Jet Blue in the United Kingdom - Research Paper Example

? Jet Blue in the United Kingdom BY YOU YOUR SCHOOL INFO HERE HERE Jet Blue in the United Kingdom Jet Blue is a United s-based airline company providing a low-cost and low-frills business model for the price sensitive consumer target markets. Jet Blue currently services a variety of domestic destinations, maintaining appropriate hubs in highly profitable markets such as Fort Lauderdale, Florida and Boston’s Logan International Airport. As an MNE, Jet Blue also services Aruba, The Bahamas, Puerto Rico, Mexico and Bermuda. Jet Blue is able to compete with much larger U.S.-based airline companies such as American Airlines as the business has been able to shed much of its high operating costs related to supply chain and fleet management by maintaining a lean operations methodology (Jet Blue, 2011). Price reductions in the form of lower and competitive ticket prices are accomplished through its lean business model that makes Jet Blue an attractive alternative to high-frills airline companies. A country where Jet Blue does not have market presence is the United Kingdom, a generally attractive market for foreign direct investment by the organization. The United Kingdom maintains a significant airline infrastructure that will assist Jet Blue in establishing a centralized hub in order to serve the UK market effectively. Major renovations to such airports as Heathrow International have provided more traffic space and feasibility for structured and timely arrivals and departures. Alongside the infrastructure exists recent government deregulation of the airline industry that had once controlled pricing and established anti-monopoly legislation by major carriers. This has removed some of the financial and regulatory barriers to new entry by airline competitors, making the United Kingdom a viable market for direct investment. Another advantage of investing in the United Kingdom is the economic environment. Currently, the United Kingdom still measures its currency against the Pound Sterling, a method of isolating volatility and risk associated with the current Eurozone economic crisis related to the Euro. The UK Pound Sterling is currently worth $1.61 as compared to a single U.S. dollar. Jet Blue currently has established a very viable and well-developed supply infrastructure within the United States, giving it many comparative advantages in relation to procurement. By investing in the United Kingdom, Jet Blue can establish a moderately higher pricing structure that is comparative to the British Pound Sterling, providing profit opportunities of approximately 60 percent, especially when moving materials procured in the United States into the foreign UK market where import pricing risks are dramatically reduced compared to this much higher-valued Sterling currency. Procurement costs for on-board operations management will be fundamentally less expensive than in the United States if not procured domestically in the United Kingdom. There is, however, a significant disadvantage to entering the United Kingdom for direct investment. There are currently many different low cost carriers, such as RyanAir and Air Asia, that provide similar low-cost and low-frills options for consumers and business travelers. Deregulation occurring in the last few years has removed entry barriers to these companies that now have high cash flow and considerable positive brand reputation with price sensitive consumers. Even Virgin Airlines offers similar low-cost methodology allowing this carrier and those such as RyanAir and Air Asia to have comparative and competitive advantages in pricing and quality. Jet Blue is not a well-known brand name in the United Kingdom which could provide much higher cost allocation toward the promotional function (such as advertising and online marketing) in order to compete in this dynamic competitive market. Minimizing foreign exchange risks is not that complicated for Jet Blue, considering the currencies regularly traded in this market. The Euro and the Pound Sterling are both valued much higher than the United States dollar, thus profitability achieved in this market can be easily converted to American dollars with considerable profit incurred through these transactions. By maintaining its parent company status in the United States, tax structures that are established against the U.S. dollar will avoid loss of profit by revenues earned with the Pound Sterling or the Euro. The British Pound Sterling is one of the highest valued currencies in the world, thus simply by having strong GDP growth and a surplus in balance of payments the United Kingdom’s economic security (by design) minimizes the currency exchange risks for revenues earned in this new market. One of the most lucrative methods of minimizing foreign exchange risks, when they are incurred in this new market, includes hedging investments. Jet Blue can utilize derivatives to minimize risks by using what is referred to as interest rate swaps. Under this methodology, Jet Blue uses the interest rate swap to convert a determined portion of the business’ debt from a floating to a fixed rate (OSGI, 2005). Foreign currency swaps are a form of hedging strategy that allows the business to better predict how to offset exchange rate volatility and fluctuations where future receivables revenues are procured in currencies other than the United States dollar. When the business believes that the value of the U.S. dollar is to decline or increase, currency swaps protect against reductions in forecasted currency value for a variety of potentially risky currencies (OSGI, 2005). Jet Blue can also utilize what is referred to as future freight agreements as a means of combating exchange rate volatility. This process involves analysis and forecasting of future transportation activities where spot transportation rates are unpredictable, such as those occurring by expediting customers looking for air transport for important cargo deliveries. Under the future freight agreement, Jet Blue becomes either a buyer or seller of projected swaps to offset negative exposure in the freight market (Simpson, Spences & Young, 2012). If it is predicted that currency fluctuations will reduce profitability in future transportation channels, the company contacts a broker who finds a buyer at a fixed price for the swap. If the currency, indeed, causes risks to revenue growth by reducing in value, then the business is able to make a profit through the investment provided by the swap buyer who now holds a much less valuable sale certificate. This is another hedging strategy common to reduce or offset risks of currency devaluation or spikes in currency value that impact profit. Fortunately for Jet Blue, the UK market is similar to that of the United States where government is active in deregulation and establishing taxation breaks for companies seeking FDI in the nation. The only notable limitation to establishing a business presence in this country as it relates to government regulation is in the tax structure that does not provide significant incentives for new market entrants. The airline industry in the United Kingdom currently provides stable governmental revenues related to taxation in which there are no deficiencies occurring due to limited competition. The UK market is saturated in this oligopolistic market structure with very powerful competitors that provide ample revenues to the national government. Therefore, it is not beneficial for the UK government to impose significant taxation incentives to try to stimulate new business investment. It is the anti-monopoly laws related to airline industry regulation that provides the best opportunity for Jet Blue to leverage profitability, thus the company can purchase a wide range of fixed assets or by borrowing capital in British Sterling and then distributing this through exchange rate conversion to enhance U.S.-based operations at a 60 percent price advantage. Jet Blue, in 2011, maintained 1.8 billion USD in equity, as compared to revenues approaching five billion dollars. The company currently has a strong cash position, even if its stock valuation is not significant due to over-exposure in the securities market. Financial management is regulated by utilizing its currently existing positive credit ratings or, again, by utilizing British Pound Sterling for capital procurement from various lending organizations in the United Kingdom. Asset purchases where the transactions are conducted in British Pound Sterling or Euros will provide for a 60 percent mark-up should the need to divest these assets occur, thus representing a long-term investment strategy to minimize exposure to unpredictable market conditions or economic instability in the United Kingdom. Establishment of a UK hub would require additional support staff recruited from the United Kingdom and would, in this market, raise the costs of labor due to the valuation of the current British currencies. Significant investment in training for recruited employees to fit the cultural and mission values of Jet Blue for service excellence and quality would need to be conducted by representatives from the U.S.-based parent company. Expatriate human resources personnel would be most critical in extolling these values to oversee and regulate the training process until the Jet Blue culture has been engrained in the newly recruited organizational staff. Marketing in the oligopolistic market structure, additionally, is critical to profit success and brand-building especially in markets where there is concentrated and saturated competition and where competitive activities are vital to maintaining competitive edge. Where all of these situations are occurring, the most viable long-run strategy is to promote Jet Blue’s brand as a cultural competent organization, positioning the company as a quality-focused organization with less emphasis on pricing as a comparative marketing tool since RyanAir and Air Asia dominate the current low-cost, low-frills airline market. References JetBlue. (2011). JetBlue Airways Annual Report. Retrieved October 31, 2012 from http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual OSGI. (2005). Annual Report, Overseas Shipholding Group, Inc. Retrieved October 30, 2012 from http://www.getfilings.com/o0001047469-05-004917.html Simpson, Spences & Young. (2012). Forward Freight Agreements. Retrieved October 31, 2012 from http://www.ssyonline.com/dyn/_assets/_pdfs/futures/TankerPresentation.pdf Read More