Has Jet Blue Missed the Boat?

After Lufthansa (DLAKY) purchased 19% of JetBlue (JBLU), one wonders what is next. The Chair of Southwest Airlines (LUV) says he is prepared to write a big check. He anticipates consolidation and he expects to be a buyer.

In the meantime, the cash infusion at JetBlue has not solved its problems. JetBlue was late in the game. The deregulation of airlines that happened in 1978 is basically over and done. After deregulation, companies like LUV cherry picked the best routes. They were able to muscle their way to growth because they did not have the heavy cost structures of the "legacy carriers".

Today, the "legacy carriers" do not have the heavy cost structures of the "old legacy carriers". These legacy carriers use feeder companies to go toe to toe with the discount carriers but these toe to toe flights give the customer additional benefits. Those who wish to connect or to pick up legacy carrier mileage or to make use of airport club facilities need to book with the feeder flights of the legacy carriers. JetBlue jumped in late a couple of years ago and appeared to be ready to become the next LUV, only to find that the profitable model has changed once again.

While the LUV Chair talks about writing a check, the majority of the consolidation so far has been through code sharing agreements. These agreements allow the companies on both ends of long international flights to gain local market share while sharing the international revenue. In domestic markets, the little guys are starting to have a very tough time, but even so they have not welcomed take overs. MidWest fought long and hard to remain independent. It was able to stay semi-independent by allowing Northwest to become an investor. The deal between Lufthansa and JetBlue is a similar attempt by JetBlue to maintain itself as an independent entity.

When these deals are made, flight patterns change. Resources are reallocated so as to limit direct competition with one's "partners". No one would be surprised to see certain MidWest and Northwest routes altered after the deal was done. Because each of the legacy carriers is a member of an "alliance", routes are less and less likely to overlap one another.