JetBlue Learns From Its Mistakes

| About: JetBlue Airways (JBLU)

Anyone who has been awake over the past couple weeks witnessed JetBlue Airways Corp. (NASDAQ:JBLU) suffer one of the worst PR fiascoes in recent memory. The airline tried to keep its planes flying despite terrible storms, leading to passengers spending hours on the tarmac, and then days in the terminals when JetBlue then had to cancel many of its flights. CEO David Neeleman was quick to apologize and promise compensation, but the stock took quite a tumble anyway.

But JetBlue, known for having smart, responsible management (several top executives declined their bonuses in 2005 when results were bad), learned its lesson quickly. On Monday it canceled a number of flights due to another major storm -- simply to make sure it had all its planes in place to resume business as soon as possible. This enabled JetBlue to take some short, fixed losses to avoid the extensive costs and bad press from the previous storm.

It also offered a new "Passenger Bill of Rights," which offers specific monetary compensation to customers who get stuck because of "controllable" delays. Neeleman also promised to update the company's flight-tracking and planning systems, which haven't kept up with the company's rapid growth.

So far, so good. Now we'll see if customers start coming back. Even if they do, JetBlue has to compete in a ruthless industry with high fixed costs and unstable fuel costs. Other airlines are dropping their prices to compete with JetBlue's. It can't keep adding routes at the same rapid pace we've seen over the past few years, and so will need to find new ways to grow profits.

So much of business is about inventory management; in the case of airlines, it's about making sure your planes are there when they're supposed to be. JetBlue's model is based on very quick turnarounds to keep costs down, which means they cut things very close and are probably more susceptible to delays than other companies. This is compounded by the complexity of managing a company that has grown extremely rapidly. Not surprisingly, JetBlue's track record with delays is only moderate. Other airlines do better.

If JetBlue can learn to improve its inventory management and still manage to keep its low unit costs, this stock could rebound, but I'm not sure it has a huge upside anyway given the competition. It's too bad that recent trouble came just as JetBlue was coming off an excellent 2006 that saw operating income grow nearly 300% after a very rough 2005. Nevertheless, I think this is a company that can get itself back on track.

Type of stock: A low-fare airline that is coming off a disastrous month. This may be an opportunity stock, in fact.

Price target: This stock was rising steadily from a low of about $9 in October, and it got up above $17 in January. I don't see it climbing above $15 again for at least a year, so I wouldn't buy unless you see a dip below $10. Even then, I'd be leery; I wrote in June that I thought it could drop as low as $5 (it did dip, but only to $9), and I still think this is a company with a tough row to hoe.

JBLU 1-yr chart

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Tagged: , Regional Airlines
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