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.
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.