Analysis of Jet Blue

Analysis of JetBlue Airways 1

Running head: ANALYSIS OF JETBLUE AIRWAYS

Strategy for JetBlue Airways Assignment1

Felicia Littlejohn BUS 599 July 9, 2010


Abstract The purpose of this paper is to evaluate the business strategy of JetBlue Airways. The company’s main strengths, i.e., customer value oriented, employee oriented, and its ability to formulate and execute effective and targeted strategies, enabled the company to rapidly expand its domestic and international market base. Recently, its current focus on creating shareholder value and conservative, high liquidity financial management has caused the company to make gains during the recession of 2009 resulting in a positive cash flow for the first time. JetBlue’s sound strategy and success in a weak economy makes it likely that the company will continue to succeed.


Analysis of JetBlue Airways JetBlue Airlines launched its first ceremonial flight in 2000. Since that time, the company has evolved into a billion dollar corporation. The purpose of this report is to examine JetBlue’s business strategy and its likelihood to survive. Trends in the U.S. airline industry & impact on strategy Trends in the US airline industry have an impact the performance and strategies of the airlines. As a result, the JetBlue has struggled to survive. The following trends will be discussed in further detail: (1) crude oil pricing fluctuations lead to passenger fees for revenue generation, (2) shortages of pilots increased labor costs, and (3) post 9/11 Aviation Security increased operating expenses. Crude oil pricing and passenger fees. In 2008, crude oil prices increased to a record $140 per barrel (Thompson, Strickland, & Gamble, 2010). This dramatic price increase caused airlines to struggle to offset the cost of fuel. Many began implementing new passenger fees including a fuel surcharge, baggage check fees, fees for heavy bags, fees for beverages and snacks, and even fees for using blankets and pillows. Presently, gas prices have dropped. However, the airlines continue to pass along the fees to its passengers to increase revenue. Clearly, the fees that began originally in response to fuel prices continue to be part of the revenue generating strategies of airlines. Shortage of Pilots. As baby boomers retire by the thousands, the airline industry is experiencing a shortage of pilots. Before becoming captains, pilots must earn sufficient fly hours. However, flying schools do not have enough instructors to train enough new pilots. According to the International Air Transport Association, an estimated 3,000 more pilots are needed each year than training schools can provide ( Thompson et al., 2010). In response, the airline industries face increase labor costs as they raise pilot salaries in order to attract pilots. Post 9/11 Aviation Security. “Shortly after the 9/11 terrorist attacks, Congress passed the Aviation and Transportation Security Act (PDF), which created the Transportation Security Administration (TSA) and mandated that federal employees be in charge of airport security screening


(Kaplan, 2006).” These mandates caused the airlines to adopt several layers of security. TSA implemented more thorough screening procedures for passengers and their baggage, including requiring passengers to remove their shoes, limiting carrying fluids onto the plane, and requiring passengers to remove their computers for x-ray inspection. Beyond passenger screening, TSA developed the Secure Flight Program for passenger prescreening and a Registered Traveler program with voluntary background information and biometrics for frequent flyers (Kaplan, 2006). In addition, several new measures designed to prevent hijackings also were adopted, including, fortified cockpit doors, armed pilots, and armed undercover officers on passenger flights. These actions have had a financial impact on the airline industry. Since 9/11, about $6 billion a year has been spent on aviation security to prevent a similar attack (Schneier, 2008). JetBlue’s strategy helped the company to overcome these obstacles.

JetBlue’s strategic intent JetBlue’s founder, David Nelleman, started JetBlue with the notion of bringing humanity back to air travel. The goal was to be a low discount airline carrier that offered comfort and service to its customers. For example, the company’s philosophy was to delay flights rather than to cancel them. In addition, JetBlue was the first airline to publish a Passenger’s Bill of Rights, a document disclosed its policies to passengers. JetBlue was the first to offer electronic ticketing which was convenient for customers. The company also offered extras like in-seat television and PayPal ticket payments. To further increase shareholder and customer value, JetBlue launched strategic growth and rapid expansion initiatives. In 2000, JetBlue made the risky decision to start up service in New York’s congested, JFK Airport between 8 and 9a was lighter. It used this hidden opportunity to its advantage to offer flights that appealed to young, affluent New Yorkers, as well as, to those traveling to New York City. In late 2008, JetBlue opened up Terminal 5 at JRK to give customers greater convenience and efficiency while also saving them $50 million in labor, fuel, and vouchers. Meanwhile, between 2003 and 2008, JetBlue began service to many destinations including San Diego, Fort Lauderdale, Portland, and more. By December 2007, the company had expanded to serve over 53 destinations (Thompson et

al., 2010). This impressive growth did not immediately lead to shareholder value, however.


JetBlue’s financial objectives & success in achieving Although JetBlue showed a lot of promise, the stock dropped in value by 50% in the five year period ending December 2007. A closer review of JetBlue’s financial performance revealed that, while revenues grew 185% between 2003 and 2007, their operating expenses grew 222% during the same period. This revenue loss was attributed to jet fuel (532% increase) and interest expense (658% increase). Instead of handling the interest expense, JetBlue took a conservative financial strategy in which they maintained high liquid ratios relative to the other major airlines ( Thompson et al., 2010). This cash balance was excluded and the securities were reclassified from current assets to long-term investments. Nevertheless, JetBlue was successful in obtaining new equity capital and credit needed to keep the company afloat despite the setbacks.

Assessment of competitive advantage Cost . JetBlue operates at a lower cost than its competitors. According to Thompson, Strickland & Gamble (2010), JetBlue’s total operating expenses were 12.17 per revenue passenger mile in 2008 versus $18.18 for American Airline, $18.18 for Continental, $20.95 for Delta, $13.85 for Southwest, $19.13 for United, and $21.45 for US Airways. Its planes, such as, the Airbus A320, tended to be newer than those of its competitors resulting in lower maintenance costs and no maintenance-related fines. The company increased flying time by minimizing turnaround time. Reservation agents worked at home resulting in cost savings as compared to a traditional call center. These measures paid off creating a major competitive advantages in the form of low operating costs that other airlines did not achieve.

Organizational culture. JetBlue’s organizational structure was created based on five steps. First, the company’s values were determined. Then, hiring managers selected employees who mirrored the company’s values. Next, the company ensured that the company exceeded employee expectations and to listen to customers. And, finally, the company created a plan to drive excellence. The values established by JetBlue were safety, caring, integrity, fun, and passion. As an example, George Forman grills were set up at the JFK terminal to allow employees to have fun. By only hiring employees that


mirrored those values, the company could encourage hiring managers to be creative during the hiring process and to weed out those that would not be a fit. By making these steps an active part of getting work done, JetBlue developed a strong organizational culture.

Human resource practices. JetBlue is a company with a strong focus on people. In

anticipation of airplane pilot shortages they implemented Aviation University Gateway, partnered with universities to identify exceptional candidates, and implemented internship programs. They addressed a lack of confidence in JetBlue’s leadership by providing leadership development training. They developed an airline training center at the Orlando International Airport. To make up for paying employees a lower base salary than its competitors, they offered health coverage, profit sharing, and 401k retirement plans. They also avoided layoffs through voluntary packages and attrition. This focus on meeting the needs of its employees, growing talent, and creating a talent pool was essential competitive benefits that were very difficult to imitate. JetBlue’s strategies for 2008 & beyond and likelihood of success.

In 2008, JetBlue adapted new strategies to re-evaluate the way its assets were used, reduce capacity, cut costs, raise fares, grow in select markets, offer services for business travel, form strategic partnerships, and increase ancillary revenues. JetBlue formed an alliance with Lufthansa to enable the company to use their terminals at JFK and signed a contract with Continental to provide LiveTV (Thompson et al., 2010). JetBlue reduced their capacity by selling nine aircrafts and reduced costs by delaying the delivery of 21 new aircrafts (Thompson et al., 2010). They reduced aircraft utilization rates, suspended service in some cities, and cancelled plan service in order to cut costs. After choosing Orlando to become a target market, they then raised prices – but to lower fares than competitors. Furthermore, they provided incentives to corporate travelers, entered into agreements with Expedia for leisure travelers and


Travelocity for business customers, and with Aer Lingus to expand their reach internationally. To generate revenue, JetBlue created new fees, including a fee for a second bag and for select seats. Even with these strategies, the airline’s financial performance shows that they are falling short of expectations during the first six months of 2008 (Thompson et al., 2010). However, 2009 was a successful year for JetBlue. The company was one of only a few to report four consecutive quarters of profitability in this year (JetBlue, 2010). A net income of $58 million was generated with an operating margin of 8.5% – which was an improvement of more than $140 million compared to 2008. They continued to have one of the strongest liquidity positions in the U.S. airline industry relative to our revenues. In addition, JetBlue generated positive free cash flow for the first time in its history. According to JetBlue’s 2009 annual report, these results demonstrated the benefits of JetBlue’s disciplined growth strategy, its focus on managing capital expenditures, rationalizing capacity, maximizing revenue, and controlling costs. Given that the company is prosperous in challenging times, it is likely that the company’s sound strategies and cash-rich positions will give the company longevity over the long term. Conclusions

The purpose of this report was to examine JetBlue’s business strategy. Trends in the U.S. airline industry impacting crude oil prices, pilot shortages, and 9/11 av iation security measures. Overall, these trends, combined with a weak economy, caused airlines to struggle to survive. JetBlue has survived by a focus on bringing humanity back to air travel at low fares. They focused on providing value, customer service, and unique extras for customers. Employees benefit from training and a strong organizational culture. The business benefited from measures to cut costs and form lucrative partnerships. Presently, the financial reports of JetBlue showed that the company was outperforming its competitors in a recession making the company highly likely to be successful over the long term.


References Dearman, W. (2009). Jet Blue’s Strategy Behind the All You Can Jet Pass. As retrieved from the Internet on July 11, 2010 from http://thestrategyblog.com/index.php/archives/287/jet blues-strategy-bhind-all-you-can-jet/. JetBlue. (2009). JetBlue's 2009 Annual Report on Form 10-K. As retrieved from the Internet on July 11, 2010 from http://phx.corporate-ir.net/External.File? item=UGFyZW50SUQ9Mzg1MDQzfENoaWxkSUQ9Mzg2NzExfFR5cGU9MQ==&t=1 . Kaplan, E. (2006). Targets for Terrorists: Post-9/11 Aviation Security. As retrieved from the Internet on July 11, 2010 from http://www.cfr.org/publication/11397/targets_for_terrorists.html. Schneier, B. (2008). Is Aviation Security Cost-Effective? The New York Times. As retrieved from the Internet on July 11, 2010 from http://freakonomics.blogs.nytimes.com/2008/07/22/is-aviation-security-cost-effective/. Thompson, A. A., Strickland, A. J., & Gamble, J. E. (2010). Crafting and executing strategy: The quest for competitive advantage: Concepts and cases: 2009 custom edition (17th

ed.). New York: McGraw-Hill-Irwin.

Analysis of Jet Blue

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