JetBlue Plans New York Expansion

The carrier plans to expand to LaGuardia Airport.
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JetBlue

(JBLU) - Get Report

plans to take a bigger bite out of the Big Apple.

The carrier announced plans this week to expand to LaGuardia Airport, asking the Department of Transportation for 10 slots at the airport, which amount to five round-trip daily departures. JetBlue already has a hub at John F. Kennedy Airport, where it has 83 daily departures, more than any other carrier.

"As New York's hometown airline, JetBlue's planned LaGuardia service will allow us to introduce our brand of service to new customers who prefer to fly from LaGuardia," said David Neeleman, chief executive, in a statement announcing the company's plans to expand to LaGuardia. "It doesn't change our growth plans for JFK, where we will continue to add more flights to more cities and are working towards construction of a new terminal and new hangar."

Analysts feel that approval is likely and could come before the end of winter, paving the way for even more competition in the Northeast, where low-cost carriers have been adding new transcontinental flights and pressuring fares.

"Given the shrinking presence of US Airways and a bevy of other low-cost carriers at LaGuardia, it is hard to see why JetBlue might not be awarded some frequencies," said Jeffrey Kauffman, analyst at Fulcrum Global Partners, in a research note.

If the Department of Transportation approves JetBlue's request, the carrier will continue its aggressive expansion in the Northeast, where it added service to Boston in early January. By spring, the carrier hopes to fly five round trips a day from LaGuardia. Company spokesman Todd Burke says LaGuardia's schedule "will compliment service out of JFK and not detract from it."

With the carrier planning a massive increase to its fleet size over the next few years, it will need to push beyond the 22 destinations it currently serves while simultaneously adding new service between the points it already serves. "As we continue to grow, we look at cities and places to fly. If there's a need for low-cost, high-quality service, then we're going to go there. That's what this is about as we look to the future," said Burke.

By the end of 2004, JetBlue plans to increase its fleet size by 20% to fly 55 Airbus A320s, with plans to add 14 more in 2004, but 2005 -- the year when rival network carriers are expected to finally post profits -- is when the low-cost-carrier will really ramp up its fleet size. The carrier has 100 Embraer 190 planes on order, which will begin arriving in mid-2005, with options to purchase 100 more.

In addition to finding places for those planes to fly, analysts also said JetBlue's move was an aggressive response to changes in the competitive landscape. For starters, there's some blood in the water, with

US Airways

(UAIR)

floating the sale of some assets, including East Coast shuttle operations out of LaGuardia. And competition is fierce, with both

AMR

(AMR)

unit American Airlines and

Delta Air Lines

(DAL) - Get Report

announcing 2-for-1 sales across JetBlue's routes to retain market share.

"This is a competitive response to Delta being at all three airports and JetBlue is only at Kennedy. They have a desire to tap into a different market, especially now that they serve Boston," said Helane Becker, airline analyst at The Benchmark Company, a New York-based brokerage. "For customers, Boston to LaGuardia is more attractive when coming in on business for the day."

JetBlue says its new LaGuardia service would cover routes it currently serves out of JFK, which would exclude service to Boston based on current schedules. But with US Airways in turmoil, a lot could change in the two to three months it will take for JetBlue to prepare LaGuardia for service, pending DOT approval.

"A lot depends on what happens in the future with US Airways and how well or not well they succeed in staying around. Most people think the airline will have to be restructured," said Becker. "I think JetBlue is getting ready to take the next step."

This rapid expansion has Wall Street nervous and investors selling stock. In December, JetBlue warned that capacity increases were lowering operating margins, and that prompted J.P. Morgan to predict JetBlue will show zero profit growth in 2004. When the J.P. Morgan note was issued on Jan. 8, JetBlue shares sank 11.6%. Shares have recovered, but as of Thursday's close, JetBlue was down 42.4% from its October peak.

Some have expressed surprise at JetBlue's move and questioned its strategy going forward. After the company's December warning, concerns are rising about the possibility of strategic miscues. Last year, JetBlue launched service out of Atlanta, only to be pushed out by Delta and AirTran's aggressive moves to cut prices and boost service. With the DOT's approval not a given, JetBlue has not been able to give specifics on its strategy, causing Morgan Stanley analyst William Greene to question the company.

"Does this move suggest growth prospects at JFK are less than believed? Can JetBlue operate effectively at LaGuardia, an airport notorious for congestion and high costs? Is this move a recognition of a significant opportunity to grow at LaGuardia in the future?" asked Greene, in his note.

With US Airways negotiating with unions, Delta and American ratcheting up the competition with sales, and JetBlue rapidly increasing its fleet size, the low-cost carrier's move to LaGuardia will have an impact on, and be impacted by, a number of variables. If the DOT approves its request, more details will come, but in the meantime, analysts advocated patience.

"We are inclined to view the move with skepticism, as it appears to raise a number of questions about JetBlue's strategy," said Greene, who added later. "In light of the success of JetBlue's past strategies, we temper our initial skepticism to wait and see what JetBlue can do at LaGuardia."