Wall Street is Warming Up to a JetBlue Without CEO Dave Barger

JetBlue

When it comes to JetBlue, Wall Street has been singing a similar tune for awhile. The general feeling is that JetBlue is too customer-friendly. It’s leaving too much money on the table. Recent speculation, however, has Wall Street getting a little more bullish on the airline. It may sound strange, but JetBlue’s CEO is not happy about this. There is a very good reason why.

Of course, you’d think the CEO of a company would like to hear that Wall Street supports what the company is doing, but there’s one small issue here. Wall Street is only getting excited because they think CEO Dave Barger’s days are done. They’re planning on new leadership to change things.

Wall Street Loves JetBlue Without Barger

The most recent kindling for this fire came from Cowen analyst Helane Becker. Her report entitled “Upgrade: A Management Shake-Up or Just a Market Make-Up?” makes the case that changes are coming. She upgraded the airline’s stock while she was at it.

In the eyes of the financial analysts, for too long JetBlue has gone against what the industry has done to start making more money. (As Dave says, JetBlue is “contrarian.”) To sum it up, the research note says this.

JetBlue has struggled with their hybrid model catering to the business travel and the leisure traveler, which has resulted in a company with a cost issue that doesn’t achieve
the returns it should given the product offering. We believe a management change would lead to a change in philosophy and likely morph the model similar to one of Spirit Airlines, although not as extreme.

That probably sounds frightening to any loyal JetBlue customer, and it should. Even a less extreme version of Spirit is still not the right thing for that company. But let’s forget about the “S” word and look at specifics. It’s not nearly as extreme as it might sound. Here are the problems.

  • Too Few Seats Onboard – JetBlue started with 162 seats on its A320s in the early days, but that slowly got whittled away. Today, there are only 150 onboard, and that means incredibly generous legroom throughout the airplane. Could the airline go back to 162 seats? I’m sure. And it could be done by finding comfortable (read: not the ones United has on the A320) slimline seats and reducing legroom in the back. There would still be an Even More Space option to get more legroom, but the impact of, say, 12 more seats on each airplane would be huge.
  • No Charge for the First Checked Bag – Other than Southwest, JetBlue is the only domestic airline that doesn’t charge for a first checked bag. It has made a lot of noise about fees coming, but it says it wants to do it right. My expectation is that means we’ll see fare bundles made available. The lowest bundles won’t include a checked bag. If I were to guess, I’d say they’ll probably introduce it as a discount off the existing fare level so it doesn’t seem like an increase off the bat. That’s really how all the airlines should have done it, if they hadn’t been in such a hurry.
  • Wifi is Free – JetBlue was very late to the wifi game, but it is trying to catch up with a very fast offering. Today, nearly half the A320 fleet has wifi onboard, and all the A321s have it. The 60-strong fleet of Embraer 190s won’t get it until next year, I believe. But while the roll-out is going on, JetBlue isn’t charging for the basic level of service. (You can pay for more bandwidth.) I don’t see this is a real issue – the airline will charge eventually.
  • Too Many Embraers – JetBlue has 60 Embraer 190s and that’s a lot less than originally planned. The problem is that these airplanes are just not suited for a lower cost, leisure operation. According to the report, JetBlue can use about 30 of the airplanes but anything above that should be ditched.

Helane mentions that JetBlue isn’t generally considered an airline with a revenue problem but rather a cost problem. Adding those 12 seats would certainly make a dent in unit costs since you’re spreading your costs over more seats. Cutting Embraer 190s would also be good for cost-cutting. But the rest of this is much more focused on revenue growth. Still, the end result in Helane’s view is that if JetBlue makes these changes, demand won’t really drop at all. The airline will just make more money serving more people on most cost-efficient airplanes.

I agree, for the most part. First off, they should charge for wifi, and I think the plan is to charge for it once the rollout is done. That doesn’t seem like an issue. As for the first bag fee, I always support that since I rarely check one. I think it’s even better if JetBlue does the rollout as I suggested above. Regarding the Embraer 190s, the airline probably does have more than it needs. This might make sense, but I haven’t studied it closely enough. You’d have to replace those airplanes with Airbuses.

As for adding seats, well, that’s the one that I think needs the most consideration. JetBlue has 150 seats on an A320 while Spirit has 178 seats. That’s a huge difference. Should JetBlue go to Spirit levels? Absolutely not. First of all, JetBlue should have the Even More Space cabin which people do pay for. But even Delta can get 160 seats on an A320 with coach, Economy Comfort, and First Class. There is room for JetBlue to shrink legroom in the back and still have good space for everyone.

As a passenger, do I like this? Of course not. I want as much legroom as I can have even though I don’t need it. But if JetBlue were to cut a couple inches out from each row, would it change my flying behavior? No. JetBlue could still have a bit more than the other guys while still offering an extra legroom section and it would do just fine. The bigger concern might be whether extra rows means the fleet can make those westbound transcontinental flights nonstop. I suppose you could always just not sell 12 seats on each long haul flight if needed, but the lighter weight of new generation seats might make a big difference anyway.

These suggestions don’t seem all that unreasonable to me, but Wall Street doesn’t think it’ll happen unless Dave leaves. More from the report:

We expect there could be a management change at JetBlue, with a new CEO after Dave Barger’s (the current CEO) contract expires in February 2015. With a change at the top we believe the company will change its focus and potentially re-work the model. As a result, we believe there is upside to estimates as JetBlue adds ancillary fees (more importantly, a first checked bag fee), changes the pitch in the economy class and de-emphasizes E190 flying especially from New York.

Dave isn’t taking this very well. Bloomberg interviewed him and he wasn’t happy. I’m sure I’d feel the same way, but in the end, everyone just wants to know if he’s sticking around or not when his contract expires early next year. Nothing has been made official yet, so we wait.

While I do imagine a new leader would alter the course of the airline to some extent, I wonder how many of these projects will happen anyway. It seems like a lot of these make perfect sense.

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41 comments on “Wall Street is Warming Up to a JetBlue Without CEO Dave Barger

  1. Consider me on Team Dave. As a passenger, enthusiast, and former (hopefully also future) airline employee, I have tremendous respect for JetBlue and their employee/customer focus. Even in my days of nonrev flying and jumpseating, it is the only airline I would go out of my way to fly and didn’t think twice about purchasing tickets with them.

    I know I’m also going against the flow, but if JetBlue can make a profit while providing EVERY passenger with free snacks, free checked bag, ample legroom, and free product use as it is being implemented, then maybe the industry should be following their example, not the other way around.

  2. I believe they cut back from 162 to 150 in order to drop an FAA required FA from each flight, ie to cut costs. They didn’t fill those marginal seats often enough or for the right price to make them worthwhile, or at least that was the logic.

    1. The cost of cutting 12 seats vs a FA salary that’s approximately anywhere from 18 to 25 max an hour..Basic math tells me cutting a FA will do no good to the airline ..it’s purely good customer service in good faith.

    2. Steve – Actually, they first went from 162 to 156 because it was a bad passenger experience. That last row didn’t recline and there were a lot of complaints. So David Neeleman made the decision to cut that row out. Later, they decided to ditch another row because of the flight attendant issue.

      But thinking about flight attendants, let’s remember that wages haven’t changed all that much, fuel has gone up (but the net increase in fuel is pretty mild compared to what is used today), but fares have gone way up since JetBlue first made that decision. So it should be a more favorable environment now. Let’s just do a little back of the envelope work here.

      Let’s say that each A320 does 2 flights a day on average, accounting for maintenance downtime as well. Long haul will do less, short haul more. So that’s 730 flights a year.

      Now, let’s say that JetBlue makes a profit of $50 per seat per flight in revenue. Remember, we’re not talking about spreading all costs over these seats. We’re just talking about applying the incremental costs and there aren’t a ton of those. This seems low, but it’s good to be conservative.

      And let’s say that JetBlue will fill only two-thirds of those seats on average, so that’s 8 of the 12 per flight. 8*730*50 = $292,000. Sure, there’s the cost of buying the seats and all that, but those get spread out over longer periods of time.

      This is very rough, of course.

      1. I would argue that it wasn’t about the FA at the time. Remember that circa 2005ish the A320s were having a hard time making it transcon. Depending on winds, JetBlue would have tons of diversions to DEN or similar places for fuel stops. Going from 156 to 150 enabled the A320 to be more reliable on transcons. The FA savings was just a bonus.

        There was a saying there at the time…”The A320 is a great transcon airplane…just not for this continent.” :-)

  3. Delta still has 150 on its A320s. It’s supposed to change during the latest modification, but I think part of getting the 10 extra seats on the place is moving the lavs and reducing rear galley space. We’ll see what happens when the mods happen.

    As for JetBlue, as long as they are making money, life should be good. There are people who actually want to fly them because of their superior product and they aren’t losing money. Wall Street is as usual very shortsighted.

  4. What is often forgotten in the discussion about adding more seats is that more seats means another flight attendant. Considering the load factors the airline sees, and the weight and cost associated with having to up flight attendant staffing significantly would the revenue from another 6-12 economy seats really pay for that? Remember too that legacies with 160 seats have a first class section that is helping to carry the load.

    JB went from 156 to 150 seats for precisely this reason.

  5. Thanks for the validation, Cranky. I posted this in your Mint piece last year and got flamed.

    Ted says:
    Oct 1, 2013 at 5:55 am
    JetBlue always seems to do just enough for everyone to be focused on the new, flashy thing that they’re doing rather than the fact that they are running an airline that barely breaks even. This will buy them another year or two of smoke and mirrors.

  6. One thing I don’t think Team Dave gets credit for is reducing debt and capital outlays for new planes. He has led B6 a long way from having $6 million in cash on hand in one quarter under David N. to more than $1b all while boosting profit. Team Dave completely restructured B6’s balance sheet for the long term and just in time for the recession. Bringing on more A321’s will definitely help to replace some E190’s although many of B6’s Boston markets would take a lot longer to mature without a smaller plane.

  7. I have really wanted to add my $0.02 on the jetblue stuff for a while and I guess now is as good of a time as any. First they should have never got rid of Dave Neeleman. I know people will disagree with me but look at Azul. Also I think their biggest problem is having hubs on only the coasts of the US. I understand that a lot of it is catering to business travelers but I can’t imagine how much they are spending on slot fees just to connect passengers. Compared to putting a hub somewhere in the middle of the country with no slot fees (STL, DFW, etc) and transfer leisure passengers that way. Or use a midwest airport (PIT, CLE, CMH, CVG, etc) and use it as a springboard for all the upstate New York and new England traffic. At least that’s my thoughts.

    1. JetBlue does have a massive donut hole in their coverage comprising of mostly the midwest. I harp on VX for not flying anywhere and making business travel impossible for someone who needs “national” coverage, but Jet Blue isn’t much better for someone who needs to get to Ohio or Tennessee or Missouri or Minnesota, etc. Ohio for example has a lot of frequent fliers that have been burned by Delta and United, why not pick up that traffic for the relatively short hops to the big east coast markets? Great place to put some ERJ’s and test things out. I’m a fan of organic growth, not just emulating the worst ULCC’s and maximizing profits on your established route system.

      1. The problem I see is that I don’t see the justification for those routes that are in many ways suitably served by a variety of legacy and a mix of other LCC’s, especially to major hubs such as NYC/DC. Frontier and Southwest often times are the alternate airlines in an area, and as much as I’d like to see JetBlue or Virgin America show up in my airport, it seems unlikely, and would add any significant new routes and would not expand considerably the international options available one stop away.

    2. Totally agree. I live in the Midwest (Omaha for 19 years and now Milwaukee for at least 3). Last October I took a trip out East to visit law schools, and almost based my itinerary around being able to fly JetBlue since I had heard such good things about them, but it didn’t end up working out. The point of that story being that I’d happily give JetBlue a shot if they flew where I do… unfortunately there probably isn’t enough money in it.

  8. Such a shame. One of the few with a brand people like, even after the weather issues and attendants jumping out of planes. Wall Street will force changes, people won’t love them anymore, and then Wall Street will wonder why they no longer make money. Perfect.

    1. Exactly. Great example of Wall Street short-sightedness and chasing income above anything else. In this case a dumb strategy: killing of what is working fine, and is generating profit and dividend. Does it run at the same margins as Spirit (or the legacies)? No, but why is that so bad? They are not running losses, are well managed, are much liked and have carved out a great niche for themselves. Leave them be! (I have only flown them twice in my entire life).

  9. Adding more seats doesn’t always mean more money into the company. Fuel costs rise, another F/A is needed, more onboard food that can go to waste if not purchased, etc.. Plus you need to have those seats sold which must not have been happening if they had removed them in the first place.

  10. Personally I hope that the seats on the A320 are not increased at the cost of a 4th inflight crewmember is now added. Also Dave has done a wonderful job running the airline and keeping it profitable. One problem are the work place is the lack of moral among crewmembers system wide. If David can muster the ivestors he needs, maybe there is a chance of him buying his baby back. Once Dave departs JetBlue (whenever that may be), all bets are off the table as to the company not being bought, buying someone else or merged with someone. Azul+JetBlue?? Just my two cents.

  11. Gotta love this kind of thinking: “Hey, you’re product isn’t crappy enough!”

    I’m guessing Helane does not fly Spirit.

  12. As others have said about the extra flight attendant required at 150 seats… didn’t TED (United’s LCC) configure their A320’s with 156 seats and lose their shirt? My understanding is that the bean counters who formulated that plan completely forgot about the FA requirement.

    I’m curious what the accepted “break even” point is for seating configuration on all-coach A320. (By that I mean how many seats you generally need to pay for the “extra” FA).

  13. This is a terrific, nice airline I’ve used…once I discovered they existed. Please! Where is their marketing, their advertising. I know…airline marketing, advertising? Here in the DC area I know they operate, but to where, from where, when, with what?

    And then there is the business of using “B6” as their IATA airline code. OK, so somebody up in Canada, I believe Helijet International Inc. has “JB.” Honestly, I’d think that getting that code from Hellijet for themselves would be worth millions in branding value. Like these codes can’t be bought for any price?

    1. This is something that aggravates me too. Everyone knows on southwest you get a free bag – it’s all over the place! JetBlue doesn’t get enough credit for its checked bag policies. I’ve read Customers’ surveys expressing surprise how they went to check in for their flight, expecting to pay, but that they weren’t charged for bags!

      Addressing your other questions, they’ve recently changed their routes to/from DC (via American giving up slots). From DCA, you can fly to Florida, Boston, SJU, and i think Nassau, Bahamas. From IAD, you can fly to JFK. I don’t think there are any transcons now from the DC area. Time was you could fly to Oakland and Long Beach, but those were scuttled to free up jets with the new slots at DCA.

    2. I’m not sure that anybody pays attention to IATA codes. Southwest, for example, uses “WN”. Who knows where that comes from? It hasn’t hurt their brand any.

      Plus all the regionals actually have their own IATA codes, but only the dorks know them because the major affiliate’s code is what shows up on the ticket stock.

      Oh, and few of the internationals have codes that “make sense.” CX, OZ, TG anybody?

  14. Helane Becker has never worked for an airline. She has been an industry analyst and Wall Street trader all her professional life. That makes her an “expert” in the industry….right? Typical Wall St. BS. Why does anyone give a damn what they say when they know so little of what they speak??!!

  15. Cranky, I’m surprised you didn’t mention a change in policy of overselling flights. That is one area I think they are leaving a lot of money on the table. I know it’s not seen as customer friendly, but you know as well as anyone that there are plenty of times that overselling works out just fine because people just flat out don’t show up for their flights and you don’t end up having to inconveniencing anyone at all.

    1. Ryan – Good point. I was really just addressing what was brought up in the research report. I don’t think that was in there unless I missed it. But yeah, that would seem to be a very obvious way to make more money. Thanks for bringing that up.

  16. I have to agree with the others Wall Street never wants to leave well enough alone. Jetblue makes money, offers better service than just about any other US airline and is reasonably well managed what more do they want? Oh yeah to squeeze more money out of a good airline so analysts and execs can buy an extra Ferrari typical Wall Street short term thinking.

  17. In many ways, jetBlue’s standing on Wall Street is indicative of the stock market’s short term focus.

    Today’s market is not about encouraging entrepreneurs to offer products or services that will cause the enterprise to grow and be consistently profitable over the long term.

    Wall Street’s focus is simple: “What have you done for me, lately?”

  18. The most successful businesses are the ones that take care of their customers and their employees. If you do that, the shareholders will take care of themselves.

    JetBlue has been far more successful than most other airlines throughout its history. Let’s hope some short-sighted Wall Street people don’t screw it up.

  19. Haven’t we been hearing the “Barger’s-on-his-way-out” tune for a while? It’s not new.

    Anyhow, I feel that B6 doesn’t cross the 150 seat threshold is due to the requirement for one more F/A. I’m not familiar with the economics, of course, but I feel that they would probably want considerably more seats to justify that extra crewmember on the airplane versus not.

  20. The Street won’t be happy until jetBlue brings in a new CEO and ends up getting gobbled up by one of the big three.

    As noted above, the feed jetBlue represents at Kennedy is very attractive.As is their substantial and growing presence in Boston.

    Delta and Alaska will at some point stop their gamesmanship and just do it,followed by American and jetBlue with the requisite divestitures to keep Southwest happy.

    Your mileage may vary…

  21. Folks….This isn’t about legroom. This isn’t about adding a Flight Attendant. This is really about an analyst trying to dictate to an airline’s Board of Directors who should be the CEO. She even threw them a bone by upgrading the stock……. What is really going on here is a concealed attempt to put JetBlue in play. Perhaps install a CEO who would prefer to SELL the company rather than actually RUN it. Grab the Golden Parachute on the way out and Ms Becker’s clients profit handsomely, particularly if a bidding war breaks out for B6………Perhaps someone should ask for Ms Becker’s resignation. Her job is to report and advise, not to manipulate.

  22. Wall street needs to be leashed with their ever increasing greed. Did this anlyst do her full reaserch? What’s the point of adding more seats to the A320s when it will go back to struggling doing the transcontinental service. The point was to streamline this to avoid tech stop costs incurred, plus reducing a f/a. Also, Barger has already put in a plan to add seats, its called converting 30 additional A320neos to A321neos bringing their efficient A321 tally to about 60 within the next 5 years! 40 more seats on a plane with just a hair above the cost of a A320! More seats, and more legroom JetBlue gets ‘even better’ at maintaining standards as other carriers reduce theirs and everyone is happy. Mrs. Becker obviously is a poor analyst by not noticing this, and this folly in her work should be noted to not any advice from a ill-informed so called analyst!

  23. This strikes me as another case of Wall Street drumming up solutions in search of a problem. My response would be, if it ain’t broke, don’t fix it. Let’s not forget, these same Wall Street analysts were ruthlessly flogging Southwest for years for failing to adopt bag fees and change fees like they wanted. Both WN and its stock ended up doing just fine.

  24. The article below is a good take on the other side of this looking at the fact that if JetBlue follow the heard it will mean the destruction of the brand and ultimately hurt not help the company. It should be remembered that the same Wall Street experts who now know what’s best for JetBlue were responsible for the short terms thinking and focus on short term profits above all else that led to the financial meltdown.

    http://for.tn/1pltp0w

  25. Helane should be forced to fly only on Spirit for 12 consecutive months.

    Signed,
    Frequent Flyers Everywhere Who Know More About This Industry Than She Ever Will

    1. Venerable travel journalist and overall great guy Joe Brancatelli eviscerated Helane recently in a recent Business Journals column…

      excerpt:
      Horrors! An airline that cares about its brand and its customers. Wall Street can’t abide it. After all, the bigger carriers have surged to record (if very recent) profits by bastardizing their names and inconveniencing travelers. How dare JetBlue embarrass the flying fraternity by giving customers a little more and earning just a little less. Becker’s comments and equally inane gripes from other analysts constitute a war on JetBlue’s soul.

      http://www.bizjournals.com/bizjournals/blog/seat2B/2014/08/road-warriors-should-keep-their-eyes-on-these.html

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