Sweet Redemption for JetBlue

The recent announcement from JetBlue of a “strategic partnership” with American Airlines, while light on details, is full of opportunity for the New York based carrier. JetBlue now has an important ally in its multi-front battle with Delta. The airline is following in the footsteps of Alaska Airlines which closed a similar deal with American back in February. More importantly, the deal unlocks opportunities to strengthen JetBlue’s network and boost its alliance and partnership strategy. In particular, it provides an opportunity to turbocharge its loyalty program, TrueBlue.

TrueBlue loyalty program

As Alaska and JetBlue have both demonstrated, a well-run, customer-friendly airline creates fiercely loyal clients. Alaska has managed to leverage that loyalty into a lucrative source of revenue and profitability from its loyalty programme Mileage Plan. Alaska’s strategic prioritization of its loyalty program led to more than $1bn in program revenues in 2019 (around 13% of total revenues). While JetBlue does not disclose much information on its loyalty program, according to Joe Dinardi of Stifel, JetBlue generates approximately $500m in loyalty revenue per annum, less than half of Alaska’s. This is despite the fact that JetBlue carries more passengers per year than Alaska.

What are the root causes of this relative underperformance?

Selling of miles

Leaving intra-company sales of miles aside, loyalty program revenues rely primarily on selling miles to credit card companies. Those miles are earned by customers through card spend and paid to the loyalty program at a negotiated rate per mile or point. The math would say Mileage Plan either generates more cardholders, those cardholders spend more and/or the credit card issuer is paying a higher rate for those miles. The truth is probably some combination of all the above.

Potential drivers of the revenue difference

It is hard to argue that the quality of the loyalty program is behind the revenue gap. For the last three years, TrueBlue has been J.D. Power’s best rated program. Similarly, JetBlue has partnered with Barclays, a proven player in the co-brand space with a card that is well-rated against competitor offerings in third party reviews.

One important difference between Mileage Plan and TrueBlue is the breadth of its partner network. Not only does Alaska offer a far larger list of partners, but while JetBlue only offers the ability to both earn and redeem on one airline, Alaska offers both with all partners. The deal with American should close that gap, unlocking the ability to strike deals with all of American’s oneworld partners.

Adding American as a loyalty partner will significantly increase the liquidity of the currency, as would adding more international partners. While JetBlue offers attractive redemption destinations such as Florida and the Caribbean, the numbers would indicate that is not enough. By adding more of the world via American, British Airways, Cathay, JAL and others the currency becomes more liquid and more aspirational. Back in 2018, Alaska highlighted the exponential growth of its global partners.

Value opportunity

So how much value could a more robust program create for JetBlue? United recently disclosed to investors an estimated value of more than $20 bn for its loyalty program. Considering that United’s current market cap is below $10bn, that certainly attracts attention.

However skeptical you are about that value estimate, there is no doubt that a more robust partner network has the potential to add a significant boost to JetBlue’s current market cap of $2.8 bn. How big could that uplift be? Let us play with some illustrative numbers, using United’s program and valuation as a benchmark.

United disclosed that its program made $1.88 bn of EBITDA in the 12 months to March 2020, on revenue of $5.36 bn. That’s a 35% EBITDA margin and United also discloses that they “only” make 20% on sales to United itself. Back calculating the margin on third party sales suggests a whopping 55% margin. A $20 bn valuation for United’s programme gives you an EBITDA multiple of 10.6x.

Using these benchmarks would imply that an extra $500m of third party sales for TrueBlue could be worth $275m of EBITDA a year to JetBlue and $2.9 bn in value. That would more than double JetBlue’s current market cap.

Pretty sweet.