A big bite of Blue

Lufthansa has announced intentions to take a $300MM stake in JetBlue, the darling of the LCC airline market in the USA. This move gives them a strange relationship with their previous US-based partners, United and US Air. Putting Lufthansa codes on the JetBlue flights would likely be a huge insult to the existing partners, though it would give them enormous access to connecting travel in/out of JFK. The other strange thing about this is that the JetBlue model is very, very, very different than the Lufthansa one. JetBlue has a single class of service. Lufthansa has three. There’s no way to buy a business/first class seat on JetBlue, so Lufthansa won’t be able to sell seats all the way through in the premium cabins, and that is where the real money is from passenger revenue, so that makes very little sense. There was a discussion of this on FlyerTalk at one point and the generally accepted theory (floated by me and confirmed by a JetBlue insider) is that JetBlue can’t really team up with other partners because they can’t offer matching cabin services.

In the end, a German carrier owning 19% of a US carrier isn’t such a big deal, especially when they are buying at a 40% discount thanks to the strong Euro versus the US Dollar. But the fact that they chose JetBlue, and that JetBlue needed the money to meet their short-term debt needs:

The cash infusion will come in handy for JetBlue, which has $433 million in current debt payable that it otherwise would have been “hard-pressed to fund from cash flow from operations or cash on hand,” according to a note from William Greene, an analyst at Morgan Stanley & Co.

The fact that JetBlue is still the darling of the industry, at least among the public, for their service offering but that they cannot meet their debt needs is a very bad sign for them. They can’t sell another 19% to Lufthansa due to ownership regulations in the USA. Plus that would pretty much kill the value of JetBlue since they’d be proving that they can’t run themselves profitably enough to meet their future debt load. Of course, they may be proving that already. If they can’t operate to meet their debt burden with the fares that they’re charging that is a very bad sign. They’ve already sold off old planes once in conjunction with acquiring new ones so the net number of planes didn’t change but the maintenance costs remained low (same reason you keep leasing a car for 3 years but then dump it after that), but the costs for doing that are pretty high. Not a good sign overall for JetBlue.

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Seth Miller

I'm Seth, also known as the Wandering Aramean. I was bit by the travel bug 30 years ago and there's no sign of a cure. I fly ~200,000 miles annually; these are my stories. You can connect with me on Twitter, Facebook, and LinkedIn.