Fuel Costs Drag on JetBlue
 

Transportation
Fuel Costs Drag on JetBlue
By Ted Reed
TheStreet.com Staff Reporter
4/25/2006 4:26 PM EDT
URL: http://www.thestreet.com/stocks/tran.../10281254.html

Updated from 8:03 a.m. EDT


JetBlue Airways (JBLU:Nasdaq) reported its second consecutive quarterly loss on Tuesday and said high fuel costs have forced it to change its business model, including backing away from long-haul markets and cutting back on its Airbus A320 fleet expansion.

The beleaguered carrier also said it wants to raise fares. As for its financial results, JetBlue lost $32 million, or 18 cents a share, in the first quarter, compared with earnings of $6 million, or 4 cents a share, last year. Total operating revenue rose 31.4% from last year to $490 million.

On average, analysts surveyed by Thomson First Call were forecasting a loss of 20 cents a share on sales of $497.9 million.

Higher fuel costs were responsible for the loss, CEO David Neeleman said during a conference call. "We haven't done a good job of managing our business for fuel prices that are over $2 a gallon," he said. Although it's forecasting a second-quarter profit, the company still expects to lose money for the full year.

Unveiling a "return to profitability plan," JetBlue said it will sell two to five of its 88 Airbus jets. The company also announced deferrals for 12 planned A320 deliveries that were scheduled from 2007 through 2009. As a result, capacity is expected to increase this year by 20% to 22%, rather than the 28% previously projected. This summer, capacity in the New York to Florida markets will be down about 15%, while New York-Los Angeles will decline around 8%. :eek:

The intent, Neeleman said, is to reduce long-haul flying while using arriving Embraer 90-seat ER190 regional jets to grow in medium and short-haul markets. JetBlue will get 18 regional jets in 2006 and 18 more in 2007. Planned new routes include Long Beach, Calif., to Sacramento; Burbank, Calif., to Las Vegas; and New York's Kennedy International Airport to Charlotte and Raleigh-Durham, N.C.

The new focus means that JetBlue will open more than the eight to 10 new markets it had previously expected, though Neeleman wouldn't quantify the increase.

Additionally, JetBlue wants to raise ticket revenue through improved yield management. The airline's average one-way fare in the first quarter was about $107, which Neeleman said was little changed from a year earlier.

"We need to trade some load factor for higher average fares," Neeleman said, noting that on Monday JetBlue raised its lowest transcontinental fare to $399 from $349. In general, he said, the carrier prefers to keep its lowest fares in place, but to sell fewer of them and more mid-range fares.

Meanwhile, JetBlue wants to reduce costs through such methods as better scheduling and reduced hiring. The combination of higher revenue and lower expenses should result in a $70 million benefit that will be fully realized in 2007, Neeleman said.

During the first quarter, revenue per available seat mile increased to 7.46 cents, up 3.3%, while costs per available seat mile rose to 7.84 cents, up 16.3%. Operating expenses climbed by $515 million, or 48%, while the average fuel price was $1.86 per gallon, up 42.5%. Excluding fuel, CASM increased 6.7% year-over-year. JetBlue ended the quarter with $419 million in cash and investment securities.

Analysts weren't impressed. Mike Linenberg of Merrill Lynch, which provides investment banking services to JetBlue and holds more than 1% of its stock, said the airline underperformed the industry's passenger RASM increase of 14.3% for the quarter. :confused:

Additionally, he said JetBlue's first-quarter operating margin was negative 5.1%, which, "so far, is the worst margin performance of airlines reporting." The airline's plan to restore profitability is "a step in the right direction," he said. The cut in growth, he said, "is not likely to be well-received by growth investors, but are there any left holding JBLU shares?"

Jamie Baker of JPMorgan, another firm that has provided banking services to JetBlue, said that at 14 times earnings, the stock's valuation is "off-the-charts by any reasonable airline standard, in our view." Baker recommended the sale of its shares due to "over-aggressive growth, unrelenting competition, multiple fleet-types, shareholder value destruction and now suspect revenue optimism added to the mix." :eek:

Meanwhile, in a letter to employees last week, US Airways (LCC:NYSE) CEO Doug Parker responded to a press release in which Neeleman said that until JetBlue came along, "the people of North Carolina have overpaid for sub-standard service." Parker wrote in his letter that the remarks appeared to be directed at US Airways, and said they are "probably indicative of the stress that JetBlue is under.

"JetBlue is experiencing a relative profitability decline that is unprecedented in our industry," Parker said. "It is probably very hard for them to hear that US Airways (who they'd counted on being gone by now) is expecting to be profitable in 2006 (excluding transition related expenses), while they have disclosed that they expect to be unprofitable."

Sorry to read about your troubles,I have many friends among the Blue

sorry double posted

there expanding like crazy, its kinda hard to make a profit when you have to do $49 intro fares, once they solidify in the new places and start bringing in the crowds at regular price theyll be profitable again. There still in a better position to succeed than alot of others with such low CASM's


"Dear Crewmembers –



Today we will report First Quarter 2006 financial and operating results. The press release, included below, is being shared with you first as we have always done in the past. As forecasted, we will report a $32 million net loss for the quarter, a result that is both disappointing and unacceptable. It may be tempting to blame the high cost of fuel on our current financial performance, but at the same time the current economic pressures have served to highlight some areas of opportunity within our control that we can improve upon immediately and also for the long term. The fact of the matter is we have to be able to operate our airline profitability even in today’s “new normal” of high fuel costs.



To that end, we have developed and begun implementing a “Return to Profitability” plan as part of our Flight Plan 2006 that focuses on a combination of right-sizing capacity, optimizing revenues sources, introducing new revenue initiatives and implementing significant cost reductions. In order to be successful, we need everyone’s help and we know you are ready to do what it takes to help our airline succeed.



A major component of our Return to Profitability plan is to right-size our capacity. To this end, we intend to sell at least two, and possibly up to five, A320 aircraft in revenue service today. Even with these sales, we expect to grow our airline between 20-22% this year over last, including launching service to more than 10 new BlueCities. Clearly, our story is still a growth story, albeit at a slightly slower pace. We will reduce long-haul flying in the non-peak season and shift more of our overall flying to shorter-haul markets, utilizing our E190 fleet in addition to our A320 fleet, to boost our revenue. Shorter haul flying uses less fuel than long-haul flights and there are many new market opportunities for us to enter with fares up to 60% lower than current competitors’ rates.



Longer term, we have deferred 12 A320 deliveries originally scheduled to enter service between 2007-2009. Those aircraft are now scheduled to enter our fleet in 2011 and 2012. We have also adjusted A320 options. These actions allow us to remain well-positioned to take advantage of market opportunities now and into the foreseeable future.



Another major component of our Return to Profitability plan is to improve our revenue performance. As you know, we do not have a demand problem – Customers love to fly JetBlue. The bottom line is that we need a higher average fare, and to achieve this, we will improve the revenue mix on our flights. We expect this will result in a lower, more reasonable load factor, which will reduce stress on our operation and help us improve reliability.



In order to keep our regular fares low, we will begin charging for some premium services. In support of this initiative, you will hear more about specific initiatives soon, such as our new $25 confirmed same-day flight change program and our new unaccompanied minor fee, also $25. Recently, we also tightened our refund policies as we are an airline that offers non-refundable tickets. These moves, and more, help us provide more consistent service to our Customers and the fees help us cover the cost of providing them across our route network.



And finally, the last major component of our Return to Profitability plan is to reduce costs. We are a low cost airline – in a category of our own as a low-cost carrier with frills like inflight entertainment and all leather seats. However, we have identified areas of opportunities to reduce costs even further, which will ultimately allow us to be more competitive and further offset the high cost of fuel in today’s environment. Fuel is our largest line-item cost and we can do better at conserving and improving fuel efficiency, such as through single-engine taxi techniques, the use of ground power units and finding ways to remove excess weight from the aircraft. Our second largest line-item expense is labor. We will look for ways to improve efficiencies throughout the company such as through the BlueTurn rollout and the further use of technology to streamline the Customer experience. In addition, we plan to slow the pace of adding non-operational positions and departmental leadership will now have to justify the need to backfill replacements or add new positions through the end of the year.



There will be many more aspects of our Return to Profitability plan, not just designed to get us back to profitability in the short-term, but to also reinforce mindsets and instill new habits that will keep us successful over the long term. We have to believe that profitability is as important as our brand and our culture, and we have to start now and carry this behavior into the future. This being the case, we can only succeed if we work together toward these goals and based on the feedback we hear from many of you, we know we are ready to take this challenge head-on.



Thank you for all you do to support our airline.



With warmest regards –



David and Dave

they realized there expanding to fast so there slowing down

Ahhhhh - THEIR, not there!

Actually, it's "they're".:rolleyes:

...and "too fast" as long as we're being pedantic.:)

I am proud of you guys. Keep each other honest!

Pedantic? Gotta look that one up!

Pedantic: Concern for formal rules. Excellent!

You guys are great!;)

Here is something off our ALPA board, I don't know anything about the author so I will not make any editorial comments:

[from: http://iagblog.blogspot.com/]
jetBlue's Loss - Preliminary Thoughts

Perhaps we should move up our prediction of their demise. PEOPLExpress started selling/giving back airplanes and did a massive market re-vamp during mid to late 1985, right before they added a first class, and right before they were swallowed up.

OK, now here is the scary part. jetBlue should be able to find homes for up to 50 or so of the 75 A320s they have on order. The fact that it seems they cannot is a little frightening. The fact that they want to get rid of 5 of them and defer delivery on the rest is a sign of dire things ahead. Is this carrier a niche carrier quickly outgrowing its niche?

Will the "revenue enhancements" mean something else? I am thinking code-share. And some co-branding, maybe a change to the frequent flyer program. There are other ways to get money in this business.

Now there is some argument to focusing more on short-haul flying. That is the last bastion of relatively high-fares on the East Coast. That is disappearing rapidly too. Southwest and AirTran and a revitalized USAirways are not going to sit back and let jetBlue waltz in and steal market share.

The second half of that, however, is that once one leaves the East Coast, short-hauls are dominated by the LCCs. California? Texas? Upper Midwest? Southeast? Florida? All of that is dominated by Southwest or AirTran or someone else. jetBlue doesn't compete well against other LCCs. They only do well against legacy carriers. Putting too many eggs into the short-haul basket tells me they are going to run out of places really soon. And the other problem is that their alleged product advantage means less the shorter the flight is. Watching TV for 4 hours is one thing, but for only 90 minutes it doesn't create as much interest.

Now, the other half of the equation is that there are more conceivable homes for 100-seaters than there are for 155-seaters. The A320, as I have said before, is great for the high-capacity long hauls. Florida, California and the big markets jetBlue are afraid to come into (or realize that they cannot come into) because they have an inferior product (not what you are thinking - JFK vs. LGA). Being mostly an ERJ190 carrier could make many more markets more attractive. The focusing more on short-haul says they have to get rid of A320s and focus on accepting more 190s.

However, their CASM is going to go up. How do they lower their costs when they have low costs already? Reference short-haul flights; the argument is that $150 or so can only be spread so far. If you can get $89 for a 150-mile flight, but only $189 for a 1500-mile flight, you have a yield or fare-weighting problem as paired against absolute costs. Absolute costs on a shorter flight can be offset by the high yield. In around 2000/1 Southwest (with then about 500 NM) stage lengths, found a sweet spot in their model, where adding some of these longer flights could help increase utilization (to spread fixed costs), and also get to a lower part of the operating (variable) cost curve as the next generation aircraft came on line.

Net, with Southwest increasing length of haul slightly, costs could decrease faster than the revenues (i.e. lower yield as fare spread across more miles). Obviously a small adjustments as opposed to large ones. Average Southwest stage length is now just over 600 NM. This is certainly an art and not a science.

The difference is that in some of the smaller-density short-haul markets, the amount of discount over the prevailing fare that jetBlue can offer might not have to be as steep, versus what they have to do currently, to gain share in the transcons and in Florida. While a $109 one-way JFK-LGB is no big deal now, offering BOS-DTW for $179 would be a serious discount over the current unrestricted Northwest fare. Anyway, it means that jetBlue's average fare is going to go up because they are going to not going to discount as heavily in the new markets and maybe revenue-manage better in some of the others. Revamping fares makes it sound like they are going to raise fares. I bet that does not happen. I hope they are just going to do a better job adjusting their capacity.

There is more ripe fruit available in the short haul markets and there is more room for growth on that end of the market. The legacy carriers are going to continue to smack at them in the larger metros. Now that smacking will not necessarily mean damaging the legacy carrier more than they damage JetBlue. They have been smacked around in Long Beach by Southwest and AirTran and Delta smacked them around in Atlanta. JetBlue is suffering from battered airline syndrome. They have lost most of the recent battles and are not willing to take up any new ones.

Saying you have a plan and having a plan are two different things. Wall Street likes the sound of jetBlue realizing they have a problem to fix, but what happens when they don't get it done soon?

While jetBlue has been hailed as a low cost operator, I have to wonder how much of that was covered up with productivity and utilization. Without 13 hour utilization (which will certainly go down given short-haul flights and the fact that they are out of new transcons) utilization goes down and thus the CASM is spread over fewer seats. Are they getting their investors ready for the bad news early? And no one could believe they could maintain good utilization operating primarily out of JFK, given the delays and cancellations - that cuts your available aircraft time. This had to come. The question is how do they react and does this put a serious wrench into their plans?

I really wish they had blamed their slowing growth on an inability to get slots/gates/etc at JFK. That would have made it sound better.
Posted on April 25, 2006

Great post and analysis. From what I hear from buds at JB the A320's they are selling are their first aircraft and are coming up on some heavy/costly inspections. The bean counters may have figured it is better to get rid of the old and take in a few new for the rest of this year and save some $$. What JB said was right though, they have to up their fares. The industry has to up their fares with the current high fuel costs. Even at a $400-500 coast-to-coast RT ticket, that is considerably cheaper than driving, let alone the time savings. But with a family of four traveling, then every $50 increase is multiplied by four and that starts to hurt. The problem is leisure travel is just that, and folks use their discretionary income to travel. With higher energy costs cutting inot their budgets, a vacation or visit to grandma is the first thing to go. People find alternate vacation spots within driving distance instead. Every carrier out there cannot operate and be profitable with just the business traveler.

Profound.






- The truth only hurts if it should -

[QUOTE=TonyC]Profound.


I guess if you took it in context that he was trying to explain a concept to maintenance workers, FAs, pilots, secretaries, and customer service agents, it was not too profound. Glad you were impressed though!

Did I take it out of context?



When you consider that it takes X amount of fuel to taxi from Gate 34B to the runway for takeoff, and Y amount of gas to taxi from the runway to Gate 17 after landing, I wonder if the Total Fuel Expended per Nautical Mile Traveled really is less for the shorter haul flying. Granted, fuel consumption at heavier gross weights is greater per time, but the longer flight should absorb the taxi fuel over more miles. It would be interesting to see a graph of Total Fuel Used relative to Nautical Miles ground distance flown to see what the actual optimum leg length is for minimizing fuel costs.

Now, had they really crunched some numbers instead of grabbing for the obvious, then I would have been impressed.


:)





- The truth only hurts if it should -

The fuel CASM is going to be higher on short hauls than long hauls. But the problem is that the RASM drops off on long hauls faster than fuel CASM, so short hauls are a better deal given high fuel costs.

Y'all understand, don't you, that I don't have seats on my shiny (well, it used to be shiny, anyway) jet, so my participation in this discussion is purely academic, and my initial remark was sparked by the "profound" statement that it takes more gas to fly longer legs.


Given your assertion that the real value must be determined by looking not only at fuel CASM (which introduces seats to the equation when I was looking simply at leg lengths) but also at RASM, a better answer to my question of optimum leg length would be to match a graph of fuel CASM and RASM. If fuel CASM drops off with leg length, but RASM drops off more quickly, where do those two intersect? How would the RASM graph be affected by a change in fare structure? What would be the comparative effects of single-class service versus two- or three-class service? How would it be affected by discount fares for round trips or off-peak periods of service? How would it be affected by fare premiums for refundable tickets or last-minute travellers? Indeed, there are many, many factors that affect RASM, and the graph would seem to be an elusive target to pin down.


So, with the fuel CASM curve and the bouncing RASM curve, it would seem that the optimum leg length for fuel cost economy would seem to involve much more than the simple statement that "shorter haul flying uses less fuel." Take that one step further and you can convincingly argue that parking the airplanes will reduce the fuel costs to zero. (Perhaps I should have just said that instead of "profound" in the first place. :) )


Hence, my facetious remark.






- The truth only hurts when it should -