Mysterious JetBlue aircraft lease rates

[Ignition Override]

We often hear that very successful US upstart airline JetBlue pays either only a fraction of "normal" lease rate (whatever "normal" is at a heavily subsidized manufacturer) or nothing, YET, for its A-320s.

Apparently, the founder/CEO was interviewed on tv about this and other facts. When Mr. Neeleman was asked about the outlook when much higher payments are soon made to Airbus, he reportedly made no response at all.

What is the true story? And does Wall Street have its head in the sand on this issue? Does JetBlue's stock price already reflect this very sharp increase in operating costs for the near future?

Airbubba-any info available?:D

Wino - ?

[Dewdrop]

Anyone would think you had a reason for wanting to talk the stock down !

[Boss Raptor]

Very simply it sounds like he has done a 'low-high' deal on his Lease or Lease-Finance payments. This is quite common especially with start ups and basically is what it sounds, you pay lower than the expected/required lease rate in say first 3 years and then this has to increase to above for the remainder of the lease period to pick up the shortfall...the advantages are decreased costs in the early years...however you then can be caught if your business has not increased as expected laterly to support the 'high' lease rate progression

If his revenues/profits have increased with expectations then this should be accounted for and make little difference to the stock price...if not then it will have the potential to knock the profits considerably and so knock the stock price

[Diesel8]

Here is a link to the jetBlue A-320 purchase agreement.Jetblue agreement (http://contracts.corporate.findlaw.com/agreements/jetblue/airbus.sales.1999.04.20.html)

[Wino]

If you look at Jetblue's SEC filings nothing is really changing. Aircraft rents in total are going up because of the rapidly increasing number of aircraft but I see no evidence that jetblue received a special deal, that is coming back to bite them.

What they did get was by being the first start up in history to start up with brand new aircraft was a VERY predictable (IE zero) maintanence expense in the first couple of years coupled with relatively good fleet reliability and utilization. All aircraft being paid for are FLYING. As the fleet ages and passes 3 years average age things like C and D checks start popping up taking those aircraft that you are paying for out of service for up to a month at time and you are seeing that effect now. So that end of the expenses are creeping up, but it shouldn't be enough to really hurt them.

My take on those rumors are that they are simply urban myth more than anything else. Also as near as I can figure it looks like Jetblue has paid cash for some of the later delivery of aircraft as well.

The decline of Jetblue's stock price is just the end of the in initial speculative boom as far as I can figure, coupled with an overblown optimism on the ability of the majors to fight back.

The majors have their handfull this time. Unlike other startups that have given them trouble in the past (think western pacific) this one is very profitable, where as most other ones NEVER made a dollar (vangard, westpac, peoples etc) or if they did make money it was for a short period of time before the lost the plot (america west, but they are coming back now).

Jetblue has been profitable all along and has quite a large war chest built up plus they own a lot of their aircraft now so they got tons of leverage they haven't even thought about using. So lets say the majors all gang up and jetblue and really try and squeeze it. Well how do you squeeze and airline that is actually making money at these rediculously low ticket prices?

Furthermore, I hate to admit it, but they have a good product that sells itself and a fanatically loyal customer base. I couldn't give away first class tickets to Florida to my neighbor on AA. He chose to pay a few hundred dollars on fly jetblue instead. How do you compete with that?

Worse, anyone who operated out of JFK during any of the snow storms this winter or the blackout, saw that jetblue kept running with their operations intact. Their computers kept working on laptops I guess. AA's sabre based system did not. Their deicing trucks are brand new state of the art. etc....

They spend money where it is important, on aircraft, technology and equiptment for the airlines, not stock buybacks to inflate share price for the CEO's options, naming arena's after them, building white elephant terminals etc... And they don't use "yield management" to gouge their best customers (which may well be a congressman trying to get home to see his kids during a 2 day break in session in washington, so when things like slots come up in congress, guess who gets them?)

unfortunatly for me and AA, Jetblue is the real deal. atleast till Nealman leaves. The crunch time for this airline will be when David neelman leaves. That is usually the crunch for most successfull airlines. When the guy with the vision and charisma departs invariably a beancounter comes in and destroys the vision. (think ANY airline, you are even seeing early stages of that at Southwest now that Herb is gone)

Cheers,
Wino

[GlueBall]

D-checks are prehistoric. Most 121 approved maintenance programs consist of progressive C-checks. :ooh:

[skidcanuck]

Glueball, could you please provide a bit more detail on C and D checks, and about the "progressive C Check".

I just need a bit more education here.

Thanks!

[Wino]

Glueball,
label em what you want, either way they get more extensive expensive and time consuming as an aircraft ages...

Cheers
Wino

[bafanguy]

Wino,

Are you sure JB is the first startup in history to use new airplanes ? What about SWA ?

[GlueBall]

skidcanuck The progressive C checks are equivalent of what used to be a heavy D check. But instead of dismantling the entire airplane at once, progressive C checks dismantle different parts of the airplane, usually after approximately 4500 hours or about 16 months, whichever comes first. (exact hours and time intervals are defined in a carrier's approved maintenance program).

[Phil Squares]

Airbus has a different check schedule than Boeing. There are phase checks or progressive checks if you prefer. The big ones are at the 5 yr and 10 yr point.

B6 has been having their checks done at AC in YWG.

The first 8 of B6's aircraft are leased from SALE and those are at market rates that existed at the time of the lease origination. The aircraft purchased from Airbus and financed by Airbus were purchased at substantial discounts from list price. There was some financing incentives, but there is no free period. One of Atlas' problems was the financing on the -400s was structured such that for the first 5 years or so, there was low payments with a balloon due at the end of that period. The way MC has structured the deal was at the end of the 5 year period, you refinance the deal. Only problem was he died and they lost their largest contract with China Airlines.

One thing B6 did with Airbus was to get them to pick up the maintenance costs for the first 5 years. It didn't cover the periodic checks, but does cover line MX. If you look at their completion rate, it's one of the highest if not the highest in the industry. Reason why? Airbus is covering all the problems.

However, with all that said, B6 is successful because of it's marketing strategy. My only concern would be with the introduction of another a/c type. This is a definite departure from the original plan. Adding another type will, according to B6's own SEC filings, raise their csm by one cent. That's almost a 20% increase.



:ok: :ok:

[Wino]

Bafanguy,

Southwest is not a startup. They were around BEFORE deregulation, and they started with 3 (used) 737s. Times were hard initially and they lost one to the bank, but the employees and herb got together and figured out how they would be able to maintain their full schedule with only 2 instead of 3 aircraft, and thus the 20 minute turn that made southwest airlines was born.

All well before the airlines were deregulated btw...

Cheers
Wino

[DC Meatloaf]

After having flown as SLF on the IAD-LGB route several times, count me among the fans (fanatics?) of jetBlue. They've added extra room in 2/3 of the plane recently -- the front third of the plane is still 32" seat pitch, but the rear 2/3 is 34" -- a big difference for someone 6'4" like me. The fact that they have a non-stop to Long Beach, a personal TV so the little loaf can watch whatever he wants (Spongebob, probably) while Dad watches a live hockey game, and very friendly staff puts them way over the top, as far as I'm concerned. Also caught this interesting piece on CEO Neeleman from Inc.com: Street Smarts: Learning from JetBlue (http://www.inc.com/magazine/20040301/nbrodsky.html). He apparently works as cabin crew on the JFK-OAK route at least once a month. Fascinating read...

Anyway, I've got one other data point relevant to the topic, but sorry I don't have any great detail. I was chatting with one of my buddies who's on the staff of the House Transportation committtee last year and mentioned my growing affection for jetBlue. He said, "Enjoy them now because I'm not sure they'll be around in a couple of years. They've got a huge balloon payment on their aircraft leases that will come due...".

[Ignition Override]

DC Meatloaf: So there seems to be something to the common perception, unless a member of the Transportation Committee is very misinformed.

And it is hard for me (though just a pilot) to imagine that Wall Street brokers read Pprune in order to evaluate their stock sales prices...

Wino (among others), as usual, has enlightened me again, this time regarding stock buy-backs. I thought that they were to help prevent a hostile takeover; not to waste profits from many hundreds of flights in order to enhance the CEO's stock value [I can't get the angry red face to appear here! Too late!].

Was Neeleman actually silent after being asked about the reported ballon payments? Or simply caught off guard, and very cautious?

JetBlue's future will now make or break the second careers of many former USAirways pilots...and I wish them and other laid-off employees good, long-term work (even with NetJets etc) at decent salaries.
:)

[Boss Raptor]

Yes Glueball all true but at approx 8 years on MSG 3 programmes the CPCP and Structural Inspection tasks commence and are integrated into the work package along with the inevitable AD's...so the Checks and Man Hours become more extensive/expensive (not even considering NRC's) regardless of whether you are on old style MSG 2 (very few new delivery acft on this) or MSG 3 schedules, many of which dont now even have a C Check...

Baseline A320 MRB MSG 3 Maintenance Sched;

A Check 500FH
C Check 15 months takes approx 5 days
IL Intermediate, HMV, C4 call it what you like basically it's a D Check - takes on average 28 days - every 5 and 10 years including all CPCP tasks (and Structurals which come in at 24,000 Cycles, approx 8-10 years)

[hostie]

I'm another fan of JetBlue, I was SO impressed I actually wrote in to the company.
The entire booking process was incredibly simple
I had to make a change to the departure point and that was not only easy, but the staff involved were very friendly and helpful
After kerb side check-in (very friendly and efficient) we flew from New Orleans to Buffalo via JFK
we were scheduled to have a 25 minute connection at JFK and that concerned me, when we were delayed and had less than 15 mins to change a/c at JFK I was seriously concerned about ever seeing our baggage again.
This was a surprise trip for my parent's 60th birthdays and they didn't know they were going to Niagara, the edge would definitely have been taken off it if we'd lost baggage.

As it was we were welcomed on to our a/c at JFK by very relaxed friendly crew, telling us to relax and take our time (even though we were obviously delaying the a/c at this point)

I was thrilled to arrive at Buffalo on time and with all our baggage.

I have worked for 7 airlines and been in the travel industry for 18 years
It takes a lot to impress me,
but Jet Blue certainly did, at every step of the way the staff were professional, whilst remaining relaxed and friendly.
I can't recommend them enough
I just wish they would operate within the UK!
:ok:

[skidcanuck]

Thanks, Glueball!