Over the past decade, the profitability of the U.S. airline industry has improved dramatically. However, despite several attempts, there haven’t been any successful new entrants during this period. Instead, a slew of mergers have reduced the number of commercial airlines in the U.S.
That could change within the next couple of years. JetBlue Airways (NASDAQ: JBLU) founder David Neeleman (who has also co-founded several other airlines over the past three decades) is raising $100 million to start a new airline, provisionally named Moxy Airways.
Neeleman has an impressive track record with his airline start-ups. Nevertheless, the success and growth of JetBlue — and of Southwest Airlines (NYSE: LUV), which acquired one of the other airlines Neeleman co-founded — could make it hard for Moxy Airways to thrive.
Moxy Airways hopes to operate its first flights in 2020. It has agreed to buy 60 CS300 jets, all of which would be delivered by 2024. The CSeries jets have a state-of-the-art design, making them more fuel-efficient than other comparable aircraft. They are also smaller than the planes operated by most airlines, with 130-140 seats in a typical configuration.
That fits in well with Moxy’s strategy of offering point-to-point flights using secondary airports rather than flying into the biggest hubs. In a presentation for potential investors, Moxy Airways noted that the U.S. economy has grown faster than domestic airline capacity over the past decade — and that secondary airports have seen sharp decreases in service.
Thus, Moxy Airways plans to fly to Providence, Rhode Island, instead of Boston; Fort Worth, Texas, instead of Dallas-Fort Worth International Airport; Burbank, California, instead of Los Angeles; Gary, Indiana, instead of Chicago; and Islip or Farmingdale, New York, instead of the major New York City airports.
The secondary-airport strategy was first perfected by Southwest Airlines. The low-cost airline pioneer was able to keep costs low and aircraft utilization high by avoiding most big hub airports during its first few decades of growth.
While a focus on smaller airports will help keep costs down, Moxy Airways isn’t pursuing an ultra-low cost carrier strategy. Instead, Neeleman reportedly plans to shape his new airline in the mold of JetBlue, with relatively generous legroom, free Wi-Fi, and not too many extra fees.
The airline industry has changed
As Southwest executed its nationwide expansion during the 1980s and 1990s, its competitors had uncompetitive cost structures and charged very high fares. These were both legacies of the long era of airline regulation, which ended in the late 1970s.
This meant that even if Southwest couldn’t or didn’t want to operate at big airport hubs, it could attract plenty of passengers to secondary airports with its combination of low fares and friendly service. In other words, high fares at the hub airports were an important driver of Southwest’s success at secondary airports.
However, the market changed during the 2000s. Most of the legacy carriers went through bankruptcy during this period, helping them to cut costs (and thus offer lower fares). But the launch of JetBlue Airways in early 2000 was perhaps even more significant.
Neeleman based JetBlue at New York’s JFK Airport, which was underutilized at the time — and became even more so after 9/11. JetBlue later entered the Boston market in early 2004. Since then, it has built itself into the No. 1 airline in Boston, which is likely to become its largest base of operations a few years from now.
JetBlue’s growth in New York and Boston meant that travelers no longer had to use a secondary airport to fly on a high-quality, low-fare airline. This put pressure on Southwest Airlines’ value proposition. Sure enough, Southwest eventually started flying to Boston and two of the three major New York-area airports. Meanwhile, it slashed its flight schedule at secondary airports in those regions — including Providence and Islip — by 40% or more.
In addition to entering the New York and Boston markets, Southwest Airlines has added several other major hub airports to its route network since 2000, including Atlanta, Philadelphia, and Washington, D.C. As a result, most major metro areas now have a meaningful amount of service from either JetBlue or Southwest — or both.
That’s going to make it hard for Moxy Airways to break into the market. When consumers can often fly cross-country for less than $300 round trip and shorter flights are frequently available for less than $100 one way, people don’t need to go out of their way to a secondary airport.
Moxy’s biggest opportunity is to serve travelers who live closer to these secondary airports than to the nearest major hub. Yet even then, it may struggle to compete. For example, there may not be enough demand to support four or five daily flights on a given route from a secondary airport — but if Moxy enters the market with only one or two daily departures, travelers may choose to drive further to the big hub airport where there are more schedule options.
David Neeleman is an airline visionary and it’s entirely possible that he will succeed yet again with Moxy Airways. That said, JetBlue and Southwest have made low fares and high-quality service easily accessible at most of the top airports, which will make it a lot harder for new airlines to carve out profitable niches.
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Adam Levine-Weinberg owns shares of JetBlue Airways and Southwest Airlines and is long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends JetBlue Airways and Southwest Airlines. The Motley Fool has a disclosure policy.