In Slumping Airline Industry, JetBlue Soars

March 13, 2002 -- As the airline industry struggles in the aftermath of Sept. 11, one small start-up is flying high — and hoping that investors come along for the ride.

Low-cost airline JetBlue, which flies to more than 15 destinations across the country and plans to add flights to Puerto Rico in May, filed for a $125 million initial public offering in February.

With its fleet of new, single class Airbus A320 aircraft boasting leather seats and 24 channel satellite television service, industry watchers say the small start-up could be the model for the rest of the industry.

Started in 1999 by David Neeleman, founder of low-fare airline Morris Air before it was acquired by Southwest Airlines in 1994, the company has come a long way in a short period of time.

After securing 75 take-off and landing spots in 1999 at John F. Kennedy Airport, which is now its base of operations, the company launched its first flight to Fort Lauderdale, Fla. in February 2000.

Since then it has quickly ramped up its service, offering low cost fares to metropolitan areas that usually command high ticket prices or popular markets that are under served by the airline industry. Among the carriers' routes include uncommon destinations such as Burlington, Vt. and Syracuse, N.Y.

"There are some airlines that are doing it right. JetBlue is one of them," says transportation expert Richard Gritta, who teaches at the University of Portland, in Portland, Ore.

Growth Amid Slump

Ironically, the airline's strategy benefits from the travel slump, say analysts.

Major airlines have cut back on their flights since Sept. 11, with the industry's passenger capacity down 15 percent in the fourth quarter of last year and U.S. airlines parking some 350 aircraft, according to the Air Transport Association.

And things aren't looking up any time soon. The Federal Aviation Administration says the number of passengers is expected to continue its decline until the fiscal year ending this September.

Meanwhile, JetBlue has been expanding its routes, adding service on May 1 at the Long Beach Airport 21 miles south of Los Angeles International Airport and to Oakland.

"It's been a great opportunity for the lower cost carriers to take on new markets," says Ronald Stewart, global managing partner of consulting firm Accenture's Transportation & Travel Services industry group in Atlanta. "They're able to price tickets where they're making money where the majors are pricing tickets where they lose money."

No Airline Food Here

Because its operating costs are low, JetBlue is able to post profits while spending less than many of its competitors. The airline's cost per available seat mile, a common cost measure in the airline industry, was less than seven cents for 2001, compared to around 11 cents that major U.S. carriers spend in their domestic operations.

Part of that savings stems from lower labor costs, which is the airline industry's biggest expense. Not hampered by costly union contracts, JetBlue paid almost $85 million in wages and salaries in 2001, representing about 29 percent of the company's total operating expenses. That's lower than the industry average of 35 percent. The company emphasizes lower cost ticketless reservation system and online bookings to cut administrative costs.

This cost consciousness does cut back on some of the perks that other airlines offer. Connoisseurs of airline food might be disappointed — JetBlue does not serve meals, but does offer free soft drinks and charges for alcoholic beverages. The airline also does not have a frequent flier program or any marketing alliances with any major airline, though the company's prospectus does say a frequent flier program is underway for 2002.

"Those things add costs to the service and they're going to enter that very carefully," predicts Stewart. "People are flying those airlines because of their lower cost and because of their schedule. Not because of their frequent flier programs."

Fleet of Airline IPOs

And while JetBlue has been a cult favorite with consumers, its success on the stock market remains to be seen. The low-cost carrier's offering will also be competing with IPOs from Northwest Airlines' regional arm Pinnacle Airlines and Continental's ExpressJet Holdings, which are also expected to tap the markets in the next few weeks.

Though those airlines are different — Pinnacle and ExpressJet are regional airlines that augment the services of a major airline or fly into new areas while JetBlue is a start-up — the offerings will still compete for investors' attention.

"We caution investors, however, that the sudden influx of IPOs in the market may limit near term stock price potential due to competition," airline analyst Susan Donofrio of Deutsche Bank Alex. Brown wrote in a recent research note.

Still, other analysts note that JetBlue's brand name, marketing and stand-alone status — the other two airlines will still be somewhat dependent on the fortunes of their parent company — might give it a boost in the eyes of the market.

"It's probably been one of the most eagerly anticipated IPOs in the sector in a long time," says Holly Hegeman, airline analyst and publisher of PlaneBusiness.com, a research site dedicated to the airline industry.