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(I had to break the article into two parts, due to it's length. Here's part 1.)

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Loss shifts JetBlue's focus to climbing back into black
By Dan Reed, USA TODAY

NEW YORK — Onetime Mormon missionary David Neeleman had hoped to spend 2006 spreading the gospel of JetBlue, especially in America's heartland, where his airline's popular brand of high-style, low-cost, low-fare service remains largely unknown.

But for Neeleman, the founder and CEO of the USA's fastest-growing airline, the focus has changed. For the first time since its wildly successful initial public offering in 2002, JetBlue lost money during a quarter.

It was a surprisingly large, $42 million loss in the October-December period, the result of high fuel prices, low fares and a slow upward creep in the operating costs of the 6-year-old carrier. The fourth-quarter loss pushed the discounter $20.3 million into the red for all of 2005. The company expects to lose more money in 2006. (Audio: David Neeleman on the value of adversity)

What may have been met with a shrug at most other U.S. airlines, where losses have become the norm, has been a wake-up call at JetBlue headquarters. Instead of personally spreading the good news about JetBlue, Neeleman's top priority now is getting an additional $5 or $10 per trip out of the average JetBlue customer's pocket — the difference, he says, between profit and loss for the airline.

If Neeleman and the industry veterans who helped him create JetBlue's early success can't get the airline back in the black by 2007, plans for the airline's aggressive growth may have to be scaled back, and JetBlue could become just another struggling airline.

In an interview, Neeleman said, for now, he'll be "just focusing on revenue."

"I'd love to go talk to the Harvard Club. I love doing charity work," he says. "But the biggest responsibility I have ... is making sure that we can get an extra $5 or $10 a ticket."

Exactly how Neeleman and his airline bump up the revenue sufficiently to regain a profit remains unclear. JetBlue has to do it in the face of fierce price competition. And it has to do it at no cost to its image as a unique airline that provides a great travel experience to an almost fanatical base of customers who view low fares as part of the deal.

But Neeleman insists it can be done by selling fewer seats at the deepest discount price and by a smart growth plan that puts the right-size aircraft on the right new route.

Neeleman says JetBlue will stay on track to add eight to 10 cities to its network this year, mostly in the nation's heartland. He also remains committed to the carrier's plan to grow aggressively — 25% to 30% a year through the rest of this decade.

What skeptics said

Since JetBlue's launch in February 2000, the skeptics have said making money in the early years would be easy but that it wouldn't last. At first, its maintenance spending would be next to zero, and its employees would all be at the bottom of the pay scale. But that cost holiday someday would end, they warned.

Now some of those skeptics are whispering, "I told you so." Neeleman dismisses the whispers. JetBlue's fourth-quarter loss, made deeper by $13 million in one-time charges, was "all about fuel," he says.

But analyst Jamie Baker at JPMorgan, in a recent report to investors, mocked JetBlue, saying that it "appears to finally be acting like an airline," complete with "over-aggressive growth, unrelenting competition, deteriorating operational integrity, earnings disappointments and — longer term — shareholder value destruction."

Neeleman is more humble than the brash airline entrepreneur of previous years, says Standard & Poor's debt analyst Betsy Snyder.

"The fourth quarter was a turning point for them. He's saying, 'We messed up.' Before, they were, like, 'We're JetBlue! We can do no wrong!' Now, that attitude has changed."

Cost pressures mount

For the first time, JetBlue is having to deal with significant cost pressures that it largely sidestepped during its first six years. What's catching up:

•Maintenance. The first of JetBlue's all-new fleet have been in the air now for six years. Though still a small portion of costs compared with traditional airlines, JetBlue's aircraft maintenance costs rose 40% in the fourth quarter from a year earlier.

•Wages Not all of JetBlue's workers are newbies anymore, and many are advancing rapidly up the pay scale. Still, its many new hires — eight to 10 new workers each day — are starting at relatively low pay, helping to mitigate the creep of labor cost.

•Route expansion. After adding nine cities to its network in 2004, JetBlue eased back a bit last year by adding only three more. Austin came on line in January, giving the carrier 34 destinations. Roanoke, Va., and Bermuda will be added this spring, and the company expects to launch service to an additional five to seven unnamed cities later this year. But that rapid expansion brings high start-up costs, including outlays for marketing and advertising, airport rental and space remodeling.

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