Jet Blue

Written by Christian Boyens, Ji-Young Cha, Ronit Livneh, Felicia Pan-Fea, Vishal Singh and Pierre-
Edouard Vintrou under the direction of Jeffrey S. Harrison at the School of Hotel Administration, Cornell
University. Copyright c Jeffrey S. Harrison.
This case study was written for the purposes of classroom discussion. It is not to be duplicated or cited in
any form without the copyright holders express permission. For permission to reproduce or cite this
case, contact Jeffrey S. Harrison (harrison@richmond.edu). Permission to use in the classroom will be
granted free of charge.

The Center for Hospitality Research
AT CORNELL UNIVERSITY

JetBlue: Flying for Success

Imagine how you would create an airline if you
were building it from scratch. No ridiculous promises of
self-actualization onboard, no exorbitant airfares, no
cattle-train mentality, no hassles.
www.jetblue.com Definition of company culture

JetBlue Airways (JetBlue) is the new discount airfare business model for the
airline industry to follow. A young company of 4 years has been able to stand strong
even after the tragic events of September 11
th
. As the industry struggles to return to
stability, JetBlue has been able to overcome the challenges and double their revenue.
JetBlues strengths can be pinpointed to executive managements experience within the
airline industry as well as JetBlues ability to differentiate itself from the competition.
Some of its most important strategies are limiting operating costs, flying with a new
airbus A320 Fleet, developing a quality brand, hiring dedicated employees, and
pursuing the latest technology. To expand more quickly, JetBlue has decided not to pay
any dividends to their stockholders, but rather use their earnings to continue further
growth of the company.

HISTORY
JetBlue is an airline with a very brief but interesting five-year history. During
February 1999, David Neeleman announced his plan to start a new discount airline. He
wanted to offer a low-fare, low-cost passenger airline that provide[d] high quality
JetBlue: Flying for Success, 2

customer service.
1
Neeleman was not new to the industry; he was actually a cofounder
of Morris Air, one of the first airlines to offer ticketless travel.
2
After selling Morris Air
to Southwest Airlines, Neeleman designed a reservation system, Open Sky, that
integrated electronic ticketing, Internet booking and revenue management tools and
generated timely operational and financial reports
3
. After he sold his new reservation
system to Hewlett-Packard, Neeleman was ready to launch his new company,
JetBlue.

The airline was originally introduced as New Air but later changed its name to
JetBlue. JetBlue mean[s] a true, deep, and absolute blue
4
. The basic strategy of the
new airline was to offer discount airfares that provided high-quality customer
service
5
on point-to-point routes. All of the flights were designed with the comfort of
customers in mind. Planes were equipped with 162 leather seats with a personalized
satellite TV that had access to 24 channels of Direct TV at each seat. The flights mostly
serviced small markets and major metropolitan areas. The company started with the
initial investment of $130 million, which was the largest capitalization venture in the
history of airline start-ups.
6
Neeleman wanted to build an organization where the
employees took pride in their company, and achieved this by instilling JetBlue
employees with the companys five core valuessafety, caring, integrity, fun and
passion. This has helped the employees focus on the strategy of the company.
7

A year after the conception of Neelemans idea, a base headquarter was
established at New Yorks John F. Kennedy International Airport. JetBlues debut was
originally estimated to open at a stock price ranging from $22 to $24 per share for 5.5
million shares, but [the] airlines shares opened at $37.52. The stock traded as high as
$46.24 before closing at $45.
8

JetBlues inaugural flight was between JFK and Fort Lauderdale. Within the first
six months, JetBlue was able to expand their services to Buffalo (NY), Tampa (FL),
Orlando (FL), Ontario (CA), Rochester (NY), and Oakland (CA).
9
As revenue increased,
the company was able to continue expansion to several more cities including Burlington
(VT) and West Palm Beach (FL). Within a year, JetBlue served its one millionth
passenger. In its first year alone, JetBlue had a net income of $38.5 million.
10

On March 20, 2001, JetBlue was ranked by Zagat as the second best airline
overall, comfort and service
11
. During that month, JetBlue serviced its two

1
http://www.ipo.com/ipoinfo/profile.asp?p=FINA&eid=6606&page=company, November 20, 2002.
2
http://www.cio.com/archive/070102/jetblue_content.html, November 18, 2002.
3
http://www.cio.com/archive/070102/jetblue_content.html, November 18, 2002.
4
http://www.epinions.com/content_71628852868, November 18, 2002.
5
Prospectus: JetBlue Airways Common Stock, 11 April 2002.
6
http://www.planebusiness.com/tscolumns/tscolumns/ts012501.html, November 20, 2002.
7
http://www.hratworkco.com/July2002.htm, November 19, 2002.
8
http://www.flagventure.com/portco_news.asp, November 18, 2002.
9
http://www.jetblue.com/learnmore/timeline.html, November 18, 2002.
10
http://www.kbcc.cuny.edu/UCVE/JetBlue%20Case.pdf, November 20, 2002.
11
http://www.jetblue.com/learnmore/timeline.html, November 18, 2002.

millionth passenger. As of February 28, 2002, the airline operated 108 flights per day,
including 52 daily flights between JFK and Florida, 26 Daily flights between JFK and
upstate New York and 18 daily flights between JFK and the western United States
12
.

After the tragic events of September 11
th
, 2002 (9/11) JetBlue remained strong
and fiscally sound. Even though there was a drastic decrease in occupancy for months
after the event, JetBlue did not lay-off or furlough any employees nor did [it] defer any
aircraft.
13
Instead, it was one of the first airlines to install bullet proof and force
resistant cockpit doors across their fleet. It also took the initiative of installing AD video
cameras in its fleet by March 2002.
14
While still recovering from the hit of 9/11, JetBlue
made their initial public offering (IPO) on April 12, 2002.
15

On June 18, 2002, JetBlue introduced TrueBlue, the first loyalty program for
low-fare carriers. The program was designed for customers to collect points instead
of miles every time they chose JetBlue over other airlines. Within a month of
introducing TrueBlue, over 94,000 people signed up for the program
16
. Each trip was
designated a certain number of points. After the customer received 100 points, the
customer was given a free roundtrip ticket.
17

On October 24,

2002, the Board of Directors announced that they had planned a
three-for-two stock split. The actual split will occur on December 12, 2002. After the
stock split, there will be 63 million shares of outstanding shares of common stock.
18
At
the same time, the company initiated a stock purchase plan for their crewmembers.
19

Even with a short history, the company has proven its success to be
incomparable to any other airline company. The company has continued to expand in
recent months to Syracuse (NY), Long Beach (CA), New Orleans (LA), Denver (CO),
San Juan (PR), Seattle (WA), Las Vegas (NV) and Washington (DC). The company
plans to add an additional 18 daily flights, increasing operations to 102 daily flights and
20 destinations by the end of the year.
20

12
13
http://media.corporate-ir.net/media_files/nsd/jblu/custom/transcript.htm, November 20, 2002.
14
http://www.ad-aero.com/latest/newsrel/jetblue/, November 20, 2002.
15
http://biz.yahoo.com/p/j/jblu.html, November 19, 2002.
16
17
http://www.jetblue.com/learnmore/pressDetail.asp?newsId=130, November 19, 2002.
18
http://news.cnet.com/investor/news/newsitem/0-9900-1028-20575971-0.html, November 18, 2002.
19
20
http://news.airwise.com/stories/2001/11/1005138308.html, November 20, 2002.

ENVIRONMENTAL ANALYSIS
The Broad Environment.
This section serves to discuss the various factors in the broad environment
affecting the airline industry. Socio/cultural, economic, political, and technological
factors are all influential to the airline industry. It is important to acknowledge that as
every factor interacts with and influences the other, the boundaries between these
factors can get blurred. Therefore, certain factors which are included in one category
may apply to another.

Socio/cultural Influences
Globalization. The airline industry lags behind other industries in carrying out
globalization. Although deregulation in 1978 released the airline market to open
competition and liberalization, some regulatory movements hinder the airlines from
owning sufficient scale to dominate their surrounding markets and [volumes] to lower
unit costs.
21
This is exemplified by the U.S. Justice Departments denial of the merger
between United Airlines and US Airways fearing the creation of a monopoly.

In many respects, globalization is an inevitable and necessary step for airlines
which are struggling to simply stay in business and out of bankruptcy. Globalization
will enable airlines to achieve economies of scope and scale, seamless service, and lower
costs and prices by exposing them to the broader market and to a bigger customer base.
However, the industry must answer the following question before it can take any steps
forward: Will the airlines overcome regulatory-imposed limits and successfully join
in the globalization trend?
22

Mergers. Since deregulation, the airline industry has to experience a great deal
of turbulence in its economic performance. Competition has become more sever with
the financial performance extremely uneven. Thus, a new trend toward mergers
between airlines has surfaced in the industry. There exists two opposing views on the
issue of airline mergers. . Some argue that the drive for scope and scale is the best
option to revive the depressed airline industry. Increasing scope and scale, meaning
creating larger companies, will allow airlines to increase their levels of such intangibles
as knowledge, management systems and brand, and such tangibles as aircraft and
communication systems.
23
In response to the view that the mergers will cause a
significant decrease in competition, merger advocates assert that mergers will, in fact,
create more competitors. According to the magazine Airline Business, the top 25
groups control close to 70% of world revenue and the top half dozen are bigger than the
entire industries of regions like Africa or even South America.
24
So, it is not surprising

21
Kevin O'Toole, Lost by line, Airline Business 1 March, 2002.
22
Daniel Yergin, et al., Fettered Flight: Globalization and the airline industry, Global Decision Group 10 Oct. 2000:
3.
23
3.
24
Chris Thornton, Whos afraid of mergers? Airline Business September 1999: 99.

that second tier carriers rush to increase their size and join the battle against the bigger
players in the industry.

The U.S governments recent policy change regarding mergers also supports the
view of merger advocates. In December, 2001, the Bush Administration promised to
financially back the merger of weak carriers with strong ones. When questioned with
the possibility of airfare increase, the Administrations responded that low-fare airliners,
such as Southwest or Jetblue would discourage uncontrolled fare increase by their
larger partners.

The other argument is that Where and when competition exists, consumers
benefit. Where and when it does not, they suffer.
25
In short, competition benefits
consumers. For instance, Air Canada quickly removed duplication of service after the
merger between Air Canada and Canadian Airlines resulting in 20% fewer flights than
the two separate airlines previously provided.
26
As this example illustrates, the merger
between major airlines would give too much market control to one player, and may
cause customers to experience fare increases, reduced flights, or bad service.

September 11. One of the most influential socio-cultural factors affecting the
airline industry was the impact of the 9/11 terrorist attacks. Although the economy had
already begun to turn down prior to 9/11, the attacks on both the World Trade Center
and the Pentagon, pushed the economy more quickly and more deeply into recession.
It also caused for people to doubt the safety of public air travel which led to a marked
decrease in demand.

According to the Department of Transportation (DOT), there was a revenue drop
for the total industry of 38%. This was the worst recession the American airline industry
had ever faced. This drop was due to two factors, an increase in operating costs coupled
with a decrease in revenues. The increase in operating costs was the result of new
security regulation from official directives, new cost of delays, and increases of labor
costs as well as increase in insurance premiums.

In addition, demand dropped due to an increased fear of flying and heightened
security which deterred many potential passengers. The ability to be at a specific time
across the country without delay or without standing in line for a long time at the
airport was a critical need of airline customers which airlines were not capable of
meeting.
27
Yet, since 9/11, air traffic has greatly increased and continues to increase.
Pre-9/11 passenger levels were predicted to return by 2003.
28

25
Mark N. Cooper, Freeing Public Policy from the Deregulation Debate, Presented at American Bar Association 22
January 1999.
26
James Dune, Air monopoly, CBS news 10 October 2000.
27
Daniel Kasper, The aftermath of 9/11: Implication for Airline Industry Structure & Competition, MIT Boeing
Conference on Air Travel, 26 March 2002.
28
Industry Survey, Standard & Poors, (2002), March 28, 2002.

Weather. The weather is an unpredictable variable with a potential short-term
effect on airline costs and operations.
29
For instance, the weather is the second largest
cause of airline accidents after pilot errors, and attributes more than 70% of delays. Air
Transport Association (ATA) reported that the direct annual cost caused by diversion
and cancellation amounts to $47 million and $222 million, respectively. In addition, the
wind speed and temperature influence the fuel consumption of the aircraft while other
weather conditions such as hurricane, ice and fog often entail flight cancellation.
30

In addition to direct costs, there are indirect costs associated with unfavorable
weather and the resulting passenger complaints. Aviation is probably more sensitive to
the weather than any other mode of transportation. Although the costs associated with
the passenger complaints are not easily obtained, they are not insignificant considering
possible loss in future revenue.

As a result, obtaining accurate weather forecast is a serious task for the airlines
not only for efficiency but also for passenger safety. Many carriers depend on
government agencies such as the FAA, or pilot reports, for making weather forecasts.
31

Economic Influence
End of high-tech booms influence on air cargo business. Last year was the
worst year for air cargo business since the 1970s, recording a 7% decline worldwide,
even lower than the 5% of sales loss during the Gulf War.
32
Considering that 25% of
airline revenue comes from cargo,
33
the financial damage to the airline industry was
significant.

Unlike passenger business, cargo business has not been substantially affected by
9/11. In fact, the real cause of the downturn in the air cargo business was the rapid
decline of the information technology (IT) industry." IT spending decreased at the end
of 2000, and at the same time air cargo began to slide," says Pascal Touin-Stratigeas,
fleet forecast analyst for Airbus.

Because of the high cost of air cargo to user companies (around 1% of world
trade by volume and 40% by volume), the companies are adopting more cost efficient
inventory strategies. For example, just-in-time manufacturing, of which emphasis is on
minimum inventory and global sourcing of parts and components, is slowly replaced
by other inventory systems which require less air shipments. Also, other companies are
increasing the dependence on inland transportation such as trucks and trains.
34

However, there are signs of recovery of the cargo business as the economy gets
better in Asia, the biggest revenue generator to the air cargo business. Cargo business

29
Industry Survey, Standard & Poors, (2002), March 28, 2002.
30
Air Traffic Management in the Future Air Navigation System, ATA (1994).
31
Industry Survey, Standard & Poors, (2002): 19.
32
Peter Conway, Eastern sunrise, Airline Business 1 November 2002: 46.
33
34
Cargo, Airline Business 1 November 2001: 56.

sales volume has gone up over 10% in Hong Kong, the most important Asian hub,
during the first quarter of 2002 and 24% in the second. Another notable factor is the rise
of China whose economy is expected to boom following its joining to the World Trade
Organization and the accelerating inward investment.
35

Tightening corporate budget. Sales recovery of the airlines to the pre-1990 level
is not foreseeable. A decrease in business travel worsens the situation for the airlines. In
an effort to exercise better cost control, corporations have restructured their traveling
policies by downgrading corporate lodgings and limiting the use of first or business
class air travel. According to the Business Travel Coalition's 2002 U.S. Business Travel
Survey, 60 percent of business travelers plan to further reduce expenditures on airline
services during 2002.
36
As a result, the number of business trips was down by 20 percent
in 2001 compared to equivalent 2000 purchases according to C. Thomas Nulty,
president of Navigant International.

In addition, business travelers indifference to business trip expenses is rapidly
disappearing. The 2002 U.S. Business Travel Survey has found that 57 percent of all
purchased tickets were non-refundable, representing a 13 percent increase in the use of
discounted tickets in a two-year period.
37
The higher mix of leisure ticket sales
decreases the yield, resulting in lower profit to the industry. Yield indicates the
passenger revenue generated per revenue passenger-miles (RPMs). This increasing
demand of low-fare tickets by business travelers is problematic to the airlines as the
business travel accounts for about 34% of the domestic airline revenues.
38

Many observers agree that the business traveler will continue to choose either
low-fare or nonrefundable tickets even after the economy improves. They support the
speculation with increasing complaints about unpleasant service in flight. Kevin
Mitchell, chairman of the Business Travel Coalition (BTC), says Only 45% of frequent
business travelers perceive the value received from them as good or very good,
compared with 80% for low-fare airlines."
39

Fuel Price. High cost and price fluctuation of fuel are the industries main
concerns. Fuel, which makes up about 15% of operation costs,
40
is the second largest
cost factor to the airlines. As the airline business has very small profit margins, between
two and five percent in the best of times, the profit erosion due to oil price fluctuations
strains the industry.
41

35
36
Business Travel To Rise Over Next Six Months, Airline Financial News 20.37 (2002).
37
38
Industry Survey, Standard & Poors (2002): 3.
39
40
Air Transport Association (2002).
41
http://www.airlines.org/public/news/display2.asp?nid=314, November 27, 2002.

Another growing concern is the unstable relationship between U.S. and Middle
East. The prospective war with Iraq has already pushed oil prices up by 46.9% to 86.83
cents per gallon from January to October, 2002.
42

Nevertheless, the impact of current fuel price increases are expected to be less
than in the past due to airlines responding by switching to fuel-efficient jets, fuel
hedging and fuel surcharging.

To mitigate the oil shock, the airline companies began to replace old planes with
newer and more fuel-efficient jets. Also, they have shielded themselves by hedging fuel
contracts through the future market. For example, Southwest hedged 100% of jet-fuel
needs for the third and fourth quarters of 2001, locking the price of crude oil at $23. As
oil prices rose to $30 a barrel, Southwest saved $43.1 million in the third quarter,
reporting a 45% year-over-year net income growth in 2001.
43

The airline industry is also known for compelling the passengers to shoulder their
financial burdens by increasing airfare. Although sometimes rescinded, the fuel
surcharges have become relatively common in the airline industry.
44

Political Influence.
Airlines are subject to extensive regulatory and legal requirements, both
domestically and internationally. These regulations involve significant compliance
costs. In the last several years, the U.S. Congress has passed laws, and the Department
of Transportation (DOT) and the Federal Aviation Administration (FAA) have issued
regulations relating to the operation of airlines that have required significant
expenditures.

Security. Since 9/11, many security measures have been implemented to
prevent further terrorist attacks, and insure public safety. However, the new security
changes have negatively affected the airlines by increasing costs associated with
heightened security and decreasing sales.

The government took initiative by signing the Aviation and Transportation
Security Act on November 19, 2001, and got hold of the security responsibility at the
airport. Under the new Act, the airlines are required to be more involved in the security
responsibilities by taking some additional costs such as equipment, federal charges, and
airport charges.

These "mandated but un-reimbursed security costs," have greatly impacted the
already financially struggling airline industry. For example, the newly imposed federal
security tax, $2.50 per flight segment, has cost airlines $265 million.
45
In addition, the
Transportation Department has demanded the airliners to reinforce cockpit doors to
protect the aircraft from any intrusions. The airlines were also forced to give up some

42
Russell Grantham, Airline fear a fuel spike, Atlanta Journal 18 September 2002.
43
Melanie Trottman, Airline commodity prices hedging, Wall Street Journal 16 January 2001: B. 4.
44
http://www2.state.id.us/dfm/ief/2000/apr00/Article0002.pdf, November 27, 2002.
45
http://www.bizjournals.com/pacific/stories/2002/10/07/daily32.html, November 27, 2002.

high-revenue seats in first-class to the marshal teams from the Federal Aviation
Administration. Federal air marshals are plain-clothed, armed law enforcement officers
who fly unannounced on domestic and international flights. Preventing the commercial
carriers from carrying U.S. mail has also significantly reduced the revenue of the airline
companies.
46

In addition, the government has intensified the security procedures for
passengers and their luggage, resulting in the longer waiting time at the airport.
47
Many
turned-off passengers have responded by traveling less or finding alternative modes of
transportation, such as car or train travel, in order to turn around the time-consuming
and unpleasant security measure. This negative consumer reaction has driven sales
revenue down in the airline industry. For example, the commuter affiliate of Alaska
Airlines has lost 10% of ticket sales on its busiest route, the Seattle-Portland, Ore.,
shuttle. Also, in the northeast U.S., flying has been gradually replaced by the Acela
Amtrak train in the New York-Washington-Boston shuttle market.
48

Technological Influences
Internet. The airline industry is capital-, labor-, and technology intensive.
49
To
survive fierce price wars, which leave only a 3-4 percent profit margin even in the best
time, the airline companies have aggressively employed cutting-edge technologies to
optimize business procedures, reduce costs and improve customer service. The Internet
has brought the most fundamental changes to the airlines.

Airlines first started using Internet for doing business
50
in 1995, since then, to
pace with the increasing number of internet users, carriers have upgraded their home
page to be more interactive. Today, travelers can not only view the flight schedules and
their frequent-flyer accounts but can also make flight reservations. Jupiter Media Metrix
predicts that online purchasing of travel products will reach $29 billion in 2003 up from
$4 billion in 1999. Considering that the airline ticket sales represent 80% of all travel
purchases, the growth of the online market is significant to the airlines.
51

The Internets biggest appeal to the airline industry is the reduction of
distribution cost. The Internet provides the lowest-cost form of distribution for airlines
through both indirect and direct channels.
52
It has lowered the number of customer
service agents, eliminated travel agent commissions and removed paper tickets. For
example, the airlines paid about $3.0 billion for travel agent commission in 2001 down
from 5.2 billion in 1999. In addition, issuing e-tickets has reduced the cost for the
airlines, and improved the customer service. Now, passengers receive itinerary and
receipt by fax or e-mail, or travel without tickets. According to United Airlines,

46
John Crawley, Proposal would life some air restriction, Reuters 30 September 2002.
47
Industry Survey, Standard & Poors (2002): 3.
48
Chris Woodyard, Security hassles deter many frequent fliers, USA Today.
49
Industry Survey, Standard & Poors (2002):11.
50
Industry Survey, Standard & Poors (2002):11.
51
http://www.bcg.com/publications/files/airline_finance.pdf, November 27, 2002.
52
http://www.bcg.com/publications/files/airline_finance.pdf, November 27, 2002.

electronic ticketing costs just 50 cents per ticket, versus $8 for paper tickets, because it
eliminates 14 accounting and processing procedure.
53

However, trade-offs do exist for online booking. As the rapid spread of Internet
technologies and the increasing customers access to information has reduced the
differentiation between the business and leisure fares, business travelers are
increasingly choosing the leisure fares leaving the air ticket sales less profitable.
54

Consequently, the average fares paid by business travelers fell by 2% in 2001 according
to American Express Co.

Also, the Internet has made consumers more sensitive to prices. Customers make
their purchasing decision heavily depending on the price incentive. It makes it hard for
airlines to build distinctive brand value, and develop customer loyalty.

INDUSTRY ANALYSIS
In 1903, the Wright brothers' first successful flight in Kitty Hawk, North Carolina
marked the beginning of the aviation industry.

In 1927, Charles Lindbergh successfully completed a solo flight across the
Atlantic Ocean and created massive interest in flying with the general public. After this,
a variety of air transport holding companies began, including Aviation Corporation.
The air transport division of the company was called American Airways and later grew
to become American Airlines. In 1928, what was to become another leading air
transport company was created as a holding company by Boeing and its air transport
division, United Aircraft and Transportation Corporation. In 1931 the four air transport
divisions of United Aircraft became United Airlines. The Air Commerce Act, passed in
1926, allowed Federal regulation of air traffic rules.

The 1950s saw dramatic improvements in the capacity and comfort of
commercial flights. Planes were modernized, and jet service was introduced in 1959,
enabling even faster cross-country service. The 1980s were marked by the deregulation
of the industry, which resulted in the growth of smaller carriers and the mergers of
larger carriers. The 1990s saw a dramatic increase in the number of passengers,
including first time passengers, as prices were cut and the cities served by airlines
increased.
55

The Product. Transportation is the product offered by the airline industry.
Airlines derive their revenues from transporting passengers, carrying mail and cargo,
and by selling in-flight services to passengers. Airlines also generate revenue through
selling frequent flier credits to hotels, car rentals, credit cards, and other organizations
that offer these credits as premiums or as a way to build good will.
56

53
Industry Survey, Standard & Poors (2002): 11
54
Gabriele Piccoli, Wyndham international: Fostering high-touch with high-tech, Cornell University 10 October
2002: 3.
55
http://scriptorium.lib.duke.edu/adaccess/airline-history.html, November 20, 2002.
56
Airlines, Industry Surveys, Standard & Poors.

The Department of Transportation (DOT) classifies airlines in the following
categories:
Major annual revenues exceeding $ 1 billion, 130 450 seats per aircraft,
average length of travel 1000 5000 miles.
National annual revenues between $ 100 million to $ 1 billion, 100 150 seats,
operating more of the short haul flights nationally.
Regional annual revenues less than $ 100 million. Comprised of Commuter
airlines and Start-up carriers.
Charter Unscheduled form of airline operation. Transport passengers on call.
Two-tier operators These carriers are typically major airlines that service long-
haul markets via a hub-and-spoke system, but which also operate a fully
independent, point to point air service, typically serving the discount excursion
market.

Channels of Distribution. The airline industry distributes tickets primarily
through travel agents (TA). TAs generate 70% to 80% of total airline bookings. Airlines
encourage TAs to steer customers their way by offering commission overrides. TAs
use any of the major global distribution systems (GDSs) to make reservations. These
include Sabre, Amadeus, Galileo and Worldspan
57
.

Airlines also book flights directly through company clerks and via the Internet.
Although airlines supply their flight and fare information to GDS operators, most
airlines reserve special rates for their own Internet websites. In June 2001, several larger
U.S. airlines launched Orbitz, a travel related web site. Orbitz competes directly with
TAs, since it allows customers to directly book their own flights on-line. Although
airlines are still charged $2.50-$3.00 per booking made by the GDS operators, Orbitz
enables airlines to eliminate TA commissions, of up to 5% per ticket, by distributing
more tickets directly via the Internet. Internet sites are very interactive and allow
passengers to check their flight status, book seats, and select specific seats on the
aircraft.

In 2001, commissions cost the leading airlines approximately $3 billion. Jupiter
Communications of New York, a research firm, estimates 11% of tickets to be sold via
the Internet in 2003 compared to 7% in 2001. Forester Research, a technology research
firm in Cambridge, MA, estimates on-line travel bookings to reach $29 billion by 2003
compared to $14.2 billion in 2001
58
.

Industry Evolution. Exhibit I presents the different steps of the product life cycle
of the airlines industry. Phase 4 is separated as it represents the actual North American
Airline Industry compared to other international markets, such as Europe or Asia
59
. It
highlights the 4 different stages of the airline industrys evolution. The industry is

57
Airlines, Industry Surveys, Standard & Poors, March 28, 2002.
58
Airlines, Industry Surveys, Standard & Poors, March 28, 2002.
59
http://act250.tc.faa.gov/jup/jupq_011002/special_guest/wangerman/presentation.pdf, November 20, 2002.

currently between phase 3 and phase 4. While the industry is just finishing
consolidating and building new hubs and alliances, the redefinition of service and cost
structure is being undertake. The new model is being developed by leading companies
as well as new entrants that redefine the way of doing business. Jetblue is definitely at
the edge of this strategy. The stability section of Phase 4 will only occur once there is
full recovery from 9/11.

Airline Industry Growth. A year ago, domestic airfares were down 19.2 percent
from the previous year. In October 2002, they remained relatively unchanged, but well
below 2000 fares, said Air Transport Association (ATA) Chief Economist David
Swierenga. Although passenger volumes appear to have rebounded, nothing could be
further from the truth since domestic travel was down 20.1 percent in October 2001.
60

Exhibit II describes the evolution of the airline industrys global revenue from
1978 to 2001. Despite the many challenges the airline industry has had to face, such as
the Gulf War and the economic recession, as previously mentioned, the worst downfall
the industry has ever known was a direct result of the events of 9/11, with a 35-40%
revenue drop.

Porters 5 Forces for the Airline Industry. Porters Five Forces model is used
below to evaluate the airline industry. The forces are competitive rivalry, bargaining
power of customers, bargaining power of suppliers, threat of new entrants, and threat
of substitute products. Understanding these forces helps in determining the intensity of
competition that exists within the airline industry and understanding the profitability
and attractiveness of the industry. The objective of the corporate strategy for any airline
is always to strengthen its position in the industry by deciding how to influence
particular characteristics of Porters Five Forces.
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Competitive Rivalry. The airline industry can be characterized as an imperfect
oligopoly, in which few carriers dominate in long-distance flights while several dozen
smaller carriers compete for short distance flights. The competition is fierce and returns
are generally low because of the cost of competition and buyers receiving benefits due
to lower prices. Currently, airlines are trying to differentiate themselves through their
frequent flyer programs. Frequent flyer programs are aimed to sway members to
remain loyal to one airline despite the fact that other airlines might offer lower prices.
Finding additional ways of differentiating their product remains critical to individual
airlines long-term successes.

To better manage the competitive rivalry, airlines began creating alliances with
each other. These alliances enable the airline in the same alliance to share customer
information, schedules and distribution systems. Exhibit III highlights the four major
alliances and their members. It is important to note that although alliances reduce

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http://www.airlines.org/public/news/display2.asp?nid=6151, November 20, 2002.
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http://www.fol.com/research/2000/features000309.htm, November 20, 2002.


competitive rivalry between individual airlines, they do not deter rivalry between the
allied groups themselves.

Bargaining Power of Customers. Bargaining power of airline customers tends
to be low because of several factors including, low concentration of buyers, the large
number of buyers, no threat of any backward integration exists, little or no bargaining
power for buyers on long distance flights. Air travel represents the only viable option in
regards to long flights such as those between the U.S. and Europe. The quality of the
service provided will possibly be only a small consideration to the buyer as this is only
part of the consideration of the buyer and results in an even lower amount of
bargaining power to the buyer

Bargaining Power of Suppliers. Suppliers are concentrated in the airline
industry, with most airlines being supplied by Boeing and/or Airbus. Because of this
concentration it is difficult for airlines to exhibit much, if any, leverage over the supplier
in an attempt to obtain lower prices. This is not to say that airlines have no choice. In
fact, airlines may not believe that the products offered by alternative suppliers are
differentiated and, therefore, are not obligated to purchase from just one supplier.
Airlines operate in an energy intensive industry. Prices and the availability of
petroleum products are subject to political, economic and market factors outside the
airlines control. The moderate degree of power over suppliers further diminishes the
ability to earn high profits and potentially reduces smaller airlines.

Threat of New Entrants. The threat of new entrants presents the possibility that
newer firms will enter the industry, increasing competition while diminishing existing
airlines returns. The airline industry has seen the entrance and growth of low fare
competitors (Air Tran Airways Inc., Southwest Airlines and Jet Blue). This entrance is
despite the high barriers to entry including the difficulties associated with establishing a
strong brand identity, obtaining a large amount of starting capital due to a high initial
investment requirement, and obtaining the proper distribution channels (hubs) typical
of the airline industry.

Once an airline has established a hub at an airport, several structural and
strategic factors combine to present high entry barriers to any other airlines that may try
and enter spoke routes emanating from that hub. By providing more departures to
more destinations, the hub carrier can attract a disproportionate share of the hub
airport's passengers. This happens for several reasons, including the preference of many
travelers to use the carrier with the most flights in a city (so that the passenger can
change departure times if travel plans change), marketing programs (such as frequent
flyer programs) that create loyalty incentives for consumers to concentrate their travel
on the dominant airline in their home city, and travel agent commission practices that
create incentives for travel agents to encourage their customers to use the hub carrier. In
addition, a hub carrier often enters into contracts with local businesses that provide
incentives for the businesses to concentrate their travel on the hub carrier. All of these
factors serve to discourage entry into a hub carrier's spoke routes, especially by other
carriers with similar cost structures.

Threat of Substitute Products. There are several substitutes to air travel (e.g.
automobiles and trains), but over long distances and flying between continents, there
are no real substitutes. The decision to use automobiles or trains is influenced by time,
money, personal preference and convenience, but air travel offers a good price/value
relationship and offers considerable speed advantages over other forms of travel.
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Costs.
The greatest costs incurred by an airline are labor, fuel, and fleet costs. Fuel cost
has decreased since 1982, but as mentioned earlier, the cost for fuel is unpredictable and
is based on a variety of factors both economic and political.
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Deregulation. Before 1978, the airline industry operated under government
regulations, which prevented airlines from price collusion. Deregulation was
introduced in 1978, and changed the U.S. airline industry dramatically. The end of
federal regulations forced airlines to adopt a hub-and-spoke system of airports. Before
this direct route system was permitted, airlines were forced to fly only between small
markets as stipulated by the government.
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Although airlines were deregulated for the
purpose of increasing airline revenues and creating more competition, many
bankruptcies, large losses, and mergers, were caused by over-expansion and a fight for
control of hub-airports.
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The goal of deregulation as to introduce competition into the marketplace so that
the industry could better meet the customers demands with efficiency, lower price and
service.

For a time, regulation did benefit the airline industry. It provided the industry
with groundwork for future growth through the 1970s by guiding it to safe and orderly
expansion, preventing competitive collusion, and ensuring high-quality service.
However, deregulation was necessary due to the slowness of the existing regulatory
system and the rapid pace of industry growth.
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One of the remarkable achievements of deregulation was the increased efficiency
of the industry. The deregulation of prices enabled the airlines to provide discounted
tickets, and fill seats which would otherwise be empty. Since the deregulation, the
number of airline passengers has more than doubled, and the seat occupancy has
grown significantly.
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http://www.fol.com/research/2000/features000309.htm, November 20th, 2002.
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http://www.airlines.org/public/industry/bin/Econ101.pdf, November 16th 2002.
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http://www.howstuffworks.com/airline3.htm, 3 December 2002.
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3.
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Carol B. Hallett, Remarks on Global Competition in the Airline Industry, Air Transport Association 30 March
1998.

In addition, the ignited competition compelled the airlines to look for a better use
of existing resources. Owing to hub-and-spoke system, the airlines could allocate
different equipment where and how they wanted; for example, big jets were placed for
long-haul routes and small jet propellers between the hub and spoke airports.
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Deregulation is often thought of as the main cause of current air traffic
congestion and airport delays. It is also blamed for the deterioration of passenger
service. The congestion and delay can be attributed to factors such as the pricing policy
of local airports and air traffic control systems, which do not reflect the use and the
value of expanding airport and airway capacity. Most airports charge landing fees
primarily based on the weight of the aircraft or apply the first-come, first-serve pricing
policy.
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This pricing policy discourages low value users such as small carriers or
private aircrafts to shift some of their activities to less congested airports and off-peak
travel times.
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It is also suggested that highly congested airports might properly add
surcharges for landings at peak hours.
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The increased price competition among the airliners has resulted in the
degradation of the service. Excessive price driven strategies after the deregulation have
compelled the airliners to give up some of the frills such as extra leg room and some
amenities in order to minimize the loss incurred from the decreased airfare.

The Global Airline Industry. The airline industry can consider being global
since many carriers operate internationally. The international carriers are affected by
constraints which affect no other industry, and that often impede the formation of an
international route system.

The Convention on International Civil Aviation recognizes a nation's sovereignty
over its airspace and its right to stop foreign aircraft from entering that airspace.
Internationally, scheduled commercial air traffic is made possible by Bilateral
Agreements in which governments typically exchange air rights for the benefit of their
respective carriers. There are three types of 'traffic' rights or 'Freedoms' which allow
airlines to earn revenue internationally:

Third Freedom: The right to carry revenue passengers, cargo or mail (traffic)
from your country to a point in the second country.
Fourth Freedom: The right to carry passengers from a point in the second
country to your country.
Fifth Freedom: The right to carry passengers between a point in a second
country and a point in a third country.

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http://www.econlib.org/library/Enc/AirlineDeregulation.html, November 27, 2002.
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John R. .Meyer and Thomas R. Menzis, Airline Deregulation: Time to Complete the Job, Issues in science and
technology online Winter 1999.
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John R. .Meyer and Thomas R. Menzis, Airline Deregulation: Time to Complete the Job, Issues in science and
technology online Winter 1999.
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http://www.econlib.org/library/Enc/AirlineDeregulation.html, November 27, 2002.

Sixth Freedom: The right to carry passengers from one country to another as
long as a stop over is made in the airlines home country.

The exchange of rights is done on a reciprocal basis. Therefore Third and Fourth
Freedom rights are easier to negotiate than Fifth Freedom, which clearly requires the
consent of the third country.
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International Airlines. Airlines define global 'presence' in many ways, from
having a new aircraft in a foreign country, to having the airlines 'code' appearing in
GDS for increased bookings on a global level. Presence is highly sought after by airlines.
Any arrangement that gives an airline a 'presence' in a foreign country, is preferable to
one which does not. This want of 'presence', is the driving force behind most of the co-
operative agreements that exist between international airlines today.

Future of the Global Airline Industry.
Many analysts believe that the 'global' airline of tomorrow will be a
multinational mega- carrier. Ideally such a firm would consist of airlines based in
different continents e.g. Europe, North America, Asia, etc. Continents that will provide
strong feed to, and otherwise support a global route system. These multi-mega airlines
would be much more than marketing alliances.

Virtually all analysts agree that such a carrier would have an enormous and
sustainable competitive advantage in today's world. Presumably, its reduced operating
costs and lower tax payments would result in both higher shareholder returns and
lower air fares for consumers. Although the numerous benefits of such an arrangement
are obvious, this type of 'future' will come very slowly, if it comes at all.

At present, its evolution is prevented by prohibitions against foreign control of
international airlines and concerns about what types of traffic rights such a carrier
might inherit from its predecessors. These problems will remain as there are too many
parties interested in the status quo.

Many countries do not look at airlines as commercial entities, but rather as an
extension of their foreign policy, proudly flying the 'flag' in many exotic destinations.
Airlines are looked at as an essential part of the national transportation infrastructure
and resist foreign control for reasons of national interest. Both the United States and
Canada fall into this category.

It is only in very recent years that certain countries have truly put shares of their
national airlines "on the market." Belgium did this in part by allowing British Airways
and KLM to each take a 20% share in Sabena World Airlines, Argentina has essentially
sold its national airline to the Spanish national airline and Australia, New Zealand and
Jamaica are displaying a new openness on the question of international airlines.

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Some countries are adopting new attitudes, but the countries which serve as
major transportation 'hubs' of Europe, North America and Asia are very slow to follow
suit. Until they do, the truly 'global' airline can not exist.
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ORGANIZATIONAL ANALYSIS
As a publicly traded company JetBlues ultimate goal is stockholder and
stakeholder satisfaction. JetBlue offers high quality air transportation at attractive prices
to its customers.

Vision and Strategic Direction. With a total fleet of 132 airplanes and contracts
for the purchase of additional 100 aircrafts
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, JetBlue wants to establish itself as the
leading U.S. low-fare carrier, leaving competitors like Continental, AmericaWest and
Southwest behind. JetBlue plans for steady growth of destinations and services which
will enable it to keep customers as frequent fliers who can rely on JetBlue for their
national travel plans. In addition to Costa Rica, JetBlue is currently developing an
international set of destinations.

Since JetBlues first official flight on February 11, 2000, its primary goal has been
to grow enough to continue being successful, but to remain small enough in order to
preserve its core values. Because the company is so young, there has been little change
to its original strategic direction.

JetBlue Defined. We are a low-fare, low-cost passenger airline that provides
high-quality customer service primarily on point-to-point routes. We offer our
customers a differentiated product, with new aircraft, low fares, leather seats, free
LiveTV (a direct 24-channel satellite TV service) at every seat, pre-assigned seating, and
reliable performance.
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Principal Internal Stakeholders.
Key Managers and their background.
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David Neeleman, 41 years old, $335K Salary
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, CEO and Director since
1998
Prior to founding JetBlue, Neeleman was co-founder of WestJet (1996-1998),
served as CEO of reservation systems company Open Skies (1995-1998), Vice President
and from 1988 President of Morris Air (1984-1994). He graduated from the University of
Utah.

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http://www.airlines.org, November 21, 2002.
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http://investor.jetblue.com, November 4, 2002.
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http://www.jetblue.com, November 4, 2002.
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http://biz.yahoo.com/t/75/4584.html, November 4, 2002.

David Barger, 43 years old, $335K Salary
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, President, COO and Director
since 1998. Barger worked for Continental Airlines, from 1992 until 1998,
and for New York Air, from 1982 until 1988. He graduated from the
University of Michigan.
Thomas Kelly, 49 years old, $335K Salary
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, Executive Vice President,
General Counsel and Secretary since 1998. Kelly served, from 1995 until
1998, as Executive Vice President and member of the board of directors of
Open Skies. From 1990 until 1994, he worked for Morris Air in the same
position. He attended Harvard Law School.
John Owen, 46 years old, $335K Salary,
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Executive Vice President and
Chief Financial Officer
Owen served, from 1984 until 1998, as Treasurer for Southwest Airlines and
holds a MBA from the University of Pennsylvania.

Managers Strengths and Weaknesses. The executive management team of
JetBlue consists of four major players who have been working consistently together
since August 1998. Only CFO Owen joined them 5 months later. The fact that they have
been working together for four years indicates a solid base for consistent performance
and decision-making. Becoming the leading low-fare carrier in the country is driving
their actions. It is interesting to note how the executives paths have crossed throughout
their careers. Neeleman and Kelly, for example, previously worked together at Morris
Air and Open Skies
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. All four executives have extensive knowledge of the airline
industry due to their prior work experience at various airlines such as Southwest,
Continental or Morris Air.

The balance in JetBlues strategic leadership may be threatened by the attrition of
any of these top executives. If one of the executives were to leave and JetBlue were to
face a serious challenge, the management team may not be able to successfully meet
that challenge. Though, currently, most of their strategies, plans and goals have proven
to be successful. This is evident in JetBlues successful advertising and marketing
campaign which has helped to enhance JetBlues strong brand image.
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Ownership of JetBlue.
JetBlue is publicly traded on the U.S. stock market (Nasdaq National Market
Symbol jblu
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). On November 6, 2002, 5.866 million shares of common stock were
offered where as 40.94 million stocks were estimated to be outstanding
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. As of
November 6, 2002, share price was $ 41, which would value JetBlue as of November 6,
2002 at $1,919 million. Both the executive committee members and board of directors

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are the principal shareholders. Refer to the Board of Directors section for a brief
discussion on a possible agency problem.

JetBlue has several main owners, some of them represented on the Board of
Directors. Sometime after JetBlues IPO in April 2002, the executive committee
communicated that no dividend will be paid and that JetBlues profits would be
reinvested in the growth of JetBlue
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. This decision was met with no criticisms which
can be indicative of the owners fully supporting this growth strategy chosen by
management.

Board of Directors.
JetBlues Board of Directors has 10 members
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:
Michael Lazarus, 46 years old, Chairman of the Board, holding 27,230 shares
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David Checketts
Dr. Kim Clark holding 1,000 shares
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Neal Moszkowski, also Board member at Integra Life Sciences and MediaLogic
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Thomas Patterson, holding 27,230 shares
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Joel Petersen, holding 189,592 shares
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Frank Sica
Ann Rhoades, formerly Vice President of People for Southwest Airlines
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David Neeleman, CEO of JetBlue
David Barger, President of JetBlue

The composition of the Board of Directors, including CEO and President, creates
a potential for conflicts of interest. Specifically, an agency problem may exist, since
JetBlues top executives, who also serve on the Board, may be influenced by their
personal interests for financial gains.

Operating Characteristics
Size of Sales. JetBlue was able to post operating revenue in 2001 of $ 320.4
million after $104.6 in 2000. This means an increase of 306%. JetBlue posted a net income
of $38.5 million in 2001 after a net loss of $ 21.3 million in 2000. Exhibit IV

illustrates
some interesting developments within JetBlue including significant increases in the
number of passengers, seat availability, and departuresall factors contributing to
increased sales. Refer to Financial Analysis section for more detail.

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http://www.humanissues.org/conference/conference_2002.html, November 4, 2002.

Size of Assets
As of December 31, 2001, JetBlue owned 9 Airbus 320 and leased 21 Airbus 320
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.
At that time it was serving 18 cities throughout the USA and San Juan, Costa Rica.

JetBlues 2001 balance sheet shows Total Assets of $673.8 million compared to
$344.1 million in 2000. Exhibit V illustrates JetBlues development from March 31 to
December 31, 2000 with regard to cities served, number of employees and operated
aircrafts.

Hubs and Locations
The John F. Kennedy Airport in New York is JetBlues main hub
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. Long Beach,
California serves as the official West coast hub. Currently JetBlue has just one
international destination, San Juan, Costa Rica. There are no further international
expansion plans published at this time
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.

Marketing Program
Reaching the Customer. Within two years of operation, JetBlue was able to
establish a widely recognized brand name. As its brand name and logo indicate, JetBlue
is focusing on the color blue, including web page design, airplanes, seats etc. As
previously mentioned, JetBlue also established the customer loyalty program called
TrueBlue. The reservation hotline telephone number 1 800 JETBLUE as well as the
web page www.jetblue.com are easy memorable. JetBlue also offers a $5 discount for all
on-line bookings. This has spurred an increase in the percentage of web-based bookings
from 28.7% in 2000 to over 44% for 2001
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. The web page www.jetblue.com and
reservation hotline provide combined 92.6% of their bookings
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.

According to JetBlue, its marketing strategy is:
to attract new customers by widely communicating [its] value
proposition that low fares and quality air travel need not be mutually
exclusive. [JetBlue] market[s] [its] services through advertising and promotions
in newspapers, magazines, television and radio and through targeted public
relations and promotional efforts. [JetBlue] also relied on word-of-mouth to
promote [its] brand.
[It] generally run[s] special promotions in coordination with the
inauguration of service into new markets. Starting approximately five weeks
before the launch of a new route, [JetBlue] undertake[s] a major advertising
campaign in the target market and local media attention frequently focuses on the
introduction of [its] low fares.
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Employee Training and Benefits.

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JetBlue currently employs over 2,300 full and part-time employees
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. JetBlue
established JetBlue University as its training facility for all employees. There are two
branches to the University, the pilot training facility located in Miami, Florida, and the
flight attendant training facility located in Kew Gardens, New York.
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Reservation agents are trained for four weeks in Salt Lake City, Utah, where the
reservation center is based.
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All newly hired pilots are required to receive an Airbus A320 type rating at the
Miami training facility, even if they have already done so in the past.
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In addition, all
pilots are trained on Microsoft SharePoint Portal Server, which serves as a high-tech
replacement for standard paper manuals once used by pilots to record required flight
information.
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By law, all major airline flight attendants must be trained to ensure the safety of
its passengers.
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All JetBlue flight attendants are required to have a high school
diploma and at least two years of face-to-face customer service experience. Once
hired, after passing three interview sessions, all flight attendants must complete a 21-
day training session, 10 days at the Miami Airbus training facility and 11 days in New
York.
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In addition to JetBlues excellent training, JetBlue also provides its employees
with outstanding benefits making employment with the airline extremely attractive.
JetBlue offers its pilots overtime pay, pay and a half, for any hours worked over the
standard 70 hours per month. Although their base pay is significantly lower than the
industry average, the overtime pay, rare for the airline industry, allows for a first-year
captain to be doing as well as the rest of the industry.
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In addition to competitive
wages, JetBlue also offers full benefits to its full-time employees, including medical,
dental, vision, and disability, and offers a 401k, stock options, and profit sharing.
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JetBlue also offers job flexibility to both reservation agents and flight attendants.
500 of JetBlues 600 reservation agents work from home, and most of the agents work a
shortened 25 hour workweek. According to Julie Strickland, JetBlue contact center
analyst, We are a corporation, but we dont want to act as corporations traditionally
do. If someone wants to work only 20 hours, theyll be more productive than if we
were pushing them to work 50 hours
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JetBlue is using a workforce-management
software to aid in its efforts of making this type of job flexibility work for both the

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http://www.jetblue.com/workhere, November 14, 2002.
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http://www.hratworkco.com/July2002.htm, November 11, 2002.
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http://www.aviationcareer.net/spotlight/cs_01252001_.cfm, November 11, 2002.
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http://www.microsoft.com/servers/evaluation/casestudies/JetBlue.asp, November 13, 2002.
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http://www.bls.gov/oco/ocos171.htm, November 14, 2002.
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http://media.corporate-ir.net/media_files/NSD/jblu/reports/2001prospectus.pdf, November 13, 2002.
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http://www.informationweek.com/story/IWK20020405S004, November 12, 2002.

agents and the organization. This software helps the organization manage and
communicate with agents by phone, Web, E-mail, chat, handhelds, and fax.
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It also
allows agents to access all other agents work schedules so that they can swap shifts at
their own discretion.
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Flight attendants are also given a substantial amount of job flexibility through
the various job levels created by JetBlue. In addition to the traditional flight attendant,
JetBlue offers special programs for college students and friends or family members. The
JetBlue Inflight Crew program offers a college student an opportunity to work as a
flight attendant for one year; this position is mostly offered to students who have
chosen to take a year off from school. The job-sharing program is offered to two flight
attendants, usually two friends or family members, who desire to share a work
schedule. The candidates interview together and, upon hiring, are given a full work
schedule; it is up to them to decide who works which shift.
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Significant Relationships.
JetBlue maintains special relationships with some of its suppliers, such as Airbus,
and governmental agencies, such as the Federal Aviation Authority (FAA) and the
Department of Transportation (DOT). Adhering to its cost savings strategy, JetBlue
operates an aircraft fleet consisting of only one type of plane with one type of engine.
The Airbus A320 was selected because of its reliability, advanced technology and wide
cabin space and the IAE International Aero Engines V2527-A5 engine for its reliability
and fuel efficiency.
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JetBlue relies on Airbus as its sole supplier of new aircraft and
IAE for its aircraft engines. If, for any reason, either company were to cease its supply
services, JetBlue would be forced to look to a new supplier that may not offer a product
with the same type of advantages.

As for governmental agencies, JetBlue, like all other airlines, is subject to
regulatory and legal requirements, imposed by the FAA and the DOT, which usually
have high costs associated with attaining full regulation compliance. Such laws include
the Aviation Security Act, November 19, 2001, requiring airlines to implement specific
security measures, which have proven to be quite costly due to increased staffing and
flight delays. New laws and regulations can be imposed on JetBlue at any point in time
and can significantly increase the cost of airline operations or reduce the demand for
air travel.
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JetBlue Culture.
JetBlue has certainly established a culture of its own which sets it apart from the
other major airlines. Stuart Klaskin of the aviation-consulting firm, Klaskin, Kushner &
Co. boasts [JetBlue is] a hip and cool place to work. Theyre the first airline designed

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http://www.aviationcareer.net/spotlight/cs_01252001_.cfm, November 13, 2002.
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for the dot-com generation.
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The corporate culture introduced by CEO, David
Neeleman, revolves around five core principlessafety, caring, integrity, fun, and
passion. These core values are shared with prospective employees during interview
rounds, and it is expected that all employees share and adhere to these values during
their employment with JetBlue.
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As an employer, the company itself adheres to these
values, as well. This is exemplified by JetBlues emphasis on its employees work-life
balanceproviding reservation agents the opportunity to work from home and flight
attendants the option to share work schedules with a friend or family member. (See
Employee Training and Benefits section for more details)

All employees, regardless of status, are referred to as crewmembers. In
addition, all newly hired employees must complete a two-day orientation, together,
which reinforces the idea that each individual represents a part of the whole.
Crewmembers are also given the opportunity to meet with top executives, including the
CEO, on a monthly basis to discuss any pertinent issues or problems they are facing.
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The open line of communication philosophy is furthered by the TLC (tender loving
care) program which involves top executives reviewing the companys financial
statements on a regular basis with crewmembers based out of cities other than New
York, NY.
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Financial Data.
Appendix I and II include JetBlues most recent income statement and balance
sheet, respectively. JetBlue made their initial public offering (IPO) on April 12, 2002. As
such, the financial information only includes the first three quarters of 2002, and
selective income related information obtained from the companys prospectus for 2001.
By comparing the total revenue and net income from operations balances (highlighted
in light blue) as of December 31, 2001 to total revenue and net income from operations
at September 30, 2002, one can see that JetBlue is doing remarkably well financially.
That is, total revenue and net income for the first three quarters in 2002 have already
exceeded revenues and income for the entire year of 2001 by approximately 40% and
3%, respectively. Financial analysts are confident that JetBlues financial success in the
immediate future will continue.
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Sources of Competitive Advantage.
JetBlues sources of competitive advantage are evident within the company itself
and are extended outward to its customers. They begin with the innovative work
culture created by JetBlue, making its employees feel as if they are part of a big family.
As mentioned earlier, top executives maintain open lines of communication with all
crewmembers by conducting monthly face-to-face meetings in which employees can
voice their concerns. In addition, JetBlue prides itself on the work schedule flexibility
made available to its crewmembers. CEO David Neeleman contends that JetBlue

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http://www.workindex.com/editorial/benefit/ben0208-03.asp, November 14, 2002.
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http://www.aviationcareer.net/features/fa_06202001_01.cfm, November 13, 2002.
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http://www.aviationnow.com/content/publication/awst/2002610/avi_stor.htm, November 13, 2002.
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http://www.workindex.com/editorial/benefit/ben0208-03.asp, November 13, 2002.
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http://biz.yahoo.com/p/j/jblu.html, November 19, 2002.

gives a lot to its employees in terms of benefits, compensation, etc. but they expect their
employees to go above and beyond the call of duty when it comes to serving [its]
customers.
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Furthermore, JetBlues information technology is superior to that of its
competitors. They created the paperless cockpit, the first in its industry, which allows
pilots to access all flight information and keep detailed flight records, electronically.
The computerized cockpit puts less reliance on airline dispatchers, allowing for on-time
arrivals and departures.

JetBlue has also implemented a queue program which immediately lets
passengers know, during check-in, which agent is available. This simple program has
cut down average check-in times to less than one minute. Recently, JetBlue has also
installed, in all of its aircraft, security cameras in the passenger cabin with monitors in
the cockpit, as a security measure, so that flight crews are aware of what is happening
in the cabin at all times. All of these technological innovations serve to make JetBlues
service more efficient and secure and is valued highly by customers.
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JetBlue currently operates the youngest fleet in the industry. This is in line with
the newly created companys strategy to provide the best service available, including
state of the art equipment and new planes.
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This is also a source of competitive
advantage because, with a younger fleet, JetBlue is likely to experience less delays due
to mechanical problems, keeping their customers happy.

Lastly, JetBlues low fares and free in-flight amenities are also a source of
competitive advantage. It offers flights to major city destinations at much lower fares,
compared to their competitors. It is able to do so because of its non-union labor, a small
airplane fleet, and operations out of secondary airports such as Rochester, NY or Long
Beach, CA.
122
In addition, each JetBlue airplane is equipped with all leather seats and
free DirecTV programming with 24 channels at every seat, while most competitors
usually charge passengers approximately $4.00 for the luxury of watching an in-flight
movie from a few rows back. JetBlue also offers its customers additional discounts for
booking their flight on-line
123
, and offers $50 vouchers or vouchers equal to the ticket
price to each passenger whose flight has been delayed for two or four hours,
respectively.
124

Threat from the competition is inevitable. Larger airlines have already begun to
lower their fares. It is only a matter of time before the major competitors begin to make

119
http://www.aviationcareer.net/features/fa_06202001_01.cfm November 13, 2002.
120
http://www.cio.com/archive/070102/jetblue.html, November 19, 2002.
121
* The aircraft in this survey are limited to the large jet transports flown by that particular airline. Smaller aircraft
flown by the carrier, and aircraft belonging to subsidiary airlines of that carrier, are excluded. The fleet sizes reflect
an estimate of the number of aircraft in service at the time of this survey.
http://www.airsafe.com/events/airlines/fleetage.htm, November 19th 2002.
122
http://www.time.com/time/columnist/donnelly/article/0,9565,167074,00.html, November 19, 2002.
123
124

even more improvements to their business in attempts to increase their market share, in
direct response to JetBlues successes. They may begin by improving their customer
service and by offering customers similar in-flight perks, in addition to making
scheduling and frequent-flier mile program improvements.
125
However, JetBlue is
anticipating these future challenges and plans to meet them by implementing new
strategies to insure that the JetBlue experience isnt diluted in any way, so that
customers keep coming back.
126

CONCLUSION
JetBlue is a young and thriving low-fare airline in an industry which has been
struggling due to the economic downturn and loss in consumer confidence. It has
succeeded in differentiating itself from the competition by offering premium service at a
discounted cost. Since its inception, JetBlue has been able to consistently increase its
customer base and revenues by offering its services to more destinations.

In response to JetBlues successes, competing major airlines might adopt similar
low-cost strategies which could threaten JetBlues market share. These major airlines
are more well-established in the industry offering more flexible flight schedules and
direct flights to major cities. JetBlue could respond to this type of threat by seizing a
growth opportunity to expand its customer-focused services in more domestic locations
and neighboring countries, such as Canada and Mexico.

As JetBlue continues to make headway in the airline industry, CEO David
Neeleman contends that he has no desire to lead a major airline, acquire another
company, or be acquired. Yet, JetBlue must realize that they are not without risk in the
post 9/11 environment, where major airlines are intensely focused on implementing
low cost strategies. The level of competition by major airlines is also not easily
predictable for the foreseeable future.

Jet Blue has been put together like no airline has ever been put
together before. It has the most capital. It has the best product. So now
the question is, can you continue it? And thats what worries me. Thats
what keeps me up at night. How can we continue what weve started?
JetBlue CEO, David Neeleman, October 16, 2002,
Interview with CBS 60 Minutes II

125
126
http://www.aviationnow.com/content/publication/awst/2002610/avi_stor.htm, November 13, 2002

Exhibit I
Airline Industry Evolution

Phase 1: Phase 2: Phase 3: Phase 4
Early Deregul ati on Ev ol ut ion Stabi l i zat i on New Model
Capaci ty Grow
Lar ge scal e cost
reducti on
Industry
Consol i dati on
Stabil i t y
undermi ned
New Entrant s
Restruct urei n of
operations f or
perf ormance
Struct urall y secure
posi ti ons emerge
(f ort ress hubs)
New serv i ce
unbundi ng (by
cust omer
segment)
Unbundl i ng of
Serv ice
Serv i ce grows i n
importance
Market di sci pl i ne
Further cost
st ructure
speci al i zati on
Pri ces drop f aster
than costs
W eak players ex i t
Broadening
cust omer
ex peri ence
Network
f ragment ati on
Focused
Com petit ors grow
El ect roni c media
redef i nes
paradi gm
ht tp:/ /act250. tc. f aa. gov /j up/j upq_011002/special _guest /wangerman/present ati on.pdf
Federal Av i ati on Admi nist rati on, Engineer ing & Int egrati on Ser v i ces
Ai rl i ne Industry Evol uti on

Exhibit ll
Seasonally Adjusted Quarterly Industry Revenue


Exhibit lII
The Four Major Airline Alliances

SkyTeam
AeroMexico
AirFrance
Delta
Korean Air
Star Alliance
Air Canada
Air New Zealand
All Nippon Airways
Ansett Australia
Austrian Airlines
British Midland, Lauda Air,
Lufthansa
Mexicana Airlines, SAS
Singapore Airlines
Thai Airlines, Tyrolean
Airways, United, Varig
Qualiflyer
Swissair, Sabena, TAP
Turkish Airlines, AOM
Crossair, Air Littoral
Air Europe, LOT PGA
Volare
OneWorld
Aer Lingus
American Airlines
British Airways
Cathay Pacific
Finnair
Iberia
LanChile
Qantas

Exhibit IV
JetBlue, Year Ended December 31, 2000 2001
Operating Statistics (unaudited):
Revenue passengers .............................. 1,144,421 3,116,817
Revenue passenger miles (000) ....................... 1,004,496 3,281,835
Available seat miles (000) ................................ 1,371,836 4,208,267
Load factor 73.2% 78.0%
Breakeven load factor 90.6% 73.7%
Aircraft utilization (hours per day) .................. 12.0 12.6
Average fare .................................................... $88.84 $99.62
Yield per passenger mile (cents) 10.12 9.46
Passenger revenue per available seat mile (cents) ... 7.41 7.38
Departures ..................................................... 10,265 26,334
Average stage length (miles) ................................ 825 986
Average number of operating aircraft during period ..... 5.8 14.7
Full-time equivalent employees at period end 1,028 2,116
Average fuel cost per gallon (cents) ................. 96.15 75.63
Fuel gallons consumed (000) 18,340 55,095
Percent of sales through JetBlue.com during period ... 28.7% 44.1%

Source: JetBlue

Exhibit V
JetBlues Development from March 31, 2000 to December 31, 2001
Cities Number of Full and Operating Aircraft
At Quarter Ended Served Part-Time Employees Owned / Leased Total
March 31, 2000 4 519 / 3 3
June 30, 2000 5 665 1 / 4 5
September 30, 2000 9 993 4 / 4 8
December 31, 2000 12 1,174 4 / 6 10
March 31, 2001 12 1,599 4 / 7 11
June 30, 2001 15 1,764 4 / 10 14
September 30, 2001 17 2,078 6 / 12 18
December 31, 2001 18 2,361 9 / 12 21

Source: http://investor.jetblue.com, November 4, 2002.

APPENDIX I
JetBlue balance sheet for the three quarters ended.
Period Ending *** 30-Sep-02 30-Jun-02 31-Mar-02
Current Assets
Cash And Cash Equivalents $207,758,000 $269,325,000 $92,536,000
Short Term Investments $12,540,000 $11,397,000 N/A
Net Receivables $10,910,000 $16,795,000 $27,810,000
Inventory $4,684,000 $4,060,000 $3,168,000
Other Current Assets $10,936,000 $8,002,000 $9,365,000
Total Current Assets $246,828,000 $309,579,000 $132,879,000
Long Term Assets
Long Term Investments N/A N/A N/A
Property Plant And Equipment $858,905,000 $718,527,000 $627,706,000
Goodwill N/A N/A N/A
Intangible Assets $64,475,000 N/A N/A
Accumulated Amortization N/A N/A N/A
Other Assets $32,300,000 $30,337,000 $25,521,000
Deferred Long Term Asset Charges N/A N/A N/A
Total Assets $1,202,508,000 $1,058,443,000 $786,106,000
Current Liabilities
Accounts Payable $168,696,000 $135,579,000 $118,199,000
Short Term And Current Long Term Debt $76,032,000 $75,850,000 $81,057,000
Other Current Liabilities N/A N/A N/A
Total Current Liabilities $244,728,000 $211,429,000 $199,256,000
Long Term Debt $523,814,000 $437,203,000 $375,298,000
Other Liabilities N/A N/A N/A
Deferred Long Term Liability Charges $41,844,000 $32,520,000 $19,875,000
Minority Interest N/A N/A N/A
Negative Goodwill N/A N/A N/A
Total Liabilities $810,386,000 $681,152,000 $594,429,000
Stock Holders Equity
Misc Stocks Options Warrants N/A N/A N/A
Redeemable Preferred Stock N/A N/A $215,450,000
Preferred Stock N/A N/A N/A
Common Stock $421,000 $420,000 $44,000
Retained Earnings $629,000 ($11,526,000) ($25,168,000)
Treasury Stock N/A N/A N/A
Capital Surplus $401,245,000 $399,033,000 $12,450,000
Other Stockholder Equity ($10,173,000) ($10,636,000) ($11,099,000)
Total Stockholder Equity $392,122,000 $377,291,000 ($23,773,000)
Net Tangible Assets $327,647,000 $377,291,000 ($23,773,000)
***Note that IPO occurred on April 12, 2002

APPENDIX II
JetBlue Income Statement--September 30, 2002 vs. December 31, 2001
Quarter Ending Year ended
Period Ending:*** 31-Mar-02 30-Jun-02 30-Sep-02 As of 9/30/02 12/31/2001 Difference Percentage
Total Revenue $133,369,000 $149,303,000 $165,261,000 $447,933,000 $320,414,000 $127,519,000 40%
Cost Of Revenue $65,975,000 $54,964,000 $43,128,000 $164,067,000
Gross Profit $67,394,000 $94,339,000 $122,133,000 $283,866,000
Operating Expenses
Research And Development N/A N/A N/A
Selling General And Administrative Expenses $39,304,000 $60,937,000 $92,746,000 $192,987,000 $293,607,000 ($100,620,000) -34%
Non Recurring N/A N/A N/A
Other Operating Expenses $4,712,000 $5,695,000 $6,926,000 $17,333,000 $63,483,000 ($46,150,000) -73%
Operating Income $23,378,000 $27,707,000 $22,461,000 $73,546,000 $26,807,000 $46,739,000 174%
Total Other Income And Expenses Net $3,099,000 ($680,000) $6,497,000 $8,916,000 $15,108,000 ($6,192,000) -41%
Earnings Before Interest And Taxes $26,477,000 $27,027,000 $28,958,000 $82,462,000 $41,915,000 $40,547,000 97%
Interest Expense $4,187,000 $1,993,000 $8,470,000 $14,650,000
Income Before Tax $22,290,000 $25,034,000 $20,488,000 $67,812,000
Income Tax Expense $9,286,000 $10,448,000 $8,333,000 $28,067,000
Equity Earnings Or Loss Unconsolidated Subsidiary N/A N/A N/A $0
Minority Interest N/A N/A N/A $0
Net Income From Continuing Operations $13,004,000 $14,586,000 $12,155,000 $39,745,000 $38,537,000 $1,208,000 3%
Nonrecurring Events
Discontinued Operations N/A N/A N/A
Extraordinary Items N/A N/A N/A
Effect Of Accounting Changes N/A N/A N/A
Other Items N/A N/A N/A
Net Income $13,004,000 $14,586,000 $12,155,000 $39,745,000 $38,537,000 $1,208,000 3%
Preferred Stock And Other Adjustments ($5,011,000) ($944,000) N/A ($5,955,000)
Net Income Applicable To Common Shares $7,993,000 $13,642,000 $12,155,000 $33,790,000
***Note that IPO occurred on April 12, 2002

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Written by Christian Boyens, Ji-Young Cha, Ronit Livneh, Felicia Pan-Fea, Vishal Singh and Pierre-

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