Saturday, May 16, 2015

JetBlue could still ruin everything that made JetBlue great

The old JetBlue could soon be a thing of the past.

The boutique airline has been under intense pressure to match trends at the low-cost end of the market. The first big change came last year, when the carrier announced that it would add checked bag fees in 2016.

It will also pack passengers more tightly into its planes.

JetBlue had in the past avoided these moves, in an effort to preserve a brand that once redefined budget flying but that in recent years has disappointed investors looking at the success of "no frills" operations like that of Spirit Airlines.
 
The changes were preceded by a management shakeup. Last September CEO David Barger stepped down amid widespread media speculation that his decision was provoked by the airline's inability to maximize profits by minimizing the passenger experience.

Wall Street analysts had accused JetBlue of underperforming and blamed Barger, suggesting that he was preoccupied with maintaining the brand values that made the carrier a big success with travelers in the 2000s.
 
Barger was replaced as CEO by Robin Hayes, formerly JetBlue's president and a veteran of British Airways.

The stock has surged. The company reported boffo first-quarter earnings and is starting to see its Mint first-class offering on select routes bring in the money – and more importantly, change the impression that the airline offers a one-size-fits-all approach to travel. Folks in the tech sector evidently adore Mint and have voted in favor of the change with their wallets.

Ultimately, the arrival of checked-bag fees, along with charging for Wi-Fi and adding seats to aircraft, is expected to increase JetBlue's earnings per share by over 50 cents, according to Cowan and Co. analyst Helane Becker (as reported by The Street).

The carrier is also increasing the number of seats on its Airbus A320s to 165 seats from 150. That means less legroom.

But the good financial news doesn't mean JetBlue has ended its crisis.

The carrier's challenge is significant. The company is caught up in a familiar dynamic for the US airline industry. It innovated when it arrived on the scene, tapping an appetite for a low-cost boutique flying experience — something akin to boutique hotels, which could be simultaneously less expensive and more stylish than established luxury lodging options.
 
There's plenty of opportunity to innovate in the airline business — as JetBlue, Southwest, and more recently and with a certain aggressive disregard for passenger comfort, Spirit have demonstrated. But the innovation tends to run its course, and then the upstart finds itself playing the same game as everyone else: competing on price. Or offering more costly, and more profitable, options like Mint.

These days, there are two ways to go in the airline industry when you compete on price: You cut economy class to the bone as far as the amenities go, charging for everything and packing in seats; or you court first- and business-class travelers and their ability to pay steeper fares.

But generally speaking, trying to stake out a middle ground is tricky. And that's exactly where JetBlue has found itself.

The company has painted itself into a corner: The brand depends on a positive passenger experience, but Wall Street has pushed the company to undermine the brand.

It doesn't make a lot of sense for JetBlue to effectively make a 180-degree change to the way it does business, vaporizing pretty much all of its brand equity in the process. Nor does it make sense for management to steadfastly stick to the way it has been running the company. 

We're now seeing the initial stages of a transformation of the old JetBlue into a new JetBlue.

The airline is going to need to innovate at a level not seen since the company was created to get through this challenging transition. So far in 2015, it appears to be moving in the right direction.

And because the carrier has put customers first for more than a decade, JetBlue has brand equity to burn. It obviously can't burn all of it, though. The trick will be figuring out how much like the rest of airline industry JetBlue can become without ceasing to be JetBlue.

(Matthew DeBord - Business Insider)


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