Wednesday, October 16, 2019

Why is JetBlue leaving Hobby?

In just a couple weeks, JetBlue will be packing its bags and leaving Houston Hobby (HOU) for Houston Intercontinental (IAH). The move, which was announced over the summer, may have come as a surprise to many. But this is not the first time a carrier picked up and left Hobby for Intercontinental. Remember, Frontier in 2012 leaving due to "customer feedback"? 

In JetBlue's press release they specifically state: 
"JetBlue regularly evaluates network performance, demand and customer feedback to strengthen its focus city strategy. The move to Bush Intercontinental is aimed at strengthening JetBlue’s relevance in New York and Boston, while also growing the carrier’s customer base in Houston where travelers love the airline’s award-winning service and competitive fares to and from the Northeast." 
Clearly, JetBlue was not happy with their performance at HOU and believe their Boston and New York customers would prefer IAH. So, we will evaluate JetBlue's statements regarding market performance as well as examining some of the Houston economic factors which likely drove the change.

It is important to understand JetBlue's history in Houston. JetBlue launched JFK to Houston service in 2006 with three daily A320 flights. Within a year, the A320 service was swapped for mostly E190 service. In the middle of 2008, the service was further downgraded from three flights to two. For the next five years, flights out of Houston remained largely unchanged outside modest fleet adjustments here and there.

As JetBlue started to build up its Boston franchise, Boston to Houston was launched in 2013. Initially, the route operated with two daily flights to Boston, however, lagging performance forced JetBlue to change the Houston set up. In the latter part of  2014, both New York and Boston were trimmed to one daily A320 flight in each market.

Taking a look at JetBlue's 2013 RASM curve, Houston to Boston service revenue production was significantly below JetBlue's RASM curve. JFK appears to be inline with system unit production. However, for both of these routes, it is important to remember that being below a RASM curve does not guarantee a route is losing money nor a route on the RASM curve to be making money. The greater the deviation from the RASM curve, the high the probability a route is over or under-performing to expectations. Given the large Boston deviation, Boston appears to be significantly underperforming.

For the Boston to Houston to close the gap between the RASM curve and our estimated RASM, the route would have needed to produce an additional $5,000 per flight. I want to reemphasize what this gap actually means. A gap above or below the RASM curve does not mean a carrier in making or losing money. Rather, it shows a perceived revenue opportunity cost of not operating a flight producing system-level revenue results.

While the performance on the route has significantly improved since the route was launched, the revenue performance still appears to be below where a route operating at this distance should be. Further, the route has largely remained stagnant since 2015 in improving the unit revenue.

One of the largest drivers in underperformance on JetBlue's BOS-HOU was its load factor. The carrier started the route incredibly soft, filling just over 50% of their seats. This significantly lagged its competitor's Southwest and United. Even with downgauging aircraft and cutting flights from two to one, the route still lags competitors' load factor to this day.

We can break down each carriers' load factor. In doing so, we quickly see that JetBlue's load factor softness is due to network design, not lack of demand. In fact, JetBlue outperforms other carriers' local load factor (load factor contributed only to passengers flying between Boston and Houston as their origin and final destination). This outperformance has only increased since the route was launched in 2013. However, without a network in Houston nor Boston for passengers to connect, JetBlue cannot flow additional passengers on the BOS-HOU leg.

With revenue gains stagnant and an inability to flow passengers via BOS-HOU, why look north? Hint: It is due to the local Houston economics. The IRS and Census Bureau provides a significant amount of data to understand and target areas of wealth in Houston.

Below, we pulled the 2016 IRS 1040 tax filings by zip code. Within the data, we can see how many tax returns were filed, the number of dependents, and a range of income metrics. Below, we mapped this data to show the population size and the average adjusted gross income by zip code. The two black dots are the location of Hobby (south side) and Intercontinental (northside).

Quickly, we notice the larger and wealthier population clusters are on the north and west side of Houston. While there are smaller, wealthier zip codes closer to downtown, Hobby is not necessarily that much more convenient. According to Google Maps, a traveler departing early in the morning from the west side of downtown (zip code 77027) would experience a 25-minute ride to Hobby vs 30-minute ride to Intercontinental. Mileage is incredibly deceiving. The access and egress from Hobby is largely city streets compared to the highway infrastructure around Intercontinental.

Further, Hobby does not have convenient access to some of the largest headquarters within the area. We were able to find a collection of mapped Fortune 1000 headquarters. When mapped the data shows the southside of Houston is largely a Fortune 1000 headquarter desert. Intercontinental, however, does have access to nearby headquarters as well as equally competitive access to headquarters located downtown and on the Houston west side.

It appears based on the information above, JetBlue really only had a few choices. They could stay with the status quo and keep a subpar route, remove the seventeenth-largest Boston demanded market from their network, or move airports and hope for better performance. With JetBlue's ambition to grow Boston to over 200 daily departures, removing one of the top O&D markets is really not an ideal plan. Neither is keeping the status quo on an underperforming market. So JetBlue is doing their next best option and moving to Intercontinental on October 27th.

Do you believe I missed something or think I am incorrect? Let's have the discussion below! You can also suggest future topics for me to review.

No comments:

Post a Comment