American Draws a Bead on JetBlue

The giant is aiming to check the upstart's expansion

Since its first plane took off from New York's John F. Kennedy International Airport for Florida in February, 2000, JetBlue Airways Corp. (JBLU ) has pretty much flown below the radar of the major carriers. No more. In two years, JetBlue has turned JFK, which serves largely as an international gateway for other airlines, into its domestic hub, with flights to 17 U.S. cities. Now, the discount airline is going bicoastal, quickly expanding in metro Los Angeles to create a West Coast base. By doing so, JetBlue has made itself a target for its more established rivals.

Will JetBlue become the latest in a long line of startups to overreach? Clearly, American Airlines Inc. is gunning for it. On June 15, the world's biggest airline will go head-to-head with JetBlue by flying nonstop from JFK to Long Beach, Calif., JetBlue's West Coast hub. American is also pushing Long Beach authorities to revoke some of JetBlue's unused landing rights and award them instead to American so that it can add more flights.

Executives at the carrier, a unit of AMR Corp. (AMR ), insist they are merely responding to a competitive threat by hiking service at Long Beach. And for now, they are leaving JetBlue alone on the bulk of its routes. But David G. Neeleman, JetBlue's founder and CEO, can't afford to relax. American has a long history of taking on the little guys when they threaten its key markets. And if they chose to wage all-out war, there's little doubt American could cripple JetBlue.

Yet Neeleman has some advantages in this fight that other start-ups haven't had. For one, American isn't the mighty carrier it once was. Although it had $2.3 billion in cash as of Mar. 31, American has been losing more money since the September 11 terrorist attacks than any other airline and can ill afford a fight that will deepen its losses.

Just as important, JetBlue isn't just another People Express, the popular discount carrier from the early days of deregulation that borrowed heavily, overexpanded, and ultimately went bust. Unlike most previous airline startups, New York-based JetBlue has a tidy bankroll. Its original investors include financier George Soros, and its initial public offering in April was the hottest in a year. At last count, Neeleman says, the company had $275 million in cash reserves, and its $2 billion market cap--at least for now--is as big as the value of UAL (UAL ), Northwest Airlines (NWAC ), and US Airways Group (U ) combined. Equally impressive, JetBlue has made money since the start of 2001, when the industry as a whole slipped into the red. The carrier has earned a loyal base of customers who rave about its new planes, 24 channels of live satellite TV, leather seats, and low prices.

Moreover, Neeleman is no wild flyboy. A disciplined manager with a financial bent, Neeleman first showed his stuff at discount carrier Morris Air Corp. The Utah-based airline grew big and profitable enough that it became an easy fit with Southwest Airlines Co. (LUV ), which snatched it up in 1993. Like Morris, JetBlue is closely modeled on Southwest, with turnaround times so fast and costs so low that it can make money at fares that would bleed American. And like Southwest, Neeleman's airline flies primarily to airports ignored by the majors, making it harder for them to punish JetBlue in a fare war. "They're obviously predatory individuals at American," says Neeleman, "but we're doing fine."

He shouldn't kid himself, though. American may yet escalate its fight, and if it does, the pain could be deep on both sides. Already, it is demanding that Long Beach authorities take back some of JetBlue's slots or lift the limit on round trips at the airport from 41 a day. JetBlue quietly grabbed the rights to every available slot last year while its rivals weren't looking. It's unlikely that Long Beach will side with American, but if it does, JetBlue's expansion plans would suffer while giving American more opportunities to pummel JetBlue.

To strengthen JetBlue's case, Neeleman has sped up its expansion, redeploying new aircraft to add flights to Las Vegas, Salt Lake City, and Oakland, Calif. Neeleman knows the risks are high. Still, every so often a discount carrier survives. And if it continues to outfox American in California, JetBlue could be flying alongside the big guys for quite some time.

By Michael Arndt in Chicago, with Wendy Zellner in Dallas

    Before it's here, it's on the Bloomberg Terminal.