Case JetBlue Airways 1

Running head: CASE JETBLUE AIRWAYS

Case JetBlue Airways

Assignment1

Juliana Hendershot

BUS 599

January 15, 2011

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JetBlue Airways and industry trends

JetBlue Airlines launched its first ceremonial flight in 2000. Since that time, the

company has evolved into a billion dollar corporation. The purpose of this report is to examine

JetBlue’s business strategy and its likelihood to survive.

Like any other airline, JetBlue has struggled to keep its head out of the water due to

several trends in the US airline industry that have a direct impact in its performance and

strategies, such as crude oil pricing fluctuations lead to passenger fees for revenue generation,

scarcity of pilots increased labor costs, and post 9/11 Aviation Security increased operating

expenses.

In 2008, crude oil prices increased to a record $140 per barrel (Thompson, Strickland, &

Gamble, 2010). This staged price increase caused airlines to struggle to offset the cost of fuel.

Many began implementing new passenger charges including a fuel surcharge, baggage check

fees, fees for heavy bags, fees for beverages and snacks, and even fees for using blankets and

pillows. Currently gas prices are considerably lower. However, the airlines continue the extra

fee trend tentatively to increase their revenue making them a permanent strategy for every

American airline.

Due to retirement of baby boomers, the airline industry is experiencing a shortage of

pilots. According to the International Air Transport Association, an estimated 3,000 more pilots

are needed each year than training schools can provide (Thompson, Strickland, & Gamble,

2010). Today flying schools do not have the capacity and human resources to train and attend to

the demand that is generated by the industry. In consequence, the airline industries are facing

increased labor costs as they raise pilot salaries in order to attract pilots.

“Shortly after the 9/11 terrorist attacks, Congress passed the Aviation and Transportation

Security Act (PDF), which created the Transportation Security Administration (TSA) and
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mandated that federal employees be in charge of airport security screening (Kaplan, 2006).”

These mandates caused the airlines to adopt several additional layers of security. TSA

implemented more thorough screening procedures for passengers and their baggage, including

requiring passengers to remove their shoes, limiting carrying fluids onto the plane, and requiring

passengers to remove their computers for x-ray inspection. Beyond passenger screening, TSA

developed the Secure Flight Program for passenger prescreening and a Registered Traveler

program with voluntary background information and biometrics for frequent flyers (Kaplan,

2006). In addition, several new measures designed to prevent hijackings also were adopted,

including, fortified cockpit doors, armed pilots, and armed undercover officers on passenger

flights. These procedures represented a large increase in expenses for the airline industry. Since

9/11, about $6 billion a year has been spent on aviation security to prevent a similar attack

(Schneier, 2008).

JetBlue’s strategic intent

JetBlue’s founder, David Nelleman, started JetBlue with the concept of bringing

humanity back to air travel. The purpose was to offer a combination of low fares of a discount

airline carrier with the comfort of a small cozy den in people’s home. The company’s philosophy

was to delay flights rather than to cancel them. Gourmet snacks, leather seats and 24-channel live

television via satellite were some of the perks of JetBlue (Thompson, Strickland, & Gamble,

2010).

JetBlue took the lead in areas such as Passenger’s Bill of Rights, a document disclosed its

policies to passengers and was also one of the first companies to use information technology to

keep costs down. It operated Open Skies software to handle electronic ticketing, Internet

booking, and revenue management.

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To further increase shareholder and customer value, JetBlue launched strategic growth

and rapid expansion initiatives. In 2000 the company decided to begin service in New York’s

overcrowded JFK Airport, focusing on early morning hours which the airport had a considerably

reduced traffic of aircrafts. It used this hidden opportunity to its advantage to offer flights that

appealed to young, affluent New Yorkers, as well as, to those traveling to New York City. In

late 2008, JetBlue opened up Terminal 5 at JRK to give customers greater convenience and

efficiency while also saving them $50 million in labor, fuel, and vouchers. Meanwhile, between

2003 and 2008, JetBlue began service to many destinations including San Diego, Fort

Lauderdale, Portland, and more. By December 2007, the company had expanded to serve over

53 destinations (Thompson, Strickland, & Gamble, 2010).

JetBlue’s financial objectives and success in achieving

Although JetBlue delivered a lot of promise, the stock dropped in value by 50% in the

five year period ending December 2007. A closer review of JetBlue’s financial performance

revealed that, while revenues grew 185% between 2003 and 2007, their operating expenses grew

222% during the same period. This revenue loss was attributed to jet fuel (532% increase) and

interest expense (658% increase). Instead of handling the interest expense, JetBlue took a

conservative financial strategy in which they maintained high liquid ratios relative to the other

major airlines (Thompson, Strickland, & Gamble, 2010). The cash balance was excluded and the

securities were reclassified from current assets to long-term investments. Nevertheless, JetBlue

was successful in obtaining new equity capital and credit needed to keep the company afloat

despite the setbacks.

Competitive advantage

Cost: JetBlue operates at a lower cost than its competitors. According to Thompson,

Strickland & Gamble (2010), JetBlue’s total operating expenses were $12.17 per revenue
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passenger mile in 2008 versus $18.18 for American Airline, $18.18 for Continental, $20.95 for

Delta, $13.85 for Southwest, $19.13 for United, and $21.45 for US Airways. JetBlue’s aircrafts,

such as, the Airbus A320, tended to be newer than those of its competitors resulting in lower

maintenance costs and no maintenance-related fines. The company increased flying time by

minimizing turnaround time. Reservation agents worked at home resulting in cost savings as

compared to a traditional call center. These measures paid off creating major competitive

advantage in the form of low operating costs that other airlines did not achieve.

Organizational culture: JetBlue’s organizational structure was created based on five

steps. First, the company’s values were determined. Then, hiring managers selected employees

who mirrored the company’s values. Next, the company ensured that the company exceeded

employee expectations and to listen to customers. And, finally, the company created a plan to

drive excellence. The values established by JetBlue were safety, caring, integrity, fun, and

passion. By only hiring employees that mirrored those values, the company could encourage

hiring managers to be creative during the hiring process and to eliminate those that would not be

a fit. By making these steps an active part of getting work done, JetBlue developed a strong

organizational culture and loyalty from its employees.

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Human resource practices: JetBlue is a company with a strong focus on people. In

anticipation of airplane pilot shortages they implemented Aviation University Gateway,

partnered with universities to identify exceptional candidates, and implemented internship

programs. They addressed a lack of confidence in JetBlue’s leadership by providing

leadership development training. They developed an airline-training center at the Orlando

International Airport. In order to compensate lower base salary than its competitors,

JetBlue offered health coverage, profit sharing, and 401k retirement plans. The company

also avoided layoffs through voluntary packages and attrition. The focus on meeting the

needs of its employees, growing talent, and creating a talent pool was essential to survive

in this industry and to create a competitive advantage.

JetBlue’s strategies for 2008 and future

In 2008, JetBlue adapted new strategies to re-evaluate the way its assets were used,

reduce capacity, cut costs, raise fares, grow in select markets, offer services for business travel,

form strategic partnerships, and increase ancillary revenues. JetBlue joined forces with

Lufthansa to enable the company to use their terminals at JFK and signed a contract with

Continental to provide LiveTV (Thompson, Strickland, & Gamble, 2010). The company

minimized their capacity by selling nine aircrafts and reduced costs by delaying the delivery of

21 new aircrafts (Thompson, Strickland, & Gamble, 2010). They reduced aircraft utilization

rates, suspended service in some cities, and cancelled plan service in order to cut costs. After

choosing Orlando to become a target market, they then raised prices – but fares continue to be

relatively lower than its competitors. In addition, they provided incentives to corporate travelers,

agreements with Expedia for leisure travelers and Travelocity for business customers, and with

Aer Lingus to expand their reach internationally. Concerned about generating revenue, JetBlue

created new fees, including a fee for a second bag and for select seats. The combination of
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strategies was not enough to bring the airline to its gold stage; the company’s financial

performance shows that they were not meeting expectations during the first six months of 2008

(Thompson, Strickland, & Gamble, 2010).

Nevertheless, 2009 was a victorious year for JetBlue. The company was one of only few

to report four consecutive quarters of profitability in that year (JetBlue, 2010). A net income of

$58 million was generated with an operating margin of 8.5% – which was an improvement of

more than $140 million compared to 2008. In addition, JetBlue generated positive free cash flow

for the first time in its history. According to JetBlue’s 2009 annual report, these results

demonstrated the benefits of JetBlue’s disciplined growth strategy, its focus on managing capital

expenditures, rationalizing capacity, maximizing revenue, and controlling costs. Given that the

company is prosperous in challenging times, it is likely that JetBlue strategies and cash-rich

positions will provide longevity over the years to come.

Conclusions

The purpose of this report was to examine JetBlue’s business strategy, how they align

with trends in the U.S. airline industry and how the company’s competitive advantage and

strategy will bring longevity in this industry. As mentioned above, negative changes in the

industry combined with a weak economy, caused airlines to struggle to survive. JetBlue has

endured by focusing on providing value, customer service, and offering unique perks for

customers. The company also paid close attention to its employees, offering them training and a

strong organizational culture. The business benefited from measures to cut costs and form

lucrative partnerships. Currently, the financial reports of JetBlue showed that the company was

outperforming its competitors in a recession making the company highly likely to be successful

over the long term.

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References

JetBlue. (2009). JetBlue's 2009 Annual Report on Form 10-K. As retrieved from the Internet on

July 11, 2010 from

http://phx.corporateir.net/External.File?

item=UGFyZW50SUQ9Mzg1MDQzfENoaWxkSUQ9Mzg2NzExfFR5cGU9MQ==&t=1

Kaplan, E. (2006). Targets for Terrorists: Post-9/11 Aviation Security. As retrieved from the

Internet on July 11, 2010 from

http://www.cfr.org/publication/11397/targets_for_terrorists.html.

Schneier, B. (2008). Is Aviation Security Cost-Effective? The New York Times. As retrieved

from the Internet on July 11, 2010 from

http://freakonomics.blogs.nytimes.com/2008/07/22/is-aviation-security-cost-effective/.

Thompson, A. A., Strickland, A. J., & Gamble, J. E. (2010). Crafting and executing strategy:

The quest for competitive advantage: Concepts and cases: 2009 custom edition (17th

ed.). New York: McGraw-Hill-Irwin.