While some think JetBlue's success could lead others to enter the low-cost market, Parker doubts that new entries will be extensive in the current market. Since JetBlue's initial public offering in April 2002, he says, "I don't see much money flowing to start-ups anymore."
Further helping reduce industry capacity in the U.S., Parker expects a continuation of the recent trend of legacy carriers reassigning aircraft to more-profitable overseas routes, thus reducing the amount of domestic flying they do.
Parker and Kerr are reluctant to predict whether the industry really will become more efficient and profitable over time. They are not alone in their caution. "I wish I knew," says JetBlue's Owen, noting that the end of regulation, too, was supposed to spur rationality. "I joined the industry right when deregulation occurred. I naively thought we'd have five years when everything would shake out, and we'd have stability. So my predicting ability is not that good."
Roy Harris is senior editor at CFO.
A Second Look at Service
Passengers may worry that it's the job of finance executives to sacrifice service and passenger comfort for the sake of restoring bucks to the bottom line. Indeed, American Airlines has pulled pillows on some flights in a bid to save $300,000 a year, more carriers are charging for coach meals, and some are adding seats in planes on higher-profit routes.
But while "people with a short-term view of the world will cram in more seats," says Aaron J. Gellman, a professor at the Northwestern University Transportation Center, "Southwest is taking seats out. The best of the finance guys are able to trade off. They understand the dynamic."
That competitive dynamic has also led airlines to match rivals in moves that build the passenger base — as Delta recently illustrated by cutting fares in a way that simplified pricing and removed Saturday-night stays as a requirement for discounts.
"The finance profession has a bad reputation for being too focused on narrow things, and not on the big picture," acknowledges JetBlue Airways Corp. CFO John Owen. Owen says he himself was thinking a bit small when CEO David Neeleman proposed investing in free live television in cabin seatbacks. "I was adamantly opposed; I saw it as a cost we could never make back," says the CFO. But since the change was made in its fleet of 69 jets, Owen and JetBlue have come to view the service as "an essential part of the total JetBlue experience," resulting in "loyalty and passenger buzz that will result in higher demand." Says Owen, "We'll make it up in the average fare, although we can never quantify it or prove it." —R.H.
Picking Their Battles
For a time last December, it seemed that Southwest Airlines Co. and America West Airlines Inc. were ready to spar over some spoils of the U.S. airline industry fare war.
At an auction of assets by the bankrupt discount carrier ATA, Southwest proposed paying $177 million to secure six ATA gates to bolster Southwest's Chicago Midway Airport operation, and for a 27.5 percent nonvoting preferred equity ownership in ATA. America West's idea was grander: a possible offer for the entire ATA operation, a move that would have given America West over-water rights to allow it to begin offering service to Hawaii. Just before the bids were due, though, America West pulled out, leaving Southwest the winner.
While America West's withdrawal might have seemed a surrender to Southwest, keen financial thinking governed the decisions at both airlines. In his final analysis, America West CFO Derek Kerr calculated that global demand for ATA's Boeing fleet had suddenly increased — in part because the Chinese were buying up 737s — driving their used-aircraft value high enough that the net present value of the whole offer fell short of the target. As for the over-water service: "We were already targeting Hawaii in 2006," says Kerr, and the ATA deal would have only "accelerated things." In an environment in which a third of the nation's airliners are being operated by carriers in bankruptcy, "there are going to be a lot of other opportunities."
For others besides America West, Southwest remains the mightiest rival, as well as an object of envy for its low cost, cozy employee relationships, marketing skills, and tough voice in the industry.
"I don't think any airline can be successful if the focus is only on cost," says Southwest CEO Gary Kelly. "The airline industry is enormously challenging from a financial perspective, with airlines having to undertake every effort available to mitigate risks." Southwest has managed to thrive — with 31 consecutive annual profits — because "we found a way to weave our way through those risks."
But low cost is still the key to profits. Where once Southwest was about the only discounter in town, "lower-cost airlines are now 25 percent of the industry," says Kelly. "The writing is on the wall. The legacy carriers are going to have to get their costs down, or else they're going to just disappear." —R.H.
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