Red ink and blue notes: JetBlue out of the black

Oh Baby Blue, who's singing the blues now? JetBlue and no baby she, but an adolescent with some real growing pains: the blue-eyed darling will lose money this year and posted a deficit for 2005, the first time since 2000 it was in the red.

For the full year, the net loss was $20.3 million, largely because of a fourth-quarter net loss of $42.4 million, when JetBlue's costs for fuel climbed by 90% from a year earlier. Labour costs at the non-union airline rose 22% as it hired workers to fly its new Embraer regional jets. Just like every other struggling player in today's airline industry, fuel and labour were its largest expenses.

Before the fourth quarter, JetBlue and role-model Southwest were the two biggest US airlines not to have reported a quarterly loss since the 11 September terrorist attacks. Southwest remains profitable, while the largest US carriers have lost more than $40 billion since the end of 2000, and pundits, analysts and legislators held out JetBlue as demonstrable proof that a well-managed airline could make money. Since it went public in 2002, JetBlue's shares have been a magnet for investors, peaking in late 2004 and retaining Wall Street's favour even as they have declined in price since. Its last quarterly deficit was in the closing period of 2000, a year for which it also lost money.

While growing pains, in particular the maturing of its workforce and fleet, its expansion and ambitious plans to integrate the Embraers, certainly combined to account for some of the red ink, stiffening competition from low-cost rivals, from Southwest to an aggressive AirTran, and rebounding legacy carriers such as US Airways and Delta's Song unit, presents a continuing challenge.

The other fundamental problem: fuel. A slightly embarrassed chief executive David Neeleman said almost wistfully: "I wish we had Southwest's hedging position, but we don't." Neeleman, who founded the carrier in 1998, some 18 months before it began operations, sees more costs ahead. The Embraers have presented some teething problems, and the airline is committed to heavy spending on a new terminal facility at its New York JFK hub, where it expects to have 26 gates by late 2008 or early the next year.

The public still loves JetBlue, but its revenue was, in the words of Merrill Lynch analyst Mike Linenberg, "a little light". Total operating revenue in the fourth quarter was up 34% to $446 million, but that was $15 million short of his forecast, and unit revenues were up just 5.3% in the quarter. That was short of the increase estimated by JP Morgan's Jamie Baker, who was looking for unit-revenue growth in the 9% range. As Baker put it: "The maturation of JetBlue has occurred far more quickly than we ever would have envisioned."

But, for just a few bucks more, things could be a lot brighter: Neeleman said that with an added $4 on each ticket, it would have made money. "What we really need is for fares to go up about $10 each." He may ask, but it may not be given.