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It takes two: can Barger help JetBlue return to profitability?

After a turbulent winter,  JetBlue Airways  founder David Neeleman has ceded daily duties to long-time aide Dave Barger to focus on longer-term goals. Can this reshuffle at the top help the carrier return to profitability and regain both passenger trust and investor confidence?

For two guys who are thoroughly different in temperament, personality and focus, David Neeleman and Dave Barger get along with each other remarkably well. What is equally remarkable is that one of them has just taken the other's job.

But Neeleman, who had to give up the chief executive role at JetBlue Airways, the airline he founded in 1998, says he is all right with his new role as board chairman and "chief visionary". And Barger, the airline's president, who added the chief executive role in May, says the new title won't mean too much change in his role at a carrier that was the USA's best capitalised start-up and the darling of flyers and investors.

Until last winter that is. After JetBlue left 130,000 passengers stranded at its New York JFK hub for hours during a bad Valentine's Day blizzard, the former favourite became an object of derision among flyers and a disappointment to shareholders as its share value plunged. Neeleman became a full-time apologist for the carrier and after JetBlue posted a $22 million first quarter loss the airline's board bumped him into the position of non-executive chairman, giving Barger the chief executive title to add to his role as president.

Both men insist that the 10 May change was not so much a shake-up as "natural evolution of roles and of the company". Indeed, Neeleman had been focusing more on long-term issues, such as revenue-increasing strategies, while Barger's attention was more on operational performance. Barger has now added financial recovery to his task of operational recovery. He approaches both with a sense of precision and firmness that seems central to his personality, a sense one does not get from the more laid-back Neeleman.

Contrasting personalities

Where Barger seems coiled for the next challenge, ready to sprint by or through an obstacle, Neeleman is a long-distance runner, more likely to go into a room and think about an answer than to react instantly. Barger is precise, often clipped in his sentences, with a comprehensive and fluid grasp of figures and factoids, while Neeleman sometimes uses phrases such as "a real big number" when he is unsure of a precise figure.

Neeleman, 47, openly discuses his attention-deficit disorder and his personal candour was brought to public attention when he apologised on national television for JetBlue's Valentine's Day operational fiasco. He admits he was "a little hurt" when the board transferred his chief executive portfolio to Barger, but says he "had been thinking about that sort of move for a while." He adds: "I know I am not a day-to-day operator. It's not something I ever enjoyed."

Barger is very much a day-to-day operator. He sees his new role as a blend of operational blocking and tackling on a longer-term basis, including the central task of expanding JetBlue's capacity and making the passenger experience at its home base of New York's JFK an easier one. Barger, 49, says much of his new job will be made easier because the carrier gained an experienced and widely sought after operations manager in March when it lured Russ Chew, the FAA's chief operating officer, away from a job he had accepted at Hawaiian Airlines. Chew, who ran the FAA's air traffic organisation from 2003 until early this year, had earlier managed the American Airlines operations centre. Barger calls Chew "an incredible find for us". Chew will be responsible for many of the day-to-day operational tasks that Barger had previously handled.

Barger concedes slightly grudgingly that right now, the JFK experience is often uneven JetBlue's smaller Embraer 190s usually operate from a temporary seven-gate terminal that passengers reach via shuttle bus. This structure is essentially a large mobile trailer, with limited amenities. While the main 14-gate terminal has a new interior and check-in area, it can easily become crowded. The airline's planned $875 million Terminal Five, which should be completed by late 2008, will give JetBlue 26 gates capable of handling some 250 daily flights and 20 million passengers annually. It will be able to accommodate the increased connecting traffic that Barger has made a goal: "It's sort of network fundamental when you have a very strong position in the most important travel market in the US, which is New York. By February, over 40% of our capacity did not touch Kennedy. So we're 59% touching Kennedy, 41% from other parts of the network. With that kind of strength, you can bootstrap other key cities, whether you call them 'focus cities' or 'minihubs' or whatever." This refers to its ability to strengthen these markets. Developing more key cities, such as Fort Lauderdale in Florida, Long Beach in California or Boston Logan, is another Barger goal.

New York connections

He stresses that "as goes JFK, so goes the airline", and that is why he is leading the initiatives here. Barger compares the city's three airports, saying: "First of all, when I think about Kennedy there's 5,000 acres underneath this airport. When you think about Newark by comparison, there's 2,200 acres. When you think about LaGuardia airport, there's 500 acres. There's four runways at this airport, a nice set of parallels, nice separation for the most part. We have three over at Newark. We have two over at LaGuardia. When I think about the number of movements, though, it's kind of interesting just to give you a feel for what's happening. JFK on an average basis today is operating - this is movements, everything, general aviation, cargo, commercial - about 1,200 movements a day. LaGuardia is operating about 1,250 movements a day. And Newark is operating about 1,300 movements a day. Well, it doesn't take a whole lot of logic to take us to the fact that there's a lot of efficiency improvements that are available for all of us to mine at JFK."

Barger is very much an aeroplane guy: he likes to watch JetBlue's aircraft as they approach the airport some eight or nine miles away. He loves the airline's Embraer 190s, which it began flying in late 2005, but knows he shares whatever blame there may be in the carrier's basic strategic shift that led to the decision to add a second fleet type - in violation of the perceived basic code of low-fare carriers.

JetBlue's retreat

Neeleman's initial strategy was to rely on the Airbus A320 for flights between JFK and some 40 markets throughout the eastern USA, many of them in Florida. As it grew it shifted, realising that the aircraft's ideal mission was a longer distance one, and that committing to an aircraft type with 156 seats and transcontinental range was forcing JetBlue to accept the Hobsonian choice of flying empty seats or filling the empty seats by charging too-low fares. So Neeleman and Barger adopted a strategy of developing longer distance markets, especially cross-country ones. It immediately ran into a competitive maelstrom as other carriers including the network carriers such as American Airlines poured resources into transcontinental routes. Some of JetBlue's new cities did not work, and it actually was forced to retreat from cities such as Atlanta when it could not match the competition on routes to the San Francisco area. To develop East Coast markets it went with the 190, a 100-seater with a range that made it the right-sized aircraft for such routes as JFK to Charlotte, North Carolina - a city that thirsted for low fares as it chaffed under the dominance of US Airways - or JFK to Washington Dulles, where the Embraers could develop the connecting traffic that JetBlue seeks.

Therein lay a central cause of JetBlue's stumble: the new aircraft did not work as well as they should have, with numerous software problems and other glitches forcing the airline to reduce its scheduling while the Embraer fixed things. Barger says: "We knew that adding a second fleet type would incur some costs and teething problems, but it is wonderful airplane." That may be, but the added cost and complexity, coming in the midst of increasing competition, helped push JetBlue into its first deficits since it went public in 2002. Last year, it embarked on a "Return-To-Profit" plan deferring aircraft deliveries and easing growth.

But all this time rivals were growing, with Southwest having made deep inroads into natural JetBlue future targets such as Philadelphia and Denver. JP Morgan analyst Jamie Baker warns that Southwest's considerable 2007/08 growth plans, as well as Delta's focus on the eastern half of the nation, may force JetBlue to slow growth even more. But the problem of growing too fast had deeper effects than the operational stumbles. Consultant Bob Mann of RW Mann & Associates says the airline's growth outstripped some of the management cultural changes that JetBlue needed. "When you only have 1,000 people, it's easy for everyone to think the same way the visionary does," says Mann. "When you get this big, you have to prompt them. You need someone who can do the sometimes unpleasant, sometimes mean things that airlines have to do. I'm not sure Neeleman could."

Now that he is out of day-to-day operations, Neeleman talks about moving his office up to a higher floor in the JetBlue headquarters to be nearer the revenue management team. In this area, says Mann, the carrier was "far behind. With limited pricing power and limited load factor leverage, JetBlue really needed to enhance its revenue management." Neeleman says he'll focus on ways to raise revenues, especially from corporate travellers. The airline now offers only non-refundable fares, and he believes that deters some corporate travel departments from booking with JetBlue.

"We are testing some refundable fares at our highest levels in our Company Blue [corporate] programme. We think that will really help us," he explains. The airline has a cobranded credit card which Neeleman says is a great source of potential ancillary revenues. He adds: "Our LiveTV subsidiary came up with some really neat technology which is a cashless cabin which allows us to take credit cards and sell all kinds of things on the aircraft." JetBlue is also considering in-flight text messaging as a source of ancillary revenue.

JetBlue Airways at a glance

Revenue $2,363 million

Change 38.9%

Operating margin 5.4%

Net margin 0.04%

RPK growth 15.4%

ASK growth 20.6%

Load factor 81.6%

Year end December 2006

Airline Business 2005 Financial ranking 50

Airline Business 2005 traffic ranking 27 

But his thinking about product differentiation, which should be fundamental, came about almost accidentally. Late last year, the airline decided to remove one seat row from each A320, bringing capacity down to 150, with 36in pitch in the first 11 rows and 34in pitch in rows 12 to 25. Neeleman explains the original reasoning: each aircraft would weigh about 900lb (410kg) less and require three rather than four flight attendants, saving it $30 million over five years. It was only later that the carrier looked at a sell-up concept giving the option of charging extra for a larger seat.

Neeleman says: "As we move forward, if somebody wanted to maybe for a reduced price book a middle seat, well that's something we don't have the technology for today completely, but something we could roll out in the not-too-distant future. If the plane is going to be empty anyway, we just want to make sure that seat is sitting next to a person who is willing to pay for it. You don't have to go put these monuments in the front that squish everybody else in the back."

Attracting the business traveller

Last year, Neeleman put JetBlue back into the Global Distribution Systems it had left for being too costly. The move was intended to attract corporate travel managers seeking to consolidate bookings through a centralised system. In May, he signed a five-year pact with Expedia and its online corporate travel agency.

Neeleman has also become fascinated by the subject of alternative fuels as a way to decrease the environmental impact of airlines, and will be lobbying Washington and industry groups heavily in this area. "It was something that I knew little about and I was astounded by how much of a difference it could make," he says. He also plans to become the point man for the airline and to some extent the industry in fending off congressional demands for passenger rights. After its winter fiasco, JetBlue introduced a voluntary "bill of rights", and Neeleman believes this approach is far preferable to new laws.

Neeleman does not relish going before Congress but he will. He says he is greatly relieved not to have to speak publicly to so many audiences. "I don't mind the aviation industry groups, but I really am glad to be away from the investor conferences, from the analysts and brokers. Now, there's a difficult audience."

Dave Barger

Dave Barger, chief executive and president of JetBlue Airways, is the last member of the founding team of executives at the airline. He joined in late 1998, before its February 2000 start of operations.

Barger knows New York City's airports and airspace better than most airline industry executives. Before joining JetBlue he was vice-president for operations for Continental Airlines at its Newark hub. Prior to joining Continental, he was an executive of New York Air as chief of stations and later its northeast director. New York Air was merged into Continental in 1998. Barger also served Continental in Guam and the South Pacific.

Growing up near Detroit, Barger "wanted to be a pilot but my eyesight wouldn't let me". Before taking on the top slot in May, he often sat in on pilot hiring interviews and sees "working with our crew members as really important. They carry the brand to the customer." He helped oversee a recent change to crew compensation that increased basic pay rates to make up for the declining value of their stock options.

Though two years older than Neeleman, Barger sometimes calls Neeleman "the old man".

David Neeleman

David Neeleman, JetBlue's founder, also co-founded Morris Air, a Salt Lake City-based charter and low-fares airline, in 1984. Southwest bought Morris Air in 1993. Neeleman moved on to Open Skies, an early internet-based airline reservations system bought by Hewlett Packard in 1999.

Neeleman recently sold one-fourth of his stake in JetBlue for $27 million but remains its largest investor. "The investment advisors kept telling me to diversify. I'm not selling out. I'm here to stay," he says.

Neeleman says JetBlue is not for sale and is not looking for a merger. Born in Brazil, where he later served a mission for the Church of Jesus Christ of Latter Day Saints, Neeleman says his Mormon faith is very important. He may help campaign for presidential candidate Mitt Romney, a fellow Mormon.

Family is also central to Neeleman. He and his wife have nine children. He once left an investor presentation to watch his son play in an American football championship game. He donates most of his salary to a charitable fund for JetBlue employees facing personal emergencies.

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