A new flight plan
JetBlue CEO sees $3 billion in smaller jets as the key to a larger coverage area
Wednesday, June 18, 2003
BY JOSEPH R. PERONE
JetBlue Airways Chief Executive David Neeleman stays awake in bed some nights staring at the ceiling and thinking about new cities his airline could serve.
For once, though, the entrepreneur is thinking small.
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In three years, Neeleman has built the nation's fastest-growing airline with a simple formula: Use a single type of plane, a 162-seat Airbus jet, slash costs and keep fares low enough to pack in budget-conscious families and business travelers.
Now, the CEO is betting $3 billion -- and perhaps the future of the company -- on a fleet of 100-seat jets aimed at providing direct service to small and medium-sized cities from upstate New York to Florida and freeing larger jets to fly to new places such as Mexico and the Caribbean.
"It's a gutsy move," said airline consultant John Pincavage Jr., president of Pincavage Associates in Westport, Conn. "He's giving himself more opportunities to fail and more opportunities to succeed."
The move, during the industry's worst downturn, is hardly surprising for an airline that enjoys tweaking the established carriers. After all, JetBlue is making money when competitors are losing billions, and next year is on track to become the first carrier in history to post $1 billion in annual sales in less than five years of operation.
But critics wonder if the company is following the same strategy as another upstart, People Express Airlines, which went on an ill-fated expansion binge during the 1980s only to buckle under its own weight. Since then, a series of budget carriers have floundered.
Neeleman told a Merrill Lynch conference last week he will not repeat the mistakes made by others.
"By getting another aircraft type, is this like People Express flying 747s to Brussels?" he said. "We don't believe it is."
Smaller regional jets such as the Brazilian-made Embraer 190 are the latest rage in the industry. It is easy to see why. JetBlue says it needs only 65 passengers per flight to break even with that plane, compared with 113 passengers on its mainstay A320.
They also provide airlines with the ability to serve smaller markets outside the hub and spoke system. Continental Airlines, the largest carrier at Newark Liberty International Airport, has even set up its own separate regional carrier, ExpressJet, using Embraer aircraft.
With a range of 2,000 miles, the Embraer could allow JetBlue to serve new markets such as Indianapolis, Cleveland, Pittsburgh, Portland, Maine, and Charlotte, N.C.
Then, the airline could use its A320 jets to begin service to Cancun, Mexico, Toronto, Montreal and St. Kitts or St. Thomas in the U.S. Virgin Islands, bolstering its competitive advantage. It costs JetBlue about 6.3 cents a mile to operate its A320 aircraft, analysts said, while major carriers are spending about 10 cents a mile to stay in the air.
JetBlue also could fly an A320 to the Caribbean in peak winter months and an Embraer 190 during the summer. The airline could fly the larger plane to Canada during the summer and use the smaller plane in winter.
"They look for overpriced markets and then try to stimulate demand with low fares," said airline analyst Ray Neidl of Blaylock & Partners in New York. "The question is whether they can integrate this new equipment efficiently, and will the numbers work out."
The Embraers cost about a penny a mile more to fly because they have fewer seats from which the carrier can derive revenue. So, Jet Blue said it will raise prices a few bucks more than its usual fares.
"While this may seem a deviation from the low cost carrier's one-plane type model, we believe this new aircraft type will actually offer further flexibility for JetBlue and offer further expansion opportunities for the carrier," Merrill Lynch analyst Michael Linenberg said.
Growth does come with risks, though, said Susan Donofrio, analyst for Deutsche Bank Securities.
"There will be operational challenges to managing this new growth through both a new aircraft type and facility issues," she said.
News that Jet Blue was buying 100 of the Embraers for delivery starting in 2005 sent the airline's shares lower last week because investors worry the airline's cost structure -- almost half of what major airlines must spend -- could be in jeopardy.
It is that cost structure that allows Jet Blue to charges fares as low as $49 to upstate New York and $299 to the West Coast. Those fares attract a sizable number of passengers from New Jersey, the airline said.
Major airlines aren't sitting still waiting for JetBlue to eat their reheated lunch.
United Airlines lowered fares on more seats to the West Coast to match JetBlue, and Delta and Continental are using larger planes to fight the upstart on routes to Florida, said Geoff Silvers, marketing director for online travel service Orbitz.com of Chicago.
"The longer term issue for JetBlue is can they sustain the same loyalty as a United when business flying becomes more popular," he said. "Major carriers have much better (route) coverage across the world, and that gives travelers a better opportunity to redeem their frequent flyer miles."
Delta Air Lines, which competes with JetBlue at JFK, has countered with its own discount service -- Song Airways. Song will begin flying from Newark to Fort Lauderdale, Fla., on July 14 and to Orlando, Fla., on July 21.
The carrier will offer fares ranging from $79 to $299, digital TV service and allow passengers to play video games against each other. A la carte food available will include free-range chicken wraps, vegetable soft tacos and summer gazpacho.
"We're upping the ante," Song Airways spokeswoman Stacy Geagan said. "We're out to revolutionize customers' expectations on what low-fare service should be."
That concept sounds familiar.