Jet Blue in Recent Years,

Jet Blue In recent years, the U.S. airline industry has become a difficult one in which to operate. The most significant concern for the industry is the highly volatile cost of fuel. Fuel is one of the biggest factor inputs for airlines in terms of cost. The cost of jet fuel fluctuates roughly in line with the cost of crude oil. For airlines, cost certainty with fuel is imperative for setting ticket prices at a profitable level.

To that end, most airlines choose to hedge some or all of their fuel expense. Hedging means to guarantee a price or price range by means of purchasing a derivative such as a swap, collar, future or forward contract. While hedging locks in fuel prices, those prices could go either up or down. Thus, hedging is essentially a form of gambling wherein the company chooses to minimize downside risk, typically at the cost of losing out on upside.

Another trend in the airline industry of late has been the move to specialization. Most new, non-legacy carriers are choosing either to operate as discounters or as premium airlines. In the United States, the latter are few and far between and almost all new entrants are in the discount segment of the market, JetBlue included. The strategic response to this for airlines in the discount business has been to strive to cut costs as much as possible in order to compete.

For legacy carriers, their cost structures are so high that they have trouble competing on price, so must also attempt to compete on other means such as brand recognition and route saturation. A third trend in the airline industry recently is the economic crisis. This has reduced traveler volumes at a time when airlines are faced with substantial cost uncertainty as a result of volatile fuel costs. The economic slowdown reduces business travel because companies are reducing their travel budgets and using technology such as videoconferencing as a substitute.

The slowdown reduces vacation travel because fewer people have jobs and those that do feel less secure about their financial future, typically a prerequisite for taking a vacation. JetBlue's strategic intent is to pursue its low-cost strategy. The company believes that with careful cost control in its operations and strategic hedging of between 40-70% of its fuel costs, it can compete on price with any carrier. Jet Blue also hopes to compete on service.

The company feels that it has sufficient financial strength to compete with other discount carriers that may not be able to sustain price wars or that may nickel-and-dime their customers too much. JetBlue approaches its hedging strategy by hedging only some of its fuel costs. Like most airlines, the company is averse to hedging too much of its fuel exposure because of the risk that the price drops. Such an event would give their competition a cost advantage.

JetBlue believes that its hedging strategy gives it enough cost control to set competitive prices while simultaneously giving it flexibility to gain from a decrease in the price of jet fuel. The company's other major strategic initiative will be to expand services to the Caribbean. This region represents strong growth opportunities for JetBlue, in particular during the winter months when northerners head south on vacation.

JetBlue is otherwise keeping its expansion strategy relatively conservative, due to the tough economic times making it difficult for the company to justify substantial route expansion. JetBlue's main financial objectives are to make a profit and to increase revenues. Over the years, JetBlue has been successful in its profit-making endeavors. The company was profitable in 2009, earning a net income of $58 million despite a very difficult operating environment.

This came as result of the firm's cost-cutting efforts after it lost $85 million in 2008 amid the start of the downturn and skyrocketing fuel prices. The company had also turned a profit in 2007 (MSN Moneycentral, 2010). Clearly, the company has been able to adapt to its circumstances and meet its financial objectives. Revenues, however, shrunk in 2009, no doubt as the result of cutting routes in order to trim costs. JetBlue does not derive a competitive advantage from its cost structure.

The reason is not that JetBlue has poor control over its costs, because it does. The reason is that other discount airlines follow the same policies and achieve the same results -- the competitive advantage JetBlue may once of have on cost was not sustainable and now other airlines match their cost-cutting efforts. Organizational structure does provide JetBlue with some advantages. The firm is able to control its costs well, and make route adjustments where necessary as the result of its organizational structure. These advantages are also not sustainable.

The most sustainable element of JetBlue's competitive advantages is the corporate culture. JetBlue aims to provide a high level of service along with the discount flight cost. Both a low cost strategy and a high customer service tactic require a strong corporate culture. The company's employees need to be jointly committed to cost cutting as a way of life and the delivery of high levels of customer service. It is too easy to sacrifice service in the name of cost-cutting, but JetBlue has not taken this approach.

An example would be the JetBlue Customers' Bill of Rights, which is a significant statement of intent from the company that compels its employees to live up to the high service standards set therein. JetBlue has set relatively modest strategies for the coming years. The company intends to reduce hedging and make small adjustments to its routes. This comes as a response to the uncertain operating environment. While the price of jet fuel is expected to only rise slightly, the company believes that fuel cost certainty can.