JetBlue Airlines 2006 Annual Report Download - page 15

Low-cost airlines largely developed in the wake of deregulation of the U.S. airline industry in
1978, which permitted competition on many routes for the first time. Southwest Airlines pioneered the
low-cost model, which enabled them to offer fares that were significantly lower than those charged by
traditional network airlines. Including JetBlue, there are currently four low-cost major U.S. airlines.
Following the September 11, 2001 terrorist attacks, low-cost airlines were able to fill a significant
capacity void left by traditional network airline capacity reductions. Lower fares and increased
low-cost airline capacity created an unprofitable operating environment for the traditional network
airlines. Since 2001, the majority of traditional network airlines have undergone significant financial
restructuring, including bankruptcies, mergers and consolidations. These restructurings have allowed
them to reduce labor costs, restructure debt, terminate pension plans and generally reduce their cost
structure, increase workforce flexibility and provide innovative offerings similar to those of the
low-cost airlines, while still maintaining their expansive route networks, alliances and frequent flier
programs. Although our costs remain lower than those of our largest competitors, the gap between
low-cost airlines and traditional network airlines has diminished.
Competition
The airline industry is highly competitive. Airline profits are sensitive to even slight changes in
fuel costs, average fare levels and passenger demand. Passenger demand and fare levels historically
have been influenced by, among other things, the general state of the economy, international events,
industry capacity and pricing actions taken by other airlines. The principal competitive factors in the
airline industry are fare pricing, customer service, routes served, flight schedules, types of aircraft,
safety record and reputation, code-sharing relationships, capacity, in-flight entertainment systems and
frequent flyer programs. In addition, the migration of fare-conscious travelers away from traditional
network airlines and their deteriorating market share has forced some of these airlines to undertake
broad cost-cutting measures and to reevaluate their basic business models.
Our competitors and potential competitors include traditional network airlines, low-cost airlines,
regional airlines and new entrant airlines. Seven of the other major U.S. airlines are generally larger,
have greater financial resources and serve more routes than we do. Our competitors also use some of
the same advanced technologies that we do, such as ticketless travel, laptop computers in the cockpit
and website bookings. Since deregulation of the airline industry in 1978, there has been consolidation
in the domestic airline industry. In 2005 and 2006, the U.S. airline industry experienced further
consolidation and there were reports of other potential consolidation in the fourth quarter of 2006.
Further industry consolidations or restructurings could result in our competitors having a more
rationalized route structure and lower operating costs, which could enable them to compete more
aggressively.
Price competition occurs through price discounting, fare matching, increased capacity, targeted
sale promotions and frequent flyer travel initiatives, all of which are usually matched by other airlines
in order to maintain their share of passenger traffic. A relatively small change in pricing or in
passenger traffic could have a disproportionate effect on an airline’s operating and financial results.
Our ability to meet this price competition depends on, among other things, our ability to operate at
costs equal to or lower than our competitors. All other factors being equal, we believe customers
often prefer JetBlue and the JetBlue Experience.
During 2006, most traditional network airlines increased capacity on their international routes and
decreased domestic capacity. During the same period, some of our competitors, notably Delta Air
Lines and its discontinued low-fare operation, Song, shifted some of their domestic capacity out of
markets where they had competed directly with us. These developments, in conjunction with our shift
of capacity from transcontinental flights to short- and medium-haul routes, resulted in our achieving
higher yields on our flights. Although we experienced improved yields in 2006, we anticipate the
extremely competitive nature of the industry to continue.
Airlines also frequently participate in marketing alliances, which generally provide for
code-sharing, frequent flyer program reciprocity, coordinated flight schedules that provide for
convenient connections and other joint marketing activities. These alliances also permit an airline to
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