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JETBLUE AIRWAYS ENTERS US LOW-FARES MARKET

"Who would want to compete in the already busy US East Coast market?", is an oft repeated question amongst the US travel and airline industry. It was a reaction to the 11 February start of services by the newest low-fare airline to hit the US market, New York JFK-based JetBlue.

In the last four years low-fare operators Delta Express and MetroJet have both moved in to the Florida market, targeting the vacation holiday centres of Florida in the process, as well as farther afield. Southwest is the low-fare US carrier by which everything else is measured, now with a 30 year pedigree, huge in terms of operations and consistently profitable. History is also littered with fierce competition and failures in the US low-fare markets.

JetBlue initially targetted the most popular and easily identifiable market in the US, Florida. Not through traditional 'gateways' such as Miami and Orlando but through Fort Lauderdale/Hollywood International and Tampa.

JetBlue's other unusual twist has been to use New York's JFK International airport as its base and operational centre in the north-east. Many other airline newcomers have steered clear of JFK because of its poor reputation and poor customer reaction to using this airport. La Guardia, Newark and even Islip have been used by rivals, but not JFK. After receiving formal US authorisation in September 1999, JetBlue was awarded 75 initial take-off and landing slots at JFK.

So why should JetBlue be the new start up airline that everyone's watching ? It may be due to the men behind the airline. Chief Executive Officer of JetBlue, David Neeleman, still only aged 35 has an impressive pedigree in the North American airline industry. He started the low-fare airline Morris Air based at Salt Lake City at the age of 24.. More recently he has been instrumental in starting WestJet, a Calgary, Canada-based low-fare airline that started operations in February 1996.

The other big name behind JetBlue is New York-based businessman and financier George Soros. When Neeleman had decided that the hub of his new paper airline - initially known as New Air before the adoption of the name JetBlue - was to be New York, it may have been partly due to market studies which showed that there were a potential 2.5 million domestic passengers living within 10 miles of JFK. The poor service level that many passengers experience at JFK was legendary. Many supporters of Neeleman were keen to do anything they could to improve the lot of the New Yorker looking for low fares but also looking for service. Even the city's mayor, Rudolph Giuliani was in on the act, providing considerable support for the new venture.

JetBlue's fleet policy was also dynamic and different. Newer low-fare airlines such as Delta Express and MetroJet have hived off older Boeing 737-200's from their main-line fleets to provide aircraft for their new start-up units. The new aircraft they had on order were slotted in to their traditional schedules, leaving the low-fare units to deal with more costly to operate and older aircraft. JetBlue's commitment to new aircraft saw huge orders placed with Airbus Industrie for 32 A320-200's and options for a further 50. The planned delivery was 10 A320's a year in 2000, 2001 and 2002. The initial A320 aircraft have been leased from both SALE and ILFC.

Generally the low-fare market is used by vacation and leisure travellers. The most popular destination for these from New York is Florida, but the two initial destinations chosen by Neeleman and JetBlue weren't immediately obvious. JetBlue had a list of 42 possible destinations that it could reasonable serve from JFK. Lots of these were in Florida but many weren't. In the cut-throat airports and airline industry world of the US many cities and their airport authorities came hat in hand to Neeleman as soon as they knew their airport was on his 'list'! Another market that JetBlue targetted early in its history has been US coast-to-coast. JFK the originating point on the east coast but none of the traditional west-coast destinations such as LAX, San Francisco or San Diego. For the Los Angeles conurbation JetBlue chose Ontario International about 30 miles east of LAX. In the Bay area of San Francisco it was Oakland that was served. Both these coast-to-coast flights are flown over-night, helping increase the fleet utilization but also being practical times of travel for the four hour flights with a three hour time difference. A flight can leave JFK at 23.00 (East Coast time) and arrive in Oakland at midnight (Western/Pacific time). It then leaves at 01.00 to arrive in JFK at 08.00. Good timings for some travelers, particularly those wanting the most economic fares. The Los Angeles to New York market is currently the most heavily traveled in the continental US.

JetBlue's arrival in one of the hottest markets in the US, flying from JFK to Ft. Lauderdale has provided further competition in a market that is already highly competitive. The New York-Ft.Lauderdale route is now the third most heavily traveled in the US (in 1999).

By 1998 Ft.Lauderdale had overtaken Miami as the destination that domestic travelers prefer to use for South Florida. Although Miami had a total of 33 million passengers in 1999, more than half of these were in transit, many using American Airline's growing hub. However, only 9.4 million were actually leaving or departing Miami for domestic destinations. In comparison Ft. Lauderdale clocked up a figure of 10.4 million last year. This figure at Ft. Lauderdale is now growing still further thanks to JetBlue, with at least 2 million people a year are now flying between New York and Ft. Lauderdale on 23 daily non-stop flights. This is from any one of the three main New York airport's, JFK, Newark and LaGuardia. However, this doesn't include Southwest Airlines, the champion of the low-fare airline, who fly from Islip on Long Island to Ft. Lauderdale. During the winter of 1999/2000 before JetBlue's February start-up, an average 6,546 people were flying daily between New York and Ft. Lauderdale. In contrast, on the New York to Washington DC route, where fares are often more, only 5,975 people per day were flying in the same period.

To complete JetBlue's start-up route structure they also chose Tampa, on the Florida Gulf coast, as a destination from JFK and using JFK as a mini-hub, Buffalo as well, feeding traffic from this Great Lakes industrial town to Florida via their JFK hub. The slots issue at JFK apparently went very smoothly.

The magnitude and pedigree of the airline's backers paid off when it came to their Airbus fleet, including the amount of investment they were able to put up front. With very little effort Neelemen was able to secure $130 million in capital. This included $40 million from Soros, $30 million from Weston Presidio Capital Fund and $20 million from Chase Capital. As a result in a rare luxury for a new, start-up airline Neelemen was able to order new A320's for JetBlue.

With tremendous fare deals - albeit introductory offers - it was hardly surprising that initial load factors were good. An American Airlines round-trip ticket from LaGuardia to Ft. Lauderdale at the same time cost around $210. JetBlue's introductory fares between JFK and Buffalo were between $49 and $99 one way, more than 60 per cent lower than those offered on the route by other airlines prior to JetBlue. It was the same on the JFK to Tampa route, where the cheapest JetBlue one-way fare was $77. On the primary JFK-Ft.Lauderdale route, JetBlue's one way introductory fare was $79.

David Neeleman knows that fares set at too low a level are a recipe for disaster, but also knows that a customer base has to be established. He also accepts from his research that whilst everyone wants to fly to Florida, the competition means that there are no huge fortunes to be made. As a result JetBlue has targetted service levels, hoping to attract customers and fly with load factors as close to 100 per cent as possible. Initial figures report load-factors of around 80 per cent on the Buffalo and Ft.Lauderdale routes

In any new operation, particularly low-fare airlines, new market sectors are generated and some passengers switch allegiance. The new market are those people who wouldn't normally have made the flight or alternatively might have traveled by bus, train or driven by automobile. The existing passengers, switching to JetBlue are a concern to the other airlines. Most concerned in the Florida market is Delta Air Lines. Delta has been the market leader in much of the north-east to Florida market and certainly at Ft.Lauderdale where they had 27 per cent of the passengers in 1999. Nearest rival to Delta at Ft.Lauderdale is US Airways, both mainline operation and their low-fare MetroJet unit, but they flew only about 50% of the number of passengers that Delta were flying.

For the general public the choice is therefore mind-boggling. A JetBlue passenger certainly gets the treatment on the airline's 162 seat, single-class A320's with leather upholstery, and for an additional $5 the chance to watch one of the 22 live TV channels on the seat back VDU unit.

The next new route that JetBlue added, when their fourth A320 was delivered in June 2000, was JFK to Orlando, with an onward service to Burlington starting this autumn. Other cities that JetBlue intend to add to their network in line with further A320 deliveries are initially Rochester and Syracuse. The list of other cities they hope to serve is extensive.

Comparisons with the US's other hugely successful low-fare airline, Southwest will inevitably be made. JetBlue has established its own agenda and business plan with simplified fares, assigned seats and generally treat their passengers as 'guests' on their aircraft. When the euphoria of the first year has died and the hard facts of ensuring there is black ink on the balance sheet, then there will inevitably be many big obstacles to deal with. However, during summer 2000 JetBlue has bought a fresh new, blue-skies approach to US low-fare air travel.

From page 26 of FLUG REVUE 11/2000