JetBlue's balancing act: Keeping fliers and shareholders happy
BREAKING: JetBlue details new bag fees, which begin June 30 (June 30, 2015)
JetBlue CEO Robin Hayes stepped into his new job five months ago tasked with delivering value to passengers and the carrier's shareholders at the same time.
One of the biggest tests of that delicate balance began Tuesday, when JetBlue, among the last U.S. carriers to allow passengers to check a bag for free, shifted to a new, tiered-fare structure that will mean for the first time, fliers who check luggage pay more than those who don't.
The fare bundles, dubbed Blue., Blue Plus and Blue Flex, will apply to itineraries booked starting today, and leave Southwest as the only major U.S. airline to allow fliers to check luggage at no extra cost.
The new fare tiers are just one of several changes Hayes, 48, is presiding over at the New York-based carrier, whose brand is rooted in the idea that all its passengers receive the same quality service at an affordable price, but which has lagged behind many of its peers when it comes to profits.
Only a year after the previously single-cabin airline added premium service between New York and the West Coast, it will start offering that upgraded product between Boston and San Francisco next March, and between Boston and Los Angeles in the fall of 2016. JetBlue, known for its more ample leg room, will also shave some of that space by adding 15 more seats to each of its
Hayes, an executive who strolls through the airport greeting his employees and has enlisted his children to help clean the plane after a flight, understands that some travelers may see these shifts as signs that JetBlue is paying more attention to Wall Street than its customers. But he strongly disagrees.
"Jetblue will still offer the best experience of any airline,'' Hayes told USA TODAY in an interview. 'I would put us up against every other product in North America. We're far superior.''
JetBlue needed to move in a different direction, airline analysts say. While it has been profitable, it's no-bag-fee policy, for instance, meant it was missing out on a revenue stream that yielded U.S. carriers $864 million during the first quarter of 2015, or 2.2% of total operating revenue, according to the Department of Transportation's Bureau of Transportation Statistics.
"We wanted to see the company move towards what the rest of the industry was doing in enhancing revenue,'' says Jim Corridore, an analyst with S&P Capital IQ. "Adding bag fees, doing the things the rest of their competitors were doing that was generating revenue premiums . ... Now that they're doing some of those things, I think they'll be closing the financial gap they have with their peers.''
And Hayes appears to be the right steward, Corridore says.
"I think he came in with a mandate to boost shareholder value and he's shown himself to be amenable to listening to outside voices,'' Corridore says. "JetBlue is a wonderful company with great service, and customers love them, and some changes, they won't be happy with. But shareholders are an important voice as well, and they weren't being heard under the previous regime.''
JetBlue has said that by 2017, the three new fare bundles are expected to boost operating income by at least $200 million. The cheapest option is for fliers with no bags to check, while the other tiers will allow passengers to check either one or two bags, and receive other perks like additional loyalty points and cheaper fees to change a ticket, or no fee at all.
Hayes says that the new pricing structure will make JetBlue more competitive with its peers, including Spirit and other ultra-low cost carriers that offer rock-bottom fares while charging for virtually every aspect of service.
"There were different models out there,'' Hayes said, "and we said we have to be competitive on each of these three segments. ... It's a way to allow us to create fare products that allow us to be competitive across different customer needs.''
But unlike some airlines that prevent passengers flying on the cheapest fare from securing an assigned seat, for instance, even those with the cheapest tickets on JetBlue will still be able to get seat assignments and access the carrier's other amenities like complimentary Wi-Fi.
Mint, introduced in June 2014, to help JetBlue compete for the premium-paying cross-country flier, has also proved lucrative. Forty-six percent of Mint fliers are new JetBlue customers, the airline says, and during the first quarter, revenue per available seat mile rose more than 20% on Mint routes as compared to last year.
Still, Hayes recalls that the idea of an upgraded service for certain JetBlue passengers sparked concern.
"It was a big change and we had some people in our own company who said, "Hey, aren't we straying too far from the early vision of the founders to create something very accessible to everybody?'" Hayes recalls. "And we said, 'At the end of the day we're doing the same thing that we did back then. ... Our fares are still so much lower than everybody else's, but we're offing a better experience.'''
Now, in addition to the new Boston-to-California routes, and beefed-up service between JFK, San Francisco and Los Angeles, Mint service will be offered seasonally between JFK and Barbados and Aruba, starting in November, and from Boston to Barbados next March.
Henry Harteveldt, a travel industry analyst with Atmosphere Research, says that Mint has paid off.
"I would say that Mint is a smashing success for JetBlue and shows that a low-cost airline can create a premium experience without sacrificing its image,'' he says.
But the verdict is still out on how the new fare bundles will be received.
"The key thing we don't know now is what pricing will be,'' Harteveldt says, "and ultimately that will be the key determinant of how consumers respond to these new tiers.''
Still, even with the additional seats on many aircraft, JetBlue will have more leg room than any other U.S. carrier and the refreshed cabins on A320s will be equipped with larger TV screens, and power outlets at every perch. And Hayes says that the first U.S. airline to introduce live TV is continuing to push the envelope technologically.
"I think JetBlue has always had a reputation as an innovative airline,'' he says, noting that the carrier is now the first to allow passengers to use Apple Pay to make purchases from iPad-equipped flight attendants.
JetBlue also announced in May that fliers who are Amazon Prime members will be able to use the airline's free, high-speed "Fly-Fi'' service to stream that content at no extra cost, while all passengers will be able to rent or buy entertainment through Amazon's instant video store.
The carrier is also continuing to broaden its network in the Caribbean and Latin America, recently announcing plans to launch service to Mexico City and Quito, Ecuador. And, starting July 3, JetBlue will operate its fifth weekly round-trip service between the U.S. and Cuba, with flights between JFK Airport and Havana.
Hayes says that part of his mission is focused on "improving our return on invested capital for our shareholders so they have confidence in our brand, and that allows us to continue to invest in growth for the future.''
But a large part of making that happen, he emphasizes, is giving passengers what they want. "Our product ... I think it's winning,'' he says. "I think customers are choosing JetBlue, and we're seeing the benefits.''