It will be interesting to see if they manage to do better than in ATL.
http://www.thestreet.com/_yahoo/markets/ericgillin/10122215.html
The fever for JetBlue (JBLU:Nasdaq - commentary - research) shares appears to have broken this week, with J.P. Morgan lowering its rating and investors sending shares down 16% over the last two days.
On Friday, J.P. Morgan analyst Jamie Baker downgraded JetBlue to underweight from neutral weight, telling investors that at 31 times his 2004 estimate, shares are too pricey. Baker also dropped his earnings estimates for the fourth quarter below current Wall Street consensus, citing increasing competition from network carriers such as Delta Air Lines (DAL:NYSE - commentary - research) and low-cost rival AirTran (AAI:NYSE - commentary - research).
A major factor in the J.P. Morgan downgrade was news this week that JetBlue will be leaving the Atlanta market just six months after it entered with great fanfare. Delta and AirTran vigorously defended market share in Atlanta, where both have hubs, by adding capacity and slashing fares. In an interview with the Atlanta Journal Constitution, JetBlue Chief Executive David Neeleman called the battle for Atlanta "crazy."
"While we applaud JetBlue for making a hasty exit from an inhospitable Atlanta market, its actions underscore a basic tenet of airlining: Dominant carriers defend hubs," said Baker, in his downgrade. "Following its rather unpleasant experience in Atlanta, we believe JetBlue's appetite to enter other airlines' hub markets has substantially lessened."
On Friday, JetBlue shares, which have doubled since their initial public offering 18 months ago, were down $4.43, or 7.2%, at $57.37. At this price, JetBlue now trades at 32.6 times projected 2004 earnings. In comparison, rival Southwest (LUV:NYSE - commentary - research), which was down 29 cents, or 1.6%, at $18.45, trades at 29.8 times 2004 earnings.
The Battle for Boston
Indeed, after the Atlanta battle, JetBlue may be more tentative about head-to-head competition at hubs down the road, limiting the markets where it can unleash its aggressive plans to expand over the next three years.
If other airlines' hub markets are factored out of JetBlue's near-term growth equation, Baker said, the low-cost carrier would eliminate 34% of the New York market from consideration. While there would be plenty of opportunities to add flights in markets that JetBlue already serves, in Baker's estimation, the company would have just $900 million in potential revenue from new markets out of JFK Airport in New York. (JetBlue flies only from JFK, which is its New York hub.)
With Delta winning the battle for Atlanta, JetBlue's plans to expand to Boston are even more important. At Logan Airport in Boston, Delta has 27% of the market, but no carriers call Logan a hub, making it an open territory for a new low-cost rival. With Delta building a new terminal in Boston and its low-cost Song unit adding flights, JetBlue's business model will face a big test.
"Boston offers hub-type demand -- annual revenue production between that of Atlanta and Houston -- without the market concentration and potential competition that accompanies Atlanta," said Baker. "This is the JetBlue business plan after all: the exploitation of large, unconcentrated markets. However, first-mover advantage belongs to Song at Boston."
Delta's victory may inspire other carriers to wage similar battles for key cities, even if that means operating flights at a loss in order to drive away competitors. For network carriers with much higher fixed costs, this strategy can be risky one, but it could be the only defense they have, barring a major change to the cost structure at network airlines.
High Valuation
To be sure, concerns about competition may prove to be isolated to Atlanta if Boston travelers take to JetBlue they way New Yorkers have -- but the company's high valuation will remain on people's radar. Over the last five months, analysts have begun to sour on JetBlue shares, worried that shares may have rallied too fast too soon.
In late May, the average analyst rating on JetBlue was 4.2, good enough to rate it above a buy, according to Bloomberg. As of Friday morning, however, JetBlue's average rating had slipped to 2.8, which is a hold rating. Only two analysts rate the company a buy, and rivals Southwest, AirTran and America West (AWA:NYSE - commentary - research) are now rated at 3.4 or better.
Because expectations and valuations are so lofty, investors have been growing skittish, dropping JetBlue shares 9% on Thursday after the company only topped expectations by a penny per share. With AMR (AMR:NYSE - commentary - research), parent of American Airlines, and Northwest Airlines (NWAC:Nasdaq - commentary - research) posting third-quarter profits, investors have begun warming to the network carriers in hopes that a powerful cyclical return to form will cause stocks to triple, as many have done so far this year.
"We believe that with modest revenue recovery and the potential for diminished corporate travel restraint in 2004, equity upside over the next 12 months could be superior at survival-challenged network carriers," said Baker.