JetBlue‘s (NASDAQ:JBLU) decision to retrofit its in-service Airbus A320 aircraft with curved extensions at wing tips will help it preserve its cost advantage. These curved extensions (also called as sharklets) provide a greater aerodynamic lift to the aircraft, which helps lower fuel burn and reduce emissions. Sharklets also increase the payload capacity and range of the aircraft, enhancing its operational flexibility.
JetBlue recently ordered 110 sets of sharklets from Airbus whose A320 aircraft allows for their addition. Post retrofit, JetBlue estimates that it will be able to either increase the payload capacity of its A320s by 1,000 pounds or fly them for an additional 100 nautical miles.  As of December 31, 2012, the carrier operated a fleet of 127 Airbus A320 aircraft and 53 Embraer 190 aircraft.  It will be one of the first airlines in the U.S. to add sharklets to its planes.
For JetBlue, the most important aspect of this investment is that the addition of sharklets will help it preserve its cost advantage, which is critical to its business model that is built around lower fares. We currently have a stock price estimate of $7.30 for JetBlue, approximately 5% above its current market price.
Addition Of Sharklets Will Help JetBlue Preserve Its Cost Advantage
Over the past few years, rising crude oil prices have pushed up operating expenses of airlines, increasing the pressure on their margins. In JetBlue’s case, fuel costs as a percentage of total operating expenses rose from around 32% in 2010 to nearly 40% in 2012.  The chart below depicts JetBlue’s fuel costs as a percentage of its passenger revenues for domestic U.S. operations.
The addition of sharklets will improve fuel efficiency of JetBlue’s aircraft with up to 3% lower fuel burn on long haul routes, according to the carrier’s estimates.  In turn, these fuel cost savings will help it preserve its low cost model, which is essential to its profitability. In 2012, JetBlue’s operating expense (including fuel) per available seat mile was 11.49 cents, which was among the lowest in the U.S. airline industry.  The low-cost operating structure allows the carrier to price its passenger fares lower than many of its larger rivals including Delta (NYSE:DAL), United (NYSE:UAL), American and US Airways (NYSE:LCC). Lower fares attract passengers and this in essence is what JetBlue’s business model is designed around. In all, the addition of sharklets are integral to JetBlue’s future growth.
The Initiative Could Lower Aircraft Utilization Rates In The Near Term
Deliveries of these 110 sharklets ordered from Airbus will start in 2014. Their purchase and retrofitting will raise the carrier’s capital expenditures over the near term. Additionally, in some cases, the aircraft may have to remain out of service for several weeks to undergo this retrofit. However, in the long run, the increased capital investment and productivity loss from lower aircraft utilization will be more than offset by improved fuel efficiency and benefits arising from greater operational flexibility. JetBlue has also ensured that future deliveries from Airbus come outfitted with sharklets.Notes: