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JetBlue Airways

Teaching Note
Synopsis:
JetBlue is a low-cost domestic airline in the United States following a rather interesting
combination of low-cost and differentiation as its strategy. From its inception in 1998,
the airline grew to become the 11th largest player in the airline industry in a short span of
6 years. It had been the only other airline apart from Southwest airlines, to have been
profitable during the aftermath of the September 11, 2001 attacks on World Trade Center,
and at a time when the entire airline industry was experiencing losses. JetBlues lowcost
strategy was achieved through a smaller and more productive workforce; automated
processes; better use of technology; and use of large and fuel-efficient planes. The
differentiation strategy involved providing a unique JetBlue Experience through
excellent customer service, new aircraft, greater comfort and entertainment through free
LiveTV. Moving into the growth phase, Jet Blue has been implementing changes into its
combination strategy. One of them was the introduction of a new model of planes, i.e.,
Embraer 190s to be used for penetrating mid-size cities and also during off-peak times on
existing routes. In February 2007, Jet Blue announced its plan to join an alliance with Aer
Lingus to facilitate easy transfers to both airlines customers. Jet Blue is also pursuing a
codeshare agreement with Cape Air.
A disastrous storm on Valentines Day 2007 exposed many weaknesses in the JetBlues
operations and had a negative impact on the airlines brand name as well as its financial
performance. Following the event, JetBlue has implemented changes in the top
management, as well as actions focused on resolving operational problems and regaining

customer trust and satisfaction through a new compensation system. In May 2007, David
Neeleman, the founder of JetBlue, was replaced as CEO by Dave Barger. The loss of
reputation, high fuel prices, competitive environment, and other cost increases are posing
a great threat on JetBlues future growth plans and profitability.
Case Objectives and Use

In terms of its content, writing style and length, the case should be relatively easy for any
undergraduate or graduate student to read and understand. The case is written in a style
that overviews the situation but intentionally avoids guiding students through any
analytical framework or specific application question. In so doing, it provides the
instructor with the latitude to adjust class discussion and thereby accommodate the
abilities of a wide-range of students. Specifically, the instructor can invite students to
reason through a situation where uncertainty exists and speculation may be required.

This case can be used for Industry analysis case (chapter 2), Internal Analysis (chapter 3),
Intellectual Assets (chapter 4) and is best used for Business Level Strategy Case (chapter
5).

As an industry analysis case, the case provides a very good start to discuss the external
environment, i.e., the general environment including the legal factors such as the
deregulation of the airline industry, the economic factors, the technological factors, etc.,
and how they affect the airline industry. It then offers the opportunity to conduct an
internal analysis of the firm using the value chain approach or the resource-based view of

the firm, followed by a detailed financial analysis of the firm to complete the various
components of internal analysis.

The business-level application of the case can be used to demonstrate challenges the
company is facing after its economic downfall and loss of reputation following February
2007. This case is very well suited to discuss the Porters generic strategies, the
advantages and disadvantages of those strategies and to discuss the merits and demerits
of a combination strategy. Students could also be encouraged to relate their understanding
of the sources of competitive advantage that they identified using the internal analysis of
the firm as a part of this discussion.
As an extension, the instructor has the latitude to discuss the prospects and problems that
JetBlue would encounter in future in its growth endeavor.

This could involve a

discussion on the various avenues of growth, the feasibility of the avenues, possible
competitor reaction and how the company could cope with it.

Teaching Plan:
The instructor may choose to assign the case to groups of 4-5 students to discuss and
present on this topic. The discussion questions and answers thereof provide a broad
overview for the discussion in class. The instructors, however, can engage in their own
analysis to guide the discussion.
As Strategic Analysis Case
Discussion questions:
1. Analyze the industry environment of JetBlue.

To answer this question, the instructor can choose to steer the discussion toward the
factors in the general environment, and then toward the competitive environment.
In the general environment of domestic airline industry, the discussion can address the
political/legal, technological, economic and other factors. Under the legal factors, the
deregulation of the airline industry in 1978 provided an opportunity to several players to
enter the market. It allowed new market segments such as that of the low cost, point-topoint services to emerge. It thus changed the industry landscape. Also, the bankruptcy
laws have a significant role to play as they allow even non-profitable operators to
continue in the industry when they are protected. The emergence of Internet technology
and other technological breakthroughs have had an impact on the way the airlines
conduct their businesses. For example, Internet reduced the dependence on ticketing
agents. Most of the low-fare airlines sell tickets through their websites. Customer
service is being extended by personnel working from their homes. All these have made
it possible to reduce the costs of operations making it favorable for the low-cost airlines
to operate. Also, with the Internet, customers now search and compare prices of air
tickets much more easily than earlier and this accentuates the price competition.
The airline industry is susceptible to upturns and downturns with the trends in the
economy. A growing economy and booming business mean greater demand for air travel,
and a slow-down in the economy means reduced demand, consequent unutilized capacity
and intensified competition. The availability of venture capital, and other capital sources
have an impact on the number of new entrants into the industry. Interest rate fluctuations
have an impact on the cost of operations for companies that have high levels of debt.

The airline industry is also highly susceptible to the extreme events such as the
September 11, 2001 attacks on the World Trade Center. These create fears in the minds
of customers toward air travel and have a severe adverse impact on the industry. It also
means increased security concerns; delayed flights, reduced turnaround times, and all
these have an impact on airline profitability. Moreover, JetBlues example shows that
severe weather can have a major influence on airline profits and ultimately also its brand
image. Furthermore, wars with other nations and increases in fuel prices strongly impact
the air industry. .

These are only some pointers, and the instructor can choose to elaborate, extend the
issues or make a more detailed analysis.
In order to deal with the analysis of the competitive environment, the instructor might
find it useful to use the Porter five-force framework. Help students apply Michael

Substitutes
Threat

Porters 5 Forces of Competition by drawing a diagram on the board similar to the


High
Suggested:
Very High
following, and
have students
fill in the details:
- there are numerous
competitors; low
switching costs for
consumers;

Rivalry
Suppliers
Power

Very High

High

Buyers
Power
Low

New Entrants
Barriers
Low-Moderate

Suggested: High the threat


of substitutes is high
especially when the distances
traveled are short.

Suggested: High there


are only two major
suppliers - Boeing and
Airbus.

Suggested: Low -buyers are not


concentrated; there is no threat of
backward integration;

Suggested: Low- there are


low barriers to entry,
especially for the low-cost
airlines; low switching costs.

Threat of new entrants: The extent of threat due to new entrants is determined by how
high or low are the barriers to entry into an industry. In the airline industry, deregulation
and availability of alternate sources of funding reduced the barriers to entry.

Economies of scale did not work out well for the players in the airline industry. The huband-spoke model developed by the major players, led to more of diseconomies of scale
than economies. However, the large investments already made by the major airlines, and

their established networks do pose a significant threat to new entrants unless they counter
it with highly efficient operations.

Product differentiation. Airlines try to create strong brand identification and customer
loyalty by using the frequent flyer programs. When there is strong brand identification, it
forces the new entrants to spend heavily on weaning away customers from the existing
players, thus discouraging their entry. However, in the airline industry the brand
identification has not proved to be so strong as to prevent people from switching to other
airlines. Some low-cost players are trying to achieve some product differentiation (e.g.,
JetBlue providing more legroom, LiveTV at each seat, etc., Southwest emphasizing
commitment to customer service). However, these are not very strong barriers to entry as
the other entrants are imitating them rather pretty easily.

Switching costs. There are virtually no switching costs for customers. The frequent flier
programs attempt to create switching costs. However, when the customers are presented
with low-cost options, there is nothing strong enough that could prevent them from
switching to other airlines.

Thus, the airline industry faces a high threat of new entrants particularly in the low-cost
segment. The barriers can be heightened only when they have very closely tied and
ultra-efficient operating routines that competitors find it difficult to copy or imitate.

Bargaining power of suppliers is high when there are few suppliers in the industry,
there are no easy substitutes to suppliers products, when the buyer industry is not an
important customer of the supplier group, the suppliers product is an important input to
the buyers business, the supplier products are differentiated or built up switching costs,
the supplier group poses a credible threat of forward integration. There are the only two
major suppliers i.e., Boeing and Airbus, to the industry and when the airline trains its
pilots on either Boeing or Airbus, switching costs get built in terms of pilots training in
the event the airline decides to change the supplier. Thus the supplier does enjoy
considerable bargaining power. However, there is no credible threat of forward
integration by the suppliers such as Boeing or Airbus.

Bargaining power of buyers is low as the buyers are not concentrated. While the buyer
does not have any switching costs, and there are several choices available, they still lack
concentration. Internet impacted in increasing the buyer bargaining power because the
buyers can compare the prices more easily and in view of no switching costs, they could
choose whichever airline offers a low price. Thus, the buyers may be able to influence
the airlines to reduce their prices over time. There is no threat of backward integration
from the buyers.

Threat from substitutes is high when the distances traveled are shorter. In such cases,
the customer can choose to travel by land, by car/bus/rail as they might prove to be
cheaper alternatives. However, for longer distances and for more hurried customers, the
airlines do not face significant threat from substitute modes of travel.

The intensity of rivalry among existing competitors in the airline industry is very high.
There are numerous competitors, and in times of low or moderate industry growth, the
competition gets fiercer as each one tries to nab customers from the other in order to keep
their capacity utilizations at acceptable levels. The exit barriers are high because it is
difficult to dispose off grounded planes as there would be few buyers. Also, due to the
bankruptcy laws, even the loss-making companies might still be around for a long time
thus intensifying competition. So, it is easier to get into the industry but might be
difficult to get out1.

2. Analyze the internal environment of JetBlue.


The instructor can make use of Porters Value Chain analysis and also introduce the
students to analysis from a resource-based perspective. The limitations of SWOT
analysis in directing attention to the bases of competitive advantage, and the merits of the
other two approaches can be driven-home with such an analysis.
A sample analysis is presented below.
Value chain activity
Primary:
Inbound logistics

Operations

How does JetBlue create value for the customer?


Web-based booking instead of booking through ticketing
agents gives greater control on managing seat sales.
Customers wont get bumped.
Paperless cockpit, no meals served, no paper tickets--all
reduce time and costs..

http://www.geocities.com/lgol27/AnalyzeIndustries.htm

Outbound logistics

Marketing and Sales

Service

Secondary:
Procurement

New A320s are larger and more fuel-efficient. New Embraer


190s are used for penetrating mid-size cities and also during
off-peak times on existing routes. Less congested airports
help quicker and on-time flight departures.
Web-based ticketing as a distribution channel. Market
segment properly identified i.e., business travelers flying
point-to-point. Effective pricing.
Currently working on improving communication with
customer to keep them informed of changes or
inconveniences. Implementation of online rebooking. The
New Customer Bill of Rights providing rewards for
customers experiencing operational problems, delays or
cancellations. CEO travels regularly to get customer feedback
first-hand. Investments in training for service orientation.
Well-conceived aircraft procurement plan to support growth.

Technology
development.

Investments in technology from the beginning of the airline.


Process initiatives such as automated baggage handling, webbased ticketing, paperless cockpit etc.,

Human resource
management

Non-unionized workforce, reward systems such as stockoption plans, profit sharing, innovative recruitment policies
and culture promoting camaraderieemployees called
crewmembers.

General Administration

Change of the CEO from David Neeleman to Dave Barger in


May 2007.Top management with expertise in airline business,
ability to coordinate and integrate activities across the value
system, and highly visible to inculcate organizational culture,
reputation and values.

The instructor can take the discussion further to identify and discuss the interrelationships
among the various activities in the Value-chain.

A sample analysis is also presented below using the resource-based approach. There can
be great divergence in how various groups would mark these resources as valuable, rare,
inimitable and non-substitutable. The instructor will probably be able to engage the

students in debate and encourage discussion as to whether or not the individual value
chain activities can lead to advantages that are sustainable. The instructor may also pose
questions about how the interrelationships among such activities would be the source of
sustainable competitive advantage. That would help drive home the idea of unique
bundles of activities/resources as the basis of sustainable competitive advantage much
more strongly.
Resource/Activity Is it Valuable?

Is it rare?
Yes
Yes
Yes
No

Are there few


substitutes?
Yes
Yes
Yes
No

Is it difficult
to imitate?
No
Yes
No
No

Inbound logistics
Operations
Outbound logistics
Marketing and
sales
Service
Procurement
Technology
development
Human resource
management
General
adiminstration

Yes
Yes
Yes
Yes
Yes
Yes
Yes

No
No
Yes

Yes
Yes
Yes

No
No
No

Yes

No

Yes

No

Yes

No

No

No

In case of JetBlue, it is too early to say whether its resources are inimitable. This is
because there is not much of path dependency or causal ambiguity and social complexity
developed at this point in time that could make the resources inimitable. As can be
noticed, its efficient low-cost operations can lead to a sustainable competitive advantage
in future. However, the low-cost operations themselves are interrelated to other activities
such as technology development, better human resource management etc. The event of
severe weather in February 2007 exposed many shortcomings of JetBlues low-cost
system, particularly in the area of communication with customers as well as baggage
handling. JetBlue should be able to develop an interlocking system of mutually

reinforcing competencies that would make it simultaneously valuable, rare, inimitable


and non-substitutable, thereby providing a competitive advantage.

The instructor may choose to complement these analyses with a detailed analysis of the
financial statements of the company before and after the first quarter of 2007. To draw
meaningful conclusions, the analysis can be longitudinally for JetBlue to identify the
changes in the various ratios, margins and stock performance, or alternatively, the student
could be encouraged to collect information related to other competing airlines and do a
comparative financial statement analysis.

3. Discuss the bases of JetBlues competitive advantage, and the merits and demerits of
both the components. Are combination strategies better? Is JetBlues competitive
advantage sustainable?

The two bases of JetBlues competitive advantage are cost leadership and
differentiation.
JetBlue achieves cost leadership by attaining efficient operations. New planes minimize
maintenance and fuel costs, larger planes ensure more revenue per flight, longer hauls on
an average as compared to other point-to-point services keep planes longer in air. Nomeals served helps quicker turnarounds and reduce costs. Reservation agents working
from home reduce need for physical infrastructure, and thereby reduce overhead costs.

Firms pursuing low-cost strategy generally get trapped in focusing on too few of value
chain activities, or lack parity on differentiation with competitors. The low-cost
advantage also gets eroded when the competitive pricing information becomes available
more easily. The strategy can be imitated too easily.

The other component of JetBlues strategy is differentiation. Differentiation is achieved


through a strong brand image, the various features including entertainment through
LiveTV ,and comfort due to more legroom.

The problem with differentiation strategy is that differentiating features could be easily
imitated. Firms may also get entrapped in too much differentiation, which customers may
not value.

Firms employing combination strategies would have a much stronger strategy to


outperform rivals. They can achieve superior performance by successfully integrating
low-cost operations with differentiation, thereby avoiding the pitfalls of either of the
strategies.

JetBlue employed a combination of these two strategies and that gives it a distinctive
competitive advantage. It combined low-cost services with a differentiated offering.
The company invested in technology for efficient operations right from its inception and,
therefore, is able to provide high quality services at low-cost. Going forward, the extent
to which JetBlue can maintain this integration of low-cost and differentiation will

determine whether its competitive advantage is sustainable. The mutually reinforcing


components of JetBlues strategy can be shown as in the figure on next page. Any
change in one of the components has an impact on all interconnected activities.

JetBlues activity system2


No meals

Pre-assigned
seating, Direct
TV etc.,

No baggage
transfer

Limited but
differentiated
service
No connections

with other
airlines
Limited use of
travel agents

Reliable
departures

Single
aircraft type
A320 and
brand new
aircrafts

Quick gate
turnarounds

Web-based and
automatic
ticketing
Effective reward
system

Lean,
productive
workforce

Non-unionized
workforce
Reservation agents
operate from home

Short and long-haul


between large
metropolitan cities
from secondary
airports

Very low
ticket
prices

High
aircraft
utilization

modeled after Southwests activity system as in M. E. Porter. 1996. What is Strategy? Harvard Business
Review, November-December, pp.60-79. Also according to this article, the darker circles indicate the
higher-order strategic themes. These are implemented through the clusters of tightly linked activities
which are in the lighter circles.

4. How have the new Embraer Jets impacted the firms strategy?
The introduction of the new smaller jets brought both opportunities and operational
problems.
The smaller Embraer jets have been used to service mid-sized cities such as Columbus
and San Antonio, which is more economical than using the 156-seat A320s. These
planes are also more cost-effective and comfortable than the smaller 50-and 70- seat jets
flown by regional carriers. The smaller Embraers are also used efficiently during offseason. Thus, addition of Embraers give JetBlue more flexibility in its operations.
However, the addition of Embraer jets has also added to the complexity of JetBlues
operations. One of the foundations of JetBlues low-cost strategy was that it had a singlemodel airplane fleet that helped in reducing the pilot training costs, maintenance costs
and made scheduling simple. Even with increased training costs, the company is not yet
comfortable operating this type of aircraft.

Additional question

1. What are the salient aspects of JetBlues culture?

JetBlues culture is built around the five key values of safety, caring, integrity, fun and
passion. The top management reinforces those values by being closely involved in the
operations. The CEO has a tradition of traveling regularly on his flights and distributing

snacks to his customers. This action sets an example to the employees on the importance
of customer service. The company invests in training its employees on safety procedures.
There is also an extensive orientation program in which new employees are told about the
value of customer service as well as the need to be productive and committed to keep
costs as low as possible. Employees are called crewmembers and that reinforces the
non-hierarchical and informal culture at the company. They are offered flexible work
hours, and attractive compensation plans to keep them motivated. The friendly and
motivating work environment offsets some of the monetary component of pay and thus
helps in reducing costs. The culture thus supports the strategy of the company.