JetBlue's Growing Old Fast

In the airline industry, maturity isn't necessarily a good thing.
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For a young, enthusiastic, fast-growing leader of the low-cost carriers that now dominate the airline industry, almost nothing could be worse than maturity.

Yet

JetBlue Airways

(JBLU) - Get Report

, which began flying in February 2000, is growing old before our eyes.

The carrier's stock is trading about 5% below its 2005 close, thanks largely to start-of-the-year downgrades by analysts at Merrill Lynch and Raymond James. Both said the stock price has gotten ahead of where it should be.

A key reason, said Merrill Lynch, which has a banking relationship with JetBlue, is that "the company may be experiencing growing pains (that include) rising costs related to the maturation of the company."

The problems with maturation in the airline industry are multiple. The cost of labor goes up as workers become more senior. Route expansion often progresses from the most desirable routes to less desirable ones, and maintenance costs can increase precipitously as aircraft require their first heavy maintenance checks after operating for several years.

Vivian Lee, an aviation analyst for Alliance Capital, which doesn't hold JetBlue stock, says that all new airlines start out with a "maintenance vacation" from the hefty checks that can cost a few million dollars per aircraft. A vacation's impact can be prolonged by rapid growth, because high maintenance costs would initially affect a relatively small percentage of an evolving airline's fleet. But eventually, all vacations must come to an end.

JetBlue is burdened with all the phenomena of aging at the same time as fuel costs have risen and competition has stiffened. In the third quarter, as operating expenses rose 46.1% from the same quarter a year earlier, operating income declined to $13.8 million, down 38.4%. Net income of $2.7 million came about largely from a tax-accounting benefit of $6.4 million, a result of reduced tax expectations since the company no longer believes it will make a profit this year.

"I would argue that JetBlue actually lost money in the third quarter," said Lee. CEO David Neeleman called the quarter difficult, as a result of high fuel costs, bad weather and tough competition. The airline said it would report a loss for the fourth quarter and the year.

Rising maintenance costs are likely to increase the burden on the company, which operates a fleet of 85 Airbus A320 jets. Heavy maintenance requirements begin after several years of operation, with the exact interlude determined by the usage of the airplane.

In fact, in the third quarter JetBlue's maintenance costs rose to $19.8 million, up 72% from the same period a year earlier. That followed a full-year 2004 increase of 94% to $44.9 million. The airline took delivery of 10 jets in 2000, 11 in 2001, and 16 for each of the past four years. In 2005, it also received its first seven Embraer 190s, a second aircraft type that it plans to deploy in markets too small for A320 service.

JetBlue has warned repeatedly that aircraft maintenance outlays will rise. "Our maintenance costs will increase significantly, both on an absolute basis and as a percentage of our operating expenses, as our fleet ages and (our) warranties expire," the company said in its 2004 annual report. But investors may not have been listening.

JetBlue should have been a Wall Street darling for many years after it went public, says analyst Lee. Instead, she said, "it is looking more like a legacy carrier and less like

Southwest Airlines

far faster than most would have imagined at its IPO only three and a half years ago."