David Neeleman Casualty or Cashing out?

Posted on 11. May, 2007 by in Featured

David Neelemen appears to be the offered sacrifice for JetBlue’s operational melt downs. Coupled with a laughable “passenger bill of rights” now all is fine at JetBlue, so they spin.
Let’s take a closer look; JetBlue has been a Wall Street darling since the day Sorros funded the start up. Low cost was the mantra, “Legacy Carriers” are doomed, they can’t compete. Just like the “Brick and Mortar” companies are doomed mantra, which now in retrospect looks pretty stupid. JetBlue is having serious problems and while the “Legacy Carriers” have turned the corner in profitability, the former darling of the industry has been left behind.
So what does the sacking of Mr. Neeleman really mean? First a little background; Mr. Neeleman’s history is one of an entrepreneur. He built Morris Air and Open Skies, and then sold them off to competitors. A surface analysis of the move by the Board of Directors to replace Mr. Neeleman with an operationally oriented CEO, would bring most observers to the conclusion that JetBlue’s BOD is in it for the long haul. Is that the case? Or are they cleaning up the mess before a sale.
The Low Cost Carriers (LCC’s) are headed for the same train wreck the Major Network Carriers had post 911. Cost, CASM (cost per available seat mile) means nothing in and of itself. It only matters in relation to Revenue RASM (revenue per available seat mile).
RASM-CASM=Yield, it appears to be that simple. It is not; to start with you have to mix in Load Factor. Here in lies the split rail that the LCC’s are speeding toward. Like the Network Carriers did in the past decade, the LCC’s as an industry have over expanded. This over expansion has diluted load factors.
Historically LCC’s kept their costs down by expansion, covering fixed over head by flying the expensive assets more. High fuel costs and overexpansion has had the duel effect of, 1. Raising costs and 2. Diluting load factors. Mix in fare wars and you will get a train wreck. South West has been able to remain profitable because they had extensive fuel hedges at half the price other carriers were paying. The hedges are running out, they are scrambling to cover the higher CASM by entering high RASM markets like Denver and Philly.
Make no mistake this is a water-shed decision for SW because it moves out side their long established model. They have expanded as far as the market will support under their old model. Now they must chase RASM to cover their increasing CASM to maintain their YIELD. They are hinting strongly the future will be bumpy.
Back to JetBlue and its problems. They too recognized the Load Factor dilution and resulting YIELD crisis and chose a different route, a second fleet to lower costs and try and get into more markets for more of the premium (business traveler) market. Problems arose immediately. First they were the launch customer for a new aircraft that came with a series of technical and operational growing pains. Second, to keep CASM down they decided to pay the crews half what the going pay rate was for a 100 seat aircraft, (approx 78 per flight hour while Air Tran paid approx 140 for the same size aircraft). Obviously the pilots were not impressed and a lot of the good will between management and them was lost. They have raised the rates since, but the damage was done.
Their hyper lean manning model, more than anything else, lead to the operational melt downs on St. Valentines Day and St. Patrick’s Day. Certainly a disillusioned and angry pilot group didn’t help. So the true conundrum they find themselves in operationally, is they have to raise their reserve pilot numbers and thus CASM or expect more melt downs in the future. All the “passenger rights” and corporate officer shuffling won’t change that. So watch for what happens, my money is on a “paint and sell” strategy. The network carriers are gaining strength and free capitol. They are supported by an international network and looking for pay back!

Is there a paradigm shift in the consolidation game? Will LCC’s be swallowed by Legacy Carriers? Stay tuned….

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