JetBlue: Hoping for Clearer Skies

Feb.20.07 | About: JetBlue Airways (JBLU)

Everyone is rightly complaining about how little ongoing information there has been from JetBlue (NASDAQ:JBLU) about its troubles. To a perhaps naive way of thinking, it seems like a classic opportunity (one right out of Scoble/Israel's Naked Conversations text) to use a company blog to humanize things and keep people updated on their efforts to get people out of airplanes, get back on schedule, etc.

So, are they doing it? Nope. Instead JetBlue has this flight operations update page, but it only has the most recent bulletin, with no archive of how the company has dealt with things on an ongoing basis. At least as baffling is that JetBlue CEO David Neeleman has a blog/flightlog, but he hasn't updated it since February 1st.

Turning to a related issue, most observers are struggling with the question of how a widely-forecast weather problem a week ago led to such problems back on February 14th for JetBlue, and has also led to so many JetBlue cancellations yesterday. Explanations offered vary, but most are some variant on "the company grew too quick, was under-staffed, and its systems and people couldn't cope with all the manual reschedulings".

Okay, but I still find that tough to handle. Even when things are going well, running a busy airline like JetBlue is a logistical nightmare. You don't get to 11,000 employees and a host of paired cities running this stuff with five guys and a Commodore 64. Granted, this was a series of crazy exceptions to normal fare, but it's still puzzle how it got so bad and propagated so far forward in time.

While I don't have a full explanation either, the entire incident sent me back to Charles Perrow's classic book about disasters in complex systems, Normal Accidents. Here is Perrow from Chapter 5 on Aircraft and Airways:

There are some unique structural conditions in this industry that promote safety, and despite complexity and coupling, technological fixes can work in some areas. Yet we continue to have accidents because aircraft and the airways still remain complex and tightly coupled, but also because those in charge continue to push the system to its limits.

That idea that this was a random event caused by pushing a complex system to its limits strikes me as good an explanation as any. In other words, however, while it was JetBlue this time that was stuck to a New York runway and fell off the map, it was a system error, so next time it could be any airline.

I'm interested in how the stock market reacted last week to the developing problems at JetBlue. If you look at the JBLU five-day stock chart, the stock had been down in the days leading up to the February 14th episode, ignored the news that day, and then traded smartly higher the next day.

JBLU

Why? Because Goldman Sachs analyst Robert Barry upgraded JBLU to a Buy before the market opened on the 15th. He predicted in a research report that the carrier's margins would surpass most other airlines in 2007, largely on the back of its embrace of Embraer 190 jets.

Fair enough, but the stock didn't trade down after that news either. Why didn't JetBlue stock fall materially last week -- as it almost certainly will on the open today -- despite the developing storm around it?

Good question, and one that should get market efficiency theorists mulling. It seems a classic example of a loud and less important short-term signal -- a Buy upgrade -- overpowering a less-loud but more important longer-term signal -- airline passengers angry and rebelling at a company's mistreatment of them.

The stock is almost certainly going to trade down today, and traders are going to be largely wrong-sided. Granted there has been action in the company's put options -- the June 7 12.50s have 20,490 open interest -- but there has been remarkably little sign that traders correctly called this one, despite ample evidence as early as the day after that they were focusing on the wrong things.

So, what can we glean from all of this from a trading point-of-view? Well, one rule might be to assume stock mispricing when looking at discount airlines: There were no traders on the JetBlue planes, because traders don't fly discount airlines. They assumed that lowly, non-fractional-jets owners must have this sort of thing happen to them all the time.

A second rule might be to fade any business scandal that makes the front page of the Drudge Report. Matt had this one early, often, and aggressively.