jetBlue Airways keeps long-term cost performance in sight as US pricing trends start to stabilise

After outperforming the industry throughout most of 2015 in its unit revenue performance, jetBlue Airways has posted negative results throughout 2016, driven by a weaker pricing environment in the US market. Unlike other airlines, jetBlue does not provide much forward guidance about unit revenue, and is not venturing to offer a timeframe for a return to positive unit revenue. For 4Q2016 the airline is facing pressure from the timing of the Christmas holiday, and the effects of suspended operations due to hurricane Matthew in Oct-2016.

jetBlue is noticing similar trends to those at other US airlines – generally, close-in bookings and pricing began to improve in 3Q2016. Most US airlines are planning lower year-on-year capacity growth in 2017; these include jetBlue, which expects its supply to drop a couple of points below 2016 levels. jetBlue’s 2017 capacity will still run higher than that of some of the larger and more mature US airlines, but the company always stresses that it remains in growth mode, reflected in the introduction of eleven new routes from late 2016 through 1H2016.

After focusing on revenue generating strategies during the past couple of years – including the launch of its premium product Mint, the introduction of fare families and a cabin reconfiguration – jetBlue appears to be focused on its unit cost performance in 2017. Its unit cost growth has eased compared with several years ago, but in order to continue its growth trajectory the airline needs to lay out a strategy in late 2016 to maintain its cost advantage relative to the large US global airlines.

jetBlue cites improving trends, but the US pricing environment remains challenging

jetBlue’s declines in yields, passenger unit revenues and total unit revenues have improved, slowing sequentially from 2Q2016 to 3Q2016. The company’s year-on-year performance in those metrics was the worst in 2Q2016, as yield fell 10% and PRASM declined 10.5% year-on-year. In mid-2016 jetBlue trimmed its capacity projections for the full year from 8.5% to 10.5% to 8% to 9.5%.

jetBlue year-on-year unit revenue, passenger unit revenue and yield decrease:

Quarter RASM decrease PRASM decrease Yield decrease
1Q2016 7% 8% 8%
2Q2016 8.2% 10.5% 9.9%
3Q2016 3.5% 4.7% 5.9%

For FY2015 jetBlue posted PRASM growth of 0.7% – a performance among the best in the industry.

Throughout much of 2015 it was shielded from the pockets of weakness cropping up in the US industry in Dallas and Chicago.

See related report: jetBlue Airways praised by analysts and rating is upgrade, but 1Q2016 unit revenue is pressured

Beginning in the 1Q2016 the company cited pressure in close-in bookings, a trend that has persisted in the US industry until near the end of 3Q2016. The company has also suffered the effects of a wider weaker pricing environment in the US in 2016. Those factors have pressured jetBlue’s unit revenue performance, which was more pronounced in tougher year-on-year comparisons due to its industry outperformance throughout most of 2015.

Similarly to other US airlines, jetBlue has remarked that it was encouraged by an improvement in close-in bookings taking hold late in 3Q2016, which made for a better Sep-2016 than the airline was expecting. Its unit revenues for Sep-2016 fell approximately 2% year-on-year. However, jetBlue executives have remarked that prices are still lower than 2015 but “noticeably improved” from earlier in 3Q2016 and throughout 2016.

jetBlue faces 4Q2016 revenue challenges from weather and holiday calendar placement

jetBlue’s outlook for 4Q2016 is somewhat choppy. Hurricane Matthew, which struck the US east coast in Oct-2016, forced cancellations in two of jetBlue’s focus cities – Orlando and Fort Lauderdale. The company expects the effects of the storm to be a negative impact if 0.5ppt on its 4Q2016 unit revenues, and it projects a 3.5% to 4% decline in unit revenues for Oct-2016.

The occurrence of the Christmas holiday on the last Sunday of Dec-2016 will also pressure 4Q2016 unit revenue, and jetBlue expects the largest year-on-year unit revenue decline of the quarter in Dec-2016. The company has also remarked that industry revenue data for Dec-2016 is looking soft due to the calendar placement of the holidays.

To combat some of the unit revenue weakness it has experienced in 2016 jetBlue plans to reduce capacity in some of its pressured international markets. For the summer time period it cut capacity to Colombia by 25%, and reallocated some service from Puerto Rico to US domestic markets.

See related report: jetBlue Airways works to reverse negative unit revenues as investors continue pressure for rewards

The company recently concluded that it was reaping benefits from the capacity changes it made in Colombia and Puerto Rico. Data from CAPA and OAG for the week of 24-Oct-2016 show that jetBlue’s seats to Colombia are down approximately 20%.

The US ULCC Spirit has previously said that currency challenges in Colombia and some Central American countries had created pressure for the airline, but conditions were beginning to bottom out.

One area jetBue has identified as a “sore spot” is Mexico City.

The airline launched those services from its focus cities in Fort Lauderdale and Orlando in late 2015. jetBlue cited the greatest challenge is gaining flight times that are commercially viable. Noting that some of its flight depart at 0500h, the company has observed: “That’s a not a great opportunity for our customers”. However, jetBlue has also said that it had not encountered problems filling its aircraft.

jetBlue aims to outline a cost-management strategy for investors in late 2016

Two years ago jetBlue outlined plans to shore up its revenues after investors became increasingly vocal about its overall strategy. Since that time it has launched Mint, created fare families, and started a seat densification programme on its Airbus fleet. Its goal was to generate USD450 million in annual operating income on a run rate basis in CY2017. Previously jetBlue has estimated that the fare products should generate an annual run rate of USD200 million in revenue during 2016 – one year earlier than the company had originally expected.

See related report: jetBlue outlines strategy to appease investors, but still offer a differentiated product

In late 2014 jetBlue also outlined a plan to keep its unit costs excluding fuel below 2%, beginning in 2015. For FY2015 jetBlue delivered a solid cost performance, with unit costs of 0.5%, excluding fuel, profit share and related taxes. 
The company is projecting unit cost growth of zero to 1.5% (excluding those items) in 2016, and is working to post results in the lower end of that guidance. jetBlue is in the process of compiling a portfolio of multi-year cost initiatives that it plans to outline for investors in Dec-2016, including opportunities to lower the long-term expense of engine maintenance for IAE V2500 power plants on its Airbus A320s.

jetBlue Airways fleet summary as of 30-Oct-2016

Aircraft In Service Inactive On Order*
Total: 223 0 139
Airbus A320-200 130 0 0
Airbus A320-200neo 0 0 25
Airbus A321-200 33 0 30
Airbus A321-200neo 0 0 60
Embraer ERJ190-100IGW(AR) 60 0 24

Even with planned growth targets in 2017 falling a couple of percentage points below 2016’s growth, jetBlue still remains in a higher expansion mode relative to more mature US airlines. The airline understands that it needs to maintain a cost advantage in order to execute that growth successfully. “We see our cost advantage versus the legacy airlines...is something that powers our growth”, company CEO Robin Hayes has said. 
One unknown for jetBlue’s cost performance in the future is the outcome of negotiations with its pilots, who are now represented by the Air Line Pilots Association (ALPA). With the conclusion of recent contract talks for pilots at other large airlines including Southwest and Delta the industry average is moving to the right, and jetBlue will have to consider the rising average rates as it moves forward in pilot contract talks.

jetBlue turns its attention toward long term cost stability after focusing on growing revenue

Although jetBlue is close to celebrating its 17th anniversary of operations it still remains one of the youngest US airlines, and thus has a different growth profile from most of the airlines operating in the country.

But it too understands the importance of reasonable growth targets during a period when fuel costs are rising and pricing in the US domestic environment still remains challenging.

During the past couple of years the airline has undertaken a raft of changes designed to shore up its revenue, and the initiatives have been largely successful. Now jetBlue appears to be laying the groundwork for a long term strategy to keep its costs in line, in order to meet its growth potential.

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