Airline industry analysts disagree about whether JetBlue Airways' decision to offer lie-flat seats and mini-suites on transcontinental routes is a good move.
"I think it's a brilliant move," says Michael Boyd, chairman of aviation consulting firm Boyd Group International. JetBlue "pretty much owns New York."
But Savanthi Syth, an analyst in New York with Raymond James & Associates, is not so sure.
"I'm a little skeptical [about] the returns," says Syth, adding that JetBlue may struggle to generate enough revenue to make the seats economically feasible.
JetBlue, which has had just one class of service since launching in February 2000, will begin taking delivery of Airbus A321s with premium cabins in 2014, and expects to deploy those aircraft between New York's John F. Kennedy International Airport (JFK) and Los Angeles and San Francisco in the second quarter of 2014.
The premium cabins will include 16 lie-flat seats, four of them enclosed in mini suites, plus 143 seats in the main cabin, JetBlue announced on 5 August.
The goal: to attract more business travellers on those high-revenue routes by offering a product that is as good as, or better than, the competition.
The move comes amid a heated battle between JetBlue, Virgin America, United Airlines, Delta Air Lines and American Airlines for business traffic on the routes.
United offers its "p.s." premium service on specially-configured Boeing 757-200s between JFK and California, while Delta has a "BusinessElite" class on Boeing 757s and 767s. American flies three-class 767s and plans to deploy new A321s on the routes, and Virgin America offers leather first-class seats.
JetBlue says its mini suites will "reinvent" the transcontinental flying experience, according to a 4 August internal employee memo obtained by Flightglobal.
The memo adds that JetBlue's revenue per available seat mile (RASM) has trailed competitors on the JFK-Los Angeles and JFK-San Francisco routes because it lacks a premium product.
Pay to play
Analysts note that lie-flat seats could further inflate JetBlue's cost per available seat mile (CASM), which was 11.34 cents in 2012.
That is less than competing legacy carriers, but more than Virgin America's 10.88 cent CASM in 2012, according to securities filings.
In addition, JetBlue's CASM excluding fuel and profit sharing could increase 2.5% to 4.5% next year due partly due to higher than expected maintenance on the engines of its Embraer 190 aircraft, according to a recent securities filing.
Maintenance expenses could jump 20% in 2013 above 2012, the airline has said.
As JetBlue's costs have risen, its profits have slowed and it has increasingly sought to appeal to business travellers.
The carrier's 2012 second quarter operating profit was $102 million, down 22% from the same period last year - the third consecutive quarter of declining profits.
The results came as most other US carriers reported profit gains.
Financial factors prompted JP Morgan to downgrade JetBlue to underweight from overweight on 17 July. The firm noted that JetBlue's growth prospects and competitive advantage have eroded due to industry consolidation and other airlines' bankruptcy restructurings.
JPMorgan downgraded Southwest Airlines on the same day for the same reasons.
Testing the waters
Analysts note JetBlue will initially install premium cabins on only 11 aircraft, minimising the CASM impact.
"I see it as a trial," says Bob McAdoo, an aerospace analyst with Imperial Capital LLC. "[They] will try it and see if it generates any business."
JetBlue will receive its first four A321s this year, but those aircraft will have 190 economy seats, and no premium cabin.
In 2014 JetBlue expects to receive its first nine A321s with premium cabins. The aircraft will have 159 total seats, including 143 economy seats and 16 lie-flat seats.
That is just 0.5% of the 27,791 seats JetBlue expects to have at the end of 2014, according to fleet plan details in its second quarter filing with the US Securities and Exchange Commission.
That is a small portion of JetBlue's total seats, but the project is not risk free, say analysts.
Syth is unconvinced JetBlue can generate enough revenue from premium seats to offset the reduction in economy seats.
The premium cabin-equipped A321s will have 31 fewer seats than all-economy A321s, notes Syth. And the 16 lie-flat seats on each aircraft will need to generate at least as much revenue as the 47 seats they would otherwise displace, says Syth.
"[JetBlue] might capture more passengers, but I'm not sure [they] will replace the opportunity costs for the space they are giving up," Syth says.
Still, she understands JetBlue's reasoning.
"As they try to capture premium revenue passengers, not having a first-class product hurts," she says.
Will flyers switch allegiance?
Boyd thinks JetBlue's plan will work.
He notes the airline has a loyal following of business customers and has become the dominant carrier on a host of business-heavy routes from JFK, like to Rochester, New York.
"[JetBlue] has enough brand identity that they can fill ... lie-flat seats for $300 more," he says. "Revenue will go up more than enough."
Boyd adds that low-cost carriers AirTran Airways and Virgin America have had success with premium products, and he sees JetBlue's strategy as a natural competitive response, not a wholesale market shakeup.
"The main competitors already have lie flat [seats], or plan to" add them, he says. "I don't think its a revolutionary shot across the bow of American or United or Delta."
JetBlue executives have avoided discussing prices, but have said the premium seats will cost less than competitors' first-class seats.
The airline also says it will not provide lie-flat seats free through upgrades.
That's how most flyers on American, United and Delta get to sit up front, says McAdoo.
He estimates only 3% to 4% of Delta's, United's and American's passengers on the New York to Los Angeles and San Francisco routes pay premium prices.
American, which flies the routes with three-class 767s, takes in only $10 more per passenger than low-cost carrier Virgin America, McAdoo says.
"The majority of people [who] ride up front don't pay big fares," says McAdoo.
Syth is not sure flyers will give up their "status" on other airlines - and accompanying free upgrades - to switch allegiance to JetBlue.
"My guess is not," she says. "Route warriors will continue to fly those [other] airlines."
Wi-fi: key to competing
One route warrior is McAdoo, who travels about once monthly between New York and Los Angeles for work.
He says lack of inflight wi-fi, not lack of lie-flat seats, is JetBlue's biggest competitive disadvantage.
On routes between JFK and Los Angeles and San Francisco, Virgin America, American, Delta and United all offer wi-fi access.
JetBlue's free inflight television is great for one- or two-hour flights, McAdoo says, but business travellers on six-hour flights want to be able to check e-mail and do other work.
"You are absolutely isolated for six hours" on JetBlue, says McAdoo. "You can't get any work done."
JetBlue has been late to the wi-fi party, but has recently made progress.
It began testing its internet, called "Fly-fi", on one aircraft this year and applied in early July with the US Federal Aviation Administration for a supplemental type certificate to operate the system on revenue flights.
ViaSat is the Ka-band connectivity provider.
JetBlue expects to operate three A320s later this year with wi-fi, and will then install the system on its A320s, followed by its E-190s.
The airline has said a base level of Fly-fi will be free, but customers who want more bandwidth will have to pay.