Fundamentals of Management 6th Edition by Ricky Griffin

Exercise 27

JetBlue Capitalizes on the Entrepreneurial Spirit
In the challenging environment of the modern airline industry, JetBlue is a notable example of entrepreneurial success. From the start, it was conceived as a low-cost carrier to be differentiated by attention to customer service and a bundle of passenger amenities unusual at the low-cost end of the air travel market. Founded by industry veteran David Neeleman in February 1999, JetBlue began small, with just a few planes and one city pair. By the end of 2000, the new airline was flying 11 planes to 11 cities around the country and preparing to add more destinations each year. Today, JetBlue flies to 53 cities in more than 20 states and several Caribbean destinations. Routes to Latin American destinations such as Colombia and Costa Rica were added in 2009.
Meanwhile, competitors in its segment have come and gone-notably United's Ted and Delta's Song, both of which took off in 2003 and both of which were grounded by 2008. Why has JetBlue been successful where competitors have failed? Obviously, the JetBlue idea -a low-cost carrier differentiated by attention to service and passenger comfort-can't be patented, but as the fate of Ted and Song indicate, a good idea isn't enough to make a business work. JetBlue has succeeded, in the first place, because it boasts a number of distinctive competencies -organizational strengths that can't be copied quite as readily as a basic entrepreneurial idea. For one thing, JetBlue has benefited from the talent and experience of Neeleman, a crossover from big business, and a team of top managers. A one-time travel agent, Neeleman started a Utah-based discount airline, Morris Air, in 1984, when he was just 24 years old. Ten years later, he sold Morris Air to Southwest Airlines for $129 million and, after a brief executive stint at Southwest itself, left to help found Canadian-based WestJet Airlines. When he came up with the idea for JetBlue, he recruited industry veterans such as COO Dave Barger and CFO John Owen, vice presidents at Continental and Southwest Airlines, respectively.
In addition, Neeleman and his team set out from the beginning to take every advantage offered by their position as a "second mover" in a new market segment of the airline industry. Traditionally, the airline industry consisted of large international carriers and a few smaller regional airlines. Competitors in both groups differentiated themselves primarily according to routes served and charged the highest prices they could command. Southwest Airlines came along in 1971, positioning itself as a discount carrier specializing in short trips to the secondary airports of large cities, and achieved significant cost advantages by radically reducing the number of activities necessary to deliver its basic air travel service. The strategy was an immediate success (and a durable one-Southwest has posted 36 consecutive years of profitability) and spawned many imitators (including Morris Air). JetBlue is the most successful of the Southwest imitators-the airline best able to duplicate the key elements of Southwest's strategy, including reduced airport and labor costs, a single type of aircraft, and a single class of service.
JetBlue, however, is more than a mere imitator: It's a second mover in the market segment created by Southwest because its presence in that segment is significant. Rather than merely imitating those aspects of the first mover's strategy that met its needs, JetBlue has introduced its own innovations. Like Southwest, JetBlue is a low-cost carrier, but it has positioned itself as the low-fare airline that offers high-quality passenger service. All JetBlue aircraft, for example, feature luxurious leather seats and individual seatback TVs. Entertainment options include 36 channels of DirecTV and 100 channels of XM satellite radio. Flyers are pampered with a selection of fine wines, a Bliss Spa kit, and Dunkin' Donuts coffee.
Such passenger amenities, of course, cost a little more, but JetBlue's success depends in part on its expertise in controlling costs. In 2006, for example, JetBlue announced that it was removing one row of seats from its A320 aircraft. Removing the seats, explained officials, not only lightened the plane by nearly 1,000 pounds (thus saving fuel) but also reduced the inflight crew from four to three (thus offsetting any revenue lost from the missing seats). JetBlue doesn't offer expensive comforts such as lounges, full meals, or first-class seating. Its workforce is nonunionized, and many employees, such as reservation agents, work from home. JetBlue has proved equally effective on the revenue-generating side of the ledger as well: It uses its differentiation advantage to attract customers from other low-fare carriers and its own low fares to attract nonfliers, and it's also found a profitable market in underserved, high-cost routes. From 1.4 million passengers in 2000, JetBlue carried 22 million travelers in 2008. It's now the country's ninthlargest airline, with nearly 11,000 employees and nearly 150 aircraft.
"I always talk about the tripod," says Neeleman, "-low costs, a great product, and capitalization." He founded JetBlue with his own fortune (amassed from the sale of Morris Air to Southwest and the sale of an electronic ticketing system to Hewlett Packard) and $160 million in venture capital. The company went public in 2002 to raise another $158 million in capital, and in addition to being the best-funded startup in aviation history, it's become one of the most popular stocks in aviation history.
When Neeleman started JetBlue, however, most observers didn't consider launching an airline a particularly good idea: Between 1998 and 2002, the major U.S. airlines had lost more than $7 billion. Obviously, early capitalization was crucial, not only to Neeleman's strategy of building a fast-growing airline but also to any hope he had of surviving long enough to build anything at all. He certainly wanted to avoid the fate of People Express, a no-frills British-owned carrier that started up in 1981. By 1985, it was the fifth-largest airline in the United States, but its strategy of expanding through acquisitions saddled it with an immense debt burden, and it was out of business by 1987. Chris Collins, a former People Express manager who's now a JetBlue executive, remembers what happened at People Express: "We were the best thing going. A year later, we're gone because we couldn't sustain growth. You know what keeps me up at night [now]? Figuring out what we're going to need, not next year but five years from now."
Growth at JetBlue accounted for record profits from 2000 through 2004 (it was one of the few U.S. airlines to turn a profit during the industrywide downswing following 9/11). The number of passengers carried grew by more than 25 percent annually between 2001 and 2006, and average sector length-the distance flown between two airports-increased from 825 miles in 2000 to 1,358 miles in 2005 as the airline added more routes and more distant destinations.
In October 2005, however, profit for the third quarter dropped to $2.7 million from $81 million the previous year-the result of rising fuel prices, low fares, and operational inefficiencies. Fourthquarter losses made 2005 JetBlue's first unprofitable year since its IPO in 2002, and when losses were again projected for 2006, Neeleman, Barger, and Owen announced a "Return to Profitability" plan calling for $50 million in reduced costs and $30 million in increased revenues. When the dust had cleared, JetBlue had declared a net profit of $14 million for the second quarter of 2006 (doubling Wall Street forecasts of $7 million), and by the end of the year, the airline had announced a return to profitability.
And then came 2007-the year of what's known at JetBlue as "2/14." The inside reference is to Valentine's Day, when a massive winter storm paralyzed all activity at New York's John F. Kennedy (JFK) International Airport, home to JetBlue's busiest hub. Amid forecasts of the imminent storm, other airlines began canceling flights, but JetBlue-which boasted a goal of completing every flight no matter how long the delay-held off. "They shut it down [and] we should have," lamented Neeleman in retrospect. Passengers on no fewer than nine JetBlue planes were stranded on the tarmac at JFK for more than six hours each, and the airline's operations were snarled all across the country for days, forcing it to cancel 279 of 503 flights the next day and 217 of 562 flights the day after that. "We love our customers," affirmed Neeleman, "and we're horrified by this. There's going to be a lot of apologies." Apologies were indeed profuse, but they ended up costing JetBlue $30 million in compensation to stranded passengers and did little to prevent observers from wondering whether the airline hadn't squandered years of industry-leading customer satisfaction ratings in one very bad week.
In May, JetBlue's board of directors asked its founder to step down as CEO. (Neeleman left the company to concentrate on starting up an airline in Brazil.) David Barger, who'd been serving as both president and COO since 1998, took over. To fill his old job, Barger hired a former Federal Aviation Administration official named Russell G. Chew. Chew dumped the policy of completing every scheduled flight, but more importantly, he took a closer look at the company's cash flow. Eight quarters of declining performance had taken their toll, and in December, Chew announced the sale of a 19 percent stake in JetBlue to the German airline Lufthansa for $300 million. Later in the year, he raised another $165 million by selling convertible debt (bonds that can be converted into stock ownership).
The move to raise capital turned out to be especially forward looking when oil prices spiked in January 2008, precipitating the most recent crisis in the airline industry. Its new leadership has given JetBlue some stability, at least temporarily, although it could do little to shield it from the economic damage inflicted first by soaring fuel prices and then by a withering global economy. Worldwide, the airline industry lost $5 billion in 2008; JetBlue announced a loss of $23 million.
And times promise to remain difficult for the industry. According to the head of the International Air Transport Association, "2009 is shaping up to be one of the toughest years ever for international aviation." Barger, who's working to replace Neeleman's emphasis on aggressive growth with a more conservative strategic approach, has cut back on plans to add more aircraft to the fleet and more destinations to the schedule. He also intends to reduce flights by about 2 percent but will follow through on plans to start service from New York to Los Angeles.
In your opinion, what will David Barger and his management team have to do if JetBlue is to survive the most recent crisis in the airline industry?