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Old 04-25-2006, 12:49 PM   #1  
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Default 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%.

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.

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."

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."
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Old 04-25-2006, 12:57 PM   #2  
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Sorry to read about your troubles,I have many friends among the Blue
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Old 04-25-2006, 02:49 PM   #3  
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sorry double posted

Last edited by hatetobreakit2u; 04-25-2006 at 02:54 PM.
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Old 04-25-2006, 02:50 PM   #4  
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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
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Old 04-25-2006, 02:52 PM   #5  
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they realized there expanding to fast so there slowing down
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Old 04-26-2006, 09:03 AM   #6  
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Ahhhhh - THEIR, not there!
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Old 04-26-2006, 10:12 AM   #7  
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Actually, it's "they're".
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Old 04-26-2006, 10:13 AM   #8  
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...and "too fast" as long as we're being pedantic.
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Old 04-27-2006, 08:38 AM   #9  
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I am proud of you guys. Keep each other honest!

Pedantic? Gotta look that one up!
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Old 04-27-2006, 08:41 AM   #10  
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Pedantic: Concern for formal rules. Excellent!
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