Avoiding the Reset Button

Hitting the reset button” is how JetBlue President and CEODave Barger refers to airlines that have gotten a new lease on life via the bankruptcy process or through a merger or acquisition. It is definitely not an appropriate characterization of JetBlue’s trailblazing flightpath over the past 10 years. The New York-based carrier, which celebrated its first decade of scheduled service last February, has stayed aloft during the most tumultuous period in the history of commercial aviation without resorting to a Chapter 11 filing, out-of-court financial restructuring, merger, downsizing or layoffs.

But JetBlue has done far more than merely survive. It has grown into the seventh-largest US passenger airline, offering 650 daily departures to 61 cities in the US, Latin America and the Caribbean while changing forever the notion of what a low-cost carrier can and should be by making cheap chic. From day one it operated the youngest fleet in the industry, offered assigned (leather) seats, generous legroom, friendly and enthusiastic customer service staff and a no-overbooking policy. Most memorably, it was the first airline to bring live television programming into the aircraft cabin. Others may have copied the template but JetBlue had to invent it first.

True, there have been low points, most notably the February 2007 operational debacle that stretched over several days and resulted in thousands of passengers being stranded on dozens of icebound aircraft for up to 8 hr. More recent was the globally publicized—and satirized—incident in which a flight attendant unleashed an obscenity-laden tirade over the intercom while a jet was parking at the gate, popped the emergency slide and departed. Yet operational performance generally has been near the top of the industry and it has received the J.D. Power and Associates Award for “highest in customer satisfaction” among North American LCCs for the past six years.

It also has been profitable in six of its first 10 years, including 2009 when it earned $58 million compared with aggregate industry losses of $2.5 billion. Net profit through the first six months of 2010 totaled $29 million on sales of $1.8 billion. This accomplishment is particularly noteworthy in light of the fact that for much of the period the main runway at New York JFK was closed for major reconstructive surgery, a situation that required JetBlue to maintain its winter schedule there through the end of June.

But Barger, who succeeded founder David Neeleman as CEO in the management restructuring that followed the February 2007 event (ATW, 10/07, p. 44), isn’t one for complacency or resting on laurels. “I tell our crewmembers, what got us here in 10 years won’t get us there in the next 10,” he says.

That attitude helps to explain the pursuit of bilateral relationships with a diverse gaggle of US and non-US legacy carriers and why Barger, who has been with the airline virtually since its creation, recently was quoted musing about the possibility of adding a third aircraft type to join the A320s and Embraer 190s—perhaps a widebody—and did not rush to deny it.

“I can honestly say that I haven’t seen a presentation at JetBlue to date that laid out widebody airplanes or the need for widebody airplanes,” he admits to ATWat the airline’s modest but modern-looking offices in Queens, while adding, “Let’s don’t be afraid of a bigger airplane if we’ve earned the right to fly it. But let’s be sure we’ve earned the right to fly it before we order any.” Meanwhile, he and Executive VP and COO Rob Maruster express strong satisfaction with the performance of their current fleet, although they very much would like to see Airbus offer a winglet retrofit option on the A320 to boost performance and bring a bit more of Latin America into range.

The idea that JetBlue should “earn the right” to grow in its second decade hints at perhaps the biggest change for an airline that once expected to be operating nearly 300 jets by year end instead of the 161 it will have in service. The new watchwords are “sustainable growth,” meaning funded primary by internally generated cash, not from borrowing. “I think what is so fundamentally different is that the order book used to drive the network and now the network drives the order book,” Barger explains, recalling that “at our crescendo, we were taking delivery of an airplane every 10 days.” It began putting the brakes on this expansion in 2006. The events of February 2007 and the 2008 oil bubble/bust and global financial crisis made the decision look prescient.

Today, he and other executives are focused on the need to generate free cash flow (achieved for the first time in 2009) and a return on invested capital. This parallels the approach of Alaska Air Group (ATW, 9/10, p. 60).

It doesn’t mean tactical opportunities will be forgone; JetBlue took six A320s from GECAS on six-year operating leases this year. But it does mean the carrier won’t be doubling in size every few years, as had been the case.

Other things have changed too. At the end of January, it began transitioning to a new integrated customer service system from Sabre. By all accounts, the massively complex cutover from the Open Skies system went very smoothly. “Having watched WestJet go through it the year before, we were aware of some of the landmines that might be out there,” Maruster observes.

Discussing the reasons for the switch, Executive VP and CCO Robin Hayes says, “I think that a lot of what we have been trying to do in the last few years [has] been constrained from a technology perspective, whether that was new pricing, products, interline and codeshare partnerships [or] new revenue streams.”

He elaborates: “In the old world, if we were going to have a fare sale or a new fare initiative and if a day or two out we started to see that the weather wasn’t going to be very good, we had to pull it because the system wasn’t robust enough to handle the demand on it from customers looking to book new fares and also from customers looking to change their flights.” With the Sabre system, “we are able to file schedule extensions when we want, run fare sales when we want and we don’t have to worry about what’s happening in the operation at the same time.”

Value Airline

The Sabre platform is critical to JetBlue’s evolution from its LCC roots into its self-described status as a “value airline.” For example, it now can price ancillary products like “even more legroom” on its A320s and 190s on a route-by-route basis. The platform also has made adding interline partnerships—a key aspect of its business plan—“very straightforward,” says Hayes.

Barger says, “We’ll announce more airlines later this year as the commercial team hones in on the geography of who they want to partner with.” The largest to date, with American Airlines, took off in late July. Under terms of an agreement announced last spring, the carriers are cooperating in non-overlapping markets from JFK and Boston Logan, linking 14 international destinations operated by AA to 18 domestic markets served by JetBlue. Frequent-flyer reciprocity on the interline routes is part of the package. Hayes says it is too soon to judge the impact of the partnership but he believes, “It’s going to allow us to really leverage our JFK network [and] Boston network and allow us to grow more quickly than we otherwise would.”

Also under the agreement AA is transferring eight slot pairs at Washington National and one slot pair at White Plains to JetBlue while the latter is transferring 12 slot pairs at JFK to AA. Subject to US Dept. of Transportation approval, the transfer is effective Nov. 1. JetBlue will use most of the DCA slots for service to Boston, its second-largest base.

In a matter of a few years, JetBlue has overtaken American, Delta Air Lines and US Airways to become the largest carrier at BOS by seat share. The operation has grown from six gates, 40 daily departures and 19 destinations in the first quarter of 2007 to 11 gates, 34 destinations and 70 daily departures in the first quarter of 2010. By year end it will offer nearly 90 daily departures. By comparison, JFK has 138 daily departures, with other New York-area airports—LaGuardia, Newark, Stewart and White Plains—adding 32 more for a total of 170.

Boston’s For Business

In building Boston, the carrier hopes to tap more deeply into the business travel segment that currently represents only about 20% of traffic, according to Hayes, who adds that it “is growing quickly.” This is particularly true for BOS, where “we have sort of laid out a business travel schedule both in terms of the network we fly and the frequency we offer,” he says.

“It is almost like we’re a leisure exit in New York and business exit in Boston,” Maruster remarks, noting, “We don’t want to abandon the core but we also don’t want to hold the brand back from being something new in a different market for us.”

Entering the GDS channel in a big way has boosted visibility to the business segment. Hayes says he has seen an increase in corporate travel agency bookings that more than justifies the higher booking costs. “The jury is still out” about the online travel agency segment, however. “Although we’ve seen increases, I think most of what we get is directly substitutional from what we could have gotten from our website.”

The growth in Boston is paralleled by southward expansion into the Caribbean and the top of South America, while the transcon network has shrunk considerably. In 2007 such flying accounted for 47.4% of capacity; it is currently around 30%. Service to the Caribbean, South and Central America, meanwhile, which represented just 11% of capacity in 2007, is now around 20%-25%. Northeast to Florida remains an important market, accounting for about a third of ASMs (Orlando and Fort Lauderdale are the carrier’s third- and fourth-busiest airports by departures). Short-haul comprises around 7.5% of ASMs. These network changes are reflected in declining average stage length, which fell from 1,358 mi. in 2005 to 1,076 mi. in 2009, while daily utilization dropped from 13.4 hr. in 2005 to 11.5 hr.

Barger cites two factors behind the decision to reduce the coast-to-coast flying: The rising cost of oil that made such routes especially costly and increased price competition, particularly after the emergence of Virgin America. “That’s not a very good formula—high oil and low fares,” he observes. He says he is comfortable with the current footprint and emphasizes that transcon remains “a core market.”

But the reduction in long-haul flying, coupled with an aging fleet and workforce (relatively speaking) and the decision to slow growth, has had an effect on costs. In 2005 cost per ASM excluding fuel was 4.81 cents. At the end of 2009 it was 6.33 cents. While acknowledging that costs increase as aircraft age and the workforce matures, Maruster cites the strong second-quarter financial performance, including record operating income of $94 million and a 10.1% operating margin, as evidence that “the model is working.” He expects CASM to flatten out over the next few years as growth resumes; ASMs are forecast to rise 6%-8% this year. It is also true that efficiency has increased: The airline achieved 20.1 departures per employee in 2009, up from 13.5 in 2005. Employees per aircraft dropped to 72 from 107.

Despite the many changes, some things remain the same: Traffic is still overwhelmingly point-to-point. “Almost nine out of every 10 customers are getting off the airplane,” Barger says, adding, “I think that’s important because people will pay a premium for a nonstop.” Maruster says, “Every airplane and every route will earn its way onto our route map . . . We don’t do things just to connect traffic.”

JetBlue is starting to see connectivity internationally at JFK with carriers like 19% owner Lufthansa (with which it has a codeshare agreement) and interline partners Aer Lingus, South African Airways and El Al (from this month). It also has a codeshare with Cape Air, a regional airline that gives it access to Cape Cod, Martha’s Vineyard and Nantucket.

No Layoffs

Another thing that hasn’t changed is the no-layoff policy. All federally licensed employees have individual work contracts but the carrier is 100% nonunion. “I use the phrase collaboration versus negotiation and we do have a direct relationship with all 12,750 crewmembers,” Barger states, while adding that it is becoming more and more difficult to maintain that status, particularly in light of the recent National Mediation Board rule change that permits a simple majority of those voting to effect unionization. The prior rule required that more than 50% of an eligible work group had to vote for a union.

“We truly believe we have the opportunity to continue to create something special and I don’t think you have to pay someone to speak for you. But it’s like painting a battleship. You finish and you’ve got to start all over again,” Barger says.

It is not a job he is willing to forgo. “The lens I look through is culture and I have to admit I’ve looked through that lens over the first 12 years that I’ve been at the company. Because anybody can put leather seats in an airplane, put LiveTV in the cabin . . . It’s the people I think that make the difference.” Don’t look for that view to change either in JetBlue’s next decade.