JetBlue Doubles Profit, but Shares Skid - TheStreet

Updated from 10:38 a.m. EDT


(JBLU) - Get Report

doubled its profit in the third quarter, but that wasn't enough for investors.

Shares ended down 9% Thursday amid disappointment that the carrier had topped Wall Street expectations by only a penny.

The airline said net income for the quarter came in at $29 million, or 39 cents a share, more than double the year-ago profit of $12.2 million, or 18 cents a share. Analysts expected the company to earn 38 cents a share, but with estimates running as high as 40 cents a share and with rival carriers beating estimates by 40-cent margins, investors expected more.

Although revenue came in at $273.6 million, up 65.5% from the year-ago quarter, shares of JetBlue fell $6.16 to close at $61.80. Even at this level, JetBlue is valued at 36 times estimated 2004 earnings, the highest in the airline sector. In comparison, low-cost rival Southwest trades at 30.6 times 2004 earnings, while AirTran trades at 31.7 times 2004 earnings.

"Our strong financial results this quarter are the result of great customer demand coupled with ongoing cost control diligence," said CEO David Neeleman.

Operating margins continue to soar at JetBlue, a result of low costs and the company's expansion. In the third quarter, the company said it had an operating margin of 19.7%, better than last year's operating margin of 13.6%.

JetBlue's strong quarter was driven by the company's aggressive expansion plans, which increased capacity, measured in available seat miles, by 66.3% over last year's quarter. Even though JetBlue boosted capacity by such a large amount, capacity was still outpaced by traffic, measured in revenue passenger miles, which was up 72.1%. With demand outpacing increasing supply, load factor, or the percentage of seats filled in every plane, came in at 87.7%.

JetBlue's planes may have been packed, but while the carrier was able to raise average fare prices, it couldn't post bigger profit off customers. In the third quarter, the average JetBlue fare was $109.56, up 2.7% from last year. But because JetBlue has begun flying longer transcontinental flights, the amount of money it was able to make per mile flown dipped in the quarter. Yield per passenger mile dropped 4.1% from last year as stage lengths grew 7.1%.

Costs are also on the rise as JetBlue continues to expand into markets from coast to coast. Operating expenses came in at $219.7 million, up 53.9% from a year earlier, but because the company is flying longer routes, cost per available seat mile, or CASM, declined. According to the company, CASM came in at 5.92 cents, off 7.7% from last year.

JetBlue's ability to keep costs low, thanks in no small part to a nonunion workforce, gives it an advantage that rivals will struggle to match. In the third quarter, despite huge concessions from employees, American Airlines' CASM was 9.49 cents, nearly 3.5 cents higher than JetBlue.

But while network carriers can't touch JetBlue on costs, growth rates and margins, they're starting to post solid earnings and seem more attractive to investors looking for carriers with cheaper valuations. A week ago, Northwest Airlines surprised Wall Street by posting a profit of $42 million, and since that time, shares have gained 11%.