JetBlue Airways business model and operations

JetBlue

Firms compete using a number of different types of strategies. Some examples of strategies that could be employed are customer intimacy, operational excellence, product leadership and customer value proposition. Customer intimacy refers to the delivery of superior customer service and forging the types of strong customer relationships that result in repeat business. Operational excellence often incorporates elements of cost reduction, but refers to eliminating mistakes and improving efficiency as a path to success. Product leadership refers to a firm that competes on the basis of having the best product or service in the industry. Each of these is a form of customer value proposition, according to the Treacy and Wiersma (1993).

JetBlue's strategy in the marketplace involves a two-headed strategy. The first element of this strategy is reliance on customer intimacy and the second element is the customer value proposition. The first element is embodied in the company slogan "bringing humanity back to air travel," which illustrates that the company intends to build a strong relationship with its customers in order to foster long-term repeat business. The second element is embodied in the company's low cost strategy. While JetBlue offers low-cost flights, it combines this with ancillary services that customers find attractive. The result is that JetBlue aims to provide its customers with a differentiated experience, but at a low cost, with the result being a better value proposition than what is offered by the legacy carriers.

As with any airline, there needs to be an element of operational excellence in JetBlue's strategy as well. Airlines have no margin for error with respect to safety and security, for example. In addition, the tight margins that airlines have -- often one or two passengers -- imply that cost controls must be strict in order for an airline to be profitable, especially one such as JetBlue that is operating on a low cost strategy. However, the keys to JetBlue's success as a five-year-old upstart are to generate repeat traffic from frequent fliers and to undercut the company's major competitors.

JetBlue utilizes a combination of different methods to deliver a value proposition to its customers in part because of the highly competitive nature of the airline industry. While normally a highly-competitive industry would be difficult in which to compete, JetBlue realized that there were areas where the existing players were not performing well. By performing well in a number of different areas, JetBlue could capture shares of different customer bases in sufficient numbers in order to generate enough demand for its services to grow the company. While most discount airline startups fail, those that succeed are those that are able to grow rapidly, which is also a key component of the internal strategy for JetBlue.

2. JetBlue faces a number of business risks. The company is obligated to outline these risks in its 10-K forms. In the 2004 10-K form, the following business risks were identified that may threaten the company's ability to satisfy stockholder expectations. The first such risk is the highly competitive nature of the airline industry. JetBlue characterizes the nature of this competition as intense and notes that there is competition on all of the company's routes. Many of the competitors are well-established firms with substantial name recognition and financial resources. Despite being a low-cost airline, JetBlue still faces price competition from other low-cost airlines and even from legacy airlines, which have greater financial resources with which to wage price wars.

The second business risk is that the company may fail to implement its growth strategy. JetBlue in 2004 was a five-year-old airline seeking to grow into a national-class carrier. The strategy included a number of different elements, including increasing the number of flights, increasing the number of markets and increasing flight connection opportunities. The company believes that it is necessary to achieve economies of scale in order to be competitive in the long run, and therefore if it fails to grow it will ultimately face failure in the marketplace. There are several elements to the growth strategy. These include gaining access to desired airports, hiring quality personnel at both the management and non-management levels, develop the necessary information systems and to obtain whatever regulatory approvals are necessary.

JetBlue has a number of fixed obligations on its balance sheet that also contribute to business risk. Increased leverage equates to increased risk. As of the end of 2004, JetBlue's debt represented 67.1% of its capital structure. Further increasing the business risk is that most of the company's debt was at floating interest rates. In addition to debt securities, JetBlue's fixed obligations included aircraft leases, terminal space and office space. There were also commitments to purchase 214 new aircraft, and the commencement of construction of new facilities in New York and Orlando. This debt represents an obligation to be paid from future cash flow. Any decline in that future cash flow may mean that either the company cannot meet its debt obligations, or that after those obligations are paid the company will not have any money left over for other things, such as dividends or retained earnings.

Another business risk faced by JetBlue is with respect to its maintenance costs. The company's low cost business model is supported by low maintenance costs because the planes are new; as the fleet ages maintenance costs will rise. The company also sees its new airplane order from Embraer as essential to its future growth strategy. Thus, if for any reason this deal does not go through -- either at the supplier end or the JetBlue end -- the company's growth trajectory will be compromised. This can be dealt with partly on a contractual level, but JetBlue must also ensure that the United States government maintains good relations with Brazil in order to minimize the political risk associated with dealing with Embraer. Alternately, the company could have selected a supplier from a more stable nation, such as Bombardier or Airbus.

There is also a risk with respect to the staff. The customer relationship component is supported by a strong staff, as is the company's growth trajectory. The company must be able to continue to attract good staff at a relatively low cost in order to continue with this strategy. There is also a risk of unionization or other increase in labor costs. The company's plane utilization strategy is also a high risk element of its business strategy. JetBlue turns its planes around quickly as part of its strategy of maximizing capacity utilization. If there are delays, it affects flights throughout the network for the rest of the day. JetBlue is also dependent on the New York City market, with 75% of its flights going through that market. Any problems in New York will have a significant negative impact on the company's earnings. Other business risks relate to technology failure, difficulties in acquiring credit, issues with suppliers, liability claims and the risks associated with an accident.

All told, JetBlue must be focused on executing its strategy, because if the company falters on any element of that strategy, it will be all the more difficult to address the other elements effectively. In particular, the company must take extra caution with its balance sheet. Balance sheet health is essential to building the credit that will allow JetBlue to continue with its expansion strategy. Balance sheet health requires operational excellence, as the company will need to continue to attract a growing number of customers, and will need to do so outside of the New York market in order to continue to be successful.

There are also a number of risks associated with the airline industry. The industry is subject to fluctuations in demand and fluctuations in fuel costs. Having gone through the difficult times following the terrorist attacks on 9/11, terrorism remains a threat to the demand side of the business in particular. Following the terrorist attacks, there were additional requirements brought about by the TSA and the U.S. government, and these can also affect demand on an industry-wide basis. Fuel costs can be hedged, but there is little that JetBlue can do with respect to industry-wide demand issues, other than to steal market share from other airlines.

Beyond the aforementioned internal controls, JetBlue must also take care to carefully analyze the industry environment in order to succeed, and to maintain some flexibility in its cost structure. The company needs to be able to break leases in the event that a steep downturn in demand reduces revenues. If not, these fixed obligations will create considerable difficulty for the company. In addition, JetBlue needs to continue to recruit top management personnel and deliver information effectively to these managers so that control over key functions can be maintained. With poor it systems and poor management, the company will be less likely to know about deviations from performance expectations and will also be less likely to effectively adapt to them. Thus, investment in management and information systems is a critical control mechanism for JetBlue. Lastly, as with all airlines, JetBlue must have strong knowledge about route profitability, not only for its own routes but for the myriad of different potential route combinations. 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.