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JetBlue’s Flight Hour Agreements
Cutting Costs and Aligning Incentives
Cutting Outsourcing Costs through Fee Per
Flight Hour Contracting
The JetBlue Story
Tech Ops Strategy
Engine Sourcing
LRU Sourcing
Questions
1
The JetBlue Story
Mission: Bring Humanity Back to Air Travel
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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Major
Airline
2
Selected History to Bring Humanity
Back to Air Travel
Feb. 11, 2000: JetBlue launches operations with its first flight between JFK and Fort
Lauderdale, FL
June 13, 2002: TrueBlue customer appreciation program launched
Sept. 27, 2002: JetBlue acquires LiveTV, LLC: its in-flight satellite TV provider
Jan. 7, 2004: 100 channels of XM Satellite Radio and three movie channels announced
June 6, 2005: State-of-the-art training and support campus in Orlando opened
Sept. 13, 2005: JetBlue becomes first airline to take delivery of the
EMBRAER 190 aircraft
Feb. 20, 2007: JetBlue introduces industry’s first Customer Bill of Rights
Dec. 11, 2007: Free in-flight e-mail and instant messaging services
introduced on aircraft BetaBlue, a first among U.S. domestic airlines
Jan. 22, 2008: Lufthansa completes stock purchase transaction for a 19
percent stake in JetBlue
Oct. 22, 2008: T5 at JFK opens its doors to rave reviews
3
Jetting By The Numbers
58 destinations
660 daily flights
150 aircraft by year end
11,500 Crewmembers
Started operations Feb. 2000
5-time J.D. Power &
Associates winner
4
5
JetBlue’s Product
– 36 Channels of live TV in every
seat
– Comfortable, reliable
new fleet
– Lots of legroom
– Unlimited free snacks
6
Focus on the Caribbean
Successfully growing in
Caribbean despite
economic downturn
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Crewmembers and Culture
JetBlue’s Crewmembers and Culture are its main differentiators and reasons for
success
8
Jetting and Jettitude
We don’t “fly,” we “jet”
Crewmembers trained
to have “jettitude”
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Constant Communication
Maintaining our culture requires communicating with Crewmembers at every
opportunity
Earning trust through transparency, honesty
10
Our New Customer Service System
We’re currently in the middle of changing our reservations software to Sabre for a
2010 launch
• Strong focus on
ongoing Crewmember
communication about
transition
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Looking at Partners in a New Way
Finding creative ways to partner with other airlines
Partners: Lufthansa, Aer Lingus, Cape Air
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Innovation
We value creativity and new ideas highly
A few industry firsts for JetBlue
– Customer Bill of Rights
– Free In-flight connectivity
– Launch customer for Embraer E190
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Innovation: Terminal 5 at JFK
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Tech Ops Strategy
In Source
Line Aircraft Maintenance at Larger Blue Cities
Positive Control
Close to Customer
Out Source Out Sourcing Objectives
Heavy Aircraft Maintenance
High Quality
Aircraft Component
Low, sustainable cost
Maintenance
Predictable cost
Avoid
Transfer risk
Capital infrastructure Variable costs
Large labor pool Freight
FOD
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Diagnostic results
Results of the company’s spend diagnostic indicated the need to manage engine costs.
Savings versus Ease of Implementation Engine MRO costs
Size of Bubble = Projected 2005 Spend ($ Millions) Large and Volatile
5.0
Airframe
4.0
Maintenance
Rapid Sourcing
3.0
Value Sourcing
Savings Estimate ($ Millions)
Projected Growth
Over Time1
2.5
Hotel Powerplant
Hardware New Buy
Expenses Parts
2.0 Component Insurance
Repairs
GSE
1.5
Janitorial
Expenses Workers Facilities
Compensation Catering Food Construction
& Beverage
Facilities Skycap
1.0 Promotional Maintenance Services People
Materials Fees Services
Aircraft Deicing Benefits
Aircraft
Printed Materials Cleaning
Into Plane
0.5 Mail Services Security & Ground Advertising and
Telecomm Fees
Screening Handling Media Buy
Crewmember Recurring Office Training
Transportation Expenses Line
Maintenance Professional Services
Furniture
0
EASY Crewmember DIFFICULT
Recognition Ease-of-Implementation
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The Perfect Storm for Sourcing
JetBlue Profit
Strong Brand
+ Solid Business Plan
Sustainable Airline
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V2500 Engine Sourcing
JetBlue’s Objectives
• Secure sustainable sources for high quality
maintenance
• Reduce costs throughout engine
maintenance overhaul and repair process
• Ensure timely delivery of engines and related
components
• Sustain strong reliability and performance in
our V2500 engine fleet
• Strengthen our competitive position
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Sourcing process
The sourcing process takes a team approach to create product and market research,
develop the RFP, and prepare for negotiations to maximize savings opportunities.
Requirements Market Develop Ongoing
Implementation
Gathering Assessment Sourcing Strategies Contract Management
• Identify user • Conduct market • Identify opportunities • Finalize supplier • Manage supplier
needs analysis • Develop and agreements relationships
• Understand • Perform distribute supplier • Implement • Track internal
current supplier RFIs supplier performance
processes and analysis • Prioritize agreements • Track criteria to
policies opportunities • Implement
• Identify process indicate when
• Develop, distribute
constraints and analyze changes next re-sourcing
• Perform supplier RFPs • Build savings should occur
detailed cost • Negotiate with into budgets
analysis suppliers
• Validate • Assess processes
requirements and policies
• Develop
performance metrics
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We provided detailed information about the existing fleet
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Detailed Bid Sheets
Costs varied with age
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JetBlue collected a great deal of data on the V2500
Develop Ongoing
Requirement Market
Sourcing Implementation Contract
s Gathering Assessment
Strategies Management
• Identify user • Conduct • Finalize • Manage supplier
needs market analysis • Identify opportunities supplier relationships
• Understand • Perform • Develop and agreements • Track internal
current supplier distribute supplier • Implement performance
processes analysis RFIs supplier • Track criteria to
and policies • Prioritize agreements
opportunities • Implement indicate when
• Identify • Develop, distribute process next re-sourcing
constraints and analyze changes should occur
• Perform supplier RFPs
• Negotiate with • Build savings
detailed cost suppliers into budgets
analysis
• Assess processes
• Validate and policies
requirements • Develop
performance metrics
• Shop Visit Intervals
Requirements Market • LLP replacement
Gathering Assessment • Labor costs
• Material costs
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SVR by engine age and RFP participant
…
Shop Visit Rate by Engine Age and RFP Participant Legend: Removals
Rate per 1,000 Flight Hours ‘05 - ‘14
33 - 118
39 - 139
37 - 115
31 - 94
35 - 136
22 - 103
IAE
33 - 117
33 - 121
Engine Age
Source: V2500 RFP Responses;
* Estimate based on 0.02 UER and 18,000 hrs between performance restoration visits; excluded from the Average SVR calculations
24
JetBlue collected a great deal of data on the V2500
Develop Ongoing
Requirement Market
Sourcing Implementation Contract
s Gathering Assessment
Strategies Management
• Identify user • Conduct • Finalize • Manage supplier
needs market analysis • Identify opportunities supplier relationships
• Understand • Perform • Develop and agreements • Track internal
current supplier distribute supplier • Implement performance
processes analysis RFIs supplier • Track criteria to
and policies • Prioritize agreements
opportunities • Implement indicate when
• Identify • Develop, distribute process next re-sourcing
constraints and analyze changes should occur
• Perform supplier RFPs
• Negotiate with • Build savings
detailed cost suppliers into budgets
analysis
• Assess processes
• Validate and policies
requirements • Develop
performance metrics
Single provider of FHA
Develop Sourcing • Maximize leverage
Strategies • Transfer risk
• Simply transactions &
administration
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Final Negotiations and Selection
Issued a RFP for FHA
Several Rounds of Feedback
and Negotiation
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Completed: Engines - FHA Negotiations Summary
The format of the two-day negotiations process helped achieve significant price
compression for JetBlue, including a 25% price decrease from MTU, the price leader.
NPV1 at Each Negotiations Stage by RFP Participant
$M; 10-year FHA contract; Calendar year NPV calculations (2005 to 2014)
FHA Entry Bids
(based on RFP)
Rank 10-yr NPV
Revised Entry Bids
1. $638.0M
2. $814.8M
3. $830.8M Rank 10-yr NPV
End of Day One
1. $638.0M
4. $922.1M Revised Bids
5. $1,141.8M 2. $777.4M
3. $814.8M Rank 10-yr NPV
6. $1,207.3M Unsolicited Bids
4. $830.8M 1. $577.9M
(Received overnight)
5. $922.1M 2. $605.1M
3. $614.0M Rank 10-yr NPV
6. $1,141.8M End of Day Two
1. $522.9M
4. $620.2M Final Bids
5. $702.8M 2. $556.8M
3. $577.9M Rank 10-yr NPV
6. $733.1M
4. $605.1M 1. $473.3M
5. $614.0M 2. MTU $XXX.XM
3. $529.0M
4. $549.4M
5. $565.2M
Potential business partner received feedback that they did not make the cut to the next stage of negotiations
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Completed: Engines - Estimated annual cash flows: calendar year
The team will achieve $354M in NPV savings over the life of the contract. In the short term,
savings will amount to $4.3M in 2005 and $17.4M in 2006.
Estimated Annual Spend on Engine Maintenance* – 2005 to 2015
$M; incl. LRUs and LLPs; based on MTU’s FHA final bid; calendar year results
10-Yr Savings
Avg of 42% savings
(2nd half) (1st half)
Annual 23% 34% 40% 45% 39% 44% 51% 38% 45% 49% 50%
Savings
JetBlue & MTU have negotiated a revised rate based on the V2500 Select and
have extended the agreement by 5 years. 28
A320 Component Repair Costs was another growing cost factor
Savings versus Ease of Implementation LRU Repairs also
Size of Bubble = Projected 2005 Spend ($ Millions) loomed large
5.0
Airframe
4.0
Maintenance
Rapid Sourcing
3.0
Value Sourcing
Savings Estimate ($ Millions)
Projected Growth
Over Time1
2.5
Hotel Powerplant
Hardware New Buy
Expenses Parts
2.0 Component Insurance
Repairs
GSE
1.5
Janitorial
Expenses Workers Facilities
Compensation Catering Food Construction
& Beverage
Facilities Skycap
1.0 Promotional Maintenance Services People
Materials Fees Services
Aircraft Deicing Benefits
Aircraft
Printed Materials Cleaning
Into Plane
0.5 Mail Services Security & Ground Advertising and
Telecomm Fees
Screening Handling Media Buy
Crewmember Recurring Office Training
Transportation Expenses Line
Maintenance Professional Services
Furniture
0
EASY Crewmember DIFFICULT
Recognition Ease-of-Implementation
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MTBRs Data highlights the impact of changes to engine MTBRs on the projected cost.
Projected annual T&M LRU maintenance spend MTBR Total
Annual Spend ($M); Based on various MTBR scenarios Used NPV Cost
$597M $1,170M
$180 Factors:
Key Variables JetBlue Bidder Date $557M $1,084M
$160 1. MTBR
2. Replacement rate
$140 $427M $840M
3. Cost assumptions
$120 $399M $777M
$100
Baseline $316M $628M
$80
$60
$40
MTBRs also influenced replacement rate
$20
$0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
MTBRs make a substantial difference in bids.
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Overview of bids soliciting both T&M and FHA rates in sequential phases.
Segments
Bidders
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Contract type discussion
Depending on the type of contract chosen, risks may or may not be shared between
JetBlue and its selected partner(s).
Contract Type True T&M Material Not to Exceed NTE & MMA Flight Hour
Management (NTE) Agreement (FHA)
Agreement (MMA)
Risks 1. Labor rates 1. Labor rates 1. Labor rates 1. Labor rates
Transferred 2.Fixed labor charge 2.Fixed labor charges 2.Fixed labor charges 2.Fixed labor charge
to Supplier
3.Labor hours 3.Labor hours 3.Labor hours
4.Transportation costs 4.Transportation costs 4.Transportation costs
5.Material costs 5.Material costs 5.Material costs
6.Shop visit rate
7.Shop visit ratio
Pros No PMA parts Control MMA costs Limits high end costs Controls everything Complete cost
Limited DERs except shop visit rate transparency
and ratio Incentives aligned
Cons Limited cost control No control over labor Strategic negotiation Strategic negotiation May or may not pay
No incentive costs or shop visit of the ceiling instead of the ceiling instead a between 0 to 6%
alignment for rates of the lowest price of the lowest price premium for FHA
material or labor Incentives are not
hours aligned
Increased JetBlue
workload
MTBR can only be controlled via a FHA
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Negotiation leverage points
Exclusivity, strategic importance, and volume create true leverage when negotiating deals
Strong leverage
Limited leverage Leverage strength
Leverage Exclusivity Strategy Volume-related
Elements
Strategic
Minimal Out Future Length Volume/
Importance of
Clauses LRU Purchases of Contract Single supplier
Contract Type Arrangement
True T&M
Material
Management
Agreement (MMA)
Not to Exceed
(NTE)
NTE and MMA
Flight Hour
Agreement (FHA)
Estimated Value 1 – 3% 2 – 5% 5 – 15%
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A320 LRU Sourcing
JetBlue’s Objectives
• Secure sustainable sources for high quality
maintenance
• Reduce costs throughout component life
cycle
• Control TAT
• Service: GCP 2000 or better
• Include freight
• FOD
• Scrap Replacement
• Assign warranties to lower FHA rates
• Maintain relationships & leverage with OEMs
• Reduce administrative costs
• Predictable costs
34
Key Dates
Key Dates
April 18th April 19th April 20th April 21st April 22nd
Initial bids received
April 25th April 26th April 27th April 28th April 29th
LRU workshop
IP package out Determine top bidders to
invite to negotiations
May 2nd May 3rd May 4th May 5th May 6th
Two day LRU negotiations Begin evaluation IP
Draft MOU
Select business partner(s) offers
May 9th May 10th May 11th May 12th May 13th
Begin drafting Second round
contracts discussions on IP
35
Quantitative Scorecard:
Please review your first round of bids and submit updated bids on or before the first day of
negotiations. Note that you are currently the leader in the Engine segment.
36
FHA Agreement Face-to-Face negotiations: Day two schedule
On May 5th 2005, we will hold the second day of negotiations with the five top suppliers
identified on Day One.
Room TBA Room TBA Room TBA
There will be a 35 minute meeting
11:00 am – for each of the top five Business
Supplier #1
11:35 am Partners
Five minutes before the start of the
11:40 am –
Supplier #2 meeting, a JetBlue representative
12:15 pm
will greet potential Business
Partners in the downstairs lobby
12:20 pm –
Supplier #3 We have planned for ten minute
12:55 pm
intervals between each meeting
1:10 am – At the end of the day, we will
Supplier #4
1:45 pm request the best and final offers
from each of the potential Business
2:00 pm –
Partners
Supplier #5
2:35 pm
4:00 pm Receive best and final offers
Senior Executive from selected Business
4:30 pm –
Partner to meet with senior leadership
5:30 pm
Sign - MOU
37
A320 Components were segmented by OEM.
Bids by segment, July 2005 – June 2015 ($M)
winning bidder
Segment
Hamilton Kid-
Messier Honeywell Liebherr ACM Goodrich Airbus Smith Diehl Engine Other
Bidder Sunstrand Systeme
Baseline
Air Canada
Lufthansa
Air France
Barfield
ST
Aerospace
Goodrich
Honeywell
Hamilton
Sunstrand
Liebherr
Messier
Smith
Kid
Systeme
38
• Based on 4,190 effective flight hours (EFH) per year; assumes no price escalations
A320 LRU FHA
• Having made 12, ten year awards, we found contract
negotiations dragged on due to constraints from our contracts
negotiations team
39
A320 LRU FHA
•Eventually, all contracts were executed and remain in
place today
• Minor modifications have been made to one or two to add
or remove components
• Since 2005, JetBlue has negotiated several more FHA
rate agreements
• APU
• Nacelles
• Thales avionics
• E190 Wheel Tire& Brake
40
Achievements under FHAs
• Nearly $750MM in savings
• Highly predictable maintenance costs
• Transfer of risk
• Alignment of incentives with business partners
• Eliminated thousands of quotes and invoices
• Simplified warranty administration
Airport Services on Cost / Flight Pricing
41
Cost Per Flight (CPF)
Despite seasonality,
JB pays equal flat
monthly
fees
Cost Per Flight (CPF) = Seasonal Troughs Cost Management
CPF is a fixed rate that is multiplied by the total monthly flights to get the total cost for that specific month.
•CPF addresses the seasonality factor where JB’s costs fluctuate based on the flight volume.
•With advance communication from JetBlue, Business Partner would be able to optimize their resource allocation.
•CPF remains the same regardless the number of flights. This provides flexibility for the provider to have fix labor
rates and only adjust hours distribution based on JB’s demand.
42
Cost Per Flight (CPF) – cont.
Resource Allocation
Fixed Hours
Skycap &
Skycap &
Wheelchair
Wheelchair
RFP
RFP
Resource Labor Rate
Cost Per Flight (CPF)
Potential provider
will adjust resources
based on flight
volume demand
(Resource Allocation Fixed Hours * Resource Labor Rate) / Monthly Flights = Monthly CPF
43
Service Level Agreements (SLA’s)
Various financial penalties will be imposed in case the contractual SLA’s are not maintained
44
What’s Next?
45
Thank you! Any questions?
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