Airline passengers are getting used to paying more for checked bags and having less room to stretch out. Today, few airlines still have free checked bags and comfortable legroom.
And that number is shrinking with JetBlue Airways (NASDAQ:JBLU) becoming the latest airline to launch checked bag fees and shrink legroom to boost profits.
Pressure for profits
JetBlue has existed as a unique airline for its entire history. In an environment where passengers complain of poor customer service, JetBlue put pleasing passengers at the top of its list, offering more legroom than most rivals and not joining in the trend of checked bag fees.
But as much as passengers may love the airline, it's still a for-profit corporation run for the benefit of its shareholders. And while other airlines profited from checked bag fees and more densely packed planes, JetBlue was missing out on these valuable revenue streams.
The pressure for changes at JetBlue mounted in the past few months as Wall Street analysts pushed for the airline to adopt some of the policies that its rivals were profiting from. In August, an analyst from Cowen & Co. raised her price target on JetBlue shares, citing the possibility for new management and a shift in the airline's strategy toward a less extreme version of Spirit Airlines (NYSE:SAVE).
JetBlue CEO Dave Barger, who plans to step down in February, defended the airline's position by comparing it to the bankruptcies of the major carriers. While he did note his support for JetBlue's position of being neither an ultra discount carrier nor a full service global carrier, the airline did announce that it was adding fees in 2015, but Barger insisted it would be done "in a JetBlue way."
Last year, U.S. airlines raked in $3.35 billion in checked bag fees, and now JetBlue is getting ready for a piece of the action. The airline has announced that under its new fare structure set to debut midway through next year, only the top two ticket classes will come with a free checked bag, leaving flyers in the lowest ticket class to pay a checked bag fee.
The airline has yet to announce how much the checked bag fee will be, but it has said the fee will fluctuate with demand. This pricing strategy is rare among major airlines which generally charge a flat fee; however, Spirit Airlines has a similar demand-based checked bag fee whereby the fee increases by $2 for travel between Dec. 18 and Jan. 5.
This checked bag fee is designed to have two main effects. First, it will be another way to collect revenue from passengers who are booking the cheapest fare classes. And second, it may encourage some passengers to book higher fare classes to avoid the checked bag fee.
Since the operating costs of an aircraft see little impact from a change in the number of passengers on board, JetBlue is joining the trend of increasing the density of seating. Most U.S. airlines have increased density by using slimmer seats thus reducing their cost per available seat mile, or CASM.
Air Canada (TSX: AC) is also betting on success from high density layouts as it increases density and reduces legroom on some of its Boeing 777 aircraft. Like JetBlue, Air Canada is looking to reduce CASM and boost total revenue.
In fairness to JetBlue, the airline's new pitch, the distance from a point on a seat to the equivalent point on the next, will only decrease to 33 inches from over 34 inches currently. This still compares favorably with almost all other major airlines, keeping JetBlue as a legroom leader, just not by as much.
Customer-friendly to investor friendly
JetBlue Airways has long positioned itself as an alternative airline by taking a customer friendly approach to its business model. But as it comes under pressure to boost profits through traditional airline strategies, JetBlue is going part of the way by launching checked bag fees and reducing legroom.
However, with legroom still above average and the exact details of its checked bag fees currently under wraps, JetBlue is still worth consideration by both flyers and investors.