Presently, David Barger, former COO elected CEO of JetBlue Airways (JetBlue), faces a key issue of slowing down their growth. The issue at hand is: What is the best path for JetBlue slow down their growth in the future airline industry?
Macro Economics Analysis
For an analysis of the Macro Economics of the JetBlue, a PESTEL analysis is shown below for the United States. PESTEL Analysis
Economic: The United Sates was hit hard economically from the terrorist attacks on September 11, 2001. This caused fare wars amongst competitors in the airline industry and domestic airline yields to drop twenty percent. These yields wouldn’t recover from pre attack rates until 2006. In fact, as of October 2006, five major United States airlines were operating under Chapter 11 bankruptcy protection. Fuel costs in the United States have seen a dramatic increase since the terror attacks in 2001.
Social: The airline industry, like every other industry, has been affected by the introduction of the internet and its users. People have made it the norm to purchase their airline tickets over the internet instead of by phone or travel agent. These sites have become user friendly and even offer incentives to the buyer. Another social trend is reoccurring business passengers that fly all over the country for work or meetings bringing in a whole other market. Technological: Mostly every industry is driven by technology and the airline industry is no exception. The development of new planes and newer ways of manufacturing them hold a great deal of value for a company. The current planes that JetBlue operate with are the A320 and the E190. The A320 was a proven plane that JetBlue had begun using since their introduction in 2000.
The E190 was turning into a promising plane that had great growth potential showing a much lower cost margin compared to the A320. The downside of the E190 is that it is not liked by JetBlue’s employees and customers as much as the A320. Environmental: Weather is the biggest threat to any travel industry, airliners in particular. Severe weather may cause flight delays or possibly cancellations making airlines an unreliable way to travel. Legal: The size of an aircraft and the amount of passengers that one can fly is regulated by the Air Line Pilots Association (ALPA). These regulations help ensure the relationship between regional airlines and legacy airlines. Pilots’ unions have even asked for scope clauses in their contracts to ensure that their routes are not encroached on by regional airlines. Airlines also operate under the Federal Aviation Administration (FAA) which dictates to them when a flight can fly or not in certain weather conditions.
To conclude, the airline industry like most industries has been dealing with economic downturn along with new social trends and the ever growing of today’s technology. Weather will always be an unpredictable travel flaw where such industries have no control of the results.
Industry: Commercial airline providers are separated by two divisions, long haul and short haul outings. The industry that JetBlue operates in is located in the U.S. and it is divided into three segments, legacy carriers, low cost carriers, and regional airlines. These segments serve each of the divisions depending on the distance of the flight and the amount of passengers that can fit on the plane. This industry is a very competitive one and has been proven hard to turn a profit for most companies. Life Cycle: JetBlue, founded in 1999, achieved major airline status in 2004 by exceeding one billion dollars in revenue. JetBlue was also able to achieve the status of the ninth largest passenger carrier in the United States in 2005. JetBlue is currently in the mature stage their life cycle but they have several opportunities for future growth. Mark Powers, the senior vice president, was quoted saying that if JetBlue keeps on the same path of acquiring airplanes in bulk they will grow themselves to death.
Competitors: As aforementioned the commercial airline industry is segmented into three types of carriers. Legacy carriers are the best known airlines in the U.S. and they got their name due to their long histories, some dating back to the 1920’s. These carriers also had a specific characterization called the hub and spoke system where these companies would have large hubs at specific airports where lots of their customers would catch connecting flight (spokes). Some examples of legacy airlines are United Airlines, American Airlines, and Delta Airlines. Low cost carriers, such as Southwest Airlines, operated by directly bringing the passengers to city to city, within the limits of 500 miles.
This was attractive to passengers due to no layovers or connecting flights and utilized a market that would otherwise travel by car or bus. In fact, Southwest Airlines was the only airline in America who constantly that made profits each year from 1973 to 2005. Regional airlines services passengers on a plane of less than 76 seats, and were often used by legacy airlines to charter customers to large hubs to connect with their long haul flight. JetBlue competes directly with all these airlines and is often compared to Southwest Airlines, in terms of being a low cost carrier.
Porters 5 Forces Model
Degree of Rivalry: The degree of rivalry in the airline industry is very high, there are multiple companies offering the same service on a daily basis for customers to choose from. There have been price wars in the past usually low cost is the consumers ultimate decision criteria. Brand recognition makes rivalry even greater and incentives that each airline gives to their customers enable them to pick and choose which company they prefer to travel with. Threat of New Entrants: Entry into the airline industry is very hard making the threat of new entrants very low. There are high barriers along with high capital costs to start operations. An airline is required to have certified pilots that include compensation and they must have substantial training in each aircraft in order to operate one. In order to benefit from economies of scale an airline must have a fleet of airplanes of at least forty to fifty, according to Tom Anderson the senior vice president of Fleet Programs.
A new entrant would have a find it hard to compete in an industry with high brand recognition from the legacy airlines that have a loyal following of passengers with past experiences. Buyer Power: Customer power is extremely mixed between high and low in the airline industry. Customers ultimately get to pick and choose which airline best suits their specific needs making their power high, but the airlines have the power of setting industry prices and times for when flights depart. Customers are left with choosing between the criteria of a low priced ticket or a specific travel time making their power a little less high or even low. Supplier Power: The supply chain for JetBlue has a relatively high amount of power. Suppliers can pick and choose what airline they want to build for due to the highly specialized trade.
JetBlue has found themselves buying airplanes as fast as their supplier, Embraer, can make them. Embraer entered into contract with JetBlue and has enabled them to customize their E190 aircraft in order to try and develop a competitive advantage over others. Fuel is a major source of supply in the airliner industry, with the ability to greater margins with lower costs. Fuel prices have seen a dramatic increase over the years from 2001’s price of seventy cents a gallon to two dollars and ten cents per gallon in 2007.
Southwest takes some of this risk out of their operations with the use of fuel hedges. Threat of Substitutions: There are no substitutes for long distance air travel besides competing companies’ different airplanes, making the threat of substitution low. Planes can be substituted for other plans like the E190 to a regional jet (RJ), but the RJ has a 34% increase in cost per available seat mile. In a way JetBlue is operating as a substitute due to the fact that they offer 65% lower fares than legacy carriers. In terms of a travel substitutes, cars, buses, and trains are all viable substitutes for air travel if a customer decides to choose so.
The above industry analysis shows that this is a highly competitive industry with varying power from consumers to suppliers. The overall conclusion is gaining loyal customers while keeping costs low in order to stay competitive in this industry. Most of the drivers of profitability are at a industry/market level rather than a general/firm level.
Primary: By utilizing their different planes, JetBlue has been able to attract two types of primary customers. The A320, the larger plane for longer hauls, attracts the family that is going on vacation say to Florida. The E190, the smaller plane for shorter hauls, has attracted the business traveller that might be going to another state for a meeting. Each plane can serve either purpose depending on the distance need travelled but these are the norms that JetBlue has found for their passengers.
Secondary: A secondary customer is served primarily on shorter hauls between cities. These revelers, as they have been called, travel from city to city for a sports event or a celebration of sorts and need to be on time without delay due to scheduling. JetBlue has found it hard in the past to guarantee no delays but continue to be one of the best in flight completion. This makes these customers non frequent flyers due to their reputation. Key Success Factors
In the airline industry the following are the key success factor for a company to have: a way of attracting customers, managing of their staff, managing of their fleet, customer satisfaction, the ability to meet competitive prices, have a low cost per seat mile, a high passenger load factor, and a high amount of connecting flights for long hauls.
The above external analysis shows us that this is a highly competitive industry full of a variety of players. In order to stay successful companies must keep costs low and have good customer service. The external factors in this industry are mostly out of the companies control and should be taken for what they are due to the impact they have industry wide.
The planes that JetBlue operates with are exploitable in a way that gives them a competitive advantage by being able to adhere to two markets instantaneously. The A320 allows them to accommodate long haul travelers while the E190 allows them to accommodate the rest of the market. The Customer Bill of Rights was established after the Valentine’s Day crisis in 2007 and it describes JetBlue’s responsibilities to its customers in information sharing, cancellations, departure delays, overbookings, and on-board ground delays for arrivals and departures. These rights are the first of its kind among the U.S. airlines.
JetBlue’s investment of $800 million for their new terminal in JFK airport with 26 new gates and a wide variety of passenger amenities gives them a huge competitive advantage. This shall attract brand recognition from the state of the art design along with the exclusive access in a very busy international airport. JetBlue with help from their supplier have been able to customize the E190 to include leather upholstery and satellite T.V. screens for each seat giving the passenger a comfortable and luxurious experience when flying. JetBlue for years has prided themselves as being the best in flight completion. BusinessWeek even had them as forth on the top performing companies in customer service.
The activities that create value for JetBlue are as follows: To lower fares JetBlue provided customers with incentives to purchase their tickets over the internet on the company website instead of by phone. If a customer still wished to book via phone then JetBlue has part time reservation agents who worked from home which in turn lowered their reservation function costs. Having their pilots exclusively fly one type of airplane and not both. To fly both they needed dual certification and needed to have “training” flying which was a form of non-revenue flight time for JetBlue. This cuts down on fuel costs as well as training time giving JetBlue’s pilots expertise with their aircrafts. “Red-Eye” Flights. Red-Eye flights are a useful capability due to the fact that not many airlines provide them. These flights are done in the early hours of the morning and connect California to the eastern cities.
Leverage: As seen above all the leverage ratios are above one meaning debt is higher than the equity produced by the firm. This can be seen as a positive and a negative. The positive is that the company has the potential to generate more money with this debt then without it. As seen in the financial statements, liabilities increase every year and so does operating revenues, maybe from a direct correlation. The negative aspect is that this gives the company another expense in interest deductive from revenues.
Liquidity: The single liquidity ratio shows a lot concerning where a business is at in terms of being able to pay off your debt when need be. JetBlue’s current ratio shows a positive and a negative aspect. The positive aspect shows that in most of the past years JetBlue has had a ratio over one meaning they could pay all their current debt if called upon. The negative aspect is that in 2005 they fell below one and below industry standards. Profitability: In the case of profit ratios, JetBlue has a minor gap in between their net income and their operating income. The major difference is that in 2005 and 2006 the operating incomes were positive and the net income negative giving an indication that there is a factor that is causing a negative impact out of operations. The industry overall has not been profitable as seen in the analysis but JetBlue who has been compared to Southwest, who was profitable in these years, must make some changes to keep up to par.
To conclude the above internal analysis JetBlue has many resources that they can use to gain a competitive advantage over their competitors. They also have several strong activities that add great value to their operations. Their financial stability might be uncertain at times but the industry as a whole is structured this way in the United States.
Alternative 1: Stop buying airplanes. Put a halt to all plane acquisitions for at least 3 years to stop the growth temporarily.
– Stops from growing to death
– Will make supplier upset
– Allows to pay off existing debt
– No further benefit of economies of scale
– Allows for employees to adjust
– Less maintenance costs
Alternative 2: Scrap the A320. Live out the rest of the days of all A320 planes then scrap them from business operations and exclusively use the E190.
– E190 provides better cost margins
– Employees do not like the E190 as much
– Using proven Southwest model of one type of plane- Would need to have a central hub in Kansas
– Not wasting the remaining life of the A320’s
– Make suppliers upset
– Unique market of medium range planes, opportunity for growth Alternative 3: Scrap the E190. Live out the rest of the days of all E190 planes then scrap them from business operations and exclusively use the A320.
– Employees like the A320 better
– Make suppliers upset
– Using proven Southwest model of one type of plane
– Miss out on better cost margins of the E190
– Proven to be profitable in the past
– Utilization of the new hub at JFK being built
The aforementioned alternatives need to be weighted with the below criteria prior to choosing a recommendation.
How upset the Supplier will be
Potential growth in the near future
We as a team recommend that JetBlue use alternative two. The reason that we have picked alternative two is due to the fact that it best fit our decision criteria. Even though employees are not as fond of the E190 compared to the old A320 we feel that they would adjust to the new setting quicker if that plane was their only option, this also includes the pilots and maintenance crew. Customers seem to like the E190 and the satisfaction should come more from JetBlue’s new policies and procedure from the Bill of Rights. We believe that the supplier will not be as upset due to the fact that JetBlue will still be buying these planes from them as they are needed.
The E190 gave the best cost margins for potential growth in the near future compared to the legacy carriers and regional jets making it a the clear choice. In order to completely satisfy the entire market of the United Sates JetBlue would need a new central hub located in Kansas City, as mentioned by Rob Maruster. By only having one type of aircraft in the fleet it allows JetBlue’s structure to act like Southwest Airlines, with their Boeing 737, and allow their ground and flight personnel decreasing the average turnaround time between landing and getting back in the air.
Implementation should begin with the stopping of purchasing or fixing the A320 planes. Once enough debt has been paid off from the saved money begin to construct a new central terminal in Kansas City. In the long term additional E190’s will need to be purchased enabling JetBlue to service more cities throughout the U.S. and keep the turnarounds quick.
If failing to be competitive and popular with the exclusive aircraft model we suggest trying to become an international airline and flying across to boarder countries like Canada and Mexico. This would not require additional capital in planes but merely agreements with countries regulations.