On Wednesday, JetBlue Airways (JBLU 5.63%) revealed a number of new strategies to boost profitability to match the industry leaders. Two notable changes were the announcement of new "fare families" -- JetBlue's cheapest fares will no longer include a free checked bag -- and a cabin reconfiguration that will add 15 seats to JetBlue's A320 aircraft.
JetBlue will add 15 seats to its A320s between 2016 and 2018 (Photo: JetBlue Airways)
The reaction from JetBlue customers was fairly predictable. Complaints from JetBlue fans (and former fans) overwhelmed JetBlue's social media pages. However, fliers' outrage is overblown. JetBlue is still one of the most customer-friendly airlines in the U.S., and customer backlash is unlikely to have a noticeable impact on the carrier.
JetBlue needed to change
One of the biggest misconceptions among airline travelers is that most airlines are unreasonably profitable. In that context, JetBlue's policy changes seem greedy.
"What may frustrate customers is that it isn't so obvious why JetBlue felt it necessary to change its focus," writes MarketWatch reporter Tomi Kilgore, noting that fuel prices are falling, the economy is doing relatively well, and JetBlue stock has risen more than 50% this year.
JetBlue YTD Stock Chart, data by YCharts
However, JetBlue's strong stock performance this year has been driven by the expectation that it would make some of the recently announced changes. While JetBlue has been reliably profitable for the last few years, profit growth has been lackluster this year, and JetBlue has one of the lowest profit margins in the airline industry.
Moreover, JetBlue announced last month that it was likely to miss its 7% return on invested capital target for 2014. Even that target was probably below JetBlue's cost of capital. This means that JetBlue needs to be more profitable just to earn a market rate of return -- and significantly more profitable to justify investing in growth.
How much will the changes hurt customers?
From the customer backlash, you might think that JetBlue was becoming like Spirit Airlines: squashing customers' knees, and charging for carry-on bags, advance seat assignments, and drinks. None of those things are happening.
Less than half of JetBlue's passengers check bags today, so charging for a first checked bag won't impact most customers. Furthermore, many people who have checked bags on JetBlue in the past because it was free will be able to avoid the fee by packing more carefully into a carry-on bag.
Southwest Airlines is now the only U.S. airline to offer free checked bags with every ticket (Photo: Southwest Airlines)
Since 2008, charging for checked bags has gone from a rarity to commonplace in the U.S. airline industry. Following JetBlue's changes, every U.S. airline aside from Southwest Airlines will charge a first-bag fee for customers buying the cheapest tickets.
The backlash over JetBlue's cabin modifications -- which won't even begin until Q3 2016 -- is even less sensible. After JetBlue adds 15 seats to its A320s, it will still offer the most legroom in coach of any U.S. carrier. (Only Virgin America will be within 1 inch of JetBlue in terms of average legroom.)
While JetBlue didn't explain exactly what its new configuration will look like, the carrier will be able to free up space by using slim-line seats and space-saving lavatories. The result is that JetBlue will be more comfortable without significantly impacting customer comfort.
Additionally, JetBlue will be making up for the slight loss of legroom with other improvements. JetBlue is in the midst of rolling out its "Fly Fi" high-speed Wi-Fi across its fleet, and it has announced that this service will remain free. The reconfigured planes will also get in-seat power ports, larger TV screens, and even more channels of free satellite TV.
You can't always get what you want
The recent backlash against JetBlue is understandable insofar as the company's free first bag policy and generous legroom likely attracted travelers who cared deeply about those features. However, years of financial under-performance have made it abundantly clear that most people aren't willing to pay for the full cost of these things.
Contrary to the current public image of JetBlue as just another greedy airline, the carrier is actually continuing to invest in new amenities that it won't charge customers for. High-speed Wi-Fi, in-seat power outlets, bigger TV screens, and more satellite TV channels will all improve the passenger experience.
To pay for these amenities while also improving its margins to at least the industry average, JetBlue needs to cut back in other areas. JetBlue's plan to charge for a first checked bag and to reduce legroom a bit -- but not nearly as much as other airlines -- actually represents a very fair trade. Eventually, most JetBlue customers will recognize this.
