JetBlue: Business Strategy Essay Sample
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Introduction of TOPIC
- Current Performance
JetBlue Airways Corporation is a passenger airline based in New York. Started in 1999 by David Neeleman, it operates primarily on point-to-point routes. With approximately 550 flights scheduled on a daily basis, it serves a total of 53 destinations in more than twenty states, in addition to the US territory of Puerto Rico, Mexico and the Caribbean. On the basis of passenger revenues miles, it is rated as the eighth largest passenger carrier in the US (Annual Report, 2007, p.1).
In its 2007 annual report (p.2), the company states that its goal is to “maintain JetBlue as an innovative, high quality, low cost passenger airline that provides competitive fares for our customers. We intend to continue to execute a disciplined growth plan that takes advantage of our competitive strengths.” When Neeleman founded the company in 1999, he founded it with the vision of “bringing humanity to air travel” (JetBlue, website, 2008).
To achieve this goal, the firm has adopted a grand strategy of growth at the corporate level, and generic strategies of differentiation and overall low cost leadership at the functional level. The key planks of this strategy include offering an exceptional quality product and service that is summarized under the “JetBlue Experience,” network expansion, low air fares, pursuit of low operating expenses, and investment in new and more efficient planes (Annual Report, 2007, p.2).
The company aims to achieve the goal of delivering a superior quality by offering friendly and customer-centered service, use of new and roomy planes that have leather seats, personalized satellite TV, premium beverages and brand name snacks. To achieve its network expansion goal, the company plans to increase the number of routes it serves within the cities it serves, between the cities, and to new markets where it currently does not have a presence. In order to ensure that it has only the newest and most efficient aircraft, the company runs a fleet that comprises of Airbus A320 and Embraer 190. This fleet has an average age of just 3.1 years, making it the youngest fleet in the US airline industry (Annual Report, p.2-3).
- Strategic Managers
At the top of the company’s organizational structure is the Chief Executive Officer (CEO), David Barger. The CEO is also a member of the board of directors. Edward Barnes is the Executive Vice President and Chief Financial Officer. Another senior executive is the Chief Operating Officer who is also the President, a position that is currently held by Russell Chew. James Hnatt is the company’s Executive Vice President, Corporate Affairs, General Counsel and Secretary. The other executive at the top level of the organization’s hierarchy is Robert Maruster, who is the Senior Vice President in charge of Airports Customer Services (annual report, p.22).
3. The External Environment:
- Economic Forces:
The company faces a severe economic environment, arising largely as a result of the sub prime mortgage crisis. As Hoover (2008) states, the economic downturn that is being experienced in the US economy is causing people to travel less and is hitting low cost airlines much harder. This is because low cost carriers such as JetBlue focus more on leisure travelers who are unwilling to pay more unlike business travelers who mostly frequent the major carriers and are likely to pay more even during economic hardships.
- Technological Forces:
Rapid technological advances are shaping the operations and processes of airlines. For example, at JetBlue, there is a widespread use of internet bookings, ticketless travel, “and laptop computers in the cockpit” (Annual Report, 2007, p.5). These are bringing about sources of competitive advantage such as enhanced efficiency and lower cost operations.
- Political Legal Forces:
The Open Skies Agreement between the US and Europe which was operationalized in March of this year allows free movement of aircraft between US cities and European cities. This presents opportunities for US airlines to expand their networks beyond the US to Europe but also increases the number of competitors in the industry.
According to Hoovers, there are about 3,000 competitors in the entire airline industry. Collectively, they have total revenues of about $120 billion. The industry is highly concentrated, with the largest 12 airlines controlling 90% of all industry revenues
Depending on their size and area of coverage, airlines can be classified as “national”, “regional” or “major.” Major airlines are those with revenues in excess of $1 billion. National airlines have revenues ranging from $100 million to $1 billion; regional airlines have revenues below $100 million, and other small airlines have revenues range between $5 and $50 million.
There currently are sixteen major airlines, with the main ones including the American Airlines, United Airlines, US Airways, Continental Airlines, Northwest Airlines, and Delta Airlines.
JetBlue’s annual report (2007) states that there are a total of five regional airlines, examples of which include Sky West Airlines and Mesa Airlines. Jet Blue operates in the low cost airline segment, which has only four competitors, the most notable of these competitors being Southwest Airlines. With consolidation increasing in the industry, the industry concentration is expected to increase even further.
Sources of competitive advantage in the airline industry include: the prices of the air fare, the safety record of the airline, customer service, the kind of airplanes used, code sharing relationships, the airline’s capacity, code sharing relationships that the airline has, its frequent flyer programs, flight schedules and in-flight entertainment systems (annual report, p.5).
Just like in any other industry, Porter’s Five Forces are also operational in this industry. These forces include the bargaining power of the suppliers, the bargaining power of the buyers, the threat of substitutes, industry rivalry, and threat of entry.
With increased deregulation of the airline industry, entry into the industry has become easy and free, making the threat of entry high. However, other factors such as the asset specificity of the industry, high capital required to set up shop in the industry, and high exit costs that occasion high exit barriers make the threat of entry less significant. Due to the high switching costs of the suppliers, the bargaining power of the suppliers is high. Industry rivalry as well as competition is intense.
According to JetBlue’s annual report for 2007 (p.15), the company had debts amounting to $3.05 billion as at the end of last year. These debts make up about 75% of its capitalization.
The firm targets fare-conscious business and leisure travelers. Customers for its in-flight entertainment subsidiary Live TV consist of other airlines, which at present are seven.
- Labor Unions:
None of the employees of the company is unionized. According to JetBlue’s annual report (p.10), “We believe that a direct relationship with JetBlue leadership, and not third-party representation, is in the best interests of our employees.”
Jet Blue is subject to regulation by various government bodies such as the DOT, the FAA, and the TSA. The FAA regulates flight operations. It is concerned with adherence to licensing requirements by pilots, dispatchers and mechanics. It is also concerned with ensuring that flight attendants are properly certified. It also ensures that airlines keep to licensing requirements specifying which specific airports or routes they are to operate in and that they use only the licensed equipment to do so (annual report, p.11).
The TSA oversees issues related to civil aviation security such as “passenger and baggage screening, cargo security measures, airport security, assessment and distribution of intelligence, and security research and development” (annual report, p.12). In addition to being subject to federal government bodies, the airline is also subject to regulations imposed by the state governments. Some regulations which the airline must uphold include the Airport Noise and Capacity Act of 1990, the High Density Rule, the Civil Reserve Air Fleer Program, and the Communications Act o
f 1934. In addition to the US federal and state governments, the
4. The Internal Environment:
The company’s main marketing goal is to attract and retain new customers. Its value proposition, exemplified by the “Jet Blue Experience”, seeks to provide an exceptional quality air travel at prices that are low, accompanied by good customer care.
The marketing mix comprises of various elements, which include promotion, pricing, distribution and the product. In the promotional element of the marketing mix, JetBlue makes use of advertising, public relations, and sales promotion. Advertisements are carried out in the newspapers, on radio, on TV, and through outside forms of advertising such as billboards in high traffic locations. In addition, the company does advertising through the internet. Other promotional strategies used by the company include word of mouth marketing, multi-marketing techniques, and participation in community activities aimed at enhancing brand awareness (annual report, 2007, p.8).
The company utilizes direct distribution channels in selling its tickets. More than 75% of all its flight bookings are done through the internet. Apart from internet bookings, the company also distributes its tickets through contracted agents, who make up 16% of all the company’s ticket sales. Other distribution channels utilized by the company are Global Distribution Systems (GDS’s) and Online Travel Agencies (OTA’s). Examples of online travel agencies used include Expedia, Travelocity and Orbitz. The company also has a vacation website through which it sells vacation packages (annual report, p.8).
Under the pricing element of the marketing mix, the company’s pricing strategy is aimed at stimulating demand through low prices. These prices are about 30% cheaper than those offered by competitors. Advance purchases of tickets receive price discounts so that the pricing structure will vary depending on how soon the ticket was bought. In this regard, the company has a 21day fare, a 14 day fare, a seven day fare, and a three day fare (annual report, p.9).
- Human Resource Management:
The company’s human resource policy is to attract the best possible people that the industry can offer and to retain them. Human resource functions of recruiting, selecting, training, motivating, and compensating employees are therefore geared towards attracting the best and retaining them (annual report, 2007, p.9).
The company uses behavioral interviews and assessments to select employees. To motivate its employees, BlueJet offers them a raft of benefits, a uniform allowance, flexible working schedules, and pay during training. The company also offers a competitive pay package which includes a base pay and benefits such as stock options. This compensation package undergoes an annual review in order to make it as competitive as possible (annual report, 2007, p.9-10).
Training is also provided for all its employees, with leadership training being targeted at managers and supervisors and technical training with an emphasis on safety is offered to its pilots, engineers, cabin crew, and reservation agents, among others. The company also encourages two way communications between management and employees, and employee satisfaction and attitudes are assessed through employee satisfaction surveys. An in-house magazine, monthly meetings and orientation of new employees are also used to foster communication between employees and management. At present, the company has over 2,700 full time employees and over 2,800 part time employees (annual report, 2007, p.10).
In 2007, the company returned to profitability after three consecutive years of losses. It had operating revenues of $2.8 billion and a net income of $18 million. It’s basic and diluted Earnings per Share (EPS) stood at $0.10 (annual report, p.25). According to Hoovers, it has a price / sales ratio of 0.43, a price / earnings ratio of 169.33, a price / book ratio of 1.0 and a price / cash flow ratio of 5.64. These are in comparison to industry averages of 0.24, 11.38, 0.80 and 2.99 respectively.
- SWOT Analysis:
The company has several strengths. These include low operational costs, a strong brand, a strategic location in New York’s metro area, and a high quality human resource (annual report, 2007, p. 4).
As far as low operating costs are concerned, the company has the lowest costs among all the major airlines. This is due to a number of reasons; including the fact that it has a high aircraft utilization rate, extremely low distribution costs, and a highly productive workforce. The fact that the airline operates only two kinds of aircraft means that it also reaps a lot of cost savings due to lower spare parts inventories, lower training expenses, and simplified maintenance and scheduling (annual report, 2007, p.3).
The company’s brand is widely recognized. JetBlue is highly regarded as one of the finest purveyors of high quality, low cost travel. Last year for example, as recognition of this, the company received the Conde Nast “Best Domestic Airline” Award in addition to the “Best Domestic Airline for Value” award and was rated first in the 17th annual National Airline Quality Ratings. A 2007 survey by a leading research body ranked the airline best in customer satisfaction (annual report, 2007, p.3).
It has well trained employees who are committed to the company’s service-oriented culture. Its organizational culture, built around the company’s five values of “safety, caring, integrity, fun and passion” encourages teamwork, extensive communication, participation and innovation, which are all key ingredients of success. The company also enjoys strong leadership (annual report, 2007, p.4).
The strategic location of the company’s hub at New York’s JFK Airport provides it with ready access to 21 million customers, another 7 million within a radius of 15 miles from the area (annual report, p.4).
The company faces threats such as intensifying competition. According to its annual report (2007, p.13), most of the airlines that the firm competes with are larger, have more resources, and enjoy a better brand recognition than JetBlue. This competition is carried out on the basis of price or service enhancements.
A major weakness of the firm is its weak financial position. Having made losses for three consecutive years, the firm returned to profitability only last year. It has huge debts for instance, which make up to 75% of its capitalization.
5. Strategic Factors:
In the airline industry, the strategic factors include: the prices of the air fare, the safety record of the airline, customer service, the kind of airplanes used, code sharing relationships, the airline’s capacity, code sharing relationships that the airline has, its frequent flyer programs, flight schedules and in-flight entertainment systems (annual report, p.5).
There are various levels of strategy in any organization. These levels include the corporate level where an organization can pursue a grand strategy of growth, maintenance or renewal. There is also the functional level where the organization can follow a generic strategy of differentiation, overall low cost leadership, or a niche strategy.
At the corporate level, JetBlue follows a grand strategy of growth. According to the Ansoff Matrix, an organization has four growth strategies at its disposal. These include the market penetration strategy, the market development strategy, the product development strategy and the diversification strategy.
The market penetration involves increasing the usage of current products among existing markets. This can be achieved through increasing the distribution networks in current markets or through extensive use of the elements of the promotional mix. From what has been outlined in the preceding sections, it can be seen that this is one strategy that JetBlue uses.
The market development strategy involves targeting existing products at new markets. This can be done through geographical expansion or through adoption of new distribution channels. It can also be accomplished through targeting new segments within the existing market that the firm does not currently serve. In its annual report (2007, p.4), the organization states that last year, it extended its services to “five new destinations including Chicago, San Francisco and Nantucket. Our primary network focus during 2007 was on ‘‘connecting the dots’’ and adding flights between our existing destinations. During 2007, we also expanded our network out of Orlando and in Boston.”
Product development involves coming up with new products which are then targeted at existing markets. Some of the innovations that the firm has come up with include its vacation package and its personalized satellite TV system for in-flight entertainment. Product diversification on the other hand involves coming up with new products and targeting them at new markets. As a strategy, the firm has not made much use of this strategy.
At the functional level, the organization makes use of the generic strategy of differentiation. This involves distinguishing itself through a superior quality product. Apart from the generic strategy of differentiation, the company also makes use of the generic strategy of overall low cost leadership.
Some other specific strategies that JetBlue has also made use of include the formation of strategic alliances. For example, in its annual report (2007, p.4), the company states that it has entered into a strategic partnership with Aer Lingus, an arrangement that allows JetBlue to directly sell its flights on its partner’s website. The company has also entered into another alliance with Cape Air in which its customers can book “travel on a single itinerary between 21 JetBlue cities and four Cape and Island destinations in Massachusetts” (Annual Report, 2007, p.4).
7. Revision of Mission, Objectives and Policies:
As stated earlier, the company’s mission is to bring humanity to air travel. It aspires to achieve this by becoming an innovative, high quality, low cost passenger airline that provides competitive fares for our customers.
8. Evaluation and Control:
Given the current environment which the firm faces, where a harsh economic environment coupled with increasingly stiff competition that is based on price, the company’s source of competitive advantage that is based on a low price may no longer be sustainable. Since most of its clients are leisure travelers, a recessionary economy will most definitely hit hard this segment, causing them to cut back on travel, which will hurt the firm. In addition, given that the firm has a weak financial base, its low cost model may not be suitable since with the increasing price competition in the industry, it may not be able to fight price wars and this would lead to an erosion of its competitive advantage.
Under the circumstances, it would be better for the firm to stop competing on the basis of price and instead use its premium quality as a source of differentiation. Since it already has established a reputation of quality judging by the numerous awards it received last year as outlined in the previous section, repositioning of the company towards this end would be easy. Such a strategy would allow it to adopt a premium pricing strategy and to target higher profile customers such as business travelers and this would enable it to grow its margins and revenues.
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