In the four columns I've written about JetBlue Airways (NASDAQ:JBLU) over the past three months, I've expressed tremendous admiration for the airline -- in particular, its cost structure, customer service, and culture -- and concluded in my initial column that JetBlue "has a decent chance to become the Wal-Mart (NYSE:WMT) of the airline industry over time."

That being said, this upstart airline operates in what remains one of the worst industries imaginable and faces significant challenges, factors that I'm not sure investors are considering fully given the nose-bleed valuation they are assigning to the stock (at yesterday's close of $59.13, it trades at 44.5x this year's consensus analysts' estimates of $1.33 and 32.2x next year's estimates of $1.73).

While I did not recommend the stock three months ago at $39.71, I did pay it a great compliment by saying, "If I were forced to buy one stock trading in excess of 35 times this year's estimates, it would be JetBlue." I can no longer say this today, given the substantial run-up in the stock since then and my greater appreciation for the many challenges JetBlue faces. Let's talk about a few of them, keeping in mind that after extolling the company's many virtues for four columns, I'm going to give skeptics a full hearing.

Maintaining the culture
As I noted in JetBlue's Beautiful Cost Structure, the company's success is rooted in two areas: highly productive people and highly productive aircraft. Regarding the former, with the exception of Berkshire Hathaway (NYSE:BRK.A), I have never in my studies of thousands of businesses seen such universally motivated, hard-working employees (called crewmembers) as I have at JetBlue -- and this in an industry infamous for having horrific labor-management relations.

I attended a new employee orientation session last week, at which both CEO David Neeleman and President Dave Barger spoke (as they do at nearly every such event), and the enthusiasm in the room was palpable. This benefits the company in so many ways, including lower costs and exceptional customer service. I wish I had the space in this column to tell you the remarkable story of teamwork and commitment that enabled JetBlue to continue flying nearly its full schedule through the recent blackout in New York -- the only airline to do so.

JetBlue's senior managers, without exception, agree with me that maintaining such a strong culture is the single biggest challenge facing the airline. It can be done -- witness Southwest Airlines (NYSE:LUV) over the past three decades -- but my experience is that most companies lose this magic as they grow. The fact that airline unions (rightly) view JetBlue as a tremendous threat only adds to the challenge. One airline CEO told me that "JetBlue is ALPA's (the militant and powerful Air Line Pilots Association) worst nightmare, and they will do anything to unionize JetBlue." (He added that, if JetBlue continues treating its crewmembers well, he thought it could possibly fend off ALPA and the other unions, though it might have to boost pay rates to do so.)

Pay rates
Generally speaking, JetBlue's overall pay scale is somewhat lower than that of major carriers -- it's roughly in line with discount airlines -- but JetBlue attracts and motivates talented crewmembers in a number of ways, including developing a well-deserved reputation for treating crewmembers well and having a great work environment, offering the opportunity for rapid advancement (for example, a First Officer can be promoted to Captain in less than three years), scheduling efficiently (thereby minimizing unpaid downtime), and contributing 15% of profits to a crewmember profit sharing plan.

Key motivators also include stock options and especially the generous employee stock purchase plan -- both of which are linked to JetBlue's soaring share price. My concern is what happens if the stock is flat for many years or, worse yet, tumbles -- both of which could easily happen, given its current levels. While this would not affect many of the factors discussed above that contribute to high morale, crewmember enthusiasm could wane, demands for higher pay could emerge, and odds of unionization could rise -- all of which would substantially erode JetBlue's cost advantage.

Airplanes are very expensive to maintain and, unlike many other cost areas, there is little room for one carrier to gain a cost advantage over another, assuming variables such as type and age of aircraft, stage length, etc. are held constant. Yet JetBlue's maintenance costs are dramatically lower than even other low-cost carriers, primarily because its planes are brand new.

As of the end of 2002, the average age of JetBlue's planes was a mere 15.5 months. For comparison, on the same date Continental's (NYSE:CAL) 366 mainline jets were seven years old on average -- and this is one of the youngest fleets among the major carriers. So many new planes give JetBlue an enormous cost advantage in its first few years, but this advantage is certain to diminish over time as JetBlue's aircraft and engines reach the age at which they require multi-million dollar overhauls.

As the fleet ages, the question becomes just how much and how quickly this cost advantage will diminish for JetBlue. It's not easily answered. JetBlue estimates that maintenance costs will only rise moderately by 0.2-0.3 cents per available seat per mile (ASM) over the next five years. I tend to believe that estimate, assuming JetBlue maintains its aggressive delivery schedule of new aircraft, though it's disputed by one executive of an airline that operates A320s: "I don't think [their estimate] is consistent with their fleet plan -- I think it's underestimated."

Another executive told me, "The downside of taking so many new aircraft in such a short period of time is that all of these planes and engines will need major overhauls at the same time. Just watch what happens to their stock when they unexpectedly report $20 million in maintenance costs one quarter."

This is indeed a danger, but I'm not convinced that it will play out this way. JetBlue may be able to offset higher maintenance costs with efficiencies in other areas (overall economies of scale, lower landing fees, and reduced financing costs, for example) or the ability to charge higher prices over time due to success building the brand, generating customer loyalty and/or achieving dominance in certain markets -- but investors should keep in mind that these factors are uncertain, while significantly higher maintenance costs are 100% certain.

Finding attractive markets
Like any airline, JetBlue evaluates every possible route that it might fly based on many factors, including current and potential traffic, existing price levels, strength of competitors and their likely reaction to encroachment, etc. I think it's reasonable to assume that as a general rule JetBlue chooses to serve the most attractive routes first, which explains why most flights today are in the heavily traveled New York-Florida and New York-West Coast routes.

But consider what happens as JetBlue grows: It must go further and further down its list of attractive routes, which is likely to pressure growth and margins. As one airline executive commented to me, "If Oakland-Atlanta is the best they could do for a new route, what on earth are they going to do with all of the new planes being delivered in the near future? And Southwest already owns 70 of the top 100 markets."

JetBlue strongly disagrees that there is any shortage of attractive routes to expand into, and cites data showing hundreds of routes with decent levels of traffic, in spite of current high fares. By introducing low fares and exceptional service, JetBlue believes it can stimulate demand as it did in the New York-Buffalo market, which has grown from 500 to 1,400 passengers per day each way since JetBlue started flying that route. If JetBlue can indeed grow the new markets it targets by such a degree, its growth plans will likely pay off -- but that's a big if.

Competitive reaction
While JetBlue has faced significant competition to date, the competitive environment is likely to provide an even stiffer headwind in the future for three reasons. First, as recently as this spring nearly every major airline was facing severe financial distress, yet almost all are in significantly better (though still precarious) shape today because they refinanced debt, raised additional capital and so forth (just look at the stock charts -- the airline sector is one of the top performers this year). While one could argue that healthier competitors might lead to more rational pricing, it can't be good news for JetBlue when its competitors significantly enhance their financial strength.

Second, to continue its torrid growth, JetBlue will increasingly have to start flying routes -- generally into competitors' hubs -- that will trigger violent reactions. One executive at a competing carrier told me, "JetBlue has been successful so far by flying fragmented markets [thereby avoiding all-out retaliation], but this will not be true going forward."

As evidence of this, consider the Long Beach-Atlanta route: When JetBlue launched three flights a day, Delta and AirTran (NYSE:AAI) responded by slashing prices and flooding the market with extra flights, which CEO David Neeleman said bordered on "predatory behavior." This was one of the reasons JetBlue pulled back to only one flight a day in this market and instead increased frequency on the Oakland-Atlanta route.

Finally, JetBlue's success is sure to attract new upstart competitors that may have even newer planes and lower maintenance costs. In fact, Richard Branson's Virgin Group, which has successfully built low-cost carriers in Europe and Australia, recently announced that it plans to launch a well-capitalized U.S. airline "definitely within nine months."

Managing hypergrowth and a new type of aircraft
JetBlue's success to date can be attributed in large part to wisely copying much of the model that has made Southwest the shining star of the airline industry for more than three decades: treating employees well, offering only point-to-point service, flying only one type of aircraft, etc. But JetBlue is deviating from this model in two related and important ways: Rather than being content to grow at a 10-15% rate each year, as Southwest has been historically, JetBlue has pursued hypergrowth, leaving little margin for error (last quarter, revenues grew 64% and the company plans to take delivery of 21 new aircraft by the end of next year, growing its fleet 45% from 47 to 68 planes).

To continue high growth, JetBlue recently announced that it has placed firm orders for 100 new Embraer 190 aircraft, with options for 100 more. I've seen mock-ups of this plane, which seats 100 passengers (vs. 156 in the A320), and I'm impressed. However, adding a second type of aircraft adds significant complexity, and committing to so much additional growth is risky. One airline executive told me that he has carefully analyzed point-to-point routes for smaller markets and, even assuming a cost structure as low as JetBlue's, concluded: "There are only a small handful of markets that can support 90- or 100-seat jets, so I have no idea where JetBlue thinks they can put so many planes."

I believe that sensible, prudent investors should spend the bulk of their time thinking about what can go wrong, especially when analyzing a richly valued growth stock like JetBlue, so let's consider the following doomsday scenario, outlined to me by a long-time executive in the industry:

"Everybody seems to believe that JetBlue has reinvented the wheel, but the fact is that they haven't. I worked for [an upstart airline] years ago and our stock rose more than ten times over a few years as we grew quickly and reported high margins, due primarily to the low maintenance costs associated with new aircraft. But then we ran out of new, attractive markets to penetrate, growth slowed, maintenance costs soared and our stock collapsed. I've seen situations like this many times before: As planes and employees get older, things change -- and what's amazing is how rapidly things change in this industry."

Will JetBlue follow the same Icarus-like path of so many of its predecessors? I don't know, but I'm certain that to avoid this fate, JetBlue will have to create a powerful brand that will translate into customer loyalty and a willingness to pay more for JetBlue's product. I don't believe that any airline has truly been able to break away from the commodity-like nature of this industry, but I applaud JetBlue's audacious attempt to do so. And it just might succeed if it can replicate its success in the New York-Florida market, in which JetBlue has the greatest number of flights and highest load factor, despite charging higher prices and flying from a less convenient airport.

As an admirer of JetBlue -- and a New York City resident who benefits from its presence in the market -- I hope the company is successful, but I'm not even tempted by the stock at these levels. As with any richly valued stock that is widely beloved by investors, I suggest searching for stocks at the other end of the investment spectrum.

Whitney Tilson is a longtime guest columnist for The Motley Fool. He owned shares of Berkshire Hathaway at press time, though positions may change at any time. Under no circumstances does this information represent a recommendation to buy, sell, or hold any security. Mr. Tilson appreciates your feedback at The Motley Fool is investors writing for investors.