JetBlue Maturing as Airline

JetBlue ( JBLU) has learned discipline as it approaches its 10th anniversary.

Consider a few recent facts. Capacity shrank in the third and fourth quarters, the first shrinkage in JetBlue's history, and will fall by 5% to 7% in the current quarter. Meanwhile, in December, JetBlue's average fare was $151, the highest in its history.

In the fourth quarter, JetBlue led all carriers with 15% growth in passenger revenue per available seat mile. And this year, for the first time in its history, the carrier will have positive free cash flow, or cash from operations minus capital expenditures.

Jet Blue goes with the flow.

CEO Dave Barger summed up the airline's situation, and the industry's, during a fourth-quarter earnings call, saying: "What's most significant is just the amount of capacity (removed), the discipline, the restraint that's taking place as a result of the economy." Last year, JetBlue opened just two cities, Puerto Plata and St. Marten, a far cry from the 16 it opened in 2006.

To briefly recall its history, JetBlue spurted out of the gate in 2000, defining rapid growth, and for a time lived on the edge of the airline industry. Its share price soared -- reaching a high of $30, adjusted for splits, in 2003 -- then sputtered, trading today around $5.78.

It repeatedly shifted strategy, starting with a list of scattered cities served from New York's Kennedy Airport with a fleet of Airbus A320s, then focused on transcontinental routes, then moved to serving midsized cities with a smaller aircraft.

The denouement to overly rapid expansion came in 2007, when a Valentine's Day storm revealed that operational infrastructure had not kept pace with growth. The result was 1,200 canceled flights, thousands of stranded passengers and $41 million in costs. Subsequently, founder David Neeleman departed, and down-to-earth operations guy Barger took over. He promised, in a 2007 interview, to "calm it down." And that is exactly what he has done.

JetBlue remains unique. It is one of the four principal carriers in the world's largest aviation market, second in total passengers behind Continental ( CAL).

In October, it opened a modernistic new terminal at Kennedy and it continues to offer a compelling coach travel experience, with free food, free entertainment and plenty of leg room. Oddly, JetBlue offers a premium seat called Even More Legroom, which generated $45 million in 2008 revenue.

In labor relations, JetBlue emulates Southwest ( LUV) with a no-layoff policy. "Others will look at it as an expense, but it positions us well," Barger said. "It allows us to springboard into growth (when) we want to dial it up." Not coincidentally, JetBlue pilots voted this month not to form an in-house union, enabling the carrier to remain the largest U.S. airline without labor representation.

Meanwhile, JetBlue continues shuffling its aircraft, hunting profitable routes. In the fourth quarter of 2008, 32% of capacity was in transcontinental markets, down from 42% a year earlier. The Caribbean accounted for 16%, up from 11%. Florida had 36%, up from 33%. The rest is short-haul and medium-haul markets in the Northeast and the West.

In Boston, JetBlue was the fastest-growing carrier in 2008, adding an average of 190 passengers daily. In the current quarter, strong Florida traffic makes JetBlue Boston's No. 1 carrier. In Orlando, where it has added international flights to Bogota and San Jose, Costa Rica, JetBlue will be No. 2 this summer. At Fort Lauderdale-Hollywood International Airport, JetBlue will have seven contiguous gates this spring, up from four today, and it will add flights to Santo Domingo and Cancun in June.

Of course, many airlines have struggled to build a franchise in Florida, where someone is always willing to charge a little bit less for a flight. In JetBlue's case, that someone is Spirit Airlines.

Privately held Spirit is off the radar for many industry observers, but it is the largest carrier at Fort Lauderdale International Airport, carrying about 20% of airport passengers. In the Fort Lauderdale-La Guardia market, where Spirit has seven flights a day and JetBlue has five, Spirit cost per available seat mile is 20% lower because it packs in its passengers, says Spirit CEO Ben Baldanza.

"They're a good airline, but they sell product, while we sell price," Baldanza says. "They can't make money at the fares we charge." Baldanza says South Florida to the Caribbean may also be a tough market for JetBlue, caught between price leader Spirit and well-established American ( AMR). And Orlando, he said, is a leisure market with limited traffic: "We've tried a number of things out of Orlando -- it doesn't work," he said.

Overall, Baldanza said, JetBlue is a New York airline, hurt by the financial services meltdown and " playing the same game a lot of legacy airlines play, figuring out where its planes are losing money and how can they be redeployed to places where they will make money."

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