JetBlue Competitive Strategy and Market Analysis

Introduction to JetBlue

JetBlue is an airline based in New York City, operating both domestic and international routes. It was founded in 1999 by David Neeleman, a former Southwest Airlines executive, using much the same business model. The company received 75 landing slots at JFK later that year, and by December had taken delivery of its first aircraft from Airbus. The first flight departed on February 11th between JFK and FLL (JetBlue.com, 2015). The company has since expanded significantly and has been profitable since at least 2009 (MSN Moneycentral, 2015). According to the Bureau of Transportation Statistics, JetBlue is the fifth-largest airline in the United States, with a 5.2% market share (BTS, 2015). It is concentrated along the Eastern seaboard, making it the largest among the major regional carriers.

The model that JetBlue uses, at least in theory, is a discounter model focused on competing on popular routes at a low cost. The inaugural route — JFK to FLL — is the tenth-most traveled route in the U.S. (BTS, 2015). The company has emulated the Southwest model in many respects, though it has also added a number of services not normally found on a discount carrier. It considers itself, first and foremost, a direct competitor to Southwest, the market leader (Weinberg, 2015). JetBlue's secondary point of differentiation is customer service. Over the years, there has been a merging of airline models in the U.S., as major legacy carriers have cut back their service levels to discounter levels without necessarily lowering fares. The challenge for JetBlue is therefore to provide better service than other airlines while simultaneously offering lower fares. If it can sustain this balance, it will continue to grow.

Rivals

JetBlue is the fifth-largest airline in the United States. The sixth-largest is Alaska Airlines, and there is not much route overlap between the two. JetBlue's greatest degree of route overlap is with the legacy carriers, and it also rivals Southwest — the company on which it based its business model and the industry's second-largest carrier. There are also several smaller discount carriers with some route overlap, such as Spirit and ExpressJet, but they are not considered rivals to the same degree, since JetBlue is primarily focused on winning market share from the larger, more established airlines.

Southwest is the primary rival — not so much because of route overlap alone, but because JetBlue was founded by Southwest executives and uses the Southwest business model. There is thus a high degree of interpersonal and institutional rivalry between the two companies. As Weinberg (2015) notes, JetBlue has begun targeting Southwest directly, entering some of the routes Southwest has already established in the East, such as Philadelphia to Fort Lauderdale and Dulles to Orlando. Southwest holds a 71% share at BWI, for example, and JetBlue has launched flights on three of the top five routes out of that airport — a significant escalation in direct competition. JetBlue has also made direct attacks on Southwest in recent advertising campaigns (Weinberg, 2015).

JetBlue has also made a point of competing against the legacy carriers. When JetBlue launched, it was the legacy carriers that dominated the Eastern seaboard, making them natural rivals. American and Delta both have JFK hubs, placing them in direct rivalry with JetBlue. Other shared hubs include FLL (Spirit, Southwest), Logan (Delta, to some extent), and Orlando (Southwest). This makes Delta and, to a lesser extent, American the major legacy carriers with which JetBlue has the most significant rivalry based on route overlap. Delta is the third-largest U.S. airline at a 16.9% share, while American/US Airways is first at 20.5%. Three of JetBlue's biggest rivals, therefore, rank among the top three U.S. airlines — United is the only major American carrier with which JetBlue does not have a significant direct rivalry. Delta and American are both legacy airlines that have struggled in recent years. A series of mergers among the major legacy carriers has reduced industry capacity, which has allowed for higher prices, reduced competition on many routes, and improved profitability across the industry — particularly for these airlines (Trefis, 2014).

Spirit is another notable rival, competing as a discounter on the East Coast and at the Fort Lauderdale hub. It is the ninth-largest U.S. airline with a 2.2% share (BTS, 2014), and its model seeks to undercut all other airlines while offering a very bare-bones experience — most famously, charging for carry-on bags (SeatGuru, 2015). It is not difficult for JetBlue to outperform Spirit on service. Nevertheless, Spirit has grown consistently and remained profitable over the past five years. Spirit's fees on baggage push some passengers toward JetBlue's business travel offerings, so there is direct competition in that segment that JetBlue should not overlook.

The U.S. Airline Market

The U.S. airline market has performed better in recent years following consolidation among legacy carriers, which has reduced overall competition. Lower fuel prices have also contributed since 2014. The number of passengers increased from 646 million in 2014 to an estimated 666 million in 2015 — a 3.1% increase — according to the Bureau of Transportation Statistics (2015). Yet, there were fewer departures overall, indicating that load factors have risen. Indeed, the average industry load factor reached 84.4%, up 1.9 percentage points from 83.7% the prior year. While fuel costs are higher today than they were in the early 2000s, they are lower than at any point since 2009, which has contributed to the improved profitability seen across more airlines in recent years (BTS, 2015). The industry remains competitive on major routes, however.

Airlines are increasingly focusing competition on major routes to attract customers and raise brand profile. The largest profits accrue on routes with limited competition. That said, many airports face competition from nearby alternative airports. There are five airports in the New York metropolitan area, and LaGuardia competes heavily against JFK. Miami and West Palm Beach have major airports that compete against Fort Lauderdale. The same dynamic applies to most of the major airports JetBlue serves — its Long Beach hub, for example, is one of several airports serving the Los Angeles area. Even when airlines do not share the same airport, travelers willing to use a nearby airport for better fares or more convenient schedules create indirect competitive pressure.

Conclusion

JetBlue should continue to be competitive for the foreseeable future. It has a strong business model and has been able to execute on that model fairly effectively. The company is therefore well positioned within the industry and retains meaningful capacity for growth. Its strategy does not need to be fundamentally changed — only expanded to fill in routes where growth opportunities remain. JetBlue may have some room left in the Caribbean, but over the next decade the greater growth potential lies in the Pacific Northwest, Mexico, and Canada. Building out the route network is simply the best avenue for growing revenue: JetBlue is already at the industry-average load factor of 84%, which limits its ability to grow meaningfully through incremental sales on existing routes — new routes offer substantially greater profit potential.

In the longer run, JetBlue will need to develop some form of strategy for the intercontinental market. This will require adding a third major aircraft type to its fleet, so such a decision cannot be made lightly. However, with a long-range plan to build the required infrastructure and secure the necessary permissions and partnerships, JetBlue could eventually look at markets in South America and Asia as possibilities in the more distant future.

References

SeatGuru. (2015). Spirit baggage. SeatGuru. Retrieved June 9, 2015, from http://www.seatguru.com/airlines/Spirit_Airlines/baggage.php

Trefis. (2014). Airline industry will have to maintain capacity discipline to remain profitable. Forbes. Retrieved June 9, 2015, from http://www.forbes.com/sites/greatspeculations/2014/06/20/airline-industry-will-have-to-maintain-capacity-discipline-to-remain-profitable/

JetBlue.com. (2015). Our company: History. JetBlue.com. Retrieved June 9, 2015, from http://www.jetblue.com/about/ourcompany/history.aspx

MSN Moneycentral. (2015). JetBlue. MSN Moneycentral. Retrieved June 9, 2015, from http://www.msn.com/en-us/money/stockdetails/financials/fi-JBLU

BTS. (2015). Airline activity. Bureau of Transportation Statistics. Retrieved June 9, 2015, from http://www.transtats.bts.gov/

Weinberg, A. (2015). JetBlue is attacking Southwest Airlines head on. Motley Fool. Retrieved June 9, 2015, from http://www.fool.com/investing/general/2015/05/20/jetblue-is-attacking-southwest-airlines-head-on.aspx

JetBlue. (2015). 2014 annual report. Retrieved June 9, 2015, from