In late 2014, JetBlue Airways (NASDAQ:JBLU) announced a multi-pronged strategy to boost its profitability after several years of underperformance. One of the key initiatives unveiled then was a move to retrofit its Airbus (NASDAQOTH:EADSY) A320s with 165 seats -- up from just 150 -- over a two year period beginning in mid-2016.
On Monday, JetBlue released its revised retrofit plans. Under the new plan, it won't be adding quite as many seats to each A320. However, JetBlue will extend its retrofit program to its small (but growing) fleet of Airbus A321s, creating more upside for investors.
Putting more seats on the plane
JetBlue now plans to add 12 seats to each of its A320s. It dropped three seats from its original plans, in order to give flight attendants more space to work.
Delta Air Lines made a similar decision late last year to drop three seats from its planned A320 and A321 configurations. This indicates that while the innovative SpaceFlex space-saving galley and lavatory configuration has freed up room for airlines to add seats, Airbus may have pushed the concept further than was practical for most airlines.
JetBlue also announced plans to retrofit its high-density Airbus A321 fleet (but not its A321s outfitted with the "Mint" premium configuration). These planes, currently equipped with 190 seats, will move to a 200-seat configuration.
Even after the retrofits, JetBlue will offer at least 32" of pitch (the distance between rows) for every seat. This will tie it with Virgin America (NASDAQ:VA) for offering the most legroom in coach. Most other airlines are settling on 30"-31" of seat pitch for standard coach seats. For ultra-low cost carriers, it's as little as 28".
JetBlue is replacing its old seats with modern slim-line seats. As a result, the reduction in legroom won't be as apparent. By contrast, Virgin America still has traditional seats. This means that 32" of pitch doesn't translate to as much legroom at Virgin America as on JetBlue. (On the other hand, Virgin America believes that its seats are more comfortable.)
While JetBlue passengers will have slightly less legroom than before, they are getting a bunch of new and improved amenities. First, JetBlue's seatback TVs are getting a huge upgrade. The new TVs will have 10.1" HD screens, compared to the old 5.6" SD screens. Additionally, JetBlue will now offer more than 100 channels of satellite TV, up from 36 before.
Second, JetBlue is installing power outlets in every row so customers can keep their personal devices fully charged. Each row of three seats will have two 110V power outlets and two USB ports. (Extra-legroom seats will each have their own power outlet and USB port.)
Third, JetBlue will make its super-speedy Fly Fi inflight broadband available from gate-to-gate, allowing customers to connect even before the flight takes off.
All of these new amenities will more than compensate for the slight decrease in legroom. The upgraded seatback TVs and availability of power outlets in particular will address two key aspects of the customer experience where JetBlue has lagged Virgin America.
More seats equals more profit
While there is obviously some expenses associated with JetBlue's upgraded amenities, the overall impact of JetBlue's retrofit program should be a solid increase in profitability.
For its 130 A320s, JetBlue will need to add a fourth flight attendant upon installing the extra 12 seats. This will offset some -- but far from all -- of the additional revenue from having more seats available.
JetBlue originally estimated that adding seats to its A320s would increase its annual operating income by $100 million. This target seemed quite conservative at the time. As a result, it is still a realistic goal despite the decision to add 12 seats to each plane, rather than 15.
The expansion of JetBlue's retrofit program to its high-density A321s will increase the financial impact. JetBlue ended 2015 with only 14 of these planes in its fleet. However, it has about 60 more high-density A321s and A321neos on order from Airbus. Thus, the A321 will become a much larger part of JetBlue's fleet in the next 5-10 years.
Furthermore, JetBlue already has four flight attendants for each of its A321s. As a result, the incremental cost from increasing seating capacity from 190 to 200 is negligible. The growth of this ultra-efficient fleet over time will be a powerful lever for JetBlue to keep unit costs in check.
Finalizing the timeline
JetBlue now plans to complete its A321 retrofits in the second half of 2016. That will push the start date for its A320 retrofits to early 2017, with the project likely to wrap up in early 2019. As this project progresses over the next few years, JetBlue's profit margin could rise to even loftier levels. Foolish investors would be wise to keep close tabs on JBLU as these plans progress - they could very well be just what the stock needs.
Adam Levine-Weinberg owns shares of JetBlue Airways and Virgin America and is long January 2017 $17 calls on JetBlue Airways, long June 2016 $25 calls on Virgin America, and long January 2017 $40 calls on Delta Air Lines, The Motley Fool recommends Virgin America. 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.