Why Do JetBlue’s Margins Lag Southwest’s Despite Its Higher Average Ticket Price?

by Trefis Team
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JetBlue (NASDAQ:JBLU) and Southwest Airlines (NYSE:LUV) are both primarily low-cost carriers which focus on the U.S. mainland and regional markets. While both airlines fly to over 100 destinations, Southwest’s fleet of 750 aircrafts is much larger than JetBlue’s 255-aircraft fleet. Despite the overhead that accompanies a fleet that large, Southwest consistently reports much higher margins than its peer thanks to its extremely efficient operations. We detail the factors responsible for this while comparing key operating metrics for Southwest vs JetBlue in an interactive dashboard. Our dashboard also highlights expected trends in these metrics for both airlines for the next 2 years.

Southwest has a much higher gross margin than Jetblue. This largely stems from the fact that while JetBlue has a much higher average fare than Southwest, (JetBlue has an average fare of $180 vs South which has an average fare of $153), its operations are far less efficient than Southwest. JetBlue’s low-cost strategy revolves around charging higher prices for a packaged service, this opposed to Southwest’s strategy that focuses on cost efficiency, and high level of customer satisfaction stemming from efficient operational capability.

Different strategies have led to different outcomes

  • Southwest’s strategy revolves around ensuring efficiency and high quality of service.
  • Southwest has ensured that it did not focus on quick expansion. It makes sure that every time that it takes up a new route, it does so only if it makes sense in terms of profitability
  • On the other hand, JetBlue has been criticized over the past decade for expanding too quickly.  This led to unprofitable routes and higher operational costs
  • This then reflects the difference in profitability between the two low-cost carriers.
  • Southwest’s current load factor stands at 86.5%, which is the highest in the industry over the past years, vs. JetBlue’s load factor over the past few years which was 84%.
  • It should be noted that JetBlue has improved its load factor to 86% over recent quarters as the management looks to focus on route efficiency.
  • In general, low-cost carriers have lower yields due to a lack of pricing power compared to full-service carriers. But despite this fact Southwest’s yield remains quite higher, even when compared to the likes of Delta, and American Airlines.
  • Southwest further ensures efficiency by preferring the point-to-point model vs. the hub-and-spoke model. This compared to JetBlue, which has preferred the hub-and-spoke model, and mixing in point-to-point, only recently.

How Southwest ensures higher profitability margins through culture and logistical efficiency

  • Southwest’s point-to-point model, and efficient route service not only ensures higher route efficiency but also ensure more direct flights and lower fares. It also means the airline is able to quickly enter growing routes, where there is little competition or potential demand that is not being served.
  • JetBlue’s model, on the other hand, has been less nimble when it comes to expanding into profitable routes.
  • A lot of key southern U.S routes like Arkansas, which were previously not viable for the likes of JetBlue become viable for  Southwest with its model, and therefore it was able to quickly move in and service these routes, when the market made sense. This strategy combined with the cost model gives Southwest the first-step in any new market in within the U.S.

Focus on cost efficiency rather than focus on revenue growth

Southwest’s operating expenses per average seat mile also remains lower. Details about how cost per average seat mile for JetBlue and Southwest have trended over the years is available in our interactive dashboard.

A factor dragging down growth was that JetBlue had previously relied on older models, for its fleet, while Southwest continued to switch in newer more efficient models as it expanded. This played a key role in cost efficiencies. Going forward the airline plans to improve its efficiency by bringing in more efficient

Another factor that remains in favor of Southwest is their culture has allowed them to constantly have negotiation power when dealing with their personnel. The ability to negotiate contracts, especially with pilots who are unionized, is key to ensure that operating costs remain within line.

 

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