Term Project – AC 413

April 30, 2013

Table of Contents

Backgrounder…………………………………………………………………………………………… 2 – 4

Competitive Analysis………………………………………………………………………………… 5 – 9

Informational Interview…..……………………………………………………………………….. 10 – 12

Financial Analysis…………………………………………………………………………………….. 13 – 14

Sources…………………………………………………………………………………………………….. 15

1

Backgrounder

JetBlue is one of the largest airlines in North America, and it is constantly

striving to remain on top while competing with other large airlines, and adapting to

the trends in the industry.

JetBlue started in 1999, by founder David Neeleman. It was first known as

“New Air”. Within the first year of the company starting, it revealed that all of its

aircrafts would offer 24 channels of live satellite television at every seat, a first for

the airline industry. In that same year, the company received an unprecedented

exemption for 75 takeoff and landing slots at JFK Airport. On April 11, 2002, JetBlue

announced the initial public offering of its common stock. In the next two years, it

would launch services to/from hundreds of more locations, add more channels to its

DIRECTV programming and launched its TrueBlue customer appreciation program.

In 2003 it was even named Best US Airline by Conde Nast Traveler Readers for the

2nd year in a row. In 2005, JetBlue received the FAA’s highly coveted Diamond

Certificate of Excellence Award and then announced a partnership with American

Express for a cobrand credit card. In 2007, the airline started something that no

other airline currently offered. After an ice storm that resulted in 23% of its flights

to 11 different cities being cancelled, JetBlue CEO offered a nationwide apology and

announced it would be instating a “Customer Bill of Rights.” This would act as a

reimbursement program for delayed passengers in certain situations. For example,

any 1-2 hour delay would grant the consumer with $25 off a future flight, 2-4 hour

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delays would result in $50 off and delays over 6 hours would grant consumers with

a free round-trip ticket. From 2007-2009 the Smithsonian’s Cooper-Hewitt National

Design Museum, J.D. Power and Associates North America Airline Customer

Satisfaction Study, HRC’s Corporate Equality Index and the AIGA recognized JetBlue

for its services and customer satisfaction.

One of the major trends in the airline industry is the rising price of fuel.

According to the International Air Transport Association (IATA), the price of fuel

has climbed 12 percent since 2011. “Iran has threatened to close the Strait of

Hormuz, the main shipping outlet for Gulf countries’ oil, in response to international

sanctions against its nuclear research program. In addition to the direct effect on

fuel costs, the I.A.T.A. said, the airline industry is at risk of becoming unprofitable if

oil prices rise enough to hurt the global economy,” according to The New York

Times. This issue is obviously tragic for JetBlue and the airline industry as a whole,

considering that fuel makes up one third of airline costs, according to the I.A.T.A. In

JetBlue’s 2011 Annual Report, it recorded a fuel expense of $550 million.

Another industry trend is the “unbundling” of airline fees. For a few years

now, customers have been hit with a load of extra charges that used to come

included in the price of the ticket. Baggage fees are among the highest, with airlines

charging up to $80 for a single checked bag, and even more if that bag is over the 50

lb. limit. JetBlue is one of the only U.S. airlines that still offers a free checked bag

(under 50 lbs.) for every passenger. Some other charges include seat-reservation

fees, pillows and blankets, food and beverage and headphones. The airline industry,

as a whole, has gotten a lot of criticism because a majority of these fees are not fully

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disclosed at the time of purchase. According to the Chicago Tribune, there has been

talk that some companies are starting to “rebundle” fees, allowing consumers to

chose which flight upgrades they want to purchase, at an overall cheaper price.

JetBlue has grown a lot of consumer respect and loyalty over the past few years

because it does not charge fees for baggage, food and non-alcoholic beverages or

seat-selection.

4

Competitive Analysis

United Air Lines

United Air Lines is one of the main competitors of JetBlue. Its products

include its commercial airline and a United Visa Credit Card offered through Chase

bank. It has pretty much the same products as JetBlue

The strengths of the company are that it retains over 15% of the market

share, giving it a lot of brand recognition and resources to improve. It also has a

large-scale trans-Pacific network.

The weaknesses that the company faces mostly deal with customer service

and satisfactions. The airline charges $25 for the first checked bag, and it also

charges for any food and drink a customer might want. These extra fees are proven

to make customers unhappy because they used to be considered complementary.

According to the Airline Quality Rating (AQR), its on-time arrival performance

declined from 85.2% in 2012 to 80.2% in 2011. United’s mishandled baggage rate

increased to 3.66 per 1,000 passengers, up from 3.40 in 2011. It also had a higher

customer complaint rate (2.21 in 2011 compared to 1.64 per 100,000 passengers in

2010). Its overall AQR score declined from to a -1.45 (-1.31 in 2010). That was the

worst AQR score out of all of the top 11 airline carriers ranked. Some of this same

information is also shown on RITA, Research and Innovative Technology

Administration Bureau of Transportation Statistics. A chart of its on-time

performance summary is shown below.

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Throughout all of this negative feedback from customers, United still claimed

15.6% of the domestic market share from December 2011 – November 2012. That’s

the second largest domestic airline in the industry, second only to Delta.

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Delta

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Delta is another main competitor of JetBlue. Delta’s products include: airline

flights and Delta Skymiles American Express credit card. It also offers “economy

comfort”, which is a flight upgrade that offers more legroom, more reclining room

and free spirits on most international flights.

One strength of the company is its popular “SkyMiles” customer rewards

program. It’s the only major U.S. airline without mileage expiration. As well as

receiving points, you also get a free checked bag for anyone who has the card. This

past year, its customer service has been a big strength for Delta. According to AQR,

its on-time percentage shows an improvement (82.3% from 77.4%). Its rate of

mishandled baggage (2.66) lowered below the industry average of 3.35 mishandled

bags per 1,000 passengers. Not only that, but it had a decrease in denied boarding

and a reduced rate of customer complaints. This moved its AQR score to -0.88,

which was the second largest improvement of the airlines rated. Its biggest strength

is that it takes up 16.3% of the domestic market share.

The weaknesses of the company are that its flights are generally more

expensive than its competition, plus it charges extra fees for almost anything

additional. For example, the first bag checked costs customers $25, the second $25

and the third $125. If you want a snack on a Delta flight, it charges anywhere from

$3-$6.99 and $4.99-$9.99 for meals.

American Airlines:

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American Airlines is another major competitor of JetBlue. The products it

offers are its commercial airline flights and its AA credit card, which offers different

levels of rewards.

The strengths of the company are that it holds 12.9% of the airline industry

market share. Also, its stocks have been on the rise since the beginning of the New

Year. It also has a large global network, which flies more than 200,000 people to 250

cities in more than 40 countries. Another strength of the company is its AAdvantage

Travel Rewards program, the world’s first and most popular frequent flier program.

AA also has its first class cabin accommodations, which include a swivel seat, a

premium cabin duvet, power connections, in-seat personal video system, under seat

storage space and an electronic recline.

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American Airlines didn’t receive high customer service ratings for the past

few years. According to their AQR score, the only area they approved in was

mishandled baggage performance. It received negative reviews for on-time arrivals,

denied boarding and customer complaints. Its overall AQR score was -1.24. The

airline also participates in charging customers for checking bags, at $25 for the first,

$35 for the second and $150 for the third. It also charges for any snacks, beverages

and preferred seating.

10

Informational Interview

On the afternoon of March 29, 2013, I conducted an informational interview

with Nilufer Koray, the marketing director of the Mustang Group Restaurant

Corporation. I began the interview by asking her to describe a typical day on the job.

I could tell by her response to this question that she has a lot on her plate. Ms. Koray

went through a checklist of checking/responding to emails, checking all of the social

media platforms for all 5 of the restaurants she handles, collaborating with the

outside marketing firm they deal with, sending out email blasts, as well as any other

miscellaneous tasks she’s asked to work on. As she was describing this to me, I was

astounded by how endless all of her workload seemed. I soon came to learn that the

marketing department consists of her, and one intern who only comes in a few

hours, 3 times a week. The internal marketing department was only created as

recently as 6 months ago. Before that time, the restaurant group had an outside

marketing company handling their social media accounts, to some extent, and their

website. I went on to ask her what her favorite and least favorite part of her job was.

She said that by far the least favorite part was building the company’s database and

all of the data-entry involved. She talked about how she got into the restaurant

marketing business because she grew up in restaurants, going from making

sandwiches in her local deli, to being a server and then a manager, and she loved

always being able to interact with customers and get immediate feedback. After all,

people are passionate about their food. I found her response interesting because

that’s the exact reason why I want to go into this business. Come to find out, she

rarely gets to interact with anyone anymore, but that was her favorite part of her

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job (when she actually got to do it). The other thing she listed as a non-favorite was

dealing with customer complaints on the social media sites. For example, she read

off some of the negative reviews one of the restaurants had gotten on Yelp. A

customer gave them a one-star rating, and said he was upset because his server

didn’t inform him that soda refills were not free. She explained that most people

would agree that this is a ridiculous thing to criticize them on, since almost every

New York City restaurant does this. But, the problem was that people probably

would never read his review, they would just see that their overall star rating went

down.

Ms. Koray told me she’s had a rough road, since she’s building this

department from the ground up, but she sees this changing a lot recently because

restaurants are bringing their marketing departments internal. It makes sense to

me, because there are thousands of restaurants in the city and competition is

incredibly tough. Mustang Group decided to bring the department internal in an

effort to make sure that they could trust their employees and maximize the money

they were spending.

Throughout the interview I had made a few comments about how her

reasoning for going into the restaurant marketing industry were similar to mine. So,

when I asked her if she had any advice for me, or anyone, wanting to follow in her

footsteps, she responded by saying, “Know what you’re getting yourself into. This

industry is tedious and time consuming and can be very frustrating. Be ready to

work your ass off. But, if you can pull it off, you’ll earn the trust of people throughout

the industry. Owners know other owners and that spreads like wildfire throughout

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the industry. It’s all about recommendations.” I think this is the best advice I’ve

heard in a while. Ms. Koray made me realize that there are people out there who are

one extreme or the other. The ones who put their whole heart and soul into

something to try and make it work, those who take risks, are the ones who gain big

in the end.

13

Financial Analysis

In terms of revenue, JetBlue did better in 2011 than they did in the two years

prior. The total operating revenues for 2011 were $4.5 million, as opposed to $3.7

million and $3.2 million in 2010 and 2009, respectively. In passenger revenues

alone, they raised their revenues by $1.2 million from 2009. To combat that figure,

JetBlue’s operating expenses got up to $4.2 million, up from $3 million in 2009.

When looking at all of the numbers together, their overall net income was $86

million. This figure is down from $97 million the year prior (2010). Their earnings

per share, $0.31, were also down from 2010, when the earnings per share were

$0.36.

Their income expenses are broken down into a few categories. By far, their

largest operating expense is aircraft fuel and related taxes. This coincides with the

trend of rising fuel costs in our economy, which was recorded by JetBlue as having a

10% increase in the December 31, 2011 cost per gallon of fuel. Salaries, wages and

benefits took up 22.6% of the expenses they had. “Other operating expenses” came

in second, taking up 12.7% of their expenses, with landing and other rents coming in

third. Aircraft rent, surprisingly, was their smallest expense, costing them $135,000.

When comparing their financial statements from 2011 to the ones in 2010,

they had an overall decrease in net income, operating income and diluted earnings

per share. Although, their operating revenues did increase 19%, primarily due to a

$36 million increase from the Even More Space seats. The chart below shows the

exact breakdown of the increase/decrease in operating expenses, comparatively:

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Geographically, in 2011 JetBlue focused on growing their key Boston and

Caribbean markets, by reducing the seasonality of the markets and attracting

business travelers. In result, their operating revenues per available seat mile

increased 11% over 2010. JetBlue also added five new destinations in Boston, trying

to achieve the goal of the largest carrier in Boston. In the Caribbean and Latin

America region, they became the largest airline serving both Puerto Rico and the

Dominican Republic. In particular, their focus on San Juan, Puerto Rico gained

attention by providing service to many of the intra-island Caribbean destinations.

JetBlue now has 25% of their capacity in the Caribbean and Latin America region.

The company also expanded their route region to service Providenciales, Turks and

Caicos Islands, Martha’s Vineyard, St. Croix, St. Thomas, Dallas/Fort Worth, Texas,

and New York’s LaGuardia Airport, along with several more.

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Sources

JetBlue Annual Report

http://www.jetblue.com/about/ourcompany/history.aspx

http://articles.chicagotribune.com/2012-12-30/business/ct-biz-1230-outlook-airlines-20121230_1_consumer-travel-alliance-airline-fees-rick-seaney

http://www.nytimes.com/2012/03/21/business/global/Fuel-Expense-Is-Forecast-to-Erase-62-Percent-of-Airline-Profits.html?_r=0

http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/press_releases/2012/bts044_12/html/bts044_12.html

http://www.airlinequalityrating.com/reports/2012aqr.pdf

http://airconsumer.dot.gov/reports/2012/September/2012SeptATCR.PDF

http://travel.usnews.com/features/Americas_Meanest_Airlines_2012/

www.delta.com

http://www.kayak.com/airline-fees

http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-IRHome

http://www.aa.com/i18n/travelInformation/duringFlight/firstClassCabin.jsp

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