Fitch Downgrades JetBlue's IDR to 'B-'; Outlook Negative.

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

--Issuer Default Rating (IDR) to 'B-' from 'B';

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

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

Fitch's downgrade follows the dramatic run-up in jet fuel costs and growing evidence of a softening revenue outlook that will likely drive larger losses and weakened free cash flow during the remainder of 2008. Although the $300 million equity investment by Germany's Deutsche Lufthansa AG helped boost JBLU's liquidity position in the first quarter, Fitch expects cash balances to remain under pressure over the next several months as JBLU and the other U.S. airlines continue to trim unprofitable capacity in the face of unsustainably high jet fuel prices. While JBLU's fleet plan flexibility provides some opportunity to manage capacity growth lower in 2008 and 2009, additional cash-raising options are limited, and the carrier's liquidity cushion will likely be eroded somewhat as operating losses continue and debt maturities are met without the benefit of positive free cash flow.

The 'B-' IDR reflects JBLU's highly leveraged capital structure, its diminished cash flow generation capacity and its vulnerability to ongoing fuel and revenue shocks in an industry that remains unable to recover surging and largely uncontrollable energy costs through higher fares. Importantly, the rating also captures the fact that JBLU's current liquidity position is adequate to meet 2008 fixed obligations, but intense fuel cost pressure and worsening unit revenue comparisons through the year will likely reduce cash balances by year-end. In addition to scheduled aircraft-backed debt principal payments this year, JBLU will fund $175 million in convertible notes that investors can put back to the company on July 15. Total scheduled debt maturities for the final three quarters of 2008 are $343 million. Besides the Lufthansa investment proceeds booked in January, liquidity will be supplemented by the sale of nine used Airbus A320 aircraft this year. These sales could generate as much as $100 million in cash after repayment of associated aircraft debt. All A320 and Embraer E190 aircraft deliveries for 2008 are financed, and JBLU may be able to defer some upcoming scheduled deliveries in order to reduce debt-financed aircraft capital spending while conserving cash tied to pre-delivery deposits.

Including currently illiquid auction rate securities ($284 million on the March 31 balance sheet) which may be sold in coming months if auctions for these securities are successful, JBLU's total cash balance stood at $1.0 billion at the end of the first quarter. Supplemental sources of liquidity are constrained, however, and JBLU has no revolving credit facility in place. Looking ahead to 2009, JBLU faces a more manageable level of scheduled debt maturities ($159 million). However, adverse fuel and revenue developments could force JBLU to explore further capital-raising options-including the sale of its LiveTV in-flight entertainment subsidiary, monetization of equity in owned A320 aircraft or new equity capital beyond the $300 million already invested by Lufthansa.

During first quarter (Q1), JBLU paid $118 million more for fuel than it did a year ago, and the outlook for Q2 and Q3 (based on the current forward curve) is discouraging. For each 10-cent move in the price of jet fuel, JBLU faces approximately $45 million of annual cost pressure. Using the company's latest guidance of $3.05 per gallon for the full year 2008, therefore, fuel costs alone would rise by approximately $500 million in 2008 vs. 2007. Through April 17, JBLU had hedged 46% of expected Q2 fuel consumption through a combination of heating oil collars (11% of total consumption with upside protection at $2.19 per gallon) and heating oil swaps (35% of expected consumption at an average price of $2.56 per gallon).

Management has again signaled its willingness to slow growth and trim unprofitable flying in an effort to stem cash outflows. This follows two years in which capacity growth rates were pulled back through the sale of used A320s and the deferral of some new aircraft deliveries. The latest capacity guidance for 2008 calls for growth of 3% to 5%, down from 6% to 8% before the most recent spike in fuel costs. To meet this capacity target, JBLU plans to sell nine used A320 aircraft this year and another one in 2009. In light of good secondary market demand and positive net cash flow on each A320 sale, this remains a workable safety valve to manage available seat mile (ASM) capacity down in a worsening operating environment. These aircraft sales, together with announced domestic schedule cuts by other carriers, should support revenue per ASM performance somewhat later in the year. However, sluggish U.S. economic growth this year will likely erode air travel demand further-limiting opportunities to fully cover rising jet fuel costs through higher fares.

Despite the fact that JBLU has an almost entirely domestic route network, unit revenue performance in Q1 topped that of the U.S. legacy carriers by a significant margin. This was due in part to very weak revenue per ASM performance in Q107 during the storm-related operational break-down last year. For the remainder of 2008, a continuation of solid unit revenue growth will be required to offset an expected unit cost increase of 20% to 22% for the full year (assuming 2008 jet fuel prices of $3.05 per gallon). Revenue per ASM growth will be supported by industry-wide fare moves that are boosting yields as load factors and traffic come under some pressure due to higher fares and slowing U.S. economic growth. In its April traffic release, JBLU reported a 5.2 point decline in its monthly load factor, while RASM increased by 3% as average fares increased on 7% growth in ASM capacity. While summer bookings appear strong, JBLU and the rest of the industry can expect to feel intense revenue pressure after August, as seasonal demand patterns shift. Importantly, this is the point at which announced domestic capacity reduction throughout the U.S. industry will begin to take full effect.

A further downgrade into the 'CCC' category could follow if the sharp deterioration of operating trends seen since the start of the year continues over the next few months, and if an extension of tight credit market conditions limits JBLU's ability to raise capital as cash balances are reduced further in the face of extreme fuel cost pressure.

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