This paper examines JetBlue Airways through multiple strategic and managerial accounting lenses. It begins by analyzing the airline's dual competitive strategy of customer intimacy and low-cost value proposition, drawing on Treacy and Wiersema's (1993) value disciplines framework. The paper then identifies and evaluates the primary business risks disclosed in JetBlue's 2004 10-K filing, including competitive pressures, debt exposure, maintenance costs, and labor risks. Finally, it applies activity-based costing concepts to JetBlue's operations, identifying unit-level, batch-level, customer-level, and organization-sustaining activities, as well as transaction and duration drivers relevant to airline cost management.
Firms compete using a number of different types of strategies. Some examples include customer intimacy, operational excellence, product leadership, and customer value proposition. Customer intimacy refers to the delivery of superior customer service and the forging of strong customer relationships that result in repeat business. Operational excellence often incorporates elements of cost reduction, but refers more broadly 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 Treacy and Wiersema (1993).
JetBlue's strategy in the marketplace involves a two-headed approach. The first element is reliance on customer intimacy, and the second 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 a differentiated experience at a low cost, yielding a better value proposition than what is offered by legacy carriers.
As with any airline, there also needs to be an element of operational excellence in JetBlue's strategy. Airlines have no margin for error with respect to safety and security. In addition, the tight margins that airlines operate on — often equivalent to one or two passengers per flight — imply that cost controls must be strict in order for an airline to be profitable, especially one operating on a low-cost model. However, the keys to JetBlue's success as a five-year-old upstart were to generate repeat traffic from frequent fliers and to undercut its major competitors on price.
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 a highly competitive industry would normally be difficult to enter, JetBlue recognized that existing players were underperforming in several areas. By performing well across multiple dimensions, JetBlue could capture shares of different customer bases in sufficient numbers to generate enough demand to grow the company. While most discount airline startups fail, those that succeed are typically able to grow rapidly — a key component of JetBlue's internal strategy.
JetBlue faces a number of business risks, which the company is obligated to outline in its 10-K filings. In the 2004 10-K form, the following business risks were identified as potential threats to the company's ability to satisfy stockholder expectations. The first is the highly competitive nature of the airline industry. JetBlue characterizes competition as intense and notes that it faces competition on all of its routes. Many 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 carriers and 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. In 2004, JetBlue was a five-year-old airline seeking to grow into a national-class carrier. The strategy included increasing the number of flights, expanding into new markets, and increasing flight connection opportunities. The company believes it must achieve economies of scale in order to be competitive in the long run; failure to grow would ultimately result in marketplace failure. Key elements of the growth strategy include gaining access to desired airports, hiring quality personnel at both the management and non-management levels, developing the necessary information systems, and obtaining required regulatory approvals.
JetBlue also carries a number of fixed obligations on its balance sheet that 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, and most of this debt was at floating interest rates. Fixed obligations included aircraft leases, terminal space, and office space, as well as 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 the company either cannot meet its debt obligations or, after satisfying those obligations, has no money remaining for dividends or retained earnings.
Another business risk concerns maintenance costs. JetBlue's low-cost business model is supported in part by low maintenance costs because its planes are new; as the fleet ages, those costs will rise. The company also views its new airplane order from Embraer as essential to its future growth strategy. If this deal fails to go through — for reasons on either the supplier's side or JetBlue's — the company's growth trajectory will be compromised. This risk can be managed partly through contract terms, but JetBlue must also be attentive to the political relationship between the United States and Brazil in order to minimize the political risk associated with dealing with Embraer. Alternatively, the company could have selected a supplier from a more politically stable country, such as Bombardier or Airbus.
There is also a risk with respect to staffing. The customer relationship component of JetBlue's strategy is supported by a strong workforce, as is the company's growth trajectory. The company must continue to attract good employees at a relatively low cost. There is additionally a risk of unionization or other increases in labor costs. JetBlue's plane utilization strategy — turning aircraft around quickly to maximize capacity utilization — is also a high-risk element. If delays occur, the effects cascade across the network for the remainder of the day. JetBlue is further dependent on the New York City market, with 75% of its flights operating through that hub. Any disruption in New York will have a significant negative impact on earnings. Other business risks include technology failure, difficulties in acquiring credit, supplier issues, liability claims, and the risks associated with an accident.
All told, JetBlue must remain focused on executing its strategy, because a failure in any one element will make it more difficult to address the others effectively. The company must take particular care with its balance sheet. Balance sheet health is essential to building the credit that will allow JetBlue to continue its expansion. This requires operational excellence — the company must continue to attract a growing number of customers, and must do so increasingly outside of the New York market.
"Managing fuel costs, demand shocks, and information systems"
Beyond the aforementioned internal controls, JetBlue must carefully analyze the industry environment and maintain flexibility in its cost structure. The company needs to be able to exit leases in the event that a steep downturn in demand reduces revenues; if it cannot, fixed obligations will create considerable financial difficulty. JetBlue must also continue to recruit top management personnel and deliver information effectively to these managers so that control over key functions can be maintained. Without strong IT systems and capable management, the company will be less likely to detect deviations from performance expectations and less likely to adapt to them effectively. Investment in management and information systems is therefore a critical control mechanism for JetBlue.
Lastly, as with all airlines, JetBlue must have strong knowledge of route profitability — not only for its existing routes but for the many potential route combinations it might pursue. With slim margins, JetBlue and its peers must identify and capture market share on the most profitable routes. This serves both the route-building strategy and the company's overall profitability relative to rivals. Robust external information-gathering capabilities are therefore as important as strong internal information systems.
Unit-level activities are those conducted at the unit or work-group level. JetBlue is essentially a single-service company, but it does maintain distinct units. The finance department, for example, is responsible for containing costs — particularly those related to financing, leasing, and fuel. A representative activity for this unit would be negotiating the lease of new aircraft. Other unit-level activities at JetBlue include operations, training, accounting, and marketing.
A marketing campaign is another example of a unit-level activity. The campaign would consist of a number of distinct tasks carried out over a period of time, all conducted by the same unit. As with the leasing department's activities, controls consist of managerial oversight and corporate culture. Oversight ensures that each unit-level activity is conducted within its allotted budget and is measured against expected results. Senior management — especially the CFO and CEO — maintain a high level of oversight over major unit-level activities.
Batch-level activities are defined as those "performed each time a batch or production run of goods or services is produced" (Crosson & Needles, 2007, p. 208). In the airline context, the clearest example is an individual flight. While many individual transactions go into a flight, the overall batch figures reflect the profitability of each service run. At JetBlue, measuring this particular batch-level activity is essential because the company must ensure that all scheduled flights are profitable.
One example of a batch-level activity is an individual flight, which involves passenger revenues, cargo revenues, fuel costs, staffing costs, airport fees, other fixed costs, and food and beverage sales revenue. Another example is the training of a new class of recruits. Each training session carries a number of costs, and success is measured not in revenue but in the number of graduates or the cost per graduate. This batch output is cost-centric but still qualifies as a batch-level activity given the nature of its inputs and outputs.
Most airlines analyze each individual flight when making decisions about routes and schedules. They must also consider that some flights may serve as loss leaders, feeding customers into more lucrative connections. The emphasis on individual flights reflects the fact that the company has a fixed number of aircraft, which represent a fixed cost, and that the seats on those aircraft represent an opportunity cost as well. The airline must ensure that each flight generates a profit, or else it must redirect that aircraft and crew to a more profitable route.
"Passenger-mile metrics and hiring as sustaining functions"
"Flight miles and training time as cost drivers"
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