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Is JetBlue the next People Express?

Industry insiders believe the JetBlue's debacle was inevitable. After seven years of nearly unbridled growth, the $2.4 billion carrier was slow to upgrade operational systems that could have minimized the problems.
/ Source: Business Week

Some years ago, a charismatic entrepreneur started a low-cost airline to reinvent the flying experience. With its hub at an underserved New York-area airport, the upstart carrier became the talk of the industry — and grew so fast that in a few years it ranked as fifth-largest. Its founder was lauded as a visionary.

JetBlue Airways Corp.? Actually, it was now-defunct People Express Airlines, which like JetBlue enjoyed meteoric growth in its early years. After JetBlue's meltdown at JFK Airport during a Valentine's Day ice storm, which left hundreds of passengers stuck on planes for as much as 11 hours, the parallels are even more striking: At both, rapid expansion outstripped management's ability to keep everything together.

JetBlue's executives were clearly chastened by the experience. Chief Executive David Neeleman said afterwards he was "sorry and embarrassed," assuring customers "it will never happen again." But industry insiders believe the JFK debacle was inevitable. After seven years of nearly unbridled growth, the $2.4 billion carrier was slow to upgrade operational systems that could have minimized the problems. "They can't keep running off a legal pad and No. 2 pencil," says a longtime industry executive.

JetBlue's fortunes started to unravel when it lost $32 million in the first quarter of 2006 because of rising fuel costs and moves into new markets. Neeleman cut costs and was back in the black by the next quarter. But the result, say industry insiders, was that necessary upgrades to its systems weren't completed, leaving the airline unable to juggle flight delays like the ones at JFK.

Already overburdened crew scheduling systems failed, so flight crews weren't rerouted to their next assignment. The reservation and call-center systems still haven't been updated, some say. JetBlue "may have been too aggressive in cutting costs," says Ray Neidl, a Calyon Securities usa Inc. analyst. A JetBlue spokeswoman attributes the problems to human error. "I wouldn't say our systems failed," she says.

Turbulence ahead
For now, no one thinks JetBlue will go the way of People, which was forced to offload assets in 1987 after its disastrous acquisition of Frontier Airlines. New York-based JetBlue, with $699 million in cash, has a far stronger balance sheet. Equally important, the carrier has started easing off its growth plans. Last December, Neeleman pushed back delivery of 36 Embraer and Airbus jets until the next decade, though he's on the hook for 22 planes this year.

Still, analysts believe JetBlue will face more headwinds than in its first seven years, when major carriers were in bankruptcy and too weak to defend their turf. To keep growing, the carrier needs to expand outside its New York stronghold, and analysts think few areas are left. "They've got a lot of planes on order, and there aren't many markets you can throw 150-seat airplanes into," says aviation consultant Mike Boyd.

What's more, its current fleet will soon need costly maintainance, expenses that JetBlue may be underestimating. Nonunion pilots could be an issue as well. JetBlue recruited them with stock options that more than made up for below-average pay and longer work hours. But with the stock now 60% off its 2003 high, pilots may feel the pinch. "I wouldn't be surprised to see union organizing later this year," says consultant Stuart Klaskin. So JetBlue must deal with its growing pains or risk going the way of People Express.