Jetblue Case Analysis

JetBlue Case Analysis Executive Summary JetBlue airline was founded by David Neeleman who is a Brazilian born entrepreneur. His goal was to single handedly create a unique airline that was innovative for the current market. The low fare airline was designed for customers who needed to travel at affordable prices, and which would essentially create a new strand of business. Named JetBlue, Neeleman’s airline originally traveled to various cities around the United States, but has recently entered the international market by offering flights that reach countries such as Puerto Rico and the Dominican Republic.

Since it is a customer oriented company, JetBlue makes ordinary flights into an extraordinary experience for its customers. With improved in-flight entertainment to electronic ticketing, JetBlue has grown to become a fast and affordable airline. However, over the years, JetBlue has experienced financial problems due to the fuel prices increase, as well as an image issue regarding the ice storm in 2007. Even though JetBlue is known to be an innovative airline, their debacles have caused a downturn in the company’s finances, as well as operations.

In recent years, Lufthansa, the German airline, has purchased a significant share of JetBlue which helps the company provide more stability. In addition, JetBlue has had to change strategies and CEO’s along the way, in order to remain a competitive carrier in today’s airline industry. Using the information provided by the case study “JetBlue Airways: A Cadre of New Managers Takes Control,” this case study analysis will provide a detailed overview of all the positive and negative aspects of JetBlue airline.

Furthermore, it will review the strategic vision and implementations of JetBlue, the airline industry, JetBlue’s financial performance, and future recommendations for the company’s strategy. Strategic Vision and Implementation When David Neeleman started JetBlue, his idea “was to start a company that combined the low fares of a discount airline carrier with the comforts of a small cozy den in people’s homes. [1] His vision entailed customers (both business and leisure) to have cheap and affordable flights all over the United States and abroad on newer aircrafts which are not only comfortable, but are furnished with modern entertainment selections. In addition, he created a customer focused business model, in which customer service is to be of number one importance. One of the moving influences behind Neeleman’s vision was an incident on a flight where his fabric seat was soaked with urine.

Neeleman chose leather seats not only because they are easier to clean, but also because they are considered more comfortable than fabric seats, and are visually pleasing to customers. Under a new executive leadership, JetBlue’s strategic vision should only be adjusted to further enrich the fundamental vision, and to integrate new technologies and opportunities which will assist growth and profitability. As part of restructuring, David Neeleman resigned after the Valentine’s Day incident in 2007, for the reason that his company failed to provide on its values of superior customer service.

When the change of management was introduced, their original goal was to help reconstruct JetBlue’s tainted reputation, and to cultivate innovative strategies which would prevent incidents such as the one in 2007 from occurring another time. It is believed that JetBlue’s vision is sound and with the exclusion of fore mentioned incident, the company would not have been compelled to change management. Nevertheless in view of that incident, it is recommended that incorporating new technologies, best practices and providing comprehensive cross-training to all employees will allow the company to remain competitive throughout the years.

Key Strategic Elements and Execution In 2008, JetBlue developed six new strategies to obtain a larger market share while reevaluating operational expenses. These strategies are as follows: 1. Reassess how the company was using its resources 2. Decrease capacity and lowered costs 3. Increased fares and develop in particular markets 4. Offer better services for companies and business travelers 5. Form strategic partnerships 6. Grow additional revenues The company implemented these strategies not through a one-strategy one-action method, but instead combined several strategies into one action, or vice versa.

For example, JetBlue established a new terminal at JFK airport which facilitated an improvement in respects to on-time departure and arrival averages at one of the nation’s busiest airports. Furthermore JetBlue had sold a stake of its shares to Lufthansa which not only improved JetBlue’s revenues, but it allowed JetBlue’s customers to fly on Lufthansa flights to Germany. JetBlue scheduled to reduce capacity and cut costs by selling nine A-320 aircrafts along with postponing the purchase or lease of numerous other aircrafts.

Furthermore, the company reduced its aircraft utilization rate from 13 hours per day to 12. 5 hours, halting service in three cities and canceling future services. JetBlue started to grow in selective markets and raised its fares. In March 2008, JetBlue declared that Orlando would become its seventh focus city, which would provide service to Cancun, Mexico and Santo Domingo, Dominican Republic. JetBlue also attracted business travelers by announcing refundable fares and discounts for company meeting planners for every 40 customers who reserved to an identical destination.

The company was also interested in acquiring partnerships with other airlines. It was able to make an arrangement with Aer Lingus, which allowed JetBlue passengers to book tickets on the Irish airline and fly to any of its 40 destinations through its JFK hub. Additional revenue prospects were explored with the establishment of checked baggage fees, charging passengers for seats with extra legroom on long flights, cashless cabins which required customers to make all in-flight meal purchases with credit or debit cards, and call-center, or airport charges if the tickets were not bought on-line.

Overall JetBlue appeals to customers by offering comfortable seats and entertainment selections on their flights, providing all flights on newer aircrafts, effortlessness of ticketing, cancellation and flight adjustments, multiple destinations and quicker service. The airline offers its customers value with the establishment of the passenger bill of rights, which articulates what the company will do about different situations that may occur. This allows customers to be familiar with what to expect on a JetBlue flight, and from the company overall.

As JetBlue’s strategic vision emphasizes customer service, the company’s functional area strategies remain consistent with its overall strategic approach. When the company’s vision has been tested, they have recovered by implementing new strategies and technologies that illustrate their pledge to customer service. An example is when JetBlue improved their reservation and ticketing software program after the infamous Valentine’s Day 2007 incident. In the past, the program could only handle a certain number of reservations at a time, which was adequate under usual conditions.

Yet under intense conditions the program failed, leaving employees and customers incapable to conversing with each other. Additional example would be the utilization of two kinds of aircraft in their fleet. The Embraer E-190 holds 100 and the Airbus A-320 holds approximately 150 passengers. JetBlue uses E-190’s for shorter flights, and utilizes the A-320’s for longer flights. This conserves fuel usage, and helps to balance flight-to-passenger capacity ratios. JetBlue also avoids cities where competition is too high, and flies to different airports in the target region.

JetBlue halted service to Atlanta Hartsfield Jackson airport because of tough competition with airlines. Also they service Long Beach airport in the Los Angeles area instead of LAX since competition and capacity is too great. The Airline Industry: Current State By 2008, the airline industry began making significant changes to keep up with external events. The US economy came to crawl, crude oil prices hit a previously unseen record of $140 per barrel, carbon dioxide emission became a growing issue, and people began taking vacations in the comfort of their home.

The airline industry needed to respond, and time was of an essence, or airlines would go under. Some however were unsuccessful. Aloha Air-group, ATA Airlines, SkyBus Airlines ceased all operations, while Frontier Airlines Holding filed for protection under Chapter 11 of the US Bankruptcy Code, and Delta Airlines merged with Northwest Airlines Corporation to avoid a second bankruptcy. The airlines which remained in business had to deal with energy conservation, and increased labor costs.

Not only were planes faced with having to lower weight due to increased fuel costs, but in addition the airlines experienced on average a shortage of at least 3000 certified pilots to fly their planes. As the years progressed, the industry remains facing profit losses, disabling the industry from seeing a significant recovery. In June 2011, the International Air Transport Association announced a $4 billion decrease in estimated profits for 2011[2], which would signal a more than three-quarters down from the estimated 2010 profit, mostly due to the increasing oil prices which are still hitting the industry.

Furthermore, to make matters worse, airlines are jousting one another for current market share- while both the US and EU governments are urging airlines to lower their carbon dioxide emission. Plans are in motion to create the Emissions Trading Scheme (ETS) which would sell permits to carriers for each ton of carbon dioxide they emit. This is a result for the outcry for global emission control. In addition, the events of September 11, and the liquid bomb plot in 2006, significantly raised the cost of airport security checks, a fee for which airlines and customers are paying.

According to the International Air Transport Association, the industry pays over $7. 4 billion[3] a year to implement the new regulations which have come into place. Furthermore, since the attacks international tourism has still yet to recover. The US accounted for 7. 3% of global arrivals in 1999, and even in 2010 it has still only come back up to 6. 2%. American carriers are still struggling with struggling with bankruptcies, un-payable debts, an overhaul inefficient cost base. However, overall economists argue that the industry will regain its strength from growth in emerging economies that rely heavily on air transport.

While the future attractiveness of the industry may look financially volatile, flying has become an everyday activity for many customers, especially in the corporate travel market. Regardless of costs, there will always be business people who will need to travel, and through JetBlue’s strategies, the company is retaining a large part of that particular market share, but more importantly, aligned with its strategic vision JetBlue continues to focus on its customers. The Airline Industry: Key Factors and JetBlue’s Competitive Advantages The airline industry requires various important success factors in order to satisfy its customers.

The most important factors are the percentage of flights arriving on time, mishandled baggage reports, and passenger complaints. For an airline, satisfying its customers is the most important task. When a passenger is comfortable and enjoys their flight they will be sure to become loyal to the airline. According to exhibit 5 of the case study, JetBlue was ranked in all three factors compared to the other airlines that share the market. For the percentage of flights arriving on time, JetBlue was ranked eighth in 2007, however; it had improved its number from being eleventh in 2006.

Furthermore, regarding mishandled baggage reports, JetBlue was ranked first in 2006 and third in 2007, making the airline one of the most trustworthy carriers in the market. The fact that it has been constantly reliable with the baggage of its customers, gives passengers the piece of mind that their belongings will be safe, and therefore they can enjoy a pleasant flight. Finally, JetBlue ranked fourth in passenger complaints. This is very good given that mayor airlines such as American Airlines were ranked seventh. JetBlue seems to be consistent with success factors up to 2007.

Along with satisfying the basic needs of its customers, JetBlue has also innovated the entertainment system on planes. It is the only airline that provides live television for passengers to watch for no extra cost, they only provide snacks during the flight to reduce the time of departure, and not wait for a catering company. Furthermore to promote a healthy lifestyle, JetBlue collaborated with Bally Total Fitness to create yoga booklets which are stored in every seat pocket on the plane for passengers to help them relax. For the better nourishment, the carrier now provides Dunkin’ Donuts coffee on the plane.

All these unique characteristics  are what made JetBlue be successful until the recession and fuel pricing issues of 2008. JetBlue’s Longevity within the Airline Industry After the recession of 2008, when under the new CEO David Barger, JetBlue developed its six new strategies the company set itself apart from competitors to fit industry conditions. For example, JetBlue began to share its services, such as by providing other airlines with its LiveTV settings. Airlines such as Continental, WestJet, Virging Blue and AirTran were one of the few that began to use LiveTV.

In addition, JetBlue reassessed its resources through hiring a financial adviser to help reduce cost. They also expanded marketing through a five year agreement with Expedia and began to accommodate its prices to reach a more competitive number. The main question that remains for the future of JetBlue is, will it remain independent? Even after strategies were changed, JetBlue did not improve and is worried they might be taken over by Lufthansa. Already JetBlue has had financial problems prior to the recession.

Furthermore, after the Valentine’s Day incident, JetBlue was left with a poor image for itself, letting customers think the carrier was becoming untrustworthy even though it was merely an anomaly. At this point, JetBlue does have to find a way to increase sales and quickly. They need to differentiate themselves from their competition and give customers something that all other airlines do not have. Now that they sold the rights to having LiveTV, one of their special characteristics is not important anymore. They were also known to be the airline which will get customers to their destinations in an affordable and fast way.

However, due to recent events they have had to increase the prices of tickets in order to pay for fuel. At this point, JetBlue has done what is need to grow, however, it is crucial for JetBlue to remain independent. One of the most important things about JetBlue is that they are constantly trying to innovate their ideas to make flying more pleasing for their customers. If they can remain in a good partnership with Lufthansa, but still remain as JetBlue, they could help each other mutually and grow simultaneously without needing to merge.

They should continue to market themselves as a low cost airline and remain as one of the best airlines in that particular of the market. By following this course of action, JetBlue will have more customers and therefore increase in revenues and earnings. JetBlue Financial Performance: Key Financial Data and Present Status Even as a low-fare airline, JetBlue’s financial and operational performance showed a significant lack of expected growth, along with a decrease in value for stockholders.

The years between 2003 and 2007 may show a 185 percent increase in revenue, however operational expenses, and interest expense also accelerated with even a higher growth due to jet fuel expenses and expansion. Since airlines provide a service as opposed to an actual ‘product’ for which cost of goods sold could be measured, one has to approach JetBlue’s key financial statements provided in their Annual Reports from a different angle. Therefore to gain a deeper understanding of the company’s financial performance and balance sheet strength, one must evaluate JetBlue on three main fronts: profitability, liquidity, and leverage.

The data used in this case study analysis is presented in Table 1, and the financial ratios in Table 2. Profitability refers to the business’s ability to manage earnings in contrast to its expenses and other costs during a designated period of time, as in this case annually. Profitability ratios compared to the company’s previous performance in past years indicates how well the company is succeeding, generally higher ratios mean it is doing well, while lowering ratios signal for a change in strategy.

One of the key indicators is operating profit margin, which shows how much profit is earned on each dollar of sales. JetBlue’s operating profit margin curve (Graph 1) indicates a downward trend between 2003 and 2005 however picks up from 2005. The same trend can be noticed for all of net profit margin (Graph 2), return on total assets, return on stockholder’s equity, return on invested capital, and earnings per share ratios. However, the last five ratios indicated all dip below zero by 2005, with return on total assets unable to recover even in 2007.

The return on total assets indicate the total investment in the enterprise, and while most would blame this on the company’s rapid expansion in the face of competitor Southwest Airline. Yet the return on invested capitals’ radically small percentage signals Jet Blue’s overall ineffective use of monetary capital invested in its operations, indicating that external factors were not the only reason for the company’s financial volatility. Liquidity ratios allow a company to determine its strength to pay off its short term financial obligations, such as its debts. A higher ratio would indicate a large margin of safety.

The two main liquidity ratios used to evaluate Jet Blue are current ratio and working capital. Current ratio signals a company’s ability to pay off current liabilities, and in most cases the ratio should be higher than 1. 0 or even higher. Jet Blue remains (Graph 3) in the proximity of 1. 0, in 2003 even almost reaching 1. 75, however by 2005 it dropped below one to 0. 94, and then experienced fluctuations until 2007. Similarly, due to a conservative financial strategy, Jet Blue’s working capital ratio (Graph 4) presents the same predicament its current ratio did.

While the company had enough liquidity to finance its day-to-day operations in 2003, and 2004, by 2005 it fell into a loss in working capital, and remained in the negative even in 2007. Leverage ratios measure a company’s ability to meet its financial obligations, looking at main factors such as assets, interest expenses, debt and equity. While Jet Blue consistently had a lower cash to total assets that their competitor Southwest, through the leverage ratios one can observe the company’s relatively excessive reliance on debt, and a weak balance sheet strength.

While analyzing Jet Blue’s debt-to-asset ratio, long-term debt-to-capital ratio, debt-to-equity ratio, long-term debt-to-equity ratio and times-interest-earned ratios, the two most striking ones that gave the most information about the company were long-term debt-to-capital ratio and times-interest-earned ratios. The long-term ratio indicates the creditworthiness of the company, the percentage of capital investment which is preferred to have a rate below 0. 25. Furthermore a lower rate indicates a greater the borrowing ability of the company.

For Jet Blue however (Graph 5), the rate continues to grow from a 0. 6 in 2003 to a 0. 71 by 2007, indicated low creditworthiness. Furthermore, the times-interest-earned ratio (Graph 6) which shows Jet Blue’s ability to pay annual interest charges is consistently below zero, when ratios from 2. 0-3. 0 would closer to the ideal. Overall, Jet Blue’s worst financial performance took place in 2005. While “the total industry losses for North American carriers were over $10 billion,” Jet Blue alone spent $167 million more on fuel costs alone than from 2004.

The company’s senior management may have been replaced later in 2007, yet to compare the data from 2003 to 2007 to their latest data available from 2010, it is difficult to find the ‘improvements’ one should be looking for. Operating Profit Margins only improved 0. 28% from 2007, and Return on Assets still remain below zero. While current ratio regained some its losses in the course of the years, it is still not even near 2003’s 1. 74 with 2010’s 1. 25. At last but least, one of the worst disappointments in hopes of seeing improvements can be witnessed in jet blue’s times-interest-earned ratio.

While by 2007 the ratio at least approached zero with -0. 75, by 2010 it has fallen back to 1. 85 even. While one has to look at the whole airline industry and its current developments to make an educated decision about the company replacing top management, it cannot solely be external factors which cause jet blue’s continuously underwhelming financial results. Some improvements can be seen, but overall the ‘new’ top management is not handling Jet Blue’s finances any better than the old one. Was the replacement necessary? With the results they have proved during the three years since the old management, the answer would be a clear negative.

Summary David Neeleman set out to create one of the most comfortable, customer oriented low cost airlines, and through JetBlue he initially succeeded. However, profits began to continuously decrease from 2003 to 2007, during a time when the original CEO left the company; a timeline through which JetBlue’s turbulent corporate history paints an accurate picture of the airline industry. First offering amenities such as leather seats, LiveTV, shorter departure waits, as well as exclusive care for baggage handling, JetBlue seemed to pursue its strategic vision quite well.

However, due to the Valentine’s Day incident in 2007, the company’s brand image as well as customer base took a significant hit. As a result, the same year, the company underwent significant strategy revamping, focusing on six new strategies which were set to follow through with the strategic vision, as well as to readjust financial and operational expenses. These six strategies led to the company working with both Aer Lingus, and Lufthansa. With these expansions, JetBlue managed to increase its market share both domestically as well as internationally. In addition, the company set new destinations, while downsizing its aircrafts.

Furthermore, in accordance with the troubles affecting the industry regarding fuel prices, JetBlue lowered its weight on its aircraft, and decreased its number of seats as well as baggage policy. As the years progressed and the airline industry found itself in more of an economic downturn, JetBlue began to focus more on corporate business travelers, while losing liquidity as well as showing a financial volatility. With its current management team and current strategies, JetBlue is on the right track in terms of strategy, however its finances need to improve, especially its credibility as well as shareholder’s value.

Overall, JetBlue has survived one of the greatest waves of bankruptcies, and it should be able to survive whatever the economy or the industry has in store. Bibliography |Table 1 & 2 | |JetBlue’s Financial Data collected from Annual Reports from 2003-2007 & 2010 | |In thousands |

In Thousands |2003 |2004 |2005 |2006 |2007 |2010 | |Profitability | | | | | | | |Operating Profit Margin (return on sales) |0. 17 |0. 089 |0. 028 |0. 054 |0. 059 |0. 088 | |Net Profit Margin |0. 1 |0. 037 |-0. 012 |0. 00042 |0. 0063 |0. 026 | |Return on Total Assets |0. 050 |-0. 0021 |-0. 033 |-0. 036 |-0. 037 |-0. 013 | |Return on Stockholder’s Equity |0. 15 |0. 063 |-0. 02 |0. 0011 |0. 017 |0. 06 | |Return on Invested Capital |0. 032 |0. 011 |-0. 0033 |0. 00013 |0. 0022 |0. 01 | |Earnings per Share |0. 0011 |0. 00047 |-0. 000 |0. 0000058 |0. 00010 |0. 0033 | |Liquidity | | | | | | | |Current Ratio |1. 7 |1. 1 |0. 94 |1. 1 |0. 89 |1. 3 | |Working Capital |276121. 0 |29082. 0 |-41000. 0 |73000. 0 |-140000. 0 |275000. 0 | |Leverage | | | | | | | |Debt-to-Asset Ratio |0. 63 |0. 7 |0. 71 |0. 72 |0. 69 |0. 60 | |Long-term Debt-to-Capital Ratio |0. 60 |0. 65 |0. 70 |0. 73 |0. 71 |0. 63 | |Debt-to-Equity Ratio |2. 1 |2. 5 |3. 1 |3. 7 |3. 7 |2. 4 | |Long-term Debt-to-Equity Ratio |1. 5 |1. 8 |2. 3 |2. 8 |2. 5 |1. 7 | |Times-interest-earned Ratio |-5. 8 |-2. 1 |-0. 45 |-0. 73 |-0. 75 |-1. 9 | | | | | | | | | | Graph 1 [pic] Graph 2 [pic] Graph 3 pic] Graph 4 [pic] Graph 5 [pic] Graph 6 [pic] ———————– [1] Mary Michel and Janet Rovenpor, JetBlue Airways: A Cadre of New Managers Takes Control, (2008), C-53. [2] Allison Leung and Harry Suhartono,”Airline profits to tumble in 2011 on fuel, turmoil,” Reuters, June 5 2011, http://www. reuters. com/article/2011/06/06/us-airlines-iata-forecast-idUSTRE75506H20110606. [3] Dan Milmo, “After 9/11: airports ‘wasting billions’ on needless security checks for passengers,” The Guardian, September 7, 2011, http://www. guardian. co. uk/world/2011/sep/07/airports-wasting-billions-needles

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