Today’s airline companies are faced with substantial challenges in an effort to keep air travel an affordable and viable mode of transporting people in the future. The airline industry continues to feel the pinch from the US economic slowdown and rise of crude oil/jet fuel prices, which have risen to record numbers with no predictable end in sight. The downturned economy is also forcing customers both business and consumer travelers to look for alternatives to save money through cutting back on travel expenditures.
The strategies that airline companies pursue for the future in an effort to offset skyrocketing fuel prices, and keep air travel affordable pose perhaps the most significant challenge to ensure success in the future. Rounding out the list of challenges is the threat of increased competition due to the vulnerability of the market to new (small) entrants partially attributable to rising fares and the potential for increased labor costs as a result of the possible future shortage of pilots predicted by studies such as the one performed by the International Air Transport Association.
To meet these challenges airlines may find themselves needing to develop and evaluate strategies associated with lowering operating expenses and increasing operational efficiencies through initiatives such as energy conservation measures, scaling back operations, targeting specific markets, pursuing partnerships with other airlines, or even mergers. Other strategies under consideration may include identifying additional ancillary revenue streams. Energy conservation measures being considered are focused on educing fuel consumption through techniques such as flying at slower speeds, higher altitudes and making airplanes lighter aimed at reducing fuel “burn rate”.
Strategies for cutting operational costs may include reducing capacity and service, re-evaluating the use of asset and most assuredly- adopting proven approaches for hedging fuel cost. As anyone who has traveled recently can attest the creation of additional revenue streams is apparent as airlines have passed additional charges to customers in the form of fuel surcharges, baggage fees and charging for amenities that were previously free, all of which impact the customer satisfaction.
Affordability and customer satisfaction will always remain a key objective in achieving success and as companies strive to keep these levels high, they may have to redirect their focus on the corporation and business traveler, which are widely known to dominate the air travel market. Discuss Jet Blue’s strategic intent. Jet Blue’s strategic intent centered on providing the ultimate “best value” scenario by combining the low fares of a discount airline carrier with enhanced customer service and comfort similar to those found in customer’s homes and normally available only with the purchase of a first class ticket.
To keep fares low, Jet Blue concentrated on controlling operating cost and using information technology to achieve operational efficiencies in the areas of ticketing and revenue management. Their mission objectives were deeply rooted in customer service, especially on-board service, geared toward never disappointing a customer; because a satisfied customer is a loyal and return customer. This strategic intent flowed from the top down as several examples of the personal deeds of top company officials toward ordinary everyday customers were detailed in the case.
Another key component of Jet Blue’s vision was their “employee focused” organizational culture based on the values of safety, caring, integrity, fun and passion. The organizational culture stemmed from a belief that ordinary people can accomplish extraordinary things when given the appropriate level of authority and responsibility. Discuss Jet Blue’s financial objectives and whether or not the company has been successful in achieving this objective. One of Jet Blue’s primary financial objectives was to keep operating cost(other than fuel cost) low.
The strategies they employed to control operating cost included populating their fleet with new, more fuel efficient aircraft that were less costly to operate, maximizing passenger carrying capacity, leveraging technology to realize efficiencies associated with electronic versus paper ticketing, providing employment packages that supplemented lower salaries with increased benefits, and embracing the efficiencies provided by teleworking. These strategies proved effective as by 2008, they led the industry in lowest total operating expenses as measured by the metric “cents per revenue passenger mile”.
Specifically, with total operating expenses of 12. 17 cents per revenue passenger mile, their expenses were between 14% to 76% lower than competitors. Another key financial objective was to grow operating revenues; which was substantial (185%) during the 5 year period between 2003 and 2007. Jet Blue’s ability to realize such a substantial growth of revenue was directly attributable to the rapid expansion of operations observed during the same timeframe.
This rapid expansion was made possible through a heavy reliance on financing which resulted in a substantial increase in interest expenses of the company over the same period. This strategy did not prove effective because even though operating revenues grew substantially during the period, the rapid expansion coupled with rising fuel cost caused operating expenses to grow at a faster rate (222%) thus outpacing revenue growth. To compound matters the non-operating expenses of Jet Blue (interest expense being the largest non-operating item) increased by 658%.
All of these factors resulted in a 82% decrease to net income of between 2003 and 2004 As fuel cost continued to rise, Jet Blue adopted a financial strategy to hedge its exposure to rising aircraft fuel cost that was based on derivative instruments comprised of option contracts and swap agreements. This approach posed a substantial amount of risk because there was no derivative market for aircraft fuel, so derivatives for crude and heating oil (which highly correlate with airline fuel prices) were used.
Jet Blue did not anticipate the impact of the “crack spread” or difference between a barrel of jet fuel and crude oil, causing jet fuel prices rise even faster that crude oil prices. As a result Jet Blue’s hedging strategy was less effective that its low cost competitor (Southwest). Specifically Jet Blue’s fuel cost consumed substantially more of its operating revenue (33%) than that of Southwest (26%). Discuss Jet Blues strategic elements of cost, organizational culture, and human resource practices and evaluate whether each element provides the organization with a competitive advantage
Jet Blue’s strategic cost element of being a discount airline carrier by offering low fares and keeping operating cost low without sacrificing service levels and quality is a very attractive strategy to a specific market of air traveler regardless of the condition of the economy. When you take into consideration the depressed state of the current economy this strategy becomes even more attractive as business and consumers look to save money in a variety of ways.
The key element in determining if this strategy will truly provide a competitive advantage is if Jet Blue can remain profitable with this type of strategy in an environment where expenses associated with operations continue to rise, while the pockets of customers continue to shrink. A critical element in achieving a competitive advantage through a low cost strategy, it is to counteract tight profit margins (normally present with low cost strategies) by increasing throughput in terms of market share and associated passenger volume.
Jet Blue’s strategic elements associated with their organizational culture were put in place to create strong values and empower employees to function in a discipline culture of success. An organization that places its values on safety, caring, integrity, fun and passion make them attractive places to work which also corresponds into becoming employers of choice thus reducing employee turnover.
These same values translate into an atmosphere of exceptional customer service because customers value the same principals. This approach is definitely a competitive advantage because customer service is absolutely essential in the success of companies in the service industry. The strategic elements of Jet Blue in the areas of hiring, training and pay result in a stable, well trained and loyal workforce which is a distinct competitive advantage, especially in the service industries.
Specifically, their targeted approach to identifying qualified candidates that fit well within the organizational culture at the outset mitigate future turnover and content, inspired employees generally translate into enhanced customer service. Their focus on training reinforced the importance of providing employees with the appropriate tools and skills to effectively carry out their responsibilities and their commitment to employees through policies such as “no lay offs” and provide enhanced benefits creates an atmosphere of excellence.
Discuss Jet Blue’s strategies for 2008 and beyond and evaluate whether or not Jet Blue will be successful implementing these strategies. According to the text, Jet Blue identified several new strategies to carry forward in 2008 and beyond which include re-evaluation of ways they use their assets, reducing capacity and cutting costs, raising fares and growing in select markets, offering improved services for corporations and business travelers, forming strategic partnerships, and increasing ancillary revenues.
These strategies chart an appropriate roadmap to meet the challenges facing the airline industry in the future, particularly for a company focused on operating as a discount air carrier. In my opinion, the rapid expansion that Jet Blue underwent from 2003 through 2007, was the primary reason that their operating performance did not deliver the expected value to its stockholders.
Their strategy of providing low fares and enhanced customer experience is a solid model for success, provided it is effectively implement and targeted to appropriate market segments. The downturn of the economy which resulted in reduced dependency on air travel and passenger revenues across the industry coupled with the unexpected and substantial increases in fuel cost (and their failed hedging strategy), exacerbated the vulnerability of Jet Blue as a result of funding the rapid expansion.
Several of the strategies identified above (asset use, reducing capacity, cutting cost, targeting markets) are geared toward right-sizing and refocusing the company on core competencies. The formation of strategic partnerships and increasing ancillary revenues are trends that the entire industry seems to be moving towards and Jet Blue will need to fall in line to remain competitive.