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Aviation History
2002
2002 - 1147.PDF
Cover story BA unveiled its Future Size and Shape restructuring in February, and made clear its intention to address the growing threat from the low-fare sector by restructuring its European short-haul business. Part of the effort involves an overhaul and simplica- tion of the carrier's fare structure and online sales. Room to grow "Within five to 10 years, the normal mode of travel will be to go on to the internet and book a no-frills airline," says Go chief oper ating officer Ed Winter. "There are huge areas of continental Europe that don't have access to low-cost carriers. For example, there are something like 94 low-cost desti nations available horn the London airports, compared to around five for Paris." This leaves plenty of room to grow. Most no-frills airlines rule out formal alliances among themselves and the point- to-point operation does not lend itself very well to codesharing, unlike full-service car rier networks. As the LCCs increase in size there may be problems confronting them. Already Easyjet is considering abandoning its com mon fleet and may purchase Airbus types as well as - or instead of - Boeing aircraft in its latest expansion. The price advantage of Airbus may mean the loss of an important low-cost element in Easyjet's operation. To maintain a good bargaining position between the two airframers, other LCCs may follow suit. Many, also, are starting second and third hubs on mainland Europe, again losing one of the elements - simplicity - that has made them successful. If they cannot restrain costs while continuing their dra matic growth, they will gradually lose the low-cost position - as their predecessors in the USA did - and face more and more of the problems of their higher-cost rivals. Meanwhile, the low-cost niche will become available for yet more contenders. This continuous instability in the market would make planning ahead difficult for anyone in the industry. But fortunately, it seems more likely that some of the present carriers will survive and retain their posi tion as low-cost operators, with a healthy stable share of the European airline market. Finally, the high profile of LCCs has proved a disadvantage before. In 1996, the US low-fare carrier Valujet suffered a seri ous crash, and the public reaction was so great that the airline underwent a reverse merger, adopting the name of AirTran Airways, a company that it had purchased in 1997. No European low-cost carrier has yet suffered a single fatality - but, in the long run, an accident is inevitable. And the backlash may be far more seri ous than any criticism from competitors. • CASE STUDY JETBLUE Southwest with seat allocation Neeleman raised nearly $130 million in venture capital for JetBlue - the largest ever for a US start-up MARY KIRBY / WASHINGTON DC When most US network carriers are bleeding unprecedented amounts of money, JetBlue Airways is the blueprint for how a low-cost start-up can succeed even in the worst of times. The New York-based operator was set up in 2000 by David Neeleman, its chief executive, who was renowned for masterminding Morris Air, sold to Southwest in 1993. He was also con sultant to Canadian low-fare start-up WestJet Airlines. After an era when US low-fare carriers have minimised start up costs by spending little on assets (ValuJet, now AirTran Airways, launched with McDonnell Douglas DC-9s cast off by Delta Air Lines), Neeleman raised nearly $130 million in venture capital for JetBlue - the largest ever for a US start-up - and launched with new Airbus A320s. Backers included Soros Private Equity Partners with $90 million, Chase Capital Partners and Weston Presidio Capital. Two later infusions have brought JetBlue's equity capital to $175 million. Investors will probably benefit from the carrier's planned $132 million initial public offering (IPO), for which it filed intent last month. JetBlue's net profit last year was $38.5 million on revenues of $320 mil lion, even as its competitors lost billions after 11 September. The airline oper ates 24162-seat A320s to 19 destinations from two hubs - its main New York Kennedy base and Washington Dulles. The airline has 59 more A320s on firm order and Neeleman envisages the fleet will number 100 by 2010. He attributes the airline's early success to an adherence to his original plan, which included strong financing, high utilisation, fleet homogeneity, attractive pricing and experienced management. "We're Southwest with seat assignments, leather seats and television," Neeleman says. After rapid expansion, Neeleman says the carrier is unlikely to introduce more than two new destinations and a frequent-flier programme this year. JetBlue is facing increasing competi tion from American Airlines and United Airlines in key markets. "So far, the car rier has not been a competitive thorn in anyone's side. American [and United] are possibly sending a message that the game is getting a little tougher," says Global Aviation Associates con sultant George Hamlin." United will compete against JetBlue Airways with similar fares from next month on services between Washington Dulles and Oakland, California on 8 May. Meanwhile, American and JetBlue have been engaged in a turf war over Kennedy Airport in recent weeks. They already compete in the Kennedy-South Florida market and American is starting to take on JetBlue between Kennedy and Oakland and Ontario, California. JetBlue, meanwhile, will move into American's back yard next month, with Kennedy-San Juan flights. This market has been dominated by American since its acquisition of TWA last year. While the IPO will raise working cap ital and assist with the purchase of additional A320s, Hamlin believes it will ensure JetBlue "has sufficient cash on hand for a war chest", so it is prepared to go head-to-head with carriers such as American. www.flightinternational.com FLIGHT INTERNATIONAL 9-15 APRIL 2002 39
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