Wednesday, January 22, 2020

Behind the Cuts: Examining Why JetBlue is Cutting Long Beach

In the early winter of 2017, a small group of us Southwest Airlines network planners were gathered in a conference room. We were given our marching orders. The 737 classic fleet was headed into retirement on September 29th, moved the 30th, and the MAX would join the fleet on October 1st. With the reduction in airframes, we were going to have to reduce frequencies and eliminate routes to keep the network operational with balancing commercial constraints. After months of debating, it was time to decide.

Cutting sucks. There’s a good chance you had to eat crow after defending the poor performance as you believed the route just needed to mature. But it was finally time. Due to aircraft constraints, pressure to get network performance up, or this route’s performance just dragged for too long without meaningful long term strategic value, today is execution day for this route. Regardless of the reason, someone is going to be pissed at your decision.

In my time as a planner, I heard it all:
  • This is the most short-sighted decision ever made 
  • I am going to have (name the ULCC) enter the city and they will take all your customers
  • You do not understand the city/market. 
  • You are lying
  • Well, I'll be calling (name the Leader) and they will be reversing this decision
Once, I heard three of these in just one 20 minute meeting.

I bring this up not for sympathy, but for understanding. I was fortunate enough to have and still maintain great industry relationships. I bring this up as JetBlue's network planners are likely experiencing this exact same reaction both internally and externally with their decision to cut Long Beach. JetBlue employees are likely being displaced or their hours reduced and front line employees may be feeling left in the dark. However, JetBlue has been struggling in Long Beach since 2008 and are executing on their fourth attempt at a city recovery.

The reality is there was little JetBlue could do with Long Beach that would make commercial and financial sense. Its commercial teams were left with no great options. It all likelihood, network planners could have been handicapped by constraints to delay what many may believe as an inevitable outcome.

With that digression, let's dig deeper into JetBlue's history and ultimate decision to reduce its operation to just 15 daily flights.

In August 2001, JetBlue entered Long Beach with twice daily JFK service, which was quickly accelerated to three times daily. After JetBlue's initial launch, B6 rapidly built up its position at Long Beach in response to their initial success in the market. This continued until 2008 when they topped out on slots and performance.


Depth to Breadth 

While the initial service into Long Beach appears to have been pretty successful for JetBlue, the performance love affair was shortlived. The Great Recession took a healthy bite into JetBlue’s revenue and in 2008 Long Beach's unit revenue production turned negative. Of the 14 routes, 12 were performing below the system RASM curve.



To counter the declining performance, JetBlue had to change something with the Long Beach service. Over a few years, JetBlue slowly began to transform Long Beach's network. The carrier believed their path to system returns lay with more markets at a lower frequency. The planners began to reduce higher frequency markets like IAD and JFK for lower frequency markets like AUS, PDX, SEA, and SFO.


Seasonalization 

Even with the breadth approach, the network performance in Long Beach still dragged on the network. In 2011, Long Beach's unit revenue performance really took a turn for the worst. At this point, most routes were double-digit negative compared to JetBlue's RASM curve. The only routes that appear to be working were back to the East Coast. All other Long Beach markets really pulled on the JetBlue network.


Without immediate action, this level of revenue performance would become quickly unsustainable. In 2012, JetBlue began aggressively cutting off-peak flying. Typically, JetBlue would reduce its seasonal schedule by 5-10% off the peak. However, in 2012 thru 2014 the carrier reduced its off-peak schedule by 20% of peak schedules. This approach trimmed JetBlue's yearly departures by as much as 10%.




Save the Slots 

In 2014, the Basin began to heat up as carriers started to fight for limited airport space. All secondary airports in the Basin, excluding ONT, are constrained by some type of noise controls. Orange County and Long Beach have slots, while Burbank has gate caps. As Orange County and Burbank started to fill, carriers began to shift their attention to Long Beach's limited slots.



Appetite for Long Beach began in earnest in late 2015 when the airport announced it would lift the noise cap to allow nine more flights into the airport. Of the nine new slots, JetBlue received three, Southwest four, and Delta two. Later, Southwest would use JetBlue’s underutilized slots to fuel additional growth in the city.

As is often the case with JetBlue’s focus city, these competitive incursions initiated a response from JetBlue. In August 2016, JetBlue announced its plans to fully utilize all of its slots. This shot JetBlue's departure count from ~23 daily flights in 2016 to 35 flights in 2017.


Plowing this much capacity into subpar routes is one heck of a way to start a turbine with cash. During this period, most routes moved further down the revenue production ladder. Long Beach now saw a sea of red as most routes were producing 20-40% below the system RASM curve.



The opportunity cost associated with operating these routes was astronomical. If these flights were deployed to routes that produced system average returns, JetBlue would have seen roughly $80M in additional ticket revenue. This value excludes all ancillary fees.



Now, I want to be extremely clear. The graph above does not state JetBlue lost $80M in Long Beach during their slot utilization ramp-up. Rather, the graph is an opportunity cost for flying underperforming routes. No one can say exactly how much money JetBlue made or lost in Long Beach except JetBlue. Please see my cost tangent if you receive airline "profitability reports". But the graph above can be used to understand the direction and magnitude of JetBlue's performance.

Slot Saving is Expensive 

After what appears to be a massive drop in Long Beach performance, JetBlue tossed in the towel. Twice. Kinda. In September 2018, JetBlue reduced flights by 30% but would not return the slots back to the airport until months later. Interestingly, the carrier decided to only exit FLL and removed frequencies across a variety of underperforming markets rather than more significant market exits.

This is the one time I’ll fault JetBlue’s logic in this entire process. Long Beach was bleeding cash and the first round of reductions really did not feel in line with the city’s performance. The first round of cuts announced by JetBlue were focused on stopping the hemorrhaging, but not on truly getting the city healthy.


The reductions in capacity greatly increased the performance of the city in terms of year-over-year unit revenue production. However, year-over-year RASM growth is largely meaningless when JetBlue's 2018 route performance is factored in.

This is where we found JetBlue until last week. Most routes continued to underperform their system RASM curve. Intra-California routes to SMF and SJC were particularly terrible. This is in line with JetBlue’s market exits.


Will Cutting to Profitability Work? 

After all the aggressive protectionism then retreating, do I think JetBlue may finally be stable within Long Beach? I give it a big maybe.

When we examine JetBlue as a whole, rather than just focusing on Long Beach, after the latest rounds of cuts, while still underperforming the system, Long Beach could be in much better financial position than it has been in quite some time. The routes that remain are generally within the tolerances of acceptable unit revenue performance. Don't get me wrong, the remaining routes are not stellar, but the entire system cannot be above system averages. Averages don't work that way.

Another thing to keep in mind, following this round of cuts, Long Beach is unlikely to have the JetBlue’s worst-performing routes attached to it. If JetBlue is looking to harvest and redistribute aircraft within their network, it appears they would have a healthy selection of other poor performers to sift through first.


Finally, there has to be consideration given to the logistics of routing crews out of the Long Beach crew base. Further cuts would make it nearly impossible for JetBlue to efficiently move crews. The costs associated with dislocating LGB based crews are might be prohibitive given the production of the remaining routes compared to extremes such as shutting down a flight crew station.


It is still very possible that we may see a reallocation of flights between the remaining markets, but I honestly do not expect any more earthshattering moves at least in the near term.

The only wildcard for Long Beach is competition, but I would not expect immediate meaningful competitive growth. Kate Kuykendall, Long Beach's public affairs officer, stated the airport has not received an official notice from JetBlue regarding their intention to relinquish slots at the airport. The airport is well aware of the announced reductions, however, until JetBlue returns slots, the airport cannot start the process of reallocating them to other carriers.

According to the Long Beach airport, JetBlue has 24 permanent flight slots. These slots have minimum usage requirements which JetBlue will dip below during the 3Q2020. This could mean, without JetBlue voluntarily surrendering their slots, it may be the 4Q2020 or 1Q2021 before slots are reallocated from this flight reduction. If the 14.8 average daily flights are the baseline for JetBlue's new slot allocation, we should expect to see JetBlue be allocated 17-18 slots, which free 6-7 slots for competitors.



JetBlue's potential delay in relinquishing slots should not come as a surprise. When JetBlue reduced capacity in September 2018, the carrier did not return its unused slots until the spring of 2019. Further, in New York, I suspect there are a lot of hard feelings following increases in curfew fines, increases in slot utilization requirements, and the city walking away from the international terminal. I do not expect JetBlue to play along nicely with its slots.

By the time the JetBlue surrenders the slots and the airport executes on the allocation process, we could be looking at early 2021 before Long Beach sees carriers backfill in the airport. In the more near term, the airport is already in the process to allocate three new noise supplemental slots. This process should be completed in February.


According to CrankyFlier, three carriers remain interested in additional Long Beach slots: Delta; Hawaiian; and Southwest. Based on JetBlue's remaining network, I believe there is limited exposure that you can reasonably see these three carriers overlapping with JetBlue.

If Delta were wanting to increase pressure in SLC, they already have the opportunity with their last slot allocation which they sent to Vegas. On the Southwest network, a reasonable person could argue for additional Las Vegas flights or maybe a long shot at Austin service. Otherwise, I’d expect the new capacity to be allocated away from JetBlue’s Long Beach network by these carriers.

Barring Alaska jumping into the mix, which is possible, but not likely, SEA, PDX, and SFO are unlikely to see additional competitive pressures. With Alaska exiting Long Beach in 2015, I do not see a large possibility of them wanting to relaunch the city.

This should for the time being bring stability to JetBlue in Long Beach.


9 comments:

  1. Sir,
    An absolutely fascinating & thorough analysis of B6 and the inherent weakness of LGB as a standalone market.

    I've observed the machinations of B6 at LGB from the comfort of my armchair for several years now. Despite artificial operational impediments, having a relatively small geographic catchment area (actually squeezed by the superior offerings at LAX & SNA), NIMBYism that continually manages to intimidate the Long Beach City Council (thus undermining potential support & growth), I truly feel that some measure of kudos is deserved by the B6 marketing & planning folks in attempting to make LGB work.

    I've mentioned on a couple of other airline blogs that I've long harbored the thought (obviously long academic now) that B6 should've approached California Pacific Airlines. That carrier was in its formative stages as a company when Jetblue approached Long Beach with a request to use the E190s in the LGB commuter slots. Though CPA founder, Ted Vallas, had a specific vision for his airline, a theoretical B6-CPA (non-merge) commercial agreement may have been beneficial for both companies.

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    1. Thanks for the reply! JetBlue does have a partnership with JetSuite or JSX, whatever they are calling themselves today.

      I am not sure how much, if any revenue JetBlue is actually getting with the partnership. JSX flies out of FBOs not terminals. It might sounds nice if you are flying local on JSX, but it sounds like a nightmare if you are trying to connect to/from. But again, the possibility of connections is extremely limited. I’d be surprised if they get more than a handful of people using the connection.

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    2. Thank you for your reply. Yes, I'm aware of the B6-JSX partnership. One of the founders of JSX, Alex Wilcox, was a former V.P. of JetBlue.

      Initially, JSX was Long Beach-based, later moving to Orange County. Apparently at the time of the move, Mr. Wilcox was quoted as saying that the administration at LGB didn't support JetSuite.

      Mr. Wilcox made an initial request of the then remaining available commuter slots (22) in Spring 2005. However, at some point between the date of the request and actual start-up date, the business plan changed. As such, with a fleet of Embraer Phenoms, that early iteration of JetSuite was not suited for Part 121 scheduled operations.

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    3. A small catchment area...That's actually not true. The area is not a circle around LGB between SNA and LAX. The catchment area for LGB is quite large. The area northeast...Whittier, Fullerton, Yrba Linda, Brea, Covina, Anaheim...all those areas are closest to LGB and are in the catchment. People forget this area is closest to LGB!

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  2. One part of the B6 history at LGB that has always eluded me. Why was the airline unwilling or unable to deploy E190s for the West coast routes? Lower capacity with the same amount of flights may have helped the shorter haul runs.

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  3. I did go back and look and it appears JetBlue did operate a limited amount of E90s in 2008-2010. But never in large scale.

    While I can’t speak for JetBlue, I suspect it might have to do with logistics. First, routing the aircraft would be difficult. Based on the economical range of the E90, the only point they could have likely routed the plane today would be AUS.

    Then you’d have to look at maintenance of the aircraft. For them to have a large build up of E90s, you’d have to move a sustainment operation to the West Coast to support them for line maintenance or if an aircraft broke, you wouldn’t be waiting for a part to be flown in from New York or Orlando.

    Next are flight crews. I’m sure a large operation would likely require the crew base to split into E90s as well, but given the size of LGB, it wouldn’t make a lot of sense to split the crew base between E90s and Airbus crews. Remember, those East Coast flights couldn’t be operated by the E90.

    Lastly, you’d have to consider costs. You are onto something if the E90 has a lower absolute operating costs vs the Airbus fleet. I assume it would, but at the rate many carriers are waiting to get rid of them, I do have to wonder if the gap is that large. If there is a measurable gap, you then have to look at how full the flights were. If the flights were full operating Airbus’ (I don’t have the data right in front of me), you’d typically want the lower unit costs vs absolute costs. Absolute costs only matter when you can’t fill your planes.

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  4. Interesting read. I'm hoping B6 maintains an SLC presence, I'd hate for DL jack up prices without non-stop competition.

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  5. This was a very interesting read. Frankly the only room for growth in Southern California is at ONT. It has no curfews and no gate restrictions. The data shows that 135 people
    a day are moving further inland because that is where they can afford to live. If you combine San Bernardino and Riverside County you have an MSA the size of Seattle. ONT is no longer under the LAWA purview and the Airport Authority continues to work hard to dispel the myths created about the region. It is has a booming an economy and continues to be the centerpiece for E-Commerce and cargo on the West Coast due to the easy access of 3 major freeways. Frankly, network planners seem to be stubborn or simply afraid to do what makes the most sense. One airline will make the jump and the rest will simply wish that they had.

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  6. Please note...LGB DOES NOT have a curfew. LGB is a 24/7 airport. The Noise Ordinance changes limits to 79db from 2200-0700 local...a limit proven that a Cessna 150 can't meet.

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