JetBlue Airways
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By SpiffyGuyJoel
October 21, 2005

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"It is what it is"

I read the release today and listened to the conference call. There's good news and there's bad news. Which do you want to hear first, the good news?

Good news. JetBlue made a profit this quarter, which was a positive surprise. They are still about 25% hedged for the 4th quarter. They have a RASM premium over Song. They have lower costs than Song. The E190 is on track to start flying passengers Nov 8. The E190 opens new higher revenue markets. Independence is pulling out of transcon Dulles. The accelerated vesting of options might generate some cash. Delta, Northwest, US Air, ATA, and Independence are cutting domestic capacity.

But there is a whole lot of bad news. The first and most obvious is that the fourth quarter is estimated to lose a lot of money; enough it might make the whole year a loss. Fuel prices are the main culprit. Net of hedges they expect $2/gal fuel. They also aren't hedged in 2006 (though a certain percentage are collared). The accelerated options will cost (earnings not real money) maybe as much as $9mil in the 4th quarter. Song is expected to keep increasing capacity, though nobody knows if it will be on JetBlue routes. Oh, and they are going to idle their planes on down days (Tues/Wed) to the tune of 200 million seat miles, or about 3% of capacity. The idled planes will raise CASM, and the hope it is will raise RASM more.

I should also elaborate a bit on the accelerated vesting and stock split. It turns out that the way stock options are accounted for is going to change. Some argue the old way is better, some argue the new way is better. But they are undeniably different. The result is that JetBlue's outstanding options were going to be accounted for as maybe $90mil over the next few years, while accelerating them will cost them maybe $9mil. So a simple accounting change would make $81mil difference on the books. It's the kind of thing that makes you want to think that earnings are meaningless and to look at cash flow and dilution separately when evaluating a stock.

So, if you are thinking of JetBlue as a short term investment, I'll tell you now the next 6 months look really, really bad. I'm a long-term guy, but the price the stock will be at soon is going to make me cringe. I am going to keep holding it because I think a year or two from now JetBlue will emerge and be very successful. But yodalives view of airlines as trading stocks is starting to appeal to me more than it used to.

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