American and JetBlue Play "Let's Make A Deal"

Is airline management finally “getting it” and acting responsible? For American (AMR) and  JetBlue (JBLU), based on last week’s announcement, the answer is yes! At least this time!

AirlineFinancials.com estimates the new “interline ticketing agreement” announced last week  will add at least $14 million to JetBlue and $55 million to American’s operating income with  virtually no increase in costs. These amounts could easily double as American will connect 12  of their popular international destinations with 18 JetBlue US domestic airports.

Additionally, each airline can further strengthen their route networks and
increase revenues from the other part of the “deal” which transfers 12 of JetBlue’s valuable
JFK slot pairs (landing and takeoff spots) to American while JetBlue finally gets to add new
service to Washington’s DCA airport by getting eight DCA slot pairs from American.
Note: JetBlue also gets one of American’s slot pairs for White Plains, NY.

By the numbers:

For year 2009

* At New York’s JFK airport, JetBlue, by far, had the largest market share with 41.7% of the
passenger traffic. Delta (DAL) was #2 holding 19.8%. American was #3 with 14.1%.

* At Boston’s airport, JetBlue once again had the highest market share with 17.4% of the
passenger traffic. American was #2 at 15.1%.

* At Washington DC’s Regan airport, US Airways was #1 with 22.3% of the passenger traffic.
American was #2 at 13.5%. JetBlue plans to start operations at DCA later this year.

Note: Market shares above do not include traffic from regional/affiliate partners.

The following provides the JetBlue daily average passenger traffic to Boston and New York’s
JFK airports that are expected to be included in the new interline agreement connecting with
American’s international flights (number in brackets is the average daily one-way passenger
traffic based on the most recent data available):

Nantucket   [79]
Burlington   [477]
Buffalo   [1,260]
Denver   [351]
Houston   [224]
Washington Dulles   [851]
Jacksonville   [349]
New Orleans   [381]
West Palm Beach   [658]
Portland, OR   [130]
Phoenix   [236]
Portland, ME   [469]
Richmond   [308]
Rochester   [429]
Fort Meyers   [622]
Salt Lake City   [115]
Sarasota   [192]
Syracuse   [415]

Collectively, the daily average JetBlue one-way passenger traffic from all of the cities above
to New York JFK and/or Boston was 7,547.

As part of the “interline ticketing agreement”, the following are the American international
destinations that JetBlue passengers will be able to connect with:

Barcelona, Spain
Brussels, Belgium
Paris, France
Buenos Aires, Argentina
Rome, Italy
Sao Paulo, Brazil
London, UK
Madrid, Spain
Manchester, UK
Milan, Italy
Tokyo, Japan
Zurich, Switzerland

The reality of the industry is that without this American-JetBlue ticketing agreement,
international passengers between any of the destinations above would likely chose Delta,
United (UAUA), Continental, or US Airways for their travel opposed to using JetBlue or American.

JetBlue now becomes a stronger domestic competitor by providing connecting service to
American’s international destinations. Without this agreement, the only way for American to
compete for passenger traffic from the JetBlue cities above would require American to add costly
domestic routes that would only drive fares lower due to unnecessary additional capacity.

AirlineFinancials.com estimates for each one percent increase in JetBlue’s passenger traffic
that is driven by American’s international connections will add $6.9 million to JetBlue’s operating
income and four times that amount for American. This additional income comes at virtually no
increase in costs to either airline.

Conclusion- Over just the past two years, US airlines have lost about $9 billion. Even
what once were the most successful and low-cost airlines, have become more-or-less break-even
for profits.

Contrary to popular belief and political efforts, these industry losses did not come from costs that
were too high. The losses came from not enough revenue.

The fact is while the real cost for new aircraft, real estate, terminal rents, fuel, taxes, etc. has
easily kept up with inflation. Current airfares are more-or-less what they were 25 years ago. If
airfares were adjusted for normal inflation, fares would be approximately twice what they currently are.

As I have frequently stated: “More focus needs to be on making the industry better and not just
cheaper.” The only way for this to occur is for the airline industry to stop adding capacity until there
is enough demand at a high enough fare to operate profitably.

This new deal between American and JetBlue is a positive move in that direction and makes both
airlines stronger.

Data source for above was SEC filings and BTS data. Projections and estimates make
assumptions that may or may not prove to be accurate.

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Disclosure- The above opinions and comments should not be used to determine the worth of any stock or
investment. At the time of writing, the author and his family did not hold stock and/or derivative positions in any of the airlines covered in this article.

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Robert Herbst has been a commercial pilot since 1969. His aviation experience and financial background
provides a unique analytical perspective into the airline industry.
Robert Herbst is the founder of: Airlinefinancials.com which provides airline industry analysis and
commentary for major US carriers.

— Robert Herbst of AirlineFinancials.com