Assignment Task:
Answer the following questions by using the scenario illustrated below.
Question 1: Which of Porter's generic strategies fit how Jet Blue positioned itself?
Question 2: What are Porter's generic strategies?
Question 3: Find evidence in the case study that suggests that either of these strategies is used by JetBlue.
Question 4: Has JetBlue made a clear choice for either of these strategies? Justify your answer.
Question 5: What choices has JetBlue made in their value proposition?
Question 6: Find evidence in the case study that shows these choices were made by JetBlue.
Question 7: Avoid being too specific, too detailed in your description of the three parts of the value proposition. Stay "high level", more general.
Question 8: What do you think are the implications of these choices for JetBlue, focusing on some customers and not on others?
Question 9: What choices has Jet Blue made in the activities in their value chain? (What does the company do? What activities have they put in place at all levels of the firm?)
Question 10: Identify and list examples of activities that JetBlue has implemented for each value chain section (from Firm Infrastructure to After-Sales Service).
Question 11: Highlight where you found this evidence in the case study document!
Question 12: Focus on where JetBlue has made specific choices in their value chain (e.g. not serving meals) and where they add most value/cut most costs
Question 13: Are these individual activities in the value chain aligned with the choices made in the value proposition? Justify your answer.
Question 14: JetBlue is intending to make changes: (a) remove rows of seats and (b) buy Embraer Airplanes. Do these changes align with the existing value proposition of JetBlue? Would you recommend these changes for JetBlue?
JetBlue Case: Room at the Back - 'Bringing Humanity back to the Air'
By Dr. David Webb
The task of sacking David Neeleman at Southwest Airlines (SWA) had fallen to the then head of HR, Ann Rhoades. Neeleman had joined SWA following their takeover of Morris Air - a low cost carrier (LCC) that Neeleman had established. For Neeleman this was a dream job - Herb Kelleher, CEO of SWA was his hero - but as Rhoades explains, 'David [was disruptive and] didn't understand the nuance of the organization. He needed to walk, not run'. He had to go!
Yet it was clear Neeleman did not hold a grudge. Five years later, in 1998, he hired Rhoades as part of his team setting up JetBlue Airways. Rhoades remained in that role until 2001 but still enjoyed her involvement as an active member of JetBlue's board of directors.
Founded in 1999 and flying since February 2000, JetBlue had entered the US domestic airline market at a tough time. A combination of a weak economy and the impact of 9/11 meant many airlines were struggling to survive. During the followingyears the industry is estimated to have made losses totalling $21bn, and United Airlines and US Airways went into bankruptcy. However, JetBlue and its fellow LCC, SWA remained profitable. Indeed JetBlue saw spectacular growth and had delivered 12 consecutive profitable quarters. On the back of its success the firm had successfully completed an IPO, raising over $150m to fund further aggressive growth.
However Rhoades, as she prepared for a meeting of the JetBlue board, knew tough challengeslay ahead. Competitiveness in the industry was rising - the major airlines were recoveringandthey and a range of new LCCs were seeking to take market share from JetBlue. In addition, SWA, by far the largest LCC, was looking to expand in the North East - the region that was JetBlue's heartland. Investors were also beginning to wonder if JetBlue was over-stretching itself. Theywere concernedwhether the practices that had made it a successful start-up would prove effective at scale.
Southwest Airlines and the US Airline Industry
The highly competitive passenger airline industry was segmented into three strategic groups: network carriers, regional carriers and LCCs. The differences between the three groups related to how the airlines served customers and the network of routes flown. The traditional network carriers operated a 'hub and spoke' system of routes - flying passengers to a hub airport where they caught a connecting flight on to their domestic or international destination. In 2000 themajor carriers such as American, Delta, Continental and Northwest dominated the sector. Regional carriers, such as Atlantic South East and SkyWest, also act as feeders to the 'hubs' in specific regions.
The fast growing LCC segment operated on a 'point-to-point' model -flying customers directly to their destination with a low-price,no-frills service. The pioneer LCC was SWA. It had begun operations in 1971 but following deregulation in 1978 other LCCs had entered the market. However, aggressive responses from the network airlines, a lack of capital and operational errors meant most had failed or had been acquired, including Morris Air (AirTran and America West being exceptions).
SWA had weathered early challenges by inventing a LCC operating model that worked. From its Texas roots it had grown quickly and profitably across the South and Midwest USA. By 2000 it hada 15% share of the total US domestic market - giving it a share of over70% of the LCC segment.
The SWA operating model was all about delivering convenient, reliable service at a low price. The network carriers' hubs needed to accommodate flights converging simultaneously to enable passenger connections. This required high levels of investment and higher expenses to service the peaks of activity in passenger support, aircraft maintenance and baggage handling. Scheduling connections andthe inevitable delays incongested hubsmeant that planes would spend more time on the ground not earning revenue. The point-to-point approach avoided these issues,while at the same time giving passengers the convenience of flying directly to their destination. SWA could select smaller, less busy airports, where landing and gate charges were lower, and focus on turnaround times to maximiseplane utilisation.
SWA operated with only one class of travel, with no assigned seating, no frequent flier programme, no lounges, no baggage transfers, and did not offer in-flight food (other than peanuts). These choices not only simplified its operating model but also speeded uppassenger loading and removed the need to restock the plane - again reducing turnaround time.
The simpler operating model meant less staff. SWA focused on hiring people with a 'positive attitude', and a sense of humour who were willing to entertain with humorous in-flight announcements, jokes and games.
Another key element of SWA's model was the use of a single type of aircraft. Having purchased its first three 737 aircraft from Boeing on very favourable terms, SWA went on to become one of the manufacturer's biggest customers. Operating a single type meant that the firm could standardize on spares parts (so gaining volume discounts) and at the same time lower inventory. It also reduced the training needed by pilots, maintenance engineers and cabin crew. Staff quickly became experts on the 737 plane, further cutting costs and increasing plane utilisation and reliability.
SWA's model had proven difficult for the majors to imitate, given their core models. The legacy of multi-plane fleets, international connections, first/business class offerings and existing employee practices added too much cost for their existing model to be competitive. Several, such as Continental, hit serious financial issues when they tried to match SWA's prices. Some of the majors were now planning separate LCC subsidiaries, however (e.g.United's Ted and Delta's Song).
JetBlue: 'Less Inflight Jokes, More Comedy Central'
Neeleman had not been idle after he had left SWA. He had been a consultant to a Canadian airline and developed an online reservation system, which he sold to Hewlett Packard for over $20m. He believed that the SWA model could not only be replicated through the use of technology, careful route analysis and strong financial backing, but could be done better. Neeleman was convinced he could create alow cost airline that could be 'efficient and effective and deliver a great customer experience at the same time'. Recognizing a gap for a LCC in New York and the North East,he raised $160m in startup capital to target leisure passengers flying to Florida and the West Coast.
He pulled together an experienced team from across the industry. These included Dave Barger as President and Chief Operating Officer (COO) from Continental, as well as John Owen (CFO) and Rhoades from SWA. Rhoades remarks that Neeleman had learnt a lesson from his SWA experience, recognising he needed to employee good people and trust their different expertise. Indeed Neeleman and Barger were seen as a 'bit of an odd couple'. While 'Neeleman doesn't dwell on [detail] Barger spends hours pouring over operational matters looking for nuggets'. With a commitment to the JetBlue concept, the team was highly effective.
Informed by the insight they had gained working for SWA, the leadership team adopted much of their operating model: point-to-point routes, one class of travel, no baggage transfers and no inflight meal. A single type of plane was selected but with a record level of funding for a US airline start-up, the firm could buy the more expensive Airbus A320s. These planes were larger, could fly further and were more fuel efficient and cheaper to maintain than Boeing 737s.
However, Neeleman wanted to ensure that passengers had a better experience of flying than was typical of LCCs and in economy class. He passionately believed that the firm had a mission to 'bringing humanity back to air travel'.
Enabled by the larger Airbus 320s, JetBlue looked to give passengers more comfort and space. They installed wider leather seats with a row spacing that gave more leg-room as well as more overhead storage-bin space. Unlike SWA, JetBlue choose to allocate seating, feeling this was a better experience for customers. The impact was that passengers did not feel they were travelling on a typical LCC and certainly not 'flying on a start up'! However, these choices had an economic benefit. While, leather furnishings cost almost twice as much as cloth ones, they last twice as long and were quicker to clean. More hand luggage space made it quicker to board the plane. This was also supported by the firm's policy of not charging for hold luggage - meaning customers were more likely to check bags.
While not providing a meal service, no matter the length of the flight, JetBlue provided unlimited snacks (including soft drinks and coffee and, inline with the fun image it was adopting, blue coloured potato crisps (chips) and animal crackers. Travellers seem to prefer this to the poor meals usually served on flights and it saved the airline over $3 per passenger. The money saved was used to provide seat back personal screens showing satellite TV - on other domestic flights passengers either watched a single display, or an entertainment system was not installed. Providing the seatback TV service cost around $1 per passenger per flight - far less than the saving made by not providing meals.
The personal TVs and greater space were features that JetBlue used in strap lines on their quirky billboard advertising (e.g. 'trays, knees, never the two shall meet' and (in a dig at SWA) 'less inflight jokes, more comedy central'). However, marketing efforts mainly promoted the airline's low prices to get people to try JetBlue, relying on the experience to get them to come back. It was effective - indeed many passengers simply tried JetBlue due to ward of mouth' recommendations, and as a result the firm did not need a high marketing budget.
JetBlue's decision to use New York's JFK airport as its home base surprised many in the industry. The airport was dominated by international flights and was further from downtown Manhattan than either LaGuardia or Newark airports. However, Neeleman realized it was only crowded between 3pm and 9pm,meaning JetBlue could use non-peak hours for 80% of its flights. The airport had greater capacity and better infrastructure than the other New York airports, meaning delays would be less. With strong government lobbying from smaller North East US cities, keen for a LCC service to and from New York, JetBlue obtained 75 slots at JFK.
The firm made a point of seeking airports where other carriers had overlooked opportunities. On the west coast it chose Long Beach (LGB) rather than the crowded Los Angeles airport (LAX). LGB was slightly further from the city and slots were limited due to environmental protection regulations. However, the lesser demand meant JetBlue could obtain 27 slots at a lower cost. The firm also targeted routes that were poorly served (e.g. the smaller upstate cities like Buffalo, NY) and introduced 'red eye' flights that by departing late at night to arrive early morning. The choices of routes and airports and 35-minute plane turnarounds meant JetBlue had the leading plane utilisation in the industry - its planes flew on average 13 hours per day compared to 9 for carriers like American and 11 for SWA.
JetBlue made extensive use of new technology to improve customer service and reduce costs -much of it developed in-house. Its electronic reservation system and ticketing reduced the hassle of booking. Of the tickets sold, 70% were via the firm's web site and for the remainder the technology enabled it to operate with reservation agents working from their homes. The combination of no office costs and lower salaries meant the firm saved around 20% on each ticket. JetBlue was an early adopter of the concept of 'paperless cockpits'. It equipped pilots with laptops to access the latest flight manuals and plans. This not only reduced costs but also allowed the crew to adjust in real time to changing conditions, so reducing flight times and turnarounds.
JetBlue's developers created a program to track flights and post the information on the firm's intranet to allow employees to better serve customers. They also enabled electronic bagging and automatic check-in - reducing staff involvement, bag losses and delays. With IBM they installed 150 self-check-in kiosks in some airports and also equipped roaming staff with portable technology to print boarding passes, switch seats and check luggage. An online-only frequent flier scheme was introduced for regular passengers. The 'TrueBlue Flight Gratitude' program awarded points to members that could then be exchanged for free flights.
Human Resources: 'We Succeed Together or We Fail Together'
Neeleman was convinced that the firm's lean workforce was JetBlue's 'real secret weapon'. He and his senior team strove to cultivate a team-based, positive and family culture in everything they did. The top management continually interacted with customers - demonstrably living the firm's culture by frequently taking shifts on planes, handing out snacks and cleaning the planes alongside the crew. Staff were called 'crewmembers' no matter their seniority and were carefully selected. Itwas more concerned about attracting people with the right attitude and 'motivational fit' than about past experience. Once employed, crewmembers received extensive training - not just on their roles but also in the company's values and culture.
Unlike SWA, JetBlue's staff were not unionized. Neeleman and Barger felt that unions increase working rules and so hamper productivity and the ability to service customers. As long as crew were compensated fairly and trusted management, the firm believed there was no need for a union. While salaries are lower than other airlines, crewmembers did gain other compensation. All employees were part of a profit-sharing plan and some received share options. Employees were encouraged to enroll in a share purchase plan - the firm believing that owning a stake in the company led to greater commitment and motivation. It also reduced cash outflow in salaries. Neeleman suggested employees also had a higher level of job security. Following 9/11, unlike other airlines JetBlue did not lay off staff, but instead redeployed them in ticket sales and other tasks until needed on flights.
Success...'But Now the Hard Part'
Based on what Neeleman called JetBlue's tripod - 'low costs, great product and [high] capitalisation' - the firm's success since its launch in 2000 has been impressive. It now operates37 Airbus 320s and employs over 4000 people. Its revenue in 2002 was $640m and operating income $105m. This resulted in a 16.5% operating margin - the highest among all major US airlines. While its prices are significantly lower than the network carriers, JetBlue's popularity among passengers - the 'JetBlue effect' - means it attracts a 10% premium compared to other LCCs.
JetBlue leads the industry on a range of operational metrics. It has an on-time performance record of over 85% (compared to 74% for the top 10 US airlines) and the firm rivals SWA on airplane turnaround times. It has the highest load factor among major US airlines (over 83% of seats on its planes were filled in 2002). It operates on 22 routes (180 flights per day) and has the lowest cost per available seat mile (6.43 compared to 9.6 cents) in the US. Its luggage handling errors are half those of competitors and customer complaints are minimal. It ranks first in denied boardings (zero - as the firm does not overbook seats). JetBlue has also won numerous awards for its service and for its marketing.
As well as an attractive value proposition, the firm had also been fortunate in the timing of its launch. The traditional airlines have been under significant revenue pressure as the economy underperformed, and had been responding by cutting routes and frequency of flights - capacity was cut back by around 25%. In addition the Internet was bringing more transparency and allowing travellers to shop around - and to switch to JetBlue and other LCCs. This had opened up opportunities for JetBlue at a time when the major carriers were less able to respond.
However, with the improvement of the US economy and major network carriers seeing their finances improve, the intensity of competition is increasing. In addition, some majors were launching their own LCC operations (Song and TED) and there were potential new entrants such as Virgin Airways. SWA was also extending its routes in the North East region, and about to start flying transcontinental routes. As a result investors were wondering if JetBlue's growth and success could be sustained. The low cost approach supported by new planes and a small enthusiastic workforce may have given a small company significant advantage in niche markets, but as it rapidly grew could the company scale its operation and maintain its edge?
Against this backdrop the agendas for JetBlue's board meetings were packed. At the next meeting there would be an update on its Airbus fleet - the firm was set to take delivery of 10 more A320s that year and had placed orders for a further 48 to be delivered by the end of 2007. It would be discussing the expansion of its network, including the recently launched range of new routes from Boston. It would also be looking at the plans to upgrade its facilities at JFK airport.
At the end September 2002, JetBlue had acquired the supplier of its seatback TV service, LiveTV, for $41m. The service was seen as critical to the airline's uniqueness and it wanted to protect its advantage. The board was now keen to hear how the integration of this business was progressing and how the subsidiary could grow sales to customers not in competition with JetBlue.
The board also needed to come to a view on two strategic moves that were more controversial. First was a proposal to remove one of the rows of seats in the A320s. This would increase the legroom for the remaining seats to 34 inches. With the industry average 31 inches, it was suggested that this would increase the firm's appeal to travellers.
Secondly, finding new route opportunities to destinations that could land the A320s was becoming harder. So rather try to grow in markets already well served by the major carriers and LCCs, JetBlue was exploring the potential of mid-sized cities. However, to enable such a strategic move the firm would need to add smaller planes to its fleet. The executive team were weighing up a decision to place an order for 100 jet aircraft with the Brazilian manufacture Embraer. The E190 was smaller, more fuel-efficient and had low operating costs. It would potentially give JetBlue an additional 300 new city destinations to target as well as allowing the firm to concentrate its A320s on longer haul routes.
Rhoades knew that both these two options would prompt concerns from investors. Removing a seat row would reduce the potential revenue per flight and adding a different plane type would add complexity and cost to JetBlue's operating model. But in an increasingly competitive market, not acting also carried risks.