JetBlue tries to preserve its status as ‘innovator’ in an ancillary-crazed era

JetBlue’s first flight from JFK to Fort Lauderdale 13 years ago made its debut during a drastically different era in the airline business before the likes of terrorist attacks, spiking oil prices and the SARS and H1N1 pandemics wiped out airline profitability for the better part of the last decade. The carrier whose brand was synonymous with bringing humanity back to air travel now finds itself all grown up, and faces the challenge of preserving its roots as a renegade innovator while producing acceptable returns for its shareholders.

The carrier’s novel seatback television developed by subsidiary LiveTV was an instant hit with passengers and left competitors scratching their heads over how to craft a competitive response to JetBlue’s onboard product and refreshing approach to customer service. United and Delta’s creation of their failed low-cost subsidiaries Ted and Song, respectively, were borne from their desire to prevent passengers from jumping to JetBlue. Although Song has faded into history, many of the favourable customer service attributes Delta is known for today – hip boarding music, seatback television and a focus on cabin interiors – are directly traceable to Song, which was a copycat of JetBlue.

Over the years JetBlue has evolved from a pure low-cost carrier into a hybrid airline that offers medium frills and targets both leisure and business customers alike. The hybrid approach is evident in its product offering – charging for a second checked bag, yet waiving that charge for its top-level Mosaic members of the TrueBlue loyalty programme. JetBlue has never said how much total revenue it garners from charging for a second bag, but the carrier has doubled the fee to $40 since initiating the charge in 2008 in the midst of record high fuel prices.

Now that JetBlue is well into its second decade of business, the carrier has to devote a significant amount of attention to producing consistent financial metrics including generating acceptable amounts of free cash flow and hitting its return on invested capital (ROIC) targets.

In a short period of time ancillary revenues have become a crucial element in every airline’s quest to deliver on its financial promises to investors, and JetBlue is no different from its low-cost counterparts and legacy airlines in pulling ancillary levers to shore up revenues and returns. During the fourth quarter of 2012 JetBlue’s ancillary revenue per passenger was roughly $20, and its “Even More” upsell that features more legroom, expedited security screening and early boarding netted the carrier $150 million in revenue for the full year, a $30 million increase from the year prior. “Ancillary revenue continues to be an ongoing focus, helping drive 2012 record revenue performance,” says JetBlue CFO Mark Powers.

JetBlue does not break out specific ancillary revenue products in its financial reports, but for the full-year 2012 its “other” revenues grew 2% to $435 million, which accounted for about 9% of the $4.5 billion in top-line revenues the carrier posted for year. JetBlue grew its total operating revenues by 11.5% during 2012.

The rise in importance of ancillary revenues creates a unique challenge for JetBlue as it charts a course to remain relevant as an innovator and deliver promised financial results to investors. Many of the product innovations JetBlue was renown for in its beginnings are now commonplace in the passenger experience including seatback television and gourmet snacks. The difference now is many of those offerings are drivers for carriers in boosting their ancillary revenues. JetBlue has joined the fold in charging for premium movie content amidst its free TV offerings and introducing buy onboard food options, neither of which is imaginative in the new ancillary era of the airline business.

Recently JetBlue CEO Dave Barger was queried about whether the carrier could still be considered an innovator, and if the airline was contemplating anything new or different that could once again shake up the industry. While Barger assured JetBlue was still every bit the innovator it was during its youth, he did remark the carrier has been somewhat of a follower in the industry with respect to the introduction of inflight Wi-Fi. The carrier plans to start testing the ViaSat-LiveTV- developed Ka-band satellite offering on its aircraft during the first quarter of 2013.

JetBlue dabbled with a connectivity solution a couple of years ago through an air-to-ground service dubbed Kiteline that offered basic email and messaging. But the testing never went beyond a single aircraft, and in the interim low-fare and full-service carriers forged ahead of JetBlue in equipping either all or a significant portion of their fleets with in-flight connectivity, largely from Gogo.

LiveTV is the Ka connectivity provider for a portion of United’s fleet; Panasonic Avionics is providing Ku on a sizeable portion as well. Delta already offers Wi-Fi on its US domestic aircraft and aims to begin offering connectivity on international flights beginning this year. Even low-fare pioneer Southwest has recognised the value passengers place on Wi-Fi, and recently reached a milestone with partner Row 44 in installing Ku-band-supported in-flight connectivity on its 400th aircraft.

As other airlines worked furiously to craft their connectivity strategies JetBlue lagged behind, countering it was waiting for the optimal system to deliver to its customers. The carrier believes Ka-band will help it develop a superior product compared to Ku-band supported connectivity. While Barger admits the favourable speeds of the Ka solution have yet to be tested, he assures JetBlue’s Wi-Fi product will be “incredibly innovative, and I think it will be disruptive to the cabin experience”.

LiveTV, however, does believe that Ku-band satellite connectivity is the “right answer” on transatlantic routes as capacity over the North Atlantic will increase with the introduction of the Intelsat Epic satellite platform in 2015. Presently, there is no Ka-band satellite offering available across the Atlantic as LiveTV structures its offering to use regional Ka capacity available in the US, Europe and the Middle East.

Part of LiveTV’s business strategy going forward is adding global airlines to its primarily North American-centric customer base. The company scored a major win from Irish carrier Aer Lingus in late 2012 to equip the carrier’s short-haul fleet with Ka-band connectivity, and has partnered with regional satellite operator Yahstat to target customers in the middle east.

The push by LiveTV to expand its customer roster should appease JetBlue’s investors, who have a long-standing curiosity about the value the IFE supplier brings to the carrier. Since JetBlue’s purchase of LiveTV more than a decade ago the carrier has fielded questions about a potential sell-off of the company. The airline has admitted no compelling reason exists to own LiveTV, but has recently declared it would hold off on a sale until a victor emerges in the battle between Ka and Ku-band technology.

In some ways JetBlue’s innovator status could be tied to the outcome of that battle since it has touted Ka’s supremacy over the cost and lack of scalability of Ku-band. In explaining its decision to sit out of the Wi-Fi race during the last couple of years, JetBlue has concluded it has a “second mover advantage” in adopting Ka-band technology. Only time will tell if JetBlue’s gamble pays off, but its CEO Barger assures that “you should absolutely think about us as certainly being an innovator and a disruptor in this industry”.