Airlines, in general, are terrible long-term investments. American, United and a slew of others have, at one time or another, filed for Chapter 11. Famed investor Warren Buffett once said that "a farsighted capitalist" would have done investors a huge favor by shooting down Orville Wright during his famous 1903 flight. JetBlue (JBLU)
Take his own company, for example. JetBlue's stock price is down 81 percent since it debuted in 2002. Still, Barger is hoping to convince investors that his airline can break the mold. And he's been busy making the same pitch to his employees, too. Everyone from the company's baggage handlers on up gets a tutorial on free cash flow, return on invested capital and other financial concepts at JetBlue University in Orlando. "We let people know that if we don't earn the cost of capital, the company won't grow, and it won't be successful long-term," Barger says.
Blue Planes in the Sky
JetBlue was ranked seventh among U.S. carriers by total passengers in 2011, up from ninth in 2010. Its planes are 82 percent full, on average.
The 54-year-old grew up, literally, in the industry (he's the son of a pilot) and has worked for airlines for 30 years. He was part of JetBlue's founding team in 1998. In May 2007, a few months after the airline canceled nearly 1,700 flights because of winter storms, the airline's board of directors replaced then-CEO David Neeleman with Barger. Besides the usual complaints from passengers about the state of flying in the U.S., Barger has had to deal with a disgruntled JetBlue flight attendant who slid down an emergency chute and a sick pilot whose erratic behavior forced an emergency landing. ("Of course, our hearts go out to the pilot and his family," Barger says. "It's such a one-off event.")
Air travel has rebounded from its recessionary lows, but so have costs. Jet-fuel prices, which can account for as much as 40 percent of an airline's expenses, are up significantly. In response, many carriers have cut the number of flights they offer. "At these fuel prices, they realize they need to focus on the more profitable routes," says Savi Syth, an analyst at Raymond James. JetBlue is taking a different route, however. It's made a big push into Boston and the Caribbean. SmartMoney sat down with Barger at JetBlue's new headquarters in New York City to talk about the company's unconventional approach to growth and why investors should be patient.
JetBlue is 13 years old now. How has the airline evolved since its inception?
It's not a hypergrowth company like in the past. When you look in the history books, post-1978, when the airline industry deregulated, we're the only pure start-up airline to fly into our second decade without some type of event, usually a merger or bankruptcy.
JetBlue is not the same low-cost carrier it was when it started, right?
It's a fair characterization. There is a value proposition at JetBlue -- new planes, comfortable seating, in-flight entertainment. We don't overbook.
In the early years, it was all about fare, fare, fare. We still want a fair fare, but I can't stand the word discount.
A lot of rivals are reducing flights. Why are you expanding in Boston and the Caribbean?
We've been a little penalized by people saying that we're not disciplined. But we're 100 flights a day in Boston, and growing. To just stop? That would not only be foolish but also reckless. To not grow means we're not listening to some of our largest corporate customers.
Some analysts believe it will take a long time -- and cost a lot of money -- for JetBlue to dominate in Boston.
These business markets do take longer to mature, because corporations are so wedded to their miles and their loyalty programs. But Boston could be nicely profitable this year, which would be unprecedented given the amount we've invested there.
What about JetBlue's increasing costs, particularly maintenance?
The new airplanes we bought in the mid-2000s are hitting their maintenance cycle. The year-over-year increase in our maintenance, material and repairs costs was 23 percent last year, and we believe it will be up 30 percent this year. That's a big number on a relatively small base number, but then it really flattens.
What do you say to investors who are concerned about the firm's profits?
Our earnings are quite strong and further improving. Oil is close to 40 percent of our unit cost. [But] we've been able to maintain earnings and strengthen the balance sheet and drive free cash flow in the past three years.
Would you rebuff any acquisition offers if they did come?
We are a public company, so we work for the shareholders. You have to take the telephone calls. That's part of our job. But we believe our organic growth plan is the best path forward.
Window or aisle seat?
Cockpit. I like the jump seat since you spend time with the crew.