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JetBlue Airways executives like to talk about how they’re building a “challenger brand,” marketing speak for an company that is neither market leader nor a niche brand, but still helps set the tone for how an industry evolves.
For many undersized companies, this can be a sound strategy, as challengers can lead through their investments in technology and other innovations.
But among airlines, success is often defined by size. The biggest carriers, such American Airlines, United Airlines and Delta Air Lines, can fly their customers nearly everywhere they want to go, directly or through partners.
JetBlue can’t — it’s only big in a handful of cities on the East Coast — and as a result, it sometimes struggles to win corporate accounts and other lucrative business. JetBlue had sought to acquire Virgin America as a quick way to increase its scale and West Coast schedule, but Alaska Airlines outbid it.
On Tuesday, JetBlue held an investor day in New York, and executives assured analysts the airline can succeed with a measured growth plan focusing on three cities where it already has enough scale to compete — Boston, New York and Fort Lauderdale. JetBlue’s leaders also vowed to take cabin segmentation more seriously, invest in ancillary products, reduce costs, and leverage new technologies.
Wall Street didn’t reward executives on Tuesday for their candor: The airline’s stock fell six cents to $18.93.
For the year, JetBlue stock is off 11 percent. Over the past three years, it has fallen roughly 29 percent.
Here are some takeaways from this year’s investor day.
Analysts often question why airline executives decided they must grow. They did it to United Airlines earlier this year when president Scott Kirby said the airline would add 4-6 capacity for three consecutive years, and they’ve asked similar questions to JetBlue for several years.
The analysts see short-term issues with growth. They know that if an airline adds more seats for sale, industry pricing should probably come down. It’s simple supply-and-demand, they say.
But on Tuesday, JetBlue executives said measured growth is strong business. Even in its biggest focus cities, the airline remains relatively small, including in Boston, where it controls just 27 percent share. (Boston is often considered the airline’s strongest market.)
If the airline can bulk up in Boston, New York and Fort Lauderdale by growing strategically by adding more capacity, it will gain several benefits just through the increased scale, said Marty St. George, JetBlue’s executive vice president for commercial and planning.
“As the utility of the airlines business model increases in a given city, customers reward that utility in many different ways,” he said. “But fundamentally, they’re rewarded with brand loyalty. That loyalty turns into earnings through things like better penetration of corporate sales programs, which will help increase yield.”
There are other benefits, too. St. George said distribution costs usually fall, as more customers book directly with the strongest airline in any market. In addition, he said, more customers carry an airline’s co-branded credit card when an airline dominates the market. And co-branded credit cards are highly profitable for all U.S. airlines.
“This is why we grow,” St. George said. “We grow because fundamentally when your network is this far underdeveloped, the growth is accretive and actually translates into higher earnings.”
Customers Pay for What They Want
Compared to many of its competitors, JetBlue offers several goodies to passengers for free, including industry-leading legroom (even in the worst seats), WiFi and in-seat television, and hardy snacks, like Terra Blue Chips.
Over its history, analysts have wondered why JetBlue didn’t charge for some of that stuff, as other airlines do. But JetBlue executives reiterated that passengers are paying for the extras. They’re not paying directly, but the airline has calculated that passengers, as a group, are wiling to pay more to fly JetBlue because of what it offers.
Executives said they are often conduct research to make sure that what they offer for free resonates with passengers. In 2014, they said, they realized that one differentiator — JetBlue did not charge for a first checked bag — wasn’t helping the airline stand out from competitors. As a result, they added a fee.
“If we are making investment in a part of our customer experience that we’re not getting paid for and we’re not producing earnings, we need to reexamine,” St. George said.
Next, JetBlue is following the industry by instituting its own form of basic economy — the no-frills product larger competitors have been using for their most cost-concious customers. JetBlue had decided not to follow last year, but ultimately, it realized it had no choice, St. George said.
Ancillary Fun Facts
The average airline doesn’t share much detail about its ancillary products. Carriers tend to keep the information top secret. But JetBlue, perhaps hoping to make its business more intriguing, shared a little more than usual Tuesday.
For each customer, JetBlue generates “nearly” $30 in ancillary revenue. Here’s how it breaks down:
- Baggage and other fees: $11-plus
- Even More Space extra legroom seats. $6-plus
- Selling of points to credit card companies and other vendors. $8
- JetBlue Vacations. $1.50
JetBlue executives have been gushing about their newish Mint business class product for a few years now, saying it has markedly helped the airline’s margins on key transcontinental routes, and wondering if it would make for a strong transatlantic offering.
But what about premium economy?
Other airlines have been installing it, and while it’s mostly a long-haul product, premium-economy equipped aircraft are increasingly popping up on transcontinental routes. United recently said it would use its Boeing 787-10s, which have it, from Newark to Los Angeles and San Francisco starting next year.
“We look at a product that we call Junior Mint,” St. George said, before explaining why it might not work.
“I’m not sure Junior Mint, as we’ve laid it out, is going to be worth the climb. But I say this much … over the 18 years we’ve been in business, this model has changed dramatically. The fact that we have one premium product that’s so wildly successful, and that we may be even thinking about a second one, I think that’s a good data point we’re going to do what it takes to make sure we produce returns.”
It’s been four years since JetBlue announced its plans to “restyle” its 130 Airbus A320s, some of which had barely been touched since the airline began flying in 2000.
But JetBlue delayed the project a couple of times, and the first retrofitted jets have only only recently rejoined the fleet. So far, JetBlue President Joanna Geraghty said, JetBlue has retrofitted 10 aircraft. It work on 60 next year, and finish the project by 2020, she said.
It’s mostly good news for passengers, who get updated screens and new leather seats. But JetBlue also is adding 12 seats to each aircraft to increase seat density, and raise profits.
Customers are fine with the trade-off, Geraghty said. “When you compare the old 320 aircraft that’s not restyled with the newly-restyled 320 aircraft, we’re seeing an eight-point improvement in customer satisfaction,” she said.
JetBlue is one of two U.S airlines — the other is Delta – making major investments in biometrics. JetBlue is using facial scans for international departures from Boston, Fort Lauderdale and New York JFK, and has been pleased with early returns, Geraghty said.
“It removes transactions from the equation so crew members aren’t doing things that don’t add value,” she said. “It enables them to do what they do best, which is serve the customer and it’s a better experience for our customers.”
Geraghty said about 95 percent of customers opt-in for boarding, and said the technology is roughly 97 percent effective.
“If you’re wondering what the 3 percent is, apparently, when you’re 75 years or older, your face begins to degrade over time and it doesn’t match your passport on file, so we have that to look forward to,” she said.