Brian Williams
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MGMT

Case Analysis #1 ­ JetBlue Introduction
JetBlue Airways was founded in 1998 by former Southwest Airlines employee, David
Neeleman, The company looks to utilize similar cost savings techniques as Southwest and has even improved, expanded and added some. In addition, JetBlue has attempted to offer differentiation in service to improve the customer experience. Unlike most point­to­point airlines, JetBlue decided to add a second airplane model in order to expand into the regional flights. A deal was struck to purchase up to 200 jets from Embraer through 2016. The growth the company forecasted was soon realized to not be in the best interests of the future of JetBlue. In 2006 the company executives discovered that the the time it would take in order to just achieve break­even cash flows with the growth model at that time was much longer than originally anticipated. This, along with dramatically rising fuel costs, meant a new plan would have to be implemented in order to slow growth. In 2007, newly appointed CEO David Barger had to design a way to reduce growth even further. What needed to be decided though was which jets to cut, and how much of each. the A320 was the model that built JetBlue and the aircraft that had proven its success in the past. The E190 provided a new unique opportunity and a niche market that JetBlue may be able to take great advantage of.

External Analysis PESTEL
Political
­ Influenced by: geopolitical events (9/11) and US regulatory environment such as new legislation that affects the industry. Economic
­ Influenced by: global or national economic climate (2008 recession), purchasing power of target market (income per capita growth of US), rises in inflation or especially oil prices. Social
­ Influenced by: customer knowledge (increased by internet access and comparison shopping), cross­cultural flights, increased desired security for passengers Technological
­Influenced by: E­Ticketing, comparison shopping, reservation and seat selection process online Environmental
­ Influenced by: weather is an extremely important factor, air traffic control, increased awareness of sustainable practices and environmentalism, emissions guidelines. Legal
­ Influenced by: Regulation/Deregulation, protocol and guidelines, customer dissatisfaction, Department of Transportation and Federal Aviation Administration

Five Forces Model
Threat of New Entrants:
­ The barriers to entry in the airline industry are relatively low. The airplanes themselves can be rented or leased, and the regulations to enter the industry are not intensive.
Especially currently with low interest rates and an ease to acquire capital, new entrants will be able to finance initial investment somewhat cheaply compared to the past. In addition, new companies can easily sway customers to switch loyalties if the new company provides cheaper service or better quality. What helps existing firms is that they have established economies of scale in the industry along with relationships with buyers and suppliers. Also, it is a highly capital intensive industry and initial costs will be high. Often companies will have to sustain losses for prolonged periods of time upon entering the industry. Even then, profit margins are low in comparison to other industries so there is not a large incentive to enter. Due to all this, the threat of new entrants is low.

Power of Suppliers:
­ There are only two suppliers for the industry, Boeing and Airbus which increases their power. Those suppliers are also often able to lock in long term contracts to the airline companies.There are other suppliers that produce regional jets, which affects large companies if they offer regional service or own subsidiaries that specialize in doing so. Airplane producers however do not pose a threat of forward integration and are somewhat reliant on the firms for business because they have very few revenue streams. The power of suppliers is medium.

Power of Buyers
­ There is no threat of backward integration from buyers since they are simply travelers and passengers but buyers have very much power in this industry. There is little brand loyalty since consumers will be sensitive to price and forced to take the airlines that will get them to their destination. Although there are programs such as “frequent flyer” that try and induce increased loyalty, there is still very little. Customers are also very easily

aware of price differences due to online sites and other than the lossed “frequent flyer miles” there is no switching cost. Fluke events such as the events of February 2007 for
JetBlue can cause dramatic changes in consumer habits and they normally can easily avoid certain companies if they so chose. For business travelers, companies are increasingly able to telecommute or e­conference so the need for business travel is becoming less prevalent. Buyers have many alternatives such as cars and trains and the shorter the distance, therefore the threat is greater. As JetBlue pushes into the regional flight market, the threat of substitutes will become ever more prevalent as the consumers in this market will be much different than those of the A320 original business plan.
The power of buyers is high.

Threat of Substitutes:
­ There are many substitutes to air travel. Although, they all force one to sacrifice time and are often still more expensive depending on the situation. However, there are many other alternatives such as trains, cars and telecommuting. Those that can afford can also fly privately. For long distance travel substitutes are less threatening. The threat of substitutes is medium.

Competition Among Existing Firms:
­ There are many companies competing in the airline industry and all are fighting to drive costs as low as possible in a low margin industry. Economics cycles also have a high effect on the size and growth of the industry so at times, the entire industry is fighting for share that cannot support that many firms. The fixed costs are very high as companies are usually locked into long term contracts with suppliers. This makes barriers to exit extremely high. Competition among existing firms is high.

Internal Analysis

(http://mbacase.blogspot.com/2012/08/jetblue­airways.html)

Business/Corporate Level Strategies

( http://www.academicmind.com/unpublishedpapers/business/management/2008­06­000aao­delta­an­anyalytical­view.html )

JetBlue is among the many low cost carriers that provide service at as low of a price per available seat as possible.In general it is trying to target the most price sensitive consumers. With a goal of offering the best service at the lowest price, it seems the company's intention is to provide those hesitant to travel that JetBlue provides comfortable and affordable travel. JetBlue uses point­to­point flights and only a couple different types of aircraft in order to keep costs as low as possible. This allows them to offer low fares and top end amenities. This rare combination means that JetBlue is attempting to compete in both cost leadership and differentiation. To see how it is working I will analyze the company's performance. JetBlue also has had an emphasis on customer service. Because they target leisure travelers especially for mid­size A320 flights, the customers are typically not as time sensitive so JetBlue believes in avoiding flight cancellation at all costs, even at the expense of increased delays. This formula has backfired in the past with the
“Valentine's Day Crisis” of 2007 which led to 1,100 flight cancellations over six days and also may need changing as the regional services on E190 jets will have many more time sensitive travelers.

Performance When David Neeleman and the rest of JetBlue decided to venture into the regional flight market and started exploring the addition of the E190, the company was not struggling.
Through 2006 JetBlue was financially competitive with the rest of the industry. At the time, with rising fuel costs, all companies were struggling to turn a profit.
Southwest was turning a massive profit compared to the rest of the large companies but
JetBlue was still at least in the positive (from operations) which could not be said for
Continental, Delta, American and United. The idea of expansion was not through desperation but rather through preparedness. From 2003 through 2006 profits decreased every year and with oil prices continuing to rise, Neeleman and the rest of the company needed to find a new market to bring in revenue and profits in the long run. When adding a new jet type, the financial gains to not come quickly. Developing core competencies, experience and knowledgeability about the aircraft and especially economies of scale all take time and especially resources. When the plan began,
JetBlue did not forecast the amount of time and resources this was going to take an in turn, repercussions and restructuring are a necessity. The decrease in growth that came with the new plan at the end of 2006 decreased available seat miles annual rate of growth from 18­20% to 14­17% and meant the total fleet of E190s as of 2011 would be 73 rather than 101. This growth decrease was thought to be enough but through 2007 JetBlue began to lag behind competitors and new DEO David Barger had to deal with rising fuel costs, decreasing profitability and moreover, what was the best way to further reduce growth. During 2007, JetBlue lagged behind other airlines in both profit margin and return on equity. The success in the early
2000s was disappearing quickly. Industry DuPont Analysis comparison:

Possible Solutions The first solution for JetBlue CEO David Barger is to continue on this the current plan in place. In 2006 the company already reduced future growth substantially and the nature of the airline industry is that there are not historically high margins, and costs and extremely sensitive to oil prices. Although performance has lagged behind the industry for the last couple of years, prior to that the company enjoyed great financial success. In
2003, with just under $1 billion in revenue JetBlue’s profits were over $100 million, a margin of over 10% which is extremely high for the industry. The addition of the E190 line has caused disruption among pilots, and caused a stir to change some of the company's fundamental operations. Staying the course and allowing for managerial and operational efficiency to grow as employees and executives adjust to the change may be enough to get the company back on track. Another option would be to revert to the core competencies that made JetBlue succeed upon its founding. That would mean a plan to eliminate the E190 line from the company.
It would seem extraordinary to give up on the region flights so soon after establishment but many of the struggles facing JetBlue have been directly associated with the new jets, including the most prominent “Valentine’s Day Crisis.” By utilizing the A320 for all flights, especially short distance (which are more profitable), it ensures the the capacity for those profitable flights are as high as possible. Also, the E190 operate at 12% high expense than the A320. There are several problems with this plan though. First, the expense to reneg the contract with Embraer could create significant sunk costs. Next, the price of purchasing E190s could be as much as $30 million less or half the price of
A320s. Also, JetBlue has a higher breakeven load factor than most of the other competitors and abandoning the smaller aircrafts will eliminate one way to bring that number down. The next option is to revert to the original growth rates, or even increase the proportion of E190. There are significant problems with this plan, first of which being that the cash flow miscalculations are still relevant and the losses over the last few years means increasing a new jet line will only prolong the company's financial struggles. Also, because the A320 can make regional flights as well, having a large fleet of purely regional jets seems extremely redundant. There are significant reasons to keeping the
E190 fleet, as I will detail below. However, increasing the proportion seems to have very little possible benefits.

The option I believe would work best is as follows; greatly reduce the number of E190s, as the 2006 JetBlue plan does and perhaps even further. There are several issues with keeping the E190 and I believe they can be solved by operating E190 flights with much different sets of norms than the A320. The customer Bill of Rights from 2007 is a good idea to outline the way customers should be treater. However, as February 2007 showed, the principles that governed JetBlue employees from its founding do not apply as well to E190 regional flights. This doesn’t mean that those principles should be abandoned, it just means that the rules may have to be different depending on the flight.
Creating a systems that keep the cancellation­limiting policies that worked so well for
A320 flights and alters them to allow for more flexibility and emphasis on timeliness for regional E190 flights may help combat some of those issues. The reason JetBlue should not eliminate the E190 is because of the cost and load factor reasons detailed above. Using a 150 seat jet such as the A320 for all regional flights seems foolish and contributes to the high break even load I mentioned. There are numerous other reasons to keep the E190 and some of them are as follows:
­ JetBlue has an advantage on regional flights in that the company is not unionized. This factor gives the company a competitive advantage that should be capitalized on.
­ The profitability of regional flights is much higher than longer ones, especialy cross country. JFK to Boston flights have a revenue/ASM (available seat miles) of 21.22 cents. That flight also has 8 trips per day meaning that they are high frequency and high efficiency. Even though they are short and therefore don’t have the highest volume of income, the addition of the E190 means there can be an added number of flights. Service from JFK to Boston was not even offered by
JetBlue in 2005. Similarly, service come JFK to Chicago and other regional cities was not available either. The addition of the E190 means increasing the number of flights and number of locations available. Using the smaller regional jet to take several trips allows A320 to take longer trips are more expensive and require higher capacity. An example of this would be that in 2005 there were only 9 trips from JFK to Orlando whereas in 2007 there were 11. Conversely, since the E190 can also make northeast to Florida trips, the flights from regional cities that will require higher capacity can utilize the A320 while the E190 makes a trip from
JFK to West Palm Beach which is offered once per day with the E190.
­ Another reason for keeping the E190 line is that it allows to JetBlue to offer its own connections rather than partnering with another airline. Allowing the E190 to make the starting or tail end flight means passengers can fly cross country from nearly anywhere all the way in JetBlue flights.

The implementation of the operational differentiation based on flight may be difficult.
However, JetBlue was not the only airline that had problems due to high volume that caused long delays. Because it was an industry wide problem, there will be industry wide solutions in cooperation with the government and individual air traffic control units.
It does not stop there, though. Creating completely different ways of handling situations and overall operations based on flight and jet may not be completely necessary. The starting point would be the willingness to cancel flights. Staff should be much more willing to cancel flights from Boston to JFK than flights from JFK to Orlando. The distinction between the time sensitivity and ease of substitution for passengers should be understood and during times of delay, should influence cancel rates. By utilizing the E190 for its most efficient and profitable uses while still enjoying the capacity and versatility of the A320 is the best option for JetBlue to turn around performance. And this means growth decreases should be made with an emphasis on the E190.