How JetBlue Takes on the Airline Industry

It's no secret that succeeding in the airline industry is difficult, yet JetBlue Airways has managed to survive a period that saw almost all legacy carriers flying today declare bankruptcy.

The airline industry has changed a lot since then. Let's look at the current industry conditions, including competition, consolidation, and potential threats, and explore where airlines could be headed.

Consolidation waveWhile the airline industry has taken a lot of challenges from economic recessions to volatile oil prices,the reason for the drop in the number of legacy carriers is consolidation, not bankruptcy. In the past few years, we have seen three major mergers within the space:

Even domestically focused Southwest Airlines got in on the merger action by acquiring AirTran Airways, giving Southwest some quick growth and access to its first international routes.

Source: Bureau of Transportation Statistics.

Consolidation benefitsBy combining with other carriers, the major airlines get better capacity discipline and can pass on higher fares. At the same time, economies of scale have resulted in billions in synergies for the major carriers as they reduced redundant services and integrated workforces.

Even though JetBlue wasn't part of any of the big airline mergers, it still stands to benefit from the mergers in two ways: additional slots in restricted airports and higher fares from reduced competition.

Source: JetBlue.

For JetBlue, slot restrictions are a double-edged sword. On the one hand, they help protect existing operations from new competitors that might bring lower fares or capture market share. On the other hand, slot restrictions could make expansion more difficult for JetBlue since it can be tougher to break into restricted airports. In 2014, JetBlue won 12 slots at Washington National Airport that American Airlines gave up to complete its merger with US Airways.

Also, with fewer major carriers fighting on prices, the entire industry has seen a lift in profitability. Reduced compeition has contributed to a 13% total nominal rise ( 2.6% inflation adjusted) in average airfares since the 2008 Delta-Northwest merger.JetBlue is reaping the benefits of these higher fares as well. Since 2008, the airline's average fare increased a total of 19.4%, or 9.4% inflation adjusted. Not only did the average fare increase, but the average stage length decreased nearly 3%, showing that the higher fares did not come solely from flying longer routes.

While this fare increase may not seem like much, the airline industry has high revenues and thin margins (JetBlue's operating margin is only 8.9%) so even small fare increases can create substantial profit growth.

Threats from new technologiesIn 2015, air travel is the fastest practical way to move people and cargo over large distances in most of the world. While some might think high-speed rail is a potential disruptor of airline traffic, I don't see this as a major threat to the airline industry. High speed rail only really works where there is a dense configuration of population centers, similar to that of the Northeastern United States and Europe, but even with high-speed rail in Europe and some in the Northeast U.S., both regions still support robust airline travel.

Digital communication may get some businesses to cut back on travel, but this technology doesn't meet all of the goals of business travel in many cases. Longer-term, this could be an area to watch as technology improves, but current business travel appears healthy despite all sorts of digital communication technologies.

For now, passenger traffic among U.S. carriers is increasing, with 2014 seeing 72.09 million revenue passenger miles, up from 70.97 million passenger miles from 2013. This increase in demand follows with the growth in the economy, which helps to stimulate business and leisure demand. Although there will likely be bumps along the road, the International Air Transport Association estimates air passenger demand to grow at a rate of 3.3% annually for the next 20 years.

Threats from new airlinesHistorically, competition has been one of the major downfalls of the airline industry, so the threat from new airlines is definitely worth examining.

While consolidation has reduced current levels of competition, there are ways new competitors could cause problems. Airlines entering with lower fares could drive down overall fares and individual airline margins. However, these airlines would either need to operate with extremely thin margins -- which is difficult for start-up companies in capital-intensive industries -- or reduce features, which would make their product a lower-end one competing for a different market. Right now, Spirit Airlines and Allegiant Air are looked at as threats because they are bringing in lower fares to attack the lower end of the market.

Moves by new airlines are something to watch, but the barriers to entry in the airline industry are high because of difficulty securing slots at key airports, the lack of a loyal customer base, and the high fixed costs that begin from day one.

Key statisticsStatisticians have plenty to work with when analyzing airlines, but there are only a few key statistics that are of particular significance. The first is passenger revenue per available seat mile, or PRASM. This metric measures how much revenue an airline is able to collect for each mile each seat is flown. Clearly a higher number is beneficial, here, as it means more revenue is being collected on the same number of seats.

Source: Company 10-Ks.

JetBlue trails its larger rivals on both operational efficiency and on PRASM growth, but it's still seeing respectable growth, here. Last June, the airline launched its new Mint suite offering, with a higher price than ordinary seats in an effort to boost revenue. Investors should see how this translates to PRASM growth as the suites see their first full year of operation in 2015.

Another key statistic industry watchers follow is load factor. This measures what percentage of an airline's seats are filled. Since there are so many fixed fees associated with travel, load factors need to be high to remain profitable.

Source: Company 10-Ks.

JetBlue's load factor is near the higher end of the range, but it registered only slight growth in 2014. The airline is not running excess capacity in the air. Investors should keep an eye on load factor results as they can provide insight on the strength of demand and, in JetBlue's case, can hint at whether or not the new premium seat offerings are selling.

Because of the significance of these metrics, airline investors should watch for the monthly traffic reports released by carriers, which contain both PRASM and load factor numbers.

The bottom lineJetBlue is the largest of the non-major U.S. carriers by market share, but it's benefiting from the consolidated industry environment the major carriers have merged to create. Investors should still watch out for new airlines and new technologies, but neither one appears to be a near-term threat to JetBlue's viability.

Overall, JetBlue is largely connected to the fortunes of the airline industry through fares and fuel prices as it continues in its growth plans.

The article How JetBlue Takes on the Airline Industry originally appeared on

Alexander MacLennan owns shares of American Airlines Group and Delta Air Lines. Alexander MacLennan has the following options: long January 2017 $25 calls on American Airlines Group and long January 2016 $60 calls on American Airlines Group. 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.

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