cactusmike

You guys are great!

Here is something off our ALPA board, I don't know anything about the author so I will not make any editorial comments:

[from: http://iagblog.blogspot.com/]
jetBlue's Loss - Preliminary Thoughts

Perhaps we should move up our prediction of their demise. PEOPLExpress started selling/giving back airplanes and did a massive market re-vamp during mid to late 1985, right before they added a first class, and right before they were swallowed up.

OK, now here is the scary part. jetBlue should be able to find homes for up to 50 or so of the 75 A320s they have on order. The fact that it seems they cannot is a little frightening. The fact that they want to get rid of 5 of them and defer delivery on the rest is a sign of dire things ahead. Is this carrier a niche carrier quickly outgrowing its niche?

Will the "revenue enhancements" mean something else? I am thinking code-share. And some co-branding, maybe a change to the frequent flyer program. There are other ways to get money in this business.

Now there is some argument to focusing more on short-haul flying. That is the last bastion of relatively high-fares on the East Coast. That is disappearing rapidly too. Southwest and AirTran and a revitalized USAirways are not going to sit back and let jetBlue waltz in and steal market share.

The second half of that, however, is that once one leaves the East Coast, short-hauls are dominated by the LCCs. California? Texas? Upper Midwest? Southeast? Florida? All of that is dominated by Southwest or AirTran or someone else. jetBlue doesn't compete well against other LCCs. They only do well against legacy carriers. Putting too many eggs into the short-haul basket tells me they are going to run out of places really soon. And the other problem is that their alleged product advantage means less the shorter the flight is. Watching TV for 4 hours is one thing, but for only 90 minutes it doesn't create as much interest.

Now, the other half of the equation is that there are more conceivable homes for 100-seaters than there are for 155-seaters. The A320, as I have said before, is great for the high-capacity long hauls. Florida, California and the big markets jetBlue are afraid to come into (or realize that they cannot come into) because they have an inferior product (not what you are thinking - JFK vs. LGA). Being mostly an ERJ190 carrier could make many more markets more attractive. The focusing more on short-haul says they have to get rid of A320s and focus on accepting more 190s.

However, their CASM is going to go up. How do they lower their costs when they have low costs already? Reference short-haul flights; the argument is that $150 or so can only be spread so far. If you can get $89 for a 150-mile flight, but only $189 for a 1500-mile flight, you have a yield or fare-weighting problem as paired against absolute costs. Absolute costs on a shorter flight can be offset by the high yield. In around 2000/1 Southwest (with then about 500 NM) stage lengths, found a sweet spot in their model, where adding some of these longer flights could help increase utilization (to spread fixed costs), and also get to a lower part of the operating (variable) cost curve as the next generation aircraft came on line.

Net, with Southwest increasing length of haul slightly, costs could decrease faster than the revenues (i.e. lower yield as fare spread across more miles). Obviously a small adjustments as opposed to large ones. Average Southwest stage length is now just over 600 NM. This is certainly an art and not a science.

The difference is that in some of the smaller-density short-haul markets, the amount of discount over the prevailing fare that jetBlue can offer might not have to be as steep, versus what they have to do currently, to gain share in the transcons and in Florida. While a $109 one-way JFK-LGB is no big deal now, offering BOS-DTW for $179 would be a serious discount over the current unrestricted Northwest fare. Anyway, it means that jetBlue's average fare is going to go up because they are going to not going to discount as heavily in the new markets and maybe revenue-manage better in some of the others. Revamping fares makes it sound like they are going to raise fares. I bet that does not happen. I hope they are just going to do a better job adjusting their capacity.

There is more ripe fruit available in the short haul markets and there is more room for growth on that end of the market. The legacy carriers are going to continue to smack at them in the larger metros. Now that smacking will not necessarily mean damaging the legacy carrier more than they damage JetBlue. They have been smacked around in Long Beach by Southwest and AirTran and Delta smacked them around in Atlanta. JetBlue is suffering from battered airline syndrome. They have lost most of the recent battles and are not willing to take up any new ones.

Saying you have a plan and having a plan are two different things. Wall Street likes the sound of jetBlue realizing they have a problem to fix, but what happens when they don't get it done soon?

While jetBlue has been hailed as a low cost operator, I have to wonder how much of that was covered up with productivity and utilization. Without 13 hour utilization (which will certainly go down given short-haul flights and the fact that they are out of new transcons) utilization goes down and thus the CASM is spread over fewer seats. Are they getting their investors ready for the bad news early? And no one could believe they could maintain good utilization operating primarily out of JFK, given the delays and cancellations - that cuts your available aircraft time. This had to come. The question is how do they react and does this put a serious wrench into their plans?

I really wish they had blamed their slowing growth on an inability to get slots/gates/etc at JFK. That would have made it sound better.
Posted on April 25, 2006

Bigflya

Great post and analysis. From what I hear from buds at JB the A320's they are selling are their first aircraft and are coming up on some heavy/costly inspections. The bean counters may have figured it is better to get rid of the old and take in a few new for the rest of this year and save some $$. What JB said was right though, they have to up their fares. The industry has to up their fares with the current high fuel costs. Even at a $400-500 coast-to-coast RT ticket, that is considerably cheaper than driving, let alone the time savings. But with a family of four traveling, then every $50 increase is multiplied by four and that starts to hurt. The problem is leisure travel is just that, and folks use their discretionary income to travel. With higher energy costs cutting inot their budgets, a vacation or visit to grandma is the first thing to go. People find alternate vacation spots within driving distance instead. Every carrier out there cannot operate and be profitable with just the business traveler.

TonyC

Profound.






- The truth only hurts if it should -

Moose

[QUOTE=TonyC]Profound.


I guess if you took it in context that he was trying to explain a concept to maintenance workers, FAs, pilots, secretaries, and customer service agents, it was not too profound. Glad you were impressed though!

TonyC

Did I take it out of context?



When you consider that it takes X amount of fuel to taxi from Gate 34B to the runway for takeoff, and Y amount of gas to taxi from the runway to Gate 17 after landing, I wonder if the Total Fuel Expended per Nautical Mile Traveled really is less for the shorter haul flying. Granted, fuel consumption at heavier gross weights is greater per time, but the longer flight should absorb the taxi fuel over more miles. It would be interesting to see a graph of Total Fuel Used relative to Nautical Miles ground distance flown to see what the actual optimum leg length is for minimizing fuel costs.

Now, had they really crunched some numbers instead of grabbing for the obvious, then I would have been impressed.








- The truth only hurts if it should -

Blue Dude

The fuel CASM is going to be higher on short hauls than long hauls. But the problem is that the RASM drops off on long hauls faster than fuel CASM, so short hauls are a better deal given high fuel costs.

TonyC

Y'all understand, don't you, that I don't have seats on my shiny (well, it used to be shiny, anyway) jet, so my participation in this discussion is purely academic, and my initial remark was sparked by the "profound" statement that it takes more gas to fly longer legs.


Given your assertion that the real value must be determined by looking not only at fuel CASM (which introduces seats to the equation when I was looking simply at leg lengths) but also at RASM, a better answer to my question of optimum leg length would be to match a graph of fuel CASM and RASM. If fuel CASM drops off with leg length, but RASM drops off more quickly, where do those two intersect? How would the RASM graph be affected by a change in fare structure? What would be the comparative effects of single-class service versus two- or three-class service? How would it be affected by discount fares for round trips or off-peak periods of service? How would it be affected by fare premiums for refundable tickets or last-minute travellers? Indeed, there are many, many factors that affect RASM, and the graph would seem to be an elusive target to pin down.


So, with the fuel CASM curve and the bouncing RASM curve, it would seem that the optimum leg length for fuel cost economy would seem to involve much more than the simple statement that "shorter haul flying uses less fuel." Take that one step further and you can convincingly argue that parking the airplanes will reduce the fuel costs to zero. (Perhaps I should have just said that instead of "profound" in the first place. )


Hence, my facetious remark.






- The truth only hurts when it should -