While shares of JetBlue Airways Corporation (NASDAQ: JBLU ) have put together a nice run in the last year, the airline still has plenty of detractors. Many investors and stock analysts have criticized JetBlue's financial performance compared to competitors like Delta Air Lines (NYSE: DAL ) . These critics argue that JetBlue stock would soar even higher with appropriate changes.
Many of the changes recommended by these investors and analysts involve dropping the most customer-friendly aspects of JetBlue's product. On the flip side, many travel writers claim that JetBlue is losing its unique identity and becoming just another airline like Delta Air Lines and the other legacy carriers.
Facing critics from both sides, what is JetBlue to do? Its best response is simply to ignore the critics for now, and continue implementing its long-term initiatives. The critics on both sides are looking for instant gratification, but JetBlue's current strategy is more likely to create real long-term value for investors and customers.
Squeezing customers for cash
Two key factors in the resurgence of legacy carriers like Delta have been the introduction of checked bag fees and initiatives to squeeze more seats onto each plane. Delta has been a leader in both respects.
Last year, Delta collected more than $800 million in checked bag fees (and a similar amount in change fees and cancellation fees. Delta has also added rows to most of its planes to reduce unit costs.
These initiatives have allowed Delta to increase revenue without incurring much in the way of additional costs. The resulting boost in financial performance has sent Delta shares soaring from single-digit territory as recently as the summer of 2012 to nearly $40 today.
Not surprisingly, Wall Street analysts want JetBlue to copy Delta's policies. One such analyst recently argued that JetBlue could grow earnings through "a first checked bag fee, increasing seat density, cutting capex, dropping hedging, simplifying the fleet, and overbooking... to name a few."
In other words, his proposal is to gut JetBlue of most of its unique features, instead, offering more fees, less legroom, less growth, and no guarantee that your seat hasn't been sold to someone else, as well. These changes probably would drive significant margin improvement in the short term. However, the biggest winners would be other airlines, which would no longer face a disruptive, growing rival.
Is JetBlue selling out?
On the other side are the consumer advocates, who think JetBlue has already become the JetBlue of Wall Street analysts' dreams -- a money-grubbing, customer-unfriendly airline. For example, consumer advocate Christopher Elliott recently wrote in USA TODAY that JetBlue has lost its heart.
He points out that some things that used to be free, like headsets, blankets, and pillows, now carry an additional charge. Yet, this overlooks all the things that don't come with an extra charge on JetBlue -- checking a bag, live TV, satellite radio, unlimited snacks and beverages, and now, also, Wi-Fi access.
Elliott also points to the addition of extra-legroom "Even More Space" seats, and JetBlue's new "Mint" premium cabins for transcontinental flights as a "betrayal of JetBlue's egalitarian values." It's true that some passengers are paying more for extra personal space on JetBlue. However, it seems petty to fault the company for that when everybody else still has more legroom than on any other U.S. carrier.
JetBlue is building long-term value
Critics don't seem to recognize that JetBlue is playing the long game. JetBlue does operate on a lower profit margin than most U.S. airlines today, including Delta. That's due, in part, to the company's refusal to adopt all of its rivals' customer-unfriendly measures, as well as its growth investments.
The payoff is that travelers continue to flock to JetBlue. Whereas other major airlines are growing capacity in the low single-digit range, JetBlue plans to grow in the high single-digit range for the next several years. That will allow it to grow revenue faster than other airlines, and ultimately leverage its investments to earn significantly more money than it can today.
By contrast, if JetBlue were to follow the analysts' recommendations, it would become nothing but an undersized legacy carrier. It might earn more money today, but it would be vulnerable to potential new entrants in the future.
As for the consumer advocates, they mainly yearn for the days when JetBlue provided top-notch service for bargain fares. However, legacy carriers like Delta have restructured to reduce their costs, and JetBlue can no longer make money with cheap fares and first-class perks. If the consumer advocates had their way, JetBlue would be on a one-way trip to bankruptcy.
So far, JetBlue is sticking to the middle ground despite taking heat from both sides. The middle ground isn't a very popular place to be right now, but long-term shareholders should be very glad that JetBlue is focusing on long-term profitable growth rather than giving into myopic critics.
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