JetBlue Airways Corporation: Getting over the 'blues'?

In 2017 JetBlue faced challenges that included rising fuel prices, troubling technical disruptions, and declining quality of the flying experience. Since the beginning of 2016, JetBlue had enjoyed low fuel prices that helped increase their earnings about 18 percent during the second quarter of 2016, but the company experienced technical issues that caused booking problems and resulted in delays, as well as bad publicity. In order to cope with the likelihood of a rise in future fuel prices, JetBlue undertook massive cost reductions by investing in cabin restyling, for instance, adding more seats to JetBlue's A320 airplanes. However, the shrinking legroom that accompanied the cabin restyling was despised by passengers, which posed a problem for an airline that had once offered customers a captivating (as opposed to a captive) flying experience.

The US airline industry

The US airline industry consists of three primary segments: major airlines, regional airlines, and low-fare airlines. Major US

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airlines, as defined by the Department of Transportation, are those with annual revenues of over $1 billion. Most major airlines utilize the hub-and-spoke route system. In this system, the operations are concentrated in a limited number of hub cities, while other destinations are served by providing one-stop or connecting service through the hub. Scheduled flights serve most large cities within the United States and abroad and also serve numerous smaller cities.

Regional airlines typically operate smaller aircraft on lower-volume routes than do major airlines. They typically enter into relationships with major airlines and carry their passengers on the 'spoke' that is, between a hub or larger city and a smaller city. Unlike the low-fare airlines, the regional airlines do not have an independent route system.

Deregulation of the US airline industry in 1978 ushered in competition in the previously protected industry. Several low-cost, low-fare operators entered the competitive landscape that Southwest had pioneered in 1971. The low-fare airlines operate from point to point with their own route systems. The target segment of low-fare airlines is fare-conscious leisure and business travelers who might otherwise use alternative forms of transportation or not travel at all. Low-fare airlines have stimulated demand in this segment and been successful in winning over business travelers from the major airlines. Southwest is the outstanding example; however, Southwest has become a major airline, having crossed the $1 billion mark in 1990.

The main bases of competition in the airline industry are fare pricing, customer service, routes, flight schedules, types of aircraft, safety record and reputation, code-sharing relationships, in-flight entertainment systems, and frequent-flier programs. The economic downturn in the late 1990s and the terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001, severely affected the airline industry and changed the competitive relationships among carriers. The demand for air travel dropped significantly, leading to a reduction in traffic and revenue. Security concerns, security costs, and liquidity concerns increased. Lower fares and the increased capacity of the low-cost airlines created a very unprofitable environment for traditional networks. Since 2011 most of the traditional network, hub-and-spoke airlines have filed for bankruptcy or undergone financial restructuring, mergers, or consolidations. With these restructurings, many of them have been able to significantly reduce labor costs, restructure debt, and generally gain a more competitive cost structure. This has enabled the major airlines to provide innovative offerings similar to those of low-cost airlines while still maintaining their alliances, frequent-flier programs, and expansive route networks. The gap between low-cost airlines and traditional network airlines has diminished drastically.

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JetBlue: The humble beginnings and the great rise

Born in So Paulo, Brazil, and brought up in Salt Lake City, David Neeleman, along with June Morris, launched Utah-based Morris Air, a charter operation, in 1984. Morris Air was closely modeled after Southwest Airlines, the legendary discount airline. Neeleman considered Herb Kelleher, Southwest's founder, his idol.

While following the Southwest model, Neeleman brought his own innovations into the business. He pioneered the use of at-home reservation agents, routing calls to agents' homes to save money on office rent and infrastructure expense. He also developed the first electronic ticketing system in the airline industry. Impressed by Morris's low costs and high revenue, Southwest bought the company for $129 million in 1992. Neeleman became an executive vice president of Southwest. However, he could not adjust to Southwest's pace of doing things. By 1994, he was at odds with top executives, and he left after signing a five-year noncompete agreement.

After the noncompete agreement with Southwest Airlines ended in 1999, Neeleman launched his own airline. He raised about $130 million of capital in two weeks. With such strong support from venture capitalists, JetBlue began as the highest-funded start-up airline in US aviation history. JetBlue commenced operations in August 2000, with John F. Kennedy International Airport (JFK) as its primary base of operations. In 2001, JetBlue extended its operations to the West Coast with its base at Long Beach Municipal Airport, which served the Los Angeles area. In 2002, the company went public and was listed on NASDAQ as JBLU. JetBlue's stock offering was one of the hottest IPOs of the year. JetBlue had been established with the goal of being a leading low-fare passenger airline that offered customers a differentiated product and high-quality customer service on point-to-point routes. JetBlue had a geographically diversified flight schedule that included both short-haul and long-haul routes. The mission of the company, according to Neeleman, was 'to bring humanity back to air travel.' To stimulate demand, the airline focused on underserved markets and large metropolitan areas that had high average fares.

JetBlue was committed to keeping its costs low. To achieve this objective, the company originally operated a single-type aircraft fleet comprising Airbus A320 planes as opposed to the more popular but costly Boeing 737. The A320s had 162 seats, compared to 132 seats in the Boeing 737. According to JetBlue, the A320 was less expensive to maintain and more fuel-efficient. Since all of JetBlue's planes were new, the maintenance costs were also lower. In addition, the single type of aircraft kept training costs low and increased personnel utilization. JetBlue was the first to introduce the 'paperless cockpit,' in which pilots, equipped with laptops, had ready access to flight manuals that were constantly updated at headquarters. As a result, pilots could

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quickly calculate the weight, balance, and takeoff performance of the aircraft instead of having to download and print the manuals to make the calculations. The paperless cockpit ensured faster takeoffs by reducing paperwork and thus helped the airline achieve quicker turnarounds and higher aircraft utilization. No meals were served on the planes, and pilots even had to be ready, if need be, to do cleanup work on the plane to minimize the time the aircraft was on the ground. Turnaround time was also reduced by the airline's choice of less congested airports. Innovation was everywhere. For example, there were no paper tickets to lose and no mileage statements to mail to frequent fliers.

With friendly, customer service-oriented employees; new aircraft; roomy leather seats with 36 channels of free LiveTV, 100 channels of free XM satellite radio, and movie channel offerings from FOXInflight; and more legroom (one row of seats was removed to create additional space), JetBlue promised its customers a distinctive flying experience, the 'JetBlue experience.' With virtually no incidents of passengers being denied boarding; high completion factors (99.6 percent as compared to 98.3 percent at other major airlines); the lowest incidence of delayed, mishandled, or lost bags; and the third-lowest number of customer complaints, the company was indeed setting standards for low-cost operations in the industry. JetBlue was voted the best domestic airline in the Conde Nast Traveler's Readers' Choice Awards for five consecutive years. Readers of Travel + Leisure magazine also rated it the World's Best Domestic Airline in 2006. In addition, it earned the Passenger Service Award from Air Transport World.

Nevertheless, high fuel prices, the competitive pricing environment, and other cost increases made it increasingly difficult to keep JetBlue growing and profitable. Will the company be able to maintain high operating margins if the fuel price starts to go up after the oil supply glut evaporates? At the same time will the company be able to provide its customers a great travel experience by keeping low fares?