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A Hard Landing

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Using a flight length of 1,391 miles, Ulmer entered in the 156 seats on the airline’s A320 aircraft. That gave him 216,996 ASMs for the flight. Multiply that by JetBlue’s projected cost per ASM of 7.13 cents (the second-quarter ASM was 6.62, but Ulmer added 51 cents to adjust for fuel-price increases), and you get a cost of $15,472 per flight. He then made a conservative estimate of a load factor of 82.05 percent—JetBlue’s first-half load factor was 86.8 percent—and got an average of 128 passengers per flight. Divide the $15,472 cost by 128 passengers, add JetBlue’s target operating margin of 10 percent and a 7.5 percent excise tax, and the average fare comes out to $143 each way. That’s a mere $10 or so over the airline’s JFK-to-Florida fare structure.

To achieve that average fare, JetBlue then made a few assumptions about how people will buy tickets for the flights. In this case, the airline assumed that 75 percent would be split equally between fare sales, fourteen-day advance ticketing, and seven-day advance. The remainder would be split 15 percent for three-day advance purchases and 10 percent walk-up. The proposed price structure rewards people who buy early without overly taxing the last-minute buyers as much as most airlines do: Fares range from an $84 sale price to a maximum of $269 for walk-up purchases.

Ulmer wouldn’t reveal which city we were talking about, but a quick scan of the map suggested the route was JFK-Dallas, a flight for which American is currently charging walk-up coach prices of up to $799. Even fourteen-day advance buyers on American could pay up to $599, more than JetBlue would hit you up for if you walked into the airport and tried to buy a ticket an hour before the flight.

For the new Embraer jets, which JetBlue plans to use for shorter hauls, like New York to the Carolinas, the airline is flying a little blind when doing a similar calculation, as it doesn’t know yet what the cost per ASM will be. But the exercise is the same: Using a proposed flight length of 541 miles (Ulmer says the airline is planning on 650-mile flights as the average for these planes), a cost per ASM of 12.5 cents—nearly double the current cost per ASM on the larger planes—and 85 percent loads on the 100-seat planes, Ulmer comes up with a $94 average fare. The highest fare is a $149 walk-up price—on a route for which a major competitor was charging $119 on a fourteen-day advance purchase on October 3, with an overnight stay required, and walk-up fares of $534.

JetBlue executives say their fare hikes—which have pushed their average ticket prices up by more than 10 percent in 2005—do not contradict its history of transparency, and indeed even suggest that the goodwill the company has built up through honest communication allows it to achieve the improbable: passenger acceptance of the necessity of higher prices. “It’s not like we’re one of the airlines that was charging $1,000 when people walked up to the ticket counter looking to go to the West Coast,” says JetBlue president Dave Barger. “Look, when you’re only paying an average of $110 for one-way flights to Orlando, there aren’t that many people that won’t go for another $2 or $4.”

Well, the total increases in 2005 amounted to a little more than that, but Barger’s right in this respect: Customers aren’t fleeing the airline. Through the end of September, JetBlue’s planes were 86.7 percent full, up more than 3 percentage points from last year.

The fact that several airlines are either in bankruptcy or teetering on the edge of it hasn’t, in the short term, made life easier for JetBlue. Competition has never been fiercer. The tone for 2005 was set early on, when Delta announced it was slashing many of its business fares by 50 percent. Along with its trendy, low-cost offspring Song, Delta is JetBlue’s major nemesis; the airlines compete head-to-head out of JFK on the popular New York–Florida routes as well as on transcontinental flights.

“Delta is our largest competitor, so it’s not a coincidence that they’re losing more money than anyone else,” Neeleman joked to me. When he continued, though, his tone turned deadly serious: “We can wait them out. We have a better product than they do.”

Two years ago, Delta started Song, mimicking many of JetBlue’s ideas, including seat-back TVs, as well as adding a few twists of its own: Passengers can order custom cocktails created by nightlife impresario Rande Gerber, limber up with an in-flight exercise program devised by David Barton, and admire Kate Spade–designed uniforms on the crew members. Frequent fliers can use their points on either airline, meaning a regular New York–to–Florida traveler on Song might cash in for a trip on Delta to Europe, a benefit unavailable to JetBlue passengers.


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