Last week, JetBlue Airways (NASDAQ:JBLU) announced that it will expand its route map in the first half of 2021, starting with the addition of up to 14 daily flights to Miami in February. The goal is to tap into unmet demand to accelerate the airline's recovery from the COVID-19 pandemic.
With its new routes to Miami, JetBlue is encroaching into American Airlines' (NASDAQ:AAL) turf. American Airlines quickly retaliated by adding new routes to New York, Boston, and Los Angeles from JetBlue's Fort Lauderdale focus city -- and it looks like a boneheaded move.
American Airlines can't afford to waste money
Entering 2020, American Airlines had the largest debt load of any major U.S. airline. Moreover, it has been burning cash faster than rivals this year. By the end of last quarter, the company had $47.5 billion of debt, pension, and lease liabilities, offset by just $8.3 billion of unrestricted cash and investments. American expects daily cash burn to average about $30 million in the fourth quarter, further weakening its balance sheet.
The new payroll support program included in the most recent coronavirus stimulus bill will mitigate American's near-term cash burn, assuming President Trump eventually signs the bill into law. After factoring in the costs associated with putting 19,000 furloughed workers back on payroll, American could net close to $2 billion of free money from the program.
Yet even with that help, American Airlines will have a crushing debt load by the time the pandemic ends and travel demand starts to normalize. To maximize its chances of eventually recovering, the company needs to keep near-term cash burn to a minimum.
Retaliating will be costly
JetBlue's new route announcement was certainly unwelcome news for American Airlines. American is the dominant carrier in Miami, controlling about three-fourths of the market in 2019 (including its regional affiliates). Now, it is set to face new competition on four routes to other top metro areas: Boston, New York (via JFK Airport and Newark), and Los Angeles. Notably, JetBlue is trying to one-up American on the Los Angeles route by offering its Mint premium service, which features 16 lie-flat seats.
At the same time, American Airlines can't be very surprised to see JetBlue landing in Miami. Demand for travel to destinations with outdoor activities has held up well compared to the rest of the air travel market in recent months, with Florida being an especially popular destination. As a result, Southwest Airlines began flying to Miami just last month.
American Airlines is responding to JetBlue's new Miami routes by launching three new routes from JetBlue's nearby Fort Lauderdale focus city. Beginning in early April, it will fly from Fort Lauderdale to Boston, New York's JFK Airport, and Los Angeles, operating two daily round trips on each route.
However, while there's no guarantee that JetBlue's Miami routes will succeed, American's Fort Lauderdale expansion is almost certainly doomed to ring up big losses. JetBlue gets better marks for customer service, has lower unit costs, and has dramatically higher market share in New York (especially at JFK) and Boston than American Airlines. All of this adds up to a recipe for American Airlines to generate significantly lower unit revenue than JetBlue on its new Fort Lauderdale routes while incurring higher costs.
An unforced error
Of course, six daily round trips represent a tiny fraction of American Airlines' route network. The full-service airline typically operates thousands of flights each day. That will limit how much money the company can lose from these new flights.
Still, every dollar counts. American's retaliatory moves will hurt it far more than they will hurt JetBlue -- and its weak balance sheet makes it less able to absorb losses. If American Airlines responds similarly when JetBlue launches flights to London (an even more lucrative market for American than Miami) next year, it could retaliate its way into oblivion before long.