Should JetBlue Sell Itself?

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Which will be the better business decision for JetBlue Airways: selling pillows and blankets for $7, or selling itself to a competitor like Southwest Airlines?

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Which will be the better business decision for JetBlue Airways: selling pillows and blankets for $7, or selling itself to a competitor like Southwest Airlines?

Domestic low-cost airlines such as JetBlue and Southwest built their business on trying to grab market share from larger, lumbering international competitors. But these nimble carriers may not necessarily be able to depend on much more growth, while their full-service rivals such as Delta Air Lines, Northwest Airlines and American Airlines look overseas.

Why JetBlue? The strain of competition is showing and, if fuel prices rise, it is likely to only get worse for many airlines. JetBlue has taken action. Analysts already expect JetBlue to cut capacity, or the number of flights. The airline recently told investors that its focus is on “cash preservation and liquidity.” To prove it, the airline arranged a $110 million year-long line of credit from Citigroup that is secured by JetBlue’s auction-rate securities, and it raised $175 million from the sale of convertible securities this year. JetBlue also has hired Morgan Stanley to help sell its Live TV unit.

Now JetBlue has never indicated it might sell itself. Quite the contrary. On its second-quarter earnings conference call, Jet Blue executives said they are committed to growing “organically.” In response to a question about airline consolidation from Calyon analyst Ray Neidl, JetBlue executives painted themselves as potential buyers of assets being sold by other airlines.

Still, like its competitors, JetBlue has resorted to scouring the couch cushions for change. It now is charging customers for $7 for a pillow and a blanket. Meantime, US Airways has slapped a price tag on a cup of water; Delta charges $100 for a second bag on round-trip domestic flights. Not since the days of Woolworths has anyone tried to build a business on nickels and dimes. And in the end, such charges don’t contribute enough to revenue to offset rising fuel costs. Analysts expect JetBlue to end the year with $1.1 billion in cash. If crude rises to $150 a barrel and stays there, JetBlue would end the year with $1 billion in cash–a full $100 million less. But its $20 bag check fee, on the other hand, could net the company only an extra $20 million this year, according to Credit Suisse. And analysts still expect Jet Blue to post losses in coming quarters.

If Jet Blue does decide to flip its script and consider a sale, the most obvious fit might be Southwest Airlines. Both Southwest and JetBlue are so-called point-to-point airlines. It is an indication that competitive pressure is hitting all airlines–not just the big ones–that other such point-to-point airlines such as AirTran Holdings and Frontier Airlines, have recorded steep losses or fallen into bankruptcy-court protection. In recognition that the U.S. market offers less growth these days, Southwest recently signed a ticket-sharing agreement with Canada’s WestJet.

Southwest, of course, is much bigger and older than Jet Blue, and compared with other airlines right now it looks like a star. It has hedged its fuel costs better than any other airline–enough to actually record a profit. And Southwest is growing where it can. In the past two and a half years, Southwest boosted its flights to Denver–an increasingly busy city–to 95 daily flights from 13. Southwest also has been one of the few airlines to boost its passenger count–up 7.9% in the first quarter–passenger count in 2008’s first quarter was up 7.9% while the passenger counts at American Airlines, Delta Air Lines and United Airlines fell 2%.

With a $11.9 billion market cap, Southwest could easily swallow the $1.49 billion market cap of JetBlue. And JetBlue could offer Southwest some access to international growth: Lufthansa bought a $300 million stake in JetBlue last year, partly to get a shot at Jet Blue’s space at New York’s John F. Kennedy Airport.

Of course, it wouldn’t be a perfect fit. The two airlines have very different fleets. Southwest’s fleet of airlines consists of only one type of plane, while JetBlue uses two types, neither of which are like Southwest’s. JetBlue also has extensive in-flight entertainment including TVs and radios, while Southwest has been a laggard on that front.

Many analysts have said the best way for airlines to cut capacity is to merge. JetBlue is far from desperate right now. Morgan Stanley analyst William Greene recently noted that the airline industry isn’t yet at the tipping point where carriers have to wrestle with consolidation or bankruptcy. That means that if JetBlue were to consider selling itself now, it wouldn’t be a desperation move. And that is the point. Wouldn’t it be better to do something while there is still plenty of time to maneuver and get the best deal possible?

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