JetBlue CEO Says They Dont Want to Become Spirit Airlines

JetBlue CEO Says They Dont Want to Become Spirit Airlines.

 

When JetBlue started operations 14 years ago, “we weren’t going to be the nextValueJet,” JetBlue CEO Dave Barger said today.

Speaking of no-frills carriers, JetBlue has no desire to mimic ultra-low cost Spirit Airlines or Allegiant, and network carriers have a different model, as well, Barger said.

JetBlue wants to occupy a “middle space,” Barger said, arguing that JetBlue is still in growth mode with its investments in Fort Lauderdale and San Juan as a bridge to Latin America, for instance. “We are still purchasing our aircraft, still acquiring our network,” Barger said.

“There is room for more than two models on the industry landscape and we are proving that,” Barger said during the company’s second quarter earnings call today.

A segment of the industry and the financial community seems to be falling in love with the ultra low cost airline model, based on the financial success of Spirit and Allegiant. And, there is even speculation that Spirit chairman William Franke has resigned his post so he can get involved in acquiring Frontier Airlines from Republic and turn Frontier into a no-frills carrier.

At one point during the question and answer session, a financial analyst seemed to be imploring JetBlue to take a different path, pointedly noting that Spirit and Allegiant get the most passenger complaints, but produce the highest return on investment capital in the industry.

Disappointing Results

Barger struck a somewhat defensive tone as JetBlue released its second quarter results today, which showed a drop in margins while much of the rest of the industry’s margins trended higher. JetBlue’s operating margins fell from 10.2% a year earlier to 7.6% in the second quarter of 2013, and net income declined 30.7% to $36 million.

Officials pinned the disappointing second quarter on increased maintenance costs, an arbitration with pilots, the sluggish economy, the timing of the Easter and Passover holidays, and even the lingering impact of hurricane Sandy, which occurred in October 2012.

“People are still moving back into their houses in the New York area,” Barger said.

In a bow to the middle ground that JetBlue is staking out, JetBlue chief commercial officer Robin Hayes said the airline has no intent of changing its first checked bag for free policy because “the first bag is very material to how customers book.”

“In essence, we are capturing [a bag fee] it in the fare,” Hayes said.

But, JetBlue increased change fees several months ago to $150, up from $100, when carried out within 60 days before the flight because people don’t usually take change fees into account when purchasing a flight, Hayes said.

JetBlue forecasts a 15% increase in ancillary revenue in 2013.

Two-Way Codeshare with South African Airways and Emirates

In other news, JetBlue announced a two-way codeshare with South African Airways, and indicated that JetBlue’s proposed bilateral codeshare with Emirates is under review by the DOT, with approval expected in the “near term.”

Hayes said the ramp up of implementing the Emirates codeshare would take place “pretty quickly” once it gets approval.

JetBlue also completed in June its first test flight with satellite-based Wi-Fi and is awaiting FAA approval. Fleetwide installation would proceed “shortly thereafter,” Barger said.

Officials said they can’t wait for Wi-Fi to be installed fleetwide because JetBlue is missing out on revenue. It’s high on the wish list of business travelers on long-haul flights.

Barger said JetBlue is confident the airline can turn around its margin degradation, and a new contract with General Electric to service JetBlue’s E190 engines will help “smooth out” maintenance expense.

Thriving in Aviation without Global Alliances

Courtesy: Brett Snyder*

Over the last decade, more and more airlines have drifted into one of the three global alliances: Star Alliance,oneworld, and SkyTeam. You might think that the alliances have become crucial to airline survival. In fact, though, a few airlines have successfully bucked the alliance trend and instead thrived by working across alliances with multiple partners.

Only a handful of airlines can make this type of strategy work, and it requires a specific type of airline. But before discussing that, it’s helpful to know why airlines join alliances in the first place.

How alliances work

There’s no question that it’s expensive to join an alliance. Alliances have a base level of standards that are required for any airline to join, and there is usually some expensive tech work to connect all the dots. For the airlines that have joined alliances (and stayed there), the costs end up being worth the jump in revenue.

When an airline joins an alliance, the frequent fliers of partner airlines can instantly earn miles when flying on the new member airline. Not only that, but they can earn elite status qualifying miles, and that’s a big deal for building loyalty. The inevitable codeshares that follow help to flow passengers between all the networks in the airline system and that results in a big bump in terms of traffic.

Star Alliance member US Airways (LCC), for example, has said that its European operation wouldn’t be able to be nearly as large as it is without its alliance partners LufthansaSwissAustrian, etc., feeding passengers into the US Airways network.

How some airlines thrive without them

For the flip side, look at Hawaiian Air, for example. Nearly every U.S. airline flies to Hawai’i, but none of them fly between the islands. Would it make sense for Hawaiian to partner with a single alliance in order to increase connections? No. Hawaiian can take traffic from airlines in all the alliances (and non-alliance airlines) and fill its inter-island flights.

Being in an alliance wouldn’t increase traffic. It’s already getting the traffic from all the airlines, so an alliance would only increase costs. Closer cooperation wouldn’t really spark any additional passengers because there is no real competition for those partnerships in the islands right now. So Hawaiian can sit where it is and enjoy its place.

Another airline with this type of arrangement is Alaska Airlines(ALK). In the Pacific Northwest, Alaska has the hearts and minds of nearly every local resident. It’s a very strong brand with a tremendously popular frequent flier program. And because of that, it has a lot of airlines knocking at its door.

In fact, it has close cooperation with archrivals Delta (DAL) andAmerican (AMR). Both airlines use Alaska to extend their reach into the Pacific Northwest and they also use Alaska for Mexico flying. Delta has built international operations in Seattle with the expectation that it can use Alaska to fill those flights. Likewise, American counts on Alaska to help fill flights in LA. Alaska’s ability to feed passengers into major airlines up and down the west coast is tremendous.

So would Alaska benefit from joining an alliance? Not much. It already has reciprocal frequent flier agreements (including elite qualifying miles) with those airlines, and it has one-off partnerships with other airlines that it can help feed in its home base. The airline also partners with Air FranceAir PacificBritish AirwaysCathay PacificIcelandairKLMKoreanLAN, and Qantas. Its reach extends beyond just one alliance.

JetBlue’s international connections

Another airline that has decided to follow this strategy is JetBlue. Sitting on its perch in New York, JetBlue realized that it could partner with all sorts of airlines that fly into JFK in order to help provide connecting options throughout the U.S. It’s most recent partners are Virgin Atlantic and LAN but it also works with Aer Lingus, American, EmiratesLufthansaSouth African, and more are on the way.

South African is a great example of why this works. As a member of the Star Alliance, it could easily send connections via its Star Alliance partners, but there aren’t many connecting options at JFK. Sure, South African can connect people over Washington/Dulles on to United, but having this partner at JFK also helps it fill its New York flights better. It also gives JetBlue loyalists an airline preference when flying to South Africa. That can only help South African.

So why couldn’t JetBlue, Alaska, or Hawaiian join an alliance but then still have these one-off partnerships like South African? They could, but the point is that they don’t need to. As mentioned, joining an alliance is very expensive, and if these airlines can make it work without joining an alliance, then that’s a better way to go. Not many airlines can pull it off, but those with very strong niches in desirable places alongside strong brands can and do make it work.

*-http://www.bnet.com/blog/airline-business/how-some-airlines-thrive-without-global-alliances/3513