JetBlue Could Upend the Transcontinental Airline Market

Last year, JetBlue Airways (NASDAQ: JBLU  ) announced plans to introduce for the first time its premium cabin on flights from New York's JFK Airport to Los Angeles and San Francisco. These two routes are incredibly important (and profitable!) for the three legacy carriers: American Airlines (NASDAQ: AAL  ) , Delta Air Lines (NYSE: DAL  ) , and United Continental (NYSE: UAL  ) .

JetBlue is bringing business-class seats to two lucrative transcontinental routes. Source: JetBlue

JetBlue's entry into the premium market could significantly disrupt this legacy carrier profit center. JetBlue has made it very clear that its strategy for winning premium traffic will be offering lower prices. This may not matter for some big corporations, but it could help JetBlue quickly gain share with small and medium businesses. In a worst-case scenario for the legacy carriers, they could be lured into a damaging price war in order to keep their premium cabins busy.

A big opportunity for JetBlue
JetBlue has stated that industry revenue on the JFK-Los Angeles and JFK-San Francisco routes is more than 50% higher than for any other domestic route, due to the high concentration of premium passengers -- and premium seats. This creates an alluring opportunity for JetBlue that fits with its gradual migration from being purely leisure-oriented to a leisure-business-hybrid carrier.

JetBlue will introduce its "Mint" premium onboard product on flights between New York and Los Angeles starting in June, and on flights between New York and San Francisco near the end of 2014. Today, JetBlue offers five round-trips from JFK to Los Angeles and three round-trips to San Francisco, but it will add two round-trips to each route by early 2015.

JetBlue will fly these 12 daily round-trips with a dedicated fleet of 11 Airbus A321s. These will be specially outfitted with 16 lie-flat business-class seats, including four semi-private suites, and 143 economy seats (some of which have extra legroom). Today, these routes are served by A320s in a single-class configuration with 150 seats.

JetBlue will offer lie-flat seats in business class. Source: JetBlue

All in all, JetBlue will be boosting its economy-class capacity by 59% on the JFK-San Francisco route and by 33% on the JFK-Los Angeles route. More importantly, it will have 80 round-trip business-class seats to San Francisco and 112 round-trip business-class seats to Los Angeles, compared to none today.

The threat
The potential threat to the legacy carriers is clear. Business traffic on the transcontinental routes is incredibly profitable. The cheapest round-trip business class ticket between New York and Los Angeles for the first week of March prices out at about $3400 on Delta. United and American are even more expensive, at around $4400 round-trip.

By contrast, JetBlue will sell business class tickets starting at $599 one way, or roughly $1200 round-trip. This huge price discrepancy may not matter for large corporations, which tend to have discount arrangements with one or more legacy carriers anyway. However, for anybody buying his or her own ticket, JetBlue will be the obvious choice.

The biggest losers
American and United have the most to lose from JetBlue's entry into the transcontinental business-class market. American is the market leader on the JFK-Los Angeles route, while United is the top dog from JFK to San Francisco. They also have the most space devoted to business-class (and in American's case, first-class) seats.

Nearly 30% of the seats on American's new A321Ts are business-class and first-class seats, and nearly 20% of the seats on United's newly reconfigured premium service 757s are in business class. On the other hand, less than 10% of Delta's transcontinental seats are in its business-class section. This allows Delta to fit more seats on its transcontinental aircraft, and insulates it from the risk of pricing pressure in business class.

Average fares also show how American and United are particularly exposed. For the JFK-Los Angeles route, American and United had the top two average one-way fares, at $463.75 and $473.82, respectively. Delta's average one-way fare is much lower, at $333.87. On the San Francisco route, United had a huge advantage, with an average one-way fare of $607.03, more than 50% ahead of American at $400.12 and Delta at $354.15.

Foolish wrap
With its new "Mint" service, JetBlue is threatening to upend the transcontinental airline market, particularly in business class. The introduction of Mint will increase business-class capacity by about 15% on the routes from JFK to Los Angeles and San Francisco, and JetBlue will sell its business-class seats starting at $599 one way, 65% or more below current prices.

The effect on legacy carriers will depend on how much JetBlue stimulates new business-class traffic, as opposed to simply stealing customers from competitors. If JetBlue fills its business-class section with people who would have otherwise endured the economy section, then the impact on American, Delta, and United should be minimal. However, if JetBlue poaches 15% of their highest-yielding customers, the legacy carriers will have a problem.

Of the legacy carriers, Delta faces the least risk because it has much less business class capacity than American and United and a much lower average fare. However, American Airlines and United Continental shareholders need to be on the lookout for potential pricing pressure on transcontinental routes in late 2014 and into 2015.

Learn from the best with The Motley Fool
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. We've compiled the best of Warren Buffett's wisdom into a new special report from The Motley Fool. Click here now for a free copy of this invaluable resource!


Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 15, 2014, at 10:56 AM, nytflyt wrote:

    Adam, as one who is in the airline business it has always puzzled my how and why and airline can charge an outrageous price for first class and not be undercut by one who see's this overpricing as an opportunity.

    AirTran used to do this. Approximately $500 one way even with a stop in ATL, no frills first class. I'd buy it every time.

    The prices the legacies charge are begging to be undercut.

  • Report this Comment On January 15, 2014, at 2:35 PM, ih8mayo wrote:

    The Motley Fool logo says 'educate, amuse, & enrich.'

    This analysis falls in the 'amuse' category.

    1) DL/AA/UA all have corporate contracts that are sold at much lower than the public list price. Around $1,999 roundtrip to be precise. All of the major banks, consulting firms, studios have contracts like this and these are the bulk of premium fares. So JetBlue's 'discount' isn't much in comparison, especially since it's on limited inventory. The corporate contracts are valid for the last seat on the plane.

    2) Virgin America tried similar introductory pricing when it launched. It was a teaser they didn't need to offer long term. JetBlue will go the same way.

    3) The real target of JetBlue is Virgin America - which doesn't benefit from the concentration of corporate contracts and is in a more precarious financial position. A corporate contract flyer can't fly JetBlue even if cheaper because of volume requirements.

    Maybe it's time to for the author to write articles that take a balanced view, and not push his/her (unprofitable) personal stock positions. United stock doing quite well.

  • Report this Comment On January 15, 2014, at 5:02 PM, beewatcher wrote:

    How is that United short doing Adam?

  • Report this Comment On January 15, 2014, at 8:11 PM, TMFGemHunter wrote:

    @ih8mayo: I mentioned in the article that large corporations usually have bulk discounts with the legacy carriers. But the best money is made on small/medium businesses that don't have that negotiating power but need the business class seat for rest purposes. That's the crowd JetBlue is going for.

    I don't think Virgin America is JetBlue's target. VX has 5 flights on each route with only 8 first class seats, and they aren't even flat beds.

    Adam

  • Report this Comment On January 16, 2014, at 2:25 PM, ih8mayo wrote:

    @Adam

    Fact check again. JetBlue has 'only' 5 flights to LAX each day as well.

    Virgin America is and always has been their biggest competitor since its launch on this route.

    Also, have you checked how many seats are being sold at this $599 price? It's 4 per flight. 4x5 = 20 seats a day at this price. And there is a $150 change fee on top.

    This is hardly revolutionary pricing. It's a predatory move to push a weak Virgin America which lacks the corporate contract stability but steals JetBlue's high yield coach passengers.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2795981, ~/Articles/ArticleHandler.aspx, 11/28/2014 6:16:42 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement