Carole Shifrin TOULOUSE

While other start-ups falter, JetBlue Airways is going strong. Having taken delivery of its eleventh A320, it is poised to continue growing

JetBlue Airways has set records from the outset. When it launched at the start of last year it did so as the best-financed new entrant since US airline deregulation. It was also granted a record 75 peak-time slots to phase in at New York's JFK and has begun to utilise them with a fleet of brand-new Airbus A320 aircraft, rather than the usual Boeing 737 workhorse. As the carrier hosted a visit to Toulouse in February to take delivery of its eleventh A320, it soon became clear that JetBlue plans to continue the record-setting and innovation that has so far characterised its launch.

JetBlue says it went into profit in August last year, after only six months of operation, and turned in a first profitable quarter for the last three months of the year. That is all the more impressive in light of the experience of fellow US start-ups last year. Legend Airlines had to close in Dallas, National Airlines in Las Vegas is under bankruptcy protection, while others too are struggling.

Not unexpectedly, David Neeleman, the 41-year-old founder and chief executive of JetBlue, credits the carrier's success to a strong business plan, backed by the small but experienced team of airline executives he assembled before launch. Dedicated employees and new aircraft are also cited. But perhaps most notably, the JetBlue product and service-orientation seems to have struck a chord in a US marketplace longing for something new.

Towards the end of last year, JetBlue's on-time performance was besting the competition in almost all of its markets. And although it carried 1.14 million passengers last year, the US Transportation Department received a scant five complaints about the airline, two from the same person. They involved a fight between two passengers and the fact that the carrier banned both for life.

In terms of product, JetBlue offers a single class of service with comfortable leather seats, each equipped with free 24-channel satellite television. All travel is ticketless, with a simplified and largely unrestricted fare structure. One-way prices range from only $49 to $249 depending on how early seats are booked, with no Saturday-night stay requirement.

But also contributing to its achievements have to been the attention to detail and an attempt to create a company culture based on collective decision-making and an open mind to new ideas.

Company culture

The attention to detail and Neeleman's involvement in all aspects of the airline's operation were obvious during the journey to Airbus in Toulouse. On a tour of the A320 assembly hangar, Neeleman darted over to an aircraft on the line to point out how a cargo door lifts out instead of in (compared with the 737), a feature that he says helps protect passenger luggage from being damaged during loading and unloading.

There also appears to be a spirit of camaraderie at JetBlue not generally found in established carriers. Neeleman and other top executives are fully involved, constantly meeting passengers, helping load bags or make telephone calls to customers to inform them of delays when necessary. The company wants to make sure passengers walk away with a good feeling about the airline. In January, after a JetBlue aircraft skidded off an icy runway after landing at JFK - even though no one was hurt and delay was minimal - passengers were given credits for the cost of their flight from California.

It would be unusual if Neeleman were on a JetBlue flight and did not take to the public address system to introduce himself to passengers. On the delivery flight, he took the microphone to sing Happy Birthday to an employee in Portuguese - a language he learned as a youngster growing up in Brazil where his parents were missionaries.

Always seeking to reinvent itself, JetBlue is considering several new customer-focussed ideas. One is taking a row of seats out of the aircraft to provide more comfort for passengers. Seats in the last row of its A320s have reduced legroom (31in pitch) and narrower seats which do not recline, Neeleman explains, calling the row "my Delta seats". Removing the row would reduce seating to 156 and provide a 34in pitch in the last 14 rows, compared with 32in in the first half. The proposal is the subject of an intense internal debate involving such issues as the lost revenue (the seats are the last assigned, but they are occupied 16% of the time); how the change would encourage more passengers to want to sit further back in the aircraft; how passengers would be more comfortable if the airline continues to add more long-haul flying, and so on.

JetBlue is also starting a frequent flyer programme, which Neeleman calls more an "appreciation" programme to reward its loyal customers. One of the things that surprised him during the first year of operation was how quickly JetBlue gained a devoted following. "I never thought we would get this level of loyalty this fast," he says. "When you take care of people, they really respond." When initiated, the programme is expected to provide travellers with a free round trip for every 10 round trips taken.

JetBlue is also considering an innovative way of providing food. It does not want to get into the business of providing meals on flights and has instead provided abundant amounts of snacks for passengers. But as it increases flying to the western half of the USA - its average stage length is already 1300 km (700 nm) - passengers on longer flights may want more than snacks. JetBlue is weighing the possibility of arranging with local restaurants to provide box lunches for passengers before boarding. Under one scenario, passengers would book a meal and pay for it on the carrier's website and have it waiting at the gate. That is significant given that almost 40% of passengers book on the Internet.

Substantial growth

As planned, the airline grew substantially during its first year and expects that strong expansion to continue. At the end of the first quarter of 2001, JetBlue was operating 64 daily roundtrip flights from its JFK hub to 11 cities. First-year services were concentrated primarily on flights to cities in Florida and upstate New York, with single overnight round trips added to Oakland and Ontario, California, and Salt Lake City, Utah. JetBlue planned originally to start a new route with each new aircraft - 20 routes with the first 20 aircraft by the end of its second year. But it has decided to scale back the number of new routes this year, probably to about five or six, Neeleman says, because of strong demand in present markets for more frequencies. JetBlue's current timetable ranges from six daily roundtrip flights to Fort Lauderdale, to one daily roundtrip on the "red-eye" routes and to Ft Myers.

JetBlue will spread its wings again in May, though, when it adds Syracuse, Seattle, and Denver to its route map. The two western cities will be served initially with overnight flights, just as initial JetBlue service begun last summer to Oakland and Ontario. The two California routes proved so successful that JetBlue is adding "day" service to both airports, also in May. Neeleman declines to name this year's other new destinations, adding "There's a lot of good hanging fruit out there."

The airline has 11 A320s in its fleet and will take 10 more this year - two later this month, one in May and the remaining seven between July and December. It signed up initially for up to 82 A320 family aircraft - 25 on firm orders, 25 on option, and purchase rights for 25 more, and seven to be leased. It has firmed up close to 40 aircraft now, counting those leased. Tom Anderson, JetBlue's vice-president for corporate planning & aircraft programmes, says the carrier looks far enough ahead to make sure the fleet plan matches the growth plan and that there is enough flexibility in it. Although JetBlue had planned to lease only seven aircraft, that has been changing depending on tax and other considerations. Two aircraft purchased last year, for instance, were sold to Japan's Matsui and leased back for 18 years.

JetBlue officials are full of praise for the A320, which they selected after an exhaustive examination. "The Boeing 737 had always been associated with low-fare and new-entrant carriers," Neeleman says. "People believed you could not run an efficient low-cost airline with Airbus." But experience has taught otherwise, he says.

Beginning in April, the airline has the option of acquiring the smaller 134-seat A319s or larger 196-seat A321s in place of the current 162-seat A320s. "We're working through trying to make the right decision," says Anderson. "We try to be dispassionate, not jump to conclusions." The process includes re-weighing the airline's strategy and the direction it is heading, and assessing what markets it wants to serve, what it would save by purchasing the A319, what more it would cost to buy the A321, the differences in operational costs, how a different sized aircraft would fit into the fleet, etc. Adds Neeleman: "My inclination is to stay constant, but if we're flying full-."

Many of JetBlue's flights are full. Between start-up on 11 February and the end of 2000, the carrier filled 73.2% of its seats system-wide. The airline anticipates carrying three million passengers this year, three times the number of travellers carried in 2000, and to take in revenues of about $300 million, three times last year's sales.

Profitable growth

Neeleman says that having already turned to profit, JetBlue will remain in the black. "We expect profits in all quarters from here on out," he says. JetBlue's breakeven load factor system-wide is forecast to be in the 56-58% range during 2001, he says, adding that by year-end, he expects costs to be under 6ó per seat mile (4ó per kilometre). The carrier already has costs under 7ó per mile, he says, a level below that of leading low-cost carrier Southwest Airlines.

JetBlue's aircraft utilisation is already at an impressive 13.25 hours a day, and is expected to grow to 14h a day by year-end. "This thing only pays for itself when it's moving," Anderson says.

Company officials work hard to keep the airline on schedule - no small task when it is committed to aircraft turnarounds of 30-35 minutes. Although that is longer than the famous 20 minute turnaround of Southwest, JetBlue also has opted for assigned seating, unlike Southwest. "People want assigned seats," Anderson says, noting that business travellers, showing up late at the gate, get the last seats on Southwest. JetBlue executives meet weekly to look at on-time performance and seek to make adjustments if a flight is lagging, Neeleman says, adding that rear boarding at some locations also will help.

There has been aggressive matching of JetBlue's low fares by the major carriers in markets it has entered. "That's why we have to build a better product and back it up with great people," Neeleman says. But JetBlue's entry onto routes has expanded the size of each market it has entered, he says. As an example, he says the size of the New York-Buffalo market has doubled and it is expected to triple. "It's the JetBlue and Southwest effect."

Conscious that it is billing itself as a new entrant with a brand-new fleet, Neeleman says he wants to make sure passengers who step on an aircraft a year old have the same sense of boarding a new aircraft as those who step on a month-old aircraft. As a result, JetBlue, when taking an aircraft through 'C' checks, totally refurbishes the interior of the aircraft.

This includes replacing the leather seat covers with new ones, tearing out and replacing the carpets, scrubbing the side walls, and washing down the interior from front to back. "We tell customers we fly new airplanes," Anderson says. "We want to keep the new airplane smell and feel."

"One reason people are dissatisfied with airlines is when you get on a major carrier you can be on a brand-new airplane or an old 727 they're milking to the last drop," Anderson says. "Our plan is to keep transparency, whether the plane is a month or year old."

If passengers are happy - and they seem to be - so are JetBlue's investors. Six months after its start-up, the airline raised an additional $30 million in equity capital from its original investors, bringing equity committed to the airline to $160 million. Each investor, including Weston Presidio Capital, Soros Private Equity Partners and Chase Capital Partners, elected to participate in a full pro-rata share. Neeleman says the new equity was priced significantly higher than the initial equity raised, a valuation reflecting the carrier's impressive initial performance. "My philosophy is that you can never have too much cash in the airline business," he says.

Neeleman is in "no hurry" to take the company public. "Public companies tend to make short-term decisions," he says. "We want to make sure we have the right foundation, and also want to have more quarters of positive trends." There is no pressure from investors, he adds. "They couldn't be happier."

Source: Airline Business