Last year, JetBlue Airways (NASDAQ:JBLU) announced plans to introduce for the first time its premium cabin on flights from New York's JFK Airport to Los Angeles and San Francisco. These two routes are incredibly important (and profitable!) for the three legacy carriers: American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), and United Continental (NYSE:UAL).
JetBlue's entry into the premium market could significantly disrupt this legacy carrier profit center. JetBlue has made it very clear that its strategy for winning premium traffic will be offering lower prices. This may not matter for some big corporations, but it could help JetBlue quickly gain share with small and medium businesses. In a worst-case scenario for the legacy carriers, they could be lured into a damaging price war in order to keep their premium cabins busy.
A big opportunity for JetBlue
JetBlue has stated that industry revenue on the JFK-Los Angeles and JFK-San Francisco routes is more than 50% higher than for any other domestic route, due to the high concentration of premium passengers -- and premium seats. This creates an alluring opportunity for JetBlue that fits with its gradual migration from being purely leisure-oriented to a leisure-business-hybrid carrier.
JetBlue will introduce its "Mint" premium onboard product on flights between New York and Los Angeles starting in June, and on flights between New York and San Francisco near the end of 2014. Today, JetBlue offers five round-trips from JFK to Los Angeles and three round-trips to San Francisco, but it will add two round-trips to each route by early 2015.
JetBlue will fly these 12 daily round-trips with a dedicated fleet of 11 Airbus A321s. These will be specially outfitted with 16 lie-flat business-class seats, including four semi-private suites, and 143 economy seats (some of which have extra legroom). Today, these routes are served by A320s in a single-class configuration with 150 seats.
All in all, JetBlue will be boosting its economy-class capacity by 59% on the JFK-San Francisco route and by 33% on the JFK-Los Angeles route. More importantly, it will have 80 round-trip business-class seats to San Francisco and 112 round-trip business-class seats to Los Angeles, compared to none today.
The potential threat to the legacy carriers is clear. Business traffic on the transcontinental routes is incredibly profitable. The cheapest round-trip business class ticket between New York and Los Angeles for the first week of March prices out at about $3400 on Delta. United and American are even more expensive, at around $4400 round-trip.
By contrast, JetBlue will sell business class tickets starting at $599 one way, or roughly $1200 round-trip. This huge price discrepancy may not matter for large corporations, which tend to have discount arrangements with one or more legacy carriers anyway. However, for anybody buying his or her own ticket, JetBlue will be the obvious choice.
The biggest losers
American and United have the most to lose from JetBlue's entry into the transcontinental business-class market. American is the market leader on the JFK-Los Angeles route, while United is the top dog from JFK to San Francisco. They also have the most space devoted to business-class (and in American's case, first-class) seats.
Nearly 30% of the seats on American's new A321Ts are business-class and first-class seats, and nearly 20% of the seats on United's newly reconfigured premium service 757s are in business class. On the other hand, less than 10% of Delta's transcontinental seats are in its business-class section. This allows Delta to fit more seats on its transcontinental aircraft, and insulates it from the risk of pricing pressure in business class.
Average fares also show how American and United are particularly exposed. For the JFK-Los Angeles route, American and United had the top two average one-way fares, at $463.75 and $473.82, respectively. Delta's average one-way fare is much lower, at $333.87. On the San Francisco route, United had a huge advantage, with an average one-way fare of $607.03, more than 50% ahead of American at $400.12 and Delta at $354.15.
With its new "Mint" service, JetBlue is threatening to upend the transcontinental airline market, particularly in business class. The introduction of Mint will increase business-class capacity by about 15% on the routes from JFK to Los Angeles and San Francisco, and JetBlue will sell its business-class seats starting at $599 one way, 65% or more below current prices.
The effect on legacy carriers will depend on how much JetBlue stimulates new business-class traffic, as opposed to simply stealing customers from competitors. If JetBlue fills its business-class section with people who would have otherwise endured the economy section, then the impact on American, Delta, and United should be minimal. However, if JetBlue poaches 15% of their highest-yielding customers, the legacy carriers will have a problem.
Of the legacy carriers, Delta faces the least risk because it has much less business class capacity than American and United and a much lower average fare. However, American Airlines and United Continental shareholders need to be on the lookout for potential pricing pressure on transcontinental routes in late 2014 and into 2015.
Adam Levine-Weinberg is short shares of United Continental Holdings. 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.