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Jetblue's Cost Structure - Good Article

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Heavy Set

Well-known member
Joined
Nov 28, 2002
Posts
2,277
By Whitney Tilson
July 11, 2003

In The Amazing JetBlue, I highlighted the upstart's remarkable success to date. There are reasons aplenty. JetBlue (Nasdaq: JBLU) was the best-capitalized startup in industry history. The airline serves lucrative, high-volume markets, and most of its competitors are ill-managed and heavily in debt. By offering customers an exceptional experience, JetBlue has fostered brand loyalty in what had become a commodity industry.

But let's not overlook the single most important driver of the airline's success: JetBlue charges considerably less than just about any other airline. In the industry, analysts track what's called passenger revenue per revenue passenger mile (RPM). In English, that's what an airline charges the average paying customer to fly one mile. For JetBlue, in 2002, that number was 9 cents.

By contrast, Southwest Airlines (NYSE: LUV), the industry gold standard for discount fares, charged 11.8 cents/RPM, 31% more than JetBlue, though, admittedly, this difference is largely due to the fact that JetBlue's average flight is 60% longer. Delta Air Lines (NYSE: DAL), considered one of the better major carriers, charged 12.1 cents/RPM, 34% more than JetBlue -- though this, in part, reflects Delta's first-class seating and other perks. It's little wonder customers are flocking to JetBlue. In June, passenger counts soared 61% year over year and planes flew at an exceptional 87% of capacity.

With its focus on high volumes and rock-bottom pricing, one might assume that JetBlue runs a low-margin business -- think Costco (Nasdaq: COST) or Wal-Mart (NYSE: WMT). In fact, that wouldn't be so bad, given that last year major carriers rode large negative margins to a collective loss of more than $10 billion. But JetBlue's operating margins are remarkably high -- 16.5% in 2002. By contrast, Southwest's was 7.6% and Delta's a minus 9.8%. The differences in Q1 '03 were even more dramatic: JetBlue, 15.9%; Southwest, 3.4%; and Delta, -17.0%.


So, how does JetBlue charge the lowest prices and still earn the highest margins? Simple: Its costs are the lowest, by a long shot.

At the risk of losing you with more industry jargon, airline costs are typically measured by dividing operating expenses by available seat miles (ASM). In other words, how much an airline spends, on average, to fly each seat (whether filled or not) one mile. For JetBlue, in 2002, that was 6.43 cents. The same thing cost Southwest 7.41 cents/ASM (15% more than JetBlue) and Delta 10.31 cents/ASM (a staggering 60% more than JetBlue).

What's behind this huge cost advantage? Let's examine the income statements of these three airlines, converting all expenses into cents/ASM:

JetBlue Southwest DeltaTOTAL REVENUES 7.71 8.02 9.39
OPERATING EXPENSES
Salaries, wages, and benefits 1.97 2.89 4.35
Fuel and oil 0.93 1.11 1.19
Maintenance materials and repairs 0.11 0.57 0.50
Aircraft rentals & depreciation 0.82 0.79 1.31
Landing fees and other rentals 0.53 0.50 0.59
Other operating expenses 2.08 1.56 2.37
----- ----- -----
Total operating expenses 6.43 7.41 10.31
----- ----- -----
OPERATING INCOME 1.27 0.61 -0.92* year ended Dec. 31, 2002
From this, we see that JetBlue's much lower costs more than make up for moderately lower revenues, resulting in more than twice Southwest's operating income/ASM. (Let's not even talk about the disasters at Delta and other major carriers.)

We also see that JetBlue's lower costs are driven by two key elements: lower salaries, wages, and benefits (highly productive people); and lower maintenance and aircraft rentals and depreciation (highly productive aircraft).

Essentially, there are three ways a company can improve return on equity: (1) raise profit margins (increasingly difficult in an environment where companies are struggling merely to maintain their margins); (2) increase
leverage, which adds risk (and corporate America is already at record-high debt levels); or (3) increase asset utilization (sales/assets). It is in the last -- maximizing the productivity of assets (including human assets) -- that JetBlue schools other companies and industries.


Productive people
JetBlue achieves tremendous labor productivity in a number of ways:


Employees feel valued and respected and have a sense of ownership, which translates into a motivated, productive workforce. How JetBlue has achieved this in an industry infamous for catastrophic labor-management relations is a topic I will address in a future column.


Workers aren't unionized so there are no restrictive work rules.


JetBlue flies one type of aircraft, which keeps training costs down, improves productivity, and increases scheduling flexibility.


On average, its pilots are paid for 83 hours per month, of which 82% are "block hours" -- the time from when a plane pushes back from one gate and arrives at another. This is a critical measure of pilot productivity since an airline only earns money during block time. JetBlue maximizes this metric primarily by reducing training time (again, flying one type of plane) and by shunning the industry-standard hub-and-spoke system and its associated delays between flights.


Finally, while JetBlue doesn't advertise this, its salaries are lower. The average JetBlue captain earns $135,000 annually (including overtime pay) vs. $149,000 for Southwest and $245,000 for Delta. Flight attendants start at $20 per hour and reservations agents at $8.25 per hour, though they work from home, saving overhead and contributing to employee satisfaction.

Wage discrepancies are not so great as they initially appear, however. Flight attendants and pilots earn time-and-a-half overtime above 70 flight hours per month, and there is ample opportunity to work extra hours (the average flight attendant works 89 hours per month). In addition, the company contributes 15% of its pre-tax income to a crew member profit-sharing plan, which last year translated into a 15.5% bonus for all employees. Finally, there's a generous stock purchase plan for employees, with nearly 70% participation, and some get stock options.


Other factors offset the lower pay at JetBlue. For one, there's a high degree of job security. There are also opportunities for advancement. For example, pilots can be promoted from first officer to captain in as little as three years -- virtually unheard of in this rapidly downsizing industry. And with JetBlue growing so fast, new employees quickly gain seniority and its associated perks: choosing which days and routes to fly, avoiding dreaded "red-eye" flights, etc. As a result -- and, of course, with all of the layoffs in the industry -- JetBlue is deluged with job applications. The company has 6,000 pilot applications on file, approximately 12 times the number of pilots hired to date.


A JetBlue flight attendant who used to work for United tells me that while her base pay is lower, she makes it up by working overtime and participating in the stock purchase plan. She likes working for JetBlue because the company treats her well, she is already quite senior (meaning that she has her pick of routes), and her fellow flight attendants work as hard as she does. At United, she said relations with management were terrible, she was among the most junior flight attendants (which was why she was laid off), and was often frustrated by burnt-out, unmotivated colleagues who -- knowing that their union would protect them -- were rude to passengers or simply sat at the back of the plane during the bulk of the flight. I don't want to read too much into one anecdote, but I suspect that her story is typical.


Productive planes
Given their high cost, it's critical to squeeze every ounce of productivity from each airplane. To keep aircraft operating costs low, JetBlue buys only new planes, which tend to need less maintenance and, even better, come with a five-year warranty. There's a rumor going around that Airbus is giving JetBlue planes for free, which is obviously untrue -- though I don't doubt that JetBlue gets excellent prices.


Equally important, JetBlue keeps its planes in the air -- the only time when they're earning revenues -- an average of 13 hours per day. This is the highest in the industry, 18% higher than Southwest (11 hours, though again this is largely due to JetBlue's longer flights) and 44% more than Delta (9 hours).

JetBlue achieves this productivity because:


Its planes are at the gate for, on average, 35 minutes, vs. an hour or more for most airlines. This is partly because flight attendants are expected to clean the plane, which motivates them to be persistent in encouraging passengers to pick up trash before the plane lands. Also, as noted above, JetBlue shuns the delay-causing hub-and-spoke system.


With many coast-to-coast routes, JetBlue flies many planes on all-night "red-eye" flights. By my count, 17 of JetBlue's 44 aircraft (39%) are in the air at some point between midnight and 6 a.m. every day.

Low distribution costs
JetBlue further benefits by selling 71% of its tickets via its website, vs. just 50% for Southwest and far fewer for most major carriers. It encourages this by offering a $5 discount per ticket. In addition, it pays no commissions to travel agents and issues no paper tickets whatsoever, which saves $5 to $7 in processing and distribution costs.
 
Read : this is not a bash on JB guys *********

Post: Is it me or is anyone else getting tired of hearing how everyother airline and their employees are scum $ucking craploa and charging the public too much but JetBlue out there saving the world from all the evil legacy airlines all while ending terrorism, solving world hunger, cleaning up health care, and putting social security back together?

My actual flight time for the last 4 months has been over 85 hours per month (and am on track to time out in NOV) but they make it seem like I'm sitting around collecting a check from U and doing nothing.

Again: not a bash on JB or their pilots/employees, JB has a awesome product, I'd love to work there bla bla bla.

Anyway good article
 
I for one am not tired of hearing about the success of Jetblue, keep it up guys!
 
Apples-to-Oranges...

Good article but I have 2 issues with it.

1. The article mentions that Jetblue does well with one aircraft type - obviously the positive economics derived from that will change with the EMB -190s...

2. You can't really compare Jetblue to Delta - they are somewhat apples to oranges. Delta flies a lot of international - and that changes the cost structures a bit - right? You should compare Jetblue to Song in about 6-12 months - that would be a more accurate comparison in my opinion...

Do you think labor costs will really remain so competitive for the foreseeable future? Not realistic.... Otherwise, a great article.
 
Re: Jetblue's Cost Structure - Good Arti

Heavy Set said:




Employees feel valued and respected and have a sense of ownership, which translates into a motivated, productive workforce. How JetBlue has achieved this in an industry infamous for catastrophic labor-management relations is a topic I will address in a future column.

.

People can focus on CASM, RASM, yield, stage length, turns, you name it. But the real reason things are going well at JB, at least from looking at it from the other side of the fence, is the human relations and values that of the management. Compare that to life at UAL, AMR or AAA these days. There is supposedly going to be a big article in the Chicago Tribune about this over the weekend. Hopefully more pressure will be put on the major's management to start viewing employees as a source of strategic advantage, not a problem to be dealt with.

At the United shuttle, we did have similar esprit de corps, and we had quick turns, good aircraft/crew utilization and a happy workforce. Too bad the product wasn't marketed right, and too bad we had to deal with the SFO fog/runway problem. Most of all, it is too bad that UAL management didn't understand having a happy, motivated workforce.

Maybe, just maybe, the JB effect will change management. I'm hoping for too much, I know.

Skirt
 
Heavy Set,

You are correct in stating that Mainline Delta and Jetblue are not really the same type of airlines. Our INTL flight have no competition on some of the routes, and the fares can be higher---like to Stutgart, Germany. Most of our Hub flying deals with massive connections with lots of RJs from smaller cities like Peoria. Peoria will probably not get much LCC service, and our fares can be higher to those types of cities. Our North --South east coast traffic is getting hurt by Jetblue and Southwest, and that is where we need to focus on Song. I think our Song management (a separate one than Delta---with Leo as the ultimate Boss) is trying to bring down the costs and our 757s will have 199 seats, a lot more than Jetblue and Southwest have. I think the Song management will put the planes on routes that will mostly be full all year round--like PBI--BOS or EWR to FLL. IF we sell the tickets at the same price as Jetblue but have 40 or 50 more seats and the costs are almost the same---then I think Song will be a success. The costs are coming down over there (even our salaries will take a hit probably), and they will add the TV's and better frequent flyer program etc...

So, what I am trying to say is that Heavy Set, you are right---let's compare Song to Jetblue and Southwest in 6 months when it is up and running---with 36 total 757's by XMAS--and another 80 or so more to go after that.

Bye Bye--General Lee:cool: :rolleyes: ;) :p
 
When are you going to realize that you can't compete by trying to be a competitor? You simply have to fix from within and stop worrying about something you cannot do anything about. Song will have minimal effect on JB or SW, especially if you are robbing the mainline to feed it.
 
Hngryflyr,

Let me try to explain this to you guys again. We are not taking passengers away fom mainline with Song. Nope. We are allowing those passengers who live in the larger cities (like BOS, NYC, FLL, etc) who want the cheaper fares to fly on Song. Then we charge more to people who live in the thousands of other smaller cities that can't get Southwest or Jetblue--like Des Moines or Fayettville, NC---to fly into our hubs on RJ's and connect onto our larger 767-400's to fly to FLL or MCO etc. Those people that wanted the cheaper seats who could have flown other carriers from the bigger towns (BOS and NYC) can now be rerouted around ATL or CVG nonstop on SONG, and leave those other seats for people in Peoria or Newport News. They will have to fly through CVG or ATL, and then onto LA, or LAS, or MIA. Got it?

We also have plenty of passengers that want to go to Dublin, Ireland or maybe Sao Paulo. When will you guys try to compete with us on those?

Song is going to affect you at Jetblue, no doubt. It will atleast take some passengers away, and it will fly out of all 3 NYC airports and offer TV and a better frequent flyer program with CO and NW involved. You guys have a good product, but so will we. The costs have been brought down, and only certain people are hired. The loads are full now, and we haven't even put the TV's and song list capabilities in yet---OCT I believe. People will choose to try LGA instead of yours at JFK, and they will see that for the same price they get the same type product, and frequent flyer points to go to Venice. We will have 36 757's flying North to South by XMAS--with another 70 or so probably going after that. Even the food is supposed to be better, with higher quality food being sold on board. We have the money (thanks to them furloughing 1310 pilots) and they want to succeed. We shall see.

Bye Bye-----General Lee:cool: :rolleyes: ;)
 
Last edited:
Please tell me again about the effect on Airtran...I need to be educated on that too. Sometimes people say what they hope will happen, ignoring the facts. Good luck though...sincerely.
 
LearLove said:
Read : this is not a bash on JB guys *********

Post: Is it me or is anyone else getting tired of hearing how everyother airline and their employees are scum $ucking craploa and charging the public too much but JetBlue out there saving the world from all the evil legacy airlines all while ending terrorism, solving world hunger, cleaning up health care, and putting social security back together?



I sure am. Believe me, it gets old. But it will end some day. No doubt about it, there will be somebody else making headlines, and we'll go back to being JetWho.

When that does happen, I will be content to know I was part of something special, no matter what period of time. Just to know I was part of something lots of people talked about, will be a kick in the pants, but only after I am no longer scrutinized for it. While it's happening, though, all you can think is "OK, when will this end"?

When you read other, non-furloughed major airline pilots comments, I really think all they want is to be part of something like that. That's why they wraps themselves in the Delta (or other airline) flag. They want to be known to be part of something bigger than themselves. It's kind of like they joined the Sigma Alpha Epsilon fraternity (sorry, no Greek letters) instead of some new-fangled fraternity. You know, something that stirs memories of azaleas and Mint Juleps.

Believe me when I tell you, I have no scrapbook filled with all the glorious things said about JetBlue. Instead, I just have lots of great memories from great people having a great time when 1) when we had common trips with FAs 2) we knew everyone 3) no one but a few die-hard airplane watchers had a clue as to who we were.

When you think about it, most pilots are the same. Most of us want the atmosphere of a small company with the bucks of a big one. Unfortunately, you can't have both. However JetBlue, I think, will have come as close to it as anyone, no matter how long it lasts. In the mean time, I've made more life-long friends in the short time I've been here, than most people could ever hope of having in their whole career. How many people can really say that?


JayDub
 
Hngry and Jaydub,

Yes, I admit it--Delta and Song have a full plate when it comes to competition. They created Song to try to battle Jetblue and its success, and Airtran is obviously still there in our backyard (ATL) giving us problems. I never said this was easy, and I think our management now DOES NOT underestimate them as much. They know that the LCC's are a threat, and only Delta has gone out there and tried to develop a separate product that can possibly fight and compete. Look at the other Majors, they haven't got a plan. We are already implementing ours, and it has a good chance, even with the silly name. The are re-branding it, giving it Direct TV and other interesting features, new paint, options to fly out of all 3 NYC airports, changing turn times, having separate lower cost employees (except pilots, yet), and allowing it to have a great frequent flyer program linked up with Delta/NW/CO--which is important to some people. I just think it has a good chance of doing well, and I want it to do well because I work for Delta. That should be obvious. I hope it does well. Delta is undoubtably the strongest of the Majors left, and they have put their heart and soul into something to try to win. There are other carriers that are doing well---Airtran/jetblue/Southwest etc and I think they have good products too. We will have to see how this all pans out, but atleast Delta is underway with a solid plan to try to win back passengers. And, the employees of Song were "auditioned" and the cranky ones were supposedly weeded out. The ones I have seen have all been "younger" and fun.

Bye Bye---General Lee:cool: ;)
 
General
I was thinking Delta was a threat that needed to be delt with not little old AirTran:D
 
FLB,

You lost me there. If I were an Airtran pilot, I would think that Delta is a major threat, and I would hope to steal some of their marketshare---is that what you mean? Delta along with DCI carries more people than any other airline. That would be a threat to contend with, for anyone. We hope to keep it that way. Song, or THONG, will hopefully help.

Bye Bye--General Lee:cool: ;)
 
General, I like the new Song paint and am sure the direct tv will be cool. Besides that a 30-40% pilot pay cut, work rules more like flying the FARs, and keeping those 757 flying 3 or 4 hours more a day will get you in competition with the low cost carriers. You seem to be focused on what is happening right now, or 6 months from now. I'm sure the Delta management reps negotiating with your union are thinking about what will keep Delta competitive several years from now. The irony that I'm sure isn't lost on your management is that the relatively good postion Delta is in today could cause you guys to miss the restructuring taking place everywhere else. Just look at your language in all these threads - we don't have to give THEM anything/we might give them a small percentage but we could walk and not negotiate and then drag out the next round of talks/we have a grievance to get the furloughees back. Unless you are in the minority and most of the other pilots don't share the us vs them mentality, you are set up to watch the LCCs and regionals take more of your flying.
 
Skykid,

The difference between Delta and the other Majors, when it comes to the LCC's, is that we already have a plan and are going for it. As far as the pay, we are negotiating right now for a slight pay cut, but will extend the contract two more years. They will take it or leave it, and they most likely will have to take it. They owe some big money in 2005 and are in no position to say no and not get an extra $250 million a year from the pilots. The grievances have worked, we won our last one. The last 250 guys furloughed on the War Emergency will come back. Why? Anyone can see that the war is over (atleast Bush stated that on the carrier), and the loads are back. An arbitrator is bound to see that. The Dalpa people I have talked to said they had the proof and were ready to file, which they did. The difference between Song and the other LCC's is that Song has Delta's massive technology base to help it do well. "Delta Technologies" is a separate corporation with a large building next to our GO in ATL, and they make life easier for Delta and Song with advancements in certain aviation technologies that are too hard for me to explain. We also use Delta to hedge fuel for Song at lower prices, and have cut all non-union wages and some benefits for those employees to make it cost competitive. (they should have had a union, darnit!) Only the pilots are paid more than LCC's--and our 757's at Song carry 40 or so more people per flight, which makes up the difference. (although, we will probably take a 10-15% paycut, which should atleast bring it down a little closer)
Back at Delta Express, the pilots were paid less than mainline pilots, and everyone else (flt atten, mechanics) were paid mainline rates. It is switched now, and that saves us money. The planes will be used more often each day, and the turn times have been faster than normal---down to 50 min turns for a 199 seat aircraft. Allnighters thru Vegas will be introduced, and we have lots of open gates there waiting to be used for allnighters---to increase the daily utilization of each 757. There will be 36 757s at the end of the year, with 70 or more waiting.

Overall, it is going to be interesting to watch, but I think they have a good idea on how to compete. The pilot salaries will come down, but they will still be higher than any LCC's, which is good because someone has to keep the bar raised.

Bye Bye--General Lee:cool: :cool: :D ;) :rolleyes:
 
"The difference between Delta and the other Majors, when it comes to the LCC's, is that we already have a plan and are going for it."


Hmmm. I disagree. I think Delta has taken some of their 757's, changed the paint, copied another airlines product, launched on the same routes and are hoping to "compete". But on the mainline they haven't changed a thing...minimal...and you tell me, are they profitable yet? Other majors are completely over-hauling their business plan, pretty much changing the whole way they do business while keeping the same name. These carriers may quite possibly be in a far BETTER position than Delta in the coming years because of it. It is painful...but necessary. So General, while you wear around your Delta pajamas, drink from your Delta coffee cup, and watch your Delta clock tick...be careful this whole mess doesn't sneak up on you. You spend countless characters reiterating what we all see DAL doing currently. But in the grand scheme of things, longterm, Song won't solve anymore problems than it will create (IMHO). Powers far above us want this, the contracts slashed at each and every carrier. Delta is no different, and unless they also overhaul, they may suffer a similar fate regardless of loads, the war being over, etc. The war is still on my friend...we just change locations. In our current economic situation, I don't think Delta's fight is with any airline...except maybe their own.
 
Hngry,

I like your statement:

"So General, while you wear around your Delta pajamas, drink from your Delta coffee cup, and watch your Delta clock tick...be careful this whole mess doesn't sneak up on you. You spend countless characters reiterating what we all see DAL doing
currently. But in the grand scheme of things..."


First of all, I think that was pretty funny. Give me a break. Also, I could bet that you have never even really been up close to a Song plane or the Song training center in ATL. It really isn't the same. They are doing their best to try to separate the brand names (maybe for future divesting??) and make it different. We did make them, according to our contract, put "Operated by Delta Airlines " on the side of the 757, though. You really have no clue about Song and do not really know the differences. The people have to "audition" to get hired, and a lot do not. No senior old hags there. I guess the intereiors are the same as mainline, right Hngry? WRONG. The put in a little more leg room, are putting in TV's at each seat, and have the other entertainment ideas--Song play lists, email, and sell gourmet food. Sounds like mainline, right? WRONG. Just the same mainline planes with a new paint scheme, right? WRONG. They have different boarding procedures that might be used by mainline eventually. The only thing that is the same is the Delta pilots coming on board with Delta uniforms. That is it. You should actually go see it for yourself instead of bashing it right off. You might like it, and if you fly on one you can get frequent flyer miles on DL/CO/NW---something Jetblue?airtran?southwest cannot offer----just think---six legs watching TV on Song and you get a free trip to Honolulu, Shanghi, Venice, or Cancun.

Bye Bye--General Lee
:cool: :rolleyes:
 

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