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A Hard Landing

JetBlue proved that profits and good service were not impossible in the airline business. But it sure wasn’t counting on jet-fuel prices soaring this high — or a recent mechanical scare that raised questions about its entire fleet.

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For a minute there, it looked like 2005 was going to be JetBlue’s year. New Yorkers’ favorite airline had crossed $1 billion in revenue in 2004, launching it into the category of “major” airlines. The company was prepping to add a new, smaller class of planes to its fleet, which would allow it to take its fare-busting strategy to even more underserved markets. The deal to take over the legendary Eero Saarinen–designed Terminal Five at JFK was on track. And the company had put together a string of sixteen consecutive profitable quarters since going public—a streak that had no end in sight when the year began.

It does now.

On September 20, JetBlue CEO David Neeleman told a Toronto news conference that the effects of Hurricane Rita—specifically, the surge in jet-fuel prices that came in its aftermath—would “put the final nail” in the company’s third-quarter results. His insinuation: In spite of a series of fare increases this year, the airline would likely post a quarterly loss for the first time since becoming a public company.

The next day, though, mere numbers were rendered irrelevant, at least for a few hours. The entire country watched as JetBlue Flight 292 from Burbank to New York circled the Southern Californian skies with its nose gear stuck sideways. As the pilot prepared for an emergency landing, passengers were able to watch much of the coverage from the seat-back TVs that are among JetBlue’s signature amenities.

Neeleman says he was calm as he received the news about Flight 292 on his drive home to New Canaan, Connecticut, and then quickly returned to the JetBlue office in Queens. “I spent the night in our command center,” he says. “We had a pretty good handle on what was going to happen. I was confident.” His biggest worry wasn’t that the plane would flip over on landing, as some speculated might happen. He was more focused on what would take place after the plane came to a stop and had to be evacuated on the runway. “I was concerned that people might panic and go out the emergency doors,” he says. But they didn’t, and disaster was averted.

Still, Neeleman had plenty of headaches in the days ahead. For one, he had to defend the safety record of Airbus, which, until delivery of those new, smaller Embraer planes, supplies JetBlue’s entire fleet. “It’s a pretty isolated event,” he says, noting that the Airbus A320 has never had a crash that’s officially been blamed on mechanical failure. “Years ago,” he adds, “engines were falling off DC-10s. That made people more concerned than this thing.”

But combined with the likelihood of a third-quarter loss, the episode raised an ugly specter—that JetBlue, for all its lovable personality and novel branding, is not immune from the ills that afflict the industry as a whole. Although it’s in a much better financial situation than most of its peers—Delta and Northwest both filed for bankruptcy in September—rising fuel prices had rating agencies threatening to downgrade JetBlue’s debt in late September. And in the first half of 2005, after years of superior performance, JetBlue posted the fourth-worst on-time rating among nineteen domestic airlines. JetBlue blamed it on problems at a single airport—Fort Lauderdale—but that sounded like the excuses other airlines are always making.

All of this marks the first time in its short life that JetBlue has really had to grapple with anything but good news. Neeleman is now confronted with the biggest challenge of his career: making sure his cute little adolescent doesn’t grow up to be just like all the other grown-up airlines.

In the four years up through 2004, while the ten largest U.S. carriers lost a total of $28.5 billion, JetBlue made almost $250 million in profit. It did so by keeping its costs down—through hypervigilant management of its workforce and equipment—and by offering a product that cleverly distinguished itself from that of its competitors. Part of this had to do with attractive features like those seat-back TVs as well as a spiffy image reinforced by friendly, nattily attired employees.

But the greatest single reason for JetBlue’s success was its fares, which, though not always the very lowest, conformed to a predictable pattern that customers could rely on. And this is where fuel prices have wreaked havoc. In repeatedly raising its prices this year, JetBlue has been forced to join the herd that it has always prided itself on standing apart from.

The basic discipline of its pricing strategy, however, remains intact. For any particular route, JetBlue uses just four primary inputs to determine its fares—the length of a flight; the number of seats on the aircraft; the estimated cost per available seat per mile, or ASM; and the anticipated “load factor,” or percentage of seats sold on the plane. To show me how it works, JetBlue’s vice-president of route planning, Dave Ulmer, walked me through a route that the airline is considering adding.


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