December 28, 2005

SHOULD THEY BE EXPECTED TO IMITATE THE FAILURES INSTEAD?:

The Steady, Strategic Ascent Of JetBlue Airways (Knowledge@Wharton, 12.28.05)

The brainchild of industry veteran David Neeleman, who is the company's chairman and chief executive, JetBlue has tried to combine the best features of low-fare carriers, like Southwest, and traditional ones, like UAL's United and AMR's American. Like Southwest, it eschews hub airports in favor of point-to-point flights and looks for innovative ways to cut costs. Its 1,100 call-center operators, for example, don't work in a center at all, but at their homes in and around Salt Lake City. "I have had some investors ask, 'Do they have uniforms?'" Barger quips. "And I'm like, 'I have no idea whether they are wearing anything at all.'" Nor, he said, does he care--as long as they provide excellent customer service.

Like traditional carriers, JetBlue offers assigned seats and in-flight entertainment. Recently, for example, it announced that it was adding 100 channels of satellite radio. The company had to do business differently if it was to succeed in a "broken industry," Barger said. "Today, three out of every ten seats flown are on a bankrupt carrier. We are growing our company and trying to fend off competition that is insensitive to price. In bankruptcy, companies have protection, and underneath that umbrella they can offer very low fares. Independence Air is offering $59 from Washington to the West Coast. How do you compete with that?"

One way is to find markets with fewer competitors. That strategy motivated JetBlue's recent purchase of 100 of Embraer's 190 aircraft. The smaller planes will enable it to economically serve less-crowded markets, such as Richmond, Va., and Austin, Texas. "A smaller airplane has some inefficiencies, but it allows us to mine markets that Southwest, Frontier and America West aren't in," Barger noted.

One criticism of JetBlue has been is that it's little more than a Southwest copycat. Barger admitted that his company has borrowed from the only major airline that has continued to thrive amid the industry's recent slump. "We have taken some aspects of Southwest. Why? Because they work. There's no pride of authorship there."


If prices aren't low and/or falling you won't succeed in the deflationary economy.

Posted by Orrin Judd at December 28, 2005 4:10 PM
Comments

Can we lobby some one in Congress to just shut down United, sell their assets, and give the proceeds to the pension guarrantee fund the just bankrupted? (GM next?)

Also, I love the "There's no pride of authorship there." quote. Would that more CEOs and other Corporate ringwraiths weren't "not invented here" Bozos.

Posted by: Bruno at December 28, 2005 4:24 PM

Let's not forget that cycles of bankruptcy and reorganization were common with the railroads. In looking at past records, often the only outward sign was when the company name changed from something like "Great Northern Railroad" to "Great Northern Railway". And the gov't was constantly intervening in them, mandating labor laws and pensions and regulating them (ICC anyone?) and their "robbern baron" owners, to nationalizing their operation during the Great War. Why should the airlines be any different?

And why don't people so ignorant of that part of the past, especially if they really don't want to repeat it?

Posted by: Raoul Ortega at December 28, 2005 5:50 PM

The airlines are the only possible rival to American auto makers as the worst managed industry.

I don't understand how it could be criticism that JetBlue copies Southwest. Bencmarking the best companies has been old hat since the 1980's.

There are plenty of contenders who would step in if we let the airline fall. I agree that it's way past time to let them continue under bankruptcy protection. If they haven't learned their business strategy doesn't work by now, they won't learn anyway.

Posted by: Chris Durnell at December 28, 2005 6:26 PM

Airlines and railroads are both examples of industries with high fixed costs and low marginal costs (rights-of-way, track, engines and cars, airplanes, airport landing slots, and fuel all cost a lot; once you've bought them, though, each additional passenger or piece of freight doesn't cost very much.) Industries with that sort of cost structure tend to have lots of bankruptcies and lots of government intervention. By the way, JetBlue isn't just copying SouthWest, they're beating them at their own game. JetBlue's cost per airline seat mile (ASM) is almost a penny lower than SouthWest's, mostly because of lower salary and benefit costs.

Posted by: joe shropshire at December 28, 2005 7:33 PM

Fortunately, Jet Blue hasn't copied Southwest's six-across-a-row seating arrangement, which leaves those already seated praying that the dietatically-challenged person coming down the aisle is not going to sit next to them on the flight (though anyone over about 220 pounds flying Southwest has their own space problems to worry about).

Posted by: John at December 29, 2005 1:06 AM
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