JetBlue TrueBlue - jetBlue Q1 earnings - major shift in gears

http://investor.jetblue.com/ireye/ir_site.zhtml?ticker=jblu&script=410&layout=-6&item_id=846920

Slightly beating earnings expectations (-$0.18/share versus average estimate of $0.20), but recognizing some of the harsh criticims, a major shift in the growth strategy:

We are focusing on diversifying our route network with an emphasis on medium- and short-haul flights, revamping our fare structures to meet the sustained high fuel prices and right-sizing capacity in our trans-continental markets. The first action of this strategy is to adjust our fleet plan by deferring 12 aircraft previously scheduled for delivery in 2007 through 2009 to 2011 through 2012, and seeking a buyer for at least two of our Airbus A320 aircraft currently in revenue service. Taking these actions now allows us to continue to grow at a less accelerated rate, while still preserving our ability to take advantage of market opportunities now and in the future.

Pulling back from transcon is interesting. Competitors accuse them of driving transcon fares down, making the routes unprofitable. Now with high fuel prices apparently here to stay, it seems like they agree.

Again, not writing the obituary yet, but this looks very serious. I'm not sure the market will reward them for this, as it looks like a real scramble.

Of course - there's nothing special or magical about the jetBlue business model. The airline was able to maintain rock-bottom costs due to brand-new planes, favorable gate leases at its incipient airports, and an all-junior workforce - as the temporary cost advantages fade, and the airline's revenue weakness increasingly manifest themselves, the true color of jetBlue-- red-- will show ever more clearly.

Pulling back from transcon is interesting.

An airline with only the 190's focusing on short-hauls where the competition flies RJ's could do really, really well.

Well, as of 12:13pm eastern time, the market does seem to be rewarding them. Share price at $10.38, up .98 or 10.43%.

But them again, I never believed in short term market movement.

And I, unlike some others who are beating this topic to death, do not see JetBlue in any kind of near death throes - this seems to be a business which seems to know how to react to conditions in its markets. I think we are likly to see JetBlue for many years to come.

Larry

They're selling the relatively new A320s? Aren't they still taking deliveries- so will it be get some, sell some? Or are the deliveries only E190s? Sorry I'm not taking time to look myself...

They're selling the relatively new A320s? Aren't they still taking deliveries- so will it be get some, sell some? Or are the deliveries only E190s? Sorry I'm not taking time to look myself...

Slowing the deliveries of a dozen A320s plus selling between 2-5 of them.

Huge mistake, IMO, to not admit that the E190 is a major cause of the current financial pain and to cancel that error.

Closed up 13% today!

I think we need to look at the big picture here--$32 MM loss can be reversed a lot easier than anything some of the leacgy have or have had.

That said I think this management team is smart enough to know when mistake was made (expanded too quick, not forseeing E190's hiccups, etc., routes too soon (NYC-BOS) and fix it.

I like their plan and really do agree that transcons are fine--they have plenty of frequency to/from the West Coast from NYC/BOS and even IAD. Adding the medium range flights served by RJ's by the legacies on the E190 would be a huge competitive advantage.

I will be the first to admit they are having some problems, some more serious than others--but lets be honest--they are not on their deathbed. This company will around for a long time.

I think they CAN charge a few bucks more for flights...Heck I'd pay $25-$50 more for a B6 nonstop flight vs a connecting flight with cramped seating and no IFE. they have a premium Y product. They can raise fares a tad to compensate for this.

To me, the most important thing they can do is get their on time performace UP. It's p-ss poor that US Air of all people is outperforming B6 in this regard. Get the E-190 straightened out FAST, get OPS to fix OTP FAST and they will recover fine.

Thats my two cents. Oh and I am very excited of the carolina-JFK additions. Smart choices IMHO.

kdinino, excellent post! You could not be more correct.

For the jetBlue skeptics out there, they simply don't understand that the situation at jetBlue is not nearly as bad as at most legacy airlines. I know I've said this time and time before - but jetBlue was built for the tough times. While all the other airlines were bleed cash (and the majority still are), jetBlue was very profitable. They overcame many challenges - let's not forget the privacy scandal in mid-2003, skepticism from being based at JFK, fierce competition mainly from AA and DL, and many other factors - and they will most likely overcome the current challenges and those that lie ahead.

Let's all pray that fuel prices stay where they currently are, if not decline at all. JetBlue will be in business for many years to come - people love thet jetBlue experience domestically.

Huge mistake, IMO, to not admit that the E190 is a major cause of the current financial pain and to cancel that error.

I disagree. Expansion may be the cause, but the E190 is the best way out. It provides a huge competitive advantage over RJs. B6 would be unwise to let any of those E190s go to competitors in the near term.

I disagree. Expansion may be the cause, but the E190 is the best way out. It provides a huge competitive advantage over RJs. B6 would be unwise to let any of those E190s go to competitors in the near term.

You may be right - I've been wrong before.*

Let's revisit this thread every quarter for the next couple of years and see whether B6 can attract the higher yields necessary to make the higher cost E190s work. :)

Sure, a 100 seater beats RJs hands down - but their increased costs are gonna weigh on B6 very heavily, IMO.

*Except about last year's full year net loss at B6: Nearly a year ago I posted predictions that it would happen. Others scoffed. Turned out I was right. :D

Sure, a 100 seater beats RJs hands down - but their increased costs are gonna weigh on B6 very heavily, IMO.



And it only beats an RJ "hands down" if they can fill it. If they are flying RJ loads (50-ish) with 100 seats, they will lose big. They need to be very careful where they place these and be ready to pull the plug early if things just aren't working out.

Obviously they are going th give the RJ strategy a go, since it is the A320s that they are selling/deferring. It is kind of odd that they will still receive a dozen 320s in 2006, and yet sell 2-5 of them at the same time. Was prob too late to work out a deferral of any of the planes for 2006, but I wonder if they might not have done better trying to sell their outstanding orders than to sell their exisiting planes. Complicated stuff, I guess.

I am surprised to see that the market was so pleased yesterday, although I think there may be a partial reversal today. In any event, I guess analysts/investors are just pleased to see that they are doing something drastic to turn the ship.

It is kind of odd that they will still receive a dozen 320s in 2006, and yet sell 2-5 of them at the same time. Was prob too late to work out a deferral of any of the planes for 2006, but I wonder if they might not have done better trying to sell their outstanding orders than to sell their exisiting planes.

The impression I got from the conference call was that their intent was to sell 2-5 of the oldest planes, which would then be replaced by new ones. That would explain no defferals this year ... new planes cost less in maintenance :-).

Does anyone know if JetBlue is considering reducing its legroom?

To me that would be an awful development. I especially love JetBlue because I can fly transcon without having to make a chiropractor appointment the next day.

Does anyone know if JetBlue is considering reducing its legroom?


I would assume not, since the A320 increased legroom resulted from the requirement that B6 create some in-cabin stowage for wheelchairs, and removing the last row was the easiest way to do that. Some of the space was spread among the remaining rows aft of the overwing exit, and tightening these rows would result in about 29"-30" pitch. I think it's safe to assume that B6 wouldn't do anything that unfriendly.

tightening these rows would result in about 29"-30" pitch. I think it's safe to assume that B6 wouldn't do anything that unfriendly.
Interesting.

Did you read the story in the NY Times about Airbus suggesting standing room harnesses to some of its asian clients?

The interesting thing is that this would result in a seat pitch of 25", less than the current U.S. industry coach standard of 31" but surprisingly not that much tighter.

The impression I got from the conference call was that their intent was to sell 2-5 of the oldest planes, which would then be replaced by new ones. That would explain no defferals this year ... new planes cost less in maintenance :-).

That's all true, but it's reflected in the price for which you can sell the plane. If you believe in efficient markets, and unless there is a shortage of used A320s of which I am unaware, then those planes will fetch a reduced price and it will be a wash - at best - in the long run.

Unless they plan to keep recyclying the old as the new come in, then it is really a pretty short-sighted view. I wish them very well, but the logic on that particular angle is weak. The planes all have to get old sometime!

I would assume not, since the A320 increased legroom resulted from the requirement that B6 create some in-cabin stowage for wheelchairs, and removing the last row was the easiest way to do that. Some of the space was spread among the remaining rows aft of the overwing exit, and tightening these rows would result in about 29"-30" pitch. I think it's safe to assume that B6 wouldn't do anything that unfriendly.

Actually the removal of six seats from the A320's had nothing to do with the requirement to store a full sized wheelchair on-board per the ADA - this is a common mistake. 1 WCHR could have been stowed just as easily in 27DEF. Row 27 was very tight as it was the last row and did not recline.

But I wonder if JetBlue wishes they had those 6 seats back at this point. The removal equaled almost 4% of the total available seats. At the time B6 was competing with AA and Song which both had greater pitch. AA then added seats back and Song is going back to DL.

At least for now the the slower growth policy is well received, glad they realized their growth plans were not realistic.

But I wonder if JetBlue wishes they had those 6 seats back at this point.

Seat pitch is the prime factor in my selection of B6. Take that away and I'll stick with UA E+ and WN (assured aisle seat if you use on-line check-in at the correct time) for long hauls. B6 would be foolish to put those seats back, becoming just another airline.

Although it is fuel, fuel, fuel..... I wonder about the influence of the following cost factors. Maybe someone has the answers?

1. What is the extra cost of building the new high-tech terminals at JFK, and maybe elsewhere?

2. I have heard that the entertainment system is expensive and maintenance costs are going up. Have these number been published? What about the customer service cost when the seat-back screen is inop.

3. I have always heard that Airbus maintenance is more expensive than B737 mx including higher parts cost, but I have not seen any direct comparisons.

4. I recall reading in an earlier annual report, or maybe it was the prospectus since I got to participate in the IPO, that all financing was done with variable rates. But maybe this is not unusual.

5. I also seem to remember that there was a comment that some of the B6 accounting conventions were based on aggressive continued growth, and if it slowed, there would be negative accounting ramifications - but maybe this was only someone trashing jetBlue.

6. The letter that was sent to pilots recently solicited voluntary leaves. If they don't get enough volunteers, what about the possibility of furloughs? Flying jobs are tough to come by unless maybe you want to fly Airbuses in India.

I am not trying to bash B6 or their business plan, but I have always had a feeling that once they departed from the SWA single fleet business model, that the clock had started ticking, and that is when I sold my stock.

Actually the removal of six seats from the A320's had nothing to do with the requirement to store a full sized wheelchair on-board per the ADA - this is a common mistake. 1 WCHR could have been stowed just as easily in 27DEF. Row 27 was very tight as it was the last row and did not recline.

That claim is often made, but there's no escaping the close temporal connection between the two events: B6 announced the removal of row 27 with great fanfare not long before the settlement with the DOT and the $100k fine for failing to provide wheelchair stowage space.

http://investor.jetblue.com/ireye/ir_site.zhtml?ticker=jblu&script=410&layout=-6&item_id=428259

http://www.dot.gov/affairs/dot09103.htm

AFAIK, Neeleman never publicly connected the two events; but if he had publicly said that the removal was unrelated to wheelchair space and solely a competitve response, the cynic in me would have accused him of lying. Reasonable people can differ in their opinions of exactly why the row was removed.

To comply with the rules, DOT's Aviation Enforcement Office has advised carriers that the priority space must be large enough to accommodate a standard wheelchair measuring 13 inches by 36 inches by 42-50 inches when folded. Investigations by the Aviation Enforcement Office found that America West, JetBlue and Southwest violated these rules by failing to provide the stowage space as required.

Could you really stow a wheelchair in row 27? DOT seemed to disagree that B6 had sufficient space.

At the time B6 was competing with AA and Song which both had greater pitch. AA then added seats back and Song is going back to DL.

True, but B6 also competes with UA, and so far, UA has not given any hints that Economy Plus is in danger of extinction.

At least for now the the slower growth policy is well received, glad they realized their growth plans were not realistic.

Completely agree. Some of us (shareholders) think his admission is long overdue and may still be too little, too late. We'll see if it's enough.

Of course - there's nothing special or magical about the jetBlue business model. The airline was able to maintain rock-bottom costs due to brand-new planes, favorable gate leases at its incipient airports, and an all-junior workforce - as the temporary cost advantages fade, and the airline's revenue weakness increasingly manifest themselves, the true color of jetBlue-- red-- will show ever more clearly.


The model the carrier has adopted is intrinsically inflationary. The company is almost forced to expand: growing its base with new equipment and junior personnel to try to maintain a cost advantage. I have finished reading the company press release in light of its recent earnings announcement: the plan to focus on shorter routes and defer the arrival of new equipment makes good sense.

I disagree. Expansion may be the cause, but the E190 is the best way out. It provides a huge competitive advantage over RJs. B6 would be unwise to let any of those E190s go to competitors in the near term.


Grabbing those E190's is a very clever move on the part of JBLU. I am curious to see how they deck out the interior. If they deploy this equipment correctly, the airline could inflict very serious fiscal damage on the legacy carriers.

The model the carrier has adopted is intrinsically inflationary. The company is almost forced to expand: growing its base with new equipment and junior personnel to try to maintain a cost advantage. I have finished reading the company press release in light of its recent earnings announcement: the plan to focus on shorter routes and defer the arrival of new equipment makes good sense.

This is not a B6 problem: It's an industry problem. As planes gets older, maintenance is more expensive. As employees get older (i.e. more tenure), they get paid more. You need to keep expanding by adding new planes and new employees to keep the costs down. This was recognized in the 1980s when AA could not expand quickly enough to keep costs down, so they implemented the "B-scale" - a lower pay scale that new employees would be hired under in order to make the cost reduction from growth more dramatic and reduce the growth rate required to bring costs down.

The legacy carriers that have had to lay off employees actually have it worse, since you make lay-offs at the bottom of the payroll, so you have to eliminate 20% of your work force to reduce labor costs by 10%. That's why the reductions were not enough, and ultimately all of them have had to get full scale salary reductions from active employees.

Considering all of that, jetBlue ain't got it so bad.

This is not a B6 problem: It's an industry problem. As planes gets older, maintenance is more expensive. As employees get older (i.e. more tenure), they get paid more. You need to keep expanding by adding new planes and new employees to keep the costs down. This was recognized in the 1980s when AA could not expand quickly enough to keep costs down, so they implemented the "B-scale" - a lower pay scale that new employees would be hired under in order to make the cost reduction from growth more dramatic and reduce the growth rate required to bring costs down.

I wasn't suggesting that JBLU stood out in any way: all airlines share, to a greater or lesser extent, the same problems. JBLU had some favorable terms on the first year leases of some its aircraft: deferred payments. Initially, it didn't have the same maintenance hurdles as legacy carriers, which gave it a small edge. jetBlue has much more uniform base compared to legacy carriers. More than most, it is forced to expand. Legacy carriers at least benefit from retirements.

The legacy carriers that have had to lay off employees actually have it worse, since you make lay-offs at the bottom of the payroll, so you have to eliminate 20% of your work force to reduce labor costs by 10%. That's why the reductions were not enough, and ultimately all of them have had to get full scale salary reductions from active employees.

Considering all of that, jetBlue ain't got it so bad.

Legacy carriers are charged with a more expensive workforce. Having said that, Chapter 11 has helped some carriers shed those expenses. Chapter 11, IMHO, is the single biggest curse to hit the industry. At least one major (perhaps US Airways) should have been let go into Chapter 7 after 9/11. I think Chapter 11 has been used to support poor business models.

Legacy carriers are charged with a more expensive workforce. Having said that, Chapter 11 has helped some carriers shed those expenses. Chapter 11, IMHO, is the single biggest curse to hit the industry. At least one major (perhaps US Airways) should have been let go into Chapter 7 after 9/11. I think Chapter 11 has been used to support poor business models.

Not just Ch 11, but the mere threat. (AA and CO have achieved pretty major concessions as well in order to stay out.) Those changes have closed some of the gap betwen legacy and B6 salary costs, but they still have an advantage.

The best thing for the industry would have been for one (or more) legacy carrier to have been liquidated in bankruptcy. Not just US (twice), but the fact that the court allowed UA 3 years of protection, offering them an extension each and every time that they asked, is unconscienable.

End result: The industry still has too much capacity, which now even B6 is admitting for the first time by slowing their growth. B6 definitely still has a cost advantage (diminished by current fuel prices). It is bound to erode over time, but looking at the WN model, if they keep to their core principles it is likely to always be there at some level.

Not just Ch 11, but the mere threat. (AA and CO have achieved pretty major concessions as well in order to stay out.) Those changes have closed some of the gap betwen legacy and B6 salary costs, but they still have an advantage.

Do you have any details about what concessions CO obtained? If we're talking about employees, that I understand. I don't think that they got anything special from the federal government.

The best thing for the industry would have been for one (or more) legacy carrier to have been liquidated in bankruptcy. Not just US (twice), but the fact that the court allowed UA 3 years of protection, offering them an extension each and every time that they asked, is unconscienable.

I read through US Airways numbers when it went into bankruptcy the first time, then when it came out. I thought, compared to other carriers, it was in worst shape coming out of bankruptcy--of course, it had to reorganize again. I truly though US Airways was going to go away: it was threatening bankruptcy in September/October 2004. It has two hubs in Pennsylvania, which was a swing state in the 2004 presidential election. I was sure that after Bush was re-elected, US Airways would be gone (particularly since Bush didn't end up carrying PA!). Granted there are public policy issues, but the way bankruptcy is being used, it's quite abusive.

The case for United is quite staggering. It carrier has had negative equity for years (many carriers also have this issue. The write off it took in the last quarter was staggering.

End result: The industry still has too much capacity, which now even B6 is admitting for the first time by slowing their growth. B6 definitely still has a cost advantage (diminished by current fuel prices). It is bound to erode over time, but looking at the WN model, if they keep to their core principles it is likely to always be there at some level.

I don't think it's a capacity problem anymore: load factors look good. It's a pricing issue. Carriers need to push prices up. For many of the majors, I don't believe that costs could be realistically reduced further. JBLU certainly has a cost advantage, but its expansion has, recently, lacked discipline. In this regard, JBLU differs from LUV. LUV has only occasionally deviated from its expansion plan. JBLU is probably going to have one or two rocky quarters.

I don't think it's a capacity problem anymore: load factors look good. It's a pricing issue. Carriers need to push prices up. For many of the majors, I don't believe that costs could be realistically reduced further. JBLU certainly has a cost advantage, but its expansion has, recently, lacked discipline. In this regard, JBLU differs from LUV. LUV has only occasionally deviated from its expansion plan. JBLU is probably going to have one or two rocky quarters.

Load factors tell us nothing about overcapacity or undercapacity. All they tell us is that most airlines are desparate to sell seats, and the current supply and demand equation means that those seats are filled for less than profitable totals.

Strictly speaking, there is a glut of high-cost seats and a shortage of low-cost seats.

The reason that fares are low is precisely because of the number of seats chasing the customers. For example, we don't really need six different airlines flying First Class seats from all kinds of midwestern and eastern hubs to LAX, SFO and SEA (and many other cities). That's where there's overcapacity. Shut down a couple of dying legacies, close their hubs, and consolidate the pax willing to pay profitable prices on the remaining legacies. That way, the remaining airlines might have enough to eat, and might just turn the corner to profitability.

Thinking about this, what B6 is doing makes a lot of sense. If they're concentrating on short and medium haul, then they're basically expanding the E190 flying at the expense of the A320s. As such they aren't going to need quite as many A320s as they previously planned. Part of this, for sure, is the fact that fares in major markets seem to very often be $200-$300 roundtrip regardless of distance -- and so shorthaul flying is by definition more profitable!

And I'm sure that B6 has crunched their numbers and worked out that selling some A320s is more profitable than deferral. It's slightly counterintuitive, but the lower maintenance cost (and 'young fleet' marketing buzz) makes the decision at least defensible.

I do wonder if this is a precursor to routes like JFK-BTV going all-E190. That said, right now, the one E190 roundtrip on that route (and JFK-BUF, and others) seems to be switching to an A320 effective Wednesday (5/3). (At least, the flight number is switching from 10xx to 1xx. ETA: Actually, that is a less reliable indicator than I thought. BOS-NAS is 1701/1702 but is currently run by an A320. That said, it was originally envisaged as an E190 route.)

For shorthaul routes, it is likely to be generally more customer-friendly to fly smaller planes more often than bigger planes less often -- whether the economics work out is what they pay the guys at B6 HQ the big bucks for :) But customer reaction to the E170/190 across the industry is very positive, and I suspect Embraer just built themselves a plane that will fuel their company for many years to come.

Load factors tell us nothing about overcapacity or undercapacity. All they tell us is that most airlines are desparate to sell seats, and the current supply and demand equation means that those seats are filled for less than profitable totals.

I can't agree with the statement: to state that load factors say nothing is, IMHO, way too strong. In general, if load factors are high, the average price per consumer is too low, and vice versa. In any market, price is determined my supply/demand. The perceived value (and concomitantly the price) may be raised through appropriate branding.


Strictly speaking, there is a glut of high-cost seats and a shortage of low-cost seats.

I don't follow this statement. Load factors have improved in the past few quarters, which doesn't support the statement made above.

The reason that fares are low is precisely because of the number of seats chasing the customers. For example, we don't really need six different airlines flying First Class seats from all kinds of midwestern and eastern hubs to LAX, SFO and SEA (and many other cities). That's where there's overcapacity. Shut down a couple of dying legacies, close their hubs, and consolidate the pax willing to pay profitable prices on the remaining legacies. That way, the remaining airlines might have enough to eat, and might just turn the corner to profitability.

I agree with the sentiment. For what appears to be public policy reasons, major carriers are not allowed to enter Chapter 7. To me, this situation is crazy. More carriers should go under--it would help if United were to falter. IMHO, the industry should segment somewhat akin to the hotel industry. There are structural differences, but I think there needs to be a carrier that markets on differentiation rather than on price: LUV operates very successfully on price.

Thinking about this, what B6 is doing makes a lot of sense. If they're concentrating on short and medium haul . . .

If I had to guess, I think you're definitely on to something. JBLU will most likely use RJ's on short-haul routes--might even increase the frequency slightly. I expect to see a web of RJ-serviced JBLU flights appear in the markets that the company serves.

Intersting perspective. Full article is at"

http://www.thetravelinsider.info/2006/email0428.htm

"""......the price of jet fuel was mentioned prominently as a factor in the poor result, but it is interesting to see - at a time when dinosaurs are all trimming their operating costs - JetBlue had a massive 6.7% increase in its operating cost per available seat mile (CASM), excluding the cost of jet fuel, as compared to Q1 2005.

By comparison, its increase in fares received - the 'yield' per ASM was only 3.3%. Increasing costs are bad; increasing costs without matching increasing revenues are terrible.

Much worse, if you include the increase in jet fuel costs (which of course you must), the CASM increased by 16.3%.

A 16.3% increase in costs with only a 3.3% increase in matching revenues is a catastrophic situation which demands urgent correction. :mad:

The airline is now scrambling to respond to its weakened financial position, and as part of a 'Return to Profitability' plan has already announced the deferral of some new A320 deliveries, and the possible sale of 2 - 5 of their existing A320 planes.

It is certainly possible that the driving need to continue expanding to meet the delivery schedule of new planes - both the A320s and the smaller Embraer E190s - may have caused some poor decisions about the new routes JetBlue has been opening but not profiting from, and a period of slower growth could allow the airline to catch its breath and do a better job of managing its future expansion.

JetBlue will also be cutting back on its trans-continental flights - many of these have not been financially successful.

It is also true that JetBlue will need to become more protective of its operating cost advantage or else it too may become a dinosaur, at least as regards its operating costs. Meanwhile, there are worrying (and very dinosaur like) sounds coming out of JetBlue about how they will be shifting their focus from filling their planes to maximizing the income they receive from each ticket sold.

In talking about his airline's optimistic outlook for the future, CEO David Neeleman said this is based in part on a newfound reliance on yield management to sell more fares in the middle range. Neeleman called it part of a 'new mindset' for the airline, in which it is more focused on increasing its average fare than filling as many seats as possible.

In saying this, Neeleman and JetBlue are walking into a trap that has snared many dinosaurs in the past. The two strategies - increasing average fares and/or selling as many seats as possible - are often viewed as exclusionary, but they need not be. Certainly, it makes sense to charge the most you fairly can per ticket sold, but there also comes a point where an airline sees itself looking at flights that are still significantly unsold, and their choice then is either to not sell those remaining seats at all, or to accept lower fares to fill the unsold seats. The better choice is the latter choice, but many times airlines fail to appreciate this.

Airlines can sometimes get fixated on measures such as average value of fare and find themselves in a situation where they'd rather sell, say, 100 seats on a 150 seater plane with an average price of $100 instead of 120 seats with an average price of $90. The latter scenario brings in 8% more revenue overall, and as long as the variable cost per extra passenger traveled is below $40, the airline makes more profit by selling 120 tickets at $90. But sometimes blinkered bean-counters can't see beyond the average fare value, and so lose out on extra revenue and miss a boost to their ultimate bottom line due to an insistence on managing only one of the many variables involved."""

JetBlue will also be cutting back on its trans-continental flights - many of these have not been financially successful.

It is also true that JetBlue will need to become more protective of its operating cost advantage or else it too may become a dinosaur, at least as regards its operating costs. Meanwhile, there are worrying (and very dinosaur like) sounds coming out of JetBlue about how they will be shifting their focus from filling their planes to maximizing the income they receive from each ticket sold.

In talking about his airline's optimistic outlook for the future, CEO David Neeleman said this is based in part on a newfound reliance on yield management to sell more fares in the middle range. Neeleman called it part of a 'new mindset' for the airline, in which it is more focused on increasing its average fare than filling as many seats as possible.


Too bad about the transcons, since those were what drew me to JetBlue in the first place. I suppose popularity with FTers = money losing. :)

I very much agree with JetBlue's shift to maximizing revenue. I've seen how Southwest has compressed its fare structure in the past 12 to 18 months. There definitely is something to keeping the top fare lower than the competition to attract last-minute customers while avoiding giving away the store with too-deep discount fares for people who plan ahead. The latter means more empty seats, but OTOH the empty seats make the flight more comfortable for those last-minute customers. Southwest has good yield with the lowest (IIRC) load factor in the industry. Fare compression works.

One counterargument is that Southwest is spending down its reputation for low fares, and that when leisure travelers figure out that they are often not getting the best price they will desert Southwest. It's possible, I suppose, but Southwest still has an important advantage with no change fees.

I see JetBlue's move as mimicking Southwest, not the legacies. I believe it will work very well.

In saying this, Neeleman and JetBlue are walking into a trap that has snared many dinosaurs in the past.

B6 has no choice - the airline has a rock-bottom RASM that is mitigated only by a low-but-increasing CASM. Despite the spin and the onboard frills, pax have not been willing to pay as much to fly on B6 as they will to fly on a legacy -- this is noteworthy because pax are often willing to pay MORE on average to fly on WN than a legacy on the same route. As B6 said in its 2005 Annual Report, "our yields were lower than all of the other major U.S. airlines", and it shows -- its 2005 pax yield was 8.02 cents/mile, a number that would get any legacy airline manager tarred and feathered.

As time goes on, the business world will finally realize that B6 is not the golden boy it was spun out to be, but rather an opportunistic parasite ala N7, albeit with better financing and a superior route network than the former.

I can't agree with the statement: to state that load factors say nothing is, IMHO, way too strong. In general, if load factors are high, the average price per consumer is too low, and vice versa. In any market, price is determined my supply/demand. The perceived value (and concomitantly the price) may be raised through appropriate branding.

My point is that today's high load factors are a result of the very low prices, and those low prices are a result of the excess capacity. Passengers bid down the price of the seats and the airlines, desperate to fill them, agree to low prices. If prices were raised sharply, load factors would go down. And unless some capacity is reduced, that would produce even larger losses. The only thing that load factors tell me is how many seats are filled. To determine whether there's undercapacity or overcapacity, I need more info: Like Profit and Loss data. ;)

Even Neeleman now blames industry-wide overcapacity for his airline's ills. Every other airline blames overcapacity. Industry analysts blame overcapacity. Pointing to high load factors isn't sufficient to refute the nearly unanimous chorus that there's too many seats.

I don't follow this statement. Load factors have improved in the past few quarters, which doesn't support the statement made above.

Lemme see if I can say it differently. Passengers seem to be flocking to the LCCs, as they tend to offer lower fares, especially for last-minute purchases. Those LCCs are growing like gangbusters. They are trying to increase their capacity of low-cost seats to match the demand for them.

The legacies, on the other hand, are slowly reducing capacity (too slowly, IMO) because they are finding fewer and fewer pax willing to be gouged. It really picked up steam in 2000 and especially early 2001, as the legacies began to show losses. Sure, the legacies are jam-packed with pax. They have cut flights and parked some airplanes. But not enough of them.

Incidentally, I have to credit BoeingBoy, a very wise and articulate legacy airline 737 Captain for coining the concept that there's a glut of high-cost seats and a shortage of low-cost seats. The legacies keep cutting the price of their seats to try to satisfy the demand for those low-cost seats, and they keep bleeding money in doing so.

Even Neeleman now blames industry-wide overcapacity for his airline's ills. Every other airline blames overcapacity. Industry analysts blame overcapacity. Pointing to high load factors isn't sufficient to refute the nearly unanimous chorus that there's too many seats.

Yes it is. The problem is not overcapacity per se, but a lack of PRICING POWER over the capacity being offered. Put another way, the issue is not how many planes are in the air, but the number of fat fingers on the keyboards determining the prices of the seats inside those planes.

That said, the legacies are aggressively attacking the revenue side of the equation, with more success than LCCs I might add.

Yes it is. The problem is not overcapacity per se, but a lack of PRICING POWER over the capacity being offered. Put another way, the issue is not how many planes are in the air, but the number of fat fingers on the keyboards determining the prices of the seats inside those planes.


Well, we'll have to agree to disagree. :)

When nearly every airline in the USA sells its seats for less than profitable fares (including WN, which isn't selling its seats for enough to cover fuel at market prices), then I'd say the domestic market suffers from overcapacity. YMMV.

The absence of pricing power is due to the domestic overcapacity existing in the USA domestic network at present.

When jet fuel is $2.20/gal, that alone ought to price some travelers out of the market (especially compared to 1998-99 when most airlines in the USA paid about $0.55/GAL).

Because of the overcapacity, those pax have yet to be priced out of air travel. Legacy airlines (and jetBlue, for that matter) are subsidizing the flights of those bargain basement fare seekers, when those pax really shouldn't be able to afford to fly.

My point is that today's high load factors are a result of the very low prices, and those low prices are a result of the excess capacity. Passengers bid down the price of the seats and the airlines, desperate to fill them, agree to low prices. If prices were raised sharply, load factors would go down. And unless some capacity is reduced, that would produce even larger losses. The only thing that load factors tell me is how many seats are filled. To determine whether there's undercapacity or overcapacity, I need more info: Like Profit and Loss data. ;)

I certainly can't disagree with the sense of your argument. Capacity has been reigned in over the past few years, but at least in the case of Continental, a lot of flights are leaving full or nearly full. I'd like to see Continental try to push fares up. jetBlue probably needs to try and do something similar. You certainly can tell something about capacity based on load factor. All else being equal, if the load is, on average low, the price is too high, and vice versa.

Even Neeleman now blames industry-wide overcapacity for his airline's ills. Every other airline blames overcapacity. Industry analysts blame overcapacity. Pointing to high load factors isn't sufficient to refute the nearly unanimous chorus that there's too many seats.

In truth, there is not a unanimous chorus that there are too many seats--I am not aware of unanimity among airline analysts about overcapacity. In a sense, airlines use capacity as a straw man argument: it often doesn't receive a careful analysis. Neeleman's problems with jetBlue are self-inflicted: he took his eye of the ball. The airline expanded too quickly. It's hard to fault him in some respects as competition was in trouble and jetBlue had to drive home a competitive advantage. That being said, there are a few industries which add capacity in large chucks at the wrong time. The airline industry is one classic example; chip producers are another.



Lemme see if I can say it differently. Passengers seem to be flocking to the LCCs, as they tend to offer lower fares, especially for last-minute purchases. Those LCCs are growing like gangbusters. They are trying to increase their capacity of low-cost seats to match the demand for them.

Passengers are definitely flocking to jetBlue. Southwest has a somewhat more measured approach to expansion. Southwest also chooses not to explore maximizing its base fare. Analysts have suggested many times that Southwest could raise its non-refundable fare, but the carrier has elected not to do so. I think the airline business is tough, because it's very hard to match the quantity demanded precisely. If a carrier is right, things go well; if it's wrong, it can be devastating.

The legacies, on the other hand, are slowly reducing capacity (too slowly, IMO) because they are finding fewer and fewer pax willing to be gouged. It really picked up steam in 2000 and especially early 2001, as the legacies began to show losses. Sure, the legacies are jam-packed with pax. They have cut flights and parked some airplanes. But not enough of them

The legacies have pulled a lot of capacity in the past five or so years, but not all of them continue to do so. In fact, in 2007, if current trends continue, many will start adding capacity again.

The industry is kind of perverse, because when things are going well--everyone is profitable--it's difficult to lease or buy equipment. The barriers to entry are high when the industry is booming. When the airline industry is in recession, aircraft are easier to come by, the barriers are lower. It's a tough business!

Incidentally, I have to credit BoeingBoy, a very wise and articulate legacy airline 737 Captain for coining the concept that there's a glut of high-cost seats and a shortage of low-cost seats. The legacies keep cutting the price of their seats to try to satisfy the demand for those low-cost seats, and they keep bleeding money in doing so.

Broadly speaking, there are two groups of passengers, those that are price sensitive and those that aren't. There are many more in the first group. The legacies try to please both, which is a challenge. In fairness, the legacies have always had inexpensive seats in their inventory: there are just more of them recently. It's a cyclical industry; it will turn around again.

Southwest also chooses not to explore maximizing its base fare. Analysts have suggested many times that Southwest could raise its non-refundable fare, but the carrier has elected not to do so.

This was true until April 2005. Then the deep discounts became much less deep. That irked me as a buyer of those fares, but it made sense for the company. My solution was to buy the stock and use the gains from that to pay the fare increase.

This was true until April 2005. Then the deep discounts became much less deep. That irked me as a buyer of those fares, but it made sense for the company. My solution was to buy the stock and use the gains from that to pay the fare increase.


Southwest still doesn't test the limits with its full fares--it's discounted fares are a different story. It's definitely a good company to own--nice an volatile. jetBlue had a model that initially resembled that of Southwest--probably due to Neeleman's experience with Morris/Southwest. The recent issues with jetBlue make for interesting study.

Forbes has reported that JetBlue (http://www.forbes.com/2006/06/23/jetblue-0623markets07.html?partner=msn&industry=IND_TRANSPORTATION) has succeed in raising fares: it's working! IMHO, that's good news for JBLU. I think the company needs to generate higher revenues--capture $$$ for the value it adds. ^ ^

Forbes has reported that JetBlue (http://www.forbes.com/2006/06/23/jetblue-0623markets07.html?partner=msn&industry=IND_TRANSPORTATION) has succeed in raising fares: it's working! IMHO, that's good news for JBLU. I think the company needs to generate higher revenues--capture $$$ for the value it adds. ^ ^
Yes, average fares are up which is great...while $69 to FL and $99 transcon is great for the consumer, it is not realistic for airlines to sell seats so far below their actual operating costs. I'm glad to see fares up and while load factor was expected to decrease due to increased fares, it has definitely beat expectations - not decreasing drastically. It's down slightly, but yields are improved.

I heard some new routes had a little trouble developing, however advanced bookings and market share looks great.

jetBlue should be in the black for the remained of 2006...let's hope fuel prices stay steady or even better, hopefully come back to earth!

For the words coming out of management look for a Q2 profit. Again these are the rumors coming out of Forest Hills so we'll have to see what get posted in the July Report.

For the words coming out of management look for a Q2 profit. Again these are the rumors coming out of Forest Hills so we'll have to see what get posted in the July Report.

I think that there's a good chance that JBLU will see a profit this quarter (Q2) and certainly next. I still think that the carrier needs to find a way to capture more dollars form the value that it adds--the comfort of the cabin, the IFE, etc.