge revenue opportunities, but these deals are part of a collection of opportunities that JetBlue is pursuing. Others include growing subsidiary LiveTV, which provides in-flight television and Internet connectivity to eight airlines, and trying to lure business travelers with refundable fares and a planned front cabin upgrade.

Additionally, JetBlue is promising growth of 10% to 12% in first quarter passenger revenue per available seat mile. A big reason is that capacity growth has slowed. A year ago, 25% of capacity was in new markets, after JetBlue entered 16 of them in 2006. Now it's 10%.

"We had so much drag from opening 16 new markets in 2006," CEO Dave Barger said last week on a conference call with analysts. "We don't have that drag in 2008." This year's capacity growth was scaled back to between 5% and 8%.

Meanwhile, at Kennedy, a new slot system promises to reduce congestion, which cost JetBlue $50 million for labor, fuel and travel vouchers last year. A new terminal, opening in the third quarter, will mean improved operating efficiency.

Analysts understand the appeal but remain skeptical about the stock, which currently is valued at around 57 times consensus 2008 earnings estimates of 12 cents.

"[A] slower growth forecast attracted JetBlue buyers, who drove JetBlue shares up 20% immediately after the company reported," wrote Bob McAdoo of Avondale Partners. But he said his 2008 earnings estimate of 10 cents makes it hard to justify the current price "or to suggest chasing the shares at this point."

The increase in the shares was surprising, given that fourth-quarter passenger RASM grew just 2.6%, "one of the weakest performances within the industry," says Mike Derchin of FTN Midwest.

Derchin says "the new management team seems to be on the right track," and will benefit from easy comparisons with year-ago numbers. He recently raised his 2008 estimate from a loss of 12 cents to a profit of 14 cents. But he rates the shares neutral, with a target price of $6.50. FTN Midwest makes a market in JetBlue.

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