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

JetBlue Airways Corporation is wisely focusing on implementing its long-term growth strategy, rather than giving in to critics focused on the short term.

Jun 26, 2014 at 6:16PM

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.

Images

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.

Jetblue Premium Cabin

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 A

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.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour. (That's almost as much as the average American makes in a year!) And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Adam Levine-Weinberg owns shares of JetBlue Airways. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers