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Today's airline companies are grappling with substantial challenges as they endeavor to maintain air travel as an affordable and viable mode of transportation for the future. The aviation industry remains under the influence of the US economic slowdown and the relentless rise in crude oil and jet fuel prices, reaching record numbers without a predictable end in sight. The economic downturn has compelled both business and consumer travelers to seek alternatives to cut back on travel expenditures, adding an additional layer of challenge to airline companies.
The challenges faced by the airline industry are multifaceted, including economic downturns, soaring fuel prices, and increased competition.
Additionally, the vulnerability of the market to new entrants, attributed partially to rising fares, coupled with the potential future shortage of pilots, as indicated by studies like the one conducted by the International Air Transport Association, contributes to the industry's complexity.
Addressing these challenges requires airline companies, including Jet Blue, to develop and evaluate comprehensive strategies.
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These encompass initiatives such as energy conservation measures, operational efficiency enhancements, market targeting, partnerships, and even mergers. Energy conservation measures, for instance, aim to reduce fuel consumption through techniques such as flying at slower speeds, higher altitudes, and making airplanes lighter to decrease the fuel "burn rate."
Strategies for cutting operational costs may include reducing capacity and services, re-evaluating asset utilization, and adopting proven approaches for hedging fuel costs. The creation of additional revenue streams through fuel surcharges, baggage fees, and charges for amenities that were previously free has become apparent in recent times, impacting customer satisfaction.
Jet Blue has strategically positioned itself by providing the ultimate "best value" scenario—a combination of low fares akin to a discount airline carrier and enhanced customer service and comfort similar to those found in first-class tickets.
To maintain low fares, Jet Blue has focused on controlling operating costs and leveraging information technology for operational efficiencies in ticketing and revenue management.
The company's mission objectives are deeply rooted in customer service, particularly on-board service, aimed at ensuring customer satisfaction and loyalty. This strategic intent is evident in the personal deeds of top company officials towards ordinary everyday customers, as detailed in various cases.
Financially, Jet Blue's primary objective has been to keep operating costs (excluding fuel costs) low. Strategies to achieve this include populating their fleet with new, more fuel-efficient aircraft, maximizing passenger carrying capacity, leveraging technology for electronic ticketing, offering employment packages with increased benefits, and embracing the efficiencies provided by teleworking. By 2008, Jet Blue led the industry in the lowest total operating expenses, with expenses between 14% to 76% lower than competitors.
However, the rapid expansion from 2003 to 2007, facilitated by heavy reliance on financing, resulted in a substantial increase in interest expenses. Despite substantial revenue growth during the same period, the rapid expansion coupled with rising fuel costs caused operating expenses to grow at a faster rate (222%), outpacing revenue growth and resulting in an 82% decrease in net income between 2003 and 2004.
As fuel costs continued to rise, Jet Blue adopted a financial strategy to hedge its exposure to rising aircraft fuel costs. This strategy involved derivative instruments, including option contracts and swap agreements. However, the strategy faced challenges due to the absence of a derivative market for aircraft fuel, leading to less effectiveness compared to low-cost competitors like Southwest.
Jet Blue's fuel costs consumed a higher percentage of its operating revenue (33%) than Southwest's (26%), highlighting the importance of effective financial strategies in the airline industry.
Jet Blue's strategic cost element, positioning itself as a discount airline carrier with low fares and maintained service levels, is attractive, especially during economic downturns. The challenge lies in ensuring profitability amid rising operational expenses. The company's focus on increasing market share and passenger volume helps counteract the tight profit margins often associated with low-cost strategies.
The organizational culture, emphasizing safety, caring, integrity, fun, and passion, contributes to a disciplined and empowered workforce. This culture not only reduces employee turnover but also enhances customer service, providing Jet Blue with a competitive advantage in the service industry.
Jet Blue's human resource practices, including targeted hiring, comprehensive training, and competitive compensation packages, result in a stable, well-trained, and loyal workforce. These practices contribute significantly to the company's competitive advantage, particularly in the service sector where employee-customer interactions play a crucial role.
In response to ongoing challenges, Jet Blue identified several strategies to carry forward in 2008 and beyond. These include re-evaluating asset utilization, reducing capacity, cutting costs, raising fares, growing in select markets, offering improved services for corporations and business travelers, forming strategic partnerships, and increasing ancillary revenues.
These strategies chart an appropriate roadmap to meet the challenges facing the airline industry in the future, particularly for a company focused on operating as a discount air carrier. In my opinion, the rapid expansion that Jet Blue underwent from 2003 through 2007 was the primary reason its operating performance did not deliver the expected value to its stockholders.
The downturn in the economy, resulting in reduced dependency on air travel and passenger revenues across the industry, coupled with unexpected and substantial increases in fuel costs (and their failed hedging strategy), exacerbated Jet Blue's vulnerability as a result of funding the rapid expansion.
Several of the strategies identified above (asset use, reducing capacity, cutting cost, targeting markets) are geared toward right-sizing and refocusing the company on core competencies. The formation of strategic partnerships and increasing ancillary revenues are trends that the entire industry seems to be moving towards, and Jet Blue will need to fall in line to remain competitive.
In conclusion, the airline industry faces complex challenges that demand strategic responses from companies like Jet Blue. Navigating economic downturns, rising fuel costs, and increased competition requires a multifaceted approach encompassing cost control, operational efficiency, and customer-centric strategies. Jet Blue's success lies in its ability to adapt and refine its strategies, learning from past experiences and aligning with industry trends.
As the airline industry continues to evolve, companies must remain agile, innovative, and customer-focused to secure their position in the market. The strategies laid out by Jet Blue for 2008 and beyond demonstrate a commitment to addressing the challenges and positioning the company for sustained success. However, the key lies in the effective implementation of these strategies and the ability to adapt to the dynamic landscape of the airline industry.
Jet Blue: Navigating Challenges and Strategies in the Airline Industry. (2020, Jun 02). Retrieved from https://studymoose.com/jet-blue-airways-case-study-new-essay
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