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Grim View at JetBlue

The airline misses estimates and predicts a year of losses.
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Updated from 7:45 a.m. EST

Fast-growing air carrier

JetBlue

(JBLU) - Get JetBlue Airways Corporation Report

reported Wednesday that it lost $42 million in the fourth quarter and expects to lose money in 2006, largely because of high fuel costs.

CEO David Neeleman said the solution to the airline's problems is to raise ticket prices and to reduce capacity in select markets. Yet JetBlue seems to be locked into an expansion mode. The company will take delivery of 17 Airbus A320s and 18 Embraer E190s this year, and it's building a new terminal at Kennedy International Airport in New York.

Under accounting rules, it must begin making $3 million quarterly payments for the new terminal this year, even though the facility won't be occupied until 2008 at the earliest.

"I feel our customers will pay us more to fly on JetBlue because we deserve it," Neeleman said on a conference call. "We have a great product. Our customers love us. We have great market share. (But) we need to get another $10 or so per ticket."

He said the airline had projected jet fuel to cost $1.80 a gallon in 2006, but the cost has risen to $1.98, which would add $80 million in fuel costs this year. Meanwhile, ticket prices averaged $109 in the fourth quarter, up $9 from a year earlier.

The New York-based discount carrier's $42 million quarterly loss was equivalent to 25 cents a share, reversing the year-ago profit of $1.5 million, or a penny a share.

These results include $13 million in charges, consisting of $6.9 million in noncash stock-based compensation expenses and a $6.1 million charge for development costs associated with a maintenance and inventory tracking system that won't be implemented.

Excluding the items, the latest-quarter loss was 19 cents a share, 5 cents wider than the Thomson First Call analyst consensus estimate.

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Revenue rose 34% from a year ago to $446 million, while the operating margin swung to negative 7.1% from positive 3.2% a year earlier. Excluding unusual items, the operating margin for the quarter ended Dec. 31 was negative 4.1%.

Yield per passenger mile was 8.16 cents, up 8.1% from 2004. Operating revenue per available seat mile increased 7.4% year-over-year to 7.02 cents. Available seat miles grew 24.7% to 6.4 billion. Operating expenses jumped 48.3% from the fourth quarter of 2004, and operating expense per ASM increased 18.9% year-over-year to 7.51 cents, including the charges.

During the quarter, JetBlue's realized fuel price was $1.87 a gallon, a 50.3% increase from the fourth quarter of 2004's price of $1.24. Excluding fuel, costs per available seat mile increased 7.9% year over year.

As a result of its fuel-hedging program, JetBlue realized an $11.8 million benefit in the fuel-expense line in the fourth quarter and a $43.1 million benefit for the full year. JetBlue ended the year with $483.8 million in cash and investment securities.

The company said that based on energy prices staying roughly where they are, it expects to post losses for the first quarter and all of 2006. Analysts were looking for a 2-cent first-quarter profit and a 13-cent full-year profit.

Shares of JetBlue were trading at a 52-week low, sinking $1.80, or 13.8%, to $11.24 on volume that was five times the normal level.

In the fourth quarter, JetBlue faced a series of problems, including bad October weather and the late arrival of its first E190s, resulting in tightened schedules. Additionally, as the planes were being put into use, foggy weather strained schedules because JetBlue pilots were required to observe enhanced visibility standards during their first 100 hours flying the aircraft. This year, the 190s are expected to account for 6% of JetBlue's flying.

Asked whether he would seek to slow growth if the losses continue, Neeleman responded, "We will consider anything if conditions warrant," but noted that continuing delivery of the 190s will strengthen operations, providing service to markets considered too small for frequent A320 flights.

He said the airline could price more aggressively if it reduced frequencies in markets such as Kennedy-Fort Lauderdale, where it currently operates near hourly service during the day. "If we can adjust capacity, we can still keep load factors where we want and get a few more dollars for our ticket," he said.

Merrill Lynch analyst Michael Linenberg on Wednesday lowered his rating on JetBlue to sell from neutral because of "growing pains" at the company. Merrill Lynch has a banking relationship with JetBlue.

In a research report, Linenberg wrote that "the results of this quarter and the fact that management expects a loss for the March quarter and full year 2006 (albeit at a relatively high per gallon fuel assumption of $1.98) support our view that the stock will face several headwinds during the year."

Among them are rising costs related to the maturation of the company, meaning aircraft and personnel, expenses associated with the introduction of the E-190s, a limited fuel-hedge position, new competition -- Virgin America is targeting transcontinental flights -- and the narrowing of its cost advantage vs. the giant carriers that fly nationwide and worldwide routes.