JetBlue Airways Corporation Should Ignore the Critics and Play the Long Game

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.

JBLU Chart

JetBlue Airways One-Year Stock Chart. Data by YCharts.

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.

Delta has improved its profitability by adding rows to its planes and boosting fee revenue. Photo: The Motley Fool

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.

DAL Chart

Delta Air Lines Five-Year Stock Chart. Data by YCharts.

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.

Does JetBlue's premium cabin show it no longer cares about ordinary fliers? (Photo: JetBlue)

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.

JetBlue's growth strategy will lead to higher earnings in the long run. (Photo: JetBlue Airways.)

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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  • Report this Comment On June 27, 2014, at 10:20 AM, datruthdog wrote:

    Your writing, while seemingly logical, is 100% wrong. Failing to adapt the "customer unfriendly" practices will eventually kill this airline. When this management team gets fired (and they will), another CEO will hopefully get this model on track. The airline graveyard is full of former airlines that have adopted your principle of "consumer friendly" and "product differentiation". Fact is, the airline model has changed and JBLU has not adapted. That's why they lag the industry in every single financial metric, including the most important one, profit and margin. You notion is that they are building for the long term is correct, only their version of the long term leads to a bankruptcy. No airline can survive long term "sticking to the middle ground". As a business that produces a commoditized product (and that's exactly what JBLU produces), it must decide where it lies. Is it a ULCC or a legacy carrier? They cannot be a legacy carrier, they have no way of building the network scope. So they must be closer to a ULCC. They don't have to go 100% Spirit, but they better go at least 75%.

  • Report this Comment On June 28, 2014, at 5:46 PM, TMFGemHunter wrote:

    @datruthdog: Thanks for the comment. Obviously, I disagree. JetBlue actually gets higher coach fares on most of its routes than the legacy carriers, which implies that it's not really a fully commoditized product. (And Southwest also gives away checked bags, free changes, and now some satellite TV content as well -- and still has very good margins, even with AirTran integration not yet complete.)

    I've written elsewhere about several profit growth drivers at JetBlue coming online in the next few years. 1) Mint (to boost transcontinental yields); 2) Fly-Fi (to attract more business customers); 3) T5i (to save aircraft taxi costs and ease domestic/int'l connections at JFK); 4) 190 seat A321s (~15% lower unit cost); and 5) sharklet retrofit (~3% fuel burn savings across the existing A320 fleet). Looking out to 2018 and beyond, JetBlue will start getting the A320neo/A321neo aircraft that will be even cheaper to operate.

    I think you will be surprised by how profitable JetBlue can be within its existing model. That's not to say it should be dogmatic... overbooking, for example, may be worth the occasional inconvenience it causes. But I don't think JetBlue would be successful trying to be Spirit, and I don't think it should attempt to go that direction.

    Anyway, thanks again for the comment. Time will tell.


  • Report this Comment On July 24, 2014, at 11:48 AM, zigman67 wrote:

    My wife and I fly JetBlue all the time from RDU to JFK. I don't want to sound overtly biased but honestly... its a PLEASURE to fly JetBlue. We've flown JB so often I've grown accustomed to the relaxed and largely uneventful flying experience. Recently (as in last week) my wife booked me on a return flight via Delta because it was slightly cheaper. I will not go into the specifics (unless you really want me to) but let me just say it was HORRENDOUS. I texted my wife from the airport "HELP! don't book me on Delta again...". The net takeaway I had from this experience was that Delta was not customer focused... at all.

    So I agree with Adam. Let JetBlue keep on doing what they do best while remaining profitable. Be smart. be customer friendly, be forward thinking. There are always people who just want the cheapest flights available and don't care about their travel experience. These folks have plenty of choices. But there also those of us who do not want to be prodded like a bunch of cattle. We want a civilized, smart, customer friendly experience and we'll pay a little extra if we have to.

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Adam Levine-Weinberg

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!

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