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Soaring ahead

The airline tries to keep its culture and ride the E190 to continued success.

By STEVE HUETTEL
Published October 24, 2005

Four months shy of its sixth birthday, JetBlue Airways has soared higher and faster than any new player in the sharp-elbowed airline business.

JetBlue launched from New York City and created an instant buzz. Customers jumped at $79 fares to Florida to fly new planes with satellite TV at every seat and friendly flight crews in snappy uniforms.

Following the lean-running model of discounters, JetBlue has made money for 19 consecutive quarters as traditional airlines have bled red ink. It hit $1-billion in revenues in 2004 - the government's definition of a major carrier - faster than any other airline.

Founder David Neeleman, 46, measures success by softer metrics, too. His airline is "humanizing" air travel with more comfortable seats, policies like not overbooking flights and handouts of free pizza when customers endure extended delays.

He even credits JetBlue with fueling Florida's real estate boom by making it easier for New Yorkers to own a second home in the Sunshine State. "We half-joke that before we go to another Florida city, we ought to buy some real estate," he says.

Now, JetBlue is moving into higher gear and uncharted territory.

The airline next month starts flying the first of a fleet of new 100-seat airplanes designed for mid-sized markets where it can't now fly profitably.

That's a seismic change for JetBlue. A key part of its strategy for keeping down costs was using just one kind of aircraft, a page borrowed from Southwest Airlines' keep-it-simple playbook.

Flying multiple kinds of planes adds layers of expenses: bigger stocks of spare parts, different maintenance programs and groups of pilots that need separate training and can't be shifted to a different plane in a pinch.

A devout Mormon with nine children, Neeleman worked briefly for Southwest but didn't strictly follow his former employer's blueprint. JetBlue, for example, flew cross-country and offered customers conveniences like assigned seats.

JetBlue will stick with its original aircraft, the long-haul A320 with 156 seats. Now the nation's ninth-largest carrier, JetBlue has 82 of the Airbus Industries planes and a work force of about 9,000.

With new deliveries of A320s and the 100-seat E190s, made by Brazilian manufacturer Embraer, JetBlue will have 275 aircraft by the end of 2010 and about 25,000 employees. That's one new plane and 100 new workers every 10 days for five years.

The rapid growth provides plenty of opportunities to slip up, wrote Citigroup airline analyst Andrew Light in a report last month.

Indeed, the stakes are higher. JetBlue last week reported a 67 percent drop in third-quarter earnings and said it expects that high fuel prices and a noncash expense will result in a loss for the fourth quarter and the entire year. That will break a profit streak extending back to the end of its first year in 2000.

JetBlue will find it harder to grow amid more airport congestion and stiffer competition from low-cost carriers like Southwest, he wrote. The two money-making carriers have mostly stayed out of each other's way so far.

But JetBlue and airline experts agree the biggest risk is maintaining a culture of teamwork and motivation. Neeleman speaks to each new class of pilots and flight attendants on Economics 101, how running a cost-conscious company shows up in their paychecks.

"The challenge is keeping everybody on the same page, keeping the culture and spirit along the way," says Michael Allen, chief operating officer of airline consultants Back Aviation Solutions.

There was "a lot of pushback" within JetBlue over adding a new aircraft type and deviating from the low-cost carrier mold, says president Dave Barger.

But JetBlue's fares suffered from fierce competition flying from New York to Florida and other big-city markets. The E190 opens hundreds of new routes where JetBlue can go against competitors whose smaller jets have higher operating costs, he said.

"The risk wasn't making a move to a second fleet type," Barger says. "The risk was not doing it."

An idea-a-minute personality who chooses not to take medication for Attention Deficit Disorder, Neeleman pushed hard for the new plane. The E190 didn't exist when JetBlue started, and companies need to change with conditions, Neeleman says.

"If GE hadn't changed," he said, "they'd still just be making light bulbs."

Neeleman was born in 1959 in Sao Paulo, Brazil, where his father worked as a reporter and bureau chief for United Press International.

His parents moved the family to Utah when he was 5. Bright but easily bored and distracted, Neeleman struggled in school. He graduated from high school, unable to sit and read a book or write well, states author Barbara Peterson in Blue Streak, her 2004 book about JetBlue.

But Neeleman had a knack for business. While attending the University of Utah, he sold condo rooms in Hawaii at $50 a night, then bought blocks of seats from a one-plane airline and hawked vacation packages. When Hawaii Express failed in 1983, Neeleman had to file for bankruptcy.

A family friend and owner of Utah's largest travel agency, June Morris, took him under her wing. Her agency branched out into an airline called Morris Air, which Neeleman ran and modeled after profitable no-frills discounter Southwest Airlines.

Under pressure from Delta Air Lines, with a big hub in Salt Lake City, Morris Air agreed to be sold to Southwest in 1993 for $129-million in stock. Neeleman came away with about $22-million and a job at the airline he so admired.

It was a bad fit. Neeleman's nonstop ideas for changes, including a move to electronic ticketing that he introduced at Morris Air, rankled Southwest executives. He was fired after five months.

A noncompete agreement he signed after the merger prohibited Neeleman from working at a U.S. carrier for five years. He helped launch WestJet, a Southwest clone based in western Canada, and formulated plans for his own new carrier. Big plans.

Startup carriers in the wake of airline deregulation typically took off with a handful of old planes, cheap fares and too little money to fend off assaults from the big boys.

Neeleman raised $130-million from investors, including George Soros' Quantum Fund. The airline placed an order with European manufacturer Airbus for up to 75 new A320 aircraft in April 1999.

His sights were set on New York City, the nation's biggest airline market but without its own low-fare carrier since the collapse of People Express in 1985.

Neeleman picked JFK International Airport, which travelers deemed the city's seediest and least convenient gateway. But the runways were deserted most of the day, the perfect launching pad if an airline could get takeoff and landing "slots" from the federal government.

Sen. Charles Schumer had pledged he would bring better and cheaper air service to upstate New York. If Schumer helped in Washington, Neeleman said, he'd help the senator make good on his campaign promise.

The Department of Transportation granted JetBlue an unprecedented 75 slots. Buffalo, N.Y., was the second destination, with Rochester and Syracuse close behind. At an unveiling of the E190 in a hangar at JFK this month, Neeleman introduced the senator as "our uncle."

"It's nice to have a rich nephew," Schumer replied.

JetBlue has stumbled during its wild ride.

In 2003, the airline jumped into Delta's huge Atlanta hub with the market's first West Coast flights by a discount airline. JetBlue offered tickets as low as $174 round-trip to Long Beach, Calif., and the walk-up fare dropped to less than half the typical $2,000-plus.

Delta matched JetBlue's prices, added flights and gave customers triple frequent flier miles. Discounter AirTran Airways leased long-range aircraft and entered the fray.

JetBlue says Atlanta was a classic opportunity market, with high fares and little competition, that got too competitive to make money. Critics called it a classic case of arrogance. Either way, JetBlue left after six months, its first retreat from a new city.

The airline has also struggled with its on-time performance. Once among the most punctual carriers, JetBlue ranked 16th among the top 20 airlines for the year ending in August. It hit bottom in July when about four in 10 flights arrived 15 minutes or more past the scheduled time.

Part of the problem is a policy not to cancel flights running late, says president Barger. And the carrier's heavy New York and Florida flying makes it prone to weather delays with summer thunderstorms and winter snow.

On strategic moves, financial analysts say, JetBlue executives have avoided any major missteps.

With competition keeping fares low, cost is king. JetBlue's unit cost - measured as the expense of flying one airline seat 1 mile - is 30 percent below the industry average, excluding fuel, according to the Citigroup report.

Airlines that buy new planes and grow have a built-in edge. Any maintenance on new aircraft is covered under warranty, typically for three or four years. Hiring a constant flow of employees at entry-level wages keeps down overall labor costs.

That's a nice benefit of buying the Embraer 100-seat jets, but not the real point, says Dave Ulmer, JetBlue's vice president for planning.

The plane can go into about 900 routes where 200 passengers now fly back and forth each way, too few to regularly fill up the bigger A320s. Those markets now are largerly served by competitors' regional jets with 50 seats.

The E190 has 40 percent more seats but doesn't cost nearly 40 percent more to operate. JetBlue undercut fares competitors now charge and still makes a decent profit. The new jets are roomier and look more like a full-sized aircraft, says James Parker, airline analyst for Raymond James & Associates.

Adding one aircraft type adds some complexity but shouldn't trip up JetBlue, Parker says. But the threat of rapid growth infecting the airline's special culture is a concern at JetBlue's highest levels, says chief financial officer John Owen.

The airline works hard to instill loyalty, teamwork and a can-do work ethic.

Salaries are mid range for the industry, Owen says. There aren't traditional pensions, but employees get profit sharing, a dollar-for-dollar match on the first 3 percent of 401(k) contributions and the chance to buy JetBlue stock at a discount.

In training and on the job, Owen says, the company reinforces "living the values" - safety, caring, integrity, fun and passion.

Can JetBlue keep the passion as waves of new workers enter the nonunion work force and it becomes harder for Neeleman to spread his personal touch?

Says Owen: "The best thing going for us is that we've acknowledged it and we're making a tremendous effort."

Steve Huettel can be reached at huettel@sptimes.com or 813 226-3384.

[Last modified October 21, 2005, 21:24:02]