Are JetBlue's Ticket Prices About to Go Up?

JetBlue's pilots have voted to unionize, which may not be good news for JetBlue's passengers.

Apr 24, 2014 at 7:44AM

JetBlue (NASDAQ:JBLU) pilots have voted to join the Airline Pilots Association, the largest pilots' union in the United States, and that likely means higher prices for JetBlue customers.

The pilots had already negotiated a new deal in January to raise pay rates by 20% (a $145 million cost to the company) by 2017 -- $30 million this year, $50 million in 2015, and $65 million in 2016.

At the time of the deal the airline said that the increased cost would "be the largest driver behind a projected 3% to 5% growth in its costs per mile flown," the New York Times reported.

When costs to an airline go up -- even an airline that has made its reputation as a high-quality, lower-priced carrier -- those costs are normally passed on to customers.

JetBlue faces a double whammy

In addition to having to now deal with a pilots' union driving costs up, JetBlue also plans to hire 125 new pilots largely to comply with new federal rules that dictate how many hours a pilot can work and how long they must be allowed to rest between shifts. 

The new fatigue rules, which took effect recently, limit the number of hours pilots can fly. This was especially problematic last winter as bad weather in the Northeast led to thousands of flight cancellations due to lack of available pilots across all the major airlines. In January JetBlue had to suspend all of its New York and Boston flights for 17 hours because of a winter storm. The airline said then that new duty and rest rules had not caused the cancellations but had complicated its operations, The New York Times reported.

These rules -- which ostensibly are created for passenger safety -- will impact all airlines so any increased costs are likely to be easier to pass onto customers as airlines tend to move in herds. If one company increases a price or adds a fee others follow. JetBlue has been an outlier in that sense, building a reputation for treating customers well by offering free snacks and drinks along with a free checked bag. But if costs rise at some point prices go up.

JetBlue already pays well

JetBlue pilots on average earned slightly more than some of its rival airlines, according to the Massachusetts Institute of Technology's Airline Data Project. The study showed a JetBlue pilot earned $187,000 in salary plus benefits in 2012. A pilot at low-cost rival Southwest Airlines (NYSE:LUV), which has a union, earned $185,000.

That means that the addition of a union is not likely to result in huge raises for JetBlue pilots, but it could result in other workplace concessions that cost the airline money. Most importantly it represents a cultural shift at JetBlue, which had prided itself on having good relationships with its employees. The presence of a union is likely to make that relationship less congenial and more adversarial.

"Union representation opens the door to further gains by the pilots, including higher health care and pension costs," Reuters reported. But industry experts said that the union is likely to work toward a compromise with JetBlue recognizing that compensation packages at the smaller carrier cannot necessarily match those offered by the bigger airlines. 

"I don't think ALPA went to all this trouble to put JetBlue out of business," George Hamlin, an aviation consultant, told Reuters. "They will try to get improved terms, but I doubt that they're promising to get legacy terms."

The unionization of pilots could also cause a ripple effect. Other employee groups at the airline could look to make sure they don't get squeezed at the expense of the pilots and look to unionize themselves. 

Price is a factor for JetBlue

"Maintaining a relative cost advantage to our network carrier competitors is critical to our ability to offer an industry-leading product and a reasonable fare," JetBlue said in its 2013 annual report. 

It's almost impossible to see how a pilot's union won't drive up costs for the airline. Even if the pilots truly intend to remain good partners with their employer, the addition of a union changes the nature of JetBlue as a company. 

JetBlue has not penalized its pilots in the past for not being in a union, as the company has paid wages on the higher end of the scale for a carrier its size. In general the company has flouted the traditions of the airline industry and along with Southwest carved out a reputation as being something different -- an airline that customers actually choose to fly. Southwest has managed to stay price competitive (and well-liked) while having unionized pilots so it's not impossible that JetBlue will be able to do the same.

Still it's hard to take the addition of a pilots' union at an airline that had previously been a model of labor peace as a good sign for consumers. JetBlue is not likely to agree to huge raises (nor are the pilots likely to ask for them) but deals will be made, costs will rise, and that will ultimately be passed on to consumers.

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Daniel Kline has no position in any stocks mentioned. He likes to fly JetBlue. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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