At a late 2014 investor day event, JetBlue Airways (NASDAQ:JBLU) unveiled a plan to boost its annual earnings by adding seats to each of its 130 Airbus (NASDAQOTH:EADSY) A320s. This "cabin refresh" project was designed to reduce unit costs while maintaining best-in-class legroom and adding new enhancements to the customer experience.
After a series of delays, JetBlue has finally completed the first A320 cabin retrofit. Last week, the carrier provided more details about its schedule for completing the project, as well as some design changes it is adopting. The cabin refresh will be a significant contributor to JetBlue's efforts to keep unit costs roughly flat over the next few years.
A moving target
Back in late 2014, when the cabin refresh plan was first introduced, JetBlue projected that the project would kick off during the third quarter of 2016 and finish before the end of 2018. Each Airbus A320 would see its seating capacity increased from 150 to 165 through a combination of a more efficient cabin layout and a modest reduction in legroom.
Since then, JetBlue has made several alterations to its initial plan. The first set of changes came in early 2016.
At that time, JetBlue announced that it would include its A321 fleet in the cabin refresh project, increasing seating capacity on each one from 190 to 200. It chose to prioritize these retrofits, completing them during the second half of 2016. This delayed the start of the A320 modifications until 2017. JetBlue also decided that it would only add 12 seats to each A320 in order to provide more galley space for its flight attendants.
By late 2016, JetBlue had scheduled the A320 retrofit program to begin in the fall of 2017. It had also lengthened the timeline for completing the project to three years in order to better align the modifications with scheduled maintenance events for its A320s. During 2017, it had to delay the retrofits again due to design flaws discovered with the lavatories installed on its A321s. However, it has finally gotten started on the A320 retrofits in 2018.
Better late than never
Last week, JetBlue formally unveiled the first reconfigured Airbus A320. While the extra seats grab most of the headlines, the retrofits also provide lots of benefits for customers. These include mood lighting, power outlets at every seat, larger (and higher-quality) TV screens, and more TV channels.
JetBlue plans to reconfigure about a dozen A320s this year, with most of that work occurring in the fall. These planes will get the same seats and entertainment systems as JetBlue's A321s -- which receive higher customer satisfaction ratings than the current A320s.
In 2019, JetBlue plans to speed up the pace of retrofits so that it can complete the modifications within three years. It will also begin using a new, wider seat and an upgraded entertainment system.
The cost savings will be substantial -- eventually
In late 2016, JetBlue laid out a target of limiting non-fuel unit cost growth to a maximum of 1% annually from 2018 to 2020. That represents an ambitious goal given that JetBlue will likely face a substantial increase in pilot wages at some point during this period.
JetBlue is working through a $250 million-$300 million structural cost reduction program, which will provide the bulk of the savings needed to meet its target. Deliveries of new next-generation A320neos and A321neos from Airbus (starting next year) will drive additional savings.
The A320 reconfiguration project will significantly improve unit costs as well. For example, JetBlue will be able to spread its pilot, maintenance, and fuel costs over more seats. JetBlue estimates that this will ultimately increase its annual operating income by $100 million.
Based on the updated schedule for the A320 cabin refresh, JetBlue will see a negligible impact on its 2018 financial results. The savings will start to ramp up next year, and JetBlue is likely to achieve the biggest year-over-year benefit in 2020, with additional savings coming in 2021. This should enable the company to deliver solid earnings growth over the next few years.
Adam Levine-Weinberg owns shares of JetBlue Airways and has the following options: long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends JetBlue Airways. The Motley Fool has a disclosure policy.