Why LHR slot acquisition is a logical choice for JetBlue

Apr 12, 2021

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As JetBlue secure slots from LHR for operations to JFK and BOS, we delve into the power of RDC’s Apex suite of products to take a look at the potential of the service. Firstly, we use tools within our SCHEDULES module to quickly identify suitable benchmark carriers for the routes JetBlue plans to operate, before moving over to the FARES module, and use the powerful query engine and Network Scatter visualisations to see how fares on the LON-JFK and BOS market performed pre-Covid. Finally, we use our Fare estimates for the new services in ROUTE PERFORMANCE - the industry’s leading route performance calculation engine to estimate route profitability in a range of scenarios.

Finding some benchmark fares data

RDC’s powerful Market Intelligence Data Suite “Apex” offers all the data we need to get a view on how JetBlue’s services might perform. Firstly we need to find a suitable comparable carrier to JetBlue, find out what fares that benchmark carrier was achieving and then make some reasonable adjustments of our Fares data to best reflect the potential premium which JetBlue’s operations from LHR may generate.

Firstly, we can use the Market Share Analyser in our Schedules module (which contains global data from 2006 and forward looking for the next 12 months) to identify some comparable historic operations on which to collate some benchmarking data. We’re looking for a non-legacy carrier operating to both BOS and JFK.

2019 Departures by Airline from London to US

Though predominantly dominated by legacy full service carriers, the London - US market has seen several challengers over the years (long after Virgin Atlantic entered the market in 1984), most notably Norwegian who in 2019, was the 5th largest carrier on operating between London and the US.

In 2019, Norwegian’s first and third largest markets operated from London were to JFK and BOS; the two markets which JetBlue are slated to operate from LHR.

We can now jump over to Apex’s Fares module to understand what kind of fares Norwegian was able to achieve on those routes.
 

2019 One-way fares by cabin

Excluding Government taxes (important, given the high level of APD levied on outbound flights from the UK, especially non-economy class seats), economy class fares on both BOS and JFK averaged just under $200 one-way in 2019, with a typical seasonal peak in Q3. Norwegian’s 787-900 used on these services had a premium economy cabin, with fares averaging $530 for BOS and $590 for JFK, with a seasonal profile more aligned to business travel demand.

JetBlue’s Mint product though is a more typical business class product, rather than premium economy class, and thus would be higher than Norwegian was achieving in Premium. Looking at Business and Premium Economy fares for BA’s operations from LHR to BOS and JFK, we see Business fares on LHR-BOS are 150% higher than Premium Economy and LHR-JFK are 290% higher, which gives us some factors to upweight Norwegian’s LGW premium economy fares to business class.

2019 LHR BA fares to BOS and JFK

Finally, we can reasonably expect there to be a premium for operating from LHR over LGW. The Scatter Plot function within Apex Fares Module is an easy way to compare two operations side by side to see what differences exist. The below chart summarises the average economy class fare in 2019 plotted against sector length for routes operated from both LHR (blue) and LGW (red). BOS and JFK, fares from LHR are c$85-$100 higher than from LGW, giving us an indication of the potential improvement which JetBlue might achieve from LHR compared to Norwegian from LGW. Doing the same for Business Class fares shows a c$300 benefit when operating from LHR over LGW.

Weighted average fare by destination from London - Heathrow vs London - Gatwick to US

JetBlue fare estimates

Combining this analysis gives us fares estimates we can use for understanding the potential profitability of JetBlue’s new LHR services.

Route Profitability Estimates

Apex’s foundations were in the Route Performance module, enabling users to quickly estimate the profit (or loss) an air service would make. Apex can do this because of RDC’s 20+ years research into aircraft operating costs for more than 25,000 different operator and equipment combinations across the globe. Our operating performance calculation engine, when combined with our fare estimates derived above, gives us powerful insights into route profitability.

With JetBlue planning to use a A321neoLR on the route with 24 MINT business class seats and 114 economy class seats, we’ll assume both cabins have the same load factor and that load factor is at JetBlue’s pre-Covid average of 84% (from Apex’s comprehensive Financial Data module, which details financial metrics for carriers covered with in the product).

JetBlue financial data

Loading new studies in the Apex Route Performance module is quick and easy. Firstly, we chose our Carrier and Equipment type, enter our Load Factor (84%) and our fare estimates assuming both cabins have the same load factor. Within seconds, we get our outputs - even at a fully allocated cost level, both JFK and BOS look like strong market opportunities for JetBlue:

JetBlue A321neoLR profit forecasts - pre-Covid load factor and fares (daily operations)

JetBlue A321neoLR profit forecasts - pre-covid load factors and fares


For both BOS and JFK, our profitability estimate is strong due to three very important factors:

  1. The A321neoLR is a very efficient aircraft, with some of the best CASK metrics from all equipment types operating. This means JetBlue can keep operating costs low and enter the market with a smaller capacity aircraft which might be better suited to lower demand in the next few years as recovery takes hold.
  2. The inclusion of a true business cabin (unlike Norwegian’s pared back premium economy offering) helps to push the average ticket price up - if all seats on the aircraft were economy (at a fare of $284 on JFK + some ancillary revenues), the routes might just about break-even (or make a loss).
  3. The fares premium which carriers generate at LHR compared to other London airports is a significant contributor. Without the c$100 bump to economy and c$300 bump to business fares, profit per pax would fall by between 20-25%

Post-Covid Scenarios

What happens if demand doesn’t rebound to previous levels, especially with lower upfront demand as the business world relies more on the Zoom you get from a video call than the Zoom you get from 180mph take off speeds? If our business cabin is only 50% full and our economy cabin hits 65% of capacity, but our Business and Economy Fares stay the same, we would still expect the route to be profitable, albeit with lower margins:

JetBlue A321neoLR profit forecasts - lower post-Covid demand but pre-Covid Fares

JetBlue A321neoLR profit forecasts - lower post-covid demand but pre-covid fares

Finally, what happens if demand remains supressed but JetBlue has to stimulate that demand through lower fares? Well then the picture starts to look weaker - if load factors drop to 50% in business and 65% in economy AND fares are 20% lower than pre-Covid times, then JFK moves still remains profitable but BOS might turn in to a loss maker:

JetBlue A321neoLR profit forecasts - lower post-Covid demand and 20% lower Fares
 

JetBlue A321neoLR profit forecasts - lower post-covid demand and 20% lower fares

Who else is going to benefit from this?

Obviously, the carrier and passengers are the number one beneficiaries of this - the former in the profit (they hope) to make and passengers in the form of more choice and greater competition. But there are two other major winners from the launch of this new service: Heathrow Airport and the UK Government. Using Apex’s sister product Airport Charges, we can quickly see how much Heathrow will charge JetBlue per turnaround and how much APD the Chancellor will make (maybe Rishi’s Fly Out to Help Out?)???

JetBlue LHR Summary

Based on our 84% load factor and the characteristics of the A3210neoLR, Heathrow would generate £7,000 in revenue per turnaround, but this is dwarfed by the £11,500 Chancellor Rishi would collect in tax, especially given the substantial levy of £180 per departing business class passenger (and £82 per economy class passenger) now in place.

Over the course of a year, a daily service would generate Heathrow just under £2.5m, while the UK Chancellor would collect a cool £4.1m.
 

Conclusions

As you can see, Apex contains all the information we need to understand the potential of a new service like JetBlue’s forthcoming operations from the East Coast US to London. We’ll be keeping an eye on the fares which JetBlue offer in the market when it launches: get in touch if you want to find out more about the Fares data we collect and understand more about how Apex helps more than 100 airport, airline and investor clients understand the performance of key carriers and markets they’re invested in.

Gareth Kitching

Author

Gareth Kitching
Head of R&D

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