CONFIDENCE IN AIRLINE PERFORMANCE IN DIFFICULT MARKET CONDITIONS: AN ANALYSIS OF JETBLUE'S FINANCIAL MARKET RESULTS

Journal of Air Transportation, 2005 by Flouris, Triant, Walker, Thomas

Our argument is that the low-cost model, in its generic manifestation, can be differentiated from the conventional-cost model along three dimensions. These dimensions, coupled with some unique operational features that low-cost airlines have (which will be identified in the next paragraph), help explain, theoretically, why low-cost carriers outperform their conventional-cost rivals. These dimensions are: (a) adopting a viable strategic position, (b) leveraging organizational capabilities, and (c) reconceiving the value equation (Lawton, 2002).

Low-cost airlines establish a viable strategic position in the market by finding an appropriate strategy that acts as a mediating force between them and the environment in which they operate. For example, both SWA and JetBlue serve price- and convenience-sensitive passengers only. Low-cost airlines, once they establish their position, move toward securing their competitive advantage by capitalizing on capabilities that cannot be used by rivals. These capabilities are quality in customer service, operational efficiency, innovation, and responsiveness to customers.

Zorn (2001) advances the argument that low-cost carriers are more resilient than conventional-cost carriers in times of economic downturn. Our analysis focusing on JetBlue's performance validates this point, and Zorn's analysis helps us demonstrate it theoretically. Zorn cites several reasons for the resilience of low-cost carriers in times of recession: first, lower overall and more variable cost structures; second, lower breakeven load factors; and, third, business and leisure traveler migration from conventional-cost airlines to low-cost airlines. Our financial analysis substantiates this point to its fullest. We found that markets value low-cost airline stocks (focusing on JetBlue and SWA) as growth stocks, whereas conventional-cost airline stocks are treated as cyclical. Even though affected, low-cost carriers emerged from 9/11 in a stronger market position than their full-fare rivals.

What interests us from an academic point of view is the relative confidence of the public in JetBlue's stock (as measured by price movements) right after the IPO, as compared to both SWA and the mainline carriers. We build a model, test several hypotheses on why there was stock performance divergence, and explain these differences based on the data, controlling for extraneous variables.

The paper is organized as follows. The first section briefly describes the series of events surrounding our period of analysis and sets the stage for our analysis. The second section discusses JetBlue's strategy and the state of the airline industry in the U.S. during the period of our analysis. The third section describes the data. The fourth section explains the methodology used to test several hypotheses concerning the performance of JetBlue's stock. The results are presented in the fifth section and the findings are summarized in the final section.

JETBLUE AND THE STATE OF THE AIRLINE INDUSTRY