How Does JetBlue Make its Money?

By Markets Fool.com

Last year, JetBlue Airways (NASDAQ: JBLU) posted a record $401 million profit; $232 million when excluding the sale of its LiveTV unit. While most of its income currently comes from fares, other areas have been driving JetBlue's profits as well. And in the coming years, revenue from other flight products could play an even greater role at JetBlue.

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Pricing power
Like other commercial passenger airlines, JetBlue earns its profits by providing scheduled air travel service. The airline sells seats on board its scheduled flights at prices that vary by a number of factors, including demand, remaining seats available, type of seat, and fare flexibility.

source: By JBabinski380 (Jetblue A320 w/ Sharklets) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

While dynamic pricing among airlines could fill a book on its own, there are a few key facts investors should know. Since airlines have large amounts of fixed costs including employee salaries and aircraft rental, airlines can't afford to park their planes for lower demand periods of the week. Instead, airlines vary prices to attract customers to off-peak times and collect more revenue from those flying during high-demand times. Airlines may also adjust prices based on the number of seats remaining figuring lower prices could bring more people to fill otherwise empty seats and higher prices would be able to extract maximum revenue in the case of few remaining seats.

Also central to JetBlue's operations is the concept of fare flexibility. At JetBlue, there are two main components that determine a fare: Refundability and the type of seat/service. As is common practice among airlines, non-refundable tickets cost significantly less than refundable tickets since passengers with non-refundable tickets have to either show up and pay the fare or pay hefty fees to change flights. Refundable tickets, on the other hand, carry the possibility that the customer will cancel leaving the airline with an unsold seat.

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Also critical is the type of seat being purchased. JetBlue, like its competitors, offers a few different classes of seating with their own features and comfort levels. Having a wide array of seat offerings allows the airline to target both budget and high-paying travelers. And certain offerings may be particularly adept at capturing business travelers.

JetBlue travelers
With its flights from the business centers of the Northeast to destinations in Florida and the Caribbean, many people have thought of the airline as a tourist, leisure, and discretionary airline. But former JetBlue CEO David Barger disagrees with this commonly held assessment.

Source: JetBlue.

In an interview in Business Travel News, Barger noted that there are significant business operations in Florida and the Caribbean and that JetBlue goes after business travelers requiring such flights.While Barger noted that many large corporations are already connected with the legacy carriers, JetBlue is positioned to capture business from small and medium-sized businesses in need of travel.

At the same time, JetBlue does provide discretionary airline service and provides this group of travelers with another alternative to legacy carriers. By selling tickets to both business and leisure travelers, JetBlue has accumulated a demographic mix of the two groups.

Price sensitivity
The airline industry has often been considered a commoditized industry, based on the idea that one seat is as good as another. While this is true for some more frugal travelers, airlines industrywide having been attempting to separate themselves from their competitors.

This attempt usually comes through extra features such as personal TVs, Wi-Fi access, and other onboard services. The key for these airlines is to provide enough extra services to differentiate their flight experience from their rivals but not drive up incurred costs.

Source: JetBlue.

Airlines have also tried to separate product offerings within their own flights. For example, economy-class seats with extra legroom are becoming more common, as are suite-style accommodations in business class.

In JetBlue's case, the airline has up to four classes of seating on any one airplane. In order of cost they are:

  • JetBlue Experience: The lowest-priced tier; similar to economy class at other airlines.
  • Even More Space: Similar to JetBlue Experience but with more legroom
  • Transcon Experience: Larger seats with more legroom; similar to business class at other airlines
  • Mint: Suite style accommodations featuring a lie-flat seat and closeable door.

With the Mint Suite offering, JetBlue may be able to attract more business travelers. While the closeable-door feature is unique for domestic flights, the idea of having several classes of seating is not. This multi-class layout helps airlines to target a range of passengers, from the frugal to the free-spending.

Ultra-discount carriers such as Spirit Airlines and Allegiant Airare also worth mentioning in respect to airline pricing. These airlines typically represent the cheapest airfare options and are able to provide them by shrinking legroom and unbundling fares. In airline-speak, unbundling means separating the features of fares, creating a lower base fare while charging extra for things such as carry-on bags, on-board snacks, and printed boarding passes.

Although the ultra-discount carriers are growing, passengers have also developed a love-them-or-hate-them attitude. Some passengers love the low fares that these airlines provide, while others hate them for cramped quarters and extra fees. Extremely frugal travelers may thus be lost to ultra-discount airlines, but business travelers and leisure travelers looking for a better flight experience are likely to remain up for grabs for JetBlue.

Brand and customers
Airlines tend to be afraid of being seen as just a commodity and JetBlue looks toward unique product offerings, certain demographic groups, and its brand name to combat the commoditization threat.

Source: JetBlue.

While many of JetBlue's offerings are similar to those of rivals, the airline also looks for new innovations. For example, the Mint class made JetBlue the first to introduce a closeable door on domestic U.S. flights and early in its history personal TVs and Sirius satellite radio provided entertainment not seen at other carriers at the time.

JetBlue is also targeting its own demographic groups. For leisure customers, JetBlue still offers more legroom than its legacy rivals in its lowest price tier while also having a strong presence on routes from the Northeast to the Caribbean. And as former JetBlue CEO David Barger mentioned, JetBlue still carries strength among small and mid-sized businesses. Here, the airline has made headway by offering more perks to lower level members at major airlines to entice them to make the switch.

By offering more perks to small businesses and giving leisure customers more legroom and entertainment, JetBlue has built a brand name as the anti-legacy carrier. While the brand name's value if difficult to quantify, it definitely has value since it carries with its the unique image of JetBlue to customers thereby preventing commoditization of the airline's seats.

The bottom line
JetBlue has built itself around being the different airline for people who don't want to fly the legacy carriers, which, in turn, helps to protect it from becoming a commoditized product. And although the airline's destinations appear to mainly serve leisure purposes, the airline is also positioned for capturing the business market, and has further entered that competition through the addition of its Mint suites.

Besides following the overall health of passenger demand, investors should keep an eye out for new product offerings from JetBlue that could boost ancillary revenue and prevent commoditization.

The article How Does JetBlue Make its Money? originally appeared on Fool.com.

Alexander MacLennan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.