Twice-recommended Motley Fool Stock Advisor pick JetBlue (NASDAQ:JBLU) has not been performing up to snuff. What gives?

The company announced positive first-quarter results on April 21, but CEO David Neeleman was clearly disappointed. Although JetBlue is one of only three consistently profitable airlines, operating and net profit margins have been falling. The cost of fuel has a lot to do with this erosion, but JetBlue can and should do better.

About those numbers
JetBlue's first-quarter revenues were $374.2 million, which represented 29.5% growth year over year. Operating income, however, was only $25.7 million, resulting in a 6.9% operating margin. During the same time last year, the operating margin was 11.3%. Neeleman put it bluntly: "We prefer double-digit margins."

Operating margins did improve on a "fuel neutral" basis, but that's an irrelevant statistic unless we're comparing airlines to airlines -- not JetBlue to any other stock on the market. Airlines rely on fuel to operate, and the cost of fuel will always have an impact on JetBlue's bottom line.

JetBlue reported that it paid $1.31 per gallon of fuel in the first quarter -- a 42% year-over-year increase. The company faces an interesting dilemma with regard to fuel prices. If the cost of a barrel of oil increases by $10, JetBlue pays approximately 24 cents more per gallon of fuel. To limit downside risk, JetBlue -- like Southwest (NYSE:LUV) -- hedges against increases by locking in certain prices. JetBlue hedges less than Southwest but more than other airlines. If fuel prices drop, Southwest and JetBlue may be locked in at higher prices. That doesn't bode well for competitive advantage, and with oil prices as volatile as they've been, there's a chance it could happen.

While the current high price of fuel has a negative effect on JetBlue's bottom line, the longer these high prices last, the better off JetBlue could be in the future. Why? A less financially secure airline might be forced to sell or go out of business. This "rationalization," as Neeleman called it, would certainly help shore up remaining airlines. I've long believed an airline or two needed to go out of business for this to be an attractive industry again. Unfortunately, the federal government and other interests have seemed unwilling to let that happen.

Expanding operations
In May, JetBlue announced a number of new routes, including Boston to Las Vegas; Boston to San Jose, Calif.; Washington, D.C., to San Diego; New York to Ponce, Puerto Rico; New York to Portland, Ore.; and New York to Burbank, Calif. The company also opened a new hangar at John F. Kennedy airport in New York. The goal of this expansion is to better position the brand for the future so that it can take advantage when the competitive environment becomes less difficult.

It's a sound strategy for JetBlue to take on new routes because it has the best load numbers in the business. In April, 87.3% of JetBlue's seats were filled, bringing the year-to-date number to 86.2%. Compare that with some competitors:

Airline April Load YTD Load

JetBlue

87.3% 86.2%
American (NYSE:AMR) 77.4% 75.9%
Continental (NYSE:CAL) 77.5% 77.0%
Delta (NYSE:DAL) 76.4% 74.9%
Independence (NASDAQ:FLYI) 68.6% 62.4%
Southwest 69.1% 66.4%


JetBlue has also signed on for 10 more gates in Boston and will add 10 Airbus A320s and seven Embraer E190s to its fleet by the end of this year. These transactions have been pre-financed and accounted for.

On the radar
On May 23, Charles River Associates reported that pension plans represent an "unsustainable cost" for traditional carriers. JetBlue is avoiding this baggage (no pun intended ... well, OK, it's intended) by offering employees a 401(k) plan instead of a pension plan. Again, if a "rationalization" occurs, JetBlue is in a good position to profit.

One thing to keep an eye on is JetBlue's debt. The company has $1.897 billion in total debt on the books, of which $1.865 billion is long term, and it is paying 4.4% to service it. The company holds $651 million in cash. In other words, it can weather this environment for a number of years, but needs to generate cash down the road.

As for guidance, the company expects the current difficult environment to continue for the rest of the year. Assuming $1.45 per gallon for fuel, JetBlue predicts 5% to 7% operating margins for each of the remaining quarters. Keep in mind, however, that the company was predicting a fuel cost of $1.17 at the end of January. The cost of fuel can change radically, and JetBlue's income and stock price will fluctuate along with it. But unlike many competitors, JetBlue has demonstrated that it can remain profitable under these conditions.

JetBlue is best of breed when it comes to airlines -- only I'm not sure that airlines are the best place to invest right now. The industry still needs to shake out, but CEO Neeleman has assured shareholders that JetBlue will not acquire anyone to spur that shaking.

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Tim Hanson wishes he could lock in at fuel prices of $1.45 per gallon for his car and lawn mower. He does not own shares of any company mentioned in this article. The Motley Fool has a disclosure policy.