By Ross Snel

TheStreet.com Staff Reporter

4/21/2005 10:52 AM EDT

JetBlue Airways (JBLU:Nasdaq - commentary - research) reported a steep drop in first-quarter profits as record fuel prices drove up expenses.

Still, the low-fare airline managed to beat Wall Street expectations as it expanded its routes and put more passengers on its planes.

New York-based JetBlue reported net income of $7.0 million, or 6 cents a share, down 54.1% from $15.2 million, or 14 cents a share, a year before. On average, Wall Street analysts expected EPS of only 3 cents.

In reaction, shares gained 61 cents, or 3.1%, to $20.08.

Revenue of $374.2 million was 29.5% higher than $289.0 million a year earlier and ahead of the $366.2 million analyst consensus.

``Thanks to the inspired efforts of our crewmembers, our financial performance was strong in the first quarter,`` said David Neeleman, JetBlue`s CEO. ``In fact, on a fuel-neutral basis, our operating margin actually improved slightly over last year`s first-quarter operating margin. Looking ahead, we`re seeing good strength in the second quarter, as our customers demonstrate their loyalty to JetBlue and our combination of excellent customer service, high-quality product and low fares.``

JetBlue continued to benefit from its fuel hedging program, which caps about 22% of this year`s needs at a crude oil price of $22.95 a barrel. Crude oil`s rise this year to well over $50 a barrel has caused the red ink to gush at most major airlines. The airline will find itself less insulated from oil next year, when its hedges expire.

Even with its hedges, JetBlue spent much more on fuel than it did in the first quarter of 2004. Fuel expense was $86.6 million, up 75.9% from $49.2 million. The company`s average fuel price was $1.31 a gallon, up 42.6% from 92 cents.

An aggressive upstart, JetBlue increased its capacity by 22.5% year over year in the first quarter. But traffic, measured in revenue passenger miles, increased even more, by 31.5%, allowing JetBlue to fill more seats on its planes. Its load factor, or the percentage of seats filled, rose to 85.8% from 79.9%.

In addition to fuel hikes, JetBlue is faced with stiff price competition resulting from a glut of capacity. That caused yields, which measure average fares, to decline 2.7% year over year during the quarter. Nevertheless, the airline`s higher load factor helped boost unit revenue by 4.5%.

The company ended the latest quarter with $651.6 million in cash and investment securities, up from $449.2 million a year before.