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.

Airline Fleet Planning

Along with choosing the routes and destinations it will serve, each airline must decide which aircraft it will operate and how many it needs. Whether the airline is a low-cost carrier (LCC) operating a single model fleet; a large network carrier operating several different aircraft types; or a large group with diverse operators, fleet planning is a crucial process.

Fleet planning has four core components: airlines must decide which aircraft suit the network; when they are needed; how many are required; and whether they are needed for replacement or for growth.

Almost universally, LCCs operate a fleet consisting of one model or family of aircraft, often the A320 or 737. The choice delivers operational simplicity and economies of scale vital to budget airlines. “As a new airline that launched in 2007, our fleet is now [comprised of a] single-type – all Airbus A320-family aircraft,” a Virgin America spokesperson told AFM, citing a number of sources. “We’ve been very pleased with the low operating costs, cabin comfort and carbon-efficient design of our all-new Airbus fleet and believe it will continue to fuel our growth and success in the North American market.

Our single fleet type is a core component of our business model. It reduces costs, streamlines maintenance and otherwise fits within our low-cost carrier business model. Every one of our pilots and in-flight team mates are trained to fly every aircraft in our fleet. There are tremendous benefits to keeping to a single fleet type, from hiring and training team mates to operations, maintenance, spare parts and managing the guest experience. It also allows us to deliver a consistent onboard experience – with all of our Airbus A320-family aircraft [A319s and A320s] undergoing Virgin America’s signature modifications [such as] mood lighting, custom seating, touch-screen entertainment platforms.”

But while LCCs usually start out operating a single model fleet, some older budget carriers are moving away from this as a result of mergers or competition with traditional network carriers on longer-haul routes.

Airlines’ perspective

Few other airlines take fleet planning as seriously as the Lufthansa Group. Lufthansa has been known for decades

for its technical standards and fleet organisation – a sizeable feat as it consists of 11 airline subsidiaries (not including BMI) and owns sizeable shareholdings in another three carriers.

Lufthansa had to decide whether to conduct its fleet planning at group level, or by individual airline. It chose to combine input from both levels, says Nico Buchholz, EVP of fleet for Lufthansa Group. “The fleet planning is done centrally, at group level, but the planning at the requirement level comes from the [individual] airline.” He explains: “The basic requirement comes from the airline because it is closer to its customer requirement and to its own market.”

For example, its subsidiary, Swiss International Air Lines, was operating A330-200s ordered before it became part of Lufthansa Group. However, it was decided that the best way to leverage SWISS’ membership to the group was to switch to the larger A330-300. The A330-300 was suitable for coping with the carrier’s traffic growth on transatlantic routes and Lufthansa and subsidiary, Brussels Airlines, already operated the aircraft.

International Airlines Group (IAG), parent of British Airways and Iberia and fellow airline group, says the ability to integrate its existing fleet is crucial but it notes a variety of other important factors. These include network fit, fuel efficiency, improved environmental performance and value for money.

According to Virgin America, a “young and growing airline,” the carrier must balance aircraft efficiency, fleet flexibility and simplicity, up-front and operating costs.

Acquisition cost is important to Lufthansa, “because it happens up-front,” says Buchholz. But he adds that operating costs are of more concern because they are “for the rest of the asset’s life.” As such, the onus will be on such things as fuel burn, carbon and noise emissions.

Lufthansa believes an environmental view of aircraft performance is increasingly important to economics – particularly in Europe, which is sensitive to carbon emissions and noise. An aircraft’s environmental performance not only affects emissions surcharges, but also aircraft utilisation. Many airports have noise curfews for aircraft that do not meet specified noise performance levels and these curfews can hinder operations.

Another factor in Lufthansa’s fleet planning is maintenance-related costs. Direct maintenance costs are clearly important, but so too is downtime during shop visits. “We want an aircraft [to offer] longer intervals between shop visits. The less unscheduled maintenance, the better,” says Buchholz. Although Lufthansa gains savings by performing most maintenance in-house or at its MRO joint ventures, the group does not want aircraft that spends much of its time on the ground.

Parallel processes

Lufthansa runs its network development and fleet planning processes in parallel. The group uses economic analyses and market development assumptions to plan for network growth and plot capacity requirements. This process is continuous and looks years ahead. When the group places an order, it usually allows about a year of lead-time; however smaller orders can be incorporated over a much shorter period – as little as four months.

Analysis for these short-term decisions is performed well in advance, when Lufthansa makes its initial assessment of the aircraft and its overall requirement. Combining long-term fleet planning with near-term aircraft buying “is not a contradiction”, says Buchholz. “We always prefer to under-order the aircraft we need. We’d rather buy one too few aircraft than too many. That’s a very costly thing to do, as some airlines have found out.”

Virgin America describes a similar process. The San Francisco-based carrier says that its route-development planning and fleet decision-making “are closely tied.” However, while “typically, most fleet planning is done several years out, one of the advantages of being smaller is that you can be a bit more flexible within those constraints based on market opportunities.”

The five-year-old carrier is still in its early stages of fleet growth. It currently has 46 aircraft and plans to raise this to 52 by the end of the year. By 2019, it aims to operate over 100 aircraft though it will retain flexibility in its plan, which will allow it to adapt to the market and its needs.

Contingencies and the virtues of ownership

When developing a long-term fleet plan for a specific aircraft size, Lufthansa always maintains a back-up fleet plan to ensure it has enough capacity if deliveries of the new type are delayed. This has happened twice in recent times: deliveries of its A380s and 747-400 Intercontinentals incurred considerable delays. However, Buchholz says that not being able to take the new aircraft on the dates originally promised did not hurt Lufthansa’s operational plans because it was able to keep flying aircraft planned for retirement until the new aircraft were delivered.

This strategy has one major prerequisite: the airline must have financial control of its aircraft, rather than short-term operating leases. Many airlines, including Virgin America, feel that taking a portfolio approach to lease start dates, termination dates and extension options when negotiating operating leases can provide significant flexibility and allow appropriate reaction to market fluctuations.

But Lufthansa looks at things differently. Some of its subsidiaries – such as Swiss, Austrian Airlines and Brussels Airlines – hold some aircraft on operating leases. The ability to return an aircraft gives an airline the opportunity to modernise its fleet with a newer aircraft type or upgraded model.

However, Lufthansa as an airline believes owning its aircraft outright provides it with the greatest fleet flexibility. Lufthansa can retain existing aircraft if replacements are delayed and it notes that purchasing and owning confers strong financial discipline. “I know it’s a very onerous approach, but it ensures we don’t overstep our limits,” says Buchholz.

It costs Lufthansa nothing in operating-costs to park an aircraft in order that it can reduce capacity during a market downturn. “If we park an aircraft, there is no cash cost – [though] we would still have depreciation, so it’s not nice for the balance sheet,” Buchholz notes. The same cannot be said for parking an aircraft that is on operating lease.

The Lufthansa Group operates most aircraft types. However, with the exception of Lufthansa itself, most of it subsidiary airlines operate only one or two types. Buchholz says that additional economies of scale do not apply beyond a certain fleet size, which is much smaller for widebodies than single-aisle aircraft.

It was this that pushed Norwegian Air Shuttle (NAS) to order both the 737 MAX and the A320 neo, allowing it to obtain maximum negotiating leverage when it wants to order the next generation of single-aisle jets.

Lufthansa has not ordered either the A350 XWB or the 787. Buchholz says there are two reasons for this. “Lufthansa has a modern fleet and an owned fleet, so we’re not being pushed by lease terminations or having old aircraft,” he says. This is part of the “comfort zone” the group designs into its fleet-planning process. Buchholz adds: “We have been working extremely closely with the manufacturers on all their new products and we have our own risk assessment [process] regarding when to order. That risk assessment may also have played a role.” Other carriers may be wishing they had been as careful.

Courtesy: Airline Fleet Management