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Updated from 1:50 p.m. EST

Wall Street's love affair with



centers on the notion that the carrier's fast growth will mimic



success. But according to J.P. Morgan, JetBlue's rapid expansion comes at the expense of profits.

On Thursday, J.P. Morgan analyst Jamie Baker cut his 2004 earnings-per-share estimate to 84 cents, matching his 2003 EPS estimate, while telling investors the carrier is expanding too fast, too soon. Investor reaction was strong, and JetBlue's stock closed down $3.25, or 11.2%, at $25.67 on 12.3 million shares traded, well past its average daily volume of 2.8 million.

"We no longer believe JetBlue is capable of earnings growth in 2004, despite a planned 37% increase in capacity," said Baker in his research note. "With EPS growth not anticipated until the final quarter of this year, we are reiterating our underweight rating, despite shares having lost 38% from their October highs."

Baker's revised estimates came after the analyst took a long hard look at JetBlue's Dec. 4 warning that fourth-quarter operating margins would come in between 13% and 14%, lower than the 16% to 17% it previously expected. JetBlue CEO David Neeleman said the lowered guidance was "due to capacity additions resulting in lower average fares, particularly in our western markets."

But according to Baker's research, Neeleman's comments were open to interpretation. The analyst said the only carrier expanding capacity in JetBlue's western markets was JetBlue. Baker said JetBlue boosted capacity 61% in the third quarter, while rivals lowered their capacity by 9%. In the fourth quarter, Baker said JetBlue's capacity rose 49%, while the competition was unchanged.

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And with rivals gearing up to expand capacity even more in 2004, Baker thinks JetBlue's operating margins, which were above 20% in the third quarter, could face even more pressure. Already rivals like



unit American Airlines are offering two-for-one sales on JetBlue's routes and boosting capacity to keep market share, reduce pricing power and further weaken revenue.

"Based on our analysis, JetBlue was the sole growth culprit in the fourth quarter. More bluntly, JetBlue fell on its own knife," said Baker. "Problem is, the industry is unsheathing its own capacity dagger to a greater extent than even we previously imagined, and we expect a pronounced negative impact on JetBlue's earnings both this year and next."

Indeed, Baker expects that rivals will boost capacity on JetBlue's routes by 12% in the first quarter and another 16% in the second quarter. This will put more pressure on JetBlue, which plans to increase capacity by 48% in the first quarter and 38% in the second.

On Thursday, JetBlue announced December results, which show how fast the carrier is expanding. In the month, the carrier increased capacity by 48.2%, while traffic, or revenue passenger miles, increased by 43.6%. By adding capacity faster than paying customers, the carrier filled 82.2% of its seats, down 2.7 percentage points from last year.

Also, JetBlue said it flew 35.3% more departures in December while the number of passengers flown increased by 29.6%, which could be a sign that capacity increases are weakening the carrier's overall results. But as one of the few carriers expected to post profits in the first quarter, and with some of the lowest costs in the entire industry, Wall Street is divided on the fortunes of this once-darling stock.

While Baker expects the worst, calling JetBlue his "most emphatic underweight" stock, the rest of Wall Street expects the company to show earnings growth of 26% in 2004, with an average EPS estimate of $1.06. Furthermore, analysts have begun warming to JetBlue given its recent pullback.

After JetBlue issued its warning on Dec. 4, shares fell 17.6% to close the session below $26. With shares down more than $20 from where they were just two months earlier, both Merrill Lynch and Raymond James upgraded the company, citing its attractive valuation and long-term prospects.

"While we think the concerns regarding increased competition are well-founded, we think that the 45% decline in JetBlue's share price over the past two months and concurrent drop in valuation

from 44 times to 24 times 2004 earnings more than fully account for these concerns," said Michael Linenberg, Morgan Stanley analyst, in his Dec. 8 upgrade.

Unlike Baker, Linenberg told investors that he believed JetBlue would produce earnings growth of 20% for the next two years. Raymond James analyst James Parker said earnings would increase on a one-to-one basis with its capacity growth, which he expects to grow by 30% compounded annually over the next four years.