David Barger, CEO of JetBlue
The Motley Fool: JetBlue serves 54 destinations in the United States, Puerto Rico, Mexico, and the Caribbean. Within the company, is there any interest to expand internationally or to large, more premier hubs in U.S. cities?
David Barger: As New York's hometown airline, we're clearly committed to growing our home base of operations -- JFK. In fact, we're planning on opening our new terminal next year at JFK, supported by $875 million in funding by the Port Authority of New York and New Jersey. Our new terminal is a state-of-the-art facility, and it will allow us to continue to grow efficiently in the years to come as we take delivery of new Airbus A320 and Embraer E190 aircraft.
In addition, JetBlue now has a very large presence in Boston, Fort Lauderdale, Long Beach, California, Orlando, and the San Francisco Bay area. Still, we do plan to add additional focus cities in the coming years and expand our international footprint within our route network.
We are constantly evaluating new cities and routes across the country and into international destinations within Canada, the Caribbean, and Mexico. Our new 100-seat Embraer 190 aircraft is the right size aircraft to enter many new small and medium-size markets, like Charlotte, Raleigh, and Richmond. It's also the right size to connect existing JetBlue cities, like Buffalo to Fort Lauderdale and Boston to Bermuda, two of our newest routes.
We launch new routes in response to customer demand, and our fundamental formula of searching for overpriced and underserved markets hasn't changed. Plus, adding new nonstop flights is key to our success, as customers always prefer a nonstop versus a connecting itinerary. In other words, the traditional airline hub-and-spoke model -- while still effective -- is one where we believe JetBlue has an effective alternative, as about 85% of our customers fly direct on a nonstop flight.
The Fool: Do you anticipate Congressional intervention to affect the ways passengers are treated? At one point, we heard that the "customer's bill of rights" could cost $25 million for winter snafus. How might this policy affect profitability in the long term?
Barger: The airline industry was deregulated nearly 30 years ago, and we don't feel like the government needs to legislate how we treat our customers. We believe market forces will determine the customer service winners and losers in aviation in the long term. And we think our customer bill of rights is more meaningful than anything that could ever get passed on Capitol Hill. And, frankly, it's more than what any other airline has come to the table to offer its customers.
We don't believe our bill of rights will affect our profitability. Offering compensation is simply one way of letting customers know they can count on us, and in those instances where they happen to be inconvenienced, we'll do what it takes to keep their loyalty and their trust. No other airline is as obsessive about customer service as we are, and [we] have been recognized with industry awards since we started flying in 2000.
The Fool: Oil prices are soaring again -- near $70 a barrel. [Editor's note: This figure was correct at the time of this interview.] United has long said that it would need per-barrel prices to normalize to $50 to sustain profitability. Will you need the same cushion? What are you doing to combat the effects of rising fuel prices?
Barger: We have a systematic fuel-hedging program in place today that requires us to hedge a minimum of 50% of our fuel in the prompt quarter, 30% in the next quarter, 20% in the following quarter, and 10% in the quarter after that. This "rolling" program allows us to take the guesswork out of fluctuating oil prices and has helped us offset some of that unpredictable variability.
Having said that, rising oil prices certainly hinder our earnings, so it's up to us to ensure we maintain our low costs structure and, to the extent we can, maximize our revenues to offset increased fuel costs. This is one of the main reasons we have increased fares, while simultaneously ensuring value for our customers, and why we have focused on ancillary revenues to offset the move of fuel at $0.80 per gallon when we started flying in 2000 to the current cost of $2.00-plus per gallon at the present time.
Still, it's important to continue to communicate to customers that it's still less expensive to fly from New York to Florida than it is to drive, as we don't want customers to think they've been gouged by the airline.
The Fool: JetBlue just instituted a pretty generous change-in-control plan, yet doesn't foresee a hostile takeover bid. Obviously, you're determined to remain an independent carrier. What do you need to do to earn higher profits as an independent?
Barger: Obviously, revenue is crucial. In the past year, we've entered a lot of markets used to seeing high ticket prices, such as Aruba, Bermuda, and Nantucket. What we've been able to do is stimulate demand with low fares and then build customer loyalty by providing a great product and exceptional customer service. We'll continue our prudent network expansion to take advantage of markets where we can maximize our RASM [revenue per available seat mile].
In addition, we will continue to explore new ways to increase revenue. For example, we recently signed an agreement with Expedia
Above all, we have to stay focused on keeping our costs low. A lot of other airlines can boast low fares, but we are one of the few truly low-cost airlines. We've made great strides at institutionalizing low-cost carrier spending habits throughout our organization, but there is always work to be done, and we will remain focused on costs as we continue to grow and evolve.
The Fool: You've just named Joel Peterson vice chairman of your board. What are the ramifications of creating a new vice chairman position? What duties will Mr. Peterson have, and how will he add value?
Barger: The board felt it was good business practice to add depth to its division of responsibility and governance. In connection with the CEO change, the board decided it wanted to memorialize Joel Peterson's long-time role as the board's lead independent director, and he will continue to add significant value to our company given his background and expertise in many diverse business areas.
The Fool: With a great deal of competition in the airline industry -- Southwest Airlines
Barger: JetBlue has a number of advantages: We've got a strong brand, and we believe we have the best domestic product -- customers prefer to fly JetBlue for our low fares, all the great snacks we offer, DIRECTV, XM Radio, the most leg room in coach and on a young fleet of state-of-the-art jets.
But more than all those things, JetBlue's real advantage is our people. We've got the best crew members in the industry, and they do an amazing job delivering the JetBlue experience each day. They're the reason we were just ranked highest in satisfaction among low-cost carriers in the J.D. Power and Associates survey. At the end of the day, we believe the airline business is about building relationships with our crew members, customers, communities, and business partners. This philosophy has served us well in our first seven-plus years of flying, and we believe the formula is right for the future.
And, finally, it's important to note that JetBlue is about innovation. Companies that grow and continue to look to innovate in their space are the ones who are well-positioned for the long term. We'd like to think that we're continuing to define the domestic airline space, as the competitive environment demands us to be innovative as a competitive advantage.