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jetBlue Airways, armed with its premium product Mint, is poised to disrupt the trans-Atlantic market

Periodically throughout the last few years jetBlue has hinted that long haul trans-Atlantic flights could be a possibility at some point in its evolution. But in mid-2016 the company took a more concrete step towards serving trans-Atlantic routes by altering its Airbus order book – potentially to support long haul expansion.

JetBlue’s decision to option the Airbus A321LR occurs at a time when airlines such as WestJet, Norwegian Air Shuttle and WOW Air are pushing the low cost model into the long haul international market. Perhaps the steps those airlines are taking to carve out the low cost niche in the long haul space has accelerated jetBlue’s evaluations of trans-Atlantic service. The company has declared that it would make a decision about its options for the long-range Airbus narrowbody in 2017 ahead of the narrowbody’s debut in 2019.

The biggest drivers for jetBlue’s decision to enter the long haul trans-Atlantic market are identifying routes where it can inject low fares to stimulate traffic and drive revenue. The company’s base in Boston is emerging as the epicentre for those potential opportunities.

Mint could be the key for jetBlue's success in trans-Atlantic markets

During the past couple of years, while JetBlue has been developing and eventually expanding its premium Mint product featured on a special subfleet of Airbus narrowbodies, WOW Air, Norwegian Air Shuttle and WestJet have ushered in the low cost model on trans-Atlantic routes.

Although Norwegian Air Shuttle and WOW Air still only represent a small portion of seats between the US and Western Europe, WOW Air’s seats have more than doubled during the past year, and Norwegian’s have increased 50%.

United States of America to Western Europe (seats per week, one way, 28-Sep-2015 and 26-Sep-2016)

Airline Week of 28-Sep-2015 seats Week of 28-Sep-2015 percentage share Week of 26-Sep-2016 seats Week of 26-Sep-2016 percentage share
Aer Lingus 18,099 seats 2.38% 21,030 seats (16.19%) 2.56%
Air Europa Lineas Aereas 3,007 seats 0.4% 3,869 seats (28.67%) 0.47%
Air France 42,050 seats 5.54% 41,277 seats (-1.84%) 5.02%
Air India N/A N/A 768 seats 0.09%
Air New Zealand 2,324 seats 0.31% 2,324 seats (0%) 0.28%
Air Tahiti Nui 1,480 seats 0.19% 1,480 seats (0%) 0.18%
Alitalia 13,382 seats 1.76% 14,370 seats (7.38%) 1.75%
American Airlines 64,703 seats 8.52% 101,759 seats (57.27%) 12.37%
Austrian Airlines 7,476 seats 0.98% 8,013 seats (7.18%) 0.97%
British Airways 87,498 seats 11.53% 89,391 seats (2.16%) 10.87%
Brussels Airlines 3,208 seats 0.42% 3,656 seats (13.97%) 0.44%
Condor Flugdienst 1,992 seats 0.26% 1,992 seats (0%) 0.24%
Delta Air Lines 110,000 seats 14.49% 117,562 seats (6.87%) 14.29%
Emirates Airline 3,521 seats 0.46% 3,633 seats (3.18%) 0.44%
Ethiopian Airlines 807 seats 0.11% 810 seats (0.37%) 0.1%
Eurowings N/A N/A 930 seats 0.11%
Finnair 2,800 seats 0.37% 4,095 seats (46.25%) 0.5%
Iberia 12,007 seats 1.58% 13,776 seats (14.73%) 1.67%
Icelandair 10,722 seats 1.41% 15,979 seats (49.03%) 1.94%
Jet Airways 1,780 seats 0.23% N/A N/A
Jetairfly 582 seats 0.08% 378 seats (-35.05%) 0.05%
KLM Royal Dutch Airlines 24,740 seats 3.26% 24,860 seats (0.49%) 3.02%
Kuwait Airways 819 seats 0.11% N/A N/A
La Compagnie 720 seats 0.09% 518 seats (-28.06%) 0.06%
Lufthansa 75,243 seats 9.91% 76,475 seats (1.64%) 9.3%
Meridiana 1,088 seats 0.14% 2,260 seats (107.72%) 0.27%
Norwegian Air Shuttle ASA 13,420 seats 1.77% 20,213 seats (50.62%) 2.46%
SAS 13,519 seats 1.78% 17,669 seats (30.7%) 2.15%
SATA International 1,554 seats 0.2% 1,656 seats (6.56%) 0.2%
SWISS 15,793 seats 2.08% 18,056 seats (14.33%) 2.2%
Singapore Airlines 3,115 seats 0.41% 3,115 seats (0%) 0.38%
TAP Portugal 3,206 seats 0.42% 6,580 seats (105.24%) 0.8%
TUI Airlines Netherlands 582 seats 0.08% 582 seats (0%) 0.07%
Thomas Cook Airlines 6,593 seats 0.87% 20,580 seats (212.15%) 2.5%
Thomson Airways 2,910 seats 0.38% 3,066 seats (5.36%) 0.37%
US Airways 38,911 seats 5.13% N/A N/A
United Airlines 99,186 seats 13.07% 106,423 seats (7.3%) 12.94%
Virgin Atlantic Airways 53,461 seats 7.04% 48,441 seats (-9.39%) 5.89%
WOW air 2,200 seats 0.29% 5,878 seats (167.18%) 0.71%
XL Airways France 1,632 seats 0.21% 2,316 seats (41.91%) 0.28%
airberlin 13,020 seats 1.72% 16,740 seats (28.57%) 2.04%
Total 759,150 seats 100% 822,520 seats (8.35%) 100%

Canada’s second largest airline WestJet debuted its nonstop long haul flights with Boeing 767 widebodies from several Canadian destinations to London Gatwick in May-2016. The service consists of year-round flights from Calgary and Toronto and seasonal routes from Vancouver, St John’s, Edmonton and Winnipeg to Gatwick.

WestJet’s service debut to Gatwick was shaky, driven by maintenance problems with its 767 widebodies, but the airline has moved past those operational challenges. The airline maintains that the service is accretive to its bottom line, and it is in the market attempting to obtain additional widebodies for expansion.

See related report: WestJet’s 767 operational problems cloud a significant low cost long haul opportunity

None of the other new entrant airlines offers a premium flatbed seating option – something that has distinguished jetBlue during the past couple of years in the US domestic market.

Mint was conceptualised by jetBlue as a mechanism to capture revenue that it was losing to competitors on key and competitive US transcontinental markets between New York JFK and San Francisco and Los Angeles. In Apr-2016 jetBlue executives stated that its routes between New York JFK and Los Angeles and San Francisco during the past 12 months had generated double-digit revenue each month. During early Apr-2016 jetBlue increased Mint fares in those markets by between USD25 and USD75.

See related report: jetBlue’s Mint a great example of innovation; next phase now tests its premium model more widely

jetBlue has expanded Mint from Boston and plans to add Mint flights from its base in Fort Lauderdale; it plans to grow its Mint subfleet from 11 A321s at YE2015 to 26 by YE2017.

It is not far-fetched to conclude that Mint’s success could be replicated in the trans-Atlantic space, since jetBlue could position its product between the higher-priced offerings of more traditional airlines and the lower-end offerings of the current low cost operators in the market.

jetBlue executives recently stated that it saw some of the same characteristics in the trans-Atlantic market as in US transcontinental routes – limited competition and higher fares.

Boston is likely to become jetBlue's launch pad for potential service to Europe

In Jul-2016 jetBlue placed an order for 30 incremental Airbus A321s, 15 of which can be converted into the A321LR that features a range of 4,000nm. The A321LR can reach several destinations on the edge of Western Europe from the US East Coast, including London, Manchester, Bristol, Belfast and Dublin.

jetBlue Airways fleet summary as of 29-Sep-2016

Aircraft In Service Inactive On Order*
Total: 222 0 140
Airbus A320-200 130 0 0
Airbus A320-200neo 0 0 25
Airbus A321-200 32 0 31
Airbus A321-200neo 0 0 60
Embraer ERJ190-100IGW(AR) 60 0 24

jetBlue has cited the capacity concentration of the large three global alliances across the Atlantic as one possible driver of the lack of lower fares in those markets.

Data from CAPA and OAG for the week of 26-Sep-2016 show that members of SkyTeam, Star and oneworld control 72% of the seats on offer between the US and Western Europe, with the bulk of that capacity controlled by immunised joint ventures among members of those alliances.

Seat share of the three alliances between the US and Western Europe: 26-Sep-2016

SkyTeam 22%
Star 25%
oneworld 25%

The company singled out its Boston base – which is jetBlue’s second largest by seat deployment – as a potential launch pad for its trans-Atlantic service. Airline executives highlighted several important business markets across the Atlantic from Boston that feature high fares.

jetBlue Airways global top 10 hubs/bases/stations by seats: 26-Sep-2016 to 2-Oct-2016

Boston is a natural choice for jetBlue’s trans-Atlantic service. The company is the airport’s largest airline, with a 24% seat share, and has worked to build its roster of corporate clients in the market.

Boston Logan International Airport capacity by airline (% of seats): 26-Sep-2016 to 2-Oct-2016

jetBlue could easily enter the Boston-London market with service to Gatwick – a route presently served by Norwegian. Aer Lingus operates flights from Boston to Dublin and Shannon. jetBlue and Aer Lingus already codeshare on Aer Lingus’ flights to Europe and on jetBlue’s beyond network from Boston. It is not clear whether the codeshare would remain intact if jetBlue launched service to those Irish markets but Aer Lingus, which is now part of the IAG Group, could benefit from additional feed from jetBlue.

Obviously jetBlue will have to consider the effects of the Brexit vote as it evaluates service to London. WestJet executives recently stated that to the extent the GBP has weakened, that puts some pressure on UK point of sale.

However, WestJet is the only North American LCC operating from Canada on routes in the North Atlantic; and its fares are lower than incumbent airlines; and if UK-originating passengers become more price-sensitive – it could be a plus for WestJet.

Paris is also within the A321LR range from Boston and is served by American and SkyTeam joint venture partners Air France and Delta. Paris could be a promising market for jetBlue’s mid-tier product that smaller corporate customers could find attractive.

jetBlue could also deploy some of the A321LRs on routes deeper into South America, and by the time it will have received the jets (2019) the region’s economic climate should be in recovery mode.

Several factors drive jetBlue's serious consideration of trans-Atlantic flights

The availability of the A321LR, jetBlue’s praise of the aircraft, and the crop of LCCs that have entered into the trans-Atlantic market during the past few years have accelerated jetBlue’s evaluation of the trans-Atlantic market.

An aircraft that fits into its existing fleet doesn’t carry the financial burden of widebody jets at a time when jetBlue has vastly improved its leverage ratios during the past couple of years. Its year-end net debt to EBITDAR ratio dropped from 4.1x in 2011 to 1.1x in 2015.

See related report: US Airline debt and balance sheets Part 2: Alaska, jetBlue and Southwest favourably leveraged

jetBlue is also no doubt closely studying the movement of other LCCs in the trans-Atlantic space to gauge the reception the model is receiving in the market; this could determine how big the opportunity could be for its differentiated product.

With Mint, jetBlue could serve as potential disruptor in the trans-Atlantic market

Although jetBlue is taking extreme care to stress it has not made a decision about exercising its options for the A321LR, the airline appears bullish on potential opportunities for its niche product across the trans-Atlantic. While the other LCCs on the route do have forms of premium seating, none has a lie-flat product of the quality of jetBlue's, a serious challenger to the incumbents' premium models.

Armed with its Mint premium product, jetBlue could prove to be a serious disruptor in a market that could use an injection of fresh thinking.

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