Investing in the airline sector is risky, as the industry has seen the bankruptcies of start-ups and former industry leaders over the past few years. The surviving companies have had to deal with high fuel prices, increased security costs and regulated travel routes, not to mention an antiquated wage structure dominated by the labor unions.

Those are reasons why I was initially skeptical when I saw that shares of

JetBlue Airways

(JBLU) - Get Report

rose 4.8% Tuesday, closing at $11.67, after posting better-than-expected third-quarter results. The stock is still down 25% year to date, but a couple of years ago this was one of the best growth stories in the country.

With that in mind, I'm here to answer investors' questions: Are JetBlue's shares ready to soar again, or is the landing gear down, in anticipation of a hard landing?

JetBlue started flying about six years ago out of New York's John F. Kennedy International Airport. The company has since taken over the airport's Terminal 6 and is expanding into the architectural landmark TWA terminal next door. The airline has made a second hub in Long Beach, Calif., and also offers several more flights daily out of Washington, D.C. (Dulles), Boston, Oakland, Calif., and Fort Lauderdale, Fla. JetBlue now offers 470 flights daily across 47 cities.

The company's business model can best be described as


-chic. JetBlue promotes low fares, but also boasted a brand-new fleet of Airbus planes when it launched, with leather seats and free 36-channel DirecTV satellite service.

The airline actually lost $500,000 in the third quarter, which rounds down to a break-even result on a per-share basis, matching the consensus analyst estimate. JetBlue's revenue grew 39% year over year to $628 million, while fuel costs were up 54%.

The company also cut its 2007 capacity growth target, measured by available seat miles (the amount of available passenger seats multiplied by miles flown), to 14% to 17% from 20%. Management could do this by adding smaller/newer planes to its fleet, selling larger/older ones, delaying pending purchases, or leasing out new planes once it takes delivery. At the end of the third quarter, the airline had firm orders at manufacturers for 167 new planes and 32 spare engines.

The cutback in expansion plans follows a strategy JetBlue announced in April, which was meant to generate $70 million in cost-savings over the next year. The company sold five larger A320 aircraft, raised average ticket prices and shifted its focus toward making shorter flights, which generally carry incrementally higher profits.

Management said Tuesday on the conference call that JetBlue was 21% ahead of its cost-cutting target to date. As a result, the company's operating margin improved to 6.6% in the quarter from 3.1% a year ago. JetBlue guided for this number to be 6% to 8% in the fourth quarter, implying further expansion is likely.

Before making any investment in JetBlue, readers should beware the stock has become a battleground for short-sellers. According to the most recent monthly data, more than 54 million shares (one-third of the company) were being sold short. That's also equal to more than 11 times the company's daily average trading volume. That means the stock could trade with increased volatility in the near term in either direction.

At the end of the day, I believe that JetBlue could be a buy at current levels. The company is taking a lot of operating momentum into the holiday travel season and 2007. Although the stock already has rallied from its recent lows, I believe the airline can trade up into the low teens over the next couple of quarters.

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David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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