Business Models: Southwest, Virgin, JetBlue

Following the successful deregulation of the air travel industry in 1978 until 2015, more than 250 different airlines have opened and failed in the United States. The established survivors, including Delta Air Lines and American Airlines, compete with similar business models and target similar audiences. But there are others, some might call them the anti-establishment airlines, with a different vision for air travel.

Southwest Airlines Co. (NYSE: LUV), Virgin America, Inc. (NASDAQ: VA) and JetBlue Airways Corporation (NASDAQ: JBLU) all fall into the anti-establishment branch of air travel, even though, as of 2015, Southwest could be considered establishment since it is the most-flown carrier in the U.S.

JetBlue and Southwest are both discount airlines, while Virgin targets upper-middle and business-class customers. They have all taken very different paths to prominence and, at the very least, proven there is more than one way to profit as an airline.

Southwest was founded by Rollin King and Herb Kelleher in 1971 with one simple, commonsense philosophy: get passengers where they want to go, get them there on time, make it cheap and make sure they have a good time along the way.

As a case study in effective management and strategy, Southwest redefined the low-cost carrier (LCC) industry by slashing operating costs and locating profitable routes. There have been dozens, if not hundreds, of books and high-profile articles devoted to its business model, and the company's success is widely attributed to several key decisions that include:

• A focus on employee happiness, first and foremost
• No assigned seating, no meals, and only one class of service on flights
• Flying just one airplane model
• A modified, point-to-point air route structure, not the traditional "hub" method
• An intelligent commodity strategy

If any airline has proven its ability for innovation and disruption, it is Southwest. The company continues to emphasize simplicity, low costs, and transparency, and customers continue to respond. In 2014, Southwest led all airlines in terms of domestic passengers. LUV shareholders were rewarded with the fastest-growing stock in the S&P 500 in 2014.

Southwest relies almost exclusively on Boeing 737 passenger jets, often buying and fixing older planes to reduce expenses. Using just one type of plane actually increases flexibility, since maintenance crews, attendants and pilots can quickly jump between any plane in the fleet.

There is no catering to business or first class, no in-flight meals and no forcing larger passengers to purchase an additional seat. This intense focus on margins pays off for customers in the form of low prices and fees. For example, Southwest is the only remaining major airline that does not charge extra for luggage. Customers can also change or cancel their flights without fees, a service that might cost $200 or more with rival Delta.

There are signs Southwest wants to attract business-class customers, even though the company traditionally eschews class distinctions during travel. Since 2012, the company has rolled out a Business Select program, Early Bird Check-In and the lesser-known SWABIZ, a direct-access booking engine designed for business accommodation.

As the only airline based in Silicon Valley, Virgin does not compete in the same discount carrier space as Southwest or Spirit Airlines, Inc. While every Southwest flight is economy class, Virgin America's mid-scale flights include extra legroom, leather seats, and mood lighting. In the company's SEC filings, Virgin lists "additional attributes that business and high-end leisure travelers value."

If there is a common link between Virgin and Southwest, it is a corporate emphasis on customer experience. With Southwest, this takes the form of lightheartedness and humor; Virgin focuses on luxury treatment and flair. It caters to tech-savvy clientele by offering excellent in-flight Wi-Fi and even a miniature, passenger-connecting social network. Virgin does not just want to get fliers from point A to point B; it wants the flight itself to be an experience.

The company went public in 2013, despite some heavy criticism from market analysts that saw a private company with only two profitable quarters in six years of operation. Virgin's outspoken CEO, Richard Branson, countered that his company's business model was simply difficult for Wall Street to understand. Branson believed his hybrid flight system was fundamentally different than the kinds of airlines that witnessed major financial problems post-2001.

Virgin America focuses on some of the busiest markets in the country, especially in California and Texas. To differentiate itself, the company emphasizes its hip and unique brand. The airline still takes steps to reduce costs, such as buying cheaper, used aircraft. It took major strides to clean up its balance sheet in 2014, but Virgin clearly believes one of its economic moats is brand personality.

In many ways, Virgin is run more like a tech company than an airline. Step one is to create a cool enough product and offer great service; the rest of the model comes later.

JetBlue built its reputation as a customer-friendly airline and a colorful alternative to the drab, corporate world of standard air transport. If Southwest is the low-cost taxi of the sky, JetBlue is the low-cost limo. Underneath the welcoming surface, JetBlue actually survives on a no-nonsense and cost-sensitive business model.

Like Southwest, JetBlue stresses personal services without the costly frills of other airlines. Industry-leading leg space and free in-flight snacks, among other services, have won the airline a devoted following among service-conscious fliers. JetBlue selected New York as its hub of choice, where it aggressively undercut larger competitors and, at times, shamelessly borrowed from the Southwest approach to marketing and labor relations. It also strategically avoided major Southwest markets and stuck to larger East Coast airports.

However, JetBlue has struggled to realize the same kind of margins that other LCCs, such as Southwest and Spirit, enjoyed. To appease shareholders, the company has compromised on customer leg room to fit more seats on the Airbus A320s and applied small fees for checked luggage.

JetBlue does not cut corners on aircraft CapEx as do Virgin or Southwest. Instead, the company flies a diverse and fairly unique fleet but has sometimes had to delay arrivals of new aircraft when returns on invested capital (ROIC) slumped. It is a continuation of the theme throughout 2015 in which JetBlue struggles to dance the line between customer satisfaction and investor demands.