Reference no: EM131303995

Low-Fare JetBlue Competes on More Than Price

Can JetBlue Airways stay in the black over the long term? Founded by David Neeleman, a savvy entrepreneur who sold his regional airline to Southwest Airlines in 1994, JetBlue sent its first flight into the skies in 2000. The airline quickly attained profitability and built a loyal customer base on the winning combination of customer-friendly service and low airfares. In recent years, however, JetBlue's high-flying profitability has lost a little altitude owing to high fuel costs and sagging revenues. CEO Neeleman knows that price is one of the top considerations for travelers. Major carriers typically quote dozens of fares between two locations depending on time of day and other factors.

By comparison, JetBlue's everyday pricing structure is far simpler and avoids complicated requirements such as Saturday night stayovers. The CEO says that the fares are based on demand and that JetBlue uses pricing to equalize the loads on the flights so that no jet takes off empty while another is completely full.

Thus fares for Sunday night flights tend to be higher because of higher demand, whereas Tuesday night flights may be priced lower owing to lower demand. Still, JetBlue's highest fare generally undercuts the lowest fare of its competitors. Promotional fares are even lower, such as the unusually low one-way price of $79 for nonstop flights from New York to California. Price is not the only way that JetBlue sets itself apart from competitors. Whereas many new carriers buy used jets, JetBlue flies new Airbus A320 and Embraer 190 jets with seat-back video screens showing satellite television programming. Rather than squeeze in the maximum 180 seats that A320s can hold, JetBlue flies with only 156, giving passengers more legroom.

In addition, the jets are outfitted with roomier leather seats, which cost twice as much as ordinary seats but last twice as long and make passengers feel pampered. Another advantage of new jets is higher fuel efficiency. A320s can operate on 60 percent of the amount of fuel burned by an equivalent jet built decades before. Even so, JetBlue's profit margin was squeezed as fuel costs skyrocketed from 81 cents per gallon to more than $1.50, pushing annual operating costs above $2.5 million. Nonetheless, the airline's total costs of 6.5 cents per mile remain well below the per-mile costs of most major competitors.

In part, this is so because JetBlue's technicians work on only two types of jets, which means that they gain proficiency at maintenance tasks and therefore save the airline time and money. Also, new jets come with a five-year warranty, so JetBlue need not budget for major repairs. Why base a low-fare airline in New York City? CEO Neeleman made this decision for two main reasons. First, he knew that New York travelers departing from nearby LaGuardia Airport faced crowds and delays unless they were willing to venture eight miles farther to fly from John F. Kennedy International Airport.

Second, unlike some metropolitan airports, JFK was not a regional hub for major airlines or for low-fare carriers such as Southwest. Seizing an opportunity to trade off a slightly less convenient location for lower competition and better on-time performance, Neeleman secured more than 70 takeoff and landing slots at JFK Airport, enough to accommodate JetBlue's growth for years to come.

From its first day of operation, JetBlue has relied on Internet bookings to minimize sales costs. Travelers who buy tickets directly through the company's website (www.jetblue.com) get a special discount and are also eligible for online specials such as "Get It Together" fares designed for two people traveling together. JetBlue books about half its fares on the Web and saves about $5 in transaction costs for each ticket booked online. The CEO's flight plan is to have JetBlue flying nearly 300 jets by 2010, transforming what was once a tiny startup into one of the largest airlines in the United States.

The biggest question mark in JetBlue's future is the effect of competition. Not only does the airline compete with low-cost carriers such as Southwest and AirTran, but it also must deal with low-fare airline brands established by United and Delta. An airfare price war in Atlanta became so intense not long ago that JetBlue pulled out of the market to concentrate on expanding into western states. Now, as Neeleman adds one new jet every three weeks and hires 1,700 new employees per year, he must keep JetBlue's prices competitive without grounding profits.

Questions for Discussion
1. In an industry in which pricing has driven many firms out of business or into bankruptcy protection, why does JetBlue compete so successfully on the basis of price?

2. How does JetBlue use pricing to deal with demand fluctuations?

3. Is a businessperson's demand for air travel likely to be relatively elastic or inelastic? Is a vacationer's demand for air travel likely to be relatively elastic or inelastic?

4. What other factors related to pricing are most important to JetBlue's management when making pricing decisions?