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The Trends in the U.S. Airline Industry and Impact on Company Strategy
The airline industry in the US has about 100 passenger airlines with total annual revenue of roughly $170 billion. The main players in the industry are American, Delta, UPS, FedEx, and United Continental. UPS and FedEx are cargo airlines. The 10 giant companies have a significant proportion of market share and they contribute to 75% of the industry’s revenue. The industry is finally recovering after a slump following the 2008 global financial recession.
The airline industry had a challenging 2009, like other industries, because the global recession led to a reduction in passenger traffic (Martin, 2010). Companies effected deep cuts on their travel budget, opting to fly their employees less often, instead, they switched to video conferencing among other methods to discuss business. Leisure traveler also cut on their travelling in order to save more, not to mention that the high unemployment rate led to less disposable incomes.
Oil prices continue to fluctuate and this trend has a considerable impact on the airline industry. The ATA has estimated that a dollar increase in jet fuel price leads to a $445 million increment in fuel prices for the entire US airline industry. Although the world oil prices have fell marginally, they are still significantly high in relation to earlier years. High oil prices drive the cost of fuel upwards, eroding the industry’s profits. Some airlines may increase their fares or use hedging strategies to protect their profits.
The airline industry reported incredible growth in business class passengers in 2010. This has led to a shift from leisure travelers who are price-sensitive to corporate passengers who tend to be price-insensitive. Furthermore, the corporate segment generates approximately 70% of passenger revenue, although it only accounts for 30% of airline passengers (Boehmer, 2011).
JetBlue is considering a shift from low-cost airline strategy to collaborating with other airlines in order to remain competitive. Moreover, it is moving to attract corporate passengers to fly aboard JetBlue in a bid to grow its revenue rapidly and consistently.
Jetblue’s Strategy Prior to 2008
David Neeleman founded JetBlue Airways in 2000 as a discount airline. The airline has rapidly grown to become a market leader in the low cost airline segment in US. The airline started in the East Coast and expanded to the other regions before venturing into the international market. JetBlue has met the needs of customers who are price-sensitive and those who fly regularly to destinations that national airlines do not fly. JetBlue identified this niche and differentiated itself by offering above average services at a discounted price and this enabled the airline to gain competitive advantage. Unfortunately, high leverage ratio and industry reorganization threaten the airline’s competitive advantage.
Jet Blue’s Financial Objectives
JetBlue posted poor financial results for the 2010/2011 financial year. The profit margin stood at a meager 2.32%; the operating margin stood at 7.92%; return on assets was at 1.42%; return on investment at 1.74%; and return on equity stood at 5.90%. Furthermore, the EPS has been plummeting year after year over the last four years not to mention a very high leverage ratio of 1.82 (Yates, 2011). All the developments have led the company to focus on advancing its balance sheet by reducing its debt obligations. The company intends to borrow modestly and payoff maturing debt obligations. The airline managed its 2011 debt obligations and this has contributed to lowering the company’s leverage ratio.
The global financial crisis of 2008 left companies with limited liquidity because the credit crunch made lending difficult. The management made liquidity conservation a major financial objective for JetBlue in 2009 to enable it to meet its 2010 debt obligations. The management succeeded in achieving this objective by increasing its unrestricted cash and investment opting for two short-term credit lines rather than a long-term debt and issuing convertible debenture to increase the airline’s cash reserves (Businesswire, 2009).
The airline sought to hedge its fuel cost exposure in 2009 and it successfully managed to save over $600 million in fuel costs by using oil futures contracts. The management added another 5% to its fuel hedge coverage in the last quarter of 2009 to protect itself from spiraling fuel prices through 2010 as the world economies recover from the global crisis.
Assessment of Jet Blue’s Strategic Elements in Sustaining Its Competitive Advantage
JetBlue uses both low-cost and differentiated strategies to provide above average flying experience to its target market. The target market consists of mainly leisure travelers who have other traveling alternatives but they chose to fly because the benefits versus the costs are high. Additionally, the airline targets markets that big carriers have neglected. The airline managed to forge a niche for itself and it has maintained the low-cost strategy to protract its competitive advantage.
The low-cost strategy has been successful because it pushed the airline to the 11th largest airline in the industry in just six years of being in operation. Furthermore, it has won the airline a significant market share in the low-cost airline market. The airline succeeded in maintaining low operating costs and quality services because it started with a fleet of new planes Airbus A320, has a sound business model and opts for non-unionized labor because it is cheaper. Moreover, it reduces costs by using online booking services, paperless cockpits, serves snacks instead of meals and uses one type of aircraft, which keeps the cost of training low.
JetBlue uses a simple model to define its organizational culture. The model required employees to identify and commit to a set of values and behavior. The human resources have the mandate to hire and retain personnel who show a commitment to the organization’s values and to reward such personnel. Moreover, the organization is committed to creating customer loyalty by exceeding the expectations of their clientele. Finally, all personnel in the organization are required to uphold discipline especially in areas pertaining to financial metrics. This culture earned the organization recognition by Fortune Magazine in 2009 and most importantly, it has contributed to the organization’s success.
Human Resource Practices
The airline does not allow unionization of labor because labor unions fight for their members’ rights. The management is aware labor unions would demand better salaries and working conditions for their members,thus, pushing operating costs upwards and probably rendering the low-cost model ineffective.
The human resources team is committed to hiring the best personnel because it hired executives who had a prior experience and core competencies in the low-cost airline business. Most of the airline’s executives including Neeleman worked with Southwest before joining JetBlue. This move enabled the airline to roll out the low-cost model more effectively than it would have been the case if top executives had no prior experience with the model.
JetBlue seeks to maximize employee’s effectiveness by providing proper training to staff, which may include cross training. Cross training enables employees to perform different tasks. Therefore, the company can save on recruiting new staff for the positions.
Jet Blue’s Strategies For 2008 and Beyond
The airline business environment has become unstable explaining the myriads of bankruptcy cases and consolidations especially across low-cost airlines. Some legacy airlines have the privilege of renegotiating labor contracts, which gives them unfair advantage over others. All these factors have made the low-cost airline environment challenging for JetBlue and other low-cost airlines. As a result, JetBlue had to come up with new strategies to protect and grow its market share as well as sustain its competitive advantage.
JetBlue has maximized on its position at JFK and moved to form partnerships to be able to penetrate new markets and grow its market share because these partnerships allow the airline’s customers to fly aboard its code-share partners and the other way round. It has partnerships with South African, Lufthansa, American Airlines and Aer Lingus. The airline intends to replicate this partnership model in Boston and Orlando. The partnership model has been effective because it has earned the airline slots at Washington National airport through an interline agreement with America (Ranson, 2010).
The airline intends to mix its customer composition with price-sensitive customers and corporate passengers who demand better quality services than the former (Boehmer, 2011). JetBlue will offer discounts to companies that book 40 passengers to the same destination. Moreover, the airline intends to fly from Boston to Raleigh, Pittsburgh and Chicago frequently to cater to the corporate segment. The airline has switched to smaller E-190 jets to fly from hub cities to destinations, has enabled the airline to maximize on seat occupation, which is cheaper as opposed to using the bigger A320 that rarely flies at full capacity for short flights. The A320 is being used for longer flights that the E-190 jets cannot cover and they often fly at full capacity.
JetBlue ceased flying to some cities that were unprofitable either because of too much competition or because of lack of capacity. This move has freed resources to serve other profitable routes better while looking into venturing into new markets with huge potential.
JetBlue is a market leader in the low-cost airline segment and it combines both low-cost and differentiation strategies. The airline industry has changed over the years with airlines going bankrupt, and others consolidating to avoid going bankrupt. The airline has remained a key player in the airline industry for more than a decade but it is time to change its strategy if it is to sustain its competitive advantage. JetBlue has signed partnership agreements with other airlines such as American Airlines and Aer Lingus in order to enable its passengers fly aboard these airlines, thus, saving on operational costs. These partnerships also help to grow the airline’s market share. In addition, the airline is making deliberate efforts to win the 30% clientele that generates 70% of the total revenue. Focusing on corporate passengers will help to grow its revenue by a bigger margin. However, caution should be taken not to neglect the price-sensitive passengers because they form the core business of the airline.