Jet Blues Strategic Intent - Case Study Example

Changed trends in the US airline industry and its impact on corporate strategy Deregulation in the airline industry in the US created turbulence in the market which brought in intense competition in the sector. Consolidation and mergers became common in the industry. Many airlines entered the segment with low-cost no-frills model but not all survived. However, the changed trend introduced a customer-focused strategy, a resource-based view and cost-cutting measures have become imperative (Rhoades & Waguespack, 2005). Towards meeting these requirements, the mainstream carriers are entering into agreements with the low-cost carriers (LCC) and regional partnerships within the regional network. Porter’s three generic strategies – low-cost, differentiation and focus – suggest that adopting any of these can give competitive advantage to the firm (Goll, Johnson & Rasheed, 2008). Southwest Airlines followed the low-cost model by providing no frills and reducing on services. Some airlines aimed at gaining competitive advantage through product or service differentiation. AIrTrans, for instance, targets the business segment by utilizing the traditional hub-and-spoke system. They are able to offer the same amenities to the passengers at 60% of the price of the traditional carriers (Rhoades & Waguespack, 2005). They cut costs through lower salaries and reduce overheads. When consumers find no difference in services between airlines, then the competition is based on price. This is what Southwest opted for but AirTrans and Jet Blue follow different strategies. Jet Blue’s strategic intent Jet Blue followed the differentiation strategy and its strategic intent was to make up its tarnished image in the industry. Their stock prices too had slid down and they needed to use technology to enhance the communication system while keeping the costs contained. It hence, combines low cost with attractive promotions such as in-flight entertainment like satellite radio and movie channels. Their strategy of differentiation lies in their customer-focused approach as they paid attention to little details that the customers found special. Jet Blue operated point-to-point systems and used two types of aircrafts. It had new aircrafts, which served to reduce the costs of operations because of high fuel efficiency and low repairs and maintenance. Their intent behind two types of aircrafts was to serve the regional passengers by flying them to the major hubs for the connecting flights. Thus they could create a new segment of customers. Their strategy was to reduce costs and overhead, and remain competitive not based on price but through differentiation. They also realized that to gain efficiencies they would need to alter the organizational culture and human resource practices. Strategic elements of cost, organizational culture, and human resource practices Jet Blue managed to meet its low cost objective which contributed to its competitive advantage. The improved turnaround helped them increase the number of flights. They used information technology to keep the costs down. They started issuing e-tickets and reduced the travel agents commission. Instead, they hired full-time who worked from home and sold the tickets over the phone. To economize on fuel they used one engine while taxiing on the runway instead of two. The airline decided to give authority and responsibility to the employees as they realized that human resources are the greatest capital. They implemented a five-step strategy in bring about a change in the organizational culture. Their corporate values of safety, caring, integrity, fun and passion brought them positive results, which reflected in the increased consumer confidence. They realized the importance of keeping their employees happy and motivated. They changed their recruitment strategy for flight attendants and they also allowed two people to share a job. They hired people who reflected the company values. They exceeded employee expectations as the pilots were granted benefits and profit-sharing oppurtunities in the first year of operation. They listened to the needs of the customers and tried to fulfill them. However, their training program was not well planned which reflected in the lack of confidence in the leadership. While the salaries that Jet Blue paid its people were much lower than traditional carriers, they made up for it by offering health insurance coverage, profit sharing and retirement plans. During difficult times, downsizing was through voluntary packages. Three financial objectives Jet Blue had strong organizational culture but it failed to meet its financial objectives. Its three financial objectives were to keep costs low, meet the stakeholders’ expectations and make profits. The airline failed to keep costs under control as the fuel prices soared. They did manage to cut down on fresh recruitments and salaries but since they did not hedge fuel to a large extent like South west, they incurred losses when fuel prices soared. Despite a conservative financial strategy which enabled them to maintain strong liquidity through the first quarter of 2008, Jet Blue incurred losses. Their operating margin reduced by 2.2 points between June 2007 and 2008. They thus failed to deliver stockholder value. This demonstrates lack of sound financial management. The situation was such that they had to induct new equity capital in March 2008 by issuing shares to Deutsche Lufthansa AG and 19% stake now belonged to Lufthansa. Jet Blue has a severance plan in place to protect the employees and executives in case a competitor tries to takeover but if Jet Blue continues to incur losses, Lufthansa could increase its minority stake in the airline to 25 percent. Strategies for 2008 and beyond Despite the turmoil and the difficulties in the airline industry, and the chances of Lufthansa increasing its minority stake in Jet Blue, the executives at Jet Blue are optimistic about the future. Towards this objective, they are using the resource-based view and re-evaluating the ways in which they could use their assets optimally. Because of the stake of Lufthansa, Jet Blue can encash on its JFK terminal by offering gates at JFK to BMI. They are utilizing their LiveTV subsidiary in raising cash. They are not entering the price war like South west and have raised the prices in certain sectors. They want to achieve competitive advantage through differentiation and not through cost leadership. In the process, the rescheduling of their network and the flight sectors will enable cutting costs. At the same time, they would be able to offer conveniently scheduled flights to international destinations. Their decision to delay taking delivery of new aircrafts would save them on operating costs. Their decision to revise the corporate terms and conditions is attractive to business travellers as this enables them to receive refunds. The business segment would be happy because last-minute cancellation of business trips cannot be ruled out and most competitors offer non-refundable low fares. This is a differentiation strategy because it also offers the corporate meeting planners meeting specific discounts. Another important strategy that can help Jet Blue to overcome the current situation is its interest to pursue partnerships with other airlines. It has regional marketing partnership within the US with Cape Air and in the UK with Aer Lingus. Under the agreement with Aer Lingus a passenger can make a single reservation from Ireland for 40 destinations within the US through JetBlue’s hub at JFK. This strategy would help them to raise cash and maintain their liquidity. They are exploring oppurtunities to increase ancillary revenue. However, not all of their plans seem practical. Each of their plans to increase revenue is by reducing the free services and levying a charge which increases the burden on the passenger. Imposing a call-centre charge, for instance, may not be justifiable because not all and not at all times may have access to internet to book through the airlines website. However, overall, if Jet Blue pursues its strategy to uses its assets like the JFK hub and LiveTV subsidiary to raise cash, and partners with other carriers, they are likely to come out of the present situation. The entire industry is turbulent and perhaps the regulations could also change to facilitate the airlines. It definitely shows a progressive attitude on the part of the executives. Goll, Johnson and Rasheed (2008) found that managerial discretion is important and those with less tenure place greater emphasis on differentiation strategy. Jet Blue has adopted a differentiation strategy and in a deregulated environment, managers have more options to make their choices. References Goll, I., Johnson, N. C., & Rasheed, A. A. (2008) Top management team demographic characteristics, business strategy, and firm performance in the US airline industry The role of managerial discretion. Management Decision 46 (2), 201-222 Rhoades, D. L., & Waguespack, B. (2005) Strategic imperatives and the pursuit of quality in the US airline industry. Managing Service Quality 15 (4), 344-356 Read More