Is JetBlue's Management Up to the Task?

Management can make or break a company, and in the historically volatile airline industry, companies with poor management can sink quickly.

Here I'll look at the management of JetBlue Airways (NASDAQ: JBLU) and what its strategy is for the airline.

Management team
Since mid-February, JetBlue has been led by CEO Robin Hayes, who formerly served as the airline's president. Before his career at JetBlue, Hayes worked for British Airways as executive vice president for the Americas.

As JetBlue looks to expand, Hayes' experience in this international division of British Airways may come in handy if JetBlue looks to add more flights to international destinations within the Americas.

JetBlue CFO Mark Powers also has prior aviation experience, having worked for Continental Airlines, Northwest Airlines, and General Electric's jet-engine unit. As with Hayes, prior experience working for large airlines with overseas international networks could help JetBlue as it looks to expand.

Also part of JetBlue's management team are:

• Mike Elliott, executive vice president, people
• Joanna Geraghty, executive vice president, customer experience
• James Hnat, executive vice president, corporate affairs; general counsel; and corporate secretary
• Jeff Martin, executive vice president, operations
• Marty St. George, executive vice president, commercial and planning
• Eash Sundaram, chief information officer

Each member has prior experience in his or her field, three of them with experience at air carriers. On JetBlue's website is a short biography on each member of the management team, and I encourage investors who want to know a little background on each individual to take a look.

JetBlue CEO Robin Hayes. Source: JetBlue.

New CEO
Former JetBlue CEO David Barger had been in his position for over seven years when he announced last year that he would retire in February. His departure was largely blamed on JetBlue's underperformance in recent years compared with other airlines. While some analysts have mentioned issues with unprofitable routes as a side issue, the vast majority of them cite the lack of bag fees as the main cause of JetBlue's underperformance on a return on invested capital--ROIC--basis. Jamie Baker of JP Morgan estimated that the airline could see $200 million in additional revenue if bag fees were added. This estimate also aligns closely with the $170 million JetBlue would expect to receive if it gets a share of the $3.35 billion in bag fees collected in 2013 proportional to its 5.1% market share.

Since checked bags only cost about $2 to transport, the bag fees themselves are extremely high margin, especially considering passengers would likely have checked the bag anyway. For Wall Street where earning money is the primary goal, it should be no surprise that analysts wanted changes to be made to begin tapping the bag fee revenue stream.

Although JetBlue has a better historical track record than the major legacy carriers due to its lack of bankruptcies,  Wall Street was hungry for JetBlue to boost its ROIC to levels closer to rivals. Among the most vocal of analysts was Hunter Keay of Wolfe Research who said in Aug. 2014 that "We believe the failure to achieve the 7% ROIC target will directly result in CEO change at JBLU."

By the end of 2014, it turned out that JetBlue just managed to beat this ROIC target but it still lagged those of rivals and Barger and JetBlue had already made the decision to replace the CEO in September. The table below shows how JetBlue compares to rivals in order of ROIC.

With the exception of Delta Air Lines which had a low ROIC due to a $1.3 billion one-time adjustment to fuel hedge contracts, JetBlue's ROIC was well behind peers so it's no surprise that Wall Street is pressuring the airline's management to improve this key metric.

JetBlue announced some of its strategy before Barger's departure, including the introduction of first checked bag fees and denser aircraft layouts, but Hayes, the new CEO, is now in the position of leading JetBlue as Wall Street pushes for more profit growth and the implementation of more revenue-generating features.

Unknowns
Normally, I'd look back at what the CEO had said on previous conference calls, but with Barger having retired, investors have little to go on for determining Hayes' performance as JetBlue's CEO. There isn't even much precedent for CEO transitions at JetBlue, considering this is only the second time the airline has had a change in the position, the first time being the removal of JetBlue founder David Neeleman.

But JetBlue functioned well and grew significantly with Hayes as President and under his previous position as Executive Vice President and Chief Commercial Officer. While investors will have to wait to gauge his performance as CEO, he seems plenty qualified, given his previous experience at JetBlue and British Airways.

Hayes has not provided any indications that he will radically shake-up the airline in terms of its general operational strategy. However, he was brought in with the goal of improving ROIC and implementing new revenue boosting techniques such as higher density aircraft layouts and first checked bag fees with these techniques expected to appear on JetBlue flights. Going forward, Hayes will need to navigate revenue generation challenges and international expansion.

Revenue generation challenges
JetBlue's management is now in a tough position. It has to please Wall Street, which wants to see bigger near-term profits, while keeping JetBlue's brand name untarnished from the popular hatred of all things airline.

source: JetBlue

This means handling potential blowback from tighter legroom and the introduction of first checked bag fees on lowest fare tickets. Management will need to strike the balance between Wall Street's demands for implementing revenue generating ideas and maintaining the value of the JetBlue brand name that separates the airline from the rest of the industry.

Overall, I see this as a positive move for investors given the potential increase from checked bag fees alone. Based on both a proportional analysis and analyst opinion, JetBlue should expect to collect around $170 million to $200 million in additional revenue once first bag fees are rolled out.

In respect to adding more seats, I believe JetBlue has struck a good balance. While more seats will be added to boost per flight revenue, even the cheapest JetBlue seats with 32 inches of pitch will still have more room than most economy class seats from rivals which typically come in at 28 inches to 31 inches of pitch. Although JetBlue's lowest paying passengers will lose some space, the airline will still offer enough extra room to separate itself from other established carriers.

International expansion
Even as JetBlue looks to grow ROIC in current operations, the airline is likely to expand further into international travel. With the U.S. domestic market being mature and many of the most in-demand airports currently at capacity, many of the best opportunities for expansion now lie abroad. While the International Air Transport Association only sees 3.2% average annual growth for the domestic U.S. market over the next 20 years, it sees 4.7% average annual growth for the Latin American market.

Based on JetBlue's management and past actions, there is strong reason to suggest Latin American expansion will continue. Both the airline's CEO and CFO have previous experience at airlines with worldwide route networks and CEO Robin Hayes previously managed the Americas division of British Airways.

JetBlue's current network is also positioned for Latin American expansion. With a large number of Caribbean destinations as well as several in South America, JetBlue has already chosen to invest in the region and has formed a network that begins to compete with those of major carriers. But the number of destinations served in Latin America only begins to scratch the surface of total possibilities leaving the airline plenty of room for expansion.

The bottom line
JetBlue's former CEO left after receiving heavy criticism from Wall Street for not implementing first checked bag fees or increasing aircraft passenger density. The current members of JetBlue's management team are now poised to move forward with these changes as they seek to capture more high margin revenue. So far, their approach appears to strike a good balance but investors should keep an eye out for consumer reaction as these changes roll out.

The members of JetBlue's management also have extensive experience in their fields with a particular focus in international operations, which is a positive going forward as the airline seeks more foreign expansion to tap into faster growing markets. At the same time, the airline's new CEO, although he appears fully qualified, will still need to prove himself in the position.

As the new CEO adjusts to his post, he will need to lead both JetBlue's expansion plans within the Americas and protect the JetBlue name during the implementation of new techniques for revenue generation.