{"id":3067,"date":"2015-12-08T15:53:44","date_gmt":"2015-12-08T20:53:44","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/jetblue-mint-disrupting-the-equilibrium-for-a-low-cost-carrier\/"},"modified":"2015-12-09T16:41:57","modified_gmt":"2015-12-09T21:41:57","slug":"jetblue-mint-disrupting-the-equilibrium-for-a-low-cost-carrier","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/jetblue-mint-disrupting-the-equilibrium-for-a-low-cost-carrier\/","title":{"rendered":"JetBlue Mint: Disrupting the Equilibrium for a Low Cost Carrier"},"content":{"rendered":"

\"\"<\/a><\/p>\n

After I board my JetBlue flight from JFK to SFO, my flight attendant, Angel, asks, \u201cHave you flown Mint before?\u201d \u201cNo, I haven\u2019t.\u201d \u201cWell, let me walk you through all of the features of your seat\u2026and here is your complementary birch box. And please let me know what three items from the menu you would like to eat.\u201d<\/p>\n

In June 2014, JetBlue piloted their first\/business class cabin, JetBlue Mint, between JFK and LAX.[1] Since then, they have expanded this service to all transcontinental flights, and some Caribbean locations. While many are thrilled that a less expensive premium flight experience is here, others are left wondering, why is JetBlue deviating from its bread and butter, the one-cabin aircraft?<\/p>\n

Business Model (Pre-Mint)<\/strong>
\nFor years, JetBlue has been the equalitarian airline for the leisure traveler. As their value proposition said, \u201cOur mission is to bring humanity back to air travel… We do this by offering what we believe to be the best domestic coach product…\u201d[2] Their limited network flies mostly from large metropolises to tropical or vacation destinations (e.g., New York and Los Angeles to Puerto Rico and Miami). They were the first airline to install DirectTV in each seat, making it the airline of choice for families with children. They offer more legroom, leather seats, and only one cabin, creating an equal and superior coach experience for each passenger. Not to mention, they also charge lower fares than most legacy carriers (Delta, American, United), to meet the needs of their elastic target demographic.<\/p>\n

Operating Model (Pre-Mint)<\/strong>
\nJetBlue was able to deliver on this value proposition by using a low cost carrier operating model. In airlines, low cost carriers (LCCs) are able reduce prices for customers by simplifying their own operations and limiting auxiliary services. One of the main methods for reducing costs is by flying fewer types of aircraft in their network. For example, JetBlue flies 3 aircraft types.[3] With this simplification, LCCs eliminate the fleeting process (deciding which plane flies on which market), reducing overhead and potential day-off operating complications, like switching out delayed aircraft. Flying one type of plane also enables all pilots and flight attendants to service any flight, radically simplifying the staffing process. They even save on revenue management overhead by offering a limited number of pricing tiers and prices changes. Jetblue transfers these cost savings to customers through reduced pricing, marrying their operating model with their business model.<\/p>\n

Post-Mint<\/strong>
\nHowever, in 2014, JetBlue is making changes that upset the equilibrium between business and operating model. In fact, they are changing both. JetBlue Mint is a premium class seat offering everything from faster check-in to tapas-style meals.[4]\u00a0Mint creates a hierarchy in customer experience that contradicts their value proposition. Mint customers board the plane first, have more comfortable seats, and get their luggage first. Mint also complicates their operations. Not all aircraft are configured with a Mint cabin:<\/p>\n

\"A321<\/a><\/p>\n

A321 With JetBlue Mint (in green)<\/em><\/p>\n

\"A321<\/a><\/p>\n

A321 Without JetBlue Mint<\/em><\/p>\n

Now, if a flight with a Mint cabin gets delayed, another A321 cannot simply replace that plane, both because customers have paid for the Mint experience, and a different number of seats are in the other configuration. This could lead to longer delays, and (already) more overhead required to manage a more complicated fleet.<\/p>\n

Impact<\/strong>
\nWith the introduction of Mint, JetBlue is looking more like a legacy carrier with each passing day. In fact, Mint is not the only new source of revenue. JetBlue now charges for checked luggage, priority boarding, and extra legroom.<\/p>\n

JetBlue looks nothing like they did 5 years ago\u2026but, it\u2019s working. JetBlue stock price has almost tripled since the announcement of Mint.[5] They have forced legacy airlines to lower their prices on competitive routes by 30-40%, and their revenue on Mint routes is up significantly (17% on JFK-LAX).[6] Financially, revenues and margins are up 10.9% and 10.5%, respectively, YTD. Although, I would caveat these numbers with lower fuel prices (down 29%) and increase in available seat miles (up 9.2%).[7]<\/p>\n

Can they sustain it?<\/strong>
\nThe question remains, how can a business that was so well aligned, and then so critically disrupted, see such a dramatic improvement from this change? My hunch is, as much as possible in airlines, JetBlue is still a winner in the long run. Beyond being a low cost carrier, JetBlue has incredible brand equity. Leisure customers choose to fly JetBlue, both for the low price, and the experience. JetBlue is capitalizing on that brand equity with differentiated products, in the same way Target creates higher end brands to compete with both Walmart and Nordstrom\u2019s.<\/p>\n

The critical path for JetBlue will require them to adapt their operations to build in dynamic fleeting and pricing, while still maintaining a low cost process to pass along savings to customers. JetBlue should also try to develop a loyal business traveler following, because they now have the product to offer those customers (although not all of the markets). I would look out for JetBlue in the future to expand their network and potentially surpass the big 3.<\/p>\n

References:
\n1 JetBlue Press Release: http:\/\/investor.jetblue.com\/investor-relations\/press-releases.aspx.
\n2 JetBlue 10-K 2009: http:\/\/investor.jetblue.com\/~\/media\/Files\/J\/Jetblue-IR\/Annual%20Reports\/jetblue-2009-annual-report.pdf.
\n3 JetBlue \u201cOur Planes\u201d: http:\/\/www.jetblue.com\/travel\/planes\/.
\n4 Flying on JetBlue Mint: http:\/\/www.jetblue.com\/flying-on-jetblue\/mint\/.
\n5 Yahoo Finance: http:\/\/finance.yahoo.com\/echarts?s=JBLU+Interactive#{“range”:”2y”,”allowChartStacking”:true}.
\n6 \u201cJetBlue is Making Mint on its Premium Service\u201d: http:\/\/www.fool.com\/investing\/general\/2015\/04\/20\/jetblue-is-making-a-mint-on-its-premium-service.aspx.
\n7 JetBlue Q3 2015 results: http:\/\/investor.jetblue.com\/investor-relations\/financial-information\/quarterly-results\/27-10-2015.aspx.<\/p>\n","protected":false},"excerpt":{"rendered":"

JetBlue is the leisure traveler\u2019s airline, offering leather seats and DirectTV at a discount to legacy airlines. But how will their customers react to an expensive premium cabin? 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