In conversation with JetBlue CEO Dave Barger
Culture counts above all for US premium LCC JetBlue – and getting the ancillary strategy right is a big part of that.
Unsurprisingly for the airline that in 2000 re-introduced the low cost model to the US market in a new guise, the company's culture is key to success. Much of what JetBlue CEO Dave Barger says about the operation echoes the Southwest philosophy, setting up a tantalising contest, as Southwest now enters JetBlue territory in New York.
"It's as simple as looking at an item as an investment in our Culture or an expense. Our greatest strength is our people, and while we're always looking for ways to become even more cost-efficient, I believe we're more productive as a workforce by investing in our Culture and ensuring the proper tools are in place. It's important to have the proper resources or tools to win against the competition in this industry landscape.
"It has never been our goal to be the lowest cost airline out there. Our mission has always been to provide more value for a fair price," says Mr Barger.
The carrier relies on its "award-winning brand, a strong route system, a fleet second to none in both fuel efficiency and comfort, a brand new terminal at JFK, solid strategic investors, outstanding business partners, a focused board of directors, a strong balance sheet and most importantly – a Culture and attitude that values winning in the marketplace". On the touchy issue of ancillary charges, JetBlue very carefully draws a line between charges for services that will add "to the customer experience" in ways that "also translate into additional revenue without taking away from the core JetBlue Experience". Instead, says Mr Barger, "we emphasise continuing to offer a number of elements as an integrated part of our product, including Live TV, one checked bag, free drinks and snacks and free seat assignments."
The value proposition is core. But that doesn't mean there is no ancillary upside. The carrier's focus, insists Mr Barger, is on "developing a number of 'Value Plus' products and services that customers have asked for and are prepared to pay an additional fee for. These include Even More Legroom seats, an Eat Up! snack box, reusable pillow and blanket and premium drinks. JetBlue Airways is still low cost – but we don't nickel and dime you."
In what ways do an airline CEO's skills need to vary from, say, a CEO of a bank or of a manufacturing company?
While not replying directly to this question, Dave Barger emphasises the sensitivity of the airline business, a factor that inevitably shapes the way management must prepare and respond:
There is a great deal of uncertainty in the economy, oil fluctuates daily, and it is difficult to forecast travel demand beyond a few months into the future. Volatility makes it more challenging to manage business across all industries, so it's important to be preventative in this landscape. JetBlue maintains one of the lowest cost structures in the industry thanks to cost discipline, a young fleet and productive and non-union crewmembers. We are focused on the long-term profitability of JetBlue. If we're convinced that we can't make something work, we're going to act upon it immediately. Our airline - while challenged in the current environment – is positioned well to be a long- term winner in the US airline industry. Working together as a team, focused on our desired result, we can overcome the obstacles and be one of the strongest players in our landscape and one of the strongest consumer brands
One of the biggest or most difficult issues to come to grips with in 'crossing over' and becoming more connective is transitioning the technology platform. Have you found a need to be more hands on in that area?
Transitioning reservations systems has been described as similar to a heart and lung transplant. To be certain, our transition to Sabre this year was a huge milestone. As an organisation, we viewed the transition as a process that required a lot of structure, a lot of planning and a solid team effort. We learned a lot from WestJet and thought very strategically about how to make the transition as seamless as possible and also how to protect our brand in the process. We are very pleased with the results.
You reaffirmed New York over Florida for your headquarters, despite some very attractive inducements to move. Why is being anchored in New York strategically worth more to JetBlue than anywhere else in the country? Does the fact that New York has a much higher average yield per pax have anything to do with it? Ditto codeshares and alliance relationships?
Our position as New York's Hometown Airline is important, both to our brand and to our goal to be America's Favorite Airline. New York, as a market, is as exciting as they come in the industry and we feel like we've been successful in navigating the commercial side, as well as coping with the regulatory and operational challenges. We view our unique position at JFK, considered the gateway to the world, as an incredible opportunity. We've started to capitalise on our unique position as the largest domestic carrier at JFK, as well as our stronghold in Boston, with international partnerships with Aer Lingus, El Al, South African and Lufthansa. We also have domestic partnerships with American Airlines and Cape Air.
Southwest is doubling New York-area capacity. At what point do they really start to hurt your position there?
It will be interesting to see how Southwest adapts to the New York environment. We are confident in the product that we offer and are willing to put it up against any coach class product in the industry.
How has Lufthansa's involvement changed JetBlue? Has there been a mutual learning curve?
We have a very positive working relationship with Lufthansa. As you may know, two of Lufthansa's senior executives sit on JetBlue's board of directors, and our strategic partnership goes well beyond just a codeshare arrangement. We have partnered with Lufthansa in a number of arenas – such as fuel purchasing – to leverage synergies between the two companies.
You want to expand into international markets and codeshares are obviously an easy way to do that. Which are the priority markets or regions in which JetBlue seeks to form partnerships?
The majority of what we do with other airlines from a partnership perspective is not codeshare, but rather have interline agreements. This is how our latest pacts with AA and LY are structured, for example.
When it comes to new opportunities, we are primarily focused on large international traffic flows in and out of the Northeast that provide the most connecting opportunities for JetBlue. So no one region is any more of a focus than another in that regard.
Has the US air travel market been commoditised? And if so, is it possible to de-commoditise it?
This is at the very core of what we do at JetBlue. We have staked our success on the concept of being a value carrier – one to which customers will return again and again if you offer the best value at a reasonable price. In doing this, we've had a decade of success – not without bumps in the road – but the brand and the concept of bringing humanity back to air travel have been very successful.
What percentage of total revenues do ancillaries now represent for you? How has it tracked over the past 18 months and what are you hoping from ancillaries over the next 18 and long term? Does it 'max out' at 23-25%, as Ryanair has suggested?
On our earnings call in July, we reported that when ancillary revenues reported in the passenger revenue line are combined with those in the Other Revenue line, total ancillary revenue in the second quarter was about USD 18 per passenger. We expect total ancillary revenues to increase ten percent year over year in 2010 [Ed: JetBlue reported an average fare of USD 139.02 for the Jun-2010 quarter].
What evidence are you seeing about the strength of the economic recovery (forward bookings/yields)?
On our most recent earnings call in July, we said that we are encouraged by the improving revenue environment and the success of our initiatives to attract higher yielding customers that include schedule optimisation, enhanced pricing capabilities and better connectivity in the GDS. We expect recent booking trends to continue through July and August with strong yields and load factors.