MBA  

 Luiss  Business  School    

   

STRATEGY  Prof.  Andrea  Lipparini  

2013        

GROUP  4              

Team members (Last name, first name)

1. Bellori Giulia

2. Concepción Raxel

3. Fattor Caterina

4. Gaetano Raffaele

5. Guadarrama Garza Arturo

6. Mushen Suzan

7. Prete Gina

8. Ruiz Perez Pablo

9. Stentella Eleonora

10. Turchetti Matteo

 

   

   Note:    

§ Enclosed   is  a   recent  article  published  by  Business  Week  –  Bloomberg.   It  describes   the  competition   occurring   in   the   airline   industry.  More   specifically,   it   focuses   on   JetBlue,  which  has  stayed  small  while  rival  airlines  grew  via  consolidation.  

 § On  the  following  pages  you  will  find  several  questions  covering  different  aspects  of  the  

Strategy   course:   resources   and   competences;   sources   of   competitive   advantages;  technology   management;   industry   and   competitors   analyses.   You   can   find   useful  theoretical  support  from  the  book  Contemporary  Strategy  Analysis  (by  Rober  Grant).  

 § Deadline   for   teamwork   will   be   communicated   by   Maria   Palumbo.   Consultation   of  

textbook  and  notes  from  the  lessons  is  allowed.      

§ The   team   leader   (to   be   nominated   by   the   team)  must   send   by   email   (both   to  Maria  Palumbo  mpalumbo@luiss.it   and   to   Andrea   Lipparini   -­‐   andrea.lipparini@unibo.it)   the  pdf  files  with  the  solution  proposed  by  the  team.  

   

                     

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Once High-Flying, JetBlue Returns to Earth

Ten years ago this week, JetBlue Airways 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 culture—founder and Chief Executive Officer David Neeleman could often be seen helping flight crews vacuum planes between runs—seemed set to reinvent the industry. JetBlue stock soon tripled as larger rivals Delta Air Lines 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 Transportation—three times Southwest Airlines’ 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 travelers—things 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 routes—thus incurring more operating and capital expenses—while 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 less-crowded 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 new routes, 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 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 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 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 there—it’s the largest domestic carrier, with 150 daily flights—would 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 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.

Question 1 Put yourself in the perspective of a consultancy firm. Please, provide:

a) A list of the key success factors in this industry. b) A list of the key strengths – if any – of JetBlue, and the reasons at the basis of

their inclusion in your list.

Question 2 Put yourself in the perspective of a consultancy firm. Please, provide:

a) A list of the key weaknesses of JetBlue, and the reasons at the basis of their inclusion in your list.

b) A list of the key strengths of key competitors like Southwest Airlines, and the reasons at the basis of their inclusion in your list.

Question 3 Put yourself in the perspective of the Top management team of JetBlue.

a) Which strategic and managerial actions would you implement to suffer less from the competition exerted by largest companies?

b) Which sources of competitive advantage appear to be as the most appropriate for survival and growth?

ANSWER 1 Put yourself in the perspective of a consultancy firm. Please, provide:

a) A list of the key success factors in this industry.

1

People (workforce): employees should reflect the values and the commitment of the company in rendering services and goods to the customers in order to make them satisfied.

2

Service/product promotions and in-flight services: promotions have a crucial role in this industry, especially when the company is defined as a “low-cost company”. Most of the travelers cares more about just reaching the destination rather than having top quality flights.

3

Route system (point-to-point flights): giving the possibility to customers to go directly from one point to another one is very important, people often don’t want to stop in other airports wasting time and lengthening the whole time of the flight.

4

Revenue/cost management: level of cost in this industry is very dangerous, since they depend on endogenous factors as well as on exogenous factors (fuel price), which the company can face only having a certain degree of flexibility in terms of organization and revenue/cost management. Therefore the whole financial management in the company should be monitored and regularly controlled, to assess the sustainability of the expected profitability.

5

Reputation of safety: this is fundamental for any segment of the airline industry. If a company is not viewed as safe by potential passengers, they will not use the carrier.

b) A list of the key strengths – if any – of JetBlue, and the reasons at the basis of their inclusion in your list.

Key strengths Reasons for their inclusion in your list

• Brand recognition/loyalty

JetBlue is a well-known company and since it has a track record of quality and low fares, it can exploit customers loyalty; therefore JetBlue can take advantage of this factor on less recognize brands.

• Broad offer of services to customers • Special devices in-flight • Entertainment

Right from the beginning of its climb to success, JetBlue characterized itself for being one of the few company to insert a human element in its service. Indeed it offered special devices such as entertainment system during the flight and the possibility to watch the television.

• Great advertisement and promotions

JetBlue tried to push on advertisement to recover from its situation of “bad reputation” and complaints from the customers. The only way out to restart constructing a good reputation is showing them that the company has changed and has sought to fill its gap.

• Efficient planes • Good technology initiatives • Single fleet • JFK International Airport

JetBlue airplanes were very efficient, the problems for the company were caused by delays and employees’ mistakes actually, and having one single fleet was an advantage in terms of both training workforce and maintenance. Moreover the leadership in JFK International Airport was a critical advantage, since it’s a key point to be hubbed at.

• Strong culture (safety, caring,

integrity, fun)

JetBlue characterized itself from the beginning as a company with a robust culture and deep values. It was a symbol of compassion due to its in-flight personnel, kind and attentive interaction with passengers while simultaneously creating a fun atmosphere. Because this human element prevailed, the company also tried to win customers with other special elements, such as the exclusivity to provide natural blue potato chips from gourmet snacks food giant, Terra chips, in-flight and the introduction of an eco-friendly and healthy blanket and pillow take-home kit for passengers at a low cost. JetBlue represents a company which has always geared towards delivering the utmost safety and integrity to its passengers.

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ANSWER 2 Put yourself in the perspective of a consultancy firm. Please, provide:

a) A list of the key weaknesses of JetBlue, and the reasons at the basis of their inclusion in your list.

Key weaknesses Reasons for their inclusion in your list • Non effective revenue/cost

management causing low economic performances

In 2011 fuel cost soared, nevertheless JetBlue kept adding flights and routes with the purpose of targeting expansion opportunities among the business fliers, while incurring in higher operating and capital expenses and causing low economic performances in the long-run.

• Small sized company vs. Big

sized competitors

While all the airline companies managed to merge, JetBlue decided to keep going on its way alone. Therefore the industry was becoming more and more characterized by the presence of less but bigger companies, which had the possibility to offer more choices to frequent fliers, cut wages and take out thousands of seats and redundant gates and routes. JetBlue didn’t have this possibility because it could rely only upon its financial and operative sources.

• Route network (no long-term travel

and international destinations, no big code-share alliances)

JetBlue route network developed mainly in the USA: on one side it was an advantage because being focused only in this geographic area JetBlue covered routes not reached from the bigger competitors; on the other side it established boundaries for JetBlue in targeting potential customers, which had to turn to other companies to reach international destination, with the possibility of never coming back to JetBlue.

• Congestion in New York area

(limitations in takeoffs and landings in JFK International Airport due to high air traffic)

High air traffic in New York area caused limitations in takeoffs and landings, therefore JetBlue experienced complaints from the customers for delays and malfunctioning in time schedules. These issues led to “bad reputation” for JetBlue, which then needed several efforts to recover.

b) A list of the key strengths of key competitors like Southwest Airlines, and the reasons at the basis of their inclusion in your list.

Key strengths of Southwest Airlines Reasons for their inclusion in your list

• High number of choices offered to frequent fliers

Bigger companies could exploit more financial and operative resources and more capabilities to implement their strategies to reach their customers with more services , to strengthen their loyalty.

• Effective revenue/costs management

(possibility of cutting costs)

Competitors of JetBlue own an effective revenue/cost management that allow them to cut costs and push up revenue when it is needed. Particularly during periods of economic downturn it can be the key capability for companies to survive.

• Expansive route network

The possibility to reach an higher number of destinations all around the world was a key factor for JetBlue competitors, and it could give them more chances to create and strengthen the loyalty of their customers, giving the start to a lock-in process.

• Preponderance of business travelers

Competitors addressed their offerings to a broader customer base. Relying on international route networks and code-share alliances, they could met the needs of more people, while JetBlue addressed mainly its services to a middle-class target.

• Economies of scale

Merged companies could exploit economies of scale more easily than JetBlue, which remained a small stand-alone company. In fact competitors were able to increase the portfolio offered to clients, while decreasing costs.

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ANSWER 3 Put yourself in the perspective of the Top management team of JetBlue.

a) Which strategic and managerial actions would you implement to suffer less from the competition exerted by largest companies?

Actions Desired outcome

• Pursue a cost leadership (as a long

term goal)

The achievement of a cost leadership may give JetBlue the opportunity to keep positioning itself as a “low cost company”, becoming the first among all the companies in this segment. Therefore this could enable JetBlue to survive alone, avoiding merger operations.

• International alliances • Route network expansion

(as short term actions)

A system of international alliances and code-share agreements could ensure a broader air cover/support, with the possibility to reach international destinations; in this way JetBlue could expand its market share targeting customers with different needs, while maintain its main focus on being a low-cost company.

• Increase in advertisement, with the exploitation of different media (as a short term action)

An increase in advertisement is required for JetBlue to recover from its bad reputation and to reach more customers. JetBlue needs to increase its customer base in order to get more profits; this would be the most important variable to have higher profits (an increase in the price would lead to a decrease in retained customers; a decrease in cost, as said before, is necessary).

• Strategic planning dealing with delay-

causing situations and complaints ( as a short term action)

JetBlue has to prove that is doing something to became again an icon of quality, fun, caring and safety to rebuilt its brand image.

• Improve the competences degree of

workforce (as a medium term action)

JetBlue suffered from errors of its employees; therefore the company should hire more prepared people and invest in training them, especially the flight attendances and the pilots, which are the company’s agents most involved in the relation with the customers.

b) Which sources of competitive advantage appear to be as the most appropriate for survival and growth?

The first possible source of competitive advantage could be sought in the resource-based view theory. In this perspective the competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors1. Indeed, the more the company is able to acquire unique resources and exploit them through an effective implementation of the strategy, the higher the probability for the company to gain a competitive advantage. Therefore, JetBlue should focus on the acquisition of highly trained and skilled personnel and of new technologies (both from internal implementation or from external sources). Secondly, JetBlue should look to a cost-leadership strategy, offering products and services at the lowest cost in the industry and trying to exploit higher profitability margins. The company might invest in newer planes with a different approach, such as, the leasing acquisition formula (very common in the airline industry) and seek a cost saving approach in terms of efficiency and maintenance. Furthermore, through the establishment of international alliances with big competitors, JetBlue can reach other types of customers, while staying focused on its main objective of being a low-cost company. This will lead directly to the implementation of an operational effectiveness strategy. JetBlue should manage to perform internal business activities better than its competitors; in fact, partnering with bigger companies, JetBlue could focus on its market target (middle-class, leisure fliers), and, in the meantime, rely upon supplementary resources with the exploitation of possible economies of scale. This would ultimately allow JetBlue to decrease costs and exploit higher margins coming both from the acquisition of new potential customers and from the increase in the retention rate of existing customers.

1 Source: http://en.wikipedia.org/wiki/Competitive_advantage