Fuel Costs Drag on JetBlue

The company will defer delivery on 12 aircraft.
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Updated from 8:03 a.m. EDT

JetBlue Airways

(JBLU) - Get Report

reported its second consecutive quarterly loss on Tuesday and said high fuel costs have forced it to change its business model, including backing away from long-haul markets and cutting back on its Airbus A320 fleet expansion.

The beleaguered carrier also said it wants to raise fares. As for its financial results, JetBlue lost $32 million, or 18 cents a share, in the first quarter, compared with earnings of $6 million, or 4 cents a share, last year. Total operating revenue rose 31.4% from last year to $490 million.

On average, analysts surveyed by Thomson First Call were forecasting a loss of 20 cents a share on sales of $497.9 million.

Higher fuel costs were responsible for the loss, CEO David Neeleman said during a conference call. "We haven't done a good job of managing our business for fuel prices that are over $2 a gallon," he said. Although it's forecasting a second-quarter profit, the company still expects to lose money for the full year.

Unveiling a "return to profitability plan," JetBlue said it will sell two to five of its 88 Airbus jets. The company also announced deferrals for 12 planned A320 deliveries that were scheduled from 2007 through 2009. As a result, capacity is expected to increase this year by 20% to 22%, rather than the 28% previously projected. This summer, capacity in the New York to Florida markets will be down about 15%, while New York-Los Angeles will decline around 8%.

The intent, Neeleman said, is to reduce long-haul flying while using arriving Embraer 100-seat E190 regional jets to grow in medium and short-haul markets. JetBlue will get 18 regional jets in 2006 and 18 more in 2007. Planned new routes include Long Beach, Calif., to Sacramento; Burbank, Calif., to Las Vegas; and New York's Kennedy International Airport to Charlotte and Raleigh-Durham, N.C.

The new focus means that JetBlue will open more than the eight to 10 new markets it had previously expected, though Neeleman wouldn't quantify the increase.

Additionally, JetBlue wants to raise ticket revenue through improved yield management. The airline's average one-way fare in the first quarter was about $107, which Neeleman said was little changed from a year earlier.

"We need to trade some load factor for higher average fares," Neeleman said, noting that on Monday JetBlue raised its highest transcontinental fare to $399. In general, he said, the carrier prefers to keep its lowest fares in place, but to sell fewer of them and more mid-range fares.

Meanwhile, JetBlue wants to reduce costs through such methods as better scheduling and reduced hiring. The combination of higher revenue and lower expenses should result in a $70 million benefit that will be fully realized in 2007, Neeleman said.

During the first quarter, revenue per available seat mile increased to 7.46 cents, up 3.3%, while costs per available seat mile rose to 7.84 cents, up 16.3%. Operating expenses climbed by $515 million, or 48%, while the average fuel price was $1.86 per gallon, up 42.5%. Excluding fuel, CASM increased 6.7% year-over-year. JetBlue ended the quarter with $419 million in cash and investment securities.

Analysts weren't impressed. Mike Linenberg of Merrill Lynch, which provides investment banking services to JetBlue and holds more than 1% of its stock, said the airline underperformed the industry's passenger RASM increase of 14.3% for the quarter.

Additionally, he said JetBlue's first-quarter operating margin was negative 5.1%, which, "so far, is the worst margin performance of airlines reporting." The airline's plan to restore profitability is "a step in the right direction," he said. The cut in growth, he said, "is not likely to be well-received by growth investors, but are there any left holding JBLU shares?"

Jamie Baker of JPMorgan, another firm that has provided banking services to JetBlue, said that at 14 times earnings, the stock's valuation is "off-the-charts by any reasonable airline standard, in our view." Baker recommended the sale of its shares due to "over-aggressive growth, unrelenting competition, multiple fleet-types, shareholder value destruction and now suspect revenue optimism added to the mix."

Meanwhile, in a letter to employees last week,

US Airways

(LCC)

CEO Doug Parker responded to a press release in which Neeleman said that until JetBlue came along, "the people of North Carolina have overpaid for sub-standard service." Parker wrote in his letter that the remarks appeared to be directed at US Airways, and said they are "probably indicative of the stress that JetBlue is under.

"JetBlue is experiencing a relative profitability decline that is unprecedented in our industry," Parker said. "It is probably very hard for them to hear that US Airways (who they'd counted on being gone by now) is expecting to be profitable in 2006 (excluding transition related expenses), while they have disclosed that they expect to be unprofitable."

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