JetBlue Airways: A Cadre CASE of New Managers Takes Control Janet Rovenpor ‘Manhattan College levieve MeCaw and her boyfriend arrived at [JFK International Airport and boarded JetB3ue flight number 351 bound for Burbank, California ‘The plane, however, never took off. An ice storm grounded the Airbus A320 on the tarmac for almost an entire day. When the ordeal was over, McCaw created a blog and posted the following message: “Nothing says ‘I love you’ like being held hostage ona frozen plane with the man you love, 99 strang- ets, 4 other people you happen to know, 4 sereaming babies and 3 rambunetious kids running about, noth~ ing but chips and soda for sustenance, faulty power, unreliable direct TV and an overfilled sewage sys- tom for 11 hours” (see www.jetbluchostage.com). ‘MeCaw was not the only traveler who was angry. The ice storm affected 130,000 passengers, caused the cancellation of 1,100 flights over a six-day period, and cost JetBlue an estimated $30 million." Industry observers and loyal customers were left to wonder how this could happen. Afterall, JetBlue was founded by David Neeleman, a Salt Lake City ‘entrepreneur, to “bring humanity back to air travel. As the eighth langest passenger carrier in the United States, JetBlue had won many awards, including “Best Domestic Airline,” “Best Domestic Airline for Value,” and “Best Overall Airline” for onboard ser- vice. Company officials explained that JetBlue’s phi- losophy was to delay flights rather than cancel them. The airline was committed to getting its passengers to their destinations despite bad weather, When the ice storm lasted longer than forecasted, flight delays at JFK caused cancellations at other airports. Out- bound passengers in New York could not deplane because there were only 21 gates for 52 airplanes 0: February 14, 2007, Valentine's Day, Gen- Mary Michel Manhattan College and some airplanes had become frozen to the ground at the gates. ‘Necleman issued several apologies on news pro- getams, talk shows, and even on YouTube. In an e-mail to passengers dated February 21, 2007, he_ wrote “We are sorry and embarrassed. But most of all, we are deeply sorry, Last week was the worst operational ‘week in JetBlue’s seven year history. Following the severe winter ice storm in the Northeast, we sub- jected our customers to unacceptable delays, flight cancellations, lost baggage. .. . Words cannot express hhow truly sorry we are for the anxiety, frustration and inconvenience that we caused.” Neeleman also announced JetBlue’s “Passenger’s Bill of Rights,” the first of its kind among US. airline carriers, in which the company disclosed its policies regarding vouch- crs and refunds in the event of delays, cancellations, and other inconveniences (see Exhibit 1). Nonetheless, JetBlue’s reputation was tarnished and a new senior management team was assembled. Russel] Chew, who had served for four years as the chief operating officer (COO) at the Federal Aviation ‘Administration, was hired 2s JetBlue’s COO in March 2007. He brought with him 17 years of experience fs a pilot and manager for American Airlines. Chew assumed the additional post of president on Septem ber 13, 2007. John Harvey, JetBlue’s chief finan- cial officer (CFO), resigned on November 9, 2007, ‘Copyright © 2008 ty Janes Rovepor and Mary Miche AU hs {ese othe ese ntors This ease ws developed othe sole paps ‘St proviting natal for cls eso. isnot nde a lsat Siler eewine or nese haaing of a maageril uation. We wish to tunk br John E Cane, Asrcioe Dea and Diet of Gide Stas, Michel Cllge of Busines, Univesity of South Aon fo bit the a presented in Eis 3, ad 1: hs assistance i ry angen cstcx Part 2 Cases in Crafting end Executing Stateay Exhibit 1 JetBlue Airways’ Customer Bill of Rights INFORMATION JetBlue wll nail customers of the following ‘+ Dolays prior to scheduled departure *+ Cancellations and their cause + Diversions and their cause ‘CANCELLATIONS All customers whose fight is cancelled by JetBlue vill, atthe customers option, receive a fl refund oF eaccommodation on the next available JeBiue fight at no eddonal charge or fare. I JetBlue cancels a fight within 4 hours of scheduled departure and the cancallaton Is due la a Controllable regula, JetBlue wil also issue the customer a $100 Voucher good for future travel on JetBlue. DELAYS (Departure Delays or Onboard Ground Delays on Departure) For customers whose fight is delayed 3 hours or mare after scheduled departure, JetBlue will provide free movies| ‘on fights that are 2 hours oF longer. DEPARTURE DELAYS 1. Customers whose fight is detayad for 1~1:59 hours after scheduled departure tine dus toa Controllable Irregulaity are ented to a $25 Voucher good for future travel on dete, 2. Customers whose fight is delayed for 2~3:58 hours aftr scheciled departure time due to a Controllable Irregularity are entitled to a $50 Voucher good for future travel on JetBlue, 3. Customers whose fight is delayed for 4-5:59 hours after scheduled departure time due to a Controllable lrregularty are entitieg toa Voucher good for future travel an JetBlue in the amount paid by the customer for the one-way tp, 4. Customers whose fight is delayed for 6 of more hours after scheduled daparture time dus to a Controllable lrregularty are entitted to a Voucher good for future travel on JetSIue in the amount paid by the customer forthe rounetrip (or the one-way trip, doubled). ONBOARD GROUND DELAYS. JetBlue will provide customers experiencing an Onboard Ground Delay with 36 channels of DIECTV@,’ food and ‘nk, access to clean restrooms and, as necessary, medical treatment, For customers who experience an Onboard Ground Delay for more than § hours, JetBlue wil also take necessary action so that customers may deplane. Arrivals: 1. Customers who experience an Onboard Ground Delay on Artiva for 1~1:59 hours after scheduled arrival time, are entitled to a $50 Voucher good for future travel on JetBlue, 2 Customers who experience an Onboard Ground Delay on Arrival for 2 hours or more after scheduled arrival time {re entitled to a Voucher good for future travel on JetBive in the amount pad by the customer for the roundip (or the one-way trip, doubie), Departures: 41. Qustomers who experience an Onboard Ground Delay on Departure alter scheduled departure time for 3-2:59) hours are ented to a $50 Voucher good for future taval on JetBlue,” 2 Customers who experience an Onboard Ground Delay on Departure after scheduled departure time for 4 or ‘more hours are enitled fo @ Voucher good for future travel on JetBlue In the amount paid by the customer for the rounsltip (or the one-way trip, doubled) Inflight entertainment: ¥JetGive otters 26 channels of DIRECTV® service on is fights in the Continental US. four LiveTV™ system is Inoperable on fights in the Continental US., customers are ented io a $15 Voucher good fr uture travel on JetBlue, OVERBOOKINGS (As Defined in JetBIue's Contract of Carriage) ‘Customers who are involuntary deniod boarding shall receive $1,000, “tvalable ony on fights nthe Continental Unied Sates, Source: ve jetiue com(Case 3. JetBlue Aways: A Cadre of New Managers Takes Control ater 18 months on the job. Harvey wanted to pur- sue “other, unspecified (professional interests.”? Ed Bares, a senior vice president in finance and prin- cipal accounting officer, became the interim CFO; he was permanently assigned to that position on Febru- ary 13, 2008. Necleman’s tenure as CEO was over. On May 10, 2007, JetBlue’s board of directors said that he would resign as CEO and become its nonexecutive board chairman. On April 10, 2008, Necleman announced that he was leaving the company and starting an airline company in Brazil. David Barger, who had been president, became the new CEO. When asked ‘what his initial goals were, Barger said, “Let's calm things down. What I mean is, we had an awful lot of growth. That's easy to say in hindsight, but the fact is wwe took on too much."* JetBlue’s managers faced many challenges ahead, JetBlue’ stock prices were in a downward spiral, dropping from $12.99 per share on February 13, 2007, to $3.97 per share on May 30, 2008, The new man- agement team needed to put in place new operating procedures, communication systems, and informa- tion technology solutions to prevent another weather- related debacle. It needed to deal with rising jet fuel prices and the emergence of new competitors just as it was making the transition from a start-up ail to a major domestic carrier. Would Barger, Chew, and Barnes be up tothe task? THE FOUNDING OF JETBLUE AIRWAYS David Neeleman’s idea was to start a company that would combine the low fares of a discount airline cartier with the comforts of a small cozy den in people's homes. Passengers would be able to save money while they munched on gourmet snacks, sat {n leather seats, and watched television. Many of Jet- Blue's original design principles eame from Necle~ ‘man’s own personal experiences. He added leather seats because he once got assigned to a fabric seat on an airplane that was soaked with urine, He real- ized that leather seats were not only more durable but also easier to clean, To make air travel enter- taining, he decided to offer 24-channel live tele sion via satellite—for free. Individual monitors were installed in all seats. css Neeleman was well versed in customer service and had worked in the travel and airline industry before starting JetBlue. He was born in So Paulo, Brazil, in 1959, but his family moved to Sandy, Utah, when he was five years old. One of Neeleman’s first Jobs was in his grandfather's grocery store in dawn- ‘own Salt Lake City.’ As a teenager, he would order items, cut the meat, and stack the beer. He learned from his grandfather never to disappoint customers; satisfied customers would return, Neeleman even pushed the shopping carts of elderly customers to their homes. Later, when Neefeman became CEO of JetBlue, he performed similar good deeds. He once drove an elderly couple from JFK to their home in Connecticut (the state where he had relocated) to save them $200 for a taxi ‘Asa young man, Neeleman studied accounting at the University of Utah, After his freshman year, he took time off to live in Brazil as a Mormon mission- ary. There, he learned tobe frugal, saving $1,300 out of the $3,000 his parents had given him.” Necleman Jeft college in his junior year. He opened up his own travel agency near Salt Lake City. He sold vacation packages to Hawaii that included airfare and a stay in a time-share. His company grew to 20 employ- ces and brought in $8 million in business.” Unfortu- nately, Pineapple Express, the air charter company ‘with which he had an agreement to transport his ‘customers, ran out of cash, Neeleman was forced to close his own business in 1983.8 In 1984, Neeleman joined Morris Air, a simall local carrier based in Salt Lake City. He stayed for about eight years, first as executive vice president and later president, during which time he experimented with several strategies that were later implemented at JetBlue, Working for Morris Air, Neeleman sold vacation packages to shoppers in malls and to cou- ples at weddings he attended. When JetBlue started service out of Long Beach, California, Neeleman hired paid college interns to ride foeal streets in nine ‘Volkswagen Beetles painted in the airline's logo and colors. For a month, they handed out bumper stick- ers, buttons, and tote bags to potential passengers in hotels, movie studios, and restaurants. ‘Neeleman introduced electronic ticketing and allowed reservation agents to work from home at Morris Air and then at JetBlue. JetBlue travelers printed boarding passes at check-in kiosks at the airport. This was convenient for people like Neele- ‘man who often forgot their paper tickets at home.oss Part2 Cases in Crating and Executing Strotegy Reservation agents worked six-hour shifts with two 15-minute breaks from home. This was a way to save money on paper tickets, on postage needed to ‘mail out paper tickets, and on rent for office space. Necleman raised capital for JetBlue from some of the same investors in Morris Ait In 1993, Southwest Airlines purchased Mor- ris Air for $129 million. The deal made Neeleman $20 million wealthier. Southwest hired Necleman as ‘a member of the executive planning committee, but Neeleman could not got used to the company’s poli- cies and procedures. In short, he was fired. Because he had signed a five-year noncompete agreement with Southwest Airlines, Neeleman could not estab- lish another airline company until 1998. When hhe was ready to start JetBlue, Neeleman raised $130 million from such investors as George Soros, ‘Weston Presidio, and Chase Manhattan Bank's ven ture capital group. He contributed $5 million of his own money. ‘Neeleman staffed his first senior management tcam carefully, He hired David Barger as president ‘and COO, With 10 years’ experience in the airline industry, Barger had been the vice president at Con- tinental Airlines and was responsible for running its Newark, New Jersey, hub. John Owen was hired a8 executive vice president and CFO. He had prior experience as a financial analyst at American Air- lines and as viee president of operations/planning and analysis, and then as treasurer, at Southwest Airlines. Owen served as JetBlue’s CFO until 2006. Neeleman’s longtime business partner Thomas Kelly became JetBlue’s executive viee president and gen- eral counsel, Kelly’ title changed to executive viee president and secretary in 2003, Ann Rhoades was hired as executive vice president to handle human resources; she held that position for three years, Rhoades had been the head of the People Depart ‘ment at Southwest Airlines and was the one who hiad fired Necleman from the earrier back in 1993. JETBLUE STARTS SERVICE OUT OF NEW YORK CITY On February 11, 2000, JetBIue launched its first cer emonial flight between Buffalo and New York City, making John F. Kennedy (JFK) International Airport its hub. The one-way fare for the first month was set at $25, which then went up to $98 round-trip. Fares for that route available from other carriers atthe time were as high as $600 round-trip." Mayor Rudolph Giuliani and Senator Charles Schumer, the latter of whom had been instrumental in helping the airline obtain its takeoff and landing slots at JFK, were among the celebrity passengers. Schumer wanted to make good on a campaign promise to help stimu- Jate the stagnant economy in upper New York State. By providing low-fare accessibility to such cities as Buffalo and Syracuse, JetBlue might encourage out- side employers to open up new businesses. Later that day, JetBlue introduced its first com- ‘mercial flight from JFK to Fort Lauderdale, Florida, with 152 passengers aboard, The one-way fare was, $159, which was 70 percent lower than the fares of other carriers. JetBlue would soon fly to Tampa, Orlando, West Palm Beach, and Fort Myers. Jet= Blue's COO, Barger, viewed Florida as “the sixth borough of New York." It became JetBlue's most popular destination The decision to start up service at JFK was a risky one, The airport was called the “black sheep of New York airports” because of its crowded skies, high costs, and inevitable hassles"? Even Southwest Airlines had entered the region by choosing to fly in and out of a secondary airport, MacArthur Airport in Islip, Long Island, instead of JFK. Yet Neeleman saw an opportunity at JFK that no one else saw, While air- lines faced heavy delays during the 3:00-8:00 p.m. time period (when most international fights arrived ‘and departed), the morning hours were relatively free. Neeleman noted that only 15 fights le JFK between the hours of 8:00 and 9:00 a.m." JFK had an average gate utilization of 27 flights a day, much lower than LaGuardia’s 5.5 fights a day." Nocleman driginally thought that JetBlue’ tare get market consisted of the 8 million people in a five-mile radius around JFK. He later found that his service also appealed to young, affluent profession- als with Manhattan zip codes. “You have this large population that makes a lot of money per capita, and everyone in New York would like to get out. At the same time, everyone outside New York would like to get in, Ie truly the nirvana of all markets,” said Neeteman.'® New York City travelers had not had access (0 a low-fare carrier since People Express folded in 1986.Case 3 JatBive Ainways: A Cadre of New Managers Takes Control Congestion at JFK got worse, Between March 2006 and August 2007, airline carriers increased their scheduled operations by 41 peteent; in the first 10 months of fiscal year 2007, the number of arrival delays that exceeded one hour increased by 114 per- cent."° JFK had the third worst overall delay record among the nation’s 32 largest airports in 2007.7 President George W. Bush and Transportation Secre- tary Mary Peters suggested that the U.S. government might auction landingitakeoff rights to the highest bidder and/or charge “peak” fees at JFK, When US. carriers lobbied against congestion pricing at JFK, a compromise was reached: U.S. airlines operating out of JFK agreed to voluntarily adjust their schedules so that no more than 83 takeoffs and landings would ‘occur per hour.'* Previously, up to 100 flights could. land or take off during a peak hour. JetBlue managers estimated that congestion at JFK cost $50 million in labor, fuel, and vouchers in 2007.1" They looked forward to the opening of Jet- Blue's new Terminal 5 at JFK in late 2008, With 26 gates and 72 acres of space, the terminal could handle up to 250 flights a day. Customers would experience {greater convenience and efficiency. There would be security checkpoint that could accommodate 20 Janes and a baggage sorting system that could pro- cess up to 40 bags per hour. Passengers would get from airport entrance to airplane door in less time. To further address vonstrained air space in the New York City area, JetBlue began service from Stew- art Field in Newburgh, New York, and Wesichester ‘County Airport in White Plains, New York. Subur- banites would not have fo travel to IFK, LaGuardia, or Newark to catch a flight for select destinations. JETBLUE'S RAPID EXPANSION Exhibit2 shows JetBlue’s growth, By the end of 2000, JetBlue boarded its millionth passenger. In addition to its Florida destinations, JetBlue provided service from JFK to Buffalo and Rochester, New York; to Burlington, Vermont; to Salt Lake City, Utah; and to Oakland and Ontario, California, Its fare structure was simple. All passengers flew coach and purchased one-way, nonrefundable tickets. The average one-way fare was $88.84, No Saturday stay ‘was required. A $25 fee was charged to passengers who wanted to change their departure times. InApril 2001, JetBlue boarded its 2 millionth pas- senger. It added service from JFK to Syracuse, New York: Seattle, Washington; Denver, Colorado; Long Beach, California; and New Orleans, Louisiana, More important, it started direct service between Wash- ington, D.C. (Dulles International Airport), and Fort Lauderdale, Florida, This marked the beginning of the ‘company’s plans to operate as 3 point-to-point carter. ‘On March 7, 2002, JetBlue flew its 5 millionth passenger. On April 12, JetBlue raised $182 million from is first public offering of stock. It sold 5.87 mil- lion shares at a staring price of $27 a share. In Sep tember, JetBlue acquired LiveTV, LLC, its provider of in-flight satellite entertainment systems. JetBlue ‘added service from Washington, D.C,,to Oakland and Long Beach, California. It significantly expanded its operations out of Long Beach by offering nine flights to Oakland, California: five duly flights to Las Veeas, ‘Nevada; and one daily flight to Salt Lake City, Utah Exhibit 2 JetBlue Airways Expansion from 2000 to 2007 Ee ‘Number of cies sorved ioe Number of departures 10,265 26,34 Number of aireratt (owned ioe al ‘and leased) Number of tuiktime equivalent 1,028 1,983 employees: Percortage of sales through 287% 44.1% JelBiue.com ee ee pia we 49 53 44144 66.20 90,532 112,009 159,152 196,594 a se eo be te 08 572 4802 6413 826 9,265 91909, 63% 78% 754% 775% «78.1% 75.7% ‘Sources Jeiiue 10K repr, mr emive com6 (On January 1,2003, JetBlue flew its 10 millionth passenger. It launched service between JFK and San Diego, Long Beach, and Fort Lauderdale. This was also the year in which JetBlue ordered a new type of plane, the Embraer 190, With 100 seats, the Embraer ‘was a smaller plane compared to the Airbus A320. JetBlue pulled out of Atlanta, Georgia, because of ‘competition from Delta and AirTran on its transcon- tinental routes to Oakland and Long Beach. In 2004, JetBlue added satellite radio and movie channels to its in-flight entertainment systems. I was, a big year for route expansion. JetBlue started ser Vice out of Boston (with fights to Long Beach, Den- ver, Fort Lauderdale, Orlando, and Tampa) and out of New York's LaGuardia airport (with flights to Fort Lauderdale). I launched service out of JFK to seven new cities including Aguadillo, Puerto Rico; Santi- ago, Dominican Republic; and Nassau, Bahamas. In 2005, JetBlue added flights from Boston to San Jose, California; Las Vegas, Nevada; and Seat- tle, Washington. It started a new service between Washington D.C.s Dalles Airport and San Diego, California, In the New York area, it added flights out of JFK to Burbank, California; Portland, Oregon; and Ponce, Puerto Rico; and out of La Guardia to ‘West Palm Beach, Florida, and to San Juan, Puerto Rico. In November, JetBlue started service between New York's JFK International Airport and Boston's, Logan Airport with its Embraer 190 airplanes. Jet- Blue lost $20.2 million, largely due to sharp rises in fuel costs On February 1, 2006, JetBlue began to serve Dunkin’ Donuts coffee on its flights. It continued to add new destinations; for example, it began to fly from Austin, Texas, to New York's JFK and Boston's, Logan airports. It offered nonstop flights between Washington, D.C., and Boston; between Oakland ‘and Fort Lauderdale; and between New York and Bermuda, JetBlue lost $1 million. It began to seale back its expansion plans. It put five Airbus A320 airplanes up forsale, deferred delivery of six A320s, ‘and modified the timing of its Embraer 190 aircraft purchases. JetBlue started 2007 by providing service to Ch ‘ago’: O'Hare International Airport and to San Fran isco International Airport. It piloted a new on-board service: e-mail and instant messaging. The German airline company Lufthansa bought a 19 percent equity stake in JetBlue when it purchased shares priced at $7.27 per share (fora total investment of $300 milion). Port 2 Cavos in Crafting and Executing Strategy By December 2007, JetBlue operated more than $50 flights a day and served 53 destinations in 21 states, Puerto Rico, Mexico, and the Caribbean, JETBLUE’S OPERATING COSTS AND SERVICE QUALITY JetBlue wasa discountairline carrie. I offered passen- szers low fares; operated point-to-point systems; used two types of aireraft; served only snacks; and main- tained quick turnaround times at airports. Its operat- ing costs were low, especially compared to those of other major US. airline companies. Inthe first quarter of 2008, for example, JetBlue’s total operating expenses amounted to 12.77 cents per revenue pas- senger mile, compared to 20.95 cents per revenue passenger mile for Delta and 13.85 cents per revenue passenger mile for Southwest (See Exhibit 3) JetBlue chose for its fleet the new Airbus A320, which had 30 additional seats and was more fuel efficient and less costly to operate than a Boeing 7372 Since the airplanes were new, repairs and maintenance costs were low for the first couple of ‘years of operations, JetBlue was spared the problems experienced by American Airlines and Southwest Airlines, whose aircraft were older. In March 2008, the Federal Aviation Administration (FAA) fined Southwest for flying airplanes that should have been {grounded for required fuselage inspections. Cracks in the fuselage of five airplanes were discovered. In April 2008, American Airlines grounded its entire fleet of 300 MDOSO airplanes to recheck wiring that it had failed to repair, JetBlue added Embraer 190 airplanes to its leet in 2005. 1t ran into unexpected technical glitches. Pilots, for example, needed to get used to the new jet. An A-320 pilot could set the parking brake when waiting in line to take off. If an E-190 pilot were to do this, the airplane's electronic systems would act as if the airplane had landed and arrived at the gate" Also, after the February 2007 ice storm, soft- ware problems were detected in the Embraers that ‘were later fixed by the manufacturer. JetBlue managers wanted to realize some of the advantages of using two types of airplanes. 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JetBive Airways: A Cadre of New Managers Takes Control cs not filled to capacity during an off-peak time, the company could deploy an Embraer with 100 seats. However, JetBlue’s passenger load factor actually declined from 80.4 percent in 2007 to 78.2 percent in the first quarter of 2008 (see Exhibit 4. ‘The Embraer was also used in smaller, regional ‘markets to transport passengers to major hubs for con- necting flights. A mix-and-mateh strategy could pro- vide a better pattern of service for business travelers interested in flying in and out of New York the same day.” Instead of operating two Airbus A320s (with 150 seats each) to fly, for example, between JFK and. ‘New Orleans, three Embraers (with 100 seats each) could be deployed morning, noon, and evening, JetBlue's turnaround time ranged from 20 to 30 ‘minutes. Because no meals were served, JetBlue did not have to wait for catering services to replenish the aircraft. To save time, flight attendants themselves stowed carry-on bags and coats in the overhead bins Everyone—pilots flight atendants, and passengers — helped throw away the trash after each flight. JetBlue was one of the first companies to use information technology to keep costs down. It oper- ated Open Skies software to handle electronic tick- ing, Internet bookings, and revenue management. It cost $1 to process an e-ticket, compared to $10 for 4 paper ticket.?® By June 1, 2008, the International Air Transport Association (representing 240 airline Exhibit 4 Load Factors for Selected U.S. Aili oe ‘America West 69.1% 70.6% American Aitines 65.2% 72.0% Continontal Air Lines 65.1% 74.1% Delta Air Lines 63.5% 72.1% Votive Airways na. 72.7% Northwest Airlines 68.9% 78.1% Southwest Aitines 68.5% 70.5% United Air Lines 692% 71.5% US Airways cast 69.4% companies) stated thatit would no longer support paper tickets. The effort was aimed at saving the industry $3 billion annually.” In 2007, JetBlue booked more than 75 percent ofits sales on its own Web site, leading the industry and reducing travel agent commissions. JetBlue hired full-time reservation agents to sell tickets over the telephone. They worked at home with company-supplied computers and second tele- phone lines. JetBlue needed to operate only a small, office in Salt Lake City for training. Starting pay for the agents was $8.50 per hour with a fixed 5 per- cent annual increase, medical coverage, profit shar- ing, and flight benefits. Traditional call centers cost about $10 more per employee hour (including, ‘overhead and training) to operate than a network of ‘home-based operators." JetBlue paid attention to the little details that customers found special. It worked with a unit of Bally Total Fitness to offer in-flight yoga cards in seat pockets. Passengers received instruction on how they could hold four yoga poses without removing their seatbelts. In 2005, JetBlue partnered with Oasis, Day Spa to offer private massages, manicures, and hair styling to travelers at JetBlue’s JFK Terminal 6. A children’s play area and big-screen television could ‘be found near its gates, In June 2007, JetBlue entered ‘a partnership with Google Maps so that flights could be tracked live on the airline's Web site and via the ies, 1995, 2000, 2005-First Quarter 2008" 79.8% 79.9% 83.256 na. 0.3% 82.1% 83.1% 80.3% 81.5%, 83.8% 84.0% 82.3% 77% 79.2% 82.0% 80.0% 84.9% 1.7% 20.4% 78.2% 20.0% 83.0% 3.8% 82.8% 70.7% 73.1% 72.6% 7e2% B1.6% a1.% 83.4% 787% 742% 79.0% 81.0% 80.0% “Load factors a measure of Pew much of an afin’ passenger-carying eapaaly actually wlized ts calculated by dildng he rummbr of revonue-ger rating passenger mies flown by he tia numbor of Sat miles avalide In olor wor, I roughly equal the percentage of total avalable seals cecupied by ticketed passengers Noles: America West merged with US Airways in September 2005; stopped eporing in 2007. Us Aimways merged wih America West in Septemer 2006; combined reporting began in 2007 ‘Source: US. Department Transporation, Bureau of Transportation Statist, At Cartier Statatios Form T-100,cw Part2 Cases in Crafting and Executing Strategy in-seat satelite television system on its aircraft. In Exhibit S compares JetBlue’ on-time perfor April 2008, passengers could pay for their flights mance, mishandling of baggage, and number of pas- using PayPal. In May 2008, JetBlue partnered with senger complaints o other major US. airlines. For the Carbonfund.org so that passengers could offset the years 2005, 2006, and 2007, between 70.1 and 72.9 carbon dioxide emissions generated by their flight. percent of JetBlue's flights arrived within 15 minutes Exhibit § On-Time Flights, Mishandled Baggage, and Passenger Complaints of Selected US. Airlines, 2005-2007 Percentage of Flights Arriving on Time" and Carrier Rank Peary 42 Months Ending 12 Months Ending Eeusetue Pee ee co AirTran 768 4 748 a ne 10 Alaska 724 6 733 10 co7 " ‘America West ei 1 ‘American 637 10 75 6 769 5 Continental 743. 5 734 ° 769 4 Dota 769 3 763 4 763 6 Frontier 78 2 807 1 JetBlue 70.1 8 729 1" 14 9 Northwest 696 9 758 5 750 8 Southwest 80.1 d 802 2 807 2 United 703 7 739 8 78 3 US Airways 87 1 759, 3 752 7 Alkairine average 734 754 787 ‘nTime means an arval logs than TS miles afer achedied arial ra Mishandled Baggage Reports Filed by Passengers ee eee ee Ce Sea een Cet eet ea en ‘AirTran 4.05 1 472 g 3.45, 1 ‘Alaska a9 8 571 “8 5.03 8 ‘America West 433 6 “American 725 9 63 8 592 9 Continental 533 4 476 4 ane 3 Delta 760 10 oy 10 7.09 10 Frontier 616 7 5.18 5 JetBlue 523 3 4.09 1 408 2 Northwest 5.01 2 4.60 2 486 7 Southwest 587 6 5.4 6 425 4 United 576 5 568 7 428 5 US Airways: a7 " 782 " 962 " Alairtine average 7.08 73 6.04 (Continued)Case 3. JetBive Arways: A Cadre of New Managers Takes Control cot Exhibit 5 Passenger Complaints (Continued) eee AirTran na, na. Alaska 076 3 ‘American 1.65, i ‘America West Continental 4.08 5 Deka 181 8 Frontier 066 2 JetBlue 078 4 Northwest 143 6 Southwest 0.26 1 United 225 8 US Airways: 318 10 Altirline average 137 ieee Paes Cee Cones pees aor) prreury fu cee Rank Boarded fa oer fu eed 0.82 5 1.00 7 052 4 077 3 4.09 8 1.02, e 096 6 oa 6 092 4 1.03 8 109 10 049 3 040 2 029 2 oe 7 94 5 one 1 018 1 1.38 " 1.02 8 41.38 10 1.88 1" oar 89 Ta = notevalabe Noos:Statstis ae displayed to one or wo decimal paces. Acial ranking oro is based on calculations carving ut the number of Gecmal places tonne US Armays and America West merged in September 2005 with he US Airways name berg retained, Front fed {oc Chapter 11 barkruplo protection in Apri 2008 but continued its normal business operations as i eorganized, ‘Souros US. Department of Transportation; Ar Tvel Coneumer Ropar, Fabrusty 2008, 2007, 2008, wrnalrconsumer.ost dot covleports of heir scheduled times. This was down from its peak performance in 2003, when 84.3 percent of JetBlue’ flights arvived within 15 minutes of their scheduled times, In 2005, 2006, and 2007, JetBlue received, respectively, 4.06, 4.09, and 5.23 reports of mishan- dled baggage (baggage that was lost or damaged) pe 1,000 passengers, This compared with 2.88 reports of mishandled baggage per 1,000 passengers in 2003. In 2005, 2006, and 2007, JetBluc had, respectively 0.29, (0.40, and 6.78 complaints per 100,000 passengers (for such things as canceled flights, poor customer service, and discrimination); in 2008, it had 0.12. JETBLUE’S ORGANIZATIONAL CULTURE Ann Rhoades, JetBlue’s first executive vice presi- dent of human resources, helped JetBlue put in place a strong organizational culture. She believed that “people can accomplish the extraordinary when they are give the authority and responsibility to suc- ceed." She helped the company achieve extraor inary results from its employees by implementing five steps. The first step was to determine the company’s values, At JetBlue, these values were safety, caring, integrity, fn, and passion. Safety was the company’s ‘number one priority, with the other four values being, © approximately equal in importance.”* The values guided employees in the decision-making process. +The carrier's concern over safety was exhib- ited early on when it signed an agreement with “Medaire Ine., enabling crew members to imme- diately consult with land-based emergency physicians anytime a passenger fell ill during a flight, JetBlue's Web site featured a section called “Inflight Health,” which offered tips on ‘what to do if flying eaused ear pain and how to prevent deep-vein thrombosis, a rare eonkition that occurred when blood clots formed in the Jeg and pelvic veins, After September 11, 2001,ford JetBlue was the first company to install Kevlar ‘cockpit doors and cabin surveillance cameras in all of its aixplanes. *+ Caring, in the form or respect and understand- ing, was exhibited after the September 11 ter- rorist attacks when the company did not lay off anyone and continued paying salaries and ben- efits.” When Neeleman was CEO, he donated part of his salary to a crisis fund, designed, for example, to pay the medical bills of an employ- cc's wife who was sick with cancer or replace the personal belongings of an employee whose home was destroyed by a fire.” + Integrity meant “doing the right thing.” When JetBlue’ security department violated com- pany policy and released passenger data to a US. Defense Department contractor, Neeleman took personal responsibility forthe incident. He cither e-mailed, called, or wrote leters to some passengers whose information had been released and sent out free airline tickets. Neeleman hired the financial advising firm Deloitte & Touche to analyze and further develop the carrier’ privacy policies. + Fun was the key to a friendly work environ: iment where people liked to be. At JetBlue's IFK terminal, employees had access to George Foreman grills, which they used for barbecues. In 2002, passengers could hit yellow punching bags to relieve stress, The bags were tagged with such humorous sayings as “Forget where you parked?” and “Left the iron on? + Employees demonstrated a passion for work and the company’s products. They cared about customers. Once, a passenger who had landed at JFK could not board a connecting flight to Italy because she had left her passport at home in Buffalo. A JetBlue customer service agent tele- phoned a colleague in Buffalo who went to the ‘woman's home, collected her passport, and put it on a flight to JFK. The passenger was able to depart for Italy.”* Managers cared about employ- ees. When employees in Burlington, Vermont, ‘complained that there were not enough health ccare providers in their area, the company added a second health insurance plan. The second step Rhoades implemented was to ‘make sure that managers hired employees who Part2 Cases in Crafting and Executing Strategy mirrored company values. An example of an outstand- ing flight attendant who embodied the values of safety and caring was a 63-year-old former firefighter who had rescued people during the 1993 World Trade Cen- ter bombing. An example of someone who was not hired was a pilot who promoted himself by saying that hhe had 15,000 hours of experience in the cockpit. He could fly a plane anywhere, anytime. Yet, when asked by the recruiter what else he had done, he could not provide an answer, JetBlue wanted to hear that a candi- date had done something special for someone else. Rhoades encouraged managers to be creative dur- ing the hiring process. Instead of asking, “How should wwe do a better job of screening flight attendants?” one might ask, “Why don’t people want to be flight attendants?” College graduates did not want to com mit themselves to a long-term contract, so Rhoades agreed to hire them for a year. That way, they could meet people and visit places. Parents with children «did not want to be away from home for long periods, ‘0 Rhoades created the Friends Crew Program, which allowed two people to share a job. This was perfect for ‘a mother and daughter. When the daughter worked, the mother cared for her grandchild. Rhoades devel- ‘oped three different paths: one for traditional flight attendants, one for college students, and one for par- ticipants in the Friends Crew Program, The third and fourth steps were to ensure that the company continually exceeded employee expec- tations and to ensure that it listened to its custom- ers, JetBlue pilots received immediate benefits and profit-sharing opportunities in their first year of ser- vive. Passengers told JetBlue that they wanted tele- vision shows free of charge and low-carb snacks like almonds. They indicated that there was no need for separate restrooms formen and women. The fifth st was to ereate a “disciplined culture of excellence The company fad to continually improve its services and differentiate itself from its competitors. JETBLUE’S HUMAN RESOURCE MANAGEMENT PRACTICES Rhoades laid the foundations for JetBlue’s focus on people. Employees were called “crew members,” pas sengers were referred fo as “customers,” and vendorsCose 3. JetBlue Aways: A Cadre of New Managers Takes Control ce were addressed as “business partners.” Vincent Stabile, ‘ho replaced Rhoades, made sure the company val. ues became an integral part of the company’s human resource management practices, His frst day at Jet- Blue was September [1, 2001, He witnessed firsthand hhow JetBlue employees put their values into action, Soon after the attacks on the World Trade Center, crew ‘members realized thatthe airports would be closing. Atthe company’s expense, they booked blocks of hotel rooms and reserved buses to transport passengers 0 their accommodations, They extended the same cour- tesy to stranded passengers who were booked on the flights of their competitors.” Hiring Each year, JetBlue received 130,000 résumés, from which 3,000 qualified candidates were hired. According to Stephen Howell, director of the Col- lege of Inflight at JetBlue University, a Blue Review recruitment team sifted through online applica- tions, prescreened candidates via phone interviews, and invited qualified applicants to an cight-hour, one-day event in Forest Hills, Queens, The team, ‘hich included the director and manager of in-flight recruitment as well as several additional representa tives from the company’s human resources and from its in-flight crew leadership ranks, interviewed the candidates. At the day’s conclusion, team members got together and made their selections. They were looking for individuals who performed especially well during group activities.$ In February 2008, JetBlue implemented a pro- gram called the Aviation University Gateway to anticipate a shortage of airplane pilots. It partnered with Embry-Riddle Aeronautical University and the University of North Dakota to identify candi- dates with exceptional potential as professional Pilots, to clearly define a career path for them, and to provide them with rigorous academic train. ing and regional airline experience.** Candidates ‘would intern at Cape Air, serve as an instructor at 4 flight school, fly with Cape Air for at least two years, and then be eligible for a final interview at JetBlue.” Faced with rising costs associated with high jet fuel prices, JetBlue implemented a hiring freeze for all management and support staff starting in April 2008. It also stopped accepting applications for first officer (ie., copilot) positions Training Mike Barger (CEO David Barger’s brother) was JetBlue’ chief learning officer: A former navy pilot who still flew JetBlue aircraft, Barger helped create JetBlue University. The university was separated into five colleges, one for each discipline: pilots, flight attendants, maintenance crew, gate staff, and reser- vations agents, Classroom-based training was held in one of five campuses—in New York, Orlando, Salt Lake City, Boston, and Long Beach.** In 2005, results of an employee survey showed a lack of confidence in JetBlue's leadership. The com- pany hud promoted qualified frontline employees to leadership positions without providing them with appropriate tools and training. “We identified great ‘doers,’ but didn’t give them a lot of tools, and they found themgelves struggling within 18 to 24 months,” said Barger.” As. result, 800 employees attended more than 14,000 hours of leadership development training. In 2005, JetBlue completed construction on a 107,000-square-Foot building at Orlando International Airport. became the new home forthe airline's rain- ing center. It had the capacity for eight flight simula- tors, two cabin simulators, classrooms, a training pool, 4 firefighting training station, and a cafeteria, Pilots, in-flight erew members, and customer service repre. sentatives received initial and continuous education there, JetBlue’s Forest Hills location was used primar- ily for recurrent training; there, trainees could work with mock-ups, such as simulations of eabin doors? Paying JetBlue was known for paying employees lower base salaries than its competitors. In 2004, for example, it was reported that flight attendants started at $25 an hour, mechanies at $26 an hour, and pilots at $108 an hour. US Airways, after imple. ‘menting cuts, paid its flight attendants $39.95 an hour, its mechanics $28 an hour and its pilots $134 an hour." JetBlue made up for these differences by offering health coverage, profit-sharing, and 401(k) retirement plans. JetBlue had a no-layoff Policy and relied on downsizing through voluntary Packages and attrition during difficult economic times.” CEO David Barger voluntarily reduced his base salary by 50 percent, from $500,000 per year to $250,000 per year, for the period of July 1 to December 31, 2008.co JETBLUE'S FINANCIAL AND OPERATING PERFORMANCE Despite its early promise and strong organiza tional culture, JetBlue did not deliver value to its stockholders over the five-year period ending December 31, 2007. None of the major aitlines did. Shareholdets of another low-fare airline, Southwest, lost less than JetBlue’s shareholders over the same period. Exhibit 6 shows that a $100, investment in JetBlue common stock on Decem- ber 31, 2002, was worth only $49 five years later. $100 investment in Southwest common stock on December 31, 2002, was worth $89 five years later. Airline stockholders would have achieved similat returns by investing in the AMBX Airline Index. A $100 investment in the AMEX Airline Index ‘on December 31, 2002, was worth $89 after five years. Tn contrast, a $100 investment in the S&P Part 2 Cases in Crating and Executing Strategy 500 Index was worth $182 at the end of the same five-year period. Industry observers quipped that it was better to place money under a mattress than invest in an airline stock." According to Michael Boyd, a Colorado-based industry expert, “Aire lines are a crummy business, and will always be a crummy business" The financial and operating data in Exhibits 7 and 8 were consistent with JetBlue’s stock perfor- mance during the period. JetBlue revenues grew 185 percent, from $998 million in 2003 to $2,842 rillion in 2007. The growth in operating revenues reflected both the increase in revenue passenger miles flown and a modest inerease in the aver- age fare. However, operating expenses grew by 222 percent during the same period, OF the operat- ing expenses, jet fuel expenses grew by 532 percent from 2003 to 2007. Operating expenses excluding Jet fuel actually grew slower than revenues (155 per= ent), JetBlue's largest nonoperating item was inter- est expense, which grew 658 percent over the period to finance the company’s expanded operations, Exhibit 6 Comparison of Five-Year Cumulative Total Return among JetBlue, Southwest Airlines, the AMEX Airline Index, and the ‘S&P 500 Index* $0}, 2002 2008 2005 Year ended December 31 "The graph assumes the Investment cf $100 in exch stock and each ofthe indexes as ofthe marke ‘ose 09 Det ber 31,2002, wh reinvestment ll dvdands on a quarterly bass ‘Source: JetBlue and Southwest, 2007 10-K reportsCose 3. Jetiue Ainwoys: A Gade of New Managers Takes Control cs ‘Summary of JetBlue Airways’ Financial Performance, 2003-2007 in millions, except per share data) Ei foe Eas Income Statement Data, Operating revenues, s2e42 $2,963 $1,701 $1,205 «S98, ‘Operating expenses ‘Aircraft uel 929 782 498 255 147 (Other operating expenses ara 184 41,165, 299) 684 Operating income (loss) 169 127 43 am 167 ‘Govt. compensation — = = = 23 Non-operating income (expense) Intorest (expense) (182) (146) en 43) (2 Other nonoperating 5a 28 19 9 8 Income betore income taxes a1 8 (24) 75 174 Income tax expense (benefit) 2a 10 4 29 1 Net income 18 “ 20) 46 103 Earnings (loss) per share, basic 10 = (ora) 030 on Earnings (Iss) per share, dlltod 0.10 aC) 28 064 ther Financial Data Cash, cash equivalents and investment securies $ 834 § 699.««$ 484 «$450 «S607 Total assots 5.598 4,843 3es2 2787185, Total debt 3.038, 2.840 2926 1,545 1,109, ‘Common stockholders’ equity 1,098 952 ant 758 670 Net cash provided by operating activities 358 24 170 199 287 Fir dductng miei captalzad Tor soll consruclad asso _SoureeJet2be, 2007 and 2008 10-K reports Exhibit 8 Summary of JetBlue Airways’ Operating Performance, 2003-2007 Bad ao Bio 2008 a Revenue passengers thousands) 21,387 18,565 14728 11,783 9,012 Revenue passenger miles (milions) 25,737 23,320 20.200 18,730 11,527 Available Seat miles (ASMs) (milion) 31,904 * 2es04 23,708 taait 13,699 Lead factor 80.7% 81.6% 85.2% 83.2% 8.5% Aircraft tization (hours per day) 128 127 194 134 130 Average tare $123.23 $1973 sito0a—$t0349 $107.09 Passenger revenue per ASM 8.26e 777 6.e46 6.450 7.086 Operating revenue per ASM Bote 8.26¢ 7.186 6.690 7.328 Operating expense per ASM 8.386 7826 6.986 6.108 6.09¢ Average fuel cost par gallon $208 $1.99 sist $1.08 so. Fuel gallons consumed (illons) 444 ar? 303 2a 173 ‘Source delve, 2007 10K report.‘Was JetBlue doomed to poor financial perfor- mance when fuel costs soared? Why had its stock performed poorly compared to the airline industry as a whole? JetBlue had a different cost and capi tal structure from Southwest Airlines, its low-fare competitor. Exhibit 9 compares the common size income statements and balance sheets of JetBlue and Southwest for the year ending December 31, 2007. The common size income statements show that JetBlue’s fuel cost consumed 33 percent of its ‘operating revenues versus just 26 percent for South- ‘west, Southwest hedged more of its jet fuel costs. JetDlue’s net interest expense was 6 percent of oper- ating revenues versus 1 percent for Southwest, In Part2Cavos in Crating and Executing Svstogy the 2007 common size balance sheets, JetBlue had a strikingly lower percentage of cash to total assets than Southwest (3.4 percent versus 13.2 percent), JetBlue’s long-term debt comprised 46.2 percent of total assets versus 12.2 percent for Southwest. Southwest hedged jet fuel prices more aggres- sively than JetBlue in'2007, according to the two companies’ 2007 10-K reports, In 2007, Southwest hedged over 90 percent of its fuel consumption at an average crude oil equivalent price of $51 per bar- rel, For 2008, Southwest had hedges to protect over 70 percent of expected fuel consumption at an aver- age crude oil equivalent price of $51. Southwest even had hedges in place to protect 15 percent of 2012 Exhibit 3 Comparative income Statement Data, JetBlue versus Southwest Airlines, 2007 irre Eoraneenese enero Suc Operating revenues $2,842. Operating expenses ‘Jet fue! 229 (Other operating expenses 1744 Operating income 169 Non-operating income (expense) Interest (expense)" (182) ‘Other non-operating income: 54 Income before income taxes 41 Income tax expense 23 Net income 313 ee ere ry Cet ee ees 100.0% $ 9661 100.0% s27% 2.538 25.7% 1.4% es4 85.5% 50% 721 8.0% (63) 07% 398 34% 7058 107% A138 42% 501s 6.5% Pon ere nn Total Assets ‘Cash and cash equivalents $ 190 3.4% $ 2213 132% ther curent assets 28 165% 2200 133% Property, plant & equipment sree 67.8% roara o40% Other assets __888 12.5% 1.455 87% Total assets 5.598 Fo00% T8772 joao. Current bites 1.256 224% 4.898 23.0% Longrterm debt and capitalieases 2,588 46.2% 2.050 122% Other ables 718 12.8% 2.989 175% Total Habits 562 81.5% 98st 58.6% Stockholders equity 1.036 18.5% 6.981 414% Total labios & equity 35508 io00% Ser 100.0% “meret expanse ater deduving ineretcaphalzed fr eoi-conevoced assole Seurco: JetBlue, 2007 10K pore.Case.3 JetBlue Aiways: A Cadke of New Managers Takes Control fuel needs at $63 per barrel, JetBlue hedged 59 per cent ofits actual fuel consumption in 2007, although it stated no crude oil equivalent price per barrel. At December 31, 2007, JetBlue hedged approximately 13 percent of its projected 2008 fuel requirement. All of its outstanding hedges were scheduled to set- tle by the end of 2008, Given the rapid increase in jet fuel prices, why did JetBlue hedge so little? David Neeleman gave some insight in an interview in the Financial Times ‘on December 14, 2007: “If oil goes up to $120 and no one is hedged, then you don’t look like a fool. But if you do it at $100 and it goes 10 $80 or $70, then ‘you really look like a fool. You have to be' careful at ‘these historically high demand levels.“ JetBlue used two types of derivative instruments—option contracts and swap agreements — to hedge its exposure f0 aircraft fuel prices, It used derivatives for crude oil or heating oil, which were highly correlated with airline fuel prices. There was xno derivative market for aircraft fuel. Ifa cash flow hedge wns to be effective, hedge gains (losses) would ‘offset (inerease) aireraft fuel expense when the deriv- ative settled and fuel was consumed. If JetBlue used an option contract to hedge increasing fuel prices when prices actually fell, the option would expire worthless and JetBlue would lose only the option premium paid. If JetBlue used a swap agreement to hedge increasing fuel prices and prices fell it would have to pay the counterparty to the swap the full extent of its losses. In addition to soaring fuel prices, the airline industry faced an increasing “crack spread” between the cost of a barrel of jet fuel and crude oil. The spread was $3.61 at the begining of 2002 and $18.59 atthe end of 2007." It averaged $23.98 a bar- rel in the period from January 1 to April 1, 2008." Refiners had increased their profit margins on jet fuel due to a lack of refining capacity. During the question-and-answer portion of JetBlue’s presenta- tion to the Merrill Lynch Transportation Conference ‘on June 18, 2008, Dave Barger said that he assumed the crack spread would stay at the “mid-thirties.™? If crude oil prices were to drop, however, airlines would not necessarily see immediate decreases in the cost of et fuel. Because of a conservative financial strategy, JetBlue maintained strong liquidity through the first quarter of 2008. I listed cash and cash equivalents of co $713 million on March 31, 2008, in its 10-Q report. The position was within its target range of 20-25 percent of trailing 12-month revenues, according, to CFO Ed Barnes during the first-quarter earnings, conference call JetBlue had one of the highest liquidity coverage ratios of the major airlines. The cash balance excluded $313 million of investments in auction-rate securities collateralized bby student loans. Because markets for auction-rate securities began to fail in February 2008, invest- ‘ments in them were reclassified from current assets to long-term investments, Barnes predicted that liquidity would return to this market or that second- ary markets would develop for most of JetBlue’s auction-rate securities.°" During its second-quarter 2008 earnings conference call, Bares announced that JetBlue used its auction-rate securities to obtain $110 million line of credit from Citigroup Global Markets on July 22, 2008.5° JetBlue obtained new equity capital in 2008 according to its March 31, 2008, 10-Q report, In Jan- vary 2008, JetBlue issued 42.6 million new common shates to Deutsche Lufthansa AG for $301 million, net of transaction costs. This investment represented 19 percent of JetBlue’s common shares outstanding, ‘A Lufthansa nominee was appointed to JetBlue’ board of directors. JetBlue was also able to obtain credit. During, its first-quarter earnings conference call, Barnes stated that financing was secured for all of its 2008 aircraft deliveries, Minimal cash was due because of favorable financing and pricing terms negotiated by JetBlue JetBlue completed its offering of two series of 5.3 percent convertible debentures, according to its 8-K report to the Securities and Exchange Commis- sion on June 4, 2008. The debentures had a combined principal of $201.25 million due in 2038. Owners of the Series A debentures might require JetBlue to repurchase them for eash on October 15 of the years 2013, 2018, 2023, 2028, and 2033. Holders of the Series B debentures might require JetBlue to rep chase them for cash on October 15 of the years 2015, 2020, 2025, 2030, and 2035. JetBlue expected to use the funds to retire $175 million of 3.5 percent com vortible notes due in 2033 that it expected to repur chase on July 15, 2008, On March 15, 2010, JetBlue ‘might be required to repurchase $250 mil percent convertible debentures due in 2035,cos LESSONS IN CRISIS MANAGEMENT ‘The Valentine's Day 2007 ice storm at JFK that resulted in flight cancellations and delays taught JetBlue’s managers several important lessons. and set in motion needed changes, JetBlue's Navitaire ‘Open Skies reservation system, which was confi ured to accommodate up to 650 reservation agents at a time, worked well during normal operations ‘but was inadequate during an emergency. It could not handle the huge volume of telephone calls from stranded passengers who wanted to rebook flights and request compensation. Many passengers waited ‘on the phone for more than an hour, and others could not get through at all. Navitaire managed to expand the system to 950 agents, but JetBlue had difficulty staffing the new lines, Off-duty crews and airport personnel volunteered to help but were not trained in how to use the computerized system..? Because the telephone lines were busy, JetBlue pilots and crew members stuck in different cities across the country could not call in to headquarters with their availability and location. It was difficult, therefore, for crew schedulers to locate and assign crews to new flights once conditions improved and the airplanes could be redeployed. Crew members waiting out a storm along with passengers could not always fly ‘out when a new schedule was made because the PAA set limits on a erew’s number of hours of duty. Bag- gage was piling up at aitports but there was no com puterized system to record and track lost bags."4 JetBlue took several steps to fix these problems. It worked with Navitaire to double the number of agents who could simultaneously use the reserva- tion system. It trained additional staff members at JEK to help out during an emergeney. It decided to provide cross-training so that employees could learn the skills necessary to use the reservation, fli and crew scheduling systems, JetBlue upgraded its Web site to allow passengers on canceled flights to ‘ebook online and at airport kiosks. It set up a sys- tem to quickly alert passengers about flight delays and cancellations by e-mail and telephone to prevent ong waits at aitports. It provided crew members with the ability to inform crew schedulers of theit availability and location via the Internet or via hand held devices. In addition, it put in place a computer- ized baggage tracking system. Part2 Cases in Crating and Executing Strateny In April 2007, JetBlue hired Alex Battaglia to be the troubleshooter at JFK airport. The position of director of JFK operations had been vacant since September 2007. Battaglia (who had previously ‘managed Delta's operations at JFK) was in charge of service and the upcoming move to JetBlue's new $850 million terminal, In December 2007, JetBlue started a search for a crisis communications agency. It needed access to experts to teach its managers how to better com- municate with the media, respond appropriately to lawsuits, and monitor the effectiveness of its adver- tising.** In June 2008, JetBlue hired MWW Group to oversee its communications for “any type of eata- strophie event” and to train executives and airport ‘managers in media relations.” JETBLUE’S POSITION IN THE AIRLINE INDUSTRY In the first six months of 2008, the U.S. economy slowed and crude oil prices rose to a record of $140 per barrel. Businesses began to cut back on employee travel, and consumers started to save moncy and contemplate “staycations” instead of vacations dur- ing the summer, Jet fuel prices skyrocketed as crude oil prices rose. The Airport Transport Association determined that each 1-cent increase in the price of a gallon of jet fuel cost the industry an additional $190 million to $200 million a year* Airline companies struggled to offset higher fuel costs by increasing revenues (adding $25 fuel surcharges; charging $15 for the first checked bag; charging for headphones, pillows, and blankets) or cutting costs Cowering wages, grounding aircraft) Some airline: companies did not survive. Fron- tier Airlines Holding, a major airline company, filed for protection under Chapter 11 of the U.S. Bank= ruptey Code, Three smaller airlines—Aloha Air- group, ATA Airlines, and SkyBus Airlines—went bankrupt and ceased all operations. Delta Airlines and Northwest Airlines Corporation (both of which had just emerged from bankruptcy) announced plans to merge, Additional industry consolidation could ‘oceur. It was rumored, for example, that Continental Airlines and UAL Corporation, the parent of United, hheld merger talks in February 2008." Exhibit 10 ranks US. airline carriers by domestic market share,3 JetBiue Ainvaye: A Cadre of New Managers Takes Control co £10 Comparative Domestic Revenue Passenger Miles for ‘the Major US. Airlines, March 2007-February 2008 Gin billions of miles) 7 suns = i aux = os i : a . oan aa a _ . soi 30 [27 5; 7 oF : 3 2°35 % 8 $ ¢@ 2175 25 i 3 i Fg a8 3 f= 8 é 5 Domestic Market Shares of Major U.S. Airlines, March 2007-February 2008 (based on revenue passenger miles) US Alrways 6.10% JetBlue 420% ‘AirTran Corp. 1 American mw Southwest United Delta = Continental 1 Northwest US Airways, = JetBlue AirTran Corp. 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With the help of US. investors, the British entrepreneur Richard Branson launched a low-fare cartier, Virgin America, with a hub in San Francisco and administrative offices in Now York City. It began operating two daily flights between San Francisco and New York and five daily flights between San Francisco and Los Angeles on August 8, 2007. A number of former WestJet execu tives planned to launch a low-cost airline cartier ‘operating out of Canada. Temporarily named Newair & Tours, the airline planned to sign a deal fora used hharrow-body jet and start service in the third quar- ter of 2008. It would add six more airplanes by the end of 2008. It would fy to destinations in Canada during peak scasons and perhaps target U.S, destina- tions in the shoulder seasons (i.c., before and after a tourist area’s peak season). The International Air Transport Association estic mated that the global airline industry needed 3,000 ‘more pilots each year than taining schools were providing. The shortage was caused by the thou- sands of pilots from the baby-boom generation who ‘were retiring every year and by the thousands of fly- ing hours first officers needed to acquire before they could become captains. Flying schools did not have the instructors to train enough new pilots. The increase in the age limit for a commercial-pilot license from 60 to 65, passed by the International Civil Aviation Organization in 2006, was considered only a stopeap measure." So, along with soaring jet fuel costs, the industry could also face increased labor costs. Large airlines resorted to stealing pilots from small carriers by offering better pay and benefits. JETBLUE’S STRATEGIES FOR 2008 AND BEYOND Despite the difficulties facing the airline industry as 4 whole, JetBlue’s new managers spoke confidently of the future. CEO David Barger said, “JetBlue is ‘well positioned with a strong route network, a flex- ible fleet order book, solid liquidity, the best crew members in the industry, and a management team that understands and has and will continue to respond to the challenges that lie ahead. We will continue to make decisions for the long-term success of JetBlue We are just being smart about it atthe same time." COO Russell Chew felt that proving that a startup low-cost carrier could mature without giving up its Uunique attributes was a “once-in-a-genetation oppor- tunity to re-invent air travel” JetBlue began to follow several new strategies, Its managers decided to (1) reevaluate the ways the company was using its assets, (2) reduce capacity and cut costs, (3) raise fares and grow in select mar- kets, (4) offer improved services for corporations and business travelers, (5) form strategic pariner- ships, and (6) increase ancillary revenues, JetBlue’ managers found new ways of deploying ‘v0 of the airline's Key assets: its JFK terminal and its LiveTV subsidiary. Lufthansa, which held a 19 percent equity stake in JetBlue and a 30 percent equity stake in BMI British Midland (withthe option to buy more shares), would be able to use JFK as a “quasi-bubs"™ For several years, Lufthansa had wanted to compete with British Airways on the lucrative London-New York routes. Iis partnership with JetBlue would give BMI British Midland access to gates at JFK (onc struction of JetBlue’s Terminal S was completed). In January 2008, JetBlue signed a contraet with Continen- “tal to provide it with LiveTV. Among Live TV's other customers were Westlet, Virgin Blue, and AirTran, Jet- Blue also hired a financial adviser 10 explore strategic alternatives for the subsidiary (including, a divestiture of LiveTV in order to raise cash), JetBlue planned to reduce capacity and cut costs by: + Agreeing to sell nine used Airbus A320s in 2008, Which would result ina net cash gain of $100 lion. 1 might sell more aircraft in 2009 and 2010,on Part 2 Cases in Crafting and Executing Strategy + Delaying the delivery of 21 new Airbus A320s, scheduled for 2009 through 2011 to 2014 and 2015. This would enable JetBlue ta postpone payment for the airplanes and save on operating expenses it would incur, + Reducing its aircraft utilization rte from 13 hours per day to 12.5 hours per day in the fourth quarter of 2008, f + Suspending service in and out of Columbus, Ohio; Nashville, Tennessee; and Tucson, Arizona, + Canceling planned service between Los Ange- les International Airport and Boston and New ‘York. The cost to fill an Airbus 320 with fuel for 4 transcontinental flight had risen from $9,600 in 2007 to more than $15,000 in 2008. JetBlue began to grow selectively in certain ‘markets and to slowly raise its fares. In March 2008, JetBlue announced that Orlando would become its sev- enth “focus city”™” It opened service between Orlando and Caneiin, Mexico, and between Orlando and Santo Domingo, Dominican Republic. It received tentative approval from the U.S. Department of Transportation to start Orlando's only service to South America (with daily nonstop service to Bogoti, Colombia). Two JetBlue partners—Aer Lingus and Lufthansa—also started flying to Orlando. This would offer JetBlue passengers other conveniently scheduled flights to international destinations, In March 2008, JetBlue’ average one-way fare reached an all-time high of $138." This was still very competitive with other airline carriers. The US. Department of Transportation noted that the aver- age domestic fare in the fourth quarter of 2007 was $331 (data for the first quarter of 2008 were not yet available). Transcontinental fares rose from $279 to $599. Fares to the Caribbean went from $299 to $599. Barger said that the new fares were being accepted by the traveling public during peak travel petiods.”” JetBlue tried to appeal to business travelers. It introduced refundable fares and enabled corporate ‘meeting planners to receive meeting-specific dise counts and a complimentary travel certificate for every 40 customers booked to the same event des- tination. It entered into a five-year agreement with Expedia Inc. to reach leisure travelers, managed business travelers, and unmanaged business travelers (unmanaged business travelers were those who booked their business travel on their own as opposed to going through a corporate travel department or a full-service corporate travel management company). JetBlue flights were also available 10 Travelocity business customers, At the same time, JetBlue was interested in pur= suing partnerships with other airline companies. It developed, for example, an agreement with Aer Lin- agus that enabled passengers to make a single reser- vation between Ireland and 40 destinations in the United States through JetBlue’s bub at JFK, It had centered into a marketing partnership with Massachu- setts-based Cape Air so that passengers could trans fer between the two carriers to get to such places as Hyannis, Nantucket, and Martha’s Vineyard Barger was exploring “ancillary revenue opportu- nities” He realized this focus would not be a panacea but would enable the airline to offset some of the costs associated with high fuel prices.” JetBlue: + Imposed a eall-eenter charge of $10 on passengers ‘who booked a flight on the phone or atthe airport + Intended to create a cashless cabin in which pas- sengers could pay for extra food items via hand- held devices carried by flight attendants. + Stopped handing out free headphones and sold only upgraded versions for $1 atthe gate. + Charged passengers additional fees to reserve seats with extra legroom. These Seats were pop- ular on fong-haul fights. The program generated more than $40 million in incremental revenue in nine months in 2008. + Charged passengers a $20 service fee for check- ing a second bag beginning June 1, 2008. The new policy was expected to generate more than $20 million in new revenues in the last six ‘month in 2008, ‘These were the strategies that JetBlue’s ma agement team had developed to deal with what Barger called “the new normal environment” of rising fuel prices and increased competition.”* The issue was whether they would be enough to ensure JetBlue’s survival; the company’s performance in the first six months of 2008, as shown in Exhib- its 12 and 13, cast doubt on the adequacy of the actions taken so far,Case 3. Jotive Ainvays: A Cadre of Nw Managers Takes Control on Exhibit 12 JetBlue Airways’ Financial Performance, First Six Months of 2008 in millions, except per share data and percentages) i Statement Data Eetenaesr Ce) Roe OPERATING REVENUES Passenger sis27 1.247 225% Other 148 st 62.0% Total operating revenues 1.675 4,838 25.2% OPERATING EXPENSES Aireraft fuel ore 416 Selaries, wages and benofts 346, 302 Landing fees and rents 100 92 Depreciation’amortization 9 85 Aireratt rent 64 60 Sales and marketing 80 oo Maintenance and repairs 65 53 (ther operating expenses 213 190 Total operating expenses 1637 7278 (OPERATING INCOME 38 6 (25.8)% Operating margin (4) 2.3% 45% (22) points Non-operating income (expense) Interest expense) (109) (108) 1.3% Capitalized interest 28 19 50.3% Other non-operating 20 ar 26.4% ‘Total ather income (expense) 1) (62) (07)% Income (oss) before income taxes @3) 2) Pretax margin (%) (4p (0.1)% (1.3) points Income tax expense (benef) 8 ft NET INCOME (3) at) Earnings (loss) per share, basic (oor) (0.00) Earmings (loss) per share, ditod (07) (0.00) Seat eri ony Bierce (Cane) Es Percent Change (Cash and cash equivalents, sas 8 190 945.0% Total investment securities 397, 44 38.4% Total assets 6.468 5598 155% “otal debt 3,835 3,048 0.4% Common stockholders’ equity 1378 1,036 33.0% Not cash provided by operating sctivitios 105 218 52.1% ‘Beace: JelBve 2006 For 10-0 forthe parid ended June 30, 2008, and peas etaso on Form 8 or duly 22, 2008.on Part 2 Casas in Crating and Executing Strategy Exhibit 13 JetBlue Airways’ Operating Performance, Six Months Ending June 30, 2008 versus 2007 Revenue passengers (thousands) Revenue passenger miles (millions) Available seat miles (ASMs) (illons) Load factor Breakeven load factor” Aircraft utiization (hours per day) Average fare Yiold por passongor mile (conts) Passenger revenue per ASM (cents) Operating revenue par ASM (cents) Operating expense per ASM (cents) Operating expense per ASM, excluding fuel (cents) Aline operating expense per ASM (cents) Departures Average stage length (miles) ‘Average number of operating alrcaft during period ‘Average fuel cost per gallon Fuel gallons consumed (millons) Percent of sales through JetBive.com Fulltime equivalent employees at period end” en Pee eeu 11,188 45% raat 5.1% 16,778 87% 79.4% (2:7) points 83.1% (04) points 128 129 (1.0)% $136.90 s116.74 173% 1147 983 166% 10 808 127% 998 367 152% 975 328 178% 87 558, 2.3% 9.53 821 16.1% 104,501 96,087 38% 1.135 1 21% 198.0 1241 112% 291 1.95 49.5% 233 214 39% 77.0% 75.2% 1.8 points 9.856 9421 46% “Excludes operating expenses and omplove ‘of LiveTV, LLG, which ar unrelated fo arine operations Source: JetBive, 2008 Form 10-0 forth period ended June 3, 2008, an press release on Form BK ford 22, 2008, Meanwhile, there were indications that JetBiue might become a takeover target. Its shares had hit an all-time low of $3.14 on July 11, 2008, JetBlue had put in place a severance plan to protect execu- tives and employees in case a competitor attempted a hostile takeover.”* Perhaps Lufthansa might have a long-term interest in increasing its minority stake in the airline, The German company could easily increase its stake from 19 to 25 percent; anything above that would require a change in US. laws. Endnotes Foreign airlines were allowed to own only up to 25 percent of a US. carrier's stock. Some industry observers suggested that if turmoil in the domes- tic airline cartier industry continued, policymakers might ease the restriction. “The US. airlines badly need more capital to survive, and the only players ‘with the resources to buy invare the [cashrich] Euro- pean cartiers.”‘noted Robert Mann Jr, an industry consultant.”* Would JetBlue remain an independent carrier in the future’ Wei What JetBlue's Ci Learned about Custree Saisacon? ‘cto. (ape 152007). 1.Retnved Saplembor 9 2007, orn ABU INFORM (Proquest database Neuman "Loya Clots Kay JtBue CEO Saye? Knight Risser “roure Busines Nowe, November, 2003p 1. Relieved hay 5, 2008, {ram ABUINFORN (Pogues) atatase 2" JetBlue Financ Chie! Harvey Resign’ Wal Soot Journal November 8, 2007, p. 85. Reteved Ai 30, 2008 tem ABL Ineo rogues databace “LBerck “Being on Coa Sles Once Move ith Finn His Blood, JtBie& Davo BagorKagps He Heed Above he Clos: Wal ‘Steet our November, 2007.1. Reeves Apt 3, 2008, tam AABLINEORM (Proqoes) dab 5. Nesters, From Mlk Cate fo High Auda! New York Tas, November 5, 2000, p 3. Ratioved Mirch 12,200, tom ABIINFORM (Prequos) databace #5. Donel, “ue Skies’ Tin 158 ly 30, 2001), pp. 24-26, Retrowed arch 122005, ram ABUINFORM Proguoa)