jetBlue v. The Monsters: can they carve out a safe space Trans-Atlantic?

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jetBlue has often said, and repeated it recently, that Trans-Atlantic operations are a genuine desire path. New York to London, Paris, Dublin and Berlin are all high on their list. But not at any price.

In a recent interview jetBlue’s CEO repeated that the problem isn’t the airline’s will power, it’s The Monsters.

The technical legal phrase that describes The Monsters is “Immunised Joint Venture”. It’s that first word that causes so much grief for competitors.

Major airlines set up joint operating systems, that allow each and every one of the participants to sell the tickets of the other as though they were all the same airline. This can be, at times and on certain websites, a nightmare to disentangle, especially if you’re me and particularly fussy over who you fly with, and don’t want the suggested airline. It’s particularly irritating if you’re looking for a connection.

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On the other hand if you don’t care and it’s just about getting from point A to Z via G it’s quite useful.

The “immunised” element means that the governments who have the airlines in their jurisdiction permit the airlines to trade in this way – in effect terminating competition between the Joint Venture’s participants, so they are immunised against the severe legal consequences of not being competitive with each other.

The spread of Immunised Joint Ventures is reaching plague proportions, but they started in effect, over the worlds busiest routes – London to New York.

These are not the same as alliances. IJV’s work inside and outside of alliances. Alliances allow airlines to transfer tickets and travel, move luggage seamlessly, permit through-check-in, ease boarding and enhance the customers journey.  An IJV allows the actual sale of a ticket for one airline on the others website.

As an example, if you’re buying a ticket to Hong Kong through Cathay Pacific they won’t be showing you anyone else’s ticket prices, or recommending British Airways as an option. Yet they’re both in Oneworld. Transfer from BA to Cathay in Hong Kong for another flight and Oneworld is your friend, all on the same flight numbers.

Buy a ticket to Hong Kong through British Airways and they’re just as likely to offer you – further down in their options list of course – a Finnair ticket with a stop in Helsinki. Possibly on a BA flight to HEL and on from there on a Finnair A350.

The same happens with BA, American Airlines, Finnair and JAL, who all share a giant IJV on West-East routes  and the first three who have an IJV that includes Iberia across the Atlantic. In effect this squashes any competition between them, perfectly legally.

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Add to that Delta and Virgin Atlantic operating out of London, Delta and AF-KLM operating out of Paris and Amsterdam, United and Lufthansa Group operating out of Frankfurt and Munich etc, and you have what amounts to a very narrow group of what is in effect little more than a trio of Monster Airlines.

The sale of tickets in IJV’s means that airlines like Virgin Atlantic can connect directly through their website  with any destination Delta flies to in the US. For them its vastly more beneficial than its is for Delta, but Delta don’t care because they own 49% of the airline. And if you do fly Delta as a Virgin Atlantic customer – prices aren’t always the same on their respective websites for the same journey though – you can still collect your miles.

The profits from ticket sales in JV’s are a huge boost to the airlines, they see around 20% improvements in sales and margins than they would without them. For smaller airlines like Virgin and Finnair, they attract new passengers for the first time who experience their brands – and often prefer them. The IJV widens options within a small arena, and helps keep customers in the IJV airlines group orbit. It also crucially, expands the ability of all of them to compete savagely against anyone outside of the IJV.

The major airlines peg prices relentlessly against one another, it’s often hard to find enough of a gap to be bothered looking across the IJV airlines on Trans-Atlantic. If they can adjust their commodity based seat pricing to undercut airlines that threaten their position, what hope do those newcomers stand of making the routes work profitably?

This question Ryan Air has looked at and concluded it can’t win, at least not yet. WOW and Norwegian, recently Primera Air have all tried to find ways of making it work with varying levels of success. Usually their prices aren’t amazing – Primera Air for example are hardly a bargain when flying into established major NY area airports, and a fully specified Norwegian ticket to a major airport isn’t any better than BA.  It’s either not that competitive or they ask you to arrive 50-100 miles from the real destination.

And that’s jetBlue’s problem. They need to fly from their base airports in New York, and with the Monster IJV’s capable of responding to match or undermine them for long enough – it may well be impossible to make a profit. And if you can’t make a profit, there’s no point in doing it.

They do have the options of sophisticated modern aircraft like the A330 or A320 neo families, but they too are costly, require high utilisation and despite fuel economy gains, the price is in constant flux, currently on an upward trajectory as Iran’s oil production is removed from the equation following the return of sanctions.

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And even the oil market isn’t an equalised landscape for airlines. Many hedge their future purchases and obtain low rates long-term, BA was especially good at this but got badly brunt when it had to pay high prices when oil dropped last time. American don’t hedge, Delta buys its own crude and refines it at its own refinery into jet fuel. That was laughed at originally but is now seen as so successful and far-sighted they’re spinning it off as a separate public company.

All of this weighs heavily on jetBlue’s decision. If they can make it work, find a niche, and do so when fuel is high, then when it’s low they can ride the crest of a wave. Yet the looming facts are simple. Airlines are not doing so well right now. The peak is over and the cycle is winding down. It’s not a disaster, not by a long way, and well run airlines are still making money.

My conclusion is that jetBlue won’t go there just yet. It’s too volatile a moment and airlines like certainty. when they do I suspect it will be a really interesting option and one I’d be happy to try.

 

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