The Best Airlines: Why JetBlue Makes the Cut and American Doesn't

An intriguing mix of premium services sold at lower-than-average fares could have a big impact over the long term.

Aug 24, 2014 at 3:37PM

Come Sept. 1, American Airlines Group (NASDAQ:AAL) will no longer offer first-class and business-class meal service on flights shorter than two hours and 45 minutes.

For American, the change is practical. A spokesperson told The Los Angeles Times that the carrier is in the process of synchronizing operations with acquired peer US Airways, which in April set a similar cutoff. For me, the change is more evidence of a movement to increase fees and cut perks industrywide.

Are there any carriers left that deliver premium perks at a price that's within reach for everyday business fliers? After looking at the data, I think JetBlue Airways (NASDAQ:JBLU) may be among this increasingly rare breed.

Best Airlines Jetblue

JetBlue's mix of enhanced services and reasonable fees makes it one of the best airlines. Credit: JetBlue

Stacked up, ready to taxi
In particular, I took SKYTRAX's ranking data for overall performance, Airfarewatchdog.com's breakdown of known fees, and added in operating margin data from S&P Capital IQ. My goal? Find a carrier that didn't splurge too much on fees to fund margins while also delivering quality service as determined by an outside evaluator. (In this case, SKYTRAX.)

To be fair, the data reflects the entirety of each airline's performance. And yet if you consider that a huge portion of daily commercial flights are inter-U.S. business travel -- i.e., flights of three hours or less -- these rankings must naturally skew to reflect the experience of short-haul frequent fliers. 

Why these sources, in particular? S&P Capital IQ does a good job of accounting for anomalies and one-time items in calculating margins, making comparisons easier. SKYTRAX has been ranking national and international airlines for years using a variety of criteria. Airfarewatchdog.com tracks airfares and offers would-be passengers money-saving tips and access to cheap tickets.

Now, let's review how the major American independent carriers ranked:

Carrier
SKYTRAX Rating (1-5 stars)
Latest Operating Margin
Max. Estimated Fees

Alaska Air Group

3 of 5

12.1%

$1,050

Allegiant Air

3 of 5

9.6%

$631.50

American Airlines

3 of 5

(1.0)%

$1,883

Delta Air Lines*

3 of 5

27.8%*

$1,794

JetBlue Airways

4 of 5

6.2%

$1,070

Hawaiian Holdings

3 of 5

3.6%

$1,330

Spirit Airlines

2 of 5

11.4%

$1,415

Southwest Airlines

3 of 5

6%

$377.50

United Continental

3 of 5

1.8%

$1,644

Virgin America

4 of 5

4.3%

$1,319

Sources: SKYTRAX, S&P Capital IQ, and Airfarewatchdog.com
* Includes significant one-time items

Sometimes, the best airlines are gougers
Frankly, I was surprised with the fees that some carriers levied.

  1. Heaping on fees doesn't necessarily lead to a worse experience. Virgin America isn't exactly cheap when it comes to add-ons with a max of $1,319, according to my read of Airfarewatchdog's data. The killer on its list: up to $399 each way for upgrades.

  2. Big fees don't always equal big margins. Both American and United Continental list fees fit for a big spender, but you wouldn't know that from their operating margins. Other costs are taking too large a toll for these carriers to earn a profit on fees the way that Spirit Airlines does.

  3. Carriers with the best cost controls, win. Not surprisingly, Southwest levied the fewest fees among the carriers I saw on Airfarewatchdog's list. Yet the carrier also had one of the better operating margins, coming in just under JetBlue. Fervent cost controls and operating with an all-737 fleet, boosting maintenance efficiency, appears to be having an impact.

JetBlue: premium services from a lower-fare airline
Of them all, none are so promising as JetBlue, though I suspect that Alaska gets close. The carrier's decent but not overwhelming fee schedule and double-digit operating margins might even put it over the top. The problem is that SKYTRAX ranks it a three-star airline; it doesn't rank among the top tier. Fresh competition from Delta in Seattle could make it difficult for Alaska to climb the ladder next year, as well.

Meanwhile, JetBlue is earning high marks for service while building a better flying experience. Consider the "Even More" program, through which the carrier sells extra legroom to A320 passengers. There's also "Mint," a premium cabin service offered on flights between New York and Los Angeles. Flights to San Francisco begin in October. What's interesting is that JetBlue started by pitching Mint and its lie-flat service for $599 each way -- a steep discount to first-class fares shopped by larger peers. Even if prices increase over time, which they will, JetBlue should be able to take plenty of premium business from the likes of American and United.

Final takeaway
Ranking the best airlines is a subjective process and Virgin America also scored well in SKYTRAX's rankings, naming it the top low-cost carrier for 2013. JetBlue, for its part, is moving upmarket, delivering a premium experience at a reasonable price -- earning accolades and improving margins along the way.  Add in a growing fleet of new, fuel-efficient aircraft and improvements for boosting efficiency and you've a stock poised to keep climbing.

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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

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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