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Breaking from formation, JetBlue surprises big airlines
01:49 PM CST on Saturday, February 21, 2004
By ERIC TORBENSON / The Dallas Morning News
NEW YORK – Launched just four years ago, JetBlue Airways Corp. has rewritten much of the book on start-up discount airlines.
While other carriers focus on eliminating frills, JetBlue promotes gleaming new planes that boast leather seats, extra legroom and television screens at each seat.
At first, big rivals dismissed the upstart. Continental Airlines Inc. chairman Gordon Bethune said JetBlue's founders were "smoking something" to think they would ever make money.
Now, as JetBlue smokes other airlines financially by posting the highest operating margins in the business, the carrier is shaking up the industry.
At the same time it studies and even copies JetBlue, the industry is striking back. Traditional carriers, such as American Airlines Inc. and Delta Air Lines Inc., have launched aggressive promotions to steal JetBlue customers.
And Wall Street, which cheered JetBlue's initial public offering in 2002 and sent its shares soaring last fall, has showered skepticism on the airline's feel-good story. JetBlue stock trades at roughly half its value from October, closing Friday at $23.59.
"I don't think we've had this kind of opposition before," said David Neeleman, chairman and chief executive of JetBlue, speaking in his office at JetBlue's headquarters in Queens, near its main hub at John F. Kennedy International Airport.
"I think we've got to get a little more thick-skinned about this stuff," said Mr. Neeleman, 44, as he stared glumly at a magazine profile of JetBlue that he considered unflattering.
The criticism hasn't done anything to blunt Mr. Neeleman's confidence. JetBlue's growth plan calls for adding a new airplane every 10 days by late next year. Some industry experts think JetBlue could eventually have a chokehold on budget-minded fliers in the New York area, the nation's top market for air travel.
"I think we are the best airline," said Mr. Neeleman, who founded discounter Morris Air, then sold it to Southwest Airlines Co. in 1994. "It's hard to try to stay there."
The carrier operated at a slick 16.9 percent margin in 2003, but Mr. Neeleman noted that promotions and stiff competition will drop the operating margin in the first three months of this year to as low as 9 percent.
That would still top the majors, defined as airlines with revenue above $1 billion a year, but it's been a warning flag to analysts such as Jamie Baker of J.P. Morgan Chase.
"We'd never suggest JetBlue would lose the war, though we do continue to believe JetBlue will lose the next several battles," Mr. Baker said in a research report.
JetBlue wants to plan for the long term, even if investors don't.
"We can't let ourselves get into thinking that we've got to protect our margins for the quarter or they're going to write nasty things," Mr. Neeleman said. "One of the things I detest about being public is this focus on what's going on in the next quarter."
'Rock solid'
From the beginning, JetBlue flew its own way. Instead of using leased older planes, it bought new Airbus A320s. It offered no meals but installed in-seat satellite TV, which has become such a draw that rival Delta added it to its low-fare carrier, Song. Both Southwest and American are considering whether to follow.
While considering how to mimic JetBlue, traditional carriers are trying to win back passengers with special deals. Under an American promotion launched this year, customers who fly twice on routes competing against JetBlue earn a free ticket anywhere.
"I don't know how much more aggressive you can get than two-for-one," Mr. Neeleman said. "But if we still have a double-digit operating margin for the first quarter, that says a lot about the strength of JetBlue."
Consultants agree that Wall Street has a tendency to overreact to bad news. The carrier's underlying model is "rock solid," said Jon Ash of Global Aviation Associates in Washington, D.C.
"They ought to be able to produce margins in the high teens, and that's just not too shabby," Mr. Ash said, noting that any carrier would drool for such figures. "I don't see any reason why that wouldn't be sustainable for them."
JetBlue's costs are the lowest of any big airline when measured by what a carrier pays to fly one seat one air mile, or a seat mile.
They're even lower than Dallas-based Southwest's, though they're nearly even when JetBlue's long flights are adjusted to be closer to Southwest's shorter average flight length. JetBlue's average flight is longer because of its reliance on transcontinental service.
Some of JetBlue's cost performance comes from having newer planes and engines, which are still under warranty from manufacturers and don't need heavy maintenance.
JetBlue recognizes those maintenance costs will rise as its fleet grows older, but all the new planes on order will keep JetBlue's average airplane age the youngest in the business, said Dave Barger, president and chief operating officer.
"By the time we hit 2011, we're the youngest fleet out there by far," he said.
Many were skeptical when JetBlue said it would buy Embraer 190s, which will have higher operating costs. They have fewer seats, and a new aircraft type adds complexity and cost.
But they'll be deployed to cities such as Austin, where a nonstop flight to New York would attract fliers who dislike connecting at Dallas/Fort Worth International Airport for American Airlines or Houston for Continental. Passengers will pay more on average for that nonstop, Mr. Barger said. (JetBlue eventually plans to add service to D/FW, but it has no timeline in mind.)
Cost advantage
Because it has new planes and no labor unions, JetBlue will be able to grow quickly without its costs spiraling from its current level of about 6 cents per seat mile.
That compares favorably with majors such as American, which nearly went bankrupt when it lowered its seat-mile costs to about 9.5 cents. At the other end of the spectrum are US Airways Corp., Northwest Airlines Inc. and Delta, all with seat-mile costs near or above 11 cents.
Fort Worth-based American knows it can't fly at costs as low as JetBlue, but it can match its prices and emphasize its global reach and a broad frequent-flier program. The promotion that targeted JetBlue has exceeded expectations, said Dan Garton, executive vice president of marketing.
"We've added 20,000 new customers to our frequent-flier program, and there's a lot of companies out there that would pay a lot of money to add that many new customers," he said.
The airline predicted that it would lose money when it first offered the buy two, get one free promotion. Mr. Garton said he now believes the promotion will generate cash for American, and he expects the carrier to try more deals using the AAdvantage program to battle low-cost rivals.
"JetBlue is glitzy, and it's hard for me not to say that this wasn't targeted specifically at JetBlue," Mr. Garton said. "But JetBlue is one of multiple challenges we're facing out there right now with low-cost carriers." Many analysts say traditional carriers are fighting a losing battle with their ticket giveaways.
"They can't keep that up for long because they're losing money on those deals," said Ray Neidl, airline analyst for Blaylock & Partners in New York. If the economy continues its improvement, there may be enough passengers for the discounters of the industry and for the traditional carriers, but the low-cost carriers are the ones setting the ticket prices, analysts note.
JetBlue is actually beating American measured by revenue per seat mile flown. That means JetBlue has such a following that passengers are paying, on average, more to fly the low-cost carrier than they are on American on the same routes.
American's Mr. Garton confirms there are some markets where his carrier, the world's largest, runs a "revenue deficit" to JetBlue. But he said the airline earns far more per seat mile across its whole network and measures its success against low-cost carriers in market share rather than in head-to-head revenue comparisons.
01:49 PM CST on Saturday, February 21, 2004
By ERIC TORBENSON / The Dallas Morning News
NEW YORK – Launched just four years ago, JetBlue Airways Corp. has rewritten much of the book on start-up discount airlines.
While other carriers focus on eliminating frills, JetBlue promotes gleaming new planes that boast leather seats, extra legroom and television screens at each seat.
At first, big rivals dismissed the upstart. Continental Airlines Inc. chairman Gordon Bethune said JetBlue's founders were "smoking something" to think they would ever make money.
Now, as JetBlue smokes other airlines financially by posting the highest operating margins in the business, the carrier is shaking up the industry.
At the same time it studies and even copies JetBlue, the industry is striking back. Traditional carriers, such as American Airlines Inc. and Delta Air Lines Inc., have launched aggressive promotions to steal JetBlue customers.
And Wall Street, which cheered JetBlue's initial public offering in 2002 and sent its shares soaring last fall, has showered skepticism on the airline's feel-good story. JetBlue stock trades at roughly half its value from October, closing Friday at $23.59.
"I don't think we've had this kind of opposition before," said David Neeleman, chairman and chief executive of JetBlue, speaking in his office at JetBlue's headquarters in Queens, near its main hub at John F. Kennedy International Airport.
"I think we've got to get a little more thick-skinned about this stuff," said Mr. Neeleman, 44, as he stared glumly at a magazine profile of JetBlue that he considered unflattering.
The criticism hasn't done anything to blunt Mr. Neeleman's confidence. JetBlue's growth plan calls for adding a new airplane every 10 days by late next year. Some industry experts think JetBlue could eventually have a chokehold on budget-minded fliers in the New York area, the nation's top market for air travel.
"I think we are the best airline," said Mr. Neeleman, who founded discounter Morris Air, then sold it to Southwest Airlines Co. in 1994. "It's hard to try to stay there."
The carrier operated at a slick 16.9 percent margin in 2003, but Mr. Neeleman noted that promotions and stiff competition will drop the operating margin in the first three months of this year to as low as 9 percent.
That would still top the majors, defined as airlines with revenue above $1 billion a year, but it's been a warning flag to analysts such as Jamie Baker of J.P. Morgan Chase.
"We'd never suggest JetBlue would lose the war, though we do continue to believe JetBlue will lose the next several battles," Mr. Baker said in a research report.
JetBlue wants to plan for the long term, even if investors don't.
"We can't let ourselves get into thinking that we've got to protect our margins for the quarter or they're going to write nasty things," Mr. Neeleman said. "One of the things I detest about being public is this focus on what's going on in the next quarter."
'Rock solid'
From the beginning, JetBlue flew its own way. Instead of using leased older planes, it bought new Airbus A320s. It offered no meals but installed in-seat satellite TV, which has become such a draw that rival Delta added it to its low-fare carrier, Song. Both Southwest and American are considering whether to follow.
While considering how to mimic JetBlue, traditional carriers are trying to win back passengers with special deals. Under an American promotion launched this year, customers who fly twice on routes competing against JetBlue earn a free ticket anywhere.
"I don't know how much more aggressive you can get than two-for-one," Mr. Neeleman said. "But if we still have a double-digit operating margin for the first quarter, that says a lot about the strength of JetBlue."
Consultants agree that Wall Street has a tendency to overreact to bad news. The carrier's underlying model is "rock solid," said Jon Ash of Global Aviation Associates in Washington, D.C.
"They ought to be able to produce margins in the high teens, and that's just not too shabby," Mr. Ash said, noting that any carrier would drool for such figures. "I don't see any reason why that wouldn't be sustainable for them."
JetBlue's costs are the lowest of any big airline when measured by what a carrier pays to fly one seat one air mile, or a seat mile.
They're even lower than Dallas-based Southwest's, though they're nearly even when JetBlue's long flights are adjusted to be closer to Southwest's shorter average flight length. JetBlue's average flight is longer because of its reliance on transcontinental service.
Some of JetBlue's cost performance comes from having newer planes and engines, which are still under warranty from manufacturers and don't need heavy maintenance.
JetBlue recognizes those maintenance costs will rise as its fleet grows older, but all the new planes on order will keep JetBlue's average airplane age the youngest in the business, said Dave Barger, president and chief operating officer.
"By the time we hit 2011, we're the youngest fleet out there by far," he said.
Many were skeptical when JetBlue said it would buy Embraer 190s, which will have higher operating costs. They have fewer seats, and a new aircraft type adds complexity and cost.
But they'll be deployed to cities such as Austin, where a nonstop flight to New York would attract fliers who dislike connecting at Dallas/Fort Worth International Airport for American Airlines or Houston for Continental. Passengers will pay more on average for that nonstop, Mr. Barger said. (JetBlue eventually plans to add service to D/FW, but it has no timeline in mind.)
Cost advantage
Because it has new planes and no labor unions, JetBlue will be able to grow quickly without its costs spiraling from its current level of about 6 cents per seat mile.
That compares favorably with majors such as American, which nearly went bankrupt when it lowered its seat-mile costs to about 9.5 cents. At the other end of the spectrum are US Airways Corp., Northwest Airlines Inc. and Delta, all with seat-mile costs near or above 11 cents.
Fort Worth-based American knows it can't fly at costs as low as JetBlue, but it can match its prices and emphasize its global reach and a broad frequent-flier program. The promotion that targeted JetBlue has exceeded expectations, said Dan Garton, executive vice president of marketing.
"We've added 20,000 new customers to our frequent-flier program, and there's a lot of companies out there that would pay a lot of money to add that many new customers," he said.
The airline predicted that it would lose money when it first offered the buy two, get one free promotion. Mr. Garton said he now believes the promotion will generate cash for American, and he expects the carrier to try more deals using the AAdvantage program to battle low-cost rivals.
"JetBlue is glitzy, and it's hard for me not to say that this wasn't targeted specifically at JetBlue," Mr. Garton said. "But JetBlue is one of multiple challenges we're facing out there right now with low-cost carriers." Many analysts say traditional carriers are fighting a losing battle with their ticket giveaways.
"They can't keep that up for long because they're losing money on those deals," said Ray Neidl, airline analyst for Blaylock & Partners in New York. If the economy continues its improvement, there may be enough passengers for the discounters of the industry and for the traditional carriers, but the low-cost carriers are the ones setting the ticket prices, analysts note.
JetBlue is actually beating American measured by revenue per seat mile flown. That means JetBlue has such a following that passengers are paying, on average, more to fly the low-cost carrier than they are on American on the same routes.
American's Mr. Garton confirms there are some markets where his carrier, the world's largest, runs a "revenue deficit" to JetBlue. But he said the airline earns far more per seat mile across its whole network and measures its success against low-cost carriers in market share rather than in head-to-head revenue comparisons.
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