Fitch Downgrades JetBlue's IDR to 'B'; Sr. Unsec. to 'CCC/RR6'; Outlook Stable.

CHICAGO -- Fitch Ratings has downgraded the debt ratings of JetBlue Airways Corp. as follows:

--Issuer Default Rating (IDR) to 'B' from 'B+'.

--Senior unsecured convertible notes to 'CCC/RR6' from 'B-/RR6'

This action affects approximately $425 million of outstanding debt. The Rating Outlook for JetBlue is 'Stable'.

Fitch's downgrade reflects JetBlue's highly leveraged capital structure and its relatively weak margin performance in a generally improving U.S. airline industry operating environment. Although planned growth rates for 2006 and beyond have been scaled back in response to unit revenue and fuel cost pressures in transcontinental and Northeast-to-Florida markets served by the Airbus A320, JetBlue is likely to face a continuation of challenging operating conditions that will put pressure on margins and operating cash flow over the next several quarters. Heavy capital spending commitments and financing requirements linked to scheduled deliveries of A320 and Embraer 190 (E190) aircraft will keep leverage high and free cash flow substantially negative for an extended period, limiting opportunities for balance sheet strengthening.

Management's recent statements regarding capitalization and liquidity priorities point to an increasing focus on liquidity -- as measured by the ratio of cash and investments on hand to LTM revenues -- as the most important indicator of balance sheet condition. As lease-adjusted debt to total adjusted capitalization rises above 75% (formerly maintained as a target leverage level), equity issuance in the near term appears unlikely as an alternative to debt financing.

Progress toward margin recovery has been made since April, when the company rolled out a plan to drive a return to profitability through more aggressive yield management and productivity improvements. Operating margins in the second quarter improved to 7.7% from an operating loss margin of -5.2% in the first quarter, but fell from 9.4% in the year-earlier period. Better sequential results came largely as a result of very strong average fare growth (15% year-over-year) resulting from domestic capacity rationalization and heavy demand. Cost reduction initiatives call for approximately $35 million in full-year 2006 operating cost savings, driven in particular by crew productivity gains and fuel conservation. Management is targeting improvement in the ratio of full-time equivalent employees to aircraft to a level of 80 by year-end 2007, bringing JetBlue's productivity more closely into line with that of low-cost leader Southwest Airlines. Productivity gains of this kind, if achieved, should limit increases in non-fuel cost per available seat mile (CASM) and help the airline deliver better margin performance into 2007. Non-fuel CASM has been pressured since late 2005 by the introduction of the 100-seat E190, as average stage lengths and aircraft utilization levels have declined.

High fuel costs remain a concern, despite the recent decline in crude oil and refined product prices to early 2006 levels. Average jet fuel prices of $2.06 per gallon (net of hedges) in Q2 increased 38% year-over-year, and fuel drove 34% of total operating expenses in the quarter. As of June 30, JetBlue had 40% of remaining 2006 fuel purchases hedged via crude oil swaps (average price of $68 per barrel) and heating oil contracts (average price of $2.10 per gallon).

With respect to the capacity outlook, Fitch believes that the planned sale of 5 A320 aircraft in 2006 and the deferral of 12 A320 deliveries between 2007 and 2009 represents a prudent step toward capacity restraint that should improve cash generation and operating performance. Reduction of scheduled service in some of the worst-performing A320 markets, together with maintenance cost savings, should support the airline's margins moving into 2007. Moreover, the ramp-up of demand in higher-yielding E190 markets should bolster system-wide RASM performance next year. Fitch expects unit revenue growth rates to moderate somewhat over the next few quarters, particularly if leisure travel demand weakens as part of a general slowdown in U.S. consumer spending. Still, a benign capacity environment, made possible in large part by the absence of large U.S. aircraft orders, should lead to continued JetBlue RASM growth in 2007.

JetBlue faces no immediate liquidity pressure, with $468 million of cash, cash equivalents and investment securities on the balance sheet as of June 30. This total was augmented by $15 million in availability on a $77 million facility to cover aircraft pre-delivery deposits. JetBlue's cash position was equivalent to approximately 23% of its revenue over the past 12 months, largely in line with measures at the other large U.S. airlines. The company does not maintain a bank credit facility, and all of its aircraft are either encumbered under debt agreements or leased. JetBlue's wholly-owned LiveTV subsidiary could be monetized, and represents a potential source of flexibility should liquidity concerns intensify in a more difficult operating environment.

The airline's secured debt, made up of both fixed and floating-rate secured aircraft notes, totaled $2.09 billion at June 30. Unsecured debt totaled $425 million and consisted of $250 million in 3.75% convertible debentures due in 2035 and $175 million in 3.5% convertible notes due in 2033. There are no significant restrictive covenants associated with JetBlue's debt agreements.

The recovery rating of 'RR6' assigned to JetBlue's two series of convertible notes reflects the preponderance of secured debt in the airline's capital structure and the expectation that enterprise values in a post-default reorganization scenario would likely result in weak recoveries for unsecured creditors.

Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. Recovery Rating analysis provides a framework for expected recoveries in the event of a bankruptcy scenario and is not meant to be a predictor of when or if a default will occur. Recovery Ratings (RR) are assigned to corporate issuers that have an Issuer Default Rating (IDR) of 'B+' or below. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at http://www.fitchratings.com/recovery.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.