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In Search of Profitability, JetBlue Increases Prices

In Search of Profitability, JetBlue Increases Prices

JetBlue made its name in the airline business with low fares. But in the bruising battle for passengers and profitability, it is trying a new tack: raising prices.

A central testing ground for this approach is the heavily traveled New York-to-Florida corridor.

JetBlue Airways - at six years old too new to have built up excessive costs that can now be trimmed - is trying mightily to raise fares in a bid to restore profits after surging fuel prices caused it to lose $42.4 million during the fourth quarter. Along the East Coast, JetBlue, which is based in New York, competes head to head against traditional carriers like Delta Air Lines and Continental Airlines. JetBlue's low fares, matched by the competition, have stimulated a big increase in demand for travel in recent years.

JetBlue says it needs a $10 increase on one-way tickets, which averaged $110 last year. If the carriers can pull off a major price increase without scaring off a lot of those price-sensitive passengers, it would be an encouraging sign for the health of the industry. It would also help JetBlue continue its rapid growth. It plans to add 35 planes this year and 35 next year, and to take on billions of dollars in debt in the hope of becoming one of the country's biggest and most successful airlines.

Domestic fares on an industrywide basis are already up by about 8 percent compared with a year ago. Much of that increase, however, is because of reduced fleets at some major carriers, which has cut the supply of airline seats at a time when demand has remained strong. As Delta and Northwest Airlines move through bankruptcy proceedings, the fleet reductions will probably come to an end and the supply of seats will rise, making price increases harder to push through.

During the last six years, when traditional airlines were piling up more than $40 billion in losses, JetBlue grew to $1.7 billion in annual revenue and became increasingly popular with travelers. Its planes feature leather seats and individual television screens with lots of channels. New planes and new, nonunion workers gave it unusually low costs. But now that fuel prices have pushed up expenses for all airlines, and older carriers have sharply cut their own labor costs, the advantage JetBlue enjoyed as a start-up is greatly reduced.

"Many JetBlue investors we speak with are under the impression there's something patently different about its model, some core ├╝ber-profitability that's waiting to be tapped," Jamie Baker, an analyst at J. P. Morgan Securities said in a report last month. "We doubt it."

JetBlue's biggest obstacle has been Delta. "We've had a competitor that's been willing to lose hundreds of millions of dollars," said David G. Neeleman, founder and chief executive of JetBlue. During last year's third quarter, Delta's average ticket prices on seven heavily traveled routes were lower than JetBlue's prices, according to Back Aviation Solutions, a consulting firm. Still, on flights between South Florida and New York, JetBlue planes flew 86.6 percent full during the third quarter and Delta planes were 76.7 percent full.

"JetBlue is charging a premium to Delta and they're getting better load factors," said Michael Allen, a managing director at Back Aviation. "The indication would be they have a preferred product."

Last October, the news that Delta would close Song, the low-price airline it started to compete with JetBlue, was greeted with relief at JetBlue headquarters. Finally, Mr. Neeleman and others hoped, the costly price war up and down the East Coast would subside. But more than three months later, JetBlue is still waiting to find out how substantially Delta will scale back the number of seats it offers on those routes. "We are waiting to see what Delta does," said Tim Claydon, senior vice president of sales and marketing at JetBlue.

Delta, while saying it will substitute smaller planes on some New York-to-Florida routes beginning in May, is in no hurry to offer comfort to JetBlue by disclosing its plans. "We ain't pulling out," Chris Kelly, a Delta spokeswoman, said. "Much to their dismay, I'm sure." Delta plans to withdraw some of the Boeing 757's that were operated as Song planes, seating 199 passengers, and replace them with Boeing 737's or MD-80's, which seat about 150 and 142, respectively, said Bob Cortelyou, vice president of network planning at Delta.

Mr. Baker of J. P. Morgan estimated that Delta was reducing seats between the Northeast and Florida by about 15 percent from a year ago. He said that should be enough to allow JetBlue to raise fares and report a small profit for 2006. ***

by Jeff Bailey

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