JetBlue ponders ways to gently—or with a bit more force—push the boundaries of its model
As you enter 's old brick office building in between a New York police station and a run-down train station in a not-so-upscale part of Queens, it is difficult to imagine the inside could offer much more than any modern office. But here is where the experience belies the expectation. The office floors resemble an airport, with “runways” (corridors) and “galleys” (break areas). Signage and design look like they could be in use today by Pan Am if New York's former hometown airline was still around.
The facility is not called the company's headquarters, it is known as the “Long Island City Support Center” in the sense that administration is supposed to support those in the field. And there are no “employees” here; “crewmembers” populate the facility, which is a bit like JetBlue itself. In many ways the carrier looks like any other airline, but in its short history it has been extraordinarily innovative, and its influence on the airline industry is huge.
Carriers worldwide are trying to emulate parts of its business model, therefore JetBlue has helped change the way both legacy and low-fare airlines define themselves in the U.S., Europe and Asia. Look at Vueling,, or . JetBlue invented the hybrid concept. And apart from trying to be “part of the fabric of New York City,” as Marketing Director Marty St. George puts it, even the headquarters building resembles the hybrid approach—a mix of old and new.
However an issue could arise, even in the very early stages. JetBlue can continue to grow within the boundaries of its existing business model, gently expanding them at times. But in spite of all these small steps, it may well be that JetBlue is tempted to take one giant step and, yet again, carve out another niche. That step could be to enter the long-haul market using widebody aircraft. JetBlue is not there yet and management might decide not to do it in the end. But, “We have talked about it,” St. George says.
It is important to keep these fundamentals in mind when it comes to understanding corporate culture: JetBlue, founded in 1999, is by far the youngest of the big U.S. airlines. Its first flight occurred Feb. 11, 2000 (from John F.to Fort Lauderdale-Hollywood (Fla.) International). It has been among the most innovative and, unlike the first low-cost role model, Southwest, not risk-averse at all. In fact, JetBlue chose to ignore the low-cost-carrier rulebook many times. It introduced live TV onboard and offered an at least 34-in.-seat pitch for every passenger, added smaller aircraft (the ) and entered partnerships.
Of course, JetBlue has also been in crisis mode more than once, including the traumatic departure of founder David Neeleman a few months after the infamous operational meltdown of February 2007, when fully booked aircraft were stranded on the tarmac for up to 11 hr. in the midst of a New York-region snowstorm. And there have been periods of what now must be considered excessive growth that the airline paid for dearly in the form of negative free cash flow and low investor confidence. The likely exit of its biggest investor,, in the coming years—coupled with 190 reliability issues—round out some of the airline's woes.
Given all the above, President/CEO Dave Barger has a surprising message. JetBlue management “isn't about thinking outside the box,” he says. “We happily settle for less glamour.” Since the 2007 shake-up, Neeleman leaving after a series of internal clashes and the airline struggling to regain its reputation, JetBlue has changed gears. Gone are the days of hyper growth. Instead, Barger has recalibrated the modus operandi to profitable growth and return on invested capital. Once highly leveraged, “we have had considerable success in improving our balance sheet.”
This is being achieved by voluntarily forgoing the lowest-cost options. Barger argues that “people will pay a premium in this geographical region.” JetBlue is not concerned that it will be able to survive without participating in the current consolidation trend. “We are only five percent of the domestic landscape, but you can still be a very successful airline,” Barger says. JetBlue aims to become more relevant by paying close attention to what customers seek. In Boston it serves 65% of the markets people want to reach, and daily departures are scheduled to rise to 150 from 120 within the next three years.
Barger's goal is to thread the needle by positioning JetBlue between super discounters and large legacy carriers. He calls it being a “tweener.” But he acknowledges that some on Wall Street are skeptical. “Investors don't like tweeners.” To be one means putting 150 seats on anthat could hold 180, providing passengers with more legroom, all-leather seats, and live television feeds (broadband Wi-Fi is slated for this year). His target is a leisure customer who is willing to pay a bit more for extra comfort. “People will pay more for a Starbucks coffee,” he says.
JetBlue not only has been deleveraging the balance sheet, it has lately tackled strategic risk. Business markets in the northern U.S. are potentially more lucrative than leisure routes, however they take around two years to mature. By pushing for growth in leisure flying, too, “we are really using the markets down south to fund the markets up north.” In an earlier stage of JetBlue's development most of its markets were dictated by seasonality; because of rapid growth a large part of the network was still unprofitable and there were no partners. Now JetBlue is using connecting traffic from partner carriers to fill off-peak capacity.
In another tweak to the existing model, JetBlue plans to provide premium cabins in its A321s. The aircraft will be used on transcontinental services, where it competes with higher-quality cabins provided by other airlines. The new product will become available next spring to make the long-duration domestic services more attractive. The cabin could also be installed in some of the airline's A320s, Barger said recently. On the other hand, his game plan includes avoiding routes where there is fierce competition. JetBlue's cross-country flights to the Los Angeles basin do not land at Los Angeles International (LAX) but at Long Beach Airport, which is served by an art deco terminal built in 1941. It's not far from Los Angeles—and it is slot-protected, limiting competition. “We don't think anybody is profitable [at LAX] except for Southwest,” Barger says.
In spite of the CEO's concerns, most investors seem to like his approach. “JetBlue clearly understands its strengths and weaknesses,” Michael Derchin of CRT Capital writes in a note to clients. “It does not want to be all things to all people. It is not going after the high-end global business traveler . . . nor the ultra-price-sensitive leisure customer.” He also notes that JetBlue manages to further close the yield gap between it and legacy carriers as it focuses its growth on key locations such as New York, Boston, the Caribbean, parts of Florida and Los Angeles.
Scott Laurence, vice president of network planning, is responsible for network, partnership and fleet planning. Yet his office is so small there is barely enough room for a guest chair. And the walls are so thin that when Laurence is on the phone chances are his neighbors will listen in, whether they want to or not. But he is not perturbed. “We are very interactive, we all get along very well, we tend to punch above our weight and we act as owners.” The executive worked for legacy airlines before he sought out JetBlue. In the job interview, Barger asked him why he wanted to join. His answer: “I want to make a difference.” In the much larger organizations, that was difficult. But at JetBlue, Laurence quickly sensed that “this is what I was born to do.” There are many like Laurence in the “Support Center.”
When Barger boarded a flight in New York on a bitter winter morning, he snapped a photo out the window of a groundcrew braving the weather, which he sent out on his Twitter feed. Barger believes valuing and motivating employees is important for JetBlue. “Customer service is off the charts,” he asserts. That the employees are not unionized is a measure of his success in building that culture. “I'm not bagging on unions,” he said later that morning in an address to the Harvard Business School's Aerospace & Aviation Club in Boston. “But we just think you do not have to pay somebody to talk.” As JetBlue continues to grow, one of the biggest challenges will be “scaling the culture of the company.” But the truth is also that very few airlines have as strong a corporate culture, with the exception of Southwest.
Having a powerful culture can leave an airline in a somewhat isolated position, but the next step in JetBlue's development involves opening up to others. The airline has long worked with different carriers, but mainly in the sense of putting the other airline's code on its own flights. Allowing JetBlue's code on someone else's flight means relinquishing some control. That is likely to happen next. “We are working with carriers with whom the brands align,” says Laurence. Emirates or Aer Lingus are among them, but the most likely carrier for two-way code-sharing partnership is South African Airways (SAA). The carrier is, in many ways, the exact opposite of JetBlue: it is government-owned and controlled, and incurs huge losses, but because the airline traditionally has a big share of very long routes owing to geography, it pays special attention to comfortable cabins.
In addition to SAA, JetBlue currently has one-way code-shares with Aer Lingus, Emirates,, and Lufthansa. The Aer Lingus deal was expanded in April to include another 33 destinations.
Another possibility is a broader partnership with. However, the planned /American merger seems to have put that plan on the back burner for the time being. Laurence notes nonetheless that “the fundamental reason why we would partner with American has not changed.”
American could indirectly provide JetBlue with some nice growth opportunities, too, if it (or US Airways) was forced to give up slots at Reagan Washington National Airport. “We absolutely hope for slots at National,” says St. George.
JetBlue's management has been discussing joining one of the three alliances, weighing the pros and cons in trying to figure out whether the benefits would be worth the investment. Two-way code-sharing may be a step in between or it could be as far as the airline is prepared to go for a long time. “Everything is on the table, and that includes alliances longer term,” says Laurence. JetBlue has been working with members of all three—Star, Skyteam and Oneworld. In fact, Lufthansa's 2007 investment in JetBlue was based on the assumption that it would need feed in New York. That need has diminished significantly as a result of the United-Continental merger that gave the Star alliance a hub at Newark (N.J.) Liberty International Airport.
Independent of future partnerships, the airline is investing billions of dollars in its fleet. The company ordered 40 A320NEOs. It still has 14 more A320s coming from an earlier order and is moving into operating larger aircraft through its commitment for 30 A321s, the first of which is due to arrive in October. JetBlue's large A320NEO order brings two major benefits. “The NEO will totally eliminate any transcontinental restrictions,” says Laurence. Today, JetBlue still needs fuel stops on around 2% of its transcontinental flights because of the current A320's range limitations. The range benefits of the NEO will be important on some of JetBlue's longest existing and new routes such as Fort Lauderdale-Lima and Boston-San Francisco. The NEO is also opening up opportunities for JetBlue to go “a bit deeper into Latin America.”
In ordering the A321, the carrier is also taking the next step toward operating larger aircraft. But the largest Airbus narrowbody is only about a 20% capacity step up from the 156-seat A320s. And it does not allow true long-haul flying. “At some point, we could operate widebody aircraft,” says Laurence. “There is no short-term plan, but we always evaluate it.” He even says “widebodies could make sense in the current network.”
Becoming a long-haul operator would be the next natural step once its short- and medium-haul networks are mature. JetBlue is already flying to previously unforeseen destinations. “Nobody would have predicted that we would be in Colombia or in Anchorage,” says St. George. “The network is dramatically different [from] the original plans in 1999.” So chances are it will continue to broaden its blueprint. The airline has already identified Latin America as one of its main growth targets, but narrowbody technology limits that. Widebodies don't, and the new generation of aircraft, particularly theas the smallest long-haul aircraft, would seem like a good fit. JetBlue is not discussing aircraft choices at this stage, but one thing is clear: “If we go long-haul, it would probably be Latin America first,” says St. George.
Because of range issues and JetBlue's approach to opening up markets, fleet choice has always been a very strategic item. The airline was the first in its segment to trade down in terms of aircraft size and introduce a 100-seater—the Embraer 190. Its experience has been mixed: Commercially, the fleet has been valuable in many aspects, but the technical side is still difficult. Barger has a clear opinion by now: “We should never have been the worldwide launch customer of a new airplane. We weren't big enough.” He is still disappointed because of the higher-than-expected maintenance cost of the aircraft. He also expressed unhappiness with the Brazilian aircraft'sengine. “We're not pleased with what we're seeing on the Embraer [with] the GE motor.”
JetBlue operates 54 100-seat Embraer 190s. Barger, who stretched out deliveries of the Brazilian jets after becoming CEO in 2007, stopped short of saying he regretted ordering the aircraft. He notes that they are optimally sized for JetBlue's expansion in Boston and other key growth markets. He says the airline has been able to drive down maintenance costs, but not enough. “We're seeing our later 40 [190s] performing better than our first 20.”
JetBlue ordered 100 Embraer 190s in 2003 and took its first delivery in 2005. The airline struggled with early maintenance challenges and delivery delays, hiccups that have been acknowledged by the manufacturer. “Back in 2006-07 we were still struggling on the [E-Jet] production ramp-up, dispatch reliability of the aircraft and we were late on deliveries,” Embraer CEO Fred Curado told Aviation Week in 2010. “JetBlue was the most visible, but other customers also had problems.”
On the other hand, the E-190s have been efficient tools to develop the network and build up thinner markets. “Boston would not have been possible with a 150-seater,” says Laurence. JetBlue tends to dispatch them on high-frequency business markets, but it also is using them on intra-regional flying in the Caribbean. “The sweet spot tends to be 300-600 nautical miles.”
The Embraer issues are an example of how the airline is willing to take risks when it sees a merit. This approach does not always pay off as expected, and a lot of work is required to fix it. Some of that work is likely to take place in one of the conference rooms in Long Island City. “Gates” they are called—it is JetBlue after all.
—With Joseph C. Anselmo in Boston
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