JetBlue Is Strafing the Big Boys--Again

Its smaller jets may let it grab more rivals' business

The history of startup airlines is littered with those that grew too fast or strayed too far from a successful business model. Look no further than '80s phenomenon People Express, which stumbled after it bought another airline and started flying jumbo 747s. So when rising star JetBlue Airways (JBLU ) Corp. stunned the industry with a $3 billion aircraft order that will allow it to enter smaller markets, nervous investors were quick to react. The stock fell nearly 5% on June 10, the day JetBlue announced its expansion plans.

Is CEO David Neeleman setting himself up for a fall? It would be easy to say yes -- if Neeleman hadn't already defied conventional wisdom for three years in building New York-based JetBlue. "He's way too smart [to repeat People Express' mistakes]," says that airline's founder, Donald C. Burr. With its 16% profit margins, JetBlue is insanely profitable, even as other airlines struggle in bankruptcy or on the verge of it. From just 10 Airbus 320 planes in 2000, JetBlue has grown to a fleet of 42 today, serving 21 cities and popular vacation destinations. Neeleman has done it by blending Southwest Airlines Co.-style efficiencies and low fares with cheeky promotions and such amenities as free live-satellite TV at every seat.

Now, Neeleman is promising to extend JetBlue service to markets that can be more economically served by the new 100-seat Embraer 190 jet. That's about 40% smaller than the Airbus plane JetBlue currently uses. It's also more cost-effective and comfortable than the smaller 50- and 70-seat jets flown by regional carriers. Neeleman claims the new fleet type -- for which JetBlue will be the launch customer, earning it favorable terms -- will provide the carrier more flexibility, less risk, and more growth opportunities. "Nothing has changed about what we are," he insists. "Our mission is to stimulate traffic, have the lowest fares, the lowest cost, and the best product."

Neeleman won't say where JetBlue will fly the new planes when the first of 100 arrive in 2005, but he hints that Charlotte, N.C.; Columbus, Ohio; and Indianapolis are possibilities, as are destinations in the Caribbean and Mexico. He might also up frequency of service to existing JetBlue cities such as Rochester, N.Y., and Burlington, Vt.

The small-jet strategy, though, could backfire. Adding a new airplane type will add complexities and costs to maintenance, pilot training, and scheduling. And it could complicate labor relations, since pilots on the smaller planes will be paid less. That's why Southwest has stuck with its Boeing 737 fleet.

JetBlue executives acknowledge that the smaller plane will have higher costs for each seat flown per mile, the standard way of measuring expenses in the industry. But these markets also have far higher fares per mile, giving JetBlue plenty of room to slash fares while still making healthy profits, they figure. And lower fares are expected to expand such markets, perhaps allowing JetBlue to bring in its bigger, cheaper planes later.

Indeed, the new plane brings tantalizing growth prospects at a time when most of the majors are scaling back. The new Embraer -- with a range of more than 2,000 miles -- will allow Neeleman to build up hub-style operations from JetBlue's New York base and perhaps Long Beach, Calif. It also gives him the opportunity to serve midsize cities in a point-to-point style that bypasses other carriers' hubs. Smaller aircraft, moreover, will enable JetBlue "to go after markets that low-cost carriers have not had much success in, and in fact haven't tried much to go after," says Daniel Kasper, an airline expert at consultant LECG Inc.

If he succeeds, Neeleman will deal yet another blow to the major hub-and-spoke carriers. Their lower-cost regional partners are mostly precluded from using 100-seat jets under existing pilot contracts. And many of the smaller markets JetBlue can target with Embraer 190s will likely be ones the big airlines thought would be insulated from low-fare competition for years to come. If JetBlue has its way, there will be no place left for them to hide.

By Wendy Zellner in Dallas

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