Monday, August 05, 2013

Discount Carrier JetBlue Goes Upmarket: New Premium Class on Transcontinental Flights Will Have Lie-Flat Beds, Suites

August 4, 2013, 4:08 p.m. ET
The Wall Street Journal

JetBlue Airways Corp.'s plans to add premium seats on some of its planes marks a major shift for the discount carrier, which aims to stay relevant against resurgent full-service behemoths and new ultra low-cost carriers.

On Monday JetBlue will provide details about the new seats, which will be located in the front of the plane, and convert into lie-flat beds. Some are walled off from the aisle by sliding doors, in what JetBlue calls "suites." Passengers opting for premium seats will receive hot meals and free alcoholic drinks.

JetBlue hopes to attract leisure travelers with premium seats.

The new seats will become available next spring, initially on flights to Los Angeles and San Francisco from New York, the two busiest and most-lucrative routes in the U.S. and ones where JetBlue's largest competitors already offer rarefied cabin service.

The move upmarket is a departure for the self-proclaimed "egalitarian" airline, launched in 2000, which won early success with a cheap-chic approach offering all-coach cabins, low fares and free DirecTV at every seat back.

"It's a big change for us culturally," said Scott Laurence, JetBlue's vice president of network planning.

The new seats are an admission that JetBlue has been missing out on the most profitable part of the market—premium seats—although it said it holds its own in revenue on a coach-class comparison with larger rivals.

Competitors routinely charge $4,000 or more for a round-trip ticket on the New York routes to L.A. and San Francisco in their first- and business-class cabins, heavily used by wealthy jet-setters from the banking, entertainment and tech industries. JetBlue's lowest coach fare on the two routes currently is about $665 to $700 round-trip.

JetBlue thinks it can attract small-business owners and leisure travelers with premium seats that are priced somewhere in between.

Executives wouldn't say what they'll charge, except that the price will be at a "significant reduction" from the competition. If it succeeds, JetBlue could expand the strategy to other routes, they said.

The move reflects JetBlue's need to adjust to radical changes in the industry that have made it a financial laggard, even though it routinely wins passenger awards and has a strong brand identity. Big airlines have lowered their costs through bankruptcies, merged and begun reinvesting in their products, targeting elite fliers but also shoring up service in their coach cabins. A new generation of super-discounters like Spirit Airlines Inc. has emerged, going after passengers who don't care about perks and want the lowest possible fares. JetBlue doesn't fall into either category.

"With returns improving at both the upper and lower end of the industry, the burden remains on JetBlue to prove it can achieve similar financial results in a different way," Barclays airline analyst David Fintzen said in a recent note.

The New York-based airline has recovered from big stumbles that caused it to lose money in the middle of the last decade. After cutting back its breakneck expansion and changing CEOs, it has been profitable since 2009—but only marginally so. Its 2012 net income of $128 million on nearly $5 billion of revenue was only slightly more than the $104 million it earned in 2003—when revenue was just under $1 billion.

JetBlue last week reported second-quarter profit that missed estimates, with a decline in operating margin that J.P. Morgan airline analyst Jamie Baker said was the worst of any U.S. airline he follows. JetBlue's market capitalization of $1.9 billion is smaller than most U.S. rivals—including Spirit, which has a market value of $2.6 billion with less than a third as many planes. JetBlue's stock, which surged to $45 a share after its 2002 initial public offering, finished at $6.50 on the Nasdaq Stock Market on Friday.

JetBlue has tweaked its model over the years, in many ways becoming more like a legacy carrier. It added a frequent-flier plan, began overseas flights to the Caribbean and northern Latin America, added rows of coach seats with more legroom that are sold for higher fares and instituted a fee for the second checked bag.

Discussing the new premium seats, Robin Hayes, an executive vice president at JetBlue said, some passengers want "a better experience than the coach experience when flying across the country. It's not a market JetBlue serves today."

Based on seat capacity scheduled in August, JetBlue has 14% of the seats from New York's Kennedy Airport to Los Angeles, fourth behind AMR Corp.'s American Airlines, Delta Air Lines Inc., and United Continental Holdings Inc. From JFK to San Francisco, JetBlue ranks fifth in capacity, according to market-research firm Innovata LLC.

JetBlue intends to start the experiment on some of 30 new Airbus A321 planes entering its fleet this fall. That model is a larger version of the 150-seat A320 plane that is the mainstay of its 186-aircraft fleet.

Eleven of the new planes will be outfitted with the luxury cabin, with 16 seats in the front. Twelve of those 16 seats will be in the traditional two-by-two layout. The other four will be alone, shielded by the sliding privacy doors. The seats will recline into flat beds measuring 6'8", have a massage feature and can be adjusted for firmness. Unlike JetBlue's current passengers, these customers will receive meals and toiletry kits and their DirecTV screens will be a larger 15", have 100 channels and touch screens.

Mr. Hayes said that JetBlue isn't abandoning its "core" audience: leisure fliers in coach. The company said it also plans to install new seats, faster Wi-Fi, larger TV screens and new carpeting in coach cabins on most of its fleet.