JetBlue Seeks First-Class Boost to Trim Gap on Rivals

(Corrects gender reference in 15th paragraph of story published Aug. 5.)

JetBlue Airways Corp. (JBLU), trailing its peers in shareholder returns and profit-margin growth, is betting on new first-class offerings to boost revenue in cross-country business travel.

Eleven of its new Airbus SAS A321 aircraft will be outfitted with lie-flat seats and several “private suites” with closable doors in hopes of gaining more of the $1.43 billion generated annually on New York-Los Angeles routes, the carrier said today in a statement. That service, debuting in 2014, also will be offered on New York-San Francisco flights.

The first-class options are the initial departure from an all-coach model for JetBlue, which began flights in 2000 with seat-back televisions and leather seats. It’s only the start of needed changes, said David Fintzen, a Barclays Plc analyst. New York-based JetBlue fell short of forecasts for second-quarter profit and has struggled with aircraft maintenance costs.

“Is it the only thing JetBlue needs to do? No,” Fintzen, who rates its stock the equivalent of hold, said in an interview. “It speaks to what is JetBlue’s major problem. Their costs are not where we would like to see them, but the bigger problem at JetBlue is a revenue problem.”

JetBlue shares have climbed 14 percent this year, the lowest among the 10 carriers in the Bloomberg U.S. Airlines Index, which increased 54 percent. JetBlue also trailed the Standard & Poor’s 500 Index’s 20 percent gain.

The stock rose 0.2 percent to $6.51 at the close today in New York.

Customer Request

The first-class offering responds to feedback from regular customers who said they wouldn’t fly JetBlue on cross-country flights because of its all-coach service, and from the addition of the Airbus A321 to the airline’s fleet, Chief Executive Officer Dave Barger said in an interview.

“The A321, with its real estate, created a much better platform for us to offer these 16 seats” in first class, he said. “We feel really good about it. The competitive dynamics of the marketplace are going to play out.”

The premium seats will offer a better product at a lower cost, Barger said, without being specific on fares. The service will start in the second quarter of 2014 and should add to earnings in those cross-country markets by the second half of that year, he said.

Boston Flights

The airline may consider later adding the premium cabin on some flights out of Boston, where it offers the most daily departures, Barger said. The A321s with first class will offer 143 coach seats, while those in regular service will have 190. JetBlue’s existing A320s have 150 seats.

JetBlue joins larger carriers such as AMR Corp.’s American Airlines and Delta Air Lines Inc. that are improving cross-country premium seats in a battle for fares that can top $6,500.

JetBlue’s second-quarter operating margin decline of 250 basis points, or 2.5 percentage points, from a year earlier was the worst among major U.S. carriers, said Jamie Baker, a JPMorgan Chase & Co. analyst in New York. He rates its shares the equivalent of sell. JetBlue Chief Financial Officer Mark Powers called the quarter’s margin contraction “highly disappointing.”

Maintenance costs at JetBlue, with one of the industry’s younger aircraft fleets, have climbed an average 49 percent annually since 2002, Hunter Keay, a Wolfe Research analyst, said in a report. Keay, based in New York, rates the stock the equivalent of hold.

Maintenance Agreement

Higher expenses for engine work on its Embraer SA E190 planes this year followed JetBlue’s struggles with a maintenance provider that unexpectedly liquidated last year. The carrier recently signed a maintenance accord with a General Electric Co. unit that JetBlue said should prevent major changes in engine repair costs going forward.

“It’s definitely something they talk about and say they are focused on,” Savanthi Syth, a Raymond James Financial analyst in St. Petersburg, Florida, said about escalating operating costs. “It obviously doesn’t show through.” She rates the shares underperform.

The delivery of JetBlue’s first A321s next year is expected to help lower unit cost, or the expense to fly each seat a mile, along with new technology at the airline’s flight operations center that should boost efficiency, Powers and Barger said last month.

“We get it and we know that this is really probably the one challenge where we have to nail it,” Barger said on a July 30 conference call. JetBlue executives on the call forecast higher unit costs and improved margins in 2013’s second half.

Low-Cost Rivals

Fintzen, the Barclays analyst, said the carrier must find more ways to boost revenue from each seat flown a mile to close the gap with competitors such as Spirit Airlines Inc. (SAVE), which generates more revenue per plane and operates at lower costs. Spirit offers lower fares, with fees for anything beyond the base ticket price.

“Analysts are forcing investors to look at the stock in a new way and pressuring the company to change or face the consequences of not changing,” said Jim Corridore, an analyst at S&P Capital IQ in New York who recommends selling JetBlue shares. “It’s no longer the fast-growing company that’s the darling of the Street.”

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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