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Jet Blue Airways
JetBlue Airways Corporation, incorporated in August 1998, is a low-cost passenger airline that provides customer service at low-fares mainly on point-to-point routes (Yahoo, 2005). As of February 10, 2005, the airline operated a total of 280 daily flights. JetBlue focuses on serving markets that have long been underserved and large metropolitan areas that have had high average fares. The airline serves 30 destinations in 12 states, Puerto Rico, the Dominican Republic and The Bahamas.
JetBlue's low fares aim to stimulate demand, especially from fare-conscious leisure and business travelers who might otherwise have used alternative forms of transportation or not have traveled at all (Yahoo, 2005). The airline also offers customers a differentiated product, including new aircraft, low fares, leather seats, free television at every seat, pre-assigned seating and reliable operating performance.
B. Major Challenges
One of JetBlue's major strengths is that it understands the importance of customer satisfaction and loyalty (DiCarlo, 2001). For example, when JetBlue first opened for business, one of its flights skidded through its landing and off the runway, jarring passengers but causing no injuries or damage. The airline worried that this slip would cause damage to its reputation among the passengers, some of whom were flying the airline for the first time. JetBlue's response was unusual -- it gave free round-trip tickets to all the passengers, ensuring that they would give the airline another try. This type of proactive, customer-first service may prevent JetBlue from being annihilated by one of its major challenges -- airline consolidation.
Another of JetBlue's challenges is the need to retain the existing level of customer service, as many customers demonstrate loyalty to JetBlue because of this key aspect of its business (DiCarlo, 2001). In fact, JetBlue founder and chief executive David Neeleman describes his company not as an airline but as a services company. While competitors brag about their dedication to prompt, friendly service, the airline industry is one of the worst when it comes to good customer service. As JetBlue's customer base continues to grow, it will be a major challenge to maintain a strong level of customer service.
Security is another major challenge for all airlines, as passengers are inceasingly afraid to fly. Yet JetBlue is addressing this concern. According to Heffernan (2003): "After September 11, 2001, the airline was the first to install cameras in its planes so that pilots could observe the passenger cabin from the cockpit."
In addition to top-notch customer service, JetBlue's business model thrives on its competitive fares, carefully selected destinations, and brand-new planes (DiCarlo, 2001). Thus, operating costs present another challenge to JetBlue, as increases in fuel prices continue at a steady pace.
II. Industry Analysis
A. Industry Definition
The U.S. air transportation industry is a major component of the U.S. economy (Duke and Torres, 2005). Nearly half of all passenger trips with roundtrip distances of between 1,000 and 1,999 miles are taken by plane. This percentage increases to 75% if the roundtrip distance is at least 2,000 miles. Advances in technology that led to the development of modern jets, along with the Airline Deregulation Act enacted by Congress in 1978, enabled the U.S. airline industry to become the main intercity mass transportation system in the U.S. The air transportation industry is crucial to our national economy, but it faces unprecedented challenges. Economic uncertainty and the terrorist attacks of September 11, 2001, led to reduced demand for air travel thereby resulting in lowered profitability or losses for many companies.
B. Demand/Supply Conditions
Various factors affect the supply and demand conditions in the airline industry. Air travel has become an affordable means of transportation for an increasing number of people. Demographic and income trends indicate positive conditions for leisure travel in the U.S. over the next 10 years. An aging population, combined with growing disposable income among the elderly, should increase the demand for airline services. However, the growth in business travel will be restricted as more and more companies downsize and automate operations, reducing the base of both current and future business travelers. Finally, communication technologies-such as fax machines, computer networks, and teleconferencing-have somewhat reduced the demand for business travel.
C. Five Forces Analysis
To analyze the competitive forces in the air transportation industry, Porter's five forces approach will be used. The five forces include Barriers to Entry, Rivalry, Threat of Substitutes, and Powers of Buyers and Sellers.
Barriers to Entry (MODERATE)
The barriers for entry into the Air Transportation Industry are moderate (Peterson, 2004). There have seen many new entrants in the past three to five years that have enjoyed success. JetBlue developed their service from one of the busiest domestic airports and the airline is running a profitable business today. However, what JetBlue did is very risky and requires significant capital resources. Still, the airline's efforts yielded strong results. In general, JetBlue's competition will continue to increase, but it is not anticipated that it will increase at a rapid rate.
In the air transportation industry, rivalry and competition are at all time highs (Peterson, 2004). Since the population of business and leisure travelers has decreased since the September 11 terrorist attacks, all airlines are fiercely competing to get passengers and increase loads and lower the available seat per mile ratio. One of the major ways that airlines are differentiating themselves is through pure price competition. Because of this, competition is higher than it has ever been in the air transportation industry. JetBlue has addressed this concern, as it offers low fares. However, it sets itself above the average airline in that it offers superior customer service.
Threat of Substitutes (LOW)
There do not appear to be any substitutes to air travel by leisure travel that could compete with air travel for long flights (Peterson, 2004). For example, if a New Yorker wants to go to travel to Hawaii for a vacation with his family, an alternative means of travel is unavailable. However, for business travelers, video telecommunications have resulted in a potential substitute for flying, but there is still a necessity for business to be completed face-to-face, and this justifies the rating of low.
Power of Buyers (HIGH)
It is a consumers' market right now when it comes to air travel. All major airlines are lowering fares to get passengers (Peterson, 2004). Travelers run the market by demanding lower fares. In addition, the buyers are essentially looking at purchasing a commodity, and therefore the lowest bidder typically get the fare (as long as the itinerary is acceptable), which is the reason for the deep discounts and high price competition. For this reason, the bargaining power of buyers has never been better and JetBlue makes many efforts to accommodate its buyers.
Power of Suppliers/Sellers (MODERATE)
Suppliers in the Air Transportation industry include jet fuel and airplane manufacturing. Fuel prices are expensive (Peterson, 2004). However, since these prices are commodity driven, there is nothing that an airline can do to force costs lower. As for the large passenger jet airplane manufacturers, Airbus and Boeing, both are highly competitive with one another, and thus the airline industry has more bargaining power with these companies. Since the power of suppliers and sellers usually deals with manufacturing companies, comparison to the airline industry, a service-oriented industry, poses problems. One critical supplier to the airline industry is the labor unions that supply workers, such as pilots, flight attendants, and ground crew/maintenance workers. According to: "The key issues here is that without the labor unions there would be no airlines, but as American showed in prior sections, without an airline there are not jobs. We believe that because of the overall ranking of the bargaining power of suppliers is moderate, due to the inability to change fuel prices, the give and take relationships among the unions and the airline industry, and the ability for the airlines to bargain on new planes."
It appears that the airline industry will continue to struggle in the near future (3-5 years) (Peterson, 2004). Innovation among this industry has been stagnant and the structure of the industry desperately needs reform. However, JetBlue has an advantage in that the industry giants/multi-national firms are too large to react to the changing environment in a fast and effective manner. This creates a large opportunity for JetBlue to innovate and develop new cost efficient means of air travel. The terrorist attacks were a significant blow in exposing the weakness of the air transportation industry that were lingering for decades, but their needs to be a positive, defining moment where the industry innovates and decides to change the status quo and the industry. While Jet Blue has showed innovation in this area, the multi-national firms dominate the industry and they are not successful. The bottom line is without more leaders, the airline industry as a whole will continue to disintegrate and will not be an investment worthy area for years to come.
III. Financial Analysis
A. Industry Financial Performance
TOP AIRLINE COMPANIES BY MARKET CAP
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