A Change of Guard at JetBlue

IN MAY 2007, JETBLUE AIRWAYS INC. (JETBLUE), a low-cost carrier (LCC) based in NewYork, announced a new leadership structure for the company. David Barger (Barger),

President and Chief Operating Officer (COO) of the airline, replaced David Neeleman

(Neeleman) as CEO. Neeleman, who founded JetBlue in 1999, had been its CEO ever

since. Under the new leadership structure, Neeleman was designated as the non-executive

Chairman of the Board. Russell Chew, a former Federal Aviation Administration (FAA)3 ex-

ecutive, took over as the COO; Barger retained his position as the President of the company.

Neeleman said at that time that the board’s suggestion that he step down had nothing to

do with the service breakdown that JetBlue had experienced in February 2007, when the north-

east region of the United States had been hit by a severe snowstorm. The airline’s slow reac-

tion to the adverse weather had left thousands of passengers stranded at airports. In addition

to having serious financial repercussions, this fiasco harmed JetBlue’s image as a customer-

friendly airline and tarnished its reliability record.

20-1

C A S E 20JetBlue Airways:GROWING PAINS

S. S. George and Shirisha Regani

“We don’t spend tens of millions of dollars telling people how cool we are. We put low fares out there and let them tell us.”

DAVID NEELEMAN, THE FOUNDER AND THEN CEO OF JETBLUE, IN 20011

“I do think they [JetBlue] had some growing pains. They were growing so fast

they didn’t have systems and redundancies in place.”

MICHAEL MAGIERA, MANAGING DIRECTOR AT MANNING & NAPIER, A MONEY MANAGEMENT FIRM THAT OWNED JETBLUE STOCK, IN 20072

Copyright © 2008, ICFAI. Reprinted by permission of ICFAI Center for Management Research (ICMR), Hyderbad,India. Website: www.icmrindia.org. The authors are S.S. George and Shirisha Regani. This case cannot be reproducedin any form without the written permission of the copyright holder, ICFAI Center for Management Research (ICMR).Reprint permission is solely granted by the publisher, Prentice Hall, for the book, Strategic Management and BusinessPolicy—13th Edition (and the International and electronic versions of this book) by copyright holder, ICFAI Center forManagement Research (ICMR). This case was edited for SMBP—13th Edition. The copyright holder, is solely respon-sible for case content. Any other publication of the case (translation, any form of electronics or other media) or sold(any form of partnership) to another publisher will be in violation of copyright law, unless ICFAI Center forManagement Research (ICMR) has granted an additional written reprint permission.

Analysts greeted the leadership change positively. For several years after it was set up, Jet-

Blue had been one of the most successful airlines in the United States, rivaling Southwest Air-

lines (Southwest)4 in profitability and growth. However, it began facing various problems, both

internal and external, in 2005–2006. Several analysts were of the opinion that JetBlue’s growth

in its early years had been too fast and unsustainable in the longer term, and that it was because

of this that things started to come undone at the airline when the business environment changed.

20-2 SECTION D Industry Four—Transportation

Background

Business plans for setting up JetBlue were developed by Neeleman, along with lawyer Tom

Kelly, in 1998. Neeleman raised $160 million5 in capital from top investors such as Weston

Presidio Capital, J.P. Morgan Partners, and Soros Private Equity Partners, and founded the

airline in February 1999.

In September 1999, JetBlue was awarded 75 landing and takeoff slots at the John F.

Kennedy International Airport (JFK) in New York, which was to serve as its base. The airline

started commercial operations on February 11, 2000, with an inaugural flight from JFK to Fort

Lauderdale airport in Florida.

Business ModelJetBlue’s business was guided by five key values—safety, caring, integrity, fun, and passion.

From its inception, it was “anti-establishment” and went against many of the accepted norms

of the aviation industry. One example of this was its choice of New York, the biggest avia-

tion market in the United States, as its base. LCCs in the United States typically avoided op-

erating from New York because flying out of LaGuardia and Newark, the city’s two domestic

airports, was very expensive. Most domestic operators avoided JFK, as it mainly served

international flights, and was also farther from Manhattan than the other two airports.

Neeleman, however, reasoned that because JFK handled mostly international flights, JetBlue

would face very little competition from domestic flights at that airport.

Positioning

From the beginning, JetBlue was positioned as a colorful and fun airline. Although it was des-

ignated as an LCC; it was in fact a “value player.” The airline combined low fares with sev-

eral value-added services that improved customer service without adding to operating costs.

All the planes operated at JetBlue were fitted with leather seats instead of cloth ones.

Leather furnishings cost twice as much as cloth ones, but also lasted twice as long. Unlike typ-

ical LCCs, JetBlue provided assigned seating and allowed passengers to choose their seat on

the plane whenever possible.

JetBlue served light snacks such as chips, cookies, and crackers, and coffee and canned

drinks, which cost a fraction of a regular meal. The snacks were complimentary, unlike in

LCCs that sold food to passengers. JetBlue estimated that it saved about $3 per passenger by

choosing to serve sacks instead of regular food.

JetBlue provided free personal satellite television to all the passengers. The television sets

reportedly cost only about $1 per passenger per flight—one-fourth the cost of a meal.

Operations

JetBlue’s operations were the key to its low costs. JetBlue did not use old planes, but oper-

ated a fleet of new Airbus A-3206 aircraft. The Airbus A-320s were chosen over the more pop-

ular Boeing-737s7 (which Southwest used) because although they cost more initially, they

CASE 20 JetBlue Airways 20-3

would be easier to maintain and were more fuel-efficient. The planes also came with a five-

year warranty. Operating a uniform fleet of planes was also economical, as it reduced costs

significantly in the areas of pilot training, maintenance, and spare parts.

All the aircraft were configured in a single class, with a uniform level of service. This also

allowed JetBlue to put in the maximum number of seats possible in its planes.

Initially JetBlue did not try to fly too many routes, concentrating instead on the Northeast,

the West Coast, and Florida—routes for which demand was high, and it was easy to undercut

the fares of rivals. In addition, JetBlue also flew to secondary cities that were neglected by ma-

jor carriers.

JetBlue flew mainly to secondary airports that did not handle too much air traffic. In this

way, the airline was able to avoid congestion to a great extent and to establish a good on-time

record. (In 2001–2002, JetBlue had an on-time performance record of 80 percent, as against

the 72 percent for the top ten airlines in the United States.) Besides, secondary airports offered

better business terms than the main ones.

JetBlue tried to operate the maximum possible number of flights per day. Its average turn-

around time was 35 minutes, which was comparable to Southwest and much lower than that

of full service airlines (FSAs), which took an hour or more to turn around. JetBlue also oper-

ated several “red-eye” flights.8

JetBlue flew only point-to-point flights, avoiding the hub-and-spoke model used by ma-

jor carriers. This helped it avoid the complications that resulted from connecting flights and

passenger transfers, and the airline was also able to operate with far fewer airport staff.

JetBlue used electronic ticketing extensively. Typically, more than 70 percent of the tick-

ets were booked through the airline’s Web site. JetBlue also cut down on the costs of back-end

operations by allowing its call-center operators and customer service executives to work from

home, using voice-over-Internet protocol.

Automation and the effective harnessing of technology further helped cut costs. JetBlue

was the first airline to introduce paperless cockpits, where the pilots were equipped with lap-

tops to access flight manuals and make the requisite calculations before takeoff. This saved be-

tween 15 and 20 minutes in takeoff. JetBlue was also one of the first airlines in the United

States to allow automatic check-in and electronic baggage tagging. Automation helped JetBlue

maintain a lean workforce (labor costs were historically the highest component of an airline’s

operating costs). In 2002, JetBlue’s cost per available seat mile was 7 cents, which was 25 per-

cent less than the average of the major carriers. JetBlue was thus able to offer fares that were

typically 30 to 40 percent lower than other airlines.9

JetBlue was also one of the few airlines in the U.S. airline industry that had a non-unionized

workforce. All the employees from the CEO down to the lowest ranking ones were called

“crewmembers.” The top management tried to create a family-like atmosphere at the airline.

JetBlue looked for a positive attitude in its employees, as they were often called on to do

things that were outside their job descriptions. For instance, JetBlue did not employ cleaning

crews to clean the flights—the flight attendants and sometimes the pilots were expected to

pitch in to get the flight ready for the next takeoff. Airport ground staff also loaded or unloaded

baggage from the flight. However JetBlue rewarded employees frequently with bonuses and

profit sharing programs. Initiative was encouraged, and all employees were free to suggest

ideas to cut costs and improve operations.

Because of the positive work culture, when customers flew JetBlue, they were impressed

by the energy and attitude of the employees.

JetBlue also went out of its way to avoid inconveniencing customers. The airline had

a policy of never canceling flights, (all through the early 2000s, JetBlue had an average

Culture

20-4 SECTION D Industry Four—Transportation

Growth and Expansion

JetBlue was founded during one of the most turbulent times in the history of civil aviation in

the United States. September 11, 2001, terrorist attacks had hit the industry hard and any of

the major airlines had either gone into bankruptcy protection, or were on the verge of doing

so. In 2001, JetBlue planned to launch an IPO to fund its expansion plans.11 The IPO had to

be postponed in light of the terrorist attacks, but JetBlue continued with its expansion plans

using its share of the $15 billion bailout ($5 billion in direct compensation and another

$10 billion in loan guarantees)12 the U.S. government granted the aviation industry, and a

fresh infusion of funds from its original investors.

JetBlue was one of the first airlines to take a proactive approach to increase safety on air-

craft. It was the first national carrier to install bulletproof, deadbolted cockpit doors on its air-

craft, even before the FAAmandated their use. The airline also installed screens in the cockpit

so that pilots could see what was happening in the passenger cabins.

JetBlue’s message to customers after September 11 also set it apart from other airlines. It

ran a newspaper advertisement that said: “We know you need time to heal. JetBlue will be here

when you’re ready to fly again.”13 For a few weeks after flights resumed, JetBlue aircraft flew

almost empty from New York to the 17 destinations it served at that time, but the airline did

not scale back operations.

Soon after the September 11 attacks, JetBlue’s management identified the routes on which

other airlines had cut capacity. For instance, most of the major airlines had cut down their

flights from New York to Florida. JetBlue boosted its services to Florida, adding seven new

flights per week on this route within a few months. JetBlue also ordered three new A-320 air-

craft in 2001. JetBlue was one among only three airlines in the United States (the other two

being Southwest and AirTran Airways [AirTran]) to post a profit in 2001 (The company posted

a profit of $38.5 million, up from a loss of $21.3 million in 2000.)14 (See Exhibit 1 for Jet-

Blue’s annual income statements from 2002 to 2006.)

InApril 2002, JetBlue launched an IPO of 5.87 million shares, raising $158 million.15 That

year, JetBlue started expanding operations on theWest Coast, usingLosAngeles as a second hub.

In late 2002, JetBlue acquired 100 percent ownership of LiveTV, the company that main-

tained its in-flight satellite TV channels, for $41 million in cash and the retirement of $39 mil-

lion in debt.16 It also started a customer loyalty program, TrueBlue, in mid-2002, collecting

nearly 40,000 members by the end of the year. In 2002, JetBlue’s cost per available seat mile

(CASM)17 was 6.43 cents, lower than all the other major U.S. airlines, which reported an av-

erage CASM of 9.58 cents.18 (See Exhibit 2 for JetBlue’s key operating statistics from 2002

to 2006.)

In 2003, JetBlue placed an order for 100 Embraer-19019 regional jets for a price of

$3 billion, with options for another 100 planes20 to serve more regional routes as a part of its

expansion plans. (This was in addition to the 16 A-320 aircraft added to the fleet that year,

with an order for 65 more, and options on another 50.21) TheA-320 aircraft were configured

in a 162-seat arrangement, while the Embraer aircraft, which were configured with 100 seats,

were a more suitable size for regional routes. The first Embraer planes entered service in

October 2005.

completion factor10 of 99.5 percent). JetBlue also avoided overbooking flights. When there

was a delay, passengers were informed well in advance. During extreme 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 were among the low-

est in the industry.

CASE 20 JetBlue Airways 20-5

EXHIBIT 1Annual Income

Statements:

JetBlue Airways

SOURCE: JetBlue Airways Annual Report 2006.

(Dollar amounts in millions except per share data)

Year Ending 2006 2005 2004 2003 2002

Operating Revenues $ 2,363 $ 1,701 $ 1,265 $ 998 $ 635

Operating Expenses

Salaries, wages, and benefits 553 428 337 267 162

Aircraft fuel 752 488 255 147 76

Landing fees and other rents 158 112 92 70 44

Depreciation and amortization 151 115 77 51 27

Aircraft rent 103 74 70 60 41

Sales and marketing 104 81 63 54 44

Maintenance materials and repairs 87 64 45 23 9

Other operating expenses1 328 291 215 159 127

Total operating expenses2 2,236 1,653 1,154 831 530

Operating income 127 48 111 167 105

Government compensation3 — — — 23 —

Other income (expense) (118) (72) (36) (16) (10)

Income (loss) before income taxes 9 (24) 75 174 95

Income tax expense (benefit) 10 (4) 29 71 40

Net income (loss) $ (1) $ (20) $ 46 $ 103 $ 55

Earnings (Loss) Per Common Share

Basic $ — $ (0.13) $ 0.30 $ 0.71 $ 0.49

Diluted $ — $ (0.13) $ 0.28 $ 0.64 $ 0.37

Other Financial Data

Operating margin 5.4% 2.8% 8.8% 16.8% 16.5%

Pre-tax margin 0.4% (1.4)% 5.9% 17.4% 15.0%

Ratio of earnings to fixed charges4 — — 1.6x 3.1x 2.7x

Net cash provided by operating activities $ 274 $ 170 $ 199 $ 287 $ 217

Net cash used in investing activities (1,307) (1,276) (720) (987) (880)

Net cash provided by financing activities 1,037 1,093 437 789 657

Notes:1In 2006, we sold five Airbus A320 aircraft, which resulted in a gain of $12 million.2In 2005, we recorded $7 million in non-cash stock-based compensation expense related to the acceleration

of certain employee stock options and wrote-off $6 million in development costs relating to a

maintenance and inventory tracking system that was not implemented.3In 2003, we received $23 million in compensation under the Emergency War Time Supplemental

Appropriations Act.4Earnings were inadequate to cover fixed charges by $17 million and $39 million for the years ended

December 31, 2006, and 2005, respectively.

In 2003, JetBlue received permission to build a new terminal at JFK, giving it 26 more

gates. (Construction of the terminal began in late 2005.) In 2004, JetBlue announced that it

planned to take delivery of one new Airbus A320 every three weeks and to hire five crew mem-

bers per day during the year.22

During 2004, JetBlue performed well on many operating metrics, with a 99.4 percent

completion factor, the highest on-time performance of 81.6 percent in the industry, and the

fewest baggage mishandlings of 2.99 per 1,000 customers boarded. Its CASM also remained

lower than the industry average at 6.10 cents.23 By the end of 2004, JetBlue flew to 30 desti-

nations, including one international destination—the Dominican Republic—launched that

year. (See Exhibit 3 for JetBlue’s growth between 2000 and 2006.)

EXHIBIT 2Operating Statistics: JetBlue Airways1

SOURCE: JetBlue Airways Annual Report 2006.

20-6 SECTION D Industry Four—Transportation

2006 2005 2004 2003 2002

Revenue passengers2 (thousands) 18,565 14,729 11,783 9,012 5,752

Revenue passenger miles3 (millions) 23,320 20,200 15,730 11,527 6,836

Available seat miles4 (ASMs) (millions) 28,594 23,703 18,911 13,639 8,240

Load factor5 81.6% 85.2% 83.2% 84.5% 83.0%

Breakeven load factor6, 5 81.4% 86.1% 77.9% 72.6% 71.5%

Aircraft utilization7 (hours per day) 12.7 13.4 13.4 13.0 12.9

Average fare8 $ 119.73 $ 110.03 $ 103.49 $ 107.09 $ 106.95

Yield per passenger mile9 (cents) 9.53 8.02 7.75 8.37 9.00

Passenger revenue per10ASM (cents) 7.77 6.84 6.45 7.08 7.47

Operating revenue per11ASM (cents) 8.26 7.18 6.69 7.32 7.71

Operating expense per12ASM (cents) 7.82 6.98 6.10 6.09 6.43

Operating expense per ASM, excluding fuel13 (cents) 5.19 4.92 4.75 5.01 5.51

Airline operating expense per ASM (cents)1 7.76 6.91 6.04 6.08 6.43

Departures 159,152 112,009 90,532 66,920 44,144

Average stage length14 (miles) 1,186 1,358 1,339 1,272 1,152

Average number of operating aircraft during period 106.5 77.5 60.6 44.0 27.0

Average fuel cost per gallon15 $ 1.99 $ 1.61 $ 1.06 $ 0.85 $ 0.72

Fuel gallons consumed (millions) 377 303 241 173 106

Percent of sales through jetblue.com during period 79.1% 77.5% 75.4% 73.0% 63.0%

Full-time equivalent employees at period end5 9,265 8,326 6,413 4,892 3,572

Notes:1Excludes results of operations and employees of LiveTV, LLC, which are unrelated to our airline operations and are immaterial to our

consolidated operating results.2“Revenue passengers” represents the total number of paying passengers flown on all flight segments.3“Revenue passenger miles” represents the number of miles flown by revenue passengers.4“Available seat miles” represents the number of seats available for passengers multiplied by the number of miles the seats are flown.5“Load factor” represents the percentage of aircraft seating capacity that is actually utilized (revenue passenger miles divided by

available seat miles).6“Breakeven load factor” is the passenger load factor that will result in operating revenues being equal to operating expenses, assuming

constant revenue per passenger mile and expenses.7“Aircraft utilization” represents the average number of block hours operated per day per aircraft for the total fleet of aircraft.8“Average fare” represents the average one-way fare paid per flight segment by a revenue passenger.9“Yield per passenger mile” represents the average amount one passenger pays to fly one mile.10“Passenger revenue per available seat mile” represents passenger revenue divided by available seat miles.11“Operating revenue per available seat mile” represents operating revenues divided by available seat miles.12“Operating expense per available seat mile” represents operating expenses divided by available seat miles.13“Operating expense per available seat mile, excluding fuel” represents operating expenses, less aircraft fuel, divided by available seat

miles.14“Average stage length” represents the average number of miles flown per flight.15“Average fuel cost per gallon” represents total aircraft fuel costs, which excludes fuel taxes, divided by the total number of fuel gallons

consumed.

However, in the fourth quarter of 2004, JetBlue recorded a drastic drop in profits. It an-

nounced a net income of $2.3 million compared to $19.54 million in the corresponding quar-

ter of the previous year.24 The drop in earnings was attributed to increased operating expenses

as a result of a rise in fuel prices. The airline ended the year with a net income of $46 million,

on revenues of $1.2 billion.25 Following this, it was recognized as a “major airline” by theDOT.

CASE 20 JetBlue Airways 20-7

EXHIBIT 3JetBlue’s Growth

SOURCE: JetBlue Airways Annual Report 2006.

Turbulent Times

Rising Fuel Costs

Fuel prices around the world experienced a sudden rise in 2004. Among the worst affected

sectors was aviation. Fuel was the second major expense in an airline’s operations after labor

in the United States, and typically constituted between 10 percent and 14 percent of an air-

line’s operating expenses. However, after the price increases, its share in operating expenses

became more than 20 percent. (See Exhibit 4 for the breakup of an airline’s operating ex-

penses in 2007.) Although the rise in fuel prices affected all airlines, its effect on LCCs such

as JetBlue was greater.

In 2005, fuel prices increased by nearly 50 percent over 2004. But even as fuel prices

pushed up operating expenses, JetBlue was unable to increase its fares significantly. The grow-

ing number of LCCs in the aviation industry, and the attempts of the FSAs to take away mar-

ket share from the LCCs had led to a fall in the average fares. The average price for a passenger

to fly a mile fell by more than 10 percent between 2000 and 2006 (see Exhibit 5). Added to

this, JetBlue had hedged only 20 percent of its fuel requirements for 2005 at $30 per barrel,

compared to the 42 percent hedged in 2004.27 By 2005, fuel constituted nearly 30 percent of

JetBlue’s operating expenses, compared to 14.4 percent in 2002. It exceeded 33 percent in

2006 (see Exhibit 6).

Operating Aircraft

Year Destinations Employees1 Owned Leased Total

2000 12 1174 4 6 10

2001 18 2361 9 12 21

2002 20 4011 21 16 37

2003 21 5433 29 24 53

2004 30 7211 44 25 69

2005 33 9021 61 31 92

2006 49 10,377 70 49 119

Note: 1Employees include full time and part time employees.

JetBlue’s performance in all the quarters of 2005 was considerably poorer than in the corre-

sponding quarters of 2004, and in the fourth quarter of 2005, it posted a quarterly loss for

the first time since its IPO. JetBlue ended the year with its first annual loss of $20 million

on revenues of $1.7 billion. The airline’s operating margins fell to 2.8 percent from 8.8 per-

cent in 2004.26

JetBlue’s performance statistics also showed a downward trend, and in 2005, the airline’s

on-time performance record fell to 71.4 percent, which was lower than almost all the major

airlines in the United States. The turbulence continued into 2006, and JetBlue announced a loss

in the first quarter of that year. JetBlue’s problems were attributed to a combination of several

internal and external factors.

20-8 SECTION D Industry Four—Transportation

EXHIBIT 4Break-Up of an

Airline’s Operating

Costs (as of 1Q2007):

JetBlue Airways

SOURCE: http://www.airlines.org.

Passenger Airline Cost Index

First Quarter 2007

Index

(2000 " 100)

% of Operating

Expenses

Labor per FTE 111.1 24.5

Fuel per gallon 276.9 23.4

Aircraft ownership per operating seat 79.5 7.5

Non-aircraft ownership per enplanement 108.5 4.7

Professional services per ASM 114.9 8.6

Food & beverage per RPM 59.6 1.5

Landing fees per capacity ton landed 137.3 2.0

Maintenance material per revenue aircraft hour 53.7 1.3

Aircraft insurance as % of hull net book value 97.9 0.1

Non-aircraft insurance per rpm 221.0 0.5

Passenger commissions as % of passenger revenue 29.5 1.2

Communication per enplanement 71.0 0.9

Advertising & promotion per RPM 66.5 0.8

Utilities & office supplies per FTE 96.3 0.7

Transport-related per ASM 399.8 13.9

Other operating per RTM 111.6 8.3

Interest as % of outstanding debt 114.1 —

Composite1 182.9 100.0

Note: 1Although interest is a non-operating expense, it is factored into the composite cost index to capture

the role of debt in the provision of air service. It is not included in the composite cost per ASM or share of

operating expenses.

EXHIBIT 5Increases in Fuel

Price—Jet Fuel

SOURCE: http://www.airlines.org/economics/energy/.

Year

Cost of Domestic Air Travel

(cents per mile)1

U.S. Jet Fuel

(cents per gallon)

U.S. CPI

(1982–84) " 100

2000 14.57 90.0 172.2

2001 13.25 75.0 177.1

2002 12.00 70.8 179.9

2003 12.29 88.2 184.0

2004 12.03 120.8 188.9

2005 12.29 172.2 195.3

2006 13.00 196.8 201.6

2006 vs. 2000 !10.8% �118.7% �17.1%

Note: 1Excludes government-imposed taxes and fees

EXHIBIT 6Fuel Price History:

JetBlue Airways

SOURCE: Compiled from JetBlue’s Annual Reports.

Year Ending December 31 2006 2005 2004 2003 2002

Gallons consumed (millions) 377 303 241 173 105

Total cost ($ millions) 752 488 255 147 76

Average price per gallon 1.99 1.61 1.06 0.85 0.72

Percent of operating expenses % 33.6 29.5 22.1 17.8 14.4

CASE 20 JetBlue Airways 20-9

Industry Factors

In the period between 2001 and 2003, when JetBlue’s growth was at a peak, most of the ma-

jor airlines in the United States were suffering from the adverse effects of the September 11

attacks. JetBlue had taken advantage of its competitors’ weakened state to boost its own

growth. However, by 2004–2005, many of the airlines that were operating under Chapter 1128

began to recapture market share. These airlines were able to undercut competition by offer-

ing very low fares, taking advantage of the protection of the bankruptcy laws. “It’s too much

competition from companies that are purposely allowing themselves to lose money. Compa-

nies in bankruptcy right now, such as United and US Air, have been significantly slashing

their own fares,” said Rick DiLisi, a spokesman for Independence Air, a low-cost airline

based in Virginia.29 JetBlue was also affected by the low fares offered by United Airlines

(United) and Delta Air Lines (Delta), both of which were operating under bankruptcy protec-

tion at the time, on transcontinental routes, American Airlines (American) and Continental

Airlines (Continental), which had escaped Chapter 11, also become aggressive about defend-

ing market share, and launched several new transcontinental flights at low prices.

In 2003, JetBlue launched flights from Atlanta to Los Angeles, one of the busiest routes

in the United States. Atlanta was Delta’s hub, and when JetBlue entered the market, Delta re-

sponded by instantly adding capacity and lowering prices on this route. It also added routes to

other destinations in California, quickly establishing its dominance in the region. AirTran, an-

other LCC that operated from Atlanta, also responded aggressively by leasing new planes to

increase capacity. Eventually, JetBlue was forced to withdraw from Atlanta in December 2003,

just seven months after it started its operations there.

Legacy carriers also launched low-cost subsidiaries of their own, in an effort to compete

with the growing number of LCCs. Delta launched an LCC called Song inApril 2003, to com-

pete directly with JetBlue. Song was also based at JFK, and flew many of the same routes as

JetBlue. Like JetBlue, Song also offered amenities such as leather seats, and a free personal

entertainment system at every seat. It also served beverages, but charged for meals and liquor.

The airline was promoted heavily, and for a few months was successful in capturing a large

part of JetBlue’s business on the New York to Florida route. However, its financial perfor-

mance was not satisfactory and it was eventually integrated into Delta’s mainline service in

April 2006.

United also launched an LCC called “Ted” in February 2004. Although Ted was designed

more along the lines of the traditional LCC model and did not serve food, it provided in-flight

entertainment in the form of inflight music and videos. Ted operated mainly on central and

western routes in the United States. According to analysts, the success of Ted was one of the

main reasons why United was able to emerge from bankruptcy in February 2006.

Song and Ted had an advantage over the other LCCs, in that they allowed passengers to

connect to the flights of their parent airlines, which had far bigger route networks than any of

the LCCs. They also shared the frequent flier programs of their parents, and had access to the

gates and landing/takeoff slots of their parents in large airports.

JetBlue also faced competition from LCCs such as Southwest, AirTran, America West,

Spirit Airlines (Spirit), and Frontier Airlines (Frontier). Although none of these airlines offered

the same kind of service as JetBlue, all of them were well established in their home markets,

and had loyal customer bases. Southwest especially had the lowest cost even among the LCCs,

and was very popular among passengers who were willing to give up in-flight services for

cheap tickets. AirTran and Spirit operated two classes on their flights and targeted business

passengers successfully with their low-fare Business Classes. With the exception of Southwest

and Spirit, all the LCCs also offered some form of in-flight entertainment, although AirTran

was the only other airline that offered it free.

20-10 SECTION D Industry Four—Transportation

Internal Factors

When JetBlue had first started operations, it had used new planes and fittings, which did not

cost much in terms of maintenance. However, a few years later, as the fleet aged, maintenance

costs began to rise. Further, JetBlue 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 adding new in-flight

services. In 2003, the airline changed the configuration of its A-320 aircraft, removing one

row of seats from the plane, in order to improve legroom for passengers (the number of seats

was brought down to 156, from 16230). While this made the aircraft more comfortable for pas-

sengers, it also lowered JetBlue’s revenue earning capacity. However, the move was expected

to cut fuel costs, due to the lower weight of the aircraft.

In 2005, JetBlue upgraded its seatback televisions.All the new aircraft were fittedwith larger

TVs, and all the old aircraft were retrofitted. At the same time, the airline also equipped all its

planes with XM Satellite radio, and increased the size of the overhead bins on the aircraft.

Most LCCs gave complimentary beverages and sold food, or served complimentary re-

freshments in strictly measured quantities. But JetBlue offered a range of complimentary

snacks and beverages in unlimited quantities. Although the airline started out serving chips,

cookies, and coffee, over the years it added several items to its line of in-flight refreshments.

As of 2007, the airline offered a range of hot and cold beverages and several varieties of

snacks. It also sold a variety of cocktails at $5 each.

Passengers traveling on red-eye flights were given complimentary spa amenity kits con-

taining mint lip balm, body butter, an eyeshade, and ear plugs. JetBlue also set up a compli-

mentary snack bar in the plane for overnight flights, and passengers were given complimentary

hot towels, Dunkin Donuts coffee or tea, orange juice or bottled spring water, just before they

landed the next morning.

Another issue was the problems that JetBlue experienced with its new Embraer-190 air-

craft that entered service in late 2005. JetBlue faced a lot of glitches in integrating the new air-

craft into its operations. To begin with, Embraer delivered the planes two weeks behind

schedule, which caused several flight delays and cancellations. Second, JetBlue’s employees

lacked familiarity with the planes. Third, the Embraer-190 had some technical issues that

caused several delayed flights and significantly lowered JetBlue’s aircraft utilization rates. In

the opinion of some analysts, JetBlue had been too optimistic in placing such a large order for

the untried Embraer planes. After two consecutive losses in the last quarter of 2005 and the

first quarter of 2006, several analysts started comparing JetBlue to People Express Airlines,31

a low-cost airline operated in the United States between 1981 and 1987.

The Return to Profitability Plan

In April 2006, soon after announcing the first quarter loss, Neeleman and Barger announced

a recovery plan for JetBlue called the “Return to Profitability” plan (RTP). The main aims of

the RTP were revenue optimization, improved capacity management, cost reduction, and re-

taining the commitment to deliver high-quality service on every flight.

As a part of the revenue optimization goal, JetBlue announced that it would reduce the

number of long-haul flights and shift its focus back to short-to-medium routes. The company

said that it planned to reduce the ratio of long-haul to non–long-haul flights from 1.5:1 in 2005,

to 1.2:1 during 2006. JetBlue also said that it would offer fewer tickets at very low fares and

more tickets at mid-level fares on all its routes to improve the mix of fares in its revenues. The

average fare was expected to rise to at least partly reflect the increased fuel prices. During

2006, JetBlue increased its lowest transcontinental fare from $349 to $399.

CASE 20 JetBlue Airways 20-11

JetBlue also committed itself to conducting a careful scrutiny of its yield management

practices to ensure it did not sacrifice revenues to increase the load factor.32 Trying to increase

the load factor put stress on an airline’s operations and also led to delays as the airlines tried

to get as many passengers on board as possible, even minutes before a flight’s scheduled de-

parture. In 2005, JetBlue’s load factor was 85.2 percent and the yield per passenger mile was

8.02 cents. This changed to a load factor of 81.6 percent and yield per passenger mile33 of

9.53 cents in 2006, which was nearly a 19 percent increase in yield per passenger mile over

the previous year.34

The RTP also committed JetBlue to manage capacity better by cutting it on unprofitable

routes, and adding it on high-demand routes. During 2006, JetBlue added only 21 percent ca-

pacity, instead of the previously projected 28 percent. The capacity on the New York—Florida

route was cut by 15 percent, while the New York—Los Angeles route saw an 8 percent reduc-

tion in capacity.

On the other hand, JetBlue introduced short-haul routes from Boston to Washington, New

York to Richmond, and Boston to Richmond; and medium-haul routes from New York to

Austin, Boston toAustin, and Boston to Nassau. The airline introduced nonstop service on two

high-demand long-haul routes from Burbank (California) to Orlando (Florida) and Boston to

Phoenix (Arizona). On the whole, JetBlue added 16 new destinations during 2006, which

mainly involved “connecting the dots” between its existing destinations using the Embraer-190

aircraft.

JetBlue sold five of its oldest A-320 aircraft during 2006, and deferred the delivery of

12 A-320 aircraft that had originally been planned for 2007–2009, to 2011–2012. The options

the airline held on the A-320s were also adjusted. (See Exhibit 7.)

JetBlue also increased its focus on cost management. The airline managed to control its

distribution cost by achieving 80 percent of its bookings through its website in 2006—the

highest in the U.S. airline industry. It also implemented several initiatives to conserve fuel and

improve fuel efficiency, especially by using single-engine taxi techniques, utilizing ground

power units, and identifying ways to remove excess weight from the aircraft. In late 2006, Jet-

Blue announced it would remove one more row of seats from its A-320 aircraft, bringing the

total seat number down to 150.

In addition to this, JetBlue was also putting in efforts to improve the efficiency of its crew

members and was trying to accomplish more with fewer full-time employees per aircraft than

before. The elimination of one row of seats allowed JetBlue to operate each flight with three

attendants instead of four, as federal regulations require one flight attendant for every 50 pas-

sengers. JetBlue also began to go slow on hiring people for non-operational positions. Better

flight scheduling practices were also implemented to control costs. JetBlue started charging

for some premium services. For instance, the company changed some of its refund policies,

and increased the fees it charged for flying unaccompanied minors and the cancellation

charges on confirmed flights.

EXHIBIT 7JetBlue’s A-320

Order Adjustments

SOURCE: http://investor.jetblue.com.

2007 2008 2009 2010 2011 2012 2013

Firm Orders Original 17 17 18 18 12 0 0

Adjusted to 12 12 16 18 18 6 0

Change (5) (5) (2) 0 6 6 0

Options Original 0 2 2 2 9 20 15

Adjusted to 0 2 4 4 6 16 18

Change (%) 0 0 2 2 (3) (4) 3

20-12 SECTION D Industry Four—Transportation

The RTP started showing results by the end of 2006. In the fourth quarter of 2006, JetBlue

posted a profit of $17 million on revenues on $633 million, compared to a loss of $42 million

in the corresponding quarter of the previous year. Analysts had expected the company to re-

turn to profitability only in the first quarter of 2007. (See Exhibit 8 for JetBlue’s quarterly re-

sults in 2006 and 2007.) JetBlue ended 2006 with a net loss of $1 million, compared to a loss

of $20 million in 2005. The operating margin also increased to 5.4 percent in 2006, compared

to 2.8 percent in 2005.35 The airline expected that the combination of higher revenues and

lower costs would help it achieve savings of around $70 million by the end of 2007.36

EXHIBIT 8A Snapshot of Jetblue’s Quarterly Performance (dollar amount in millions)

Compiled from JetBlue’s Annual Report 2006 and 10K filings with the SEC.

Period Ending On

March 31,

2006

June 30,

2006

September 30,

2006

December 31,

2006

March 31,

2007

June 30,

2007

Operating Revenues 490 612 628 633 608 730

Operating Expenses 515 565 587 569 621 657

Operating Income (loss) (25) 47 41 64 (13) 73

Other Income (expense) (22) (22) (40) 34 (32) (30)

Income Tax Expense (benefit) (15) 11 1 13 (23) 22

Net Income (32) 14 – 17 (22) 21

The Customer Service Fiasco

Even as its financial performance started showing signs of improvement, JetBlue faced an-

other crisis in February 2007, when a snowstorm hit the Northeast and Midwest regions of

the United States, throwing the airline’s operations into chaos.

Because JetBlue followed the practice of never canceling flights, even when the ice storm

hit and the airline was forced to keep several flights on the ground, it desisted from calling

them off. Because of this, passengers were kept waiting at airports for their flight to take off.

In some cases, passengers who had already boarded their planes were kept waiting on the tar-

mac for several hours and not allowed to disembark. In one extreme instance, passengers were

stranded on board a plane on the tarmac at JFK for 11 hours. However, after all this, the air-

line was eventually forced to cancel most of its flights because of bad weather.

Even after the storm cleared, JetBlue struggled to get back on its feet as the canceled

flights had played havoc with its systems, which were not equipped to deal with cancellation.

The airline’s poor database management systems resulted in major problems in tracking and

lining up pilots and flight crew who were within federal regulation limits for the number of

flying hours to operate the resumed flights. In addition, the delays and cancellations had

caused a baggage crisis, with several passengers losing their luggage. The airline had to give

all its passengers full refunds if their flights were canceled, or rebook them on new flights,

which added to the complications.

The airline had canceled nearly 1,200 flights in the days following the storm and it took

several days of its operations to get back to even keel. In contrast, American, Continental, and

Delta, which had canceled flights immediately after the storm broke, were able to resume op-

erations more quickly. The fiasco reportedly cost JetBlue $30 million (which included $10 mil-

lion in refunding tickets for canceled flights, $16 million for issuing travel vouchers, and

$4 million for incremental costs, such as hiring overtime crews).37

CASE 20 JetBlue Airways 20-13

Notwithstanding the financial loss, the loss of goodwill was expected to be much more se-

rious for JetBlue. Traditionally, JetBlue had had one of the lowest rates of consumer com-

plaints filed with the DOT.38 It also usually ranked high on customer service.39 But following

the fiasco, BusinessWeek, a prominent business magazine, pulled JetBlue off its list of Cus-

tomer Service Champs, published early in 2007. JetBlue 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 philosophy too far in having failed

to set up the necessary systems to support its rapid growth. Following the fiasco, JetBlue pub-

lished apology letters in the New York Times and USA Today, among other places. Neeleman

also apologized during his appearances on the Late Show with David Letterman on the CBS

Network, and on YouTube. “We should have acted quicker,” said Neeleman. “We should have

called the Port Authority quicker. These were all lessons learned from that experience.”40

In late February 2007, Neeleman unveiled a “Customer Bill of Rights,” which laid out the

airline’s policy on compensating passengers for delays and cancellations (see Exhibit 9). Ad-

ditionally, JetBlue launched a new database management system to help it track crew and bag-

gage better, and upgraded its Web site to allow online re-bookings. Employees at the airline’s

headquarters were being trained to help out with operations at the airport in emergency situa-

tions. JetBlue also became more proactive during bad weather conditions in the months fol-

lowing the storm. In March 2007, when bad weather hit the East Coast once again, JetBlue was

one of the first airlines to cancel flights to and from airports on the East Coast. The airline re-

portedly canceled nearly 230 flights during this time.

According to analysts, JetBlue’s handling of the events following the crisis was likely to

go a long way in redeeming it in the eyes of the public. “The single most important thing a

company needs to show in a crisis is that it cares. That’s not a feeling. It’s a behavior,” said

Bruce Blythe, the CEO of Crisis Management International41, 42. Several consumer polls con-

ducted after the February 2007 crisis also showed that JetBlue’s popularity with passengers

continued to remain high. The crisis and its repercussions were expected to put a burden on

JetBlue’s already strained finances. But JetBlue managed to return to profitability in the sec-

ond quarter of 2007, after a first quarter loss of $22 million.

More Turbulence Ahead?

Analysts felt that the appointment of Barger as the new CEO was likely to benefit JetBlue.

According to them, the fresh leadership was likely to help JetBlue through its growing pains

and provide it with a positive direction for the future. They also pointed out that Barger dif-

fered considerably from Neeleman in his leadership style. (Barger was thought to be more or-

ganized than Neeleman, and much more focused on operational issues than the latter, who

enjoyed strategizing.)

However, JetBlue was likely to face many more challenges in the future than it had faced

during the first few years of operations. The FSAs, most of which recovered by 2007, were

ready to defend their turf against LCCs. Delta had launched a big sale of discounted tickets

during the Thanksgiving weekend in 2006, triggering a price war in the industry.

In addition to this, JetBlue was likely to face competition from other LCCs such as Air-

Tran and Frontier, which had formed an alliance in late 2006, to combine their marketing and

mileage programs.43 Competition was also expected from new airlines like Virgin America,

which had been launched amidst a lot of buzz in August 2007, and was positioned as a “value”

carrier. Like JetBlue, Virgin America also tried to attract passengers with amenities such as

satellite TV, mood lighting, onboard self-service mini bar, and meals-on-demand. Virgin

America had announced that it expected to expand to 10 cities within a year of operation and

to up to 30 cities within five years.44

20-14 SECTION D Industry Four—Transportation

EXHIBIT 9Jetblue’s Customer

Bill of RightsINFORMATION

JetBlue will notify customers of the following:

� Delays prior to scheduled departure

� Cancellations and their cause

� Diversions and their cause

CANCELLATIONS

All customers whose flight is canceled by JetBlue will, at the customer’s option, receive a full re-

fund or reaccommodation on a future JetBlue flight at no additional charge or fare. If JetBlue can-

cels a flight within 12 hours of scheduled departure and the cancellation is due to a Controllable

Irregularity, JetBlue will also provide the customer with a Voucher valid for future travel on Jet-

Blue in the amount paid by the customer for the roundtrip (or the oneway trip, doubled).

DEPARTURE DELAYS

� Customers whose flight is delayed prior to scheduled departure for 1–1:59 hours due to a Con-

trollable Irregularity are entitled to a $25 Voucher good for future travel on JetBlue.

� Customers whose flight is delayed prior to scheduled departure for 2–3:59 hours due to a Con-

trollable Irregularity are entitled to a $50 Voucher good for future travel on JetBlue.

� Customers whose flight is delayed prior to scheduled departure for 4–5:59 hours due to a Con-

trollable Irregularity are entitled to a Voucher good for future travel on JetBlue in the amount

paid by the customer for the oneway trip.

� Customers whose flight is delayed prior to scheduled departure for 6 or more hours due to a

Controllable Irregularity are entitled to a Voucher good for future travel on JetBlue in the

amount paid by the customer for the roundtrip (or the oneway trip, doubled).

OVERBOOKINGS

(As defined in JetBlue’s Contract of Carriage)

Customers who are involuntarily denied boarding shall receive $1,000.

ONBOARD GROUND DELAYS

For customers who experience an onboard Ground Delay for more than 5 hours, JetBlue will take nec-

essary action so that customers may deplane. JetBlue will also provide customers experiencing an on-

board Ground Delay with food and drink, access to restrooms and, as necessary, medical treatment.

Arrivals:

� Customers who experience an onboard Ground Delay on Arrival for 30–59 minutes after

scheduled arrival time are entitled to a $25 Voucher good for future travel on JetBlue.

� Customers who experience an onboard Ground Delay on Arrival for 1–1:59 hours after sched-

uled arrival time are entitled to a $100 Voucher good for future travel on JetBlue.

� Customers who experience an onboard Ground Delay on Arrival for 2–2:59 hours after sched-

uled arrival time are entitled to a Voucher good for future travel on JetBlue in the amount paid

by the customer for the oneway trip, or $100, whichever is greater.

� Customers who experience an onboard Ground Delay on Arrival for 3 or more hours after

scheduled arrival time are entitled to a Voucher good for future travel on JetBlue in the amount

paid by the customer for the roundtrip (or the oneway trip, doubled).

Departures:

� Customers who experience an onboard Ground Delay on Departure for 3–3:59 hours are enti-

tled to a $100 Voucher good for future travel on JetBlue.

� Customers who experience an onboard Ground Delay on Departure for 4 or more hours are en-

titled to a Voucher good for future travel on JetBlue in the amount paid by the customer for the

roundtrip (or the oneway trip, doubled).

SOURCE: www.jetblue.com, accessed 2007.

CASE 20 JetBlue Airways 20-15

N O T E S

1. Eryn Brown, “A Smokeless Herb JetBlue Founder David

Neeleman . . .,” Fortune, May 28, 2001.

2. Chris Zappone, “JetBlue Struggles with ‘Growing Pains,’”

money.cnn.com, April 20, 2007.

3. The Federal Aviation Administration is an agency of the United

States Department of Transportation with the authority to regu-

late and oversee all aspects of civil aviation in the United States.

4. Southwest Airlines, set up by Herb Kelleher in 1978, was the pi-

oneer of low-cost airlines in the United States. The airline was

headquartered in Dallas, Texas, and was known for its prof-

itability record (it had posted profits for the 34th consecutive

year in January 2007).

5. Eryn Brown, “A Smokeless Herb JetBlue Founder David

Neeleman . . .,” Fortune, May 28, 2001.

6. Airbus Industrie is a leading manufacturer of aircraft in the

world. It was established in 1970 and is headquartered in

France.

7. Boeing is a U.S.-based manufacturer of aircraft. Boeing and

Airbus are the two biggest aviation companies in the world.

8. Flights operating between 9:00 p.m. and 5:00 a.m. local time

are called red-eye flights. In North America, red-eye flights fly

from the west to the east coast, capitalizing on the time-zone

changes.

9. Amy Tsao, “Thinking of Taking Off with JetBlue?” Business

Week, April 5, 2002.

10. The percentage of accomplished flights in relation to scheduled

flight. In other words, it is the percentage of scheduled flights

that were not canceled.

11. Paul C. Judge, “How Will Your Company Adapt?” Fast Com-

pany, November 2001.

12. “Big Airlines Benefit from Bailout Bill,” www.taxpayer.net,

June 7, 2002.

13. Paul C. Judge, “How Will Your Company Adapt?” Fast Com-

pany, November 2001.

14. Amy Tsao, “Thinking of Taking Off with JetBlue?” Business

Week, April 5, 2002.

15. “JetBlue IPO Soars,” money.cnn.com, April 12, 2002.

16. “JetBlue Closes Live TVAcquisition,” Communications Today,

September 30, 2002.

17. An airline industry metric arrived at by dividing operating ex-

penses by available seat miles.

18. JetBlue Airways Annual Report 2002.

19. Embraer, a Brazil-based aircraft manufacturer, specialized in

manufacturing regional jets.

20. Michael Bobelian, “JetBlue Lands Expansion Plans,” Forbes,

June 10, 2003.

21. JetBlue Airways Annual Report 2003.

22. JetBlue Airways Annual Report 2003.

23. JetBlue Airways Annual Report 2004.

24. “JetBlue Stays in Black,” money.cnn.com, January 27, 2005.

25. JetBlue Airways Annual Report 2004.

26. JetBlue Airways Annual Report 2005.

27. JetBlue Airways Annual Report, 2005.

28. Chapter 11 is a chapter of the United States Bankruptcy Code,

which permits reorganization under the bankruptcy laws of the

United States. Chapter 11 bankruptcy is available to any busi-

ness, whether organized as a corporation or sole proprietorship,

or individual with unsecured debts of at least $336,900.00 or se-

cured debts of at least $1,010,650.00, although it is most promi-

nently used by corporate entities. (www.wikipedia.org)

29. Chris Isidore, “Low Fare Blues,” money.cnn.com, Novem-

ber 24, 2004.

30. Press release on www.jetblue.com, November 13, 2003.

31. People Express had revolutionized air travel with its low fares,

customer focus, and energetic staff. Within five years, the air-

line had reached one billion dollars in sales. However, People

Express’ troubles started in 1985 after it acquired several air-

lines in the United States, while facing aggressive competition

from the FSAs. It was eventually merged with Continental in

1987. The case of People Express was often cited by airline in-

dustry analysts as an example of an airline growing too fast and

not being able to sustain the growth.

32. The percentage of an aircraft seating capacity that is actually

utilized.

33. The average amount one passenger pays to fly one mile.

34. JetBlue Airways Annual Report 2006.

35. JetBlue Airways Annual Report 2006.

36. www.airlinepilotforums.com

37. Grace Wong, “JetBlue Fiasco: $30M price tag,” money.cnn.com,

February 20 2007.

38. In 2006, the complaint rate was only 0.4 complaints per 100,000

passengers, which was the third best in the industry, behind

Southwest, and a feeder airline for Continental Express called Ex-

pressJet (Source: “JetBlue Fliers Stranded on Plane for 8 hours,”

Fortune, February 15 2007.)

39. The airline featured consistently in the University of Nebraska’s

national Airline Quality Rating (AQR) study every year since

2003; it ranked first in 2004, 2005, and 2006. It won the Read-

ers’ Choice Award from Condé Nast Traveler for five years un-

til 2006, and ranked high in every measured category in the

airline satisfaction ratings study conducted by J.D. Power &

Associates.

Rising fuel costs were also a major concern for JetBlue in the future, as were potentially

increasing operational expenses as the airline’s fleet aged and operations expanded. Ana-

lysts also thought that JetBlue’s growth would dilute the close-knit culture that the company

enjoyed in its initial years. However, many industry experts still believed that the airline

would be able to overcome most of the hurdles it faced and enjoy significant growth in the

future.