JetBlue Courts Business Travelers in New York, Washington

JetBlue Airways (NYSE:JBLU) is set to double its presence at New York LaGuardia Airport and Washington Reagan National Airport following the acquisition of 16 slot pairs at the business hubs. The low-cost carrier paid $72 million for the coveted landing rights, comfortably outbidding rival Southwest Airlines (NYSE:LUV) by some $26.6 million. ^[1] The move allows JetBlue to target more corporate travelers, who will in turn drive up its revenue per passenger mile. Higher revenue and expanding market share justify our price estimate of $7, which is 40% above the market value.

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Business Traffic Fair Game for Low-Cost Carriers

JetBlue is firmly committed to the no-frills business model that has to date kept its cost-base low while also maximizing fleet utilization. However, given its ambitious plans to continue growing capacity, the airline is also keen to expand its corporate offering in tandem. To this end, it broadly follows the hybrid business model pioneered by Europe’s easyJet.

Both JetBlue and easyJet seek to woo business traffic by offering service upgrades to their single-cabin product offering. In JetBlue’s case, passengers can pay a relatively modest sum of between $10 and $65 for additional legroom and early boarding privileges. While our models regard these extra sums as part of the airline’s ancillary revenue stream, they nonetheless boost JetBlue’s profile among corporate travelers, who may be wary of bargain-basement products.

The high price JetBlue paid for its landing slots at New York and Washington underscores the profitability of those hubs, with corporate and political travelers requiring high-frequency outbound services to multiple domestic destinations. By enhancing brand awareness amongst this customer base, JetBlue should be able to continue growing revenue per passenger mile – which has already risen from $0.112 in 2009 to an estimated $0.132 this year.

Opportunities to Grow Domestic Market Share

JetBlue and Southwest were eligible to bid for the landing rights at LaGuardia and Washington Reagan because they operate less than 5% of slots at each of the airports. The relatively modest market share enjoyed by JetBlue is evident in the chart below, which shows that the airline has cornered 4.5% of the domestic market compared to Delta Air Lines’ (NYSE:DAL) 15%.

With orders for 120 more aircraft to complement its 167-strong fleet, JetBlue continues to add capacity even while most of its rivals scale back their bloated networks. As long as passenger traffic growth continues to outpace capacity growth, the airline should have little difficulty in scooping up market share. Its encroachment into the corporate market is just one facet of this strategy.

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1. JetBlue Outbids Southwest for LaGuardia and Reagan Slots, Wall Street Journal, Dec 1 2011 [↩]