CASE 20 GROWING PAINS S. S. George and Shirisha Regani “We don’t spend tens of milioms of dollars telling people how cool wwe axe. We put lowe fares sab NELLEMAN, HE FOUNDER aN “Ido thik shy [FerBlue) had some growing pa they din’) have syst Mics Martens, Mavacic DIETOM AY Maine & NAPIER, & MOREY A Ae)AGEMINT FIRM TA A Change of Guard at JetBlue Ww May 2007, JerBuve Amwavs INC. (JerBLuE), a low-cost York, announced a new leadership structure for the compas President and Chief Operating Ofticer (COO) of the airline, (Neeleman) as CEO, Neeleman, who founded JetBlue in 19% since. Under the new leadership structure, Neeleman was desig Chairman of the Board, Russell Chew, a former Federal Aviation ceculive, took over as the COO; Barger retained his position as the Neelernan saiel at that time that the board's suggestion that he do with the service breakdown that JetBlue had experienced in Feb east region of the United States had heen hit by 1 severe snowstor| tion to the adverse weather had left thousands of passengers stra to hail uncial repercussions, this fiaseo harmed JetB) nicline and tarnished its reliability record, serious fs ‘Gopmishy © 2008. ICHAT, Reprised by pemnisson of ICFAI Conte for Manage India Websie- wor emvindiz ong. The authors ate 58. George and Shisha Reval in any fo ihn the wren permis of te copyrigin ber, ICAI Center [Repuint poison soley prantd hy the pubis. Prentice Hall ore bik, Su Pokey Edin anal be Intex ol cletonie versions his bok) hy Mongernt Resear (ICMR), Ths case weed fr SMBP—15th Bah The ‘ible tr case content Any eth ible uf the cate (tarsation, any fom of {any fan of parnership) 49 anlber publisher wil be ic violation of copy Daragetncit Reseach (ICMR) las anal alditonal write reprint pesissin tut there ame ee them tel us" ie CEO oF Dexa 2001" 1s, They were growing so fast and redundancies in place. ‘owen SERB STOCK 8 2007 rier (LCC) based in New David Barger (Barger), eplaced David Neelem: hhad been its CEO ever ited as the non-exective ministration (FAA) ex- resident of the company. step down had nothing 10 tary 2007, when the north n, The airline's slow reac fed at airports. In addition lve's image as a customer- nt Research (ICMR), Hyder This cise cannot be reprodiced ‘Management Researe 1M), stegie Maageriont na Bases ongrigh hotter (CHAI Center for opprit Holde ese respon rons ether mati) or sold Taw uniess ICAI Center foe 20-1Background Business Model Positioning Operations Was set up, Jet ing Southwest Air- jous problems, both 1 JetBlue's growth that it was because ronment changed. Analysts greeted the leadership change positively, For several years af Blue had been one of the most suecess{ul airlines in the United States, riv Jines (Southwest) in profitability and growth. However, it began facing va Internal and external, in 2005-2006, Several analysts were of the opinion U ints early years had been too fast and unsustainable in the longer term, an ‘ofthis thai things started to come undone atthe airline when the business g with lawyer Tom such as Weston and founded the Business pkins for setting up JetBiue were developed by Necleman, alos Kelly, in 1998, Necleman raised $160 million® in capital from top inves Presidio Capital, J.P, Morgan Partners, and Soros Private Equity Parine: airline in February 1999. In September 1999, JetBlue was awarded 75 landing and takeolT Kennedy International Airport (JFK) in New York, which was to serve ay slanted commercial operations on February 11,2000, with an inaugural Mi Lauderdale airport in Florida, fan, and passion. Ihe accepted norms the biggest avia- cally avoided op- ity’s two domestic i mainly served ther two airports nal lights, JetBlue JetBlue’s business was guided by five key values—safety, caring, integrit From its inception, it was “ant-establishment” and went against many of of the aviation industry. One example of this was its choice of New Yor! tion market in the United States, as its base. LCCs in the United States ty erating from New York because flying out of LaGuardia and Newark, the airports, was very expensive, Most domestic operators avoided JFK, 2 international flights, and was also farther from Manhattan than the Neeleman, however, reasoned that because JFK handled mostly internat ‘would face very little Competition from domestic fights at that airport. From the beginning, JetBlue was positioned as a colorful and fun airline ignated as an LCC; it was in fact a “value player.” The sitline combined cral value-added services that improved customer service without addin, All the planies operated at JetBlue were fined with leather seats in Leather furnishings cost twice as much as cloth ones, but also lasted twice ical LCCS, JetBlue provided assigned seating and allowed passengers 10 the plane whenever possible. JetBlue served light snacks sueh as chips, cookies, and crackers, and|coffee and drinks, which cost a fraction of a regular meal. The snacks were complimentary, unlike in LCs that sold food t passengers, JetBlue estimated that it saved about $B per passenger by choosing to serve sacks instead of regular food, Jetbilue provided free personal satellite television to all the passengers. The television sets reportedly cost only ubout $1 per passenger per Hlight—one- fourth the cos} of a meal though it was des. ow fares with sev (9 operating costs sad of cloth ones, ‘slong. Unlike typ- youse their seal on inned JetBlue’s operations were the key 10 ls low costs. JetBlue did not use old planes. but oper ated a fleet of new Airbus A-320 aircrall, The Airbus A-320s were chosen per the more pop- ular Bocing-737s? (which Southwest used) because although they cost spore initially, theyCulture case 2 ‘would be easier to maintain and were more fuel-efficient. The pl year warranty, Operating a uniform fleet of planes was also econ! Significantly in the areas of pilot training, maintenance, and spare All the airerafi were configured ina single class, with a unifor allowed! JetBlue to put in the maximum number of seats possible i Initially JetBlue did nottry to fly too many routes, concentrat the West Coast, and Florida—routes for which demand was high, the fares of rivals. In addition, JetBlue also fTew to secondary cities jor carriers. JetBlue flew mainly to secondary airports that did not handle way, the airline was able 1» avoid congestion to a great extent and record. (In 2001-2002, JetBlue had an on-time performance recor the 72 percent forthe top ten airlines in the United States.) Besides, better business terms than the main ones JetBlue tried to operate the maximum possible number of Might around time was 35 minutes, which was comparable to Southwest oF full service airlines (FSAs), which took an hour or more to turn ated several “red-eye” Hights.6 JetBlue flew only point-to-point flights, avoiding the hub-and, jor carriers. This helped it avoid the complications that resulted fi passenger transfers, and the airline was also able to operate with fs JetBlue used electronic ticketing extensively. Typically, more cts were booked through the airline’s Web site. JetBlue also cut do ‘operations by allowing its call-center operators and customer servi home, using voiee-over Internet protocol. ‘Autoniation and the effective hamessing of technology Furth \was the first airline to introduce paperless cockpits, where the pill tops to access flight manuals and make the requisite calculations be tween 15 and 20 minutes in tskeofT. JetBlue was also one of the States to allow automatic check-in and electronic baggage tagging. maintain 2 lean workforce (labor costs were historically the hi ‘operating costs}. In 2002, JetBIue's cost per available seat mile was ‘cont less than the average of the major carriers. JetBlue was tus al typically 30 to 40 percent lower than other airlines.” level of service. This also its planes. 2 instead on the Northeast, dit was easy to undercut hat were neglected by ma- 19 much air traffic. In this establish a good on-time of 80 percent, as against secondary aizports alleced per day. lis average tarn- ‘and much lower than that round, JetBlue also oper- ‘spoke model used by ma: m connecting fights and Fewer airport staf? an 70 percent of the tick non the costs of back-end executives to work from helped eut costs. JesBiue ‘were equipped with lap- re takeoff, This saved be- fist airlines in the United ‘ulomation helped JetBlue ‘component of an aitline's nls, which was 25 per- le 10 offer Fares that were that had « non-unionized fanking ones were called mosphere at the airline vere offen called on todo. did not employ cleaning e pilots were expected 10 fT also loaded or unloaded quently with bonuses and wees were free to suggest JetBlue was also one of the few airlines in the U.S. airline industry ‘workforce. All the einployees from the CEO down to the lowest “crewmembers.” The top management ued to create a family-like JetBlue looked for 8 positive attitude in its employees, as they tings that were outside their job deseriptions. For instance, Jet Blu crews to clean the Mights—the flight attendants and someumes th pitch in to get the Might realy for the next takeoff. Airpost ground st baggage from the Hlight, However JetBlue rewarded eriployees profit sharing programs. Initiative was encouraged, and all emple iddcas to cut costs and improve operations. Because of the positive work culture, when customers flew Jet by the energy and attitude of the employees. JetBlue also went out of ils way to avoid inconveniencing 4 poliey of never canceling Aights, (all through the early 2000s, ue, they were impressed tomers, The airline had JetBlue had an averagecompletion factor:® of 99.5 percent), JetBlue also avoided oyerbooking flights. When there was a delay, passengers were informed well in advance. During extreine delays, JetBlue ‘would hand out gift vouchers that could be redeemed for a future flight) All this was done ‘even when the delay was because of uncontrollable factors. JetBlue’s passenger complaint numbers and baggage handling errors: ‘est im the industry. se among the low= Growth and Expansion JetBlue was founded during one of the most turbulent times in the histor the United States, September 11, 2001, terrorist attacks bad hit the indus! the major airlines had either gone into bankrupicy protection, or were on so. {n 2001, JetBlue planned to Launch an 1PO to fund ils expansion plan be postponed in light of the terrorist attacks, but JetBlue continued with using ils share of the $15 billion bailout ($5 billion in direct compen: 310 billion in loa guarantees)!” the U.S. government granted the avia fresh infusion of funds from its original investors JetBlue was one ofthe firstairlines (0 take 2 proactive approach to in craft, I was the first national carrier to install bulletproof, deadbolted coe! craft, even before the FAA mandated their use. The airline also installed sci so that pilots could soe what was happening iu the passenger cabins. JelBlue’s message to customers after September 1] also set it apart fr rana newspaper advertisement that said: “We know you need time to heal when you're ready to fly again.” For a few weeks after flights resumed. J almost emply from New York to the 17 destinations it served at that tim not scale back operations. Soon after the September I attacks, JetBluc's management identified other airlines liad cut capacity. For instance, most of the major airlines fights from New York to Florida, JetBlue boosted its services to Florida, flights per week on this route within a few months. JetBlue also ordered 1 craft in 2001. JetBlue was one among only three airlines in the United 5} being Southwest and AirTran Airways [AirTran to posta profit in 2001 a profit of $38.5 million, up lrom a loss of $21.3 million in 2000.) (See Blue's annual income statements from 2002 to 2006.) In April 2002, JetBlue Invnched an IPO of 5.87 million shares, caising yar, JetBlue started expanding operations on the West Coast, using Los Angé In late 2002, JetBlue acquired 100 percent ownership of LiveTV, the tained its in-flight satellite TV channels, for $41 nillion in cash and the rel lion in debi.§ I also started customer loyally program, TrueBlue, in nearly 40,000 members by the end of the year. In 2002, JetBBlue"s cost per (CASM)"” was 6.43 cems, lower than all ihe other major U.S. airlines, wh erage CASM of 9.58 cents.'* (See Exhibit 2 for JetBlue's key operating 6 2006.) In 2003, fetBlue placed an order for 100 Embraer 190"? regional jets for a price of $83 billion, with options for another 100 planes to serve more regional rdutes as a part of its expansion plans. (This was in addition to the 16 A-320 aircralt added tothe fleet that year, ‘with an order for 65 more, andl options on another 50.2") The A-320 aircraft were configured in a 162-seat arrangement, while the Embraer sireralt, which were configured with 100 seats, were 4 more suitable size for regional routes, The first Embraer planes entered service in October 2005, of civil aviation in ry hard and any of the verge of doing "The IPO had to ts expansion plans ‘ation and another jon industry, and « rease safely on air: pit doors on its ai- ns in the cockpit ym other airlines. It ictBlue will be here Blue aireraft flew bout the airline did he routes on whitch wad cut down their adding seven new ee new A-320 air ates (the other two ne company posted Exhibit I for Jet- 158 million." That les asa second bub. ompany that main- inement of $39 mil- 14-2002, collecting available seat milecase2} ine, EM Aanialincome (Dla mounts in milion except per sore dat) setentnaye Yearning 2006 2008 | 2004 2003, 2002 peratngRevenes S98 $35 Operating Expenses Saris, ge, and ones sama | a7 Ost ‘rca ak mo 48 | ss Landing es ad tere iia | 70 Depron and ararizaton i os | om Ant i | Sales ond marketing wo | ke Daineance ntl and eps 7 | Cte eng ee a | ais as Tal operating expen noe est |Last Operaig income ia | ner overt competion? a - # Cer nce apes) am 0 | 69 09 treme (ns) fr coe tes 9 a | “7m Income fn expense eet) 0 | 7 Net income (loss) $0) $20) | $46 $103 arnngs (on) Per Cone Share = s— s@1) |s020 son Died $— $101 [S028 Soo Other Financial Data Opening ain 34% 28% | 8% 6am 69% pee agi Came (ae ($9 174% 1508 Tein aig xd chug a |) eee Nateshpeovdsdby opemingacvics «$M $170 8199 $267 3217 Ne eash used in esting ois cam 0276 |72 (oe) x Netendprovided by tmeing wives 03? is |G? 788 G57 "im 2006, we utd five Aithas A320 arr, Which resulted in again of $12 “12005, we reconded $7 million in non-cash stock-hased compensation expens relate to the acceleration ‘of cera employee stock options and wrote off $ million in development ist lating 103 ‘maintenance aid inventary tacking even that Was nt mplemented "4 2003, we received $25 mllinn in compensation unser the Emergency Wat Tine Supplemental ‘Appropriations Ae. “anni were inaesete to cover fied eharees by $17 malin and $39 mili forthe years ended ‘December 31 2006, and 2005, respectively ‘SOURCE: dertue Airways Anu! Report 2006. In 2003, JetBlue received permission to build a new terminal at JFK, giving it 26 more sates, (Construction of the terminal began in late 2005.) In 2004, fet Blue announced that it planned to take delivery of ane new Airbus A320 every three weeks nd to hire bers per day during the year? During 2004. JetBlue performed well on many operating metres, with a 99.4 percent completion factor, the highest on-time performance of $1.6 perceht in the industry, and the Feswest baggage mishandlings of 2.99 per 1,000 customers boarded, is CASM also remained lower than the industry average at 6,10 cents.25 By the end of 2004, JetBlue flew to 30 d cluding one interiational destination—the Dominican] Republio—launched that InIbIL 3 for JetBlue's growth between 2000 and 2006, nations, year. (SeeSECTION © in EXHIBIT Operating Statistics: letslue Airways! ¥ Pour Tian =e a Revenue passengers? (thousands) 18565 (14,729 11,783 5752 [Revenue passenger miles (millions) 73320 © 20200 15,730 6.836 “Available seat wiles? (ASM) (illions) 28594 © 23.703 18911 8.240 Load factors BOR 852% 82.2% 830% reakeven Toad factor BLAG 861% 77.9% Ns Aieraft utilization? (hours per sy) 129 134 134 29 ‘Average faret $119.73 $110.03 $193.49 $ 10595 ‘Yield per passenger mile” (cents) 953 8.02 195 9.00 Passenger revenue per!® ASM (cents) 777 684 6s 247 ‘Operating revenue per!! ASM (cents) 8.26 718 609 mn ‘Operating expense per'? ASM (cents) 982 698 6.10 643 (Operating expense per ASM, excluding Fuel™ (cents) si9 492 4.95 551 Airline operating expense per ASM (cents)! 1766.91 6.04 643 Departures 199,182 112,009 90,532 44144 ‘Average stage length! (wiles) hiss a8 1,339 wise Average number of operating aircraft during period 1065 775 008 220 ‘Average fuel cost per gallon!= $199 $161 $1.06 072 Foe! gallons consumed (millions) 317 303 2a 106 Percent of sules through jetblue.com duting period 791% 715% TSA 63.0% Fulltime equivalent employees at period end® 9265 8426 GID 3572 Notes: "Exclnges results of optatons and eniployees of LiveTV, LLC, which ae unrelated ¥ on iting operations sd esate operating revuts, >Rovenne passengers” represent the tial umber of paying passengers Flown om ll light segments SRevenve passenger miles epresems Ue umber of mils flown by eevene Passengers “arable seal miles represents the numberof wets available for passengers mili by the muniber of mi il Lind fa epresent the percentage of ater seating capacity tht i actually lized (revenve passenger» available set miles) ‘freakeven lod factors the passenger loud Factor tht wal recut opeating revenues being equal to operatin constant revenue per passenger mile apd expenses, saint lization” epresens the avenge numberof block hours operated pe day per seal or dhe otal tse "average fe” represen the average ona-way fae paid per light segment hy a revenue passenger "Yield per pasenger nile” represens the uverage amount one passenger pays toMy one re ‘epassengrrevenne per wvalale seat il" represents passenger revenue divided by available vet mls. opening event per avaiable seat mile represents operating revenues divided by available seut mes Operating eepence per oilable sen mile” represents operating expenses divided by avatable sea mies operating expense per available sex mile, excluding fel” represents operating expenses, es aera fuel dvi inmates our xpenses, assuming uy avilable seat les ‘Average shige oi eprownts he average nuuber of les own per Might "average fel cost per aH” represens otal sircaf fe costs, which exclades fuel utes divide Dy the otal mero fel gallons SOURCE: tae Airsuse Anmuat Report 2008, However, in the fourth quarter of 2004, JetBlue recorded a drastic dfop in profits. It an hounced a net income of $2.3 million compared to $19.54 million in the gorresponding quar tev of the previous year: The drop in earnings was attributed to increased operating expenses: asa result of arise in fuel prices. The airline ended! the year with a net inepme of $46 million, ‘on revenues of $1.2 billion.25 Following this, it was recognized as a "major hirline” by the DOT.CASE 2) seiBlucAiwans EXHIGIT 3 JetBlue's Growth ‘Year Destinations Employees! Owned Total 2000 2 nm 10 2001 18 2361 2 2002 0 4011 37 2003 2 5438 33 2004 20 mail 8 2005 33 021 2 2006 40 loa7T 119 Note: 'Emphoyees inc fl tne und pat tne employes. SOURCE. fran Airwnys Avsaal Report 2006 Turbulent Times Jetftlue’s performance in all the quarters of 2005 was considera sponding quarters of 2004, and in the fourth quarter of 2005, it the first time since its IPO. JetBlue ended the year with its first con revenues of $1.7 billion, The airline’s operating marwins fell cent in 2004. JetBlue’s performance statistics also showed a downward tre fen-time performance record fell 10 71.4 percent, which was low airlines in the United States. The turbulence continued into 2006, in the first quarter of that year, JetBlue’s problems were atributed internal and external factors. poorer than in the corre jasted a quarterly loss for anual loss of $20 million 2.8 percent from 8.8 per and in 2005, the airline ‘than almost all the major JetBlue announced aloss 0 a combination of several Rising Fuel Costs Fuel prices around the world experienced a sudden rise in 2004, sectors was aviation. Fuel was the second major expense in an tt in the United States, and typically constituted between 10 pe line’s operating expenses. However, afler the price increases, its became more than 20 percent, (See Exhibit 4 Jor the breakup o} penses in 2007.) Although the rise in fuel prices affected all sittin as JexBlue was greater. In 2005, fuel prices increused by nearly 50) percent over 204 pushed up operating expenses, JetBlue was unable to increase its fi ing number of LCCs in the aviation industry, and the attempts of Ul ket share from the LCCs had led to a fallin the average fares. The a to fly a mile fell by more than 10 percent between 2000 and 2006 this, JetBlue had hedged only 20 percent of its fuel requirements compared 10 the 42 pervent hedged in 2004..7 By 2005, Iuel cons! JedBluc’s operating expenses, compared to 14.4 percent in 2002, ‘mong the worst affected nne’s operations after labor and 14 percent of an air- ware in operating expenses an airline's operating ex +s, its effect on LCCS such But even as fuel prices -ssignificanily. The grow- je FSAS to take away mar ‘erage price for a passenger (see Exhibit 5). Added 10 for 2005 at $30 per barrel, tuted nearly 30 percent of it exceeded 33 percentEXHIB! ap UR OA Passenger Aline Cost Index ines Operating ce costs (as of tqz0o7y, Fst Quarter 2007 JetBlue Airways Laborper FTE Fl per gilon ‘Aircraft ownership per operating seat Nowaircraft ownership per enplanement Profesional services per ASM ood & beverage pet RPM Landing fees per capcity ton Handed Maintenance material per revenue aircraft hour {Alzeraft insurance a8 % of bl net book value Nor-aieraft insurance pr pm Passenger commissions as $b of passenger sevenve Communication per enplanement [Advetsing & promation per RPM Lites & office supplies per FTE “Transport related yer ASM Other operating per KTM. Interest as % of outstanding debt Composite 129 100.0 ‘Note: ‘Altuogh inten is nom-qperiiiexpens. its Factor ito the composite co index to capone the role of debt inthe provision of ac service It sor ncladd in te composite cost pet ASM or share uf operating expenses ‘SOURCE: tap /funntnes or EXHIBIT S| Increasesin Fuel Cost of Domestic Ale Travel US. Jot Buel us.crr cesta ‘Year (cents per mille) (cents per gallon) (982-84) = 100 2000 1457 1722 2001 13.25 2002 12.00 1799 2003 1229 1840 2004 13.08 188.9 2005 1229 195.3 2006 13.00 2016 2006 vs, 2060 —10.8% Noe: Excludes government-ipasad taxes and fees SOURCE: inpittonneaietins ogleconomiesenergsh ExHigt Fuel Price History Year Ending December 31 2006 2002 TetBlue Airways | Sen = Gallons consumed (millions) 77 105 Total eost¢$ millions) 352 % Average price per gallon 199 on Percent of operating expenses % H6 laa SOURCES Compt from Jetite’s Anna Reposeo | Industry Factors In the period between 2001 and 2003, when JetBlue"s growth wai jor airlines in the United States were suffering from the adverse attacks, JetBlue had taken advantage of its competitors’ weak: growth. However, by 2004-2005, many of the airlines that were oj bogan to recapture market share, These airlines were able (0 un ing very low fares, taking advantage of the protection of the ban competition from companies that are purposely allowing, themsel nies in bankruptcy right now, such as United and US Air, have their own fares,” said Rick DiLisi, a spokesman for Independk based in Virginia? JetBlue was also affected by the low fares (United) and Delta Air Lines (Delta), both of which were operati tion at the time, on transcontinental routes, American Airlines ( Airlines (Continental), which liad eseaped Chapter 11, also becor ing market share, and launched several new transcontinental fli] Tn 2003, JetBslue launched flights from Atlanta to Los Angek in the United States, Atlanta was Delta's hub, and when JetBlue e! sponded by instantly adding capacity and lowering prices om this other destinations in California, quickly establishing its dominane: other LCC that operated from Atlanta, also responded aggressive! pacity. Eventually, JetB hie was forced to withdraw from Just seven months atter it started its operations there, Legney carriers also launched low-cost subsidiaries of their with the growing number of LCs. Delta launched an LCC called pote directly with JetBlue. Song was also based at JFK, and flew JetBlue. Like JetBlue, Song also offered amenities such as leat entertainment system at every seat, It also served beverages, bute ‘The airline was promoted heavily, and for a few months was sue part of JetBlue’s business on the New York to Florida route. H mance was not satisfactory and it was eventually integrated into April 2006, United also launched an ICC called “Ted” in February 2004. more along the lines of the traditions] LCC model and didl not se entertainment in the form of inflight music and videos. Ted oper western routes in the United States. According to analysts, the su main reasons why United was able to emerge from bankruptey in ‘Song and Ted had an advantage over the other LCCs, in that connect to the flights of their parent airlines, which had far bigs the LCCs. They also shared the frequent flier programs of their gates and landing/takeoTf slots of their parents in large airports, Jeulue also faced competition from LCCs such as Southw Spirit Aislines (Spirit), and Frontier Aielines (Bromtier) Although m the same kind of service as JeiBlue, all of them were well estublis and had loyal customer bases, Southwest especially hud the lowest and was very popular among, passengers who were walling to 21 cheap tickets. AirTran and Spirit operated two classes on their 1 passengers successfully with their low-fare Business Classes. With and Spirit, all the LCCs also offered some form of in-flight enter ss the only other airline thal offered it free. ‘ata peak, most of the ma- fects of the September 11 ed stale to boost its own erating under Chapter 112% cut competition by offer- upley laws. “It's too much Jes to Jose money. Compa- 1cen significantly slashing ee Air, a low-cost airline ofiered by United Airlines under bankruptey protec- inierican) and Continental aggressive about defend 1s at low prices. , one of the busiest routes ered the market, Delta re nite. Halso added routes to in the region. AirTran, an= by leasing new planes to ‘Atlanta in December 2003, in, in an effort to compete ‘ong in April 2003, to com- inany of the samme routes as seats, and a free personal arged for meals and fiquor vessful in capturing a large vever, its financial perfor Delta's mainline service in though Ted was designed food, it provided in-Mlight ed mainly on central and ess of Ted was one of the ehruary 2006. hey allowed passengers to foute networks than any of ents, and had aecess to the 4, AirTran, America West, ne ofthese airlines offered ined in their home ti enamong the LCCs, /¢ up in-flight services for ahs and targeted business he exception of Southwest Jinment, although AirTranInternal Factors The Return to Profitabi ction b Industry Four—Trnspetation When JetPluc had first started operations, it had used new planes and fitfings, which did not cost much in terms of meintenanee. However, a few years later, as the Hleet aged, maintenance costs began to rise. Further, JetBine had to employ more people to meet its requirements, and also give pay increases to people who had been with the airlines for several years. In an ef- fort to differentiate itself from its competitors, JetBlue had also kept services, In 2003, the airline changed the configuration of its A-320 ai row of seals from the plane, in order fo improve legroom for passengers ‘was brought down to 156, from 162%), While this made the aireraft more sengers, it also lowered JetBIue's revenue earning capacity. However, th to cut fuel costs, due to the lower weight of the aircraft, 12005, JetBlue upgraded its seatback televisions. All the new aircraft TVs, and all the old aircraft were retrofitied. At the sume time, the airline planes with XM Satelite radio, and inereased the size of the ovethead bins: Most LCCs gave complimentary beverages and sold food, or serves freshments in strictly measured quantities. But JetBlue offered a rang snacks and beverages in unlimited quantities. Anhough the airline stare cookies, and coifee, over the years it added several items to its line of in As of 2007, the airline offered a range of hot and cold beverages and snacks. It also sold a variety of cocktails at $5 each, Passengers traveling on red-eye Mlights were given complimentary s taining mint lip balm, body butter, an eyeshade, and ear plugs. JetBlue a mentary snack bar in the plane for overnight flights, and passengers were ‘hot towels, Dunkin Donuts coffee oF tea, orange juice or bottled spring Ws landed the next morning, Another issue was the problems that JetBlue experienced with its crall that entered service in late 2005, JetBlue faced a lot of glitches in int craft into ss operations. To hegin with, Embraer delivered the planes) schedule, which caused several flight delays and cancellations. Second, Jacked familiarity with the planes. Third, the Embraer-190 had some ( caused several delayed flights and significantly lowered JetBlue’s nirerati the opinion of some analysts, JetBlue had been too optimistic in placing st the untried Embraer planes. After two consecutive losses in the last quai fest quarter of 2006, several analysts started comparing JetBlue to Peopl a low-cost airline operated in the United States between 1981 and 1987 ‘omfortable for pas nove Was expected refitted with larger Iso equipped all its n the aircraft complimentary re of complimentary ‘out serving chips, fight refreshments several varieties of la amenity kits con- so set up a compli ‘ven complimentary 1 just before they Embraer-190 air- rating the new air utilization rates, In ich a large order for jer of 2005 and the Express Airlines," y Plan Barger announced ‘The main aims of reduction, and re In April 2006, soon after announcing the first quarter loss, Necleman an a recovery plan for JetBlue called the “Return to Profitability” plan (R’ the RTP were revenue optimization, improved capacity managertent, 60% laining the commitment to deliver high-quality service on every Tight. AS a part of the revenve optimization goal, JetBlue announced that ‘number of long-haul flights and shift its focus back to short-lo-mediusn r sad that it planmed to veduee the ratio of long-haul to non-long-havl flights to 1.2:1 daring 2006, JetBlue also said that it would offer fewer tickers al ore tickets at mid-level fares on all its eoutes to improve the mix of fares average fare was expected 10 rise to at least partly rellect the increased 2006, JetBlue increased its lowest transcontinental fare Irom $349 to $394 ht would reduce the tes, The company from 1.5:1 in 2005, very low fares ancl in th revenues. The fuel prives, DuringJette Ales of its yield management case 2) JetBlue also committed itself to condueting a careful scruti pructices to ensure it did not sacrifice revenues to increase the load factor.» ‘Trying 10 increa: the load factor put stress on an airline's operations and also led tc delays as the airlines tied to get as many passengers on board as possible, even minutes befpre a flight's scheduled de- parture, In 2005, JetBlue's load factor was 85.2 percent and the yield per passeoger mile was 8.02 cents. This changed (o a load factor of 81.6 percent and yield per passenger mile” of 9,53 cents in 2006, which was nearly a 19 percent increase in yield per passenger mile over the previous year™ The RTP alsa committed JetBlue to manage capacity better routes, and adding it on high-demand routes. During 2006, JetB}u pacity, instead of the previously projected 28 percent. The capacity route was eut by 15 percent, while the New York—Los Angeles tion in capacity. On the other hand, JetBlue introduced short-haul routes from York to Richmond, and Boston 10 Richmond; and medium-haul Austin, Boston to Austin, and Boston to Nassau. The airline introd high-demand long-haul routes from Burbank (California) to Orla Phoenix (Arizona), On the whole, JetBlue added 16 new destin tainly involved “connecting the dots” between ils existing destina avert JetBlue sold five of its oldest A-320 aircraft during 2006, a 12.A-320 aircraft that had originally been planned for 2007-2008, the airline held on the A-320s were also adjusted, (See Exhibit 7. Jetilue also increased its focus on cost management. The ai distribution east by achieving 80 percent of its bookings throug! highest in the U.S, airline industry It also implemented several init improve fuel efficiency, especially by using single-engine taxi power units, and identifying way's to remove excess weight from U Blue announced it would remove one more row of seats from its total seat number down to 150. Jn addition to this, JetBlue was also putting in efforts to impro members and was trying to accomplish more with fewer full-time belore, The elimination of one row of seats allowed JetBlue to op attendants instead of four, as federal regulations require one fight sengers, JetBlue also began to go slow on hiring people for non Tight scheduling practices were also implemented to control cos! Tor some premium services. For instance. the company ehanged and inereased the fees it charged for flying unaccompanied mi charges on confirmed flights. ‘cutting it on unprofitable ‘added only 21 percent ca- ‘on the New York—Florida ue saw an 8 percent reduc Joston to Washington, New routes fron New York to -ed nonstop service on two jo (Florida) and Boston 10 tions during 2006, which jons using the Emabraer-190 1d deferred the delivery of 10 2011-2012, The eptions ine managed (© control its its website in 2006—the tives to conserve fuel and cbniques, utilizing pround aircralt a late 2006, Jet 320 aircraft, bringing the 1 the elficieney of its erew smployees per aircraft than rate each Might with three {endant far every 50 pas- jerational positions. Bett JetBlue started charging ne of its relund policies, nors and the cancellation exnieny 7 etBlue’sA-320 2007-2008 20092010 | 201120122013, Order Adjustments Fis Orders Original a 7 tee 2 eo Adjusted to 2 ee is 6 0 Change o» © @ 0 6 6 oo Options Original ° 2 2 2 9 15 Adjusted to o 2 4 4 6 6 2B 36 (6) ° 0 a 21a © 3 SOURCE, bnp-investorjeshie.conEXNIBIT 8 ‘A Snapshot of Jetblue’ Quarterly Performance (dollar amount in millions) March 31, June30, |, December 31, March 31, June30, Period Ending On 2006 2006 2006 2006 2007 (Operating Revenues 0 612 on @ 70 Operating Expenses 3 565 si 500 630 Operating Income (loss) 5) a” 41 4 B Other Income (expense) 2 2 40) M 0) Income Tax Expense (benef) (15) n 1 B 2 [Net Income fe} le oy 2 Gin fom dete’: Annet Report 2008 ond 10K flings with the SEC The Customer Service Fiasco (er of 2006, JetBlue loss of $42 million the company to re- [Blue's quarterly ve- compared to a loss, in 2006, compared igher revenues and \d of 2007. The RTP siarted showing results by the end of 2006. In the fourth quai posted! a profit of $17 million on revenues on $633 million, compared to in the conesponding quarter of the previous year. Analysts had expect tur to profitability only in the First quarter of 2007. (See Exhibit 8 for Je sults in 2006 and 2007.) JetBlue ended 2006 with a net loss of $1 million (0820 million in 2005. The operating margin also increased to 5.4 percen to 2.8 percent in 2005." The airline expected that the combination of | ower costs would help it achieve savings of around $70 million by the e JetBlue Faced an- fidwest regions of Even as its Financial performance started showing signs of improvemen other crisis in Februsy 2007, when a snowstorm hit the Northeast and the United States. throwing the airline’s operations into chaos, Because JetBIve followed the practice of never canceling thights, ever hit and the airline was forced ta keep several flights on the geound, it d them off. Because of this, passengers were kept waiting at airports forth Tnsome cases, passengers who had already boarded their planes were ket mac for several hours and nat allowed to disembark. In one extreme insta stranded on board a plane on the tarmac at IFK for 11 hours. However, s line was eventually forced to cancel most of its Nights because of bad we Even after the storm cleared, JetBlue struggled to get back on its fights had played havoe with its systems, whieh were not equipped to de: ‘The airline's poor database management systems resulted im major probl lining up pilots and flight erew who were within federal regulation lini flying hours to operate the resumed flights, In addition, the delays an ised a baggage crisis, with several passengers losing their luggage. Th | oF rebook th when the ice storm sisted from calling ir ight to take off. waiting om the tar= +e, passengers were er allthis, the aie- ther. set as the canceled | with cancellation, sms in tacking and for the number oF cancellations hau aleline had to give mon new flights, all is passengers full refunds if their flights were cancele which added to the con ‘The airline had canceled nearly 1,200 flights in the days following tle storm and it took several days of ils operations fo get back 10 even keel. In contrast, Americ4n, Continental Delta, which had cnnceled flights immediately after the storm broke, werd able to resume op erations more quickly. The Fiasco reportedly cost JetBlue $30 million (whidh included $10 mil lion in refunding tickets for canceled flights, $16 million for issuing thivel vouchers, and $4 million for incremental costs, stich as hiring overtime crews). plications,chive sins Gy Notwithstanding the financial loss, the loss of goodwill was expected to be much more se rious for JetBlue. Traditionally, JetBlue hd liad one of the lowest rates of consumer com- plaints filed with the DOT It also usually ranked high on customer service.” But following. the fiasco, BusinessWeek, a prominent business magazine, pulled JetBlue off its list of Cus- tomer Service Champs, published early in 2007. JetBluc was to Have held the #4 spot on the list compiled from consumer responses from the first half of 2006 ‘Some analysts felt that JetBlue had taken its low-cost philos to set up the necessary systems to support its rapid growth. Fotlo Fished apology letters in the New York Times and USA Today, arn‘ also apotogized during his appearances on the Late Show with D| Network, and on YouTube, “We should have acted quicker,” said called the Port Authority quicker. These: were all lessons learned Jn late February 2007, Neeleman unveiled a “Customer Bill o airline's policy on compensating passengers for delays and cancel ditionally, JetBlue launched a new database management system t gage belles, and upgraded jts Web site to allow online re-booking headquarters were being trained to help out with operations atthe tions. JetBlue also became more proactive during bad weather c Jowing the storm, In Maren 2007, when bad weather hi the East Cs cone af the first airlines to cancel flights to and fern airports on th portedly canceled nearly 230 flights during this time, ‘According to analysts, JeiBlue’s handling of the events fotloy g0 4 long way in redeeming it in the eyes of the public. “The si ‘company needs to show in a erisis is that it cares. That's not a fe Bruce Blythe, the CEO of Crisis Management fiternational*:*. ducted after the February 2007 crisis also showed that JetBIne’s continued (0 remain high. The erisis and its repereussions were JetBlue's already strained finances. But JetBlue managed 10 retus fond quarter of 2007, afiera fist quarter loss of $22 million, hy too far in having Failed ig the flasca, JetBlue pub- ing other places. Neeleman wid Letterman on the CBS feeleman. “We should have om thal experience.” Rights,” which laid out the ations (see Exhibit 9). Ad- help it track crew and bae- Employees at the airline's ‘itpost in emergency situa ditions in the months fol- astonce again, JetBlue was ‘Bast Coast. The airline re ng the crisis was likely to \gle most importan ling. It's a behavios ‘everal consumer polls con- wopularity with passengers pected to puta burden on n to profitability in the sec~ More Turbulence Ahead? ‘Analysts felt that the appointment of Barger as the new CEO w: ‘According to them, the fresh leadership was likely to help JetBh and provide it with a positive direction for the future, They also feted considerably trom Neeleman in his leadership style. (Barger panized ian Neeleman, and much more focused on operational enjoyed strategizing.) However, JetBlue was likely to faee many more challenges in uring the first few years of operations. The FSAs, most of whi ready 10 defend their turf against LCs, Delta had launched a bi 1! niksgiving weekend in 2006, ti nthe industry In addition to this, JetBlue was likely to face competition frm other LCCs such as Air Tran and Frontier, which had formed an alliance in late 2006, to cbnobine their marketing and mileage programs.’ Competition was also expected from new alslines like Virgin America, ‘which had been launched amidst alot of buzz in August 2007, and was positioned a8 a “value cartier. Like JetBlue, Virgin America also tried to attract passengers with amenities such as satellite TY, mood lighting, onboard self-service mini ar, and meals-on-demand. Virgin ‘Atmerica had announced that it expected to expand 10 10 cities wiflin a year of operation and lo up t 30 cities within five years. is ikely to benefit JetBlue. through its growing pains oinied out that Barger dif was thought to be more or. ‘issues than the latter, who the Future thaw it had faced recovered by 2007, were p sale of discounted tickets ering a price war| 20-14 Jthlue’s Customer Bill of Rights INFORMATION JetBlue will notify eustomers of the following Delays priorto scheduled departure Cancellations and their cause = Diversions and their cause CANCELLATIONS All customers whose flight is canceled by JetBlue wil, at tho customer's opti find or reaccommodation om a future JetBlue flight at no additinal charge or cels a flight within 12 hours of scheduled departure und the cancellation is Irreguluity JetBlue will also provide the cwstomer with a Voucher valid for Blue in the amount paid by the customer forthe roundtrip (or the oneway ti DEPARTURE DELAYS 18 Castomers whose fight is delayed prior to scheduled departure for {1:59 ‘wollable regularity are ended to a $25 Voucher good for Future travel or 1 Customers whose fight is delayed prior to scheduled departure for 28:59 tuollable rregulaity ao entitled to » $50 Voucher good for future travel on 1 Customers whose fight is delayed priar to scheduled departure for 45:59 ttollable Inegulaity ae entitled to a Voucher good for futore travel on Je Did by the customer forthe oneway’ trip. Castomers whose flight is delayed prior to scheduled departure for 6 or Controllable Lrrogularity are entitled © a Voucher good for future ta amount paid by the customer forthe roundtip (or the eneway tmp, dauble OVERBOOKINGS (As defined in Jetblue's Contact of Carriage) ‘Castomers who are involuntarily denied hoarding shall reeive $1000. ONBOARD GROUND DELAYS Foresters who experience un onboarel Ground Delay for more than S hours, J ‘essary action so that customers may doplansJeeBlue will also provide customers ‘boat Grou! Delay with food andl drink, access to restrooms and, as necessary, receive a fall re I ettue ca toa Controllable joe travel on oul) ours due a Com TeeBue, ours dae to Con JetBlue. ours due to a Cone vein the amous pe hours due 10 2 ‘on FetBue in the . iu wil take nee pesiencing.an on redial treatment Arrivals: ‘4 Customers who experience an onbeatd Ground Delay on Amtival for 3 scheduled arival time ate entiled to a $25 Voueher good for future travel 59 minutes after Jesu, Customers who experience an onboard Ground Delay on Arrival for I-15 ‘led arrival ime are entitled a $100 Voucher good for future travel on J Customers who experienee an onboard Ground Delay an Arrival for 22:5 ‘led arrival tie are entited to Voucher good for foture travel on JetBlue, by the customer forthe oneway tip, oF $100, whichever is preate. hours afer sched fv the amount paid mone hours aftr 4 Customers who experience an onboird Ground Delay on Arrival for 3 heim the amount schestued arrival time are entitled toa Voucher good for fature travel on Je aid by the customer for the roundup (or the oneway tip, doubled) Departures: 8 Customers who experience an onboard Growl Delay on Deparure for 3 ted tot $100 Voucher good for Faure travel on JetBlue. ‘Customers who experience an ona Grown Delay on Departure or a Lihed to & Voucher good for future travel on Jeisue in the amount pal by roundtrip (or the oneway trip, doubled) 59 hones we ent pore hours are en ye custome forthe SOURCE wth cam, acceseed 200%Rising fuel costs were also a major concern for JetBlue in th increasing operational expenses as the airline's fleet aged and furure, as were potentially perations expanded. Ana- lysis also thought that JetBlue’s growth would dilute the close-kalit culture that the company enjoyed in its initial years, However, many industry experts still believed that the airline would be able to avercome most of the hurdles it faced and enj future. “A Smokeless Hest JetBlue Founder David Neen...” Rrtane May 28, 200 2. Chris Zappone, “FexBlve Struggles with “Growing Psins,”” imoney.cnn com, April 20, 207, 3. the Feral Aviation Adminstraon isan agency ofthe United Sates Department f Traraporaton with the ashy to ee ‘ie and oversea aspects of civil aviation inthe Lied Sates. 4, Scutnwest Aiines setup by Herb Kelleher [Twas hep ‘over of low-cost lites in the Usted States. The sine was eadgurtered im Dallas, Texas, and was known for its prof ‘eility record (thud posted profs for the 34th consecative yearn Jy 2007) 5, Liyn Drown, "A Smokeless Herb JetBlue Founder David ‘Neslemsn .” Forme, May 28,2001 6. Alshus fadusttio is Leading mafoctrer of irra in the Work It wes esiblisied in 1970 and J headqianered in France 7. Hecing ie 4 US-based manufacure of aera. Boeing and ‘Aina he fo bigest aviation companies in the word 8, Flighus operating between 9:00 pum. and 5.00 an. eal time seca red-eye flights te North America, el-eye Highs fly From the west othe east cot, capmahzing tbe tne-rone ‘changes. 9. Amy Ts, “Thing of Taking OW with JetBlue?” Busines Moot. Apel 5, 2002 10, The percentage of accompshod gas in elaiono scheduled Aight. tn oir words it is the parentage of suhedled Migs ‘hor were not canceled 1, Paul C186g6, “How Wall Your Company’ Adapt?” Fase Com pee, Noveniber 2001 12, "Big Alehnes Benefit from Bailout Bil sue 7, 2000 43, Pa C. suoge, “How wan Your Company Adapt? Rasr Com ‘pany, November 2001 14. Amy Tso, “Thinking of Taking O1F with eve?” Musinss ees. Apri s, 2002 15. “tive IPO Soar” mnoy-ean cons, Ap 12, 2002 16, ~kaBlue Closes Live TY Aemisition,” Commnnatn To, September 3, 2602 7. An sinine nasey mes acved a by dividing operating ex- ‘ene by avilable Set rales, 18, Jaue Airways Anal Report 2002 19. timbre, a Hrarhased ainerall ouwuticwrer, specialize a swanufaauriagregonal es. 20, Mictue! Hobelin, “Jae Lands Expansion Plans.” Forbes, Jae 10,2005, 1. Heyn Browe, sewn tanpavernet 2. 2 23. 2. 25. 6 mh, 28, 29. 30. 31 Grace Wong, signifieant growth in the Jerse Aieways Anni Rey eiBlue Airways Aanoal Re {etBlue Aways Anus Re fete Stays in Black" JetBlue Aways Anaual Re JeBlue Airways Annual Re Jeiltue Ainoays Auual Re Chapter {1 se ehapier of ‘whic permis eoreun2aton United Sates, Chapter 11 bs ‘ess, whether organic forinavid’ with secre ‘caret debs of test $1.01 net ued by corporate en Chis Iskore, "Low Fare be 24, 2008 1 2095, ‘ned Sues Bankrapicy Code. under the bankruptcy ls ofthe rkrupiy is availabe to ay bus pri Gr ole pice ef at est $336,900.00 ives” moneyenncom, Noves com, November 13, 2003 nized ar wavel with ts low fares, staf Within ive year, he i follar i sles, However, People 1985 afer it acquired several sir le icing aggressive competition ally merzed wath Continental res was ofen sited by ine ln nine rowing ast and ouch eating eopecty that is actualy suslomer focus, ard eneise line had veehed ome aon Express’ troubles stated in lines in the United fram the FAs I as even 1987. The ene of People dusty analysis as am example ot being ale wo sua the The percentage ofan incr stig “The average amin ne pas JeeDe Airways Anal Rey ger pays ly one le 0M pice a,” money.con com, ebay 20 2007, 1 2006, the compan ate passengers, which wa the Soon, at ar sire presidt (Soiree: “Iie Fh Fonte, Fetmacry 15.27.) “Thesirlne featured cosisten tional Airline Quality Rt 203 aah frst 2004, oni Acoma pr 1,00 ir Festi he ihr. bind for Cannel Express called Ex ‘Sane on Pie Fo 8 hous ty ine University ef Nebraska's 1s (AQRD siny every year since 10s! 2008, Iwi te Read ‘eChoice Avo fram Con Nast Traveler for Five yas ws 1) 2006, andl ranked! ish i every measured extegory in the ine cainfaction ratings sty condicted by J.D. Power & |eT 40. a SECTION BD thulustey Hour —frausportation “An Extrordinay Stumble ut Jeve:” Business Wook, March 5, 2007 alse Management International was an AUana-bised gobs! ‘oman fir tht specialized sn helping engaizatons p= pte Fr and mage the unespectd by offering sratgleetiss Pianagement planing an elate consuling services. 2 43. Cite Satter, Lessons from the mac.” Fast Company May 2007 Under the allan, passengers could use their frequen Mer miles on bat he airlines. J, Fessica Diekler "Delays Thvas ng Atmetic's Fst Fgh.” money cnn com, August 8, 2007