At its Investor Day last November, JetBlue Airways Corporation (NASDAQ:JBLU) finally confirmed plans to stop including a free checked bag for customers buying the cheapest tickets. The vehicle for this change was to be the introduction of a new booking platform from Datalex and a new fare system called "fare families," which JetBlue said would arrive in Q2 2015.
Today is the last day of Q2 -- and sure enough, JetBlue has made the official announcement, having finished its extensive testing of the new system.
With that in mind, how does the new pricing structure affect travelers? And does it matter for investors?
What will the new system look like?
JetBlue will use a variant of the traditional "good, better, best" pricing strategy deployed across numerous industries.
The cheapest "Blue" fares will not include a checked baggage allowance -- except on a few international routes. The middle "Blue Plus" tier will allow one checked bag, and the highest "Blue Flex" fare type will include two checked bags. By contrast, all JetBlue customers were allowed to check a bag for free under the old system.
While the introduction of bag fees gets most of the press attention, there will be some other notable differences among the fare tiers. First, customers purchasing the higher-tier fares will earn more of JetBlue's TrueBlue frequent flier points per dollar spent, if they book online. Second, change fees will be lower for customers who purchase Blue Plus fares, while Blue Flex fares allow free flight changes. Third, the Blue Flex fares include JetBlue's "Even More Speed" expedited security.
How much will it cost?
JetBlue says that Blue Plus fares will generally cost about $15 more than Blue fares. Blue Flex fares will typically cost $85 more than Blue Plus fares (i.e., $100 more than Blue fares).
This is a very reasonable pricing structure. The $15 extra cost to check a bag is lower than the $25 charge that has become fairly standard in the industry. (However, if you select a Blue fare and later decide to check a bag, you will be charged $20 if you add the bag online or at a kiosk, and $25 if you do it at a check-in counter.)
Furthermore, the Blue Plus fare includes extra frequent flier points and slightly lower change fees as a bonus. Lastly, JetBlue reduced the fee for a second checked bag to $35, in line with the industry standard, from $50 previously.
The impetus for JetBlue's new pricing strategy was the realization that the carrier wasn't being fully compensated for offering a free checked bag on many of its routes. In other words, many travelers didn't seem willing to pay any extra for a JetBlue ticket compared to a ticket from one of its many competitors that do charge for bags.
To some extent, this isn't very surprising. First, fewer than half of JetBlue customers check bags even when it's free. Second, as a whole, the traveling public cares far more about price than anything else when choosing an airline. Third, fliers have become accustomed to bag fees in the U.S. -- to the point where some customers have handed over their credit cards at JetBlue check-in counters when checking bags, not realizing it was free!
However, JetBlue EVP of Commercial and Planning Marty St. George told me recently that the move to the Datalex platform was also important to the decision to change the fare structure. With its old tech platform, customers would have been charged for checked bags as an add-on fee after choosing an itinerary. While this is standard in the industry, JetBlue wanted to be more transparent about bag fees.
The Datalex platform is allowing JetBlue to show customers a choice between the three fare types on the initial booking screen. What you see there is what you pay -- there's no extra bag charge that pops up later in the booking process or at the check-in counter, as long as you pick the appropriate fare type.
What it means for investors
JetBlue estimated that the introduction of Fare Families would generate incremental revenue of $65 million in 2015 and more than $200 million annually by 2017 or 2018. The company reiterated the $65 million target for 2015 in January. But given that the new fare structure appears to be rolling out a little later than JetBlue initially intended, that might be a stretch.
Still, that's no big deal for investors. JetBlue has consistently posted the best unit revenue growth in the industry recently, and it has finally gotten its costs under control. As a result, Wall Street analysts on average expect adjusted EPS to jump more than 150% year over year in 2015, reaching $1.77.
The bulk of the benefit from the new fare families will come in 2016, which should help JetBlue maintain strong earnings growth next year despite facing a much tougher comparison. JetBlue's other profit improvement initiatives -- such as ramping up its Mint premium service and adding seats to its A320 planes -- will also contribute to profit growth next year.
Most important, I do not expect a significant or long-lasting backlash against JetBlue from its new fare structure. There will undoubtedly be complaints, along with hand-wringing from consumer advocates. Yet JetBlue still offers friendly service, the most legroom of any U.S. carrier, free, fast Wi-Fi on an increasing number of flights, and free satellite TV at every seat. That should be plenty to maintain the loyalty of most customers.