=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2002/07/26/f= inancial1553EDT0221.DTL ---------------------------------------------------------------------- Friday, July 26, 2002 (AP) JetBlue is topflight, but risks on radar ^By GENE COLTER (07-26) 12:53 PDT (AP) -- A Dow Jones News Analysis NEW YORK (Dow Jones/AP) -- JetBlue has been a fine ride for customers and investors, but the latter constituency might want to watch the radar for signs of turbulence. The nation's newest airline of note is, so far, a rousing success story. Debuting as a public company in April, JetBlue Airways Corp. is a rarity: a successful airline stock that several months later is nearly $20 above its $27 initial public offer price, and Thursday it reported its sixth straight profitable quarter. It goes without saying there are risks to an airline business post Sept. 11. And the history of airline stocks is not pretty. So far JetBlue hasn't succumbed to precedent, but factors to scan include a sky-high valuation on the stock. Some authorial disclosure is warranted lest anyone think this column is a hatchet job: I love JetBlue. My family and relatives do, too. But the topic here is whether the company and its stock are in danger of overreaching. Management's customer plan works. The concept of marrying low costs with no frills is old hat and by no means a guarantee of success, the ultimate example perhaps being PEOPLExpress, a popular, cut-rate carrier that went bust when it couldn't afford its lofty expansion plans. JetBlue's revolution is to make sure that no frills doesn't mean no service. You don't get a full meal, and you have to help tidy up, but you do get a nice flight, an attentive and professional staff, plus satellite TV, and you arrive on time. Corporate strategy is on course, too. Besides saving money on meals, JetBlue saves serious cash by flying only one type of plane, the Airbus A320. That caps operating costs. The airline is "hubbed" in New York City, but when it came time to expand in a big way, the airline didn't fight the New York bureaucracy. It made another base in Long Beach, Calif. Long Beach is a hike from destination city Los Angeles, but travelers gladly fly there to get the great JetBlue discount. More important, the price was right for JetBlue in Long Beach compared to expensive "slots" at LAX. Chief Executive Officer David Neeleman says he prefers to add flights to cities JetBlue already serves rather than adding new destinations. That's what you want to hear, that a new airline isn't overdoing it. Except that, since launching in February 2000 JetBlue has already added a number of routes. In addition to its regional routes in upstate New York and the Florida tourist towns, it also flies to the aforementioned New Orleans; Washington, D.C.; Burlington, Vt., Denver; Salt Lake City; Seattle; Canada and even San Juan, Puerto Rico. It's expanding in California, adding Oakland flights from Long Beach, where it will also fly to Las Vegas. There's the catch-22: As long as the routes are profitable airlines want to add as many as they can, but adding a lot of routes also adds a lot of upfront costs, particularly when the airline, like JetBlue, is having to buy new planes to fly them. Debt hurts all companies, but it's been a real bane to the cyclical airline business. Then there's the competition. Dallas-based Southwest Airlines Co. is the heavyweight champ of the non-major airlines, and reportedly is going to fight a fare war with JetBlue in California and elsewhere that will slash some seats to $19 a pop. Meanwhile, major carrier Delta Air Lines Inc. says it will come up with low-fare strategy, a direct response to the likes of JetBlue. Of course, the smaller and regional airlines are in a lot better shape than the majors, which are all but buckling from a lack of business travel and are hoping for government cash. The smaller guys' success explains why an airline like Southwest gets rewarded with a stock price that at about $12.40 is roughly 41 times projected 2002 earnings. At about $46, newcomer JetBlue also changes hands at 41 times forward earnings. (The major airlines are expected to lose money this year, so P/Es don't apply for them.) It's that kind of valuation that took some of the wind out of JetBlue immediately after its IPO when influential UBS Warburg analyst Sam Buttrick said it's a great airline that nonetheless "appears overvalued." The shares had risen as high as $55. Make no mistake, JetBlue is the airline to watch, not to mention fly. And people like to own stocks in products they love -- call it the Krispy Kreme phenomenon. But there may come a time in the not-too-distant future when JetBlue might, for investors' sake, need to fly a little closer to the ground or risk a sudden and stomach-churning descent. EDITOR'S NOTE -- Gene Colter is deputy managing editor, Dow Jones Newswires. =20 ---------------------------------------------------------------------- Copyright 2002 AP