To evaluate the external environment of JetBlue airways we will use the PESTEL analysis. PESTEL analysis stands for “Political, Economic, Social, Technological, Environment and Legal analysis”.
How and to what extent the government does intervenes in the economy. Political factors can be tax policy, labor law, environmental law, trade restrictions, tariffs, and political stability. Political factors that are found in the JetBlue case are: Government monitors the airline industry more scrupulously as a result 60% of airline industry is unionized
Heightened sense of consumer information privacy
Airport slot/gate allocations
Security considerations since 2001 attacks
These factors have major impact on how businesses operate and make decisions. They include economic growth, interest rate, exchange rates, and inflation rates. Economic factors that are found in the case are: 1978 Airline Deregulation Act created intense rivalry between airlines Downturn in airline travel after 9/11 2001 affected most airlines – JetBlue reported 18 consecutive quarterly profits IT Spending continued post 9/11
Fuel costs spiraled, aggressive competition and increased operating costs Availability of venture capital
Legacy Airlines exiting bankruptcy and streamlining operations Strategic Alliances
Fair Pricing is an important competitive factor
Trends in social factors affect the demand for a company’s products and how the company operates. They include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Social factors that are found in the case are: 2001 Terrorist attacks in US negatively affected airline industry Anxiety about safety at airports
Travel has become inconvenient due to safety precautions
Internal Culture at JetBlue – Management is hands on – a great place to work
The technological factors determine barriers to entry, minimum efficient production level and influence outsourcing decisions. They include ecological and environmental aspects, such as R&D activity, automation, technology incentives and the rate of technological change. Technological factors found in the case are:
Diffusion of Technology
Digital Revolution – internet does away with ticket agents but allows price comparison Customer service working from home reduces operations costs
These factors include weather, climate, and climate change. Environmental factors that are found in the case are: War, Political Turmoil and Natural Disasters drive fuel prices from $30/bbl. in ‘03 to $60/bbl. in ‘05 Airport slot/gate allocations
Security conditions build barriers to ease of travel
These factors can affect how a company operates, its costs, and the demand for its products. They include discrimination law, consumer law, antitrust law, employment law and health and safety law. Legal factors that are found in the case are: 1978 Airline Deregulation Act eliminated government control over fares and routes Airport and FAA density regulations
Security laws since 9/11
Porter’s Five Forces
In order to understand Jet Blue’s external environment, Porter’s 5 forces are a helpful tool in order to evaluation the company’s competitive environment and the degree of rivalry amongst competitors within the aviation industry. The competitive environment will be evaluated in terms of 4 different aspects, namely the bargaining Power of customers and suppliers, the threat of new entrants and new substitutes. The bargaining power of customers within the aviation industry is rather high as there are standard products and services that are less unique and can be easily imitated by competitors. Furthermore, there are only low switching costs incurred for the buyer in general, meaning that there is usually a lower degree of customer loyalty towards one single company and that customers can compare offers easily especially due to the option to purchase tickets online.
Suppliers generally have a moderate to high bargaining power within the industry due to the limited number of suppliers which forces aviation companies to choose from the number available and accordingly to accept their prices. In fact, fuel is the second highest cost for aviation companies. There are highly depended on supplier’s prices and the availability which indicates on a relatively high bargaining power of suppliers. In addition, there are high switching costs which are strongly in favor of the suppliers and means that the company experiences an increase in operating costs when switching to another supplier as flying another type of aircraft leads to additional costs (maintenance, training etc.).Aircrafts are vulnerable to delays due to the location of gate locations which leads to a decrease in utilization and therefore to an increase in costs. In terms of the threat of substitutes there are not a lot serious threats and alternatives to products within the aviation industry, therefore the threat can be rated as medium.
However, private aircrafts can be seen as a substitutes within the industry. Within the transportation industry there are more alternatives for substitutes such as trains, buses, cars and boats. The threats of new entrants is very low as there are certain barriers to entry such as a high amount of investments that are required and it is rather difficult to build up a reliable and trustworthy from scratch as the industry is already dominated by several competitors. In conclusion it can be said that there is a medium degree of rivalry within the aviation industry due to a rather high degree of bargaining power of customers and suppliers and a rather low threats of new entrants and substitutes within the industry. One of the remedies to avoid high bargaining power of customers would be to try to differentiate from competitors by building a unique and favorable image on the market. On the other hand companies could use the strategy of backwards integration and acquire their suppliers in order to avoid the bargaining power of suppliers. However, those investment decision are always highly dependable on the company’s financial budget, priorities and goals in general.
The following graph is an evaluation of JetBlue Airways and Southwest Airlines based on financial information found on the companies’ income statements, balance sheets, and cash flow statements:
As you can see, JetBlue is consistently below Southwest on the ratios. JetBlue’s liquidity ratios have decreased over the last three years and could be considered worrisome. However, we know that the fleet is aging and the company is making investments to replace the old fleet and expand the fleet. This is a very reasonable cause for the decrease in these ratios. JetBlue’s equity multiplier is higher than Southwest. At first, you might think this is better. However, a higher equity multiplier is not a good thing. A high equity multiplier means that a company finances a larger portion of its assets through its debt.
Therefore, southwest has a better equity multiplier. While JetBlue’s net profit margin is slightly lower than Southwest’s, it is in line with the industry average of 3.2%. JetBlue’s return on equity is also in line with the industry average of 8%. JetBlue has a high capital intensity ratio which is okay because, as an airline, they require a large amount of capital to operate. Overall, the financial ratios are lower than Southwest’s but they don’t show any problems that don’t make sense. The net profit margin, return on assets, and return on equity have all improved over the last three years. The cash coverage ratio is also improving. The finances seem to show that the company is improving and is stable.
When we look at the case JetBlue shows several strengths. One of the most important is customer satisfaction; they satisfy their customers by being a low-cost airline but at the same time offer excellent experience (the JetBlue Experience). They have new airplanes (that keep the operational costs low) with inflight entertainment systems, their customers get a drink and a snack and their employers are involved and motivated. JetBlue is an innovative company, for example they were the first North-American airline company that used electronic ticketing and they introduced the first paperless cockpits.
When analyzing the company internally we also see several weaknesses. From the case it became clear that the company had problems with facing mass cancellation; a weak reservation system and also no baggage handling systems. The company got high debts because of the rising fuel prices, and also because of the compensations that they gave their customers after making mistakes. Currently the baggage handling system works properly and their online reservation systems are also improved. Another weakness of JetBlue is that is focusses on the middle class of society, therefore they do not have many high class people that are willing to spend more.
The company is also influenced by external factors, and we will first discuss the opportunities for JetBlue. The case made clear that JetBlue is getting more and more interline agreements with other airline companies. Due to this fact JetBlue will have more destinations to fly to and they can also make reservations under each other’s names. It is therefore wise that JetBlue keeps making new interline agreements with the bigger airline companies. Another opportunity for JetBlue is technological improvements, since JetBlue is an innovative company they like to try new things out such as they did with the paperless cockpit. Also the deregulation of international air travel and loosening laws and regulations are opportunities for JetBlue. There are a lot of regulations around air travel, especially after the terroristic attacks on 9/11 and also the tax laws influence the company. Whenever these will become looser the company will have less expenditures.
When we evaluate the external factors that are influencing the company we also find several threats. One of the biggest threats for the airline industry are fuel prices, since they are the biggest costs for an airline company. Another threat for the airline industry are terroristic attacks, after 9/11 the customers got afraid of travelling by plane. Also all the safety procedures make travelers rather want to use another way of transportation, such as the car or train. Financially the high user taxes and currency changes also influence the airline industry.
After evaluating the SWOT analysis we can now look at the externally-focused TOWS analysis. The TOWS analysis matches external opportunities and threats with internal strengths and weaknesses.
How can you use your strengths to take advantage of the opportunities? If we compare the strengths and opportunities of JetBlue, some of the strategies they could implement are: Focus on the technology improvements; JetBlue is an innovative company and they like to try out new technologies. They can make the JetBlue experience even better than it already is. Focus on the interline agreements; when JetBlue has more interline agreements with other airline companies their customers will have more choice of countries where they want to go, it will also be easier for them to make a reservation. Lower the operating costs; whenever the law and regulations will be in favor of the airline industry the company can lower its operating costs and therefore also lower their prices.
How can you take advantage of your strengths to avoid real and potential threats? The strengths that JetBlue could use to avoid real and potential threats are: Focus on technological developments; again they should focus on this for example they could maybe develop new security check machines that are easier to use and also safer to avoid terroristic attacks Develop the JetBlue experience; there is intense competition in the airline industry, however JetBlue should differentiate itself by improving the JetBlue experience which is already known for excellent customer service, friendly personnel, new planes, entertainment systems etc. If they improve this experience and keep focusing on being a low-budget company they will win more customers.
How can you use your opportunities to overcome the weaknesses you are experiencing? There are several opportunities that JetBlue could use to overcome the weaknesses that they are experiencing, such as: Loosening laws and regulations; whenever the regulations will be looser the turnaround process of the airplanes will be easier and faster. New technology; the new technology could help the company to improve the online presence. The online presence was in the case really bad but currently they already improved this. However E-business and M-business is getting more and more popular so it is always wise for a company to keep on track with this by improving their online systems.
How can you minimize your weaknesses and avoid threats? The strategies that JetBlue should use to minimize its weaknesses and threats are: Improve the systems; some of the weaknesses are weak baggage handling systems and online presence. Also in the case it became clear that JetBlue faced problems with mass cancellation. This could all be improved by implementing ERP systems so that it is clear what is exactly going on in the company. For online presence they should have an IT department that focusses on that. Improve safety systems: there are a lot of safety procedures because of the fear of terroristic attacks. The airplane industry should invest in have safer and easier systems to improve the safety of its travelers. Differentiate itself from other airline companies; there are a lot of airline companies and this causes intense competition. However if JetBlue makes sure that they offer their product in an exclusive way the company will win customers.
In the following we will establish a balanced score card for Jet Blue by collecting and analyzing data on the company’s current performance. The overall goal of the balance scorecard is to analyze the gathered data and compare it to the desired performance and strategic goals. Furthermore it is a helpful tool to align business activities to the company’s current mission and vision. At large, there are 4 major perspectives that are analyzed during the balanced scorecard which are the customer, internal business, innovation& learning, and financial perspective. In terms of the internal Business Perspective it becomes clear that Jet Blue has one of its major core competencies in quick turnarounds. One of the main reasons for this is the “paperless cockpit” innovated and introduced by Jet Blue itself. In fact, the paperless cockpit ensures faster takeoffs by reducing paperwork which eventually leads to quicker turnaround rates, as well as higher aircraft utilization. Jet Blue’s high completion rate is another significant competence of the company’s business operation (rate of 99.6 % compared to 98.3% at major airlines).
Furthermore, the Jet Blue would keep operating costs low by integrating a less costly plane, the A 320, which is significantly less costly than the Boeing 737. In addition, the A 320 is more fuel-efficient, requires less maintenance costs, and training costs are kept at a lower level which leads to an overall decrease in operating costs and enables the company to offer less costly tickets to the end-customer. However, Jet Blue aims at renewing its fleet expansion in 2012. The airline planes to purchase the A321s and A320neo. Besides, the company had to deal with major system issues in regards to the baggage-handling system, online rebooking system, the sabre airline solution applications which caused significant delays in daily operations and lead to dissatisfaction among customers. Another perspective of the balanced scorecard that needs to be analyzed is the customer perspective. The company markets its service package as the “Jet Blue experience” which includes the new aircraft, variety of TV channels& movies, leather seats and more leg room.
Furthermore, Jet Blue adds value to its customers by offering services such as priority boarding. The company, in fact positions itself as a low-price company, but focuses strongly on customers services (the ‘Jet Blue experience’) as well. This strategy enables the company to differentiate themselves from their competitors and adds unique value to their products. However, after the operations meltdown of 2007, customers lost trust in the company. For the future, significant changes are needed to restore customer’s trust. In terms of the company’s financial perspective it can be said that company’s liquidity ratios have been decreased over the past 3 years and could be considered worrisome, however, as Jet Blue plans to replace its fleet there is a reasonable cause for the decrease. Furthermore, Jet Blue’s equity to debt ratio is still below the average which indicates on a lower amount of equity financed by banks and is therefore favorable.
Jet Blue’s return on equity and net profit margin are in line with the industry average and therefore refer to stability. The net profit margin, and return on equity have all improved over the last three years which indicates on the profitability of the company. The cash coverage ratio has improved as well which refers to Jet Blue’s liquidity. Also the return on assets ratio has been improving and is above the industry’s average (3% compared to 2.46 % in 2013) which refers to a preferable efficiency of the company. The finances seem to show that the company is improving and is stable. Regarding the innovation& learning Perspective it becomes obvious that Jet Blue launched several solutions and systems. The paperless cockpit, for instance, that has been explained in a paragraph above is one of the innovations that Jet Blue launched on the market. In addition, less-congested airports reduced the airline’s turnaround time.
Other innovations that facilitated operations and made services more customer-friendly are the tickets and mileage statements that do not require paper anymore. According to the article ‘Jet Blue airlines: getting over the blues ‘, ‘…innovation has been everywhere.’ Subsequent to the operations meltdown and the financial breakdown of the company in 2007, Jet Blue attempted to initiated strategic changes within the company by significant capital reduction from 2010 to 2011, a change of the CEO, a renew in flight expansions, partnering up with former competitors, and selling $42.6 of common stock to the German carrier (Lufthansa). Generally, measurable key performance indicators need to be established in order to evaluate the company’s performance. The financial ratios are the means within the balanced scorecard to evaluate the company’s perspective. The customer perspective could be evaluated in terms of market share, customer satisfaction scores, and customer loyalty scores.
The internal business perspective can be measured in turnaround rates and completion rates for instance. Number of innovations, an improvement index, or number of employee suggestions can be used to put the innovative& learning perspective into tangible terms. As a result, the company needs to restore customers trust and loyalty, improve on internal operating systems in order to regain former financial strength in the future. Especially, the reliability of the company’s operating system needs to be secured in order to avoid another major meltdown in the future. Furthermore, the company needs to find adequate strategic changes in order to ensure compliance with Jet Blues current mission, “Bring humanity back to air travel” which is currently pursued by a low-cost strategy in combination with a strong focus on customer-services and compare current performance to desired performance, however the company’s goals and targets do not become clear from the case.
Courtney from Study Moose
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