Daring Tales

People Express. ValuJet. MGM Grand. Muse Air. Midway. Braniff. Eastern. Pan Am. 

jetBlue entered an industry littered with bodies.

From 1938 to 1978, the airline industry was ruled by the Civil Aeronautics Board (CAB), a government bureaucracy that approved all new routes and had the power to set fares. The CAB’s decline and eventual closure by the Airline Deregulation Act of 1978 unleashed a flood of productivity, as many start-ups tried to get in on the game.

One problem. Succeeding in the airline industry is hard.

Between 1978 and 2001, nine major carriers and over 100 smaller airlines went bankrupt or were liquidated–including most of the dozens of new airlines founded post-deregulation [click here]. Into the mix came David Neeleman, formerly an executive for Southwest Airlines. Neeleman had been kicked out of Southwest Airlines for being tactlessly argumentative [see Blue Streak]. He wanted to start up his own airline but had to wait five years for his Southwest non-compete clause to expire. 

So what do you do when it seems like everyone that’s come before you has failed? You learn from their mistakes.

What becomes clear in Blue Streak is the amount of reflection that went into creating jetBlue. Neeleman’s favorite activity in those five years seems to have been trying to understand why the start-ups failed. Start-ups tended to begin with around $10 million. What that bought was a few small planes from obscure foreign airlines, staff, and basic operating costs. The strategy was to fly to a few locations with little advertising, figuring that the rock-bottom fares you’d charge would generate a windfall of free advertising once word got out.

Neeleman saw a recurrent and inevitable pattern of problems. Fixed costs were higher because the start-up wasn’t big enough to negotiate cheap airport leases or lower prices on gas or insurance. The old airplanes would break down frequently, giving the company a reputation as unreliable. The new airline’s only real competitive advantage was pricing, but the major airlines would temporarily lower their prices to wipe out that advantage. 

The solution? Start big. Neeleman created a plan that would address the start-ups’ problems by allowing it to negotiate lower fixed costs, buy new airplanes, and run a healthy number of flights out of the gate. The only problem? Instead of $10 million, this plan would cost $130 million. Raising that money posed its own challenges, but–if jetBlue’s success is any indication–it was the right move.

There’s much more to the story here that I’d love to tell. The one part in particular that I really want to explore is how Neeleman and company came up with the particular innovations that make jetBlue jetBlue. In the meantime, I recommend Barbara Peterson’s “Blue Streak.”

jetBlue’s creation is a classic example of seemingly impossible odds. I think that the two most common actions people would take in the circumstances are either to give up or to plunge on and hope. But there’s a third option, which Neeleman clearly did. 

The third option is to learn.