10-K Integration ProjectEduard Hoffmann Mondays Section 12 JetBlue Airways Corporation S.M.A.R.T. September 29th, 2012! 1!PESTEL Forces 1) Political Our business would also be harmed by any circumstances causing a reduction in demand for air transportation in the New York metropolitan area, such as adverse changes in local economic conditions, negative public perception of New York City, terrorist attacks or significant price increases linked to increases in airport access costs and fees imposed on passengers. (pg. 17)1 This excerpt portrays how the airline industry is susceptible to the risk of calamities, including terrorist attacks like those that hit New York City on September 11th, 2001. Those attacks have altered the mindset of customers and of governmental agencies and have caused extra caution and political pandering to promote extra security around the airline industry's operations. These security concerns can endanger an airline's ability to service its customers on a timely manner and can cause people to choose alternative forms of transportation out of fear and out of convenience. Airlines are also at the mercy of wars and conflicts with other nations since these can alter the price of fuel which in turn can hurt an airline's ability to make a profit without gouging its clientele and potentially turning them away (pg. 10). 2) Economic The global economic recession and related unfavorable general economic conditions, such as higher unemployment rates, a constrained credit market, housing-related pressures, and increased business operating costs can reduce spending for both leisure and business travel. Unfavorable economic conditions could also impact an airline's ability to raise fares to counteract increased fuel, labor, and other costs. (pg. 20) This excerpt portrays that JetBlue and the airline industry is highly susceptible to the economic climate around it. Airlines operate on low profit margins due to the expenses they occur and the need to offer a better deal to consumers than their competitorsJetBlue is no different (pg. 8). When the economy is doing well and companies have more funds to spend !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 All page numbers from JetBlue's 10-K filed with the SEC unless otherwise noted ! 2!then airlines tend to see more business come their way; a slow economy tends to reduce the demand for flights which leads to unutilized capacity on an airline's planes and to even more intense competition. JetBlue, like many other airlines, has a high level of debt, which means that fluctuations in interest levels have a major impact on profitability and on the ability for the airlines to pay off what they owe to their lenders and suppliers (pg. 15). 3) Sociocultural Unlike most airlines, we make an investment in our culture by having a policy of not furloughing crewmembers during economic downturns, and we have a non-union workforce, which we believe provides us with more flexibility and allows us to be more productive. However, the increasing seniority of our crewmembers and rising healthcare costs are presenting cost pressures. (pg. 34) This excerpt portrays the pressures imposed upon JetBlue by the current societal culture of taking care of one's workforce. JetBlue enjoys the benefit of not having to work with a union for its labor force, which in turn lets it be in more control of its employees and allows it to be more productive (pg. 34). However, this control comes at the cost of meeting the healthcare needs of its ageing crew. JetBlue cannot fire its crew due to age because of discrimination laws as well as the social turmoil it would create for itself by acting in such bad faith. Therefore it is forced to pay higher and higher amounts in healthcare for its employees due to social pressures. 4) Technological Our information technology and other systems that maintain and transmit customer information, or those of service providers or business partners, may be compromised by a malicious third party penetration of our network security, or that of a third party service provider or business partner, or impacted by deliberate or inadvertent actions or inactions by our employees, or those of a third party service provider or business partner. (pg. 18) This excerpt portrays how dependent, and thus vulnerable, JetBlue is to its technological resources. The Internet has completely changed how airlines conduct business. The Internet has!3!reduced the reliance on ticket agents, ridding the industry of a waged position. Most of the lowcost airlines, including JetBlue, use the Internet to sell tickets to its customers. Customer service representatives are now able to work and help potential clients from the comfort of their own homes, reducing costs in capital expenditure for business facilities to house these employees. These Internet-enabled innovations have allowed low-cost airlines like JetBlue to be competitive but also represent a significant potential threat should something occur that could take down their ability to do business over the Internet (pg. 18). 5) Environmental There is growing consensus that some form of federal regulation will be forthcoming with respect to greenhouse gas emissions (including carbon dioxide (CO2)) and/or cap and trade legislation, compliance with which could result in the creation of substantial additional costs to us. (pg. 21) This excerpt portrays the environmental concerns that are going to put financial pressure on JetBlue and other airlines to cut down on carbon emissions from their airplanes and operations. The government may enact regulations that would force JetBlue to invest in new environmentally friendly capital, placing a major financial burden on a carrier that is already cost cutting as much as it can while still making minimal profit (pg. 21). 6) Legal We may be subject to unionization, work stoppages, slowdowns or increased labor costs; recent changes to the labor laws may make unionization easier to achieve. (pg. 17) This excerpt portrays JetBlue's concerns for recent laws that have made unionization easier to achieve, something JetBlue has strived to keep out of its company culture. The deregulation of the airline industry in 1978 helped open the doors to new airlines being formed!4!with easier barriers of entry (Wikipedia)2. Low cost airlines were able to come into existence thanks to it, changing the entire airline industry landscape. Bankruptcy laws have given protections to airlines having problems creating a profit, giving struggling airlines a lifeline during economic hardship. Porter's Five Forces 7) Current Competitors (and intensity of rivalry among them) Our ability to meet this price competition depends on, among other things, our ability to operate at costs equal to or lower than our competitors, including only charging for fees that we believe carry an intrinsic value for the customer. (pg. 10) This excerpt portrays that the intensity of the rivalry between airline competitors is significant. JetBlue has a multitude of competitors who try to gain customers from each other in order to keep their capacity utilizations at a level they deem to be acceptable (pg. 17). In order to attract customers from other airlines JetBlue is in a struggle to keep costs low but offer a differentiated product that appeals to the followers of its brandseats with extra legroom, 36 channels of DirecTV at each seat, and a complementary meal or snack on each flight (pg. 32). Profit margins are cut-throat low and JetBlue and its competitors are constantly working towards lowering their costs in order to raise their economic value added to their products; specifically, JetBlue prides itself in its engaging crew and customer service to keep costs down and create value for its customers (pg. 2). 8) Threat of new entrants (and entry/exit barriers more generally) The highly competitive nature of the airline industry makes airline profits sensitive to even slight changes in fuel costs, average fare levels and passenger demand. (pg. 9) !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2 "Airline Deregulation Act." Wikipedia. Wikimedia Foundation, 21 Sept. 2012. Web. 22 Sept. 2012. . ! ! 5!This excerpt portrays that the threat of new entrants to the airline industry and to low-cost companies such as JetBlue is fairly high. JetBlue is the only airline to have begun operations after deregulation to survive into its second decade of operation (pg. 2). This deregulation lowered the entry barriers into the low-cost airline industry and allows anyone to start their own airline, provided they have the funding to commence operations. What may hold back new potential competitors from entering the industry is the high cost of exiting the airline business; in order to be competitive a massive investment in capital must be made and selling used planes to get out of the market is not easy to do as the only potential buyers for the used capital is the competition who are not often in need of extra planes (pg. 15). This means that that a low-cost airline might stay in business because it has no recourse it can take to easily exit the industry, thus artificially increasing competition in the market. 9) Suppliers (and their bargaining power) We are subject to the risks of having a limited number of suppliers for our aircraft, engines and a key component of our in-flight entertainment system. (pg. 19) This excerpt portrays that JetBlue is dependent on a limited number of suppliers. In the case of airplanes there are only two major suppliers, Boeing and Airbus. Since they both sell highly differentiated products the costs of switching between one and the other, such as training the pilots on how to operate a different cockpit console, is high, giving the airplane manufacturers a significant amount of power (pg. 19). The bargaining power of Airbus and Boeing are quite high with every airline company despite the fact that the threat of forward integration by either one of them is nonexistent at the present moment.!6!10) Buyers (and their bargaining power) In addition to our regular fare structure, we frequently offer sale fares with shorter advance purchase requirements in most of the markets we serve and match the sale fares offered by other airlines. (pg. 33) This excerpt portrays that the bargaining power of the buyers of JetBlue's airline services is moderate at best. One of the advantages JetBlue has over its buyers is that its clientele is not concentrated; a single passenger does not represent enough of a revenue fallout if he decides to not fly with JetBlue on that dayif hundreds of people jointly decide to boycott JetBlue then their bargaining power might increase. While it is true that buyers have little to no switching costs and that the advent of the internet has allowed for customers to more easily compare prices between airlines, JetBlue, and its competitors, has engaged in the practice of creating customer loyalty programs, such as frequent flyer mileage groups, to create a cost of switching airlines (pg. 7). JetBlue does not have to necessarily beat its competitors' prices down to the dollar since it depends on its brand loyalty and differentiated flying experience to increase its value in the minds of its customers (pg. 4). Also, JetBlue does not need to be concerned about its customers integrating backwards and creating their own airline industry. 11) Threat of substitute products/services (and their influence on the company) When we enter a new market our fares are designed to stimulate demand, particularly from fare-conscious leisure and business travelers who might otherwise have used alternate forms of transportation or would not have traveled at all. (pg. 33) This excerpt portrays that the threat of non-flying substitutes are high when the distance to be traveled is relatively short or the potential customer's time is not limited; in these cases the alternative forms of transportation, automobiles, trains, and even bicycles, may be less expensive and more convenient and thus a threat to JetBlue and the airline industry as a whole. However, there is little threat of substitute for longer distances and for customers with tight and valuable!7!schedules; for these customers there are no other good substitutable modes of transportation and they will most likely use an airline to get to their destination (pg. 33). SWOT 12) Strengths One of our competitive strengths is our service-oriented company culture that emphasizes friendly, helpful, team-oriented and customer-focused employees. (pg. 19) This excerpt portrays that JetBlue believes its biggest strength is its people and customer service. It knows that in order to compete with its competitors it needs to harness its brand and people to make it unique in the eyes of customers. It believes in this so strongly that they continuously train their employees in the company culture and encourage them to be fun and friendly with customers; potential hires are screened for attributes that follow with JetBlue's culture (pg. 2). 13) Weaknesses Our current dependence on two types of aircraft and engines for all of our flights makes us vulnerable to significant problems associated with the Airbus A320 aircraftresulting in an inability to operate our aircraft. (pg. 19) This excerpt portrays JetBlue's dependence on a few plane manufacturers, primarily Airbus, and the risks that come with that. If anything were to happen to their planes then JetBlue would have little recourse than to pay whatever it was that Airbus demanded of them. The costs of switching to an alternative provider, specifically Boeing, are too high in terms of physical capital and human capital (the training of the pilots) (pg. 19). 14) Opportunities This strong foundation affords us the ability to expand and profitably grow our route network and our customer offerings as well as the flexibility to take advantage of market!8!opportunities as they become available, such as the slot auctions in New York and Washington D.C. during 2011. (pg. 34) This excerpt portrays the opportunities that JetBlue believes it has to expand at the moment. JetBlue is currently the leader in the number of flights a day between metropolitan New York and Florida (pg. 6). If it can capitalize on the future slots opening in New York and Washington D.C. then JetBlue can further service two of the most important metropolitan centers in the country while transporting more individuals than ever before between them and Florida. With the economy slowly improving, the tourism industry should pick up and with it flights to and from tourist destinations such as Orlando and Miami. Taking advantage of these opportunities are a must if JetBlue wants to remain competitive (pg. 34). 15) Threats The challenges of the airline industry are numerous. It is one of the most heavily taxed industries, extremely capital and energy intensive and it has a unique susceptibility to economic downturns, inclement weather, international events, natural disasters and acts of terrorism. (pg. 9) This excerpt portrays the multitude of threats facing JetBlue and the airline industry as a whole. JetBlue faces heavy taxation on its revenue, massive depreciation on its airplanes, tremendous energy costs that fluctuate with the price of fuel, and vulnerability to the changes in the consumer price index and earning power of its customers. Also, unique to the airline industry is the threat of natural disasters, such as hurricanes and lightning storms, as well as international conflicts and acts of terrorism which can cause the FAA to force all planes to divert their paths or stay grounded for a duration of their choosing (pg. 11). Overall Strategy A key objective of ours is that competitive fares and quality air travel need not be mutually exclusive. Our competitive fares, high quality product and outstanding customer!9!service create the overall JetBlue Experience that we believe is unique in the domestic airline industry. Key to what we offer to our customers is how and where we offer our service while maintaining a low cost structure relative to our network and superior product level. (pg. 3) JetBlue's strategy is unusual as they are attempting to gain a competitive advantage by offering a product that is both cost cutting and differentiated from its competitorsJetBlue uses an Integration strategy to have both a cost leadership and differentiation strategy. JetBlue achieves cost leadership by having as efficient an operation as possible. Increases of aircraft utilization via longer routes than other low-cost point-to-point airlines allows for a more cost effective use of their capital by having their planes in the air more and their planes on the ground less. Purchasing newer planes than their competitors allows JetBlue to shave on fuel costs with more aerodynamic fuselages and by bringing in more revenue by holding more passengers than older aircraft (pg. 1). New planes also allow JetBlue to have lower maintenance costs than competitors using older aircraft. Allowing JetBlue reservation agents to work from home reduces investment in infrastructure; fewer overhead costs come as a result of less physical capital on the ground (pg. 3). These savings allow JetBlue to offer competitively low fares to their customers while still maintaining a profit (pg. 4). For example, a quick rate comparison using Expedia showed on September 28th, 2012, that a round-trip flight to New York City from Orlando during the week of October 9th, 2012, was $252 a person on JetBlue and was $810 a person on AirTran, a principle competitor against JetBlue. Offering rates that compare favorably with your competition by lowering your own costs makes you a cost leader. JetBlue achieves differentiation by building a strong brand with an almost fanatical fan base. Premium features unavailable on other airlines in the industry entice customers to view JetBlue's flying experience as one of luxury. Having 36 channels of DirecTV at every seat is luxury that cannot be found anywhere else and adds to the perceived value of the JetBlue!10!experience (pg. 3). The ability to have more legroom for a nominal charge, and to have a greater seat pitch on all seats by default, allows for a more comfortable experience even in coach (pg. 4). JetBlue also differentiates its product by offering unlimited snacks to its passengers, something almost no low-cost airline provides and something hub-and-spoke airlines have cut down on severely (pg. 3). JetBlue successfully was able to keep its costs low to itself and to its customers by purchasing newer airplanes and by having an efficient operation thanks to investing in high-end technology from the onset. At the same time, they added value to their brand by offering entertainment options and comfort that other airlines do not even come close to offering, differentiating themselves as a premium brand. By doing both of these two things successfully JetBlue has followed an Integration strategy down the line; as long as JetBlue can continue to be both a successful cost leader and differentiator it will continue to have a sustainable competitive advantage over its competition. Compare and Contrast JetBlue views itself as a glowing example of an airline with a successful Integration strategy and with a sustainable competitive advantage over its competitors. However, according to a Bloomberg Business Week article published earlier this year, JetBlue may have found itself in the same mire as the rest of the airline industry (Bloomberg)3. JetBlue prides itself on screening for and hiring people who fit the company culture happy, fun individuals committed to excellent customer service fits the JetBlue profile. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 3!Farzad, Roben, and Justin Bachman. "Once High-Flying, JetBlue Returns to Earth." Bloomberg Business Week. Bloomberg L.P., 05 Apr. 2012. Web. 22 Sept. 2012. . ! ! 11!Unfortunately, according to the Bloomberg article a pilot had a midair meltdown on March 27th, one of a string of public mishaps; other mishaps include a plane with passengers being stranded in an ice storm for 11 hours in 2007 and a flight attendant leaving a plane via its exit chute after a scuffle with passengers in August 2010. JetBlue highly values its company culture and these actions serve that culture poorly, casting a negative shadow on JetBlue's training, screening, and personnel management. JetBlue has been taking advantage of their opportunities and expanding their routes and adding flights despite the rest of the industry cutting back on both to cope with fuel costs. While JetBlue views this as an opportunity, Bloomberg cites Dahlman Rose analyst Helane Becker as being concerned about the adding of routes and flights since it brings added operating and capital expenses with it. She argues that the 7% in capacity increase is targeted to routes attractive to higher-fare corporate fliers, which deviates from JetBlue's original clientele; JetBlue started as the airline for the New York leisure traveler. They don't have the route structure or the miles to compete with the majors [airlines] for business dollars. JetBlue's brand is synonymous with high quality flight experiences at a low cost and not usually associated with men in business suits getting work done as they are commuting to and from a meeting with clientele. If they try too hard to target this sector and ignore their original customer base then they may find themselves losing market share to their competitors who are ready to scoop up the disenchanted fan base. The article also points out how JetBlue's competitors have grown larger via mergers while JetBlue has held its ground as a small airline. Even its principle competitor and model corporation, Southwest, has acquired AirTran Airways and grabbed routes from the now liquidated carrier ATA; Continental and United have merged, as have Delta and Northwest, and US Airways and America West. While keeping itself independent from the hub-and-spoke!12!airlines allows Jet Blue to remain independent for the time being and allows their company culture to not merge with that of another company, the Bloomberg article believes that independence makes them too small to be able to compete with the every growing competition down the road. The article does give credit to JetBlue's attractiveness in the New York area for potential buyers of the corporation. It is the largest domestic airline at the JFK airport, with 150 daily flights, and even though current JetBlue CEO Dave Barger has stated that JetBlue will grow independently and organically, the offers of a buyout by American Airlines, once reorganized after bankruptcy, or Delta may be too attractive to refuse. In conclusion, JetBlue is currently a lone paddleboat in a sea of ever-growing airplane carriers. While JetBlue flaunts its employees and new fleet of airplanes, news of employee mishaps and failure to identify those in distress pop up. JetBlue currently services its targeted clients and meets their expectations more often than not, but may find they will have trouble pleasing anyone if they target a business audience that has not traditionally been their client base. And finally, JetBlue's small size and independence might not be able to withstand the pressures put upon it in the next couple of years as buyout offers and economies of scale from its competitors force JetBlue to capitulate and give up its current position in the market to larger, more profitable airlines.!13!Once High-Flying, JetBlue Returns to EarthBy Roben Farzad and Justin Bachman on April 05, 2012 Ten years ago this week, JetBlue Airways (JBLU) staged a festive initial public offering at the Nasdaq marketplace in New York's Times Square. Although September 11 had plunged the airline industry into record losses, the then-two-year-old carrier was the envy of its peers. Out of the gate, it was funded by venture backers and strategically hubbed at New York's John F. Kennedy International Airport. It boasted brand-new, leather-seat-equipped Airbus A320s and fanatically loyal customers drawn to its free in-flight TV and help-yourself snacks. Its low costs and tight-knit company culturefounder and Chief Executive Officer David Neeleman could often be seen helping flight crews vacuum planes between runsseemed set to reinvent the industry. JetBlue stock soon tripled as larger rivals Delta Air Lines (DAL) and United Airlines rushed (unsuccessfully) to launch their own cheery, low-cost spinoffs. With founder Neeleman long gone and shares 80 percent off their high, JetBlue now finds itself bereft of much luster. A JetBlue pilot's midair meltdown on March 27 was the latest in a string of very public mishaps, starting with passengers getting stranded on a plane for up to 11 hours during a February 2007 ice storm and a flight attendant bolting the plane's exit chute after cursing passengers in August 2010. JetBlue now ranks last among 15 airlines in on-time performance and ninth in customer complaints to the Department of Transportationthree times Southwest Airlines' (LUV) complaint ratio. The tables have turned. A vastly consolidated airline industry once again favors major carriers with expansive route maps and a preponderance of business travelersthings JetBlue lacks. JetBlue isn't immune to the industry's bane: soaring fuel costs. Ten years ago jet fuel cost an average of 71 a gallon; JetBlue now pays an average of $3.15. Higher fuel costs represented 71 percent of its yearly increase in operating expenses. Spokeswoman Allison Steinberg says part of the jump was due to more people flying on JetBlue at a time when its fuel costs surged 30 percent in a year. That practice of adding flights and routesthus incurring more operating and capital expenseswhile the rest of the industry is shrinking to cope with fuel costs is what bothers Dahlman Rose analyst Helane Becker. JetBlue increased its capacity by 7 percent last year, as it continued to add routes attractive to higher-fare corporate fliers. We're concerned about their expansion into the business traveler, Becker says. JetBlue started as the airline for the New York leisure traveler. They don't have the route structure or the miles to compete with the majors for business dollars. JetBlue's Steinberg says the airline is making headway among business fliers, especially in Boston, its fastest-growing market. That's a switch from JetBlue's initial focus on leisure travelers and service to lesscrowded airports from its hub at JFK. But during much of the recession, whenever a major carrier retrenched somewhere, JetBlue would quickly target expansion opportunities. It now plans to have 45 nonstop routes out of Boston by next month, and it's expanding service out of San Juan. As American Airlines began dismantling its San Juan hub in 2008, JetBlue has added 11 new nonstop flights from Puerto Rico to Florida, the Northeast, and other Caribbean islands. Some analysts say that expanding this way in spite of soaring fuel costs is a risk. JetBlue remains profitable, having posted net income of $86 million last year, ending 2011 with about $1.2 billion in cash and short-term investments. George Ferguson, senior airline analyst at Bloomberg Industries, also notes the carrier has managed to retain the industry's lowest costs. But JetBlue can't quell investors' worries that it seems destined, despite its newroutes, to remain a small player in a business where size matters. Indeed, its bottom line represents a sliver of the $800 million-plus that far larger Delta and United Continental Holdings (UAL) each netted last year. Profits aren't the only disparity. A decade of mergers, alliances, and bankruptcies has let the majors get bigger, offer more choices to frequent fliers, cut wages, and take out thousands of seats and redundant gates and routes. US Airways (LCC) and America West have merged, as have United and Continental and Delta and Northwest. Even go-it-alone Southwest, Neeleman's alma mater and the model for JetBlue, nabbed routes from liquidated carrier ATA and acquired AirTran Airways. JetBlue's route network, meanwhile, has no big code-share alliances, nor does it have the kinds of revenue-sharing opportunities other carriers have forged. Lufthansa (LHA) did buy 19 percent of the airline in December 2007. But the German carrier in March announced its intention to raise money by selling convertible bonds linked to its JetBlue stake, which could trim the holding by 2017. With the industry so thoroughly merged and allied, the question is whether JetBlue can remain independent now that rivals have bulked up. Because of congestion in the New York area, JFK is limited in how many takeoffs and landings are permitted each hour. JetBlue's slot dominance thereit's the largest domestic carrier, with 150 daily flightswould be a key asset for a potential acquirer. JetBlue's Steinberg responds that CEO Dave Barger recently reiterated at an industry conference that the carrier intends to grow organically and independently. Still, Roger King, an airline analyst with research firm CreditSights, says JetBlue could be particularly appealing to American or Delta, carriers that boast plenty of international flights into JFK but not the complementary domestic traffic United Continental enjoys at its Newark trans-Atlantic hub. If now-bankrupt American reorganizes successfully and Delta senses a competitive threat in New York, both carriers might try to woo JetBlue, says William Swelbar, an aviation researcher at Massachusetts Institute of Technology and Hawaiian Airlines (HA) director. On some routes, American already has frequent-flier reciprocity with JetBlue and is likely to expand its code-sharing after its bankruptcy. An acquired JetBlue, he says, could benefit as a unique brand within a larger airline. What makes JetBlue kind of hard to integrate is that it's got its culture, it's got its cult following. And to desert that does damage to the very franchise that you're looking to buy. Indeed, JetBlue is the only four-star-rated domestic carrier on Skytrax's airline rankings. Ferguson, however, says that's only worth so much these days: At the end of the day, it's a bus ride in the air. The bottom line: JetBlue, which went public 10 years ago, has stayed small while rival airlines grew via consolidation. That could hurt it more than help. http://www.businessweek.com/articles/2012-04-05/once-high-flying-jetblue-returns-to-earth#p2