jetblue.doc

1 JetBlue KML Strategic October 24 2007 BUSA 499 Professor Lee 2 Executive Summary JetBlue is a low cost carrier LCC that currently operates mostly in the United States They have the lowest per seat operating cost of any other airline in the Unites States JetBlue is currently facing competition from other airlines which is threatening its market share The company has a very aggressive expansion plan In order to maintain this expansion JetBlue has to find new markets The key problem for JetBlue is the increasing competition not only from domestic airlines but also from international airlines entering the United States market They also need to make sure their infrastructure is able to sustain the growth that the company is trying to achieve The airline industry in which JetBlue operates is highly competitive and constantly changing After analyzing the five forces model JetBlue has positioned itself as the lowest priced carrier however they serve the least number of markets They need to continue to form barriers to entry and reduce the threat of rivals Their management strategy is a sustained competitive advantage because it adds value to the company and is exploited by the organization Another sustained competitive advantage is their customer service and positioning Both of these add value to the organization are rare and are used to full capacity The pricing strategy is not unique but it does add value This means that it is a comparative parity These core competencies define JetBlue as a company as well as differentiate them from other low cost carriers JetBlue has two options to help solve this problem It can either expand into new markets or expand into new services JetBlue should expand into new markets because this option has the greatest potential for an increase in profits This option will be easy for them to assimilate and implement because it falls within their current company policy of expansion JetBlue needs to do something to increase its competitiveness in the market They are currently being threatened by international airlines such as Virgin who is entering the market as an LCC Overall we think that option two would provide a greater opportunity to combat the growing amount of competition in this marketplace 3 EXECUTIVE SUMMARY 2 MISSION STATEMENT 4 KEY PROBLEMS 4 CUSTOMER TRENDS AND MARKET FORECASTS 6 ENVIRONMENTAL FORECAST 6 FIVE FORCES ANALYSIS 7 THREAT OF ENTRY 7 THREAT OF RIVALRY 7 THREAT OF SUPPLIERS 8 THREAT OF BUYERS 8 THREAT OF SUBSTITUTES 9 INDUSTRY POSITIONING 9 VRIO ANALYSIS 10 MANAGEMENT 11 POSITIONING AND DISTRIBUTION 11 CUSTOMER SERVICE 12 PRICING STRATEGY 12 PROBLEM STATEMENT 13 OPTION 1 13 ADVANTAGES 14 DISADVANTAGES 14 OPTION 2 15 ADVANTAGES 15 DISADVANTAGES 16 RECOMMENDATION 16 IMPLEMENTATION PLAN 16 COMPETITIVE ADVANTAGES 17 4 Mission Statement We are a low fare low cost passenger airline that provides high quality customer service primarily on point to point routes We offer our customers a high quality product with new aircraft roomy leather seats free in flight entertainment pre assigned seating and reliable performance We focus on serving markets that have had high average fares We currently serve 50 destinations in 21 states Puerto Rico Mexico and the Caribbean and operate over 500 flights a day with a fleet of 98 Airbus A320 aircraft and 23 EMBRAER 190 aircraft 1 Key Problems One of the key problems facing JetBlue is competition JetBlue has to fight against all the other competitors for the travelers and there are lots of competitors It has to deal with existing carriers low cost startups like Skybus and Virgin America and a Delta that is emerging from bankruptcy 2 Many of the larger airlines have already created copies of the JetBlue travel model so they can also compete on the smaller routes While facing competition is normal in any industry many airports are basically already at the maximum number of passengers they can handle This means that you have a relatively fixed number of passengers and all the competitors fighting over a piece of that pie While JetBlue does deal with a lot of small airports that are not yet at their maximum capacity every year there are more passengers wanting to fly so eventually the existing smaller airports will also reach their maximum capacity There is also a high 1 JetBlue 2007 Accessed October 19th 2007 from 2 New Worries About JetBlue Accessed October 23rd 2007 from cx af 0425markets16 html feed rss tickers 5 fixed cost for each flight so any empty seats result in lost potential revenue which cannot be recovered in the future Therefore as competition picks up it will mean that JetBlue has to fight harder There are also rising costs of operation The biggest being the high oil prices Demand for oil is going up around the world faster than we can increase the supply and it will only get worse with time This means higher fuel costs which get passed on to the consumer Consumers are also constantly demanding more luxury on the planes in the form of in flight entertainment and communication This means that depending on how much their competitors improve their planes JetBlue will be forced to improve their offerings as well There is also the increased demand from employees for higher wages All these demands result in more monetary expenditures during a time when competition is already fierce and profit is more difficult to attain With all the competition it will be harder for JetBlue to grow Every customer it gets means one less for the competitors and the competitors are fighting just as hard as JetBlue to get the travelers Also with the increasing costs it will be harder to finance the growth because more money has to be diverted to cover those costs and airlines already use a lot of debt for business operations While it is not impossible for them to grow more it will simply be difficult when many of the competitors are so much larger than them and have greater bargaining power for terminal space should they choose direct confrontation Customer Trends and Market Forecasts There are several customer marketplace trends The first trend is to offer more in flight luxuries These can be in the form of more movies TV shows bigger flat panel 6 displays on the seats and faster Internet access not just for first class customers but also for other passengers While obviously this costs money to deploy across the entire fleet the manufacturing costs for these high tech options continue to decline This makes it easier to add these services to the planes over time There is also the trend of using smaller airports more often because larger airports are already at their maximum capacities People are also making more international flights so the airlines have to offer more options in that respect Environmental Forecast For the environmental forecast because of rising costs airlines are trying to reduce unnecessary costs wherever possible With the rising oil prices airlines are looking to buy more fuel efficient planes In addition some scientists are working on creating ways for planes to run on different kinds of fuels to reduce the dependence on oil Given time there might be less business travelers taking planes With the rise in communications many businesses already find it far more cost effective to do conference calls than to send an employee on a trip For those businesses that need face to face communication we already have video conferencing which is constantly getting both cheaper and better and can reduce that need for travel as well First class travel has also been going down a lot over the years and will probably either stay the same or shrink a bit more over time The largest area of growth should be in economy passengers which is where low cost carriers such as JetBlue are best 7 Five Forces Analysis One way to evaluate the airline industry is through a five forces analysis The analysis evaluates five factors and where JetBlue is positioned in the industry Threat of Entry The airline industry has a high capital investment which is a strong barrier to entry There is also strong brand recognition because everyone knows the names of Delta United Northwest ect This causes a problem for new carriers because customers will choose a company where they know the brand name over one that is unknown There is a limit on the number of planes that can enter an airport because of a limit on runways and airspace A new airline can have problems finding good routes and airports After the airline industry was deregulated competition increased which lowered the profit margins for airline companies Lastly the government through financial assistance has protected airlines that have declared bankruptcy like United This does not allow for free market competition Overall the barriers to entry are strong and JetBlue does what it can to protect its brand identity and increase its company image so that people will choose their airline over their competition Threat of Rivalry In the airline industry there are high exit barriers because of high equipment costs If a company chooses to leave the market they must sell their planes However there are only a limited number of buyers for airplanes The industry is still growing and there are still markets that are underserved which provides opportunities for rivalry The threat of 8 rivals is a real one but JetBlue is preparing their company by offering the lowest cost and high luxury Threat of Suppliers In the airline industry there are only two suppliers Airbus and Boeing JetBlue has chosen to go with Airbus planes Because there are only two suppliers the suppliers have more power then they might in another industry Another industry would not put up with the continued delays in the delivery of planes and the long wait to get planes The suppliers have some power however because JetBlue only uses two airline models the suppliers must be careful to provide what JetBlue actually wants The threat of the suppliers is minimal Threat of Buyers The buyers in the airline industry are the people who purchase the tickets and in the American market alone there are over 300 million people 3 Even if only half of the people in the United States purchase airline tickets that still leaves over 150 million customers There are also six major airline carriers and numerous other LCCs Older America also remembers a time when the airline industry was regulated and all of the prices were the same The deregulation has allowed for buyers to have more influence over the airlines by asking for new routes or lower prices but they do not have much power over the airlines themselves Even if tickets are expensive people will still purchase tickets to fly home for Christmas or go on a summer vacation The buyers do not pose a significant threat to JetBlue or other airlines in the industry 3 CIA Last update 2007 The World Factbook United States Retrieved on October 19 2007 from https www cia gov library publications the world factbook geos us html 9 Threat of Substitutes The substitutes to JetBlue are driving taking the train or taking a boat or cruise ship Driving or taking the train is a real threat for short distances however to get from Seattle to Beijing China a person would need to fly Driving from Seattle to Portland only takes two to three hours versus taking a plane which requires finding a way to get to the airport checking in at least one hour before the flight and then a short flight Overall it might take more time to fly than to drive This is why JetBlue focuses on the long haul trips from east to west coast along with shorter flights on the east coast where traffic can be difficult People value time and money which is why it is more realistic to fly from Long Beach California to New York than it is to drive Realistically the threat of substitutes for JetBlue is not significant Industry Positioning 10 JetBlue is the lowest priced carrier but also has the least number of domestic destinations They are positioned well but need to increase their number of domestic locations in order to be more competitive Delta and US Airways have more locations domestically which might encourage customers to use their airlines because they have a better chance of finding routes that meet their needs versus JetBlue VRIO Analysis After analyzing the five forces involved in the external environment of JetBlue it is important to investigate the internal environment as well A simple VRIO analysis of each of the core competencies that JetBlue possesses will illustrate whether that competency provides a competitive advantage To conduct this analysis each core competency must be defined and examined to see if it is Valuable Rare costly to Imitate and is specific to the organization VRIO AnalysisValueRarityImitabilityOrganization ManagementYesYesNoYesSustained Competitive Advantage PositioningYesYesNoYesSustained Competitive Advantage Customer ServiceYesYesNoYesSustained Competitive Advantage Pricing StrategyYesNoNoYesComparative Parity 11 Management The first attribute of JetBlue is its management Because of the success that JetBlue had especially in its early years and even through the rough patch they are enduring now it is obvious the management creates that value The actions and decisions that the management of JetBlue makes do add value but could be made by any other manager The model that JetBlue is following presently would be considered rare because of the amenities that they offer within their low cost carrier status However those decisions would not be costly to imitate by competitors Although anyone could decide to do the same things as JetBlue the decisions that are made are specific to the resources available at JetBlue As a result this creates a competitive advantage for JetBlue Positioning and Distribution The next attribute of JetBlue that was investigated was the positioning and distribution Within the industry of low cost airlines JetBlue positions their company as the luxury company of the low cost carriers due to the extras they offer in flight This positioning and distribution to the correct market creates a large amount of value to the customer At this point in time this tactic used by JetBlue is rare Few companies that advertise themselves in the low cost market use the extra amenities to position as a luxury airline This positioning that JetBlue has chosen to pursue could be adopted by any other airline in the market at a relatively low cost which means that this core competency is not costly to imitate The organization has utilized its resources and capabilities to 12 position itself in this way making their positioning specific to JetBlue as an organization The positioning of JetBlue helps to create a competitive advantage Customer Service By creating a positive customer service experience and becoming the first to offer online baggage checking JetBlue has given consumers an easy way to fly Their customer service is a core competency for them and by doing it well creates value to the company The next question is whether or not the customer service of JetBlue is rare In this case customer service is rare Many airlines have different tactics within customer service but few offer the same opportunities as JetBlue Few other companies offer all of these opportunities such as online bag checking discount pricing for last second scheduling and call center employees who can work from their homes These specific tactics are not shared with other companies but they could be reproduced by competitors at a low cost which does not make them costly to imitate Lastly the customer service offered by JetBlue is specific to the resources of the organization Overall the core competency of JetBlue s customer service creates a competitive advantage Pricing Strategy Finally the last attribute of JetBlue within the internal analysis is the pricing strategy JetBlue is a low cost carrier and as such promotes inexpensive flights to consumers Providing low cost air travel creates value for the consumer and the company Although JetBlue is a low cost carrier there are multiple other low cost carriers in the market today They all offer different promotions and deals but all strive to lower the cost to consumers This shows that the strategy used by JetBlue is not rare 13 Also this strategy is not costly to imitate It would be more expensive for a higher cost provider to change their business model to fit JetBlue s model than a low cost carrier copying the specifics of JetBlue However in the bigger picture it is not costly to imitate low cost carriers which include JetBlue Furthermore because all low cost carriers attack the market in different ways the specific strategies used by JetBlue in pricing are specific to the organization All the aspects of the pricing strategy of JetBlue create a competitive parity The completed VRIO shows the competitive advantages available to JetBlue as a whole With this knowledge it will be simpler to analyze the problems presented to JetBlue and utilize the strengths of the company to come up with solutions from which they will benefit Problem Statement JetBlue s main problem is the increasing competition not only from domestic airlines but also from international airlines entering the United States market They also need to make sure their infrastructure is able to sustain the growth that the company is trying to achieve Option 1 JetBlue could offer bundled packages including car rental hotel booking and vacation packages along with airline tickets These changes would be easy to integrate into the company In order to offer these other services JetBlue would need to form partnerships with hotel and car rental companies It is a common practice for airlines to offer bundled deals which means the car and hotel companies would be familiar and 14 willing to implement this idea JetBlue is a well known company Therefore they would attract better hotels and car rental companies unlike Spirit airlines which is w