JetBlue Mint: Disrupting the Equilibrium for a Low Cost Carrier
JetBlue is the leisure traveler’s airline, offering leather seats and DirectTV at a discount to legacy airlines. But how will their customers react to an expensive premium cabin? Is JetBlue still a low cost carrier?
After I board my JetBlue flight from JFK to SFO, my flight attendant, Angel, asks, “Have you flown Mint before?” “No, I haven’t.” “Well, let me walk you through all of the features of your seat…and here is your complementary birch box. And please let me know what three items from the menu you would like to eat.”
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?
Business Model (Pre-Mint)
For years, JetBlue has been the equalitarian airline for the leisure traveler. As their value proposition said, “Our mission is to bring humanity back to air travel… We do this by offering what we believe to be the best domestic coach product…”[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.
Operating Model (Pre-Mint)
JetBlue 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.
Post-Mint
However, 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] Mint 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:
A321 With JetBlue Mint (in green)
A321 Without JetBlue Mint
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.
Impact
With 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.
JetBlue looks nothing like they did 5 years ago…but, it’s 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]
Can they sustain it?
The 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’s.
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.
References:
1 JetBlue Press Release: http://investor.jetblue.com/investor-relations/press-releases.aspx.
2 JetBlue 10-K 2009: http://investor.jetblue.com/~/media/Files/J/Jetblue-IR/Annual%20Reports/jetblue-2009-annual-report.pdf.
3 JetBlue “Our Planes”: http://www.jetblue.com/travel/planes/.
4 Flying on JetBlue Mint: http://www.jetblue.com/flying-on-jetblue/mint/.
5 Yahoo Finance: http://finance.yahoo.com/echarts?s=JBLU+Interactive#{“range”:”2y”,”allowChartStacking”:true}.
6 “JetBlue is Making Mint on its Premium Service”: http://www.fool.com/investing/general/2015/04/20/jetblue-is-making-a-mint-on-its-premium-service.aspx.
7 JetBlue Q3 2015 results: http://investor.jetblue.com/investor-relations/financial-information/quarterly-results/27-10-2015.aspx.
Ah…airlines. I was actually not aware of the transformation taking place at JetBlue, so thank you for posting. I am not surprised that Wall Street has rewarded these decisions; investors love new sources of revenue and higher margins. However, this strikes me as a very serious change in the operating model and a significant long-term risk. It reminds me of the Starbucks case we did in Marketing. We learned that businesses have to constantly ask which customer they want to serve as their business evolves. I think that most customers willing to pay more for their flight experience are professionals, who may not be well-served by JetBlue’s existing routes. I do recognize, however, the structural disadvantage JetBlue is trying to close compared to its peers. It will be interesting to see if JetBlue can tilt its focus without leaving its original customer base behind.
This is a super interesting development to study and a great example of how a seemingly small operational choice could potentially be seen as a radical strategic change. I am inclined to agree with your conclusion that, where JetBlue has Mint, it’s basically now a traditional airline, since single-class planes are one of the main distinguishing elements of LCCs.
The facts suggest JetBlue is adding this to be competitive on routes with a lot of premium passengers (which I would have actually guessed is a pretty high percentage of its route-map). If it maintains the single-class plane structure in other areas of its operations, is it almost two separate airlines? How much operational complexity and overhead inefficiencies are they signing up for with a choice like this? Do they further bifurcate their two concepts, perhaps going full Southwest on some routes and making Mint the luxury equal of a United on a cross-country flight?
Great post, Sarah! Thanks for sharing details about JetBlue Mint — I wasn’t even aware such a program was underway!
I’m fascinated by the company’s decision to launch Mint. I’m sure they had many other strategic levers they could pull to bring in additional revenue (e.g., more food options for purchase, other extra perks), but it seems they felt their customer base would want to take advantage of a premium offering. I actually like this concept — just as economy customers of Delta, United, etc. enjoy flying JetBlue for lower prices and a better service experience, I’d imagine the premium customers of these airlines will also be happy to learn about Mint. JetBlue has taken share from legacy airlines for its fantastic service model and I’m sure premium customers of other airlines will want to try JetBlue out for the same reason. I wonder if they’ve focused on launching Mint on certain routes to minimize the subsequent chaos that can occur from having a varied fleet in service? Either way, it feels to be a step in the right direction and I’m curious to see how it plays out for the company.
Fascinating post. I was not aware of Mint before and will definitely look out for these differentiated seats in my next Jetblue flight.
It’s interesting that through Mint, Jetblue has been able to force the legacy airlines to lower their prices on competitive routes by 30-40%, yet still manage to increase their own revenue. Given their legacy as a LCC and their new entrance to the premium seating airline space, I wonder how much they are pricing their Mint seats on these routes relative to competition and if it has made an impact in business travelers’ mind share. If Jetblue intends on entering into this business market, it will be interesting to see how their future branding efforts (ads, social media, etc) cater toward this new market to increase their market share. In the future, I’d love to see how they manage / innovate on their operational model to cater to this change in business model.
Hi Sarah,
Excellent post! I have always been impressed by how JetBlue could provide such an excellent service at a low cost.
It is very interesting to see how they have been able to build such a big brand equity by targeting price sensitive customers who tend to be less brand loyal.
The question I have is whether the introduction of the Mint program was an opportunity they found out in the development of their business or it was something that they wanted to do since the origin of the airline. Whether it is one case or the other, the introduction of JetBlue Mint makes me think that the company wants to enter the long haul market in the near future. Maybe flying to other continents by themselves or by becoming part of one of the major global alliances.
This is awesome post Sarah! Talking about inflight customer experience, based on my experience, these days it is the key differentiating factor among various airlines and I have come across lots of customers who choose an airline to fly with just for the inflight experience (even though fares are slightly on the higher side). It is completely visible that JetBlue is changing itself to suit new needs of travelers and to sustain itself in this low margin industry.
It would be interesting to see how JetBlue positions itself once it starts entering into the business market. Matching frequent flyer miles for each loyal customer on other airlines will be a challenge for JetBlue, so it will be interesting to see what strategy JetBlue will use to convert super loyal customers on other airlines and make them fly on JetBlue for business purposes.