Strategic Analysis of Jet Blue Airlines
Strategic Analysis of Jet Blue Airlines
JetBlue is a company built on a focus strategy of low-priced, no-hassle ticketing and refreshingly efficient customer service. The company began with the goal to eliminate many of the complexities and asininities of commercial air travel and set a new standard for customer service. Thus far the company has flown beyond these goals and everyone’s expectations while returning a handsome profit to whomever chooses to invest in this airline industry success.
From his humble beginnings as a University of Utah drop-out, CEO David Neelman shorlty became a self-taught airline industry guru – gaining a comprehensive understanding of the inner workings of the industry as the co-founder of WestJet, CEO of Open Skies and President of Morris Air. His experiences gave him a first hand knowledge of what worked and what needed improvement in the airline business – knowledge that he believed would help him to create an innovative new airline able to revolutionize the market.
In 1999, Neelman announced his plans to start a new airline called “New Air”. What New Air’s name lacked in originality was later made up for in Neelman’s innovative strategies. Within a year Neelman’s airline, by then dubbed “JetBlue”, successfully completed the airline application process, and its inaugural flight took place on February 11, 2000. By JetBlue’s first birthday, it had already flown its one millionth passenger and reported $100 million in flying revenue. Soon after JetBlue’s second anniversary, JetBlue’s IPO was announced.
Demand for the IPO was so high that the original offering price had to be raised – one of select few ‘IPO Darlings’ during the bear market economy. As the other airlines were suffering from the aftermath of the 9/11 terrorist attacks, JetBlue’s revenues were on a continual rise. In September 2002, JetBlue had already flown its eight millionth customer.
Why are people flocking to JetBlue? One answer is the luxury treatment at an economy cost. All seats are leather and outfitted with an individual screen with access to 24 satellite stations from DirectTV. There are even cards in each seat pocket with instructions in flight yoga. All this and more at a low cost due to Neelman’s mantra of service. He also cuts costs by having reservation agents work from home and directing customers to buy tickets over the Internet, with plans to soon have computer kiosks take the place of ticket agents at the airport.
The corporate lore at JetBlue has Neelman loading luggage in sub-zero temperatures to help a flight get off the runway on time – and whether fact or fiction, it’s apparent that his work ethic has trickled down to all JetBlue employees
“We set out with the goal of bringing humanity back to airline travel and making flying more enjoyable. Our consistent profitability in the face of a challenging industry environment demonstrates that we can do so in a way that offers long-term shareholder value. Our focus remains on driving top-line growth by providing exceptional customer service, while continuing to maximize operating efficiencies as we grow.”
But for how long can JetBlue maintain the market edge that low-cost fares and no-hassle ticketing ? How will JetBlue counter the threat of unionizing workers, an aging airplane fleet and employees who begin placing more value on tenure and benefits packages than kind socially responsible management and company stock options? These questions are more than hypothetical, for how they are answered will determine the future of the IPO darling, JetBlue.
What if Airlines Sold paint
Customer: Hi, How much is your paint?
Clerk: Well, sir, that all depends.
Customer: On what?
Clerk: Actually, a lot of things.
Customer: How about giving me an average price?
Clerk: Wow, that’s too hard a question. The lowest price is $9 a gallon, and we have 150 different prices up to $200 a gallon.
Customer: What’s the difference in the paint?
Clerk: Oh, there’s no difference; it’s all the same paint.
Customer: Well, then, I’d like some of that $9 paint.
Clerk: Well, first I need to ask you a few questions. When do you intend to use it?
Customer: I want to paint tomorrow on my day off.
Clerk: Sir, the paint for tomorrow is $200 per gallon.
Customer: What? When would I have to paint in order to get $9 paint?
Clerk: That would be in three weeks, but you will also have to agree to start painting before Friday of that week and continue painting until at least Sunday.
Customer: You’ve got to be kidding!
Clerk: Sir, we don’t kid around here. Of course, I’ll have to check to see if we have any of that paint available before I can sell it to you.
Customer: What do you mean check to see if you can sell it to me? You have shelves full of that stuff; I can see it right there.
Clerk: Just because you can see it doesn’t mean that we have it. It may be the same paint, but we sell only a certain number of gallons on any given weekend. Oh, and by the way, the price just went up to $12.
Customer: You mean the price went up while we were talking?
Clerk: Yes sir. You see, we change prices and rules thousands of times a day, and since you haven’t actually walked out of the store with your paint yet, we just decided to change. Unless you want the same thing to happen again, I would suggest you get on with your purchase. How many gallons do you want?
Customer: I don’t know exactly. Maybe five gallons. Maybe I should buy six gallons just to make sure I have enough.
Clerk: Oh, no sir, you can’t do that. If you buy the paint and then don’t use it, you will be liable for penalties and possible confiscation of the paint you already have.
Clerk: That’s right. We can sell you enough paint to do your kitchen, bathroom, hall, and north bedroom, but if you stop painting before you do the other bedroom, you will be in violation of our tariffs.
Customer: But what does it matter to you whether I use all of the paint? I already paid you for it!
Clerk: Sir, there’s no point in getting upset; that’s just the way it is. We make plans based upon the idea that you will use all of the paint, and when you don’t, it just causes us all sorts of problems.
Customer: This is crazy! I suppose something terrible will happen if I don’t keep painting until Sunday night?
Clerk: Yes sir, it will.
Customer: Well, that does it! I am going somewhere else to buy paint!
Clerk: That won’t do you any good, sir. All paint companies observe the same rules. You might as well just buy it here, while the price is now $13.50. Thanks for flying–I mean painting–with our airline.
Though comical to the extreme, the preceding metaphor illustrates the level of absurdity that airline ticket pricing has reached, and the frustration felt by those consumers that have no choice but purchase tickets through an un-fair and arbitrarily expensive system. In the real world a bucket of paint – analogous to a flight to NY, for example- costs no more or less expensive depending on when it is purchased.
Similarly, a red-eye round-trip flight with several connections en route to its final destination costs the airline no less than a day-scheduled one-way flight covering the same distance. In charging a price for a fare, almost without regard to when it is purchased, JetBlue is answering the question that so many consumers have been asking: What makes up this drastic discrepancy in pricing?
On April 2002, JetBlue successfully completed their Initial Public Offering. This translates into a mere seven months of public financial information. JetBlue is also a relatively new company, begun in 2000, and by all accounts is currently experiencing a stage of growth. There have been rapid earnings reported with a 100% year over year increase in revenue of $165.3 million in quarter three. Rueters states, “It booked its first monthly profit in August. Neeleman is cagey on specifics but says it recorded about an 8% margin.” The question is can JetBlue maintain this rapid growth?
JetBlue’s stock has been on a roller coaster. It is traded on the NASDAQ under the ticker JBLU. After JetBlue’s IPO, stock prices rose to their all time high of $55.15. Prices began to equalize and the stock stayed in the $30-$40 range. The dip seen in October is due to the share lock-up expiring six months after the IPO.
JetBlue is making headway in an industry that has seen the worst drop in its history and currently will lose more than $7 billion in 2002 . Suffering from a slumping economy devastated by the tragic events of September 11 the airline industry is receiving less business from both those who cannot afford to fly and those who now are too afraid. In times where other airline companies are struggling to tighten their belts and cut any corporate non-essentials, JetBlue has amazingly posted a 17.5% profit – more than five times that of their nearest competitor, SouthWest – amidst nearly unprecedented growth.
JetBlue currently employees 3,563 workers: pilots, flight attendants, mechanics, ticket agents, reservation specialists, etc. The staff is considered young for the industry and make anywhere between $8.25 an hour to $55,000 a year with generous stock options. Though several pilots have been reported as discussing matters with the Union, the company remains un-unionized, which helps keep labor costs to roughly a quarter of the revenues. To most, JetBlue’s starting salaries seem on the lower end when compared with similar positions, however employees are willing work for the company as they offer excellent promotions and the added benefit of stock options and working from home.
Both the age of the company and the size of the company contribute to its centralization: the company is only two and a half years old employs three and half thousand. As a result, most of the major management decisions are made at the top level of this relatively thin company hierarchical structure. David Neeleman is at the center of the important decisions, however, as the company grows and becomes larger he recognizes the need for more decentralization – the need to branch out and allow others the freedom to make important business decisions.
To date, it has not yet been JetBlue’s strategy to diversify the company. The youth and small size of the company also contribute to this non-diversification. The entirety of JetBlue’s efforts are concentrated on creating a quality airline at a lower price. However, as the company grows and accomplishes these original objectives, diversification both in related and unrelated areas are in the plans of the company. As previously mentioned, JetBlue is successfully differentiating itself by providing an airline with superior customer service and low-price. The company is combining two attributes that traditionally are thought of as trade-offs. While airline customers often will choose Southwest for cheap flights and Delta when an on-time arrival and good customer service are preferable, JetBlue is becoming the airline known for both.
Because JetBlue is working on differentiating itself with low price and friendly, efficient customer service, a high level of integration is key to their viability. On the one hand, the company is striving to be the most inexpensive; on the other, they aim to offer superior quality. As they strive for a high level of differentiation, they must also require a high level of integration in order to make the company efficient. JetBlue understands that because they are striving to best the best in several value creation functions, integration plays a key role in the ultimate success of all value creation functions.
Several measures such as setting up teams and integrating roles have taken place in order to insure the success of the integration. Ticket agents, for example, will play a key role in reserving the cheapest possible ticket as well as assisting the customer in any way they may need. This is also why JetBlue follows a functional structure where managers of all areas can meet together to discuss and resolve issues.
External and Industry Analysis
The airline industry is an increasingly hostile and competitive business environment. The immense strain placed on individual firms to secure customers and return a profit pressures them to maintain a high level of efficiency during both booming and down-turned markets. When the economy performs well and business thrives an airline must scramble to meet the demand for new flights with airplane acquisitions and the hiring of more pilots and flight attendants to staff them.
On the other hand, when air travel sales slack these same companies face the challenge of hastily down-sizing their workforce in order to minimize the impact of the resulting shrinking revenues on their profit margins. Furthermore, the massive scale on which airlines compete with one another has established an exclusive and expensive playing field privy only to industry high rollers willing to gamble in the millions of dollars. These huge required initial outlays create a formidable barrier to the entry of new competitors.
All of these factors combine to create a large, complex, and difficult-to-define business environment where Airlines scramble to stay in business. With the end of World War II domestic airlines improved their ability to develop faster and larger aircraft, and the commercial airline industry was born. Since this time, the airline industry has unrelentingly faced unpredictable and sometimes devastating turbulence.
In the mid-1980’s, consolidation of airlines occurred at a rapid pace and former industry giants Pan American, Eastern and Piedmont Airlines saw their routes gobbled up by Delta, American and United. This emerging trio of industry giants dominated the market leading into the 1990’s, when the industry began a nearly five year financial freefall that resulted in a loss tallying an estimated $13 billion.
But even as the majors lost billions of dollars, a star emerged that would have a profound effect on the industry structure: Southwest. Airlines, a low-fare, point-to-point carrier based in Dallas. Southwest’s immediate and unequivocal success would change forever the way the public saw low-fare airlines and significantly altered the operations of major domestic airlines. CEO Herb Kelleher built SouthWest’s business in secondary airports and midsize cities, initially focusing on the southwestern and western United States, where the weather was usually warm and air traffic relatively un-congested. SouthWest was able to lure away many travelers who were fed up with the complex, unintelligible and confusing fare rules that typified the major carriers. With this strategy SouthWest quickly began to steal market share away from the major carriers.
As Southwest – followed by a small slew of other less-notable, less capitalized carriers – began to bleed the profits of larger airlines, Continental was the first big player to respond by unveiling in November ’93 a discounted airline called Continental Lite. This unclearly and poorly differentiated spin-off offered discounted fares, bare-bones in-flight service and fewer restrictions on purchasing tickets than its parent corporation. The result: Continental lost hundreds of millions of dollars with Continental Lite and finally discontinued the airline and focused instead on reducing Continental’s fare prices, a move that would further hurt profits but allow it to better compete with SouthWest.
Delta was the next major airline to respond to the threat of SouthWest, as the 1990’s signaled a massive restructuring program for the airline – named Delta 7.5. Their goal was to transform the airline into the most cost-effective of the big three carriers. Delta, which had never laid off a single employee in more than 50 years in the skies, fired thousands of workers, sold off non-core assets, reduced in-flight meal service and dropped un-profitable and low-traffic routes. Following Delta’s lead, the other major carriers fell in line with their own version of cost-cutting – doing all possible to grow their margins and maintain profitability.
Delta provides an example of what happens to a company that cuts too much from its core operations. Many of Delta’s cost cuts directly hit customer service areas, from employee morale and onboard meals to baggage handling and on-time arrivals. Delta eventually realized that cutting travel agent commissions could save tens of millions of dollars without directly hurting customer service, and since their cost restructuring conveniently co-incided with the birth of e-commerce, Delta was able to dove tail their independence from travel agents with the electronic ticket. As Delta continues to receive poor reviews – a 3-star rating of a possible 5 on a popular internet customer service ranking site – it is difficult to gauge exactly how much damage this negative consumer feedback has caused their bottom-line.
A given is that JetBlue faces fierce competition in the airline industry and will yet be presented with many obstacles that could thwart their success. One struggle they are certain to face is that of staying on the cutting edge of technology in the aviation industry, which has a history of eroding a company’s competitive advantage through advances in technology. For example, in 1945 Pan Am ordered a fleet of Consolidated Value planes with a cruising speed of 342 miles per hour and capacity of 204 passengers – at that time the largest cargo for a civilian plane. With the arrival of the 1950’s and a booming U.S. economy, leisure travel had been born. The International Air Transport Association reported that scheduled airline service between Europe and North America had increased 20% from the year previous.
By the late 1950’s the Jet age was looming. The new aircraft were able to move larger numbers of passengers faster than ever across the continent and oceans, and instilled a confidence in consumers about the safety and comfort of air travel. By 1958 Pan Am had was using a jet aircraft that could cruise at 605 miles per hour . Why would one choose to fly on a prop plane that was less-safe and half as fast as a newer jet model? In just over 10 years, the entire fleet purchased from Consolidated Value was obsolete.
By the time Ronald Reagan took office in January of 1981, the government was beginning to de-regulate the heavily regulated Airline industry. Airlines were no longer required to file fare changes with the government and international air treaties were opening the skies to increased competition. As a result, the rise of low-fare competition was beginning to have a greater impact on the operations of the major carriers. Rather than engage low-fare carriers in one-on-one attempts at competition, some carriers took extreme measures to counter the effects of the discounters.
In a landmark case, the Justice Department filed a lawsuit against American Airlines, charging that it tried to fix prices with Braniff Airlines . The lawsuit alleged that then acting CEO, Bob Crandall, acting on behalf of the airline, attempted to arrange a deal during a phone call with Braniff President, Howard Putnam, that would raise certain Dallas fares 20%.
The question with the complexity of all these factors taken into account is where does JetBlue fit in this industry and what threatens its livelihood? We can safely assume that the commuter rail and bus lines do not pose any serious threat to the well-being of JetBlue or any airline industry for that matter. Therefore, we will essentially consider all airlines that service the same or alternate routes as JetBlue competitors: Delta, American Airlines, SouthWest, Continental, America West, NorthWest, United, and U.S. Airways.
However, as JetBlue has sought to provide a low-cost, high-service substitute to the lackluster high-priced airlines to which Americans have become accustomed, their most direct competitor should be considered SouthWest – which also provides efficient, “no-frills” carrier service. In addition to existing airlines, since the “share of low-cost airlines has nearly doubled since 1986 to 15% in 1998.” Small start-up carriers certainly pose less of a threat than established major carriers flying similar routes, and Neeleman says “A lot of these small guys are the carrier of last resort… Big airlines put small ones out of business when they put more planes in their market and the spillover to the last-resort airline dries up.”
With the airline industry already struggling before the September 11, 2001 terrorist attacks many airlines have asked congress and received “bailout” money simply to stay in business. Despite this assistance, major airlines have been forced to make sweeping layoffs and drastic cuts to the number of flights and cities serviced. It would appear, as illustrated by US Airways, that highly leveraged airlines may be headed towards extinction. Amidst these economic woes, the airline industry’s giants are trying to keep pace with Southwest – whose profitability amid their losses has earned it a stock market value bigger than all its rivals’ combined.
As a benchmark for the industry, Southwest maintained a post 9/11 gross profit margin percentage of between 3 and 4 percent. In contrast, United Airlines’ post-9/11 gross profit margin is a -20 percent. IPO darling JetBlue has been able to further raise this standard set by Southwest Airlines – posting a remarkable post-9/11 gross profit margin of 17.5 percent.
However, this astounding success aside, the future promises to present JetBlue with serious strategic issues – issues that have marked the collapse of other similar airline start-ups. Primarily, the cost advantage enjoyed by JetBlue is certain to erode as the company’s A-320 leases expire, the new planes age and purchases need to be made. Furthermore, in the coming years the routine maintenance costs will begin to climb with the older fleet – just as they did for SouthWest following their highly successful nascent years.
Neeleman has also been able to keep the Unions at bay until now, but admits that their formation is foreseeable and would be “most disappointing” . The cost of both mechanic and pilot unions comprises much of the massive overhead for more mature airlines such as United and Delta. In its financial recovery plan, United hoped to trim its union-inflated expenses with “$5.8 billion in labor cutbacks with its flight attendants and machinists.”
Also, with a low-cost initiative, it is questionable whether or not JetBlue will be able to develop the economies of scale that allow other providers to offer low fares – and with the expansion that could yield an economy of scale for the company, their focus on customer service would most definitely suffer. In short, the question remains as to whether or not JetBlue’s cost advantage today will result in overall profitability for the long run, as other similarly structured airlines – People Express, for example – have already crashed and burned.
When questioned about the price threat, Neeleman has responded that his aim is to “get passengers to choose JetBlue more for the experience than the fare.” – a fair answer, but JetBlue has taken business away from other major airlines primarily by undercutting their fares, not offering frills. JetBlue has installed all leather on their Airbus 320’s, in-flight entertainment by way of personal monitors for every passenger and an in-house 20 plus channel satellite television. In buying the satellite service provider, JetBlue hopes to have differentiated itself sufficiently to keep other from springing the required $40 million to install a comparable system.
Being still a small company by airline standards, JetBlue’s 3,563 employees benefit from a great deal of Neeleman’s mentoring and oversight. But there is likely to be turbulence ahead: unions, pension plans and retiree health care, rising capital costs, customer retention and expansion are all issues that will have their sway on JetBlue’s future.
IV. Internal strategic evaluation
“JetBlue has set out with a mission to, really treat customers like customers, passengers like customers. I think people see passengers as an annoyance – ‘Man, if we just didn’t have these people, my job would be a lot easier.’ We realize that they pay our way every day,” Owner, David Neeleman. (See attached Welcome Statement)
Resources and Competencies
The fares for JetBlue are relatively low. But passengers get all-leather seats and live, 24-channel satellite TV. David Neeleman bought the satellite company, which means other airlines will have to buy the service from him. This is a tangible resource that has enhanced the company’s long-run competitive position. With the survival of the big airlines being severely tested on Wall Street, JetBlue stock went on the market in April. The stock soared, then dropped, but is holding its own. The Owner say’s “JetBlue is making money.” On JetBlue, the headsets are free, but forget about getting a sandwich, even on transcontinental flights. This helps keep expenses down. Another competency of JetBlue is flying just one kind of airplane – European Airbus A-320s.
This reduces scheduling and preservation problems, and it is more capable to keep up with the growing needs of an airline. Another way that JetBlue keeps its costs down is their unique reservation system. Most tickets are purchased over the Internet, with the airline offering e-tickets only. Also, JetBlue does not try to fly everywhere, concentrating its service in the Northeast, the West Coast and Florida. An additional intangible resource that keeps costs down is there are no union members working for JetBlue. The employees, who get fairly generous stock options and profit sharing, seem content not to have a union. JetBlue screens employees rigorously, trains them well and gives them the best tools. They are motivated and service-oriented. Neelemean says, ” He takes care of his employees, and they don’t need a shop steward. That may sound paternalistic, but it helps keep his costs down.”
JetBlue has a distinctive competency that has enabled them to achieve
substantially lower costs than its competitors. They have accomplished this by their unique and valuable resources, and the capability to manage its resources as listed above. JetBlue has pursued its uniqueness in various ways. Recently, David Neeleman showed up on one of his flights to talk to his passengers. “I hope you realize we’re trying a little harder than the other lines to treat our customers well,” he told them. JetBlue believes that customer service is the only chance airlines have to survive.
B: Organizational Culture – Norms, assumptions and expectations
JetBlue’s goal is to make a personal connection with its passengers. Neeleman does this himself by flying his airline once a week. He thinks most airlines are more like freight trains or cattle cars and he wants JetBlue to be different. By offering the customers the best experience JetBlue can deliver, they find most of them come back regularly and tell their friends and family about JetBlue. Their customers have given them incredible word-of-mouth recommendations.
Traditions, ways of doing things, personality
Everyone pitches in. After they land the plane, the pilots emerge from the cockpit to pick up the trash. After a flight to Buffalo, a JetBlue manager comes on board with her vacuum cleaner. Other airlines criticize JetBlue as a cheap start-up airline. Neeleman says JetBlue is different. “It’s different with JetBlue. And people feel different. They don’t feel like they’re flying on a start-up airline.”
Summary of strengths & weaknesses
The strengths of JetBlue are various. They made a profit the first year! That is hardly ever heard of. The owner has made some excellent marketing and non-traditional decisions that have worked well for JetBlue. Costs are kept low by not offering traditional catering on the planes, using new planes with no maintenance expense to services the customers, employees are not under a union system and a large part of advertising is done by word of mouth.
At the beginning, the experts simply waited for JetBlue to fold, as nearly every other start-up airline with aspirations of major success has done since the U.S. airline industry was deregulated in 1978. There are still a lot of potential obstacles out there for JetBlue. The carrier is still small enough to care about customers and avoid the labor problems that hinder many large airlines, but its recent expansion throws up red flags: Growth for an airline frequently spells trouble for its customers. JetBlue is also dealing with hardball business tactics from other carriers, and the more the newcomer expands, the more opponents it will attract.
D: Current Strategies – Generic / Corporate Strategy
How can JetBlue offer great service with low fares and make a profit? The current and corporate strategy of JetBlue starts with an abundance of liquid assets and reserves. JetBlue is noted as the best-capitalized airline start-up in history. This means that JetBlue is able to empower themselves in the market by producing the best product available. You will see them display it with their unique planes, free satellite TV, cozy leather seats and fast check-in technology.
Second, they fly the newest innovative Airbus A-320. JetBlue has contracts for a fleet totaling 132 new A320 aircraft, with 123 ordered with Airbus. All JetBlue aircraft are configured for 162 passengers and outfitted with leather seats with free satellite television at every seat.
Third, JetBlue embraces five values that represent the company and create our unique culture:
Safety, Caring, Integrity, Fun & Passion
The five values that JetBlue has selected, not only differentiate JetBlue’s product; they result in a superior customer and crew members. “JetBlue is a different kind of airline… youthful, refreshing, more innovative then more mature airlines. We’re looking at creative ways to reduce the hassles of flying and simplify the travel experience. So, we’re looking for creative, dynamic people to work with us to help develop the airline that brings humanity back to air travel.”
Fourth, JetBlue places focus on service. By offering customers the premium experience they can deliver, they find most of them come back regularly and tell their friends and family. “It’s not rocket science… our customers have given us incredible word-of-mouth recommendations. (And for that, we will always be grateful.) At JetBlue, we’re not perfect, but we do try to do things differently and work hard to be the best. But don’t take our word for it. Ask someone who’s flown us.”
Current Functional Strategy
As above you see that Neelman has outlined functional strategies directed at improving the effectiveness of basic operations with analyzing production, smart marketing, materials management, research and development, and human resources. JetBlue is aware of flexible manufacturing technology to increase the utilization of its aircraft. The JetBlue fleet of new Airbus A320s comes with a grouping of rewards. The new aircraft are more reliable, so they spend less time grounded where they won’t enhance the capital for the company. They’re more effective, so they spend less on fuel than other carriers. In fact, JetBlue is the youngest fleet in the sky. JetBlue also, looked to the Internet as another way to offer high-touch service at bargain costs.
Hip New York advertising agency Merkley Newman Harty translated the brand’s clean, blue line over to JetBlue.com. “We really wanted to make something that didn’t look or feel like any other airline’s [website] and that [visitors would find] utterly simple and user-friendly,” Curtis-McIntyre says. The site has just a few navigational options, but the customers find it user friendly. While the major carriers sell an average of 10 percent of their tickets online, JetBlue books fully half of its fares on the Web and saves about $5 in transaction costs for each ticket booked online.
Current Business-Level Strategy
JetBlue’s business-level strategy includes a plan of action that the managers adopted using company resources and distinctive competencies to gain competitive advantage over its rivals in the market industry. Neelman with his vast experience building airlines from scratch was versed in his intentions for the foundation of the company. He knew what would gratify the customer’s needs: No outrageous promises of ‘self- actualization’ onboard, no unnecessary airfares, no cattle-trained mentality, no hassles. In their place he added, simplicity, friendly people, technology, design, and entertainment. Neelman detected what customers he was to provide for: Conservative customers expecting low-fares, with high superiority customer care. In the awake of September 11th, JetBlue still maintains the low-cost leader.
JetBlue ranked Best Domestic Airline in Condé Nast Traveler’s 2002 Readers’ Choice Awards and Best Domestic Airline (Coach) in Condé Nast Traveler’s 2002 Business Travel Awards. The airline also placed second in the Best Airline categories in Travel & Leisure magazine’s 2002 World’s Best Awards and Zagat’s 2001 Airline Survey. (See attached awards for customer service) He identified his distinctive competentices as a low-cost leader that has enabled them to attain a position with fellow competitors. JetBlue shows valuable resources of capital, cutting-edge airliners, self-reliant culture, pioneering leadership and this all presented by contemporary marketing that grabs the attention of consumers and competitors.
Current Global Strategy
JetBlue has been known primarily to have its focus on domestic travels at this early stage in their corporation. Though, they have stepped out of the domestic region and have announced plans to hold a direct flight to Puerto Rico. JetBlue publicized flights to Puerto Rico in May 2002. Puerto Rico Governor Sila Maria Calderon said: “The presence of JetBlue Airways in Puerto Rico is especially important as the airline has combined highly competitive fares with excellent service. Puerto Ricans who live on the island and visit their families in New York now have a reasonable option for travel which, without a doubt, will serve to reinforce the ties of family and friendship that exist between the two cities. Puerto Rico gives its warmest welcome to JetBlue Airways and wishes the airline the very best in its endeavors. JetBlue’s success is our success.”
Evaluation of strategic fit with internal organizations
Rather than molding employees to an existing corporate structure, the airline is introducing new twists to traditional jobs as a way of catering to the personal needs of employees. . Instead of being in a room of 300 cubicles to answer phones all day, for example, JetBlue’s staff of 350 reservationists work from their home. “We look at each work group and address what they want to have happen, not what the company thinks should happen,” says Ann Rhoades, executive vice president of human resources. “Our style is accommodation.” Content employees provide better service. So, in order to keep employees, customers, and, ultimately, JetBlue happy, the airline has put a new spin on select job categories.
IV. Competitive Evaluation and Recommendations
What do you recommend to a company that turned a profit in every quarter since its inception and in an era of unprecedented industry troubles has more than quadrupled the profit margin of the nearest competitor? How do you prognosticate or even guess the problems that an airline will face when the industry itself is so highly cyclical resultantly unpredictable? Thererfore, the difficult task of answering what JetBlue can do to immunize itself from the very turbulence that has arguably made them so successful is frightening.
However, if history is any indication of future events, JetBlue will be faced with many internal and external strategic issues to overcome in order to maintain its competitive advantage. A good lesson to any airline start-up – even the highly-capitalized JetBlue – is the sparkle and fade fate met by the 1983 airline People Express. Twenty years before JetBlue a short-haul carrier under Donald C. Burr set out to reap a profit on cheap, reliable service offered to under served cities such as Buffalo, Columbus and Sarasota. Like JetBlue, People Express soared quickly, netting $10 million on revenue of $287 million in 1983.
Employees were initially enthralled by the company’s profit-sharing plan and Burr’s habit of calling even the loweliest employee a “manager”, but the idealistic corporate culture came under fire when two years later the company reported only $20 million in profits on $928 million in revenue. The more the airline grew and expanded its routes, the more it watched its profits grow anemic. People Express disappeared after only four years of business when it was bought by Texas Air for $301 million in stock and cash.
Most analysts predict that JetBlue will experience growing pains in the future, as did People Express. JetBlue CEO David Neeleman’s successful strategies will be put to the test in the coming months and years as the company seeks to expand its routes and business.
JetBlue’s low costs have been a key component to the airline’s ability to secure customers. In order to maintain the profit margin they have enjoyed it will be critical for them to keep their costs low. Analysts and shareholders are watching closely and wearily for any increases in JetBlue’s cost structure. In a November 7, 2002 article discussing JetBlue, Fox News reported, “…shares of JetBlue dropped more than 7 percent on Thursday as investors worried about a spike in operating costs.”
David Neeleman was quick to downplay the increase in third quarter costs and promised that costs would return to second quarter levels in the fourth quarter. With aging planes, possible worker unions, and possible expanding customer service costs and as JetBlue grows, it will be essential that they be extremely proactive in keeping costs down. The struggling airline industry, post 9/11, has shown that those with lower costs are more successful in weathering unforeseen difficulties that can and will arise.
Another key factor to JetBlue’s success in the future will be its maintenance of customer service. Customers have responded very positively to some of JetBlue’s unique benefits: individual TV screens with satellite channel access, for example. A recent Forbes article showed the company to have has a far higher online booking percentage than other airlines. Also, customers are pleasantly surprised when JetBlue CEO David Neeleman hops on a plane and asks customers to provide feedback on JetBlue’s service. JetBlue’s unique approach to customer service has been a key component to its success. It will prove difficult for JetBlue to maintain this unique appeal to its customers as it grows and expands its business amidst more heated competition from other airlines.
The key component to JetBlue being successful in the long run is to remain the low cost leader. It has been pointed out that the new fleet of airplanes, the lesser traveled airports as hubs, and the no frills commutes themselves are the major reasons for the company’s success. In order to ensure that these strengths do not become weaknesses, some serious planning will be required.
Arguably the single most important factor for the profit margins enjoyed by JetBlue is its new fleet of aircraft. They require relatively no maintenance and Neelman was able to work out an undisclosed mix of leases and purchases to keep operating costs low. However, as the fleet of aircraft ages the company will surely face rising maintenance costs on the multi-million dollar jets. JetBlue has started off on the right foot as they chose, partly for this reason, to have only one craft and one type of engine for their entire fleet. All of the JetBlue AirBus A320s have International Aero Engines (IAE) on their planes, making maintenance and repair single-faceted and more easily done.
One of the ways engine manufactures, such as GE Aircraft Engines, are attracting customers is that they sell a service package with their engines – meaning that they have their own crew ready and available to help any carrier with problems that arise. A strong recommendation for JetBlue would be to make sure that they pursue and relationship with IAE so that they can keep the number of in-house maintenance employees to a minimum. If they are able to leverage the knowledge and expertise of the manufactures own employees, it could be much cheaper for JetBlue to contract these employees on an as needed basis rather than keeping a large number of employees on their own staff to keep up with all of the maintenance requirements of the fleet.
This type of a relationship with the manufacturer could be especially beneficial at the smaller airports that JetBlue services. They could keep the bare number of employees needed to maintain the scheduled routine services of the aircraft in their major airports, and contract the IAE employees to help handle any of the special case problems that arise, as well as handle any maintenance required in airports where JetBlue will not have a full time staff. As the IEA employees will only be contractors they could negotiate a contract with IEA that would be a huge cost savings for JetBlue, as opposed to having all of the required employees on their payroll on an ongoing basis. It would not only save the payroll and benefits, but it would also eliminate the expensive training costs that would be required for each of the individual employees.
Another way that JetBlue has been able to gain a competitive advantage is through the targeting of smaller, somewhat out of the way airports. The best example of this would be the preference of Long Beach airport over that of LAX. With virtually no competition at this airport, since all of the larger carries use either LAX or John Wayne, JetBlue faces little competition and is all but assured timely arrivals and departures. This has made fare wars more difficult since the airlines are not going head to head. It would seem prudent for JetBlue to continue utilizing these smaller airports as they continue to grow and try to stay away from those that are busier and more competitive.
They may want to spend some time creating strong alliances with these airports so that there is a win-win situation with the two parties. With the success of JetBlue, all of the people coming and going in the airport will be a valuable source of revenue that these smaller airports will not have had in the past. With the airport making more money from the increased traffic JetBlue should be able to negotiate some better rates again lowering the cost of business and therefore adding to their net income.
As a discount carrier JetBlue needs to keep their bottom line as low as possible. Up to this point they have done a wonderful job. They are one of the only airlines turning a profit, and have been growing at a very healthy rate. However, as they continue to grow, many of the advantages that they currently enjoy could begin to disappear as they continue to grow because they will be forced to move into markets where the will have to directly fight with the older more established carriers. JetBlue needs to figure out where the optimum size is so that they will be able to maintain their gross margins. If in the future the voice of the customer (VOC) tells them that they need to continue to expand then they can look at other alternatives to support that growth while at the same time keeping their best practices.