In 2001, less than two years after its first flight, New York-based airline JetBlue Airways (NASDAQ:JBLU) decided to set up a West Coast focus city in Long Beach, just outside of Los Angeles.
Long Beach Airport is unusual because it has a very restrictive noise ordinance that limits the number of commercial airline flights permitted there. JetBlue has taken advantage of this situation to maintain a dominant share of traffic at Long Beach Airport for more than a decade.
However, JetBlue has dialed back its service in Long Beach in recent years. Meanwhile, it is about to face a bit of new competition there from Southwest Airlines. Yet it still talks about Long Beach as a potential growth market. What is JetBlue's plan?
A shifting relationship
JetBlue grew rapidly in Long Beach in the first few years after it entered the market in 2001. Thanks to its customer-friendly policies and the appeal of an uncrowded airport, JetBlue built up a loyal customer base in the Long Beach area. Meanwhile, the noise ordinance protected it from direct competition, as other airlines were unable to add flights there.
Solid flight demand and low competition made Long Beach a nicely profitable market for JetBlue -- for a while. However, beginning around 2005, rising oil prices caused JetBlue to cut back on long-haul service there in favor of shorter flights, often using its smaller E190 planes.
The arrival of Virgin America (NASDAQ:VA) at Los Angeles International Airport (LAX) in 2007 added further pressure. Virgin America quickly began flying to many of the same cities that JetBlue served from Long Beach. With its stylish service and low fares, Virgin America began to lure travelers back to LAX.
A blessing and a curse
Furthermore, while Long Beach Airport's noise ordinance helped JetBlue in the early days by keeping competition out, it has also stifled JetBlue's growth on the West Coast. As early as 2003, JetBlue was operating an average of 23 daily departures at Long Beach Airport during the summer peak season, utilizing 56% of the airport's commercial airline slots.
It continued to expand gradually thereafter, reaching nearly 30 daily departures by the summer of 2009. However, that left it with no room for further growth in Long Beach.
This meant that JetBlue couldn't offer enough flights to make many connecting itineraries possible. It also meant that JetBlue was limited to fewer flight frequencies than competitors at LAX. Even tiny Virgin America offers up to 10 daily flights to San Francisco and up to seven daily flights to Las Vegas from LAX.
Even with the lion's share of the slots at Long Beach Airport (JetBlue now has 32 of the 41 slots), JetBlue can't offer high-frequency flights like that. (Furthermore, Southwest Airlines offers even more frequent short-haul flights.) Having fewer flight options offsets some of the "convenience factors" from operating at the smaller airport.
JetBlue expands at LAX, reorients Long Beach
In 2009, JetBlue finally began flying from its top two focus cities (New York and Boston) to LAX: the Los Angeles area's main airport. Since then, JetBlue has grown its presence at LAX in order to appeal to business travelers.
Today, JetBlue offers up to 10 daily roundtrips between New York and LAX with its Mint premium service, compared to just two daily roundtrips between New York and Long Beach. Meanwhile, it ended its seasonal flights from Long Beach to Washington D.C. in 2014 and cut three daily roundtrips from its summer schedule at Long Beach Airport in 2015.
Yet even as it has cut some flights, JetBlue has made a big push in recent years to open Long Beach Airport to international service. Marty St. George, JetBlue's EVP of Commercial and Planning, told me last year that the carrier hoped to serve the "visiting friends and relatives" market. Indeed, about a third of Long Beach's nearly 500,000 residents are of Mexican ancestry.
What's the next move?
When Long Beach Airport recently made another nine slots available, JetBlue applied for all nine -- despite not fully utilizing its existing slot portfolio. It ultimately received three more.
Yet I don't expect JetBlue to use its additional slots in the near future. With 35 slots, it still can't provide high-frequency short-haul service. And while fuel prices have come down, so have fares for long-haul flights at LAX, driven by Virgin America's entry into the market and JetBlue's own expansion there.
JetBlue probably had two aims in applying for slots. First, it wants to keep competitors out if at all possible. JetBlue is only required to use a little more than half of its slots, so applying for slots and then not using them is a viable (if somewhat cynical) strategy.
Second, JetBlue would likely use all of its slots if international service became a possibility. So far, many Long Beach city leaders have opposed opening the airport to international flights. Nevertheless, JetBlue needs to maintain its slot portfolio in case political conditions change.
JetBlue could also consider targeting the leisure market with flights from Long Beach to Hawaii. While the LA-Hawaii market is crowded, there is also tons of proven demand. Furthermore, it's a market for which it isn't necessary to operate numerous flights throughout the day. Despite these positive aspects, JetBlue hasn't shown much interest in Hawaii flights.
One thing is certain: LAX will play a bigger role in JetBlue's network going forward, having become highly profitable since JetBlue launched its upscale Mint service. By contrast, without the possibility of international flights, Long Beach Airport may continue to fade in importance for JetBlue.
Adam Levine-Weinberg owns shares of JetBlue Airways and Virgin America and is long Jan. 2017 $17 calls on JetBlue Airways and long June 2016 $25 calls on Virgin America. The Motley Fool recommends Virgin America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.