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Vinay’s Take: Why JetBlue CEO Dave Barger Was Forced Out

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Vinay’s Take: Why JetBlue CEO Dave Barger Was Forced Out

Vinay’s Take: Why JetBlue CEO Dave Barger Was Forced Out
September 24
07:40 2014

 

MIAMI — JetBlue CEO David Barger is stepping down next February, marking the end of 7.5 years at the helm of JetBlue. He will be succeeded by current president Robin Hayes, also a longtime veteran at the company. The move comes after weeks of speculation, especially on Wall Street, about Barger’s eventual departure. He has overseen a nearly 20% decline in JetBlue’s share price since 2007, and while JetBlue tried to frame his departure as voluntary, it is clear that he was forced out. Why? Because he didn’t give customers what they want. 

David Barger (Credits: Arbitrarily0)

David Barger (Credits: Arbitrarily0)

Alright, let’s pause for a second so that you all can re-arrange your faces from the shocked expression they just adopted. I’m perfectly aware of JetBlue’s (many) merits; ranging from extra legroom and free first checked bags, to snacks, and friendly employees. They are just a few of the many reasons why I love flying JetBlue. And I would imagine that’s why the average passenger enjoys flying JetBlue too. But loving JetBlue’s customer experience isn’t the same as getting what you want.

A better way to define what customers want is what they are willing to pay for. And that’s where JetBlue’s “customer friendliness” falls apart. Airline passengers around the world (including in the US) have proven time and time again that they choose low base fares, schedule, and network above all else. There is a certain caliber of passenger willing to pay for a true first class product, but that passenger also tends to require the worldwide reach of America’s legacy carriers. So for the class of passenger that JetBlue can reach; those are the three factors that matter. That, at the end of the day, is what airline customers pay for. And the proof is in the numbers. JetBlue’s “great” economy class product doesn’t generate enough of a revenue premium to pay for the opportunity cost of fewer seats and far less checked baggage revenue. For far too long, JetBlue has been operating a premium economy product and charging a normal economy class fare for it.

When I make this point, people like to respond by saying JetBlue is making “enough” profits, and therefore it shouldn’t make these moves to enhance profitability. They also claim that JetBlue will lose a competitive advantage if it adds more seats and checked bag fees. I’ll tackle the second one first.

For JetBlue, adding more seats to its A320s need not be an anti-competitive task. With good (i.e. not United or Evolve) slimline seats, a more powerful booking engine, and compression of seat pitch at the rear of the aircraft, JetBlue could reasonably maintain 30-31 inches of seat pitch (still better than or as good as competitors) with the Even More section for passengers that want lots of extra legroom, and importantly, a middle tier with 34 inches of seat pitch sold at a higher fare (this is where the booking engine with a seat map or clear description comes into play) that frequent flyers and higher value business customers can fly in. This would lower costs, and squeeze more passengers into the plane, while still allowing those that are willing to pay for it, the ability to get those four extra inches of legroom. Competitively, the book-away would be minimal (it’s not as if other airlines have millions of empty seats floating around the system), and would be more than offset by the additional revenue from 8-12 new seats.

In terms of baggage fees, assuming JetBlue starts by marketing them properly (as part of a discounted fare bundle), they will boost revenue by hundreds of millions of dollars. And in terms of book away, the only carrier that a customer can book away to is Southwest. Assuming JetBlue exempts international flying, how exactly will a customer be able to book away to Southwest. Boston and New York have limited Southwest presence and little scope for expansion by any other airline, as does Long Beach. About 50% of Fort Lauderdale (by ASMs) will be Latin America, and San Juan is out of Southwest’s wheelhouse (and lots of Latin America as well). So you’re left with Orlando (which is unprofitable anyway) and about half of Fort Lauderdale. How is JetBlue going to lose substantial amounts of business?

And let’s turn to the idea of JetBlue making “enough” of a profit. Well frankly, no it’s not, especially not when judged against its peers, or against the intrinsic profit potential of the business. And that again comes back to JetBlue not giving customers what they want. A business is most profitable when it is giving customers what they want. And airline customers (in aggregate) want low base fares (price), network, and schedule. Here’s to hoping that Robin Hayes gives them what they want.

 

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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