Final Recommendations for Jetblue

Hedge Fuel:

• Use financial instruments as Jetblue has successfully done in the past
• Make plane lighter by using lighter interior materials to reduce fuel cost
• Invest in possible fuel alternatives. Possible first mover advantage. Founder David Neelman has already started this process as mentioned in a previous blog post

Expansion of Routes:

• Organic growth strategy
• U.S. expansion: West Coast and Texas areas. Low coverage by Jetblue in these high volume traffic areas
• Mexico and Canada expansion: No routes in these countries and no partnerships that cover these areas. Possibility to expand Jetblue into North America or at least create partnership for these destinations
• Passenger Carrying Capacity in 2010, 2011, and 2012 was 82.6%, 83.5%, and 87.6% respectively. Current routes and planes are being saturated creating need for expansion of routes and additional aircraft

Increase Nationwide Marketing:

• Currently, Jetblue is only spending 4.5% of revenues on marketing
• Average marketing expenditure is 10% of revenues, 20% when introducing new product
• Since Jetblue is in a growth state, the company needs to create more awareness, brand recognition, and loyalty

Promote Trueblue membership:

• Create loyal customer base
• Members become less price sensitive
• Increase awareness of route growth through Trueblue members

Review of Class

Overall I have really enjoyed this class (I promise I’m not just saying that). The structure of the course, doing cases each week reinforced the material a lot more than I have experienced in other classes. The lectures may be fairly dry, or maybe that is just the nature of lectures, but the material we learned wasn’t particularly new. We’ve spent the past 3 years learning all about distinctive competencies, vertical integration, joint ventures, blah, blah, blah. But to be honest, none of it really hit home until we were able to really apply it. Sure, we have done projects on companies before about what makes them great or crappy but they are normally all done by students and completed with the I’ve-done-enough-for-a-C- attitude. This was the first class were the professor helped analyze the companies and provided real insight. I found the class much more engaging due to this and also feel slightly less incompetent for entering the real business world.

Jetblue Financial Analysis

As I am also an accounting major, I thought I would take a look at Jetblue’s 2011 10K and see what I could decipher. Although much of the language and information was industry specific and way above my expertise as a college senior, I was able to find out a few interesting points.

Leases:

The accounting for leases has been under scrutiny in recent years as many companies were hiding millions of dollars of debt in off balance sheet financing by classifying leases as operating leases, therefore not capitalizing on the asset or recording the debt on the balance sheet. The airline industry in particular is notorious for this accounting facade as most airlines are leasing their planes which constitute huge future financial obligations. Of the 169 planes that Jetblue uses, 60 are classified as operating leases. These 60 planes make up almost $1.2 billion of long term debt that Jetblue has not recorded on their balance sheet. Although this sounds extreme, most competitor airlines are in the same position and have been for many years (I believe Delta is an exception to this as I think I read an article which stated Southwest owns their entire fleet giving it a unique financial advantage in the industry). Even with this large amount of unrecorded debt, Jetblue seems to be in a good enough financial position to cover all their financial obligations.

Steady Financial Position:

Jetblue’s Current Ratio (as I calculated it) is 1.15, meaning they can just about cover all their current obligations if they liquidate their current assets. I didn’t expect their current ratio to be much more than this, as they are an airline and liquidity isn’t a strong suit in the industry. Nonetheless, it’s encouraging to see that if sh*t hit the fan, Jetblue would have enough money to clean it up. Jetblue has also shown steady increases in revenue, volume of flights, number of planes, and additional routes. Noting no other major financial issues, I would judge Jetblue to be fairly financially stable. Although I would most likely encourage investors to invest their money elsewhere as the airline industry isn’t the place to get $$.

JetBlue reacts to Hurricane Sandy

I thought it would be interesting to look at how Jetblue handled the hurricane last week as it had a huge impact on the entire industry. To me it seems Jetblue did a good job handling the situation through communication with their customers, relief efforts on the East Coast, and up to date information about the hurricane. First off, Jetblue had to cancel 1,714 flights due to Sandy, which should cause a significant impact on the fourth quarter earnings for the New York based airline. All flights that were cancelled due to the hurricane were either fully refunded or kept on account with Jetblue for rescheduling. Jetblue also waived any cancellation fees on flights that were booked for a given period of time during the storm. This, I believe, was expected from all the U.S airlines, otherwise there would of been a massive negative reaction from customers. But Jetblue provided a lot more to the victims of the hurricane than a flight credit.

Jetblue sponsored fourteen food trucks in New York City to provide hot, free meals to the community as many were without power for several days. Stations were set up with power cords at the food truck locations so people could charge their cell phones. Jetblue encouraged their customers to donate to the Red Cross to help the hurricane victims by offering six Trueblue points for every dollar donated, and is also matching $100,000 in donations. These efforts showed that Jetblue values it’s community, as it is a local airline and I think that will go a long way with their customers. Although their relief efforts were great, I think Jetblue handled the situation best with it’s communication to it’s customers. I received several emails from Jetblue and their CEO, David Barger wishing for the well-being of family and friends affected by the storm. Their blog was updated multiple times a day with the latest news of the hurricane, the local airports, flying conditions, and Jetblue’s operations during the storm. I really liked the transparency the airline gave. I think that during a natural disaster like this, especially when the power is out and some people are not receiving the most current news, transparency regarding the situation is reassuring to customers, without it, customers would feel more ‘in the dark’ (and with the power already off, that’s not a great feeling). Jetblue also announced that their CEO will be visiting the local airports in New York City to check in with customers, pilots, and crew members. So despite this hurricane being a huge obstacle to the airline, Jetblue handled the situation well.

Jetblue Corporate Level Strategy

As Jetblue is still a relatively new airline in the industry, it has a growth corporate strategy which is organic in it’s domestic market, yet the airline uses strategic partnerships in the international market.

Jetblue CEO David Barger believes there is room in the U.S. for a developing domestic airline to grow. Jetblue continues to add more flights, destinations, and routes within the U.S. every year. Expanding their domestic range of direct routes and low cost structure is Jetblue’s main strategy currently. I think this is the right focus for the airline. The customer service and flying experience on Jetblue is far superior to most of the legacy airlines, and with a low price also, they are sure to be more desirable than the other airlines. The main problem Jetblue has now with it’s competition is the lack of availability: the more established airlines have routes and access to major airports than Jetblue has yet to offer, leaving customers without the choice of Jetblue as their airline on some trips. I do believe that customers would rather choose Jetblue than say, Delta, if given the choice. It is just a matter of Jetblue growing its domestic market to capture these opportunities. Jetblue has taken the same approach to their cargo service as well, as it is only offered in the U.S. and is consistently adding more destinations and shipping routes annually. Therefore Jetblue is organically growing within the U.S.

CEO Barger also mentioned that Jetblue does not intent to follow suit with it’s competitors in the horizontal integration trend in the airline industry. One issue that was pointed out was Jetblue’s non-unionized workforce, as most of the airline industry is unionized, it would make for a difficult integration of services. Other than the unionization problem, reasons were not given as to why Jetblue will not be pursuing this strategy. I believe that the company realizes it’s competitive advantage in its operations, customer service, and cost structure and because of this, they do not want to risk integration that may hinder these advantages that set Jetblue apart in the industry.

On the international side, Jetblue has turned to partner airlines to handle the extended market. Wanting to focus on what they do best, Jetblue has left international travel is the hands of Aer Lingus, Japan Airlines, Virgin Atlantic, and 19 other airlines. Using a Strategic partnership strategy, Jetblue has been able to focus on its domestic market. As the company is still developing in the U.S. market, it is not ready to start entering the international market on it’s own. Jetblue recognizes this limitation and has chosen to provide the service of international travel to its customers through others, creating some cross-selling. Although this global strategy is not ideal profit-wise, it does help Jetblue gain more customers on its domestic flights. ‘Connecting Traffic’ makes up 14% of Jetblue’s passenger travel. If Jetblue decides to enter the international market at a later time, these strategic alliances may serve as obstacles as Jetblue will have been directing their new customer base away to others airlines for years.

Business Level Strategy

I had trouble determining whether Jetblue had a focused cost leadership strategy or a focused differentiation strategy. So I’ll first discuss their customers, customer needs, and distinctive competencies that led me to these two strategies.

Customers: Jetblue’s target market is identified in their 10K as “fare-conscious travelers who might otherwise have used alternate forms of transportation or would not have traveled at all.” This pretty clearly states they are targeting the most price-sensitive customer base. How else could you capture these customers without a focused cost leadership strategy? Their planes only offer coach seats, no first class or business class. This is also supported by their website layout and interface which emphasizes prices (for example, when booking a flight on a certain date through Jetblue’s website, the display will show the customer the prices of flights on the days previous to and after the depature/arrival date in case there is a lower fare which the customer would rather take).

Customer Needs: Jetblue is providing the transportation that it’s customers need at an inexpensive cost. According to their mission statement, they are trying to do so while providing an enjoyable experience for the customer as well.

 

Distinctive Competencies: Jetblue provides low cost transportation to their customers through their low cost structure. By using point-to-point flights, only two types of aircraft, and mostly second tier airports, their operating costs are much lower than the legacy airlines and Jetblue operates more efficiently, passing on the savings to their customers. In addition to this, Jetblue provides its customers with select benefits to make the transportation process much more enjoyable. Happy, fun pilots and stewardesses manage the plane, snacks and free entertainment is standard for each customer on every domestic flight, and Jetblue also offers the most leg room for coach customers than any other airline. 

 

Jetblue’s low cost structure and emphasize on low prices point towards a focused cost leadership strategy for customers whom might use a different form of transportation. However, their added features and enhanced customer service seems to point to a focused differentiation strategy based on ‘bringing back humanity to their airline industry” to price-sensitive flyers. Either way, I think Jetblue is doing a pretty darn good job. 

 

More recently, Jetblue has been promoting their Trueblue membership and Trueblue Mosaic membership. Their Trueblue membership is free to join and gives members the benefit of earning points through Jetblue which can be used to purchase flights. Trueblue mosaic is only available to Jetblue customers that fly with a certain frequency based on ‘base flight points’. Mosaic members get many benefits such as complimentary access to an expedited security line, early boarding,first and second bags check for free, and customer have access to a dedicated customer service line. So it seems that Jetblue is trying to attract more frequent fliers that are still price conscious rather than customers would might rather drive than fly. Is Jetblue changing their customer base? I would say probably not, but they are making an attempt to gain more market share by branching out to different segments of customers. So maybe Jetblue is in the midst of a switch from a more focused cost leadership strategy to a focused differentiation strategy that still targets the price sensitive customers.

Jetblue SWOT

Internal Analysis

Strengths:

• Low Cost Structure – point-to-point flights using second tier airports and only using two types of aircraft.
• Employee Relations – good relations with employees due to company culture.
• Stable Finances – Airline is liquid (in current and long-term), steadily increasing revenues, and slowly lowering debt.
• Great Customer Responsiveness – Jetblue’s mission is to bring humanity back to air travel and they definitely have accomplished this through their business-level strategy of a customer-oriented approach. They have created a Customer Bill of Rights, added features that were important to customers, their website interface is easy and fun to use, they have a large social media presence with many promotions, and Jetblue receives numerous awards each year for their customer satisfaction.

Weakness:

• Relatively New to Industry – Still somewhat of an underdog in the industry as it fights for a spot at the top.
• Small Market Share – Jetblue commands less of the market than most airlines as it doesn’t have as many aircraft, routes, destinations, or international presence.

External Analysis

Opportunities:

• Expansion – add more routes and destinations in the U.S., still many areas of the U.S. that Jetblue could enter.
• Global Expansion – become more of an international airline. Jetblue already has 22 partnerships with international airlines but their presence abroad is not even close to what it potentially could be.

Threats:

• Rising Fuel Costs – the forever increasing price of fuel has already been causing problems for the industry as operational costs continue to increase and profit margins become slimmer.
• Tough Competition – The airline industry is mature and competition is heavy, pricing wars is already the name of the game.
• Governmental Regulations – airline regulations are extremely expensive and could cause higher expenses and more inefficiency in operations.

Jetblue founder on mission to convert natural gas into jet fuel

David Neeleman, founder of Jetblue (and major investor in JetSuite) announced on September 17th that converting natural gas into jet fuel is his next big thing. Technically, this has already been accomplished. Shell has built a gas-to-liquid plant in Qatar that has successfully powered a aircraft but at a cost of $80 per barrel. Neeleman states that a conversion cost of $40 per barrel would completely revolutionize the airline industry (and probably the entire world’s energy consumption). If this conversion price was reached, airlines could save about one third on their current fuel expense. Considering Delta Airline’s fuel expense for 2011 was $12 billion, this is a pretty big deal. Neeleman is encouraging other carriers to donate funds to a research effort to accomplish this goal. No governmental help with this project so far but seeing as this was only announced 6 days ago, I don’t think anyone should expect massive donations anytime soon. What surprised me about this event was that Neeleman seemed to be trying to accomplish this fuel cost reduction for the entire airline industry and not for his company. If Neeleman could achieve the $40 conversion cost, and Jetblue exclusively had access to it, then the company would dominate the airline industry (at least for a time). It is interesting that Neeleman is broadcasting this project to the entire industry. Maybe he believes the goal couldn’t be achieved alone? Or maybe the initial capital contribution is too large for Jetblue alone? We’ll have to wait and see how Neeleman’s ‘next big thing’ turns out.

Airline Industry Attributes and Competitor Comparison

Before completing a full SWOT analysis of Jetblue, I wanted to get more information on the industry in which it operates and its competitors so I can fully understand where each airline positions itself within the market.

Industry: The airline industry can be broken down into multiple subcategories; passenger airlines, low cost carriers, air freight, and regional and commuter carriers. The first two subcategories have merged for the most part in the recent years due to intensified competition and a trend of mergers and acquisitions. This is the market segment Jetblue operates in, so I will focus my industry analysis on this subcategory.

Substitutes: Possible substitutes for passenger airlines are private aviation, trains, buses, and personal transportation. However, since the U.S. does not have a well developed national train or other public transportation system in place, most customers choose to fly to destinations over a few hundred miles. Private aviation is only available to a very small, wealthy percentage of passengers and therefore does not qualify as a real threat of substitution.

Suppliers: Airbus and Boeing are the main manufacturers of aircraft for most airlines which gives them a much larger bargaining power than other industries considering their product is so very vital to the industry.

New Entrants: There is not much threat of new airlines in the industry. The high labor cost, capital-intensiveness, competitiveness, and low profitability of the industry discourages any new airlines from forming.

Profitability: low profitability is caused by high fuel, labor, and asset costs. Government regulations on safety and security also create huge expenses. To top it off, customer loyalty in the industry is low and therefore airlines compete with low prices.

Competitors: There has been much change in the airline company mix over the past 5 years. Now it seems to have boiled down to two types of airlines: Low cost carriers and legacy airlines.

Low Cost Carriers: Southwest: including merger with Airtran Airlines

Jetblue

Legacy Airlines:    American Airlines

United Airlines: including merger with Continental

Delta: including merger with Northwest airlines

Before I discuss the differences between each of the competitors listed above, it’s important to note the differences between these two different types of Airlines. The legacy airlines operate on a more tradition model for the industry, using hubs and spokes as a system to connect customers to all of their locations. Legacy airlines have multiple hubs that are strategical located across the U.S., mostly at major airports. Then spokes are used at second or third tier airports to connect customer to the main hubs. Therefore, most passengers on a legacy airline will go through a hub before reaching their final destination. Low cost carriers operate on a more efficient operation. Instead of having hubs at major airports which can be costly, they have point-to-point routes. This system simplifies their flight schedules, reduces their operating costs, and offers more direct trips to their customers. The criticism of this system is said to be it’s limitation of availability of routes to specific cities. Although I believe that Jetblue and Southwest are both on the verge of overcoming this obstacle as they gain more market share and expand their routes and destinations. Another problem that faces legacy airlines is their constant battles with their workforce. Unionized employees often cause headaches for the legacy airlines whereas the low cost carriers have great relations with their workforce and utilize them as an asset of the company. Jetblue’s employees are not unionized and therefore cause less problems for the company. I believe Jetblue’s culture and attitude towards its employees is also a reason for the cohesiveness. Southwest incentivizes its employees and ties the company’s success with its employees so moral is much higher.  Now here are some individual strengths and weaknesses of each of the major competitors.

American Airlines: Not too many strength here at the moment. Struggling with bankruptcy and the big question in the airline industry: to merge or not to merge, has weakened the airline significantly. American has yet to successfully restructure itself to incoporate higher operating costs and simpler scheduling. Inefficiency is slowly killing this airline.

United Airlines: Now the largest airline after the merger with Continential, grabbing the largest market share. Potential growth and synergies could bring this airline back to the forefront of the industry.

Delta Airlines: Second largest airline. Good international alliances and potential growth on the international market. Also has a cost advantage over other airlines as it now owns the majority of its fleet, where as most airlines are still leasing their aircraft.

Southwest: Low cost because the airline only operates one aircraft, Boeing 737 and avoids major airports. An efficient point-to-point networking system has allowed the company to report profitability for over 39 quarters consecutively. However, Southwest has no international presence.

Jetblue: Successful low cost structure and direct routes. Some international presence with many more partnerships than its low cost carrier competitor Southwest. Aircrafts have more value added features for an improved customer experience.

A full SWOT analysis of Jetblue to follow.

“How do you become a millionaire? Start as a billionaire, and then buy an airline.”

– Richard Branson