JetBlue Airways ( JBLU) shares fell 1.6% Wednesday after Raymond James downgraded the company to outperform from strong buy.

The brokerage is taking a more cautious view on the low-cost carrier because the airline industry has added so many new flights and routes in the last year that the carrier's growth prospects are more limited. And with rivals using deep discounts to spur demand for the new flights on JetBlue's routes, the carrier's margins will continue to suffer.

"We are taking a more conservative view with respect to our 2005 earnings per share forecast due to over-capacity in the industry, particularly in transcontinental markets, which, in turn, is placing downward pressure on yields," said Jim Parker, analyst at Raymond James, in a note. "Unless the legacy carriers remove capacity, we believe the weakness in yields could continue into 2005." (Raymond James expects to receive or intends to seek investment banking compensation from JetBlue in the next three months.)

In reaction, shares of JetBlue fell 45 cents to $27.24.

As a result, Parker lowered his 2004 and 2005 EPS estimates on the company. In the upcoming quarter, the analyst now expects JetBlue to make 20 cents a share, a penny less than Wall Street's expectations. In the third quarter, Parker expects JetBlue to make 25 cents a share, in line with consensus estimates.

With the summer travel season almost half over and seasonal demand set to decline in mid-August, when children start heading back to school, legacy carriers may move to reduce capacity. If this happens, then Parker said he will revisit JetBlue's fortunes.

But in the meantime, the industry's overcapacity problem is becoming as pernicious as the rising cost of oil -- giving the recovery another block to stumble over.