With slim margins, JetBlue and other airlines must discover and capture market share in the most profitable routes. Not only does this serve the route-building strategy of JetBlue, but it allows the company to be more profitable than its rivals. Thus, there needs to be good external information gathering capabilities in addition to internal information systems.
3. Unit-level activities are those that are conducted at the unit or work group level. JetBlue is essentially a one-service company, but it does have different units. The company has a finance department and the role of this arm is to contain costs, especially those pertaining to financing, leasing and fuel costs. An example of an activity for this unit would be negotiating the lease of new airplanes. Other unit activities that JetBlue has include operations, training, accounting and marketing.
A marketing campaign would be another unit-level activity that JetBlue has. The campaign would consist of a number of different tasks over a period of time, but all conducted by the same unit. As with the leasing department activity, JetBlue's controls consist of managerial oversight and the corporate culture. Oversight ensures that each unit-level activity is conducted within the budget that has been allotted and that it is measured against the expected results. Senior management, especially the CFO and CEO, have a high level of oversight into major unit-level activities.
4. Airlines have a number of batch-level activities. Batch level activities are defined as those "performed each time a batch or production run of goods/services is produced" (Crosson & Needles, 2007, 208). The best example is a flight. Each flight is a batch-level activity. While there are a number of individual transactions that go into a flight, the overall batch figures reflect the profitability of each individual flight. At JetBlue, it is important to measure this particular batch-level activity because the company must ensure that all of the flights on its schedule are profitable.
The first example of a batch-level activity is an individual flight. There are passenger revenues, cargo revenues, fuel costs, staffing costs, airport costs and other fixed costs. There is also revenue associated with food and beverage sales. Another example of a batch-level activity at JetBlue is the training of new recruits. Each training session has a number of costs associated with it, and success in this case would be measured not in revenue but in the number of graduates or the cost per graduate. This example of a batch output is cost-centric, but still qualifies because of the nature of the inputs and outputs.
Most airlines analyze each individual flight when making decisions about routes and times. They must also consider that some flights may be loss leaders, feeding customers into more lucrative flights. The emphasis on flights is because the company has a fixed number of airplanes, and those planes represent a fixed cost for the company on its income statement and the seats on those planes represent an opportunity cost as well. The airline must ensure that each individual flight is generating a profit for the company, or else the company will need to take that plane and that crew and put it towards a different flight that is profitable.
5. Customer-level activities are those conducted at the level of each customer, rather than a batch or unit. In a service industry, the concept is usually applied to an individual service for a customer, or to a number of services that are performed for a given customer. While JetBlue fosters repeat business, it does not typically track revenue per customer simply because it has millions of customers, each with relatively small transactions. Only through a loyalty program could an airline typically have a sense of its highest-revenue customers. Even then, the airline would need an effective metric for the costs and revenues associated with servicing that customer. For airlines, a critical measure is revenue per passenger mile. This is a good example of a customer-level activity. In most industries, the measure would be revenue per customer, but because the capacity of servicing of each customer varies, the metric used for airlines is passenger mile. This still measures the effectiveness of the airline to generate revenue from its customers.
Organization-sustaining activities can be difficult to define. The most important characteristic in defining an organization-sustaining activity is that it should not be a catch-all for undefined tasks (Angelis, 2001). Rather, the activity should support the continued existence of the organization or its mission. In the case of JetBlue, one activity that helps to sustain the organization is hiring. This human resources function allows the organization to meet its strategic objectives with respect to both differentiated customer service and with respect to low cost provision of services. The company needs to find the best employees and retain them, without spending much money. Thus, this task not only sustains the organization's mission but is a key component of the growth strategy for JetBlue for the years ahead.
6. A transaction driver is used to count the frequency of an activity. In an airline, a good example of a transaction driver is a flight. Each flight is a specific activity that is closely associated with the total amount of business that an airline does. The flight mile is a more accurate transaction driver that is commonly used in the airline industry. Costs and revenues both are outlined on the basis of both total flights and total flight miles, making these two good transaction drivers.
A duration driver is a measurement or estimate of the time required to perform the task or activity. Going back to the example of training a new class of recruits, this task has a duration driver measured in days. The number of days it takes to get a new class of recruits into the skies or call center is a duration driver in that the shorter this time period can be, the less the activity will cost.
These different drivers can be used in an activity-based costing system to help JetBlue manage its costs effectively. By understanding the cost structure of each flight, or of each passenger mile, or of each unit of time for a given activity, JetBlue can focus its efforts on delivering the cost savings where they count the most. In short, the company can go where the money is in order to maximize its cost savings. Being able to do this is essential for any company that attempts to compete on a cost leadership strategy with a high value proposition.
Angelis, D. (2001). Implementing activity-based management in an acquisition organization. Acquisition Review Quarterly. Retrieved February 28, 2011 from http://findarticles.com/p/articles/mi_m0JZX/is_1_8/ai_81763208/pg_5/
Crosson, S. & Needles, B. (2007). Managerial Accounting. Boston: Cengage.
JetBlue 2004 Annual Report. Retrieved February 28, 2011 from http://library.corporate-ir.net/library/13/131/131045/items/211507/200410k.pdf
Treacy, M. & Wiersma, F. (1993). Customer intimacy and other value disciplines. Harvard Business Review. January/February 1993, 84-93.
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