Image: JFK terminal
Richard Drew  /  AP
JetBlue made headlines in February when an ice storm socked the Northeast. The JFK hub was particularly hard-hit as planes continued to arrive and none were allowed to leave. Thousands of people were trapped on planes for hours or stranded in terminals for days.
updated 8/30/2007 6:21:29 PM ET 2007-08-30T22:21:29

Memories of the Valentine’s Day ice storm that grounded more than a thousand JetBlue flights and tens of thousands of passengers didn’t stop Suzanne Dohm from flying the New York airline.

“One incident like that is not going to turn me off. Those were extraordinary circumstances,” said Dohm, of New York, while waiting on a recent day for a JetBlue flight at John F. Kennedy International Airport. “I know what it was like that day. It was horrible.”

Customers may be willing to forgive the airline that offers free snacks and DirecTV at every seat, but investors have not: Shares of JetBlue Airways Corp. have been on a long slide in recent months and now trade for little more than half their January peak.

One big concern is that JetBlue has been forced to scale back its growth plans as it faces new competition from startup Virgin America and other carriers. Wall Street analysts say the seven-year-old carrier’s high debt load, along with its chronically congested JFK hub and reliance on cutthroat domestic routes, are crimping profits and leave it vulnerable to a takeover.

Indeed, JetBlue’s revenues per available seat mile have grown only 9.4 percent over the last five years, compared to growth rates of 23.5 percent at Southwest Airlines Co. and 28.6 percent at AMR Corp., which operates American Airlines. Per-seat costs, meanwhile, have jumped 29.4 percent at JetBlue, compared to a 20.7-percent increase at Southwest and a 3.3-percent increase at AMR. Fuel expenses, which make up nearly a quarter of airline costs, have risen sharply in recent years. Labor expenses have also increased, though more slowly.

JetBlue’s new management team knows that boosting the airline’s financial performance is imperative. But they also have no choice but to keep their focus on operational issues. Another systemwide misstep could be fatal.

JetBlue made headlines in February when an ice storm that socked the Northeast collided head on with the carrier’s policy of not canceling flights ahead of bad weather. JFK was particularly hard-hit as planes continued to arrive and none were allowed to leave. Thousands of people were trapped on planes for hours or stranded in terminals for days.

“We gridlocked ourselves,” said Dave Barger — named chief executive in May when JetBlue’s board asked founder David Neeleman to step down.

Neeleman, who remains chairman, was criticized for spending more time apologizing than fixing problems. JetBlue didn’t fly a full schedule for days.

Over the next month, JetBlue implemented a pre-cancellation policy and a “remote exit” procedure to get passengers off planes when terminal gates are full. It hired operational experts, including chief operating officer Russell Chew, who has an airline and Federal Aviation Administration background.

Most visibly, JetBlue drafted a “customer bill of rights,” promising vouchers in some cases when passengers are stranded or delayed. Vouchers cost the company $24 million in the first quarter, which included the storm. JetBlue hasn’t disclosed its voucher costs since.

While the changes didn’t save Neeleman, they helped JetBlue avoid a second meltdown when another ice storm struck on March 16. “We pre-canceled the airline and the next day we were at (a) 94 percent completion factor,” Barger said. “That was a textbook event.”

Customers continue to be loyal. JetBlue topped consumer surveys by J.D. Power and Associates and Consumer Reports conducted since the February storm.

“They don’t treat you like you’re an idiot or just a piece of cattle,” Dohm said.

JetBlue helped itself by taking immediate responsibility and changing quickly, said Tom O’Guinn, a marketing professor at the University of Wisconsin and executive director of the Center for Brand and Product Management. “They were very contrite. I think that helped a lot,” he said.

Barger acknowledges that the storm problems cost JetBlue some bookings. But he adds, “what we heard from customers was, ’OK, thanks for the apology. Stop apologizing. Fix it, and we really like you guys. Make sure it doesn’t happen again.’ “

That’s a tough task, however, when your home base is JFK airport, where summer storms and overloaded skies contributed this summer to one of the nation’s worst on-time showings.

In June, JetBlue flights were on time (defined as arriving within 15 minutes of schedule) only 63 percent of the time, compared to an average of 69.4 percent for the industry as a whole, according to Things didn’t get much better in July, when JetBlue flights were on time only 65.3 percent of the time, compared to an industry average of 71.5 percent.

JetBlue earned $21 million, or 11 cents a share, in the second quarter, when it filled 83.5 percent of its seats. That fell a penny short of the expectations of analysts, who are forecasting third-quarter earnings of 7 cents a share based on a projected load factor of around 80 percent.

That would be an improvement over last year’s third quarter, when JetBlue broke even on a per-share basis on a loss of $500,000. Other airlines are also expected to post improved earnings in the third quarter.

“(JetBlue) has lagged because the domestic market is a more difficult operating environment than the international marketplace — more competition and less pricing power,” said Michael Derchin, a New York-based analyst at FTN Midwest Securities Corp. “And Virgin America is seen as a bigger threat to (JetBlue) than others.”

That’s because billionaire Richard Branson’s brainchild, which mimics JetBlue with upscale cabin designs, free TV and discount fares, also overlaps about 10 percent of JetBlue’s network. JetBlue has already matched some Virgin fares.

JetBlue’s struggles have many wondering whether it’s an acquisition candidate, speculation fueled by a June Goldman Sachs research note on Delta Air Lines Inc.

Delta management “seemed eager to discuss the strategic logic of a JetBlue-Delta combination,” Goldman analysts wrote after a meeting with top Delta executives. “We understand this was not the first time (Delta) articulated an interest in JetBlue.”

A Delta spokeswoman declined to comment on what she called “rumors and speculation.”

“Haven’t been approached,” Barger said when asked about the report. “I believe that organic growth is absolutely our game plan.”

JetBlue’s reduced growth rate is part of Barger’s plan to “calm” the airline’s once frantic expansion pace. Last month, Barger cut aircraft purchase plans by 26 percent over the next six years, and said JetBlue will expand to only 2 to 4 new cities a year, down from as many as 16.

“There’s no question in my mind that I think that we grew too fast,” Barger said.

However, JetBlue is not about to stop growing completely. Even with the cutbacks, the company will add 106 planes by 2012. After that, JetBlue’s pace of growth will accelerate — Barger plans to nearly double previously planned aircraft acquisitions between 2013 and 2015.

He realizes his challenge is managing that growth in a way that will keep customers happy and bring JetBlue back into favor with Wall Street. The company can expand, but it doesn’t have to be at a 30 percent compounded annual growth rate, Barger said.

“There’s still a lot of growth in JetBlue,” he said.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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