As JetBlue Airways retrofits its oldest aircraft, making them look factory fresh with new leather seats and high-definition television screens, it is earning higher satisfaction marks from travelers, according to its customer survey data.

But the airline, which reported second quarter earnings Tuesday, is not winning similar plaudits from investment analysts, as some question whether JetBlue can control costs and deliver the industry-leading margins it seeks as it grapples with spiking fuel costs.

JetBlue reported a pre-tax net loss for the quarter of $160 million. The loss isn’t a big concern for analysts, since it includes a pre-tax impairment charge of $319 million related to the carrier’s decision to retire its Embraer E190 fleet sooner than expected. Instead, it will add 60 new-technology Airbus A220-300s, with deliveries beginning in 2020. JetBlue expects the replacement jets to produce better revenue at lower costs. 

What’s more concerning is that, without the impairment charge, JetBlue’s profit growth fell considerably. Without the charge, JetBlue would have reported $159 million in pre-tax profit, a 51 percent decrease, year-over year. JetBlue’s pre-tax margin was only 8.2 percent, off 9.5 points compared to last year, when the impairment is excluded.

JetBlue’s stock was off almost 10 percent by 1 p.m. in New York.

The decline is profit margins is a concern for an airline that has been relentless in pursuing what it has called, “superior margins,” compared to its peers.

But JetBlue’s second quarter pre-tax margin, without the impairment charge, was about 4 points lower than margins from competitors American Airlines, Alaska Airlines, Spirit Airlines, United Airlines, Southwest Airlines and Delta Air Lines. Some of those carriers have not reported earnings, so JetBlue is relying on estimates when making the comparisons.

JetBlue’s costs for fuel went up about 41 percent, year-over-year, but that was not the only reason the airline faltered. Its revenue is also lagging, with revenue-per-available seat mile, which measures how much an airline makes for each seat it flies one mile, off 1.2 percent, year-over-year.

Our first priority really was to get to above average industry margins,” CEO Robin Hayes told analysts. “And that’s what we have been over the last couple of years focusing on. It is very disappointing to me and the team here … that we’ve actually fallen below that, because that is an absolute focus. And I don’t think that we should be using higher oil prices as excuse.”

Cost Control

As it tries to improve margins, JetBlue has been on a cost-cutting kick.

Last week, it said it would cut staff at headquarters through buyouts, layoffs and attrition as it tries to trim $300 million in non-fuel costs by 2020.

It has told analysts it expects its costs-per-available-seat mile, not including fuel, a metric that measures how much an airline spends for each seat it flies one mile, will increase no more than 1 percent, year-over-year, in 2018, 2019 and 2020. JetBlue is not including retirement costs for the E190 fleet in this goal, but it is including a costs from a pending labor deal with its pilots.

In the second quarter, unit costs, not including fuel were up 1.9 percent, slightly better than targeted. The airline said unit costs will increase 1-3 percent in the third quarter, but said it remains on target for the full-year costs to rise no more than 1 percent.

“The critical issue and key stock driver for JetBlue is if management can execute on their goal for [costs without fuel] to be flat to up 1 percent 2018-2020, including a pilot deal,” Daniel McKenzie of The Buckingham Research Group wrote in a report. “We believe they will but it’s likely a bumpy ride there.”

Still, Kevin Crissey, an analyst at Citigroup, noted on the call that JetBlue has historically not been as strong on cost control as its competitors, saying investors “have concerns” about whether the carrier can meet its targets. But Hayes said it will, saying JetBlue is particularly focused on maintenance costs, “an area where we significantly underperform.”

“We want to be an airline that becomes very reliable and very consistent in delivering year-after-year strong unit cost performance,” Hayes said. “And we know we haven’t done that in the past, and we’re going about fixing it.”

Reducing Capacity

In an attempt to boost margins amid higher fuel prices, JetBlue executives told analysts they intend to trim some capacity later this year.

For the fourth quarter, executives said they plan to reduce capacity growth by 2 points, from the planned level.

For the year, that means JetBlue will increase capacity by 6.5 to 7.5 percent, year-over-year, rather than an earlier target of 6.5 to 8.5 percent. But JetBlue is still growing significantly, leading analyst Jamie Baker of J.P. Morgan Chase to ask why JetBlue won’t slow its capacity increases more drastically, considering higher fuel prices and other pressures.

“What’s the point of growth in the first place?” Baker asked. “If I look at pretax income over the last three years, it’s down by about one-third. The stock is down about the same thing. Capacity is up 20 percent. It seems like the more you grow, the less you earn.”

But Hayes and other executives said the airline is content. While JetBlue will remove some underperforming flights from the schedule later this year, and may take more drastic action in 2019, executives said it makes no sense to stop growing in Boston and Fort Lauderdale, where it is “relatively underweighted” in its market share, Hayes said.

In Boston, it has about 30 percent share, while in Fort Lauderdale it has about 25 percent, executives said. Usually, airlines generate the best returns at their hubs when they control between 50 and 80 percent of share.

Moreover, Hayes said, JetBlue has been performing fine on revenue, despite recent capacity increases, and the choppy second quarter unit revenue result. In the current quarter, JetBlue said it expects unit revenue to rise between 0 and 3 percent, year-over-year.

“I’d say that we’ve actually done well in the unit revenue performance over the years with our growth rate, but we’ve under-delivered on cost, and that’s what we are focusing our structural cost program,” Hayes said. 

Photo Credit: JetBlue's Embraer E190s, including the one pictured above, will be gone from the fleet by 2025. JetBlue is taking an impairment charge of more than $300 million as a result. Kevin Boydston / Flickr