JetBlue Heads West In Search Of Growth And Diversification

by Trefis Team
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JetBlue (NASDAQ:JBLU) recently announced that it will start daily flights on the Anchorage-Seattle route during the summer months. [1] The airline already flies on the Anchorage-Los Angeles route; however operations on the newly announced route are significant as maximum passenger traffic to and from the state of Alaska is through Seattle. Thus, the route holds significant growth potential for JetBlue.

In addition, increased flights on the west coast will reduce the airline’s dependence on its east coast operations. We currently have a stock price estimate of $5.79 for the airline, approximately 10% above its current market price.

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The route has long been dominated by Alaska Airlines

The route between Anchorage in the state of Alaska and Seattle has long been dominated by Alaska Airlines (NYSE:ALK). Seattle is also the primary hub for Alaska Airlines. In 2011, passengers to and from Seattle formed nearly 63% of total passenger traffic for the airline. [2] However, JetBlue’s entry could impact this domination. Low-cost carriers like JetBlue and Southwest have in the past captured market share on new routes by leveraging their lower fares.

Additionally, operations of a low-cost carrier on a route significantly impacts the pricing power of other carriers on that route. Thus, JetBlue’s operations on the Anchorage-Seattle route will impact both margins and market share of Alaska Airlines over the long term. Seattle is also the top destination for passengers from the state of Alaska. So, the route offers a big opportunity for JetBlue to add to its passenger traffic growth.

The route reduces JetBlue’s dependence on east coast operations

Further, most of JetBlue’s passenger traffic and capacity is focused on the east coast with New York as the hub. Diversification of this network to other geographies will reduce the risk associated with JetBlue’s operations being focused on a particular area. For instance, the impact of hurricane Sandy which struck the U.S. east coast was much more on JetBlue compared to most other airlines, as JetBlue derives a large portion of its total passenger traffic from the east coast. The airline anticipates to incur expenses of $25 to $30 million on its operating income in the fourth quarter due to the hurricane. [3] Thus, the addition of routes on the west coast will reduce JetBlue’s vulnerability to natural calamities on the east coast. The airline will begin service on the Anchorage-Seattle route on May 16, 2013.

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Notes:
  1. JetBlue to Give Alaska Customers a New Option With Debut of Anchorage – Seattle Route, November 16 2012, www.jetblue.com []
  2. Alaska Air Group 2011 10-K, www.alaskaair.com []
  3. JetBlue Airways Reports October Traffic, November 15 2012, www.jetblue.com []
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