In theory, airline giants like American Airlines (NASDAQ: AAL) and Delta Air Lines (NYSE: DAL) should face intense competition across their route networks. There are few natural barriers to prevent smaller carriers from challenging entrenched airlines, even in their core markets.
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This lack of barriers to entry allowed JetBlue Airways (NASDAQ: JBLU) to upend the U.S. airline industry after it burst onto the scene in 2000. It became a leading carrier in cities like New York, Boston, and Fort Lauderdale by offering leisure travelers lower fares and better amenities than the incumbents. More recently, it has been making inroads among business travelers, due in part to its new "Mint" premium long-haul service.
JetBlue has become the fifth largest U.S. airline in less than two decades. Image source: JetBlue Airways.
However, legacy carriers like Delta and American maintain one big advantage over upstarts like JetBlue: sizable slot portfolios at some of the most important airports in the world. Without access to slots, smaller airlines can't add flights at these airports, putting them at a disadvantage in competing for business travelers.
Thus, it's great for JetBlue when slot-constrained airports in key business markets are expanded, creating new slots. In the coming years, JetBlue could benefit from major airport expansion projects in Mexico City and London.
Mexico City is getting a new airport
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Mexico City is already a key business hub within Latin America. As the Mexican economy develops, it will become an even more important city for business travelers.
One of Mexico City's biggest economic weaknesses is its substandard airport. Mexico City International Airport has been filled to capacity for years. Its runways are too close together for simultaneous operations, and there is no room to expand.
JetBlue began serving Mexico City in late 2015, but its daily flights to Fort Lauderdale and Orlando haven't been a big success. As one JetBlue executive recently put it, "Right now we're the carrier of choice if you want to fly at 5:00 a.m." JetBlue hasn't been able to secure any daytime slots in Mexico City, which severely limits its appeal to potential customers.
In the short run, JetBlue can try to gain a few extra slots from the eight slot pairs that Delta Air Lines must divest as a condition of forming a joint venture with Aeromexico. (Aeromexico already holds nearly half of the slots at Mexico City International Airport.) But this would only be a partial solution.
Delta will soon divest its eight slot pairs at Mexico City International Airport. Image source: The Motley Fool.
Fortunately, the Mexican government has begun construction of a new, much larger airport for Mexico City. If all goes well, the first phase of the new airport will be ready by 2020. This will enable greater competition.
With slot constraints removed, JetBlue could offer a more convenient flight schedule to Orlando and Fort Lauderdale, with multiple daily flights. It could also add service to Mexico City from its larger New York and Boston focus cities.
London airport expansion plans inch forward
An even more momentous airport project is slowly moving forward in London, the world's largest aviation market. The U.K. government recently endorsed building a third runway at London's overcrowded Heathrow Airport. It would be the first new runway built in the London area since World War II!
Earlier this year, JetBlue publicly acknowledged its interest in flying to Europe, using Airbus' upcoming A321LR aircraft. Yet any such effort would be complicated by the fact that Heathrow Airport -- the preferred London airport for business travelers -- doesn't have any slots available for new entrants.
Slots are rarely available for purchase, partly because British Airways and its joint venture partners (including American Airlines) control more than half of Heathrow's slots. They fetch enormous sums when they do come on the market. A few years ago, Delta paid $360 million for a minority stake in money-losing Virgin Atlantic just to have more access to slots at Heathrow Airport. Earlier this year, a single slot pair sold for a whopping $75 million.
Even if JetBlue managed to buy a few slot pairs at Heathrow Airport, the high cost of acquiring them would drive up its fares. By contrast, a third runway would increase the airport's capacity by about 50%, enabling hundreds of extra flights per day and creating room for new entrants like JetBlue.
If it can assemble a robust slot portfolio at Heathrow Airport, JetBlue's Mint premium service would be a great fit for the New York-London and Boston-London markets. JetBlue has been incredibly successful competing against the likes of Delta and American in the transcontinental market, and Mint could prove to be just as popular on transatlantic flights.
JetBlue's premium Mint service could be appealing for transatlantic flights. Image source: JetBlue Airways.
Heathrow's third runway isn't scheduled to open until 2025. With legal challenges in the pipeline, many observers think construction could drag out until 2030. Still, JetBlue is at least three or four years away from expanding into Europe -- and there are plenty of other cities it could serve profitably. It can afford to wait to make its move in London.
JetBlue has lots of opportunities
JetBlue Airways is already incredibly successful, but the company has tons of upside left. JetBlue was fortunate to secure a big footprint in New York before slots became scarce there, but it still lacks adequate access to some key business markets.
Upcoming airport expansion projects should allow JetBlue to build out a much more competitive schedule in Mexico City and give it access to the lucrative London market. This will support its continued evolution into a more business-friendly airline.
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Adam Levine-Weinberg owns shares of JetBlue Airways and is long January 2017 $17 calls on JetBlue Airways and long January 2017 $40 calls on Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.