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JetBlue redefines the “budget” airline

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A corporate strategy article by Thunderbird students Amina Ahmed, Marquita Blanding, Benjamin Donner, Julia Glad and Carla Vila

Introduction

Positioned as a budget airline company with a tourism focus, JetBlue is synonymous with the keywords “quality” and “customer satisfaction.” JetBlue offered many firsts in the airline industry, including: satellite TV, satellite access to e-mails, vacation packages on eBay, and a “customer bill of rights” — that enables customers to be compensated for their inconveniences. Today, JetBlue has expanded its operations to include partnerships with international airlines, with a fleet of more than 400 airplanes. Despite the fierce competition of the airline industry, JetBlue continues to rise in popularity and revenues. How does JetBlue manage to continue its growth, especially while competing with rival discount airline Southwest?

Fierce Competition – Jet Blue and the airline Industry

The airline industry has changed dramatically since the early 2000s, due, in part, to the volatile global economy. Many airlines, more so in the U.S., have had to alter their competitive plans in order to keep up with the changing dynamics of the industry. In order to stay afloat, many full-service airlines looked to cost-cutting options, while airlines like Jet Blue and Southwest focused on delivering services differently than their competitors. At the time, these services were either standard or unique to the industry. Ultimately, full-service airlines found it much harder to compete with low-cost, convenient service airlines. Some of those airlines either went out of business, or completely re-engineered their business plan, or merged with other airlines to be competitive. Some of the most noteworthy mergers and acquisitions are United and Continental, US Airways and American West, American Airlines and TWA, and Southwest and AirTran.

Despite all of the industry changes and airline consolidations, Jet Blue has remained true to its strategy, and has shown consistent growth through the economic downturn. Based on passenger revenue miles from October 2010 - September 2011, the top domestic airline market share leaders are Delta (16.3%), Southwest (14.8%), American (13.3%), United (9.6%), and US Airways (7.9%). JetBlue rounds out this group by taking the tenth spot, with 4.5%.

According to Hoover, Jet Blue’s top three competitors are AMR Corporation (the holding company of American Airlines and TWA), Southwest, and United Continental, whose annual sales in 2010 were $3,779M, $22,170M, $12,104M, $23,229M, respectively. Although it appears that Jet Blue is falling short in annual sales, the company is showing strong financial potential to meet or surpass its competitors. With AMR Corp. filing for Chapter 11 bankruptcy on November 29, 2011, it remains to be seen how the industry dynamics change and who will become the new markets leaders.

“Aruba, Jamaica, Ooo I want to take ya…”

Catering to the sun cravings of the urban northeast, JetBlue’s services are right in line with travelers looking for convenient, fun, travel experiences to sun-soaked destinations: there is no business/first class, one free checked bag, Caribbean-bound flights, and flights to major tourism destination cities. By focusing only on tourist destinations, JetBlue has streamlined the number of routes it offers. Although some potential customers might find JetBlue’s limited selection of destinations frustrating, JetBlue has created a competitive advantage by only servicing those major tourist traffic destinations—in doing so, JetBlue can ensure that its planes are even more full than its biggest budget competitor (the average 2010 Load Factor for JetBlue was 81.3% compared to 79.2% for competitor Southwest). The strength of their approach can be seen in their most popular routes: JFK (New York) to San Juan, PR; Boston Logan to Fort Lauderdale, FL; JFK to Orlando, FL, and Fort Lauderdale to Buffalo Niagara, NY.

To further cater to the needs of tourists, JetBlue conducted research on unused vacation days, and upon discovering that the customer’s fear of approaching their bosses was a major reason vacation time went unclaimed, it created “Getaways Granter:” an “app” for employees to ease the process of requesting vacation time.

This tourism focus does have one major downturn in terms of cost: viz., fuel costs. With long flights to the Caribbean from the northeast, JetBlue’s average fuel cost per passenger fare is $48.02, while Southwest’s is nearly $6 cheaper per passenger at $41.87. Consequently, JetBlue has to work hard to secure fuel at good prices and balance out fluctuations in oil costs.

Comfort and In-flight Entertainment

On the way to vacation, fliers want their comfort to start as soon as they leave home, so it is crucial that JetBlue is known for its amenities and comfort. The seats are plush leather and offer extra room and slanted backs for passengers. Although some may see this move as counter-intuitive (if you add more room, then you have fewer passengers and less revenue), JetBlue justifies this as an advantage. By removing an entire row of seats on its planes, JetBlue has eliminated the need for an additional flight attendant. Furthermore, since JetBlue is known for its comfort and style as well as its value level prices, more customers choose JetBlue, translating into lower cost per customer. This is an example of how truly JetBlue’s activities fit with its strategy and positioning.

More leg room than your average carrier is only the start. JetBlue was the first to offer -in-flight satellite TV for each individual seat to entertain families on their way to vacation, and will be the first to set up cutting edge broadband satellite wireless internet- that will be introduced in 2012- to allow for media internet streaming to further expand the entertainment offerings.

Keeping Costs Low

JetBlue is able to position themselves as the most affordable option for this tourism market segment due to its low operating costs. These are made possible by: the tradeoff of fewer end destinations, choice of smaller airports with lower air traffic, and efficient employees. While they keep costs down by not serving meals and charging for some of the extras other airlines offer for free (like pillows), they make up for these tradeoffs by providing excellent customer services.

Another way JetBlue keeps costs low is by avoiding non-tourist locations – for example: the non-coastal skiing capital Salt Lake City and the gambling mecca Las Vegas. The few interior cities it does serve have a population large enough to have strong outbound tourism: Chicago and Dallas make the cut as fitting within JetBlue’s model. In addition to the strong tourist pull JetBlue offers, its Northeast – Caribbean/Latin America connections also serve the strong Hispanic population, particularly Dominicans and Puerto Ricans, present in the northeast, which undoubtedly helps smooth out the strong seasonal fluctuations in tourism.

Another crucial cost-management factor for Jet Blue pertains to their employees. JetBlue is a non-union airline, and as such it has more liberties than other airlines. For example, it can adjust seat numbers to minimize the number of flight attendants. These liberties mean that JetBlue can cut costs in places where other airlines cannot. The amount of wage expense per dollar of passenger fare revenue is significantly lower for JetBlue (at $0.26 per dollar of passenger revenue) than it is for its competitor SW ($0.32), though both, in keeping with their service-oriented positioning, are higher than budget competitor airline Airtran ($0.22).

Finally, as a new airline that has invested in new planes, JetBlue has the somewhat short-term advantage of lower maintenance costs: JetBlue’s Ratio of Airplane Maintenance to Revenue is 4.5% while Southwest is forced to expend 6.2% of its revenue for airplane upkeep. Over time it will lose this advantage unless it chooses to sell off older planes and purchase new ones, but in the meantime it does help this relatively young airplane save capital to keep costs lower for passengers.

JetBlue’s Song of Survival: Response to the Economic Downturn

It is significant to note that in 2010, during the economic downturn, JetBlue achieved $3.7 billion in sales, and recorded a net income of $97 million. Income growth was 67.2% and overall growth was 15%. By using the formula of low fares, new planes, and efficient personnel, JetBlue was able to drive home its value proposition as an airline that neither endorsed high fares (its fares are 65% lower than those of major airlines) nor subjected its passengers to frequent delays. Thus, JetBlue dealt with the high force of buyers by differentiating its product and efficient operations. The keywords by which it operated were – ‘reliability’ and ‘value for money’. After all, its CEO David Neeleman was aiming to “bring the humanity back to air travel”. It turned out that this was a worthy goal at a time when the economy was facing a downturn, and JetBlue’s formula for success helped achieve this admirably. Today, JetBlue is ranked as a 4-star low-cost carrier by SkyTrax.

In the years 2010 and 2011, JetBlue has in fact grown by signing interline contracts with American Airlines, South African Airways, Virgin Atlantic, and Jet Airways (of India). It also signed a codeshare agreement with ElAl (of Israel), LAN Airlines (South American), and TAM Airlines (of Brazil). Quite a lot of travelling for a small jet, and a low-cost one at that!

In 2010, JetBlue marketed its customer-centric image with its ‘You Above All’ campaign. Its message was to show the world that it flew people, not airlines. Interestingly, in the period after 9/11 when the airline industry was hard hit, JetBlue was similarly consistently recording profits. At this time, JetBlue faced some competition from mini-carriers introduced by Delta Airlines (‘Song’) and United (‘Ted’). However, both these rivals folded up, unlike JetBlue that has been going strong with its superior service.

It was only in February 2006 that JetBlue recorded its first quarterly loss (-$42.4 million). The reasons for this were cited as rising fuel costs, operating inefficiency, and fleet costs. The situation was quickly remedied by cutting $50 million in costs, and aiming to raise revenue by $30 million. This was achieved in the very next quarter with a profit of $14 million.

Maintaining Competitive Advantage

Currently, JetBlue is attempting to increase their routes, and thus lessen the threat of copycats. It has announced new routes at low costs serving more people. However, JetBlue’s model and product are still easily imitated by new entrants/rivals. While JetBlue can work to maintain customer loyalty via its points program, enhance flight availability for through partnerships, and continue being innovative with services such as in-flight digital services that prove successful for JetBlue, all of their actions can be easily adopted by their competitors.

JetBlue’s organizational fit is what makes their strategy successful. Everything is in line with serving the needs of tourist travelers desiring low-cost transportation to tropical locales, with customer service and physical comfort being the perfect introduction to a pleasant vacation. Costs are kept down through the use of efficient, service-oriented employees, a limited number of smaller airports with less traffic, and their new planes which offer greater comfort and service by way of greater leg room, digital connectivity, and the Customer Bill of Rights.

Only time will tell how JetBlue will fare, but if Porter’s theory that strategy, competitive advantages and fits are any indication of a company’s future success, than JetBlue will be around for a while longer. Its amenities and comfort fit with its positioning as a tourist airline. Its servicing of high-traffic destinations fits with its strategy of keeping costs down, as does removing an aisle of seats to cut down the number of flight attendants. JetBlue continues to expand its reach, through partnerships and by adding new destinations. If it stays true to its positioning and strategy, the company could enjoy long-term success.

Bibliography

  1. www.JetBlue.com – JetBlue website
  2. www.transtats.bts.gov/ - Bureau of Transportation Statistics website
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  5. “The Steady, Strategic Ascent of JetBlue Airways” http://knowledge.wharton.upenn.edu/article.cfm?articleid=1342
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