Crafting and executing strategy in organizations

JetBlue launched its business with the intent to "bring humanity back to air travel." This strategic intent is based around the idea that by improving customer service, JetBlue would be able to differentiate itself from other airlines. Although the company has low prices, it does not explicitly compete as a cost leader, but rather attempts to differentiate itself with its purchasing, ticketing and in-flight service offerings. This is supported by the Passenger Bill of Rights, a key component of JetBlue's marketing program that also helps to guide the company in terms of its operations.

This strategy was designed to meet the needs of the changing airline industry in the U.S. The industry is dominated by large, older airlines known as legacy carriers (so named for the debts and union contracts that they must carry). The legacy carriers have high cost structures, so were essentially competing on the basis of route saturation -- they were unable to be cost leaders but could not afford to deliver superior service levels either. The weakness of the legacy carriers opened the industry for a number of upstart competitors, most of who competed in the cost leadership segment. JetBlue's approach signaled another shift in the industry, where firms would compete more directly against the legacy carriers by offering a combination of favorable pricing and high service.

By 2007, the airline industry had begun to recover from a difficult decade. The early part of the decade saw the industry in decline in the wake of the 9/11 terrorist attacks and a slumping economy. The industry's prognosis going forward, however, is good. Load factors had been improving for several years at most airlines. There are major threats, however, such as the threat of the economy turning south, the threat represented by skyrocketed fuel costs and the threat of another terrorist attack.

JetBlue's financial objectives were not met over the previous five years. The company has successfully grown in size, increasing revenues from $998 million in 2003 to $2.8 billion in 2007. However, even management concedes that this growth came too quickly. JetBlue was unable to grow profits in line with revenues. The company made $18 million in 2007, compared with $103 million in 2003. JetBlue did exhibit strong cost control over most expenses, as operating expenses were 61% of revenues in 2007 compared with 68% of revenues in 2003. However, the rising cost of jet fuel reduced those gains. Jet fuel costs in 2007 were 32.6% of revenues, versus 14.7% in 2003. Part of the problem was that JetBlue did not hedge as much of its fuel costs as competitor airline Southwest did -- this left the company more susceptible to the increases. In addition, JetBlue's rapid expansion has left it with a high debt load, which in turn subjects it to a high income expense. Therefore, despite increasing revenues, JetBlue has generally had disappointing financial performance in recent years.

The company does not derive competitive advantage from cost. In particular, the decision not to hedge fuel costs has left the company at a cost disadvantage vs. many of its rivals. Its high debt load contributes to its cost disadvantage. The corporate culture does not give it a competitive advantage. JetBlue's culture is easily replicated by any other airline and provides no particular benefit that the customer appreciates. They lag Southwest in this regard. The human resource practices work to make the firm functional, but again JetBlue does not do anything unique that adds sustainable value to the firm.

JetBlue's six strategies for 2008 were to "reevaluate the ways the company was using its assets; reduce capacity and cut costs; raise fares and grow in select markets; offer improved service to corporate travelers; form strategic partnerships; and increase ancillary revenues.

The company was able to make ground in strategic partnerships via its equity sale to Lufthansa, which required them to bring a Lufthansa executive on their board. This also represented a move towards redeploying key assets, including the JFK hub. The firm also was able to utilize its LiveTV asset better as well. The company reduced its routes and began to focus on Orlando and other vacation cities. Fares increased as well, although in the early part of the year the cost of jet fuel rose significantly as well. Other new service fees were introduced.

JetBlue has successfully implemented most of its six strategies. Whether these strategies will have a positive impact on the firm or not remains to be seen. The changes bring JetBlue's operations more in line with those of a legacy carrier, especially with regards to increasing both fares and ancillary costs to the customer. Beyond the massive increase in fuel prices, the company was unable to contain other costs in early 2008. Marketing, maintenance and "other" operating expenses all skyrocketed. This reduced their operating margin. Operating expenses overall increased 28% while revenues only increased 25%. The company's move towards a higher cost structure was met with lower load factors. The airline industry is subject to high price elasticity of demand, which makes it difficult for airlines to increase their prices, even when they themselves are subject to higher fuel costs.