View Single Post
Old 02-07-2006, 05:46 PM   #1  
mike734
New boss = Old boss
 
mike734's Avatar
 
Joined APC: Mar 2005
Position: Ca B737
Posts: 2,739
Default A view of Jet Blue

The following is an article forwarded to me from a friend. We don't know who wrote it. It makes interesting reading however.


Several years ago, an innovative airline executive decided to try out his long thought-out ideas on designing an airline with an emphasis on its company culture. The idea was to create a pleasant environment to work, which would in turn keep employees happier without having to pay them more, and fit well within the low cost business model put together. An underutilized New York airport was chosen, and the new low fare carrier was born. Quickly touted as the new darling of the industry, this airline performed very well: both operationally and financially. Growth was the order of the day, and aircraft couldn't arrive quickly enough. Accolades were plenty from both customers and business magazines, and the CEO was considered to be the future of the industry with an uncanny insight to grow his company as quickly as he had. Profits were consistent, customer satisfaction was high, and growth was explosive.

Peoples Express failed within a year of becoming the fifth largest carrier in the US.

The similarities between jetBlue and Peoples Express are too glaring to dismiss, but there's one factor that stands out above the rest: explosive growth. This early blessing for Peoples Express turned quickly into their strongest curse, growth. The idea: by maintaining constant growth, new, lower paid employees can be brought in constantly, aircraft warranties can be taken advantage of, and cheap financing can be easily found.

Growth brings its own benefits, and its true that by increasing growth, the cost benefits increase as well, but it also puts a heavier burden on marketing to find markets from which to pull more revenue. Costs can consistently be kept low with growth, but eventually the revenues, diluted by their own capacity as well as competition, will not be able to keep up.

jetBlue continues to increase ASM's (Available Seat Miles) while Revenue Passenger Miles continues to lag


This is the problem jetBlue finds itself in today. 2005 was the first year jetBlue's increase in capacity exceeded its increase in passengers. The airline is showing the first signs of not being able to keep itself up with its recent growth, and what's worse, with 100 new Embraer 190's and another 100 A320's on order, jetBlue plans to further increase its capacity by over 100% within two years. The blame can be put on jetBlue’s marketing department for not keeping up with the increase in capacity, but there comes a point when its impossible regardless of how good your marketing department is. Sometimes you’re just growing too fast, and jetBlue has aready reached that point, with 200 aircraft to go.

Is the 190 to blame? I don’t think the EMB-190 itself is the problem. Much like how Independence’s failure was blamed on CRJ’s, I think jetBlue’s issues are going to be blamed on the new Embraers, but the problem isn’t the airframe, it’s the number of airframes they’re getting. Doubling your fleet within two years is an enormous gamble, but doing so with an aircraft you are the launch customer of is almost reckless. I’m entirely convinced that jetBlue could be very successful flying 100 EMB-190’s on point-to-point markets across the US, but I’m in no way convinced it can happen within a year and a half. It all boils down to marketing. Can they find enough passengers to pay enough for a ticket to keep this airline profitable? I just don’t see it happening. Remember, that at the same time the 100 EMB-190’s are coming on line, there is still an order for 100 A320’s being filled. In a U.S. domestic airline industry routinely being hammered for over capacity, there aren’t nearly enough new markets to fill this kind of aircraft order. So are the executives at jetBlue really off their rocker, or do they have some sort of plan? They understand there aren’t enough markets for the new aircraft they’re bringing on. It only takes a trip to the airport to understand that. What they seem to be counting on is being able to take customers away from other airlines by the masses. The reasoning? David Neeleman honestly thinks jetBlue is the better airline and that it deserves more passengers and higher fares. To some extent, he may be correct, yet perhaps David needs to meet with Don Burr about the better New York airline vanishing.

A downward trending yield and an upward trending CASM spell bad news for an expanding airline

jetBlue began operations in 2000 and is just over five years old. This is significant for several reasons: 1. the most senior jetBlue employee is being paid at the 5-year pay scale, 2. aircraft warranties are beginning to expire, and 3. competition has had enough time to respond.

First, the employees may all be paid at the bottom 5 years of the pay scale, but each year this increases. Each year jetBlue can guarantee their employee costs will rise. Even at the lower five years, jetBlue’s rates are extremely low. They’ve been able to keep employees happy without paying them top of the line rates because of their philosophy of offering stock options. The rapid rise over the past five years has more than made up for any shortfall in the employees pay, but what happens now that the stock price is falling? We’re starting to see jetBlue’s performance and customer satisfaction plummet. On-time arrivals have been the worst in the industry for the last two months with 75% and 67% of all jetBlue flights arriving on time in November and December respectively.

Mishandled bags increased 37% as well, and with jetBlue connecting fewer than 4% of its passengers, there is no excuse. Is the always happy jetBlue culture starting to take a hit? After having spoken to several employees, it is apparent that their confidence in jetBlue’s management team is beginning to fail. Unfortunately for jetBlue, the failure in confidence is coming much faster than at other airlines because each employees pay is based on the stock price of the company. Once again, we see a possible accelerant to jetBlue’s decline.

There’s been several rumors over the past several years that jetBlue has been able to defer its aircraft payments to one mass payment it won’t be able to make in the future. I don’t buy it, for several reasons, but one expense that jetBlue is going to be forced to deal with is aircraft maintenance. With the A320’s coming of Airbus’ warranty, maintenance is now a financial responsibility of jetBlue, and their efforts to outsource to South American heavy maintenance facilities may come back to haunt them. The recent jetBlue A320 landing at LAX with the nose wheel cocked turned out to be a media blessing for them, but what few people realize is that the A320 may have had up to seven other incidents just like this. If there is another issue with a jetBlue aircraft, regardless of the outcome, people are going to start looking at their choice of maintenance.

The result of jetBlue's A320 cocked nosegear landing
Not everyone has forgotten about ValueJet’s maintenance nightmare in 1996, and a quick reminder of how violently the public responded should be enough to scare jetBlue into distancing itself from anything resembling shoddy maintenance, but so far they haven’t. With costs as low as they are right now, and jetBlue still unable to make money, its easy to understand why jetBlue is outsourcing their maintenance; they can’t afford not to. This is the first sign that jetBlue has backed itself into a financial corner, and I predict over the next few years, we’ll see many more.

When jetBlue started, they did have an outstanding product that set them apart from the competition. The DirectTV in the aircraft was an outstanding selling point, and one that was not matched by any competitors. Now, more and more competitors are beginning to put entertainment systems in every seat. jetBlue’s product is quickly becoming a commodity like the rest of the industry, and the “wow” factor to fly on jetBlue is fading. Yields are down, due partially to jetBlue’s own expansion, but also due to competition, and Neeleman is finding that he can no longer raise prices just because its jetBlue. Their answer to progressing competition was the 190, which is an innovative and potentially successful strategy, but not with as many as they’re receiving.

jetBlue has always required a higher load factor to break even due to lower fares, but with costs increasing and performance decreasing, jetBlue's low fares may be a thing of the past


The success of jetBlue has been founded on growth. Keep costs low by hiring new employees, acquiring new airplanes on bulk discounted orders, and keeping the bulk of the fleet on maintenance warranties. The success of an airline should be how profitable it is without growing. jetBlue will not be able to grow indefinitely. Until they show they can deal with the actual costs of its operation without diluting it with such constant fast growth, I’ll remain a skeptic of jetBlue Airways, and it seems these days there are an increasing number of skeptics.

Last edited by mike734; 02-08-2006 at 08:57 AM. Reason: Combined Pt 1 & 2 (I can do after all! :)
mike734 is offline   Reply With Quote