JetBlue started with such promise: a feisty new entrant offering low fares and convenient flights. Above all, JetBlue marketed innovative service to customers. It resulted in a beloved airline, rewarded with loyalty and rapid growth, David besting airline Goliaths in a notoriously difficult industry.
Fast-forward to JetBlue’s current effort to raise $2.8 billion in debt. On the day of the recent announcement, JetBlue suffered its largest one-day stock decline of 20%, now at less than $5/per share, testing all-time lows, as it was simultaneously downgraded by the major ratings agencies. To put the debacle in perspective, JetBlue since October 2003 has lost more than 80% of its market value, while over the same period the S&P 500 increased by 400%. That is a good working definition of wealth destruction.
How it happened and why it matters are both important stories.
At bottom, the airline business is about funding new aircraft, an incredibly expensive proposition. Globally, there are approximately 34,000 planes in service. Over the next ten years, the industry will require some 2,000 to 2,400 new planes annually, where each plane costs $100 million to $300 million, depending on size. The need to upgrade fleets is unending, to meet rising demand and enhance customer comfort, for fuel economy, green initiatives, and fleet and route optimization. All must ultimately be funded out of meager airline profits.
In 2023, for example, McDonald’s generated nine times the U.S. airline industry’s pre-tax profit, which is roughly 25% relative to all U.S. companies. Even for the top-tier U.S. carriers, it is a tough task. United Airlines has a current fleet just under 1,000 planes, the third largest globally, yet it is committed over the next ten years to the purchase of 800 new planes. That’s wonderful for customers but not so great for United shareholders; United’s current share price is unchanged since 2006.
Now look at JetBlue, which by comparison operates 284 smaller, less costly narrow-body and regional planes. In a dooming move, JetBlue embarked on a growth plan into Latin America, Europe, and unprofitable U.S. markets. As a result, it has sustained capital and operating losses that now imperil the airline’s viability.
New management is retrenching as fast as possible, by abandoning unprofitable routes, reducing costs everywhere it can, and most notably cancelling or deferring 44 Airbus planes to avoid $3 billion in aircraft orders. Management believes that its JetForward plan can eventually generate $900 million in sustainable annual profits.
Time will tell, but the damage has been done. JetBlue is unable to fund a new fleet, beyond the run-off in deliveries through 2026. While competitors steadily modernize, JetBlue customers will be flying an aging, shrinking fleet, without a new plane order in sight for at least five years. Instead, the $2.8 billion it seeks to raise will be used to cover negative free cash flow, projected by Moody’s at a combined $3.6 billion in 2024 and 2025, to pay for planes ordered before the spigot could be turned off.
The loans are secured with JetBlue’s last unencumbered asset: its loyalty program. Having eaten the harvest, and now the seed corn, JetBlue is reduced to survival mode, with no remaining borrowing power, in an insanely capital-intensive business.
Although management believes that it has a program to restore operating profitability, the plan will take time to execute, it does not account for a recession, and JetBlue is still stuck in über-competitive East Coast routes and the after-effects of its expansion in the U.S., Latin America, and across the Atlantic. Added to its woes, and yet another tipping point, JetBlue is suffering the ongoing impact of Pratt & Whitney engine failures, which will force the idling of aircraft.
It is the execution failures where JetBlue is perhaps most to be faulted. Although it garners support for its premium service products, in the 2024 J.D. Power airline survey, JetBlue’s core economy and premium economy now score only average customer satisfaction, far from the customer lovefest heyday built by JetBlue founder David Neeleman and his famous, now interred, promise to “bring humanity back to air travel.” For many travelers, the J.D. Power survey understates customer dissatisfaction, as the methodology ranks satisfaction against other unpopular airlines. And this is before JetBlue embarks on its draconian cost-cutting program.
Shockingly, JetBlue has lost control of its boarding process, where passengers have learned from experience to crush forward to board. JetBlue compounds the problem by assigning priority boarding to anyone with disabilities. Instead of restricting pre-boarding to those who legitimately need extra time and assistance, JetBlue’s customers by the dozens seize on unmonitored disabilities. When asked, the disability answer from a passenger was “allergies.” Turning a blind eye, JetBlue aids and abets such behavior. As a result, even for JetBlue priority customers, the overhead bins are already filled when boarding well back into the cabin.
The in-flight experience is devolving as well. Instead of customer care, passengers are cautioned that failure to follow crew instructions can result in fines, arrest, and no-fly restrictions. In former days, the system worked well. Not so well when crew wear Palestine emblems, belatedly banned, and refuse to reseat an Orthodox man in an ongoing lawsuit. The messaging, and the new reality, is clear: talk to crew members at your own risk.
Incredibly, for an airliner fighting for its survival, the management conference calls ritually have every member of senior management thank the incredible crew members. This reflects life in a unionized environment, with a dollop of political correctness. At JetBlue, customers have become the afterthought, attended to as allowed by crew members.
It is part and parcel of the new-age belief that corporations are tasked with serving all stakeholders, including Mother Earth, larded with ESG and DIE obligations. Witness JetBlue even in calamitous times proudly announcing its meaningless purchase of biofuels.
The larger lesson is the cost of mismanagement. Business is a brutal undertaking, in all industries, and thankfully so. It is the engine for innovation, growth in services, reduced cost, efficiency, and merit-based opportunity.
JetBlue is the flip-side of the coin, the casualty of its unthinking growth hubris, customer neglect, and capture by its unionized employees.
It is fair to say that JetBlue is now damaged goods — not as an airline, but as an equity investment. At some point, creditors will control JetBlue in a reorganization, the airline will be purchased, or it will linger as a marginally public stock. American Airlines is the most likely acquirer, but it is an open question whether JetBlue, even at a rock-bottom stock price, is worth the assumed liabilities, an aging fleet, and the enormous managerial and strategic effort, including anti-trust scrutiny.
It is a story worthy of consideration.
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