JetBlue Airways (Nasdaq: JBLU)
trading at $36.90 as of 10/24/02

I concede that the lovely, reserved leather seats face many channels of excellent satellite TV service. I admit the staff is amusing, the atmosphere light, and the fares rock bottom.

But just wait, dear shareholders, because there are skeletons rattling in the cargo hold. 

Anyone old enough to remember People's Express or any number of other discount airlines can tell you they've seen it all before. JetBlue is just another chapter -- albeit blue -- of the same old airline playbook. It's an industry that has, in its history, lost more money than it ever created. Given enough time, all airlines are a hex on their shareholders. Sure, in the interim, some well-managed airlines such as Southwest Airlines(NYSE: LUV) may reward, but they are rare, and the long term prognosis is lousy.   

To bolster my case that JetBlue won't fly above the stormy weather, I offer the 10 Immutable Laws of Upstart Airlines:

1. You start an airline.

2. You buy new planes that impress customers.

3. You serve underserved markets -- none of the big folks will let you have takeoff and landing slots at airports worth having, anyway.

4. You pay lower labor costs and offer the fresh-faced employees stock options instead.

5. Your lower cost-labor structure allows you to charge lower fares.

6. But you do still have debt from buying those planes.

7. And, sooner or later, your employee costs creep up.

8. Sooner or later, you need debt to finance more planes.

9. Sooner or later, you can only increase revenues by moving in on markets others own, where you just might find another low-cost airline. As in California... as in Southwest Airlines.

10. Sooner or later, your stock, which was selling at three times sales (more than Merck(NYSE: MRK)), 27 times earnings (about the same as Johnson & Johnson(NYSE: JNJ)), and zero times no-free cash flow (because no airline ever produces sustained free cash flow), dives.

Not convinced? Let me scream past the graveyard.

JetBlue makes No. 4 even worse for shareholders. Bill Mann said:

I saw an unbelievable interview the other day, in which JetBlue's CEO said stock options were a main reason his company can keep fares low. So, the next time you fly JetBlue, be sure to thank a shareholder. She's subsidizing your ticket. That's been part of the game for so long: The company pays you some, but then the idiot shareholders make up the difference.

Here is the Mann-Jacobs corollary to Nos. 4 and 7: Sooner or later, when your employees grow wise to the fact that the options provide a short-term benefit (if that), they want more cash. They eventually unionize. Your gravy train, uh, plane, is over.

JetBlue might have a longer lease on life were it not for No. 6: it's heading for a mid-air collision with another successful, low-cost provider, Southwest. While other airlines may crash and burn, these two have each other to restrain prices, and profits, for any spoils they may share.

I would short JetBlue at anything above $35, its price when I wrote this, and make sure I've got a high enough equity balance to hold it through any price rise that could bring a margin call. But please note: Shorting is not for beginning investors. Many investors who do short have a rule that they cover their short at a certain percentage above their short price, say, 20% or 25%. If you aren't 100% comfortable that you understand the risks of shorting, please spend more time learning about shorting first, and a good place is our special, Is Shorting Stocks Foolish?   

TransLove Airways gets Tom Jacobs (TMF Tom9) there on time. At press time, he had no long or short positions in companies mentioned in this story. To see his stock holdings, view his profile. The Motley Fool has a disclosure policy.

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