JetBlue Cost and Productivity AnalysisGreg Koch

HW for OR 750

Question 1

• Jet Blue is considered a Low Cost Carrier– Avoided Labor unions (lower wage rate)– Uses Single Cabin service (no premium class)

• However it has few characteristics of LCC– Operates 2 types of aircraft– Uses JFK as a natural Hub– Assigns Seats– Has on board services– Loyalty Program– Adopted GDS

Question 2• RPM –Revenue Passenger Mile – One revenue paying passenger transported one mile.

Sum over all flights(# of revenue passengers * # of miles traveled)• ASMs – Available Seat Miles – One available seat flown 1 mile. Sum over all flights(# of

seats on flight * # of miles flown)• RASM – Revenue Per Average Seat Mile –Revenue made from each seat mile offered

(revenue/ASMs)• CASM – Cost Per Average Seat Mile -Cost to operate each seat mile offered (operating

costs /ASMs)• Yield – measure of the average fare paid by all passengers per mile flown. (total

revenue/ # Revenue Passenger Miles)• PRASM - passenger revenue per ASM. (total passenger revenue/ASM)• Fuel Consumed – Total volume of fuel used• Fuel Costs per ASM – Volume of Fuel used per ASM• Non-Fuel Costs per ASM - (= Wages and Salaries, Other rentals and landing fees,

Depreciation and Ammortization, Maintenance materials, and repairs, Commisions…, Rentals…, and Other

Chart 1

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ASM and RPM with Yield

ASMRPMLoad Factor

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•As Available Seat Miles have increased the number of Revenue Passenger miles has increased as well. Which means the demand for travel is keeping pace with travel offered by Jet Blue•The Load factor is cyclic dropping off in Q4 and Q1 of every year and increasing Q2 and Q3

Chart 2

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Income - Expenses - Revenue

Income (Loss) Before TaxesTotal Operating ExpensesTotal Operating Revenue

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•The beginning of the data set shows growth in revenue that exceeds expenses resulting in consistent income, albeit a very small profitable margin•In 2005 an oscillation between profitability and losses begins even though income has continually grown.

Chart 3

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RASM - CASM - Yield RPM - PRASM

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•Falloff in Revenue during 2001-2003 recession (dot com bust) general growth during economic expansion till 2009 and then revenues drop.•Costs generally increase during expansion because competition for fuel in the world drives prices higher

Chart 4

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Costs and Consumption

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•Falloff in fuel prices after 2008 recession begins leads to a growth in fuel consumption.•Nonfuel costs increase consistently by about 10% every year. Fuel costs also rise but are impacted by other economic factors causing wide variation on cost and consumption.

Chart 5

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Costs vs. Jet Fuel Price

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•Non Fuel costs per ASM remain fairly consistent•As Jet Fuel Prices spike, the cost per ASM spikes as well, the variability in jet fuel prices causes the variability in total costs more so than all other operating expenses combined.

Question 4

• a. Fuel Prices on Expenses (Chart 5, 4, 3)– the variability in jet fuel prices causes the variability in total costs (and

thereby profits) more so than all other operating expenses combined.• b. Fuel prices on Airline Finance (Chart 2)

– An oscillation between profitability and losses is caused by the razor thin profit margin of airlines and the exposure to wild oscillations in jet fuel costs that represent a large portion (1/3) of total operating costs

• c. Fuel Prices on Airline Network Structure (Chart 1)– A hub model using fewer flights can increase load factors. Higher load

factors increase the yield of a flight and help offset the fuel costs. An empty plane uses nearly the same amount of fuel as a full one.