The Amazing JetBlue WHILE MOST AIRLINES ARE STRUGGLING, JETBLUE SEEMS POISED FOR A RAPID ASCENT. DOES ITS HIGHFLYING FOUNDER DAVID NEELEMAN HAVE THE VISION TO BUILD HIS CUSTOMER-FRIENDLY STARTUP INTO A MAJOR-LEAGUE AIRLINE?
(FORTUNE Small Business) – Just as JetBlue flight 389 comes to a complete stop, crew member David Neeleman unsnaps his seatbelt, jumps to his feet, and cracks a smile. "Have a great vacation and thanks for flying with us," he cheerily tells a New York couple who've taken the 8:20 A.M. to Fort Lauderdale to set out on a weeklong cruise. A few handshakes and smiles later and he's in the aisles wrestling carry-on bags out of overhead bins on behalf of a few remaining passengers. Once it's nearly empty, he races through the plane putting seats in their upright position, re-laying safety belts neatly across each seat, and bravely sticking his ungloved hand into seatback pockets to pull out a few gum wrappers and other bits of trash. Neeleman, 43, then gets down on all fours to pick up a crumpled USA Today and a People magazine hiding underneath seats 9A, B, and C.
By now you may already know the punch line to this tale. The clean-cut guy dressed in khakis and a powder-blue dress shirt getting on his hands and knees is JetBlue's CEO and founder. At the end of every flight they're on, Neeleman--who is worth more than $215 million--and all the company's "crew members" ("employee" is considered a dirty word) are supposed to prep planes for their next trip. Even pilots are expected to haul trash, vacuum, and tidy up restrooms if needed. "I'm just doing my job," says Neeleman, who flies on his own planes at least once a week. "But I guess it might be strange for some to see an airline CEO on cleanup duty." Indeed, it's hard to imagine his counterparts at American, United, or US Airways collecting garbage. But maybe it's something they should consider.
After all, the majors are in a serious mess. United has been limping along in Chapter 11 since December 2002. US Airways managed its way out of bankruptcy in late March but needed a largely federally backed $1.24 billion loan to do it. American, the world's largest airline, may still be forced into Chapter 11 despite winning $1.8 billion in annual concessions from its three major unions. The industry as a whole isn't faring much better. Since Sept. 11, domestic carriers have lost $18 billion. The war in Iraq and public fears of SARS (severe acute respiratory syndrome) aren't helping. The Air Transport Association estimates that airlines may lose another $10.7 billion this year. "JetBlue, however, is an extraordinary exception," says Robert Mann of R.W. Mann & Co., an airline analysis and consulting firm. "At the moment they're doing almost everything right."
Open their books and you'll find it hard to argue with that. While almost everyone else is awash in red ink, JetBlue is in the black. In 2002, Neeleman's three-year-old discounter logged a $55 million profit on revenues of $635 million. This year earnings are expected to rise 42%. Since going public a little over a year ago, its market cap has grown to $1.7 billion, nearly as large as Delta, United, and American combined. Business is so good that he's hiring an average of six new employees a day, and this year he'll be adding 12 shiny new Airbus A320s to his current fleet of 41. He'll need each one, since he's adding more frequent flights to the 20 cities JetBlue already serves as well as plotting new routes. With its cheap tickets, extras like leather seats, 24 channels of satellite TV, and all-you-can-eat Terra Blue chips, JetBlue has inspired a growing cult following. In a recent New York magazine personals ad, under the heading "Five Items I Can't Live Without," one man wrote, "A good glass of wine, laughter, JetBlue, my climbing harness, and Shakespeare."
Usually when the words "startup" and "airline" appear in the same sentence, the story ends tragically and expensively (see box). But can Neeleman keep rewriting the script played out by legendary flops like People's Express and ValuJet? After all, the turbulence troubling American, United, US Airways, and others will eventually ease up. As they reorganize, the industry will likely become leaner and more competitive. Delta already launched its own JetBlue look-alike, Song, last month, going head-to-head with JetBlue on its lucrative New York to Fort Lauderdale route. United, meanwhile, is also considering its own discount spinoff. And Virgin Atlantic's founder, Richard Branson, reportedly has his eye on the American market.
But a look at Neeleman's past suggests that if anyone can avoid becoming a startup statistic, it's this son of a Mormon missionary. Neeleman was born in Sao Paulo but grew up in Salt Lake City. By his own admission, he was a "miserable" student who was bored with studying and unknowingly suffered from attention deficit disorder. (Neeleman--who typically talks on the phone and sends e-mails on his BlackBerry while driving in heavy traffic--was diagnosed just last year.) After his freshman year at the University of Utah, he returned to Brazil as a missionary for two years, baptizing more than 200 converts in Rio's notorious favelas (slums). Dropping out of college when he returned home, he began renting out condos in Hawaii. To bring over prospective clients, he started his own travel agency and chartered flights from Salt Lake City to the islands. A rabid salesman, he even tried to push honeymoon packages on couples during their weddings.
His hard-sell reputation caught the attention of June Morris, who owned one of the state's largest corporate travel agencies. Together they launched Utah-based Morris Air, a charter operation, in 1984. Neeleman modeled it after legendary discounter Southwest, borrowing from the strategies of its founder and CEO, Herb Kelleher. "He was my idol," recalls Neeleman, who was then 25. "I studied what Kelleher was doing and tried to do it a little better." That meant everything from keeping costs low by turning planes around quickly to choosing casual uniforms. That's not to say that Neeleman didn't have his own ideas. He set Morris Air apart by pioneering the use of at-home reservation agents, routing calls to their homes to save money on office rentals. He also developed the industry's first e-ticketing system. With a fleet of 21 Boeing 737s, Morris had morphed into a regularly scheduled airline by 1992 and was poised for an IPO.
Then along came Southwest. Impressed by Morris's low costs and high revenue, Kelleher bought the airline for $129 million. It was a bittersweet moment for Neeleman. His business partner, June Morris, was diagnosed with breast cancer around the time of the sale. (She has since recovered.) Once the deal was finalized, Neeleman found himself $22 million richer and a new member of Southwest's inner circle. At the time of the acquisition, Kelleher said he and Neeleman were "kindred spirits."
"It was a dream," remembers Neeleman, who became an executive vice president. "But it's never the way you think it will be." Almost immediately Neeleman grated on the entrenched executive team, says Ann Rhoades, then Southwest's head of human resources. Many eyed the newcomer as Kelleher's handpicked successor. "There was a little bit of jealousy," says Rhoades. "But David was also a little annoying back then." Used to running his own company, he lacked the diplomacy needed to push through his ideas on everything from e-ticketing to assigned seating. "Southwest is a great company, but I'm an entrepreneur," says Neeleman. "I move at a different pace." Within a year it was clear that he was going to be given a one-way ticket out. "He was hurt," says Rhoades, who helped break the news. "But David being David, he actually started pitching his next company while he was getting fired." Perhaps temporarily impaired by the stress of the moment, Neeleman talked about creating a chain of family dental practices in Salt Lake City, with kids queuing up in a kind of oral-hygiene assembly line.
Fortunately, he abandoned his dentistry aspirations. Though saddled with a five-year noncompete agreement, Neeleman managed to stay in the airline industry. Fine-tuning the online reservations system he helped design at Morris Air, he dubbed it Open Skies and sold the company to Hewlett-Packard in 1999 for a reported $22 million. Then, working with his lawyer and JetBlue's eventual executive vice president, Tom Kelly, he wrote a white paper that closely resembles the final business plan for JetBlue.
It was pretty bold. From the outset, Neeleman went for the brass ring--New York City--revealing a talent for choosing markets that would help fuel the airline's growth. Despite the presence of three busy major airports in the metropolitan area, he identified key routes that were being poorly served. Back then, unrestricted roundtrip flights from New York City to upstate areas like Rochester, Syracuse, and Buffalo could easily cost between $500 and $800. A similar ticket to Fort Lauderdale was about $500.
Undercutting those prices wouldn't be too difficult, reasoned Neeleman, not with the right technology and equipment. From the start he bought new, fuel-efficient Airbus A320s. While they cost more up front, the brand-new planes would be cheaper to maintain and at the same time would counter the image of a startup on a shoestring. Having once been assigned a urine-soaked fabric seat, he was determined to use leather upholstery at JetBlue. As for his trash-collection policy, it wouldn't be just an egalitarian exercise. It would allow JetBlue to turn planes around in about 35 minutes--compared with the hour or more at other airlines--giving Neeleman the opportunity to sell more flights. To minimize labor costs, he'd offer electronic ticketing and web-based purchasing.
But to pull off his plan, Neeleman needed money. He was willing to gamble $4 million of his own cash, but that wasn't enough. Not long before his noncompete agreement expired, Neeleman called Michael Lazarus of Weston Presidio Partners, a San Francisco--based venture capital firm whose investment in Morris Air had more than doubled when Southwest acquired it. Over coffee at Salt Lake's Little America Hotel, Neeleman made his proposal. It wasn't that hard a sell. "We had a history together," says Lazarus. "I knew anything David touched would turn to gold." Weston Presidio kicked in $30 million, and Lazarus was named the company's chairman. He brought in additional investment from Chase Capital and George Soros. Neeleman's new airline would launch with $130 million, making it the best-funded startup airline in U.S. aviation history.
It was an investment largely based on a leap of faith. Neeleman had yet to secure his management team, sign a deal to purchase planes, and line up flight certification or airport slots. During walks around Temple Square, he reassured Lazarus that everything would more than come together. "David told me, 'I'm going to make you ten times your money,' " says Lazarus, who also remembers Neeleman trying to convert him from Judaism to the Mormon church. "He was shameless. He made me promise I'd convert if he did, in fact, make us ten times our investment." As Neeleman has gotten closer to fulfilling his prophetic promise, he's e-mailed Lazarus regular updates. "Lately I've been getting messages on my BlackBerry telling me I'm 65 cents from the church."
Now armed with a big checkbook, Neeleman went after industry veterans. Dave Barger, who'd spent ten years running Continental's Newark hub, signed on as COO. He also lured onboard two of Southwest's top execs: John Owen, Southwest's treasurer for 14 years, came over as CFO. And Ann Rhoades, the woman who sacked Neeleman at Southwest, came to handle human resources. "At Southwest, David used to think he could do it all," says Rhoades, who left her job at JetBlue in 2001 but remains on the company's board. "But five years later he knew better. He was putting together a team who understood how to execute his ideas, and I wanted to be part of that."
As his team came together, Neeleman set out to find the right airport. With Newark and La Guardia too crowded and Southwest already flying out of Islip's regional airport, he went after John F. Kennedy International. He astutely played on the frustrations of state legislators who had long clamored for lower fares and better service from New York City to upstate areas. In part by promising to service Buffalo, Rochester, and Syracuse, he won the right to fly 75 daily flights in and out of JFK. He's kept his word and also used his JFK "slots" to fly the much more lucrative New York to Florida routes that became his bread and butter. JetBlue now carries more people from New York to Fort Lauderdale than any other airline.
What's filling JetBlue' seats? besides being comfortable, they're cheap and preassigned, unlike the old cattle cars at People's Express. Roundtrip from JFK to Florida can cost as little as $138, with no Saturday night stay required and just a seven-day advance purchase. Passengers can watch 24 channels of satellite TV. And there aren't any rubber chicken entrees onboard, just all-you-can-eat supplies of Terra Blue potato chips, Animal Crackers, and other fun snacks that don't cost much.
True to his roots at Southwest, Neeleman's also built an airline that excels at customer service. He's made finding employees who know how to keep customers coming back such a priority that getting hired is harder than being accepted into the Ivy League. Last year 130,000 applicants vied for 2,000 jobs. To choose its hires, JetBlue tests them on how they would handle a long list of hypothetical situations involving demanding passengers.
Neeleman asks each person he hires to follow a few corporate commandments known as the Values, embodying safety, caring, integrity, fun, and passion. Perhaps because the airline is doing so well, some employees willingly go beyond these edicts. "Right now, it's a lot like working for Microsoft in the '80s," says Chris Calta, the company's customer service training manager. That may also explain why a group of New York gate agents was spotted last winter spontaneously breaking out into a little song and dance for passengers delayed by weather. "I really am evangelical about being nice," says Neeleman.
While other airlines wondered how to address fears of terrorism and other threats, Neeleman comforted customers by acting quickly. With just one aircraft model, JetBlue was able to engineer new safety features much more rapidly than competitors after Sept. 11. It was the first to retrofit each of its planes with reinforced cockpit doors and onboard surveillance cameras.
But Neeleman knew he couldn't depend just on tight security and tasty junk food. To reach out to the 19 million people living within a 60-mile radius of New York City, he relies on Amy Curtis-McIntyre, a veteran of Virgin Atlantic's marketing department, to develop ad campaigns that are high on creativity and snarkiness. A native New Yorker, she's primarily responsible for the hip image JetBlue has developed. "He wanted cheap and cheerful," says Curtis-McIntyre. "I wanted cheap and chic. We used to have job-threatening battles about how to approach advertising."
Ultimately, they compromised on cheap and cheeky. Billboards in New York promise FREE TV WITH EVERY PURCHASE. In the Los Angeles area the company pushes flights to San Francisco with its "From smog to fog" advertisements. One spot, targeted at New Yorkers, depicts what a subway car might be like if it were a JetBlue flight. Crew members dance through the car inserting pillows under passengers' heads, placing blankets over sleeping bodies, pouring coffee in the cup that a beggar is using to collect change, and so on. All the while, they dance with passengers and sing "Put a Little Love in Your Heart." This approach is selling well among both New York's bargain-hungry and its most affluent, and it's earned JetBlue a loyal and loving following. According to the airline, the majority of the tickets it sells out of New York are to people who live within the Upper East Side's 10021 zip code, Manhattan's version of 90210.
But is his brand of niceness enough to help JetBlue maintain its edge in the long run? After all, company values and all that sweetness are great when business is going your way. Labor costs are likely to rise if employees unionize in the next couple of years. Neeleman has tried to head that off with a package that gave employees 15.5% of their gross salary in profit sharing last year, but that may not be enough. Then there's the inevitable aging of its planes, which will need costly repairs. "We've factored those added expenses into our plan going forward," argues Rhoades.
Competition from other airlines is also looming, and each has its own take on cheap and cheeky. Delta launched its discount spinoff, Song, this month with daily flights to West Palm Beach from all three major New York City airports, perhaps gaining an edge over JetBlue, which is sticking to JFK for now. Like JetBlue, the new airline will offer satellite TV later this year, along with in-seat Internet access and multichannel MP3 audio. And oh, yeah, it has leather seats too. That's not to mention a frequent-flier program it will share with Delta and its partners. Inspired by JetBlue's success, Virgin's Richard Branson has also reportedly been eyeing the American market. Branson is already reeling in the green with his inter-city carriers Virgin Blue in Australia and Virgin Express in Europe. He's long wanted to set up in the U.S. and flirted with Neeleman about a joint venture in 1998.
Ironically JetBlue's biggest competitor may prove to be Southwest. Profitable for 30 straight years, it has a pretty comfortable lead over Neeleman's young upstart. But the veterans don't discount their former colleague. They're already automating their baggage-handling and boarding-pass processes--ideas Neeleman pushed when he worked for them. "We've got to be prepared for intense competition," says Gary Kelly, Southwest's CFO. Not long ago Southwest ordered model JetBlue planes and sent them out to some executives with a note: "Know Your Enemy." For now, though, the two airlines, which don't compete out of many of the same airports, have steered clear of each other.
"JetBlue will continue to eat out of the major carriers' rice bowls for quite some time," says analyst Robert Mann, who thinks spinoff carriers like Song will ultimately undercut the main airlines rather than hurt JetBlue. Moreover, it will take several years for United, American, and US Airways to recover from their recent battering. "While they struggle to repair their balance sheets and become more liquid and financially flexible, low-cost carriers like JetBlue will expand into the vacuum the majors have created," he says.
In the meantime, Neeleman has yet to fully develop JetBlue's powerful advantages. Even if his maintenance and labor costs rise, the airline is so much leaner than most of the majors that it should remain more profitable for the next few years. His costs per passenger-mile are 6.43 cents per mile--second only to Southwest's 6.33 cents and far less than high-spending US Airways' 12.45 cents.
When it comes to expansion, Neeleman remains cautious. He will keep moving into markets only where tickets are overpriced and competitors aren't in a position to expand. Set for takeoff: a new route from Atlanta to Long Beach starting this month, followed by service that customers have requested from New York to San Diego in June. He's built in room to grow by transforming Long Beach into his West Coast hub. But for now, he's opting not to overextend JetBlue by blanketing the country. He's concentrating on adding more frequent flights to the cities he already serves. "That will allow the airline to grow while keeping its resources and company culture intact," says Susan Donofrio, an analyst with Deutsche Bank.
To stay ahead of copycats, Neeleman is constantly looking for ways to make flying fun and fast. While he hasn't announced plans to offer pay-per-view TV or in-flight shopping, there is a conspicuous but still inactive credit card swiper alongside each seat-back TV. To turn planes around faster while keeping costs low, Neeleman has also adopted a "paperless cockpit" system that digitizes cumbersome flight plans.
JetBlue is at a crossroads that other airlines have stalled at before. Can its formula--efficiency, low costs, and high levels of customer service--remain undiluted as the company continues to grow? "Absolutely," says Neeleman, with his characteristic confidence. If there's anyone who can convert doubters, it may be this missionary's son.