JetBlue:10 Years On Top of the Tarmac

New York ( TheStreet) -- It's possible that no airline has come as far in its first ten years as JetBlue ( JBLU) has.

Since its first flight from New York's John F. Kennedy International Airport to Fort Lauderdale-Hollywood International in February 1999, JetBlue has evolved into one of the four principal carriers in the world's largest aviation market. In fact, if the merger between United ( UAUA) and Continental ( CAL) is approved, the four leading New York carriers will be the three biggest U.S. airlines, plus JetBlue.
Jet Blue

Moreover, a buildup that began in 2004 means that JetBlue is also the largest carrier at Boston Logan Airport. And recently, JetBlue began an effort to operate at Washington Reagan National Airport, another key Northeast airport. If approved by regulators, a slot swap with American ( AMR) would enable JetBlue service from National beginning Nov. 1.

JetBlue's accomplishments have been accompanied -- and propelled -- by its iconoclastic customer service approach, which includes amenities like a good amount of legroom, free snacks and free live TV and radio, as well as a modernistic, state-of-the-art terminal that opened at Kennedy in 2008. Yet despite all the extras, JetBlue remains a low-cost, low fare airline. The combination of low fares and amenities has engendered a level of passenger loyalty that once led aviation consultant Mike Boyd to remark: "JetBlue doesn't have passengers. It has groupies."

JetBlue burst on the scene as a rebellious upstart, challenging the long-prevailing concept that domestic passengers would not venture to Kennedy for domestic flights. Today, JetBlue is firmly established as one of the Big Three low-cost carriers, which have expanded as the legacy network carriers reduce their domestic presence.

The trio of AirTran ( AAI), Southwest ( LUV) and JetBlue control about 30% of the domestic market today, up from 24% five years ago.

Stifel Nicolaus analyst Hunter Keay calls JetBlue an "incredible" success story.

"To have this kind of model up and running with a favorable brand and reliable operations at challenging airports and a management team that values employee satisfaction and employee morale, that's something that's hard to find in any business, let alone this one, where the mortality rate is quite high," said Keay. "These guys have done an impressive job and you have to give them credit."

Unfortunately, JetBlue's success has not been reflected in its stock price.

Rather, the chart above tells the story of the evolution from high-flying startup to mature business. Initially, the price soared, reaching a high around $30, adjusted for splits, in 2003. Then it sputtered. Today it trades below $6, and JetBlue is generally viewed as just another cyclical airline stock. It may be a nice company, but it operates in a historically unprofitable industry where stocks are constantly overwhelmed by exogenous events ranging from gyrating fuel prices to terrorist threats to outbreaks of weird diseases in Asia.

"When they were in hyper-growth mode, they were the darling of Wall Street and they traded at a massive premium, even though they were never free-cash-flow positive until this year," said Keay. "Now, they trade at the place where airline stocks typically trade, where they are correlated with other airline stocks."

Moreover, said Keay, "they do a lot of things that make the customers happy -- in my opinion, they have one of the most attractive coach class offerings in the U.S. domestic market, if not the world. But a lot of these things don't line up with what investors would like to see."

JetBlue's first-quarter disclosures on April 28 raised some red flags. Not only did the carrier report a loss that it attributed to snow storms and a reservations system conversion, but it also projected current year capacity growth at 6% to 8%, the highest in an industry that has uniformly benefited from capacity reductions. Specifically, JetBlue said it would lease Airbus A320 jets in order to continue expanding in Boston. Shares fell 9% that day.

"Their numbers are not very good," said Avondale Partners analyst Bob McAdoo. "Also, they are one of the few carriers that decided this is a good year to add capacity, which almost nobody else is doing."

It almost seems as if JetBlue wants to recapture its glory days by reliving its Kennedy buildup in Boston. The airline now carries 17% of Boston's domestic passengers -- the largest share, according to figures compiled by OAG Consulting for TheStreet. Rapid growth has come largely at the expense of Delta, which merged with Northwest in 2008. The combined carriers' market share has slipped from 31% in 1999 to 15% in 2009, the firm said.

But despite his misgivings, McAdoo still gives JetBlue a market outperform rating, saying the carrier will outperform the market even if it does not best other airlines. "JetBlue probably made more progress than any other airline in its first 10 years," he said. "It established itself as someone who is going to be around for the long term."

-- Written by Ted Reed in Charlotte, N.C.

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