Case 16

JetBlue Airways: Challenges Ahead

Theodore Bosley, Christopher Calton, Jeffrey Deakins, Tomoko Nakajima, Sally Orford, Robin Pohl, Robin Chapman

Arizona State University

Introduction delaying deliveries of some aircraft, selling others, and eliminating some cross-country flights.4 Despite these We’re going to bring humanity back to air travel. —David Neeleman actions, in a recent interview Neeleman insisted, “We’re 5 Founder and Chairperson still a growth airline.” It remains to be seen how JetBlue will continue to grow in the face of increasing strategic David Neeleman, JetBlue’s founder and chairperson, challenges. sought to “bring the humanity back to air travel.”1 Since launching operations in February 2000, JetBlue distin- History guished itself from its competitors by providing superior customer service at low fares. The JetBlue experience in- Founding History of Jet Blue cluded brand new airplanes, leather seats, and personal David Neeleman founded JetBlue Airways Corporation satellite TV service. The firm experienced rapid early in 1999, after raising $130 million in investment capi- growth. In a period when most U.S. airlines struggled in tal. Building on his past experiences, Neeleman hired the aftermath of the September 11, 2001, terrorist attacks, talented executives, such as David Barger, previous vice JetBlue reported 18 consecutive quarterly profits. president of the Newark, New Jersey, hub for Continental, Then in 2005, JetBlue announced its first net loss of and John Owen, previous vice president of Operations $20 million. The disappointing results were attributed Planning and Analysis for Southwest.6 JetBlue chose John to spiraling fuel prices, aggressive competition, and in- F. Kennedy International Airport in New York as its hub creasing operating costs. Global events such as war, po- and initially obtained 75 takeoff and landing slots. litical turmoil, and natural disasters contributed to the Neeleman’s vision was to provide “high-end customer rise in fuel prices. The average price for a barrel of oil in service at low-end prices.”7 Although JetBlue imitated 2003 was $30, by the summer of 2005 prices had climbed competitor Southwest Airlines with a single seat class, above $60 per barrel. The legacy airlines were becoming it did so with Airbus A-320 narrow-body jets instead of more competitive after exiting bankruptcy and stream- Boeing 737s. The A-320 provided wider cabins and wider lining their operations to benefit from economies of seats for JetBlue passengers with more room for carry-on scale.2 Analysts speculated that JetBlue was experiencing baggage.8 JetBlue implemented innovative IT programs growth pains:, their maintenance costs on aging planes such as an Internet booking system that allowed cus- were increasing, employees were becoming more se- tomers to make reservations online or with a touch-tone nior, and new profitable routes were harder to obtain.3 phone, and a paperless cockpit to allow pilots to prepare The company continued to lose money in 2006. While for flight more quickly, helping planes to stay on schedule.9 major competitors, such as AMR, the parent company JetBlue also provided complementary, unlimited snacks for American Airlines, and Continental, reported higher and beverages, preassigned seating, and a selection of than expected returns, JetBlue announced a narrow first-run movies available from Fox InFlight on flights third-quarter loss of $500,000. Following its third-quarter longer than two hours. For further differentiation, JetBlue loss, JetBlue announced plans to slow down growth by installed 36 channels of free DIRECTV programming.

The authors would like to thank Professor Robert E. Hoskisson for his support under whose direction the case was developed. The authors do not intend to

© Don Hammond/Design Pics/Corbis illustrate either effective or ineffective handling of a managerial situation. The case solely provides material for class discussion.

205 Case 16 • JetBlue Airways: Challenges Ahead 206 Onboard Service and Airline” wasnamed Overall also “Best of service, by Development Award” for its first two successful years 2002, JetBlue won 2002AirTransport the World “Market spending to further improve offered. tofurther spending services work toinclude sixmore destinations and resumed IT made aprofit and within eight weeks expanded its net- announced millions inlostrevenue following 9/11,JetBlue mostof airlinepacting the industry. While other airlines resulted inawidespread fear of air travel, negatively im- The September 11,2001,terrorist attacks on America Rapid Growthin2000–2004 customer and reported $100million inrevenues. Neeleman announced landmark the of JetBlue’s millionth Florida, New York, Utah, and Vermont. By December, year to include 12additional inCalifornia, airports JetBlue gradually increased its destinations during the New York to Fort Lauderdale, of with afleet two planes. Source: JetBlueAirways Corporation2006AnnualReport. Exhibit 1 noetxepne(eei)1 4 97 40 71 29 (4) 10 Net Income(Loss) expenseIncome tax (benefit) Income (Loss)before incometaxes Other Income(Expenses) Operating Income Operating Expenses Operating Revenues Early first JetBlue in2000,the departed flights from oa te noe(xes)(1)(2 3)7(10) (21) 7 (29) 41 27 530 127 (36) (53) 76 9 60 20 1 54 831 159 43 (72) 1 44 (107) 147 23 70 33 1154 27 63 162 215 (118) 51 (173) 28 70 255 45 74 $615 1653 45 267 291 81 77 Total otherincome(expense) 92 488 government compensation $965 64 Interest incomeandother 103 2236 Capitalized interest 337 328 81 104 Interest expense 115 $1220 112 752 87 428 140 Total OperatingExpenses $1620 151 158 Other operatingexpenses Maintenance materialsandrepairs $2223 553 Sales andmarketing Aircraft rent Depreciation andamortization Landing fees andotherrents Aircraft fuel Salaries, wages, andbenefits Total Operating Other Passenger Consolidated Statement ofIncome Consolidated Statement magazine. eeus26 7116 9 635 998 1265 1701 2363 Revenues 11 OnApril 11,2002,JetBlue 1 2)$ 4 13$55 $103 $46 $ (20) $ (1) (in $millions,yearendedDecember31) 2 8$ 1 17$105 $167 $111 $48 $ 127 10 0620 0420 2002 2003 2004 2005 2006 In February February In JetBlue AirwaysCorporation 2)7 7 95 174 75 (24) 9 JetBlue’s hub within three airport years. would allow for more than double number the of at flights hadatotalwhich budget of $875million. The expansion an expansion airport project at John F. Kennedy Airport, Also, inlate 2005,JetBlue decidedto fund$80million of Airbus A-320, and 100channels from XMSatellite Radio. a 100-seat configuration, bigger television screens than the Embraer E190sto JetBlue its fleet. ordered aircraft the with In November 2005JetBlue decidedto addninenew Slowed Growthin2005–2007 statementsfinancial for years the 2001to 2005. to $1.27billion in2004.Exhibits 1through 3show JetBlue’s operating revenues growing from $998.4million in2003, JetBlue grew steadily between 2003and 2004,with annual operating revenue in2005were 29.5 percent, 34.5 percent, to show growth saturation. Quarterly growth records of lion shares of common at stock aprice ofshare. $27per announced its initial public offering (IPO) of 5.86mil- 9885 6955 However, JetBlue’s started report quarterly financial 23 13 12

Case 16 • JetBlue Airways: Challenges Ahead

207

Source: JetBlue Airways Corporation 2006 Annual Report. Annual 2006 Corporation Airways JetBlue Source:

Equity

83$39 77$28 $1,379 2186 $ 2797 $ 3892 $ 4843 $

Total Liabilities & Shareholders’ Shareholders’ & Liabilities Total

5 1 5 7 415 671 754 911 952 Total Equity Total

te qiy oa 7 2 (9) (2) 7 0 (7) total equity, Other

eanderig 4 4 6 2 16 120 165 145 144 earnings Retained

diinlpi-ncptl83745152407 552 581 764 813 capital paid-in Additional

Common stock Common 22111

Preferred stock-non Preferred 00000

Redeemable preferred stock $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ stock preferred Redeemable

$ 4843 $ 3892 $ 2797 $ 2186 $ 1379 $ 2186 $ 2797 $ 3892 $ 4843 $ Total Assets Total

te ses oa 0 0 0 0 0 total assets, Other $ 3891 $ 2981 $ 2043 $ 1515 $ 964 $ 1515 $ 2043 $ 2981 $ 3891 $ Total Liabilities Total

te ogtr ses oa 4 3 95 30 57 99 236 446 total assets, long-term Other te iblte,ttl258 83 17 34 38 86 275 total liabilities, Other

oercial ogtr 0 0 0 0 0 long-term receivable Note Minority interest Minority 00000

ogtr netet 0 0 0 0 0 investments Long-term eerdicm a 3 1 2 939 99 121 116 136 tax income Deferred

nagbe,nt3 35 268 62 54 43 32 net Intangibles, Long-term debt and leases $ 2626 $ 2103 $ 1396 $ 1012 $ 640 $ 1012 $ 1396 $ 2103 $ 2626 $ leases and debt Long-term

odil e 0 0 0 0 0 net Goodwill,

Property/Plant/Equip, total $ 3438 $ 2978 $ 2130 $ 1421 $ 997 $ 1421 $ 2130 $ 2978 $ 3438 $ total Property/Plant/Equip, 370 $ 270 $ 370 5 7 8 $ 488 $ 676 $ 854 $ Total Current Liabilities Current Total

te urn iblte,ttl3023141598 135 174 243 340 total liabilities, current Other

$ 927 $ 635 $ 514 $ 645.74 $ 283.06 $ 645.74 $ 514 $ 635 $ 927 $ Total Current Assets Current Total Leases

te urn ses oa 2.85 0 0 0 0 total assets, current Other urn ot fL etcptl1518156 51 67 105 158 175 debt/capital LT of port. Current

rpi xess143 71.25.59 13.42 17 36 124 expenses Prepaid oe aal/hr-emdb 96 43 22 30 44 64 39 debt payable/Short-term Notes

oa netr 72 0834.84 8.3 10 21 27 inventory Total cre xess14119 554 85 94 111 164 expenses Accrued

oa eevbe,nt7 43 67 11.93 16.72 37 94 77 net receivables, Total Payable/Accrued 00000

Cash and short-term Investments $ 699 $ 484 $ 450 $ 607.31 $ 257.85 $ 607.31 $ 450 $ 484 $ 699 $ Investments short-term and Cash 53 $ 46 $ 53 conspybe$ 16$ 9 1$ 71 $ 99 $ 136 $ payable Accounts

Assets Liabilities and Shareholders’ Equity Shareholders’ and Liabilities

0620 0420 0220 0520 032002 2003 2004 2005 2006 2002 2003 2004 2005 2006

December 31 December December 31 December

(in $ millions, except share data) share except millions, $ (in

JetBlue Airways Corporation Airways JetBlue

Consolidated Balance Sheet Balance Consolidated Exhibit 2 2 Exhibit Case 16 • JetBlue Airways: Challenges Ahead 208 though JetBlue 47destinations served with up to 470 daily of $0.5million inthefirst three quarters, respectively. alossofported $32million, aprofit of $14 million, and aloss quarterly netloss. representing share alossper of $0.25. It wasJetBlue’s first announced afourth quarter netlossof $42.4million, 40.2 percent, and –5.2percent, respectively. JetBlue Exhibit 3 Source: JetBlueAirwaysCorporation2006AnnualReport. te,Nt–5(3 1)()(34) (9) 150 (19) (71) 33 27 (13) 416 (25) 174 $247 0.3 44 (57) $129 –15 $103 (30) 446 $ 136 117 $ 89 (77) $19 265 68 $14 (47) $(84) 499 $6 20 11 (117) $103 $(13) $ 10 45 872 (71) $19 (1) $4 178 1 (390) (544) (80) $6 152 (11) 855 (2) 28 (573) 10 2 (235) 2 Cash andcashequivalent atendofperiod (4) 46 406 (26) Cash andcashequivalent atbeginningofperiod (109) (617) 7 (5) Increase inCashandEquivalents 25 76 (7) 9 Net CashProvided by Financing Activities 7 (19) (11) (160) (941) 37 Other, Net (4) (86) (79) 45 Repayment 40 ofshort-termdebt 0 2 (180) (996) Repayment (5) oflong-termdebt (6) 25 11 39 Short-term borrowings 35 (16) (20) (1002) Aircraft saleandleaseback transactions (183) 67 69 Issuance oflong-termdebt 2 (20) (23) 18 16 69 Issuance ofcommonstock 38 (28) Proceeds from: (106) 101 $55 29 Cash Flows from Financing Activities (28) 9 15 Net CashUsedinInvesting Activities 18 97 $103 (12) 21 Increase inrestrictedcashandotherassets 136 (4) $ Purchase 46 ofavailable-for-sale securities Proceeds frommaturities ofheld-to-maturity investment 21 54 $(20) Purchase ofheld-to-maturity investment 10 Predelivery depositsfor flightequipment $(1) expenditures Capital Cash Flows from 33 Investing Activities Net CashProvided by Operating Activities Other, Net Increase inaccountspayable andotheraccrued liabilities Increase inairtraffic liabilities Increase ininventories Increase inreceivables operatingassetsandliabilities Changes incertain Stock-based compensation Amortization Depreciation Deferred incometaxes Operating Activities Net Income Cash Flows from Operating Activities In 2006, the firm announcedIn firm 2006,the unstable earnings, and re- Consolidated Statement ofCashFlowsConsolidated Statement 14 JetBlue AirwaysCorporation 15 Even Even (in $millions) 13 19 47$ 79$(5) $789 $437 $1093 $ 1037 (37 17)$ 70 97 $(744) $(987) $ (720) $(1276) $ (1307) 0620 0420 2002 2003 2004 2005 2006 for JetBlue. weather Bad inFebruary resulted inmany competitors. cash,enablingpreserve JetBlue toremain stable among Exhibit 4.Effort to slow growth the rate wasintended to Data for destination commenced are and listed service in three years by delaying of additional delivery the planes. flights, it decidedto reduce its rate of growth over thenext 7 7 9 8 216 287 199 170 274 The first quarter of 2007didnot get off to a great start December 31 16

Case 16 • JetBlue Airways: Challenges Ahead 209 JetBlue’s Destinations JetBlue’s Destination YorkNew York, New Florida Lauderdale, Fort York New Buffalo, FloridaTampa, Orland, FloridaOntario, CaliforniaOakland, CaliforniaYork New Rochester, Burlington, Vermont Florida Beach, Palm West Utah City, Salt Lake Florida Myers, Fort February 2000 2000 February WashingtonSeattle, Service Commenced York New Syracuse, 2000 February ColoradoDenver, Orleans, LouisianaNew 2000 March California Beach, Long 2000 June 2000 July Airport) (Dulles D.C. Washington, 2000 August 2000 August Rico Puerto San Juan, October 2000 NevadaVegas, Las September 2000 San Diego, California MassachusettsBoston, 2000 November Sacramento, California 2000 November Rico Puerto Aguadilla, May 2001 Santiago, Dominican Republic 2001 May 2001 November CaliforniaSan Jose, 2001 July Airport) (LGA York 2001 May New York, New 2001 August Phoenix, Arizona BahamasThe Nassau, 2002 May Burbank, California OregonPortland, 2002 November Rico Puerto 2003 June Ponce, January 2004 Jersey New Newark, 2004 March 2004 June TexasAustin, September 2004 2004 May VirginiaRichmond, Hamilton, BermudaSarasota-Bradenton, Florida 2004 June Cancun, MexicoArubaIsland of 2004 November Chicago, Illinois October 2004 York White Plains, New 2005 May CaliforniaSan Francisco, 2005 May 2005 June October 2005 September 2006 March 2006 January 2006 2006 May 2006 November 2007 March 2006 November 2007 May January 2007 Source: JetBlue Airways Corporation Form 10-K, Fiscal year ending December 31, 2006. Exhibit 4 Exhibit Case 16 • JetBlue Airways: Challenges Ahead 210 were put inplace. train crew members, and communication new strategies council wasformed,advisory plans were madeto cross- JetBlue Customer Bill of Rights wascreated, acustomer efforts were madeto regain its brand image such that a establish astrong position against JetBlue rivals. succeededNeelemanmer COO asCEOand neededto CEO inorder toappease shareholders. David Barger, for- predicament, Neeleman eventually hadto step down as 2007. Despite hissincere efforts to bounce back from this affected by additional storms throughout winter the of fees and fare differences toassistcustomers may who be Continental Airlines,and DeltaAir. tional carriers, AMRCorp, United Airlines,USAirways, tors are low-cost Southwest carrier Airlinesand tradi- primarily on point-to-point routes. Its major competi- JetBlue isone of smallermajor the carriers and competes enue, Mesa operates routes, on flights local select while Air Express. In exchange for an agreed proportion of rev- Delta Airlines asDelta Express, and with USAiras United Airlinesand operates asUnited Express, with routes, and risk, costs.For example, Mesa partnerswith which typically with partner themajor airlines to share markets. new tofind low-cost airlines struggle competitive and expand domestic their businesses, the lower coststructures. As major the airlines more become airlines areacy emerging with clean balance sheetsand low-farethe market. Following recent bankruptcies, leg- traditionalthe airlines are becoming more aggressive in than $100million). lion to $1billion), and regional/commuter (revenue less than $1billion), national (revenue between $100mil- egories on annual based revenue: major (revenue more Transportation airlines classifies into (DOT) three cat- riers and 79regional airlines. TheU.S. Department of is now highlycompetitive, consisting of 43mainline car- competition. toincreased industry Theairline industry ernment control over fares and routes, opening up the In AirlineDeregulation 1978,the Act eliminated gov- Competitive Environment dark,in the and an undersize reservation system.” munications system that pilots left and attendants flight not strong enough. [It] result wasthe of com- ashoestring humbly admitting “that hiscompany’s management was his management of situation. the Neeleman responded by CEODavidcel flights. Neeleman received badpress for weather the toleaders hadexpected clear and didnot can- sengers sat on tarmacfor the sixhours, JetBlue because the crisisoccurred when nineairplanes fullof pas- angry cancelled and flights stranded passengers. Theclimax of Competition comes also from theregional carriers, Southwest isJetBlue’s mostobvious competitor, but 18 19 In addition JetBlue waived change With annual revenue of $1.7billion, 20 21 17 Rapid consolidations. mented and would industry likely have triggered further merger would have created largest the airline inafrag- regional airlines are deciding to operate independently. as Atlantic aformer of partner Coast, United Airlines— are renegotiating agreements, the and insome cases—such petitive environment toughens, many of large the airlines 9.4 percent. passengershown increase volume they by an average of marketthe power of and members, their research has all competitors within theindustry. paths offered by airlines. Therefore, consolidations affect leading ticket to higher prices, and complicate flight the major players, consolidations affect ticket prices, usually may create amore with fewer airline efficient industry increase traffic withoutincrease traffic increasing costs. costs. JetBlue ishoping to create an agreement that will many agreements of these include overhead increased ter atraditional agreement with other airlines, because power at hub the inJFK.JetBlue not does want to en- with international airlines inan effort to leverage its any alliances, it hashaddiscussions about forming one of tickets by booked 7.4percent on short-haul flights. researchers an average observed improvement innumber carriersglobal to seeking expand theirnetwork abroad, Canada, serves 157countries. Canada, serves Scandinavian AirSystem, AllNippon and Airways, Air Alliance, by spearheaded United Airlines,with Lufthansa, and operates ashared frequent program. flyer TheStar form theOneWorld 135countries Alliance, which serves Quantas,British Airways, and various European airlines to scheduling capabilities. American Airlinespartners with other and international carriers—to share marketing and to reach agreement financial with Delta creditors. but withdrew its offer inJanuary 2007due to inability the bid for bankrupt Delta Airlinesinfourth quarter 2006, competitivethe landscape. madeahostile USAirways Delta, and United. available from traditional airlines, such asAmerican, of discounted fares, some of thecheapest tickets are now cost airlines, like JetBlue, still offer the greatest number in order to compete on low-cost routes. Although low- by discounting tickets. Even airlines slashfares legacy the avoid to increase market dilemma,carriersshare try this on theground or planes fly with empty seats. In order to nificant problem, causing airlines to either leave planes industry.the For many years excess capacity asig- posed twice as fast as the nationaltwice asfastthe carriers. years, regional the airlines fared better than most,growing its partners handle reservations and marketing. In recent Although JetBlue not does currently participate in The major airlines form also alliances—with each Rumors of consolidation could change industry inthe Fare pricing isan important competitive factor within 25 Although ismore benefit the significant for 29 Even though awave of consolidation 27 24 Such alliances increase 22 However, com- asthe 26 28 The 23 Case 16 • JetBlue Airways: Challenges Ahead 211 August 2005 Enplanements 304 $ 231

6,606 $ 29,751 970 $ (606)

7 ,576 7 $ 29,145

August 2005 Rank 33 (6,203) 343 $ $ However, evidence now indicates a shift in its a shift in its indicates evidence now However,

(13,593) $ 347 $

32 Southwest’s strategy emphasizes low costs; the costs; firm low emphasizes strategy Southwest’s was the first to sell tickets online and to introduce unas- introduce to and online sell tickets was the to first fleet 481 of aircraft a single operates It signed seating. unique its for is also lauded Boeing company 737s. The ser- customer high of level its and friendly culture and vice. strategy—from serving compet- to strategy—from underserved routes, Philadelphia. and as Denver such markets in major ing terms of in airline U.S. the largest is now Southwest con- to in order 6), and (Exhibit passengers of number United against is competing Southwest grow, to tinue of out routes US Airways, on and hub, Denver in its Philadelphia. August 2006 Enplanements 31 JetBlue UAL SWA Delta Continental US Airways AMR Corp. Exhibit 5 compares key financial data for for financial data key 5 compares Exhibit 30 Top 10 U.S. Airlines, Ranked by August 2006 Domestic Scheduled Enplanements 2006 Domestic Scheduled August by Airlines, Ranked U.S. 10 Top U.S. Major Airlines’ Select Financials for Year Ended 2006 (in $millions) Year Select Financials for Airlines’ Major U.S. Current liabilitiesCurrent 854 7,945 2,887 5,769 3,955 2,712 8,505 Current assetsCurrent 927 6,273 2,601 5,385 4,129 3,354 6,902 12345 Southwest6 American7 Delta8 United9 Northwest Continental US Airways 8.7 America West 6.5 AirTran 5.4 4.1 5.1 3.1 2.6 1.8 1 3 1.8 2 5 4 7 6 8 8.1 9 6.8 7.0 4.2 5.0 2.9 3.1 1.9 1.5 Total assetsTotal $4,843 25,369 $13,460 $ 19,62211,308 $ $ Total owner equity owner Total $ 952 2,148 $ $ 6,449 $ Total liabilitiesTotal $3,891 $ 23,221 $ 7,011 $ 33,215 $10,961 $ Passenger numbers in millions Passenger August 2006 Rank Carrier Total revenuesTotal Cost of revenuesGross profit as % of revenueProfit $2,363Operating income (loss) 1,653Net income (loss) $ 19,340 24% 127 14,114 $ 9,086 570 $ (1) 23,381 27% $ 17,171 6,311 $ 22,38613,128 5,226 $ 934 28% $ 499 14,430 $11,557 $ 2,573 $ 22,563 (6,148) 11,007 10% 1,694 9,049 468 11% 1,453 17,659 558 16% 1,814 1,060 22% 4,904 10 JetBlue 1.7 13 1.3 Note: Percentage changes based on numbers prior to rounding. Source: Bureau of Transportation Statistics, T-100 Domestic Market. Source: 2007, MSN Money Central, http://moneycentral.msn.com/investor/research/welcome.asp, July 24. Source: 2007, MSN Money Central, http://moneycentral.msn.com/investor/research/welcome.asp, Exhibit 6 Exhibit 5 Key Competitors Key Airlines Southwest carrier. no-frills, U.S. is the low-fare, leading Southwest air- a Texas-based in 1967 as was founded The company The airline Antonio. San and serveline to Dallas, Houston, In States. the United across 63 cities than flies more now to net sales and profit a $499 million reported 2006, Southwest $9.86 billion. of the major airlines. In 2005, America West’s CEO, Douglas CEO, 2005, America West’s In airlines. the major “They were as follows: really described Southwest Parker, in kid who weights was lifting the scrawny point one at than bigger they’re and out they come Now his basement. else.” anybody than stronger elseanybody and Case 16 • JetBlue Airways: Challenges Ahead 212 filed forfiled Chapter 11bankruptcy in 2002. after years UAL several of difficulties, financial eventually United losttwo also planes on September 11,2001,and United Airlines and expanded its routes inAsia. order to return to profitability, streamlined firm costs the its Asia/Pacific routes. inJuly announcedstrategy; firm 2006,the plans to expand prove profitability. Globalexpansion iscentral to UAL’s isnowThe firm looking for ways new to expand and im- 2004, United launched its own low-cost off-shoot, Ted. from bankruptcy asamore competitive In firm. February from bankruptcy inApril 2007. a target acquisition by just USAirways before it emerged tions in95countries. for Delta filed bankruptcy and was routes over in2005–2006. Delta now 450destina- serves on international expansion, addinginternational 50new year after merger. the a 45percent increase instock price during first full the debt. balance sheet, having recently retired $100million in hired merger Goldman possible Sachs toassess options. in 2005and other significant inpreceding losses years. million, an improvement over its netlossof $861million on Continental’s regional and Latin American routes. uted to greatly increased number of passengers, especially ger thanresults. expected Thepositive results were attrib- pathin the airlines of by other the legacy reporting stron- U.S. and international routes. Continental targets business the traveler diverse by serving Continental Airlines among traditional airline icons. With an 11.8%domestic market share, Deltaplaces third Delta Air that United wasnot able to.” big difference iswe were“The able togenerate synergies firm’s performance post-bankruptcy to United, hestated, acquisition comparing when strategy issuccessful; the and West. America US Airways CEOParker this believes GroupUS Airways product isthe of amerger between US Airways 2003. terrorist attacks and barely thefirm avoided bankruptcy in its planes were hijacked during September the 11,2001, and Asia. It hashadits share of successand failures; two of out North Europe, Caribbean, the Latin America, America, offersmain to flights 150destinations subsidiary) through- As world’s the largest airline, American Airlines(AMR’s AMR Corp. 43 34 In third the quarter of 2006, Continental followed In 2006,AMRCorp. reported netearnings of $231 40 37 Recent rumors report that UAL 39 42 Shareholders experienced 41 Continental hasastrong Delta is strongly focused focused strongly is Delta 36 UAL emerged 44 35 In In 38 pense atpense 33.65 percent. In JetBlue’s costs became 2006,fuel largest operating ex- in 2004,40.5percent in2005, and 30.4percent in2006. According to FAA, the costsrose by jetfuel 20.1percent international travel. fly, how much can charge, they and how can market they many regulations on where, when, and how airlines can conducting business internationally. Thegovernment has scrupulously by government the than any other industry higher-priced fuel. ticket price and recover some of costsassociated the with can include they lines because surcharges fuel inthe greater ininternational efficiencies travel. income for consumers, and lower airfare resulting from actions have contributed, aswell asmore discretionary to grow by 4.6percent annually. Globalbusiness trans- ofber transatlantic plane tickets purchased isexpected 7.3 percent and 8.0percent. forward, Looking num- the to Asia year Southeast by and Chinaincreasesabout every for international aviation. AirFrance/KLM,cifically inrevenues lead the hastaken tional market. TheEuropean airline industry, more spe- United States might more be of aforce interna- inthe and lessrestrictions on international air travel that so the in theUnited States have fighting been for deregulation tive sources of energy, such asliquid the coal. Because seriously considers costs and fuel isinvestigating alterna- will remain for high years. nextseveral the Neeleman try experiences a$450million lossinpretax experiences profits.try inpriceincrease for abarrel airline of the indus- fuel, try. A Merrill Lynch analyst indicated that $1 for every contributor to rising operating airline costsinthe indus- consider. airline market conditions are afactor that JetBlue must sions necessary tosions remain necessary competitive. derstand companies/industries the that supply provi- the competitive environment, but it important isalso to un- domestic travel growth rate intheUnited States. ternational travel growth rate ismore than double the nificantly over Exhibit pastdecade(see the 7).Thein- The demand for international travel sig- hasincreased International MarketConditions next to labor. Fuel for expense isusually second-highest the an airline Fuel Key Suppliers However, ismonitored airline the industry more The international market isattractive to many air- As well asdomestic competitors, international the Not only isit important for JetBlue to consider its 48 Therefore, price fuel increases are amajor 46 Many lobbyist and politicians firms 51 TheFAA forecasts costs fuel 47 45 Travel Travel 50 49

Case 16 • JetBlue Airways: Challenges Ahead 213 Cost efficiencies would 55 Typically, the low-cost airlines operate few aircraft aircraft few operate airlines the low-cost Typically, manufacturer, has seen lackluster commercial sales, but is sales, but commercial has seen lackluster manufacturer, increased sales in the from benefiting military sector. train- and scheduling, their maintenance, types, reducing models, airplane two owns currently costs. JetBlue ing 96 Airbus of the addition include plans growth its and E190s. 92 Embraer and A-320s General Environment After travel. in air emerging are new trends of A number in the number 2001, the 11, industrySeptember a drop saw appeared this trend later years five but travelers, corporate of a survey to the National by According be reversing. to businesses of 65 percent Association, Travel Business be lost if JetBlue switched suppliers, exposing the firm suppliers, switched be lost if JetBlue suppliers. aircraft its of either to related problems any to the challenges are JetBlue for pressing more currently But industry. the airline with associated JetBlue JetBlue 53 52 2.9% 5.0% 3.1% 3.6% 5.5% 4.1% Revenue Passenger Enplanements (millions)Revenue Passenger Miles (billions) Revenue Passenger U.S. Commercial Air Carriers Total U.S. Passenger Traffic Passenger U.S. Total Air Carriers Commercial U.S. 54 Airlines engage in fuel hedging in order to manage to manage in fuel in order hedging Airlines engage Fiscal YearHistorical* 2000 Domestic200120022003 International20042005 641.2 626.8 SystemForecast 574.52006 587.82007 56.4 628.5 Domestic2008 56.7 661 51.22009 54.2 International2010 660.9 61.42011 697.6 693.3 683.4 86.22012 713.8 System 625.82013 735.7 642.0 89.72014 758.9 689.9 512.8 75.8 508.1 782.62015 79.8 747.2 473.02016 807.7 84.0 492.72017 833.4 181.8 750.6 88.3 540.2 860.5Average 183.3 769.1 92.9 Annual Growth 573.7 158.2 793.6 888.42005–2017 97.6 155.9 102.3 819.7 917.7 177.4 577.6 848.4 107.2 694.6 847.2 603.3 691.4 221.5 875.5 112.3 624.6 631.3 905.2 117.6 648.6 647.7 935.7 232.5 123.1 671.9 717.7 967.7 221.5 234.5 697.6 1,000.7 795.1 1,035.3 724.5 247.9 752.6 1,071.6 262.1 810.1 782.2 824.7 276.9 813.3 859.0 846.1 291.9 307.4 895.6 880.6 323.5 934.1 340.2 974.5 357.5 1,016.4 1,059.9 375.2 1,105.7 1,153.5 1,203.6 1,255.8 Source: Forms 41 and 298-C, U.S. Department of Transportation. Exhibit 7 Exhibit Aircraft Manufacturers companies, two by industry is dominated The aircraft following Boeing. economy the weak and Due to Airbus planes new commercial for 2001, their 11, orders September improved, business as commercial However, sharply. fell space the buoyant from profited manufacturers the large aircraft four the number Embraer, markets. defense and United States has an abundant supply of coal, Neeleman Neeleman coal, of supply abundant has an States United to fund a new ad- bill support to his customers urging is plants. coal-to-liquid ditional unpredictable costs. However, the jet fuel commodities the jet fuel commodities costs. However, unpredictable is especially the difficult large it and for is illiquid, market fuel. of sufficient quantities hedge to airlines is increasing its efforts to systematically hedge against against hedge systematically to efforts its is increasing efficient fuel also seeks more fuel needs. JetBlue future flight improved and purchased the planes through usage planning. Case 16 • JetBlue Airways: Challenges Ahead 214 for 10-year slot reallocation. lations encouraging of use larger aircraft, and aproposal York Guardia La include airport growth limitations, regu- capacity.airport For example, recent measures at New with intent the congestion to ease problems and enhance in the downin the position that gear nose the hadrotated 90degrees and waslocked jured during landing. the Upon landing it certain became None of 139passengers the or sixcrew members wasin- for three hours, to burn off fuel,Flight 292landed safely. International and after Airport circling Orange County was madetohave an landing emergency at Angeles Los knowledged problems with landing the gear. Thedecision JFK inNew York City. after pilot the takeoff, Soon ac- JetBlue Flight Burbank, 292left California, bound for crewmembers.” going attempts by unions to organize groups of JetBlue JetBlue’s management commented, “We on- can expect workers.ramp Thebid service wasunsuccessful; however and Aerospace Workers campaigned to represent JetBlue’s June International 2006,the Association of Machinists ized, it environment. canaffected by be industry the In military installations. system passengers to risk identify high that might threaten junction with U.S. the Army, tested acustomer profiling senger data to adata mining company, Torch, incon- who formation privacy. In 2002,JetBlue offered extensive pas- all airlines. tically. Theperceived safety of air travel isimportant for lives lost, JetBlue’s been image would have suffered dras- come wasultimately favorable, hadFlight 292crashedor a timeframe allotted for takeoff and landing) 292 landing Angeles. inLos appearing mechanical isthe inheadlines failure of Flight coverage and negative press. Onerecent major incident JetBlue to widespread the isexposed attraction of media ployees are unionized. along Atlantic the and Gulf coasts. by winter weather Northeast inthe and tropical storms states during summermonths. Airtravel affected isalso quite popular during winter the months and western the performance the affect statistics for air travel. Florida is mance statistics. United States, and congestion airport the hampers perfor- by operating areas northeastern traffic suchasthe inhigh tions. JetBlue general performance experiences setbacks characteristics of and airport the FAA density regula- cent predict an increaseamount inthe of business travel. employeesexpect to more take in2007,and flights 75per- Airlines also faceaheightenedAirlines also of sense consumer in- As from can expected be thegeneral environment, In airline the industry, more than 60percent of em- Natural disasters and annual weather patterns also Another factor environment inthe of air travel isthe 62 57 TheFAA regulates slot airport (aslot is 64 65 (see Exhibit (see 8).Although out- the 61 According Court, to District the Although JetBlue isnonunion- 59 63 OnSeptember 21,2005, 60 58 allocations 56 q0245a.shtml, October2. Source: JetScott,2005,http://www.aerospaceweb.org/question/planes/ porate and business strategies. and ensure that allactions are inalignment with its cor- of associated setbacks the with general the environment pressured to protect passengers’ identity. With online increased purchases, allairlines are publicly kit from Bliss, includes which earplugs, lip balm,an eye unlimited. transfat-free selection. Allsnacks are complementary and snacks and, asof November 2006, offers a100percent improve customer the JetBlue experience, addedhealthier Landing GearJammed Exhibit 8 and its Embraer E190planes have XMSatellite Radio. board JetBlue passengers receive service, free DIRECTV Asroom mostcarriers. previously than mentioned, on features leather seats and an additional two inches of leg tem, ticketless travel, and preassigned seating. Thecabin fromers benefit JetBlue’s simple-to-use reservation sys- not provide asawhole package. Before traveling, custom- and on-board conveniences that other low-cost carriers do JetBlue by offering delivers additional service this preflight Superior CustomerService an imageachieve of far customer service. superior try, JetBlue competes by differentiation. Thegoal isto low-costin the segment carrier within airline the indus- manyBecause of other the airlines play asignificant role JetBlue Strategies ily aswell number asthe of vehicles owned or leased.” numberthe of adults and children passenger’s inthe fam- economic status, number, security social occupation, and name, address, gender, home ownership or rental status, JetBlue wasresponsible for release the of “each passenger’s New York,Eastern Memorandum & Order 04-MD-1587, JetBlue must make aconscious above effort to rise all All passengers on “shut eye” receive flights acomfort JetBlue Airbus A-320 Flight292withItsNose 67 To To 66

Case 16 • JetBlue Airways: Challenges Ahead 215 A 86 84 80 By using animation in animation using By 79 81 This system gives JetBlue flex- JetBlue gives This system 77

Yet, they have made concerted efforts efforts made concerted they have Yet, 78 82 To create a fresh identity, JWT found can- JWT found identity, a fresh create To 83 In the one-week New York exhibit, an esti- an exhibit, York New the one-week In 85 In order to record customers’ opinions on JetBlue ser- JetBlue on opinions customers’ record to order In Another value-adding initiative is BlueTurn, the name the name is BlueTurn, initiative value-adding Another travel a single types and aircraft two operates JetBlue low- the standard follow strategies These cost-cutting services, its has care- to best market order JetBlue In JetBlue also uses technology to manage its marketing also uses marketing technology its JetBlue to manage telephone reservation system. Reservation agents work work reservation Reservation system. telephone agents com- personal using Lake City, Salt in their homes from for stands VoIP technology. VoIP with equipped puters to the Internet utilizes and Protocol Internet over Voice calls. phone free make mated 20,000 people participated in the installation. participated 20,000 people mated vice, an interactive video installation called the “JetBlue called the “JetBlue video installation interactive an vice, is and Center, in Rockefeller was set up Booth” Story served cities other the to country by around traveling JetBlue. for JetBlue’s ground operations. In an effort to improve the improve to effort an In operations. ground JetBlue’s for allows BlueTurn statistics, performance on-time overall the decrease time and minimize ground to crewmembers aircraft. time for turnaround and maintenance, training, reduces This simplicity class. mul- operate that competitors to relative costs operating types. aircraft tiple sacrificing the ul- model, without business cost, low-fare service customer superior strategy providing of timate employees. happy with approach. marketing its fully considered Marketing Strategy is best accomplished marketing believes that Neeleman to aims management top therefore mouth; of word by employ- and well treated are customers that sure make valued. ees feel costs. JetBlue employs Omniture software to increase ef- increase to software Omniture employs costs. JetBlue search associated decreasing searches, ficiency Internet of 94 percent. costs by conversion did statements by customers on JetBlue service. Online JetBlue on customers by did statements Epinions. and as Craigslist such consulted were sources used to cre- were as short stories, written The statements, JetBlue’s to ads as testimonials animated different eight ate were marketing service. direct of customer Other forms in serviced bins snack benches and used as leather such dis- and postcards comical also created airports. JetBlue their comments. back mail to customers to tributed to market in other ways. To establish a media campaign, a media campaign, establish To ways. in other market to (JWT) advertis- as its Thompson Walter J. hired JetBlue agency. ing its television ads with its advertising agency, JetBlue pro- JetBlue agency, advertising its ads with television its one. of price the standard ads for eight duced ibility to handle varying call volumes without needing a needing without varying handle call volumes to ibility call center. costly vehicle called Blue Betty was created to simulate an air- an simulate to Bettycreated was called Blue vehicle trav- it As in-flight amenities. showcase and cabin plane could visitors the country, across events various eled to

76 In 75 In order order In 69 74 72 His philosophy is that if is that philosophy His 70 73 68 This management style continues to attract to attract style continues This management 71 The combined effort to provide exceptional service exceptional provide to effort The combined the instal- and Song Delta’s by as proven However, A critical factor in achieving superior service superior in achieving factor A critical is em- It is valuable to customers to have their flight depart as have to customers to is valuable It mask, and hand lotion. Crewmembers wake customers customers Crewmembers wake lotion. hand and mask, a hot offer and coffee Donuts Dunkin’ thesmell of with service.towel and instill a valued-employee culture will fulfill Neeleman’s will fulfill Neeleman’s culture a valued-employee instill and our keep and fresh folks our “keep can JetBlue that hope back.” coming customers service” the “superior planes, in its seats leather of lation has also What competitors. by be can imitated attributes competi- ahead step in its one remain to JetBlue allowed is cost management. environment tive Cost Management ticket- electronic includes initiative cost-saving JetBlue’s check-in. online and cockpits, paperless ing, ployee moral. As Neeleman has stated, the crewmembers the crewmembers has stated, Neeleman As moral. ployee secret weapon.” the “real are planned. To provide customers with confidence, JetBlue JetBlue confidence, with customers provide To planned. its the expense of even at rate, completion its focuses on 2006, JetBlue quarter third the end of At rate. on-time custom- addition, In rate. completion had a 99.6 percent their bags they will have that be to confident want ers was JetBlue 2006 year-end, the flight. At the end of at in regard airlines the 15 busiest of 1 out number ranked bags. mishandled lost or of the leastto number motivated new hires; JetBlue has a reputation as a great as a great has a reputation JetBlue new hires; motivated high productivity sharing, profit company work, to place 2004 In advancements. rapid and people, and planes of 1,700–1,800 people. hired JetBlue alone, crew members are treated well, they will in turn treat the treat they will in turn well, treated are members crew well. customers Culture Dave and chairperson, Neeleman, David Currently, interact to who like people hands-on are CEO, Barger, of Each members week customers. and employees with al- and members 12 crew fly 8 to with management top new teach crew- to training new hire attend most always makes the company how brand, JetBlue’s about members the bottom to crewmembers contribute how and money, they the the clean crew help theyline. Whenever fly, time. turnaround a quick the ensure flight to after plane crewmem- with meetings informal they have addition In as crewmembers problems issues and bers to learn about see them. to achieve paperless cockpits, JetBlue supplied pilots and and pilots supplied JetBlue cockpits, paperless achieve to flight man- electronic retrieve to laptops with officers first calculations. balance load and preflight make uals and One of JetBlue’s more original strategies to cut costs is its costs is its cut to strategies original more JetBlue’s One of the year following implementation of paperless cockpits, cockpits, paperless of implementation following year the labor. of 4,800 hours approximately saved the company Case 16 • JetBlue Airways: Challenges Ahead 216 from its point-to-point service. ate demand inmany midsized markets that could benefit tion of JetBlue’s and lower prices. service tothem predict how amarket willreactto introduc- the This information along with JetBlue’s historical data allows customer business especially base, travelers. are deals nection. These an attempt to reach abroader to purchase tickets for JetBlue travelers with asingle con- arrangement willallow more than 52,000travel agencies ment with Sabre Holdings and GalileoInternational. This August of company 2006,the signedafive-year agree- pand distribution channels willincrease revenue. In overseas. tunities, its because aircraft are not large enough to fly JetBlue to capitalize on international the market oppor- of aircraft inJetBlue’s an alliance fleet, istheonly way for to enter international the market. Dueto limited the type midst of some discussions about creating apartnership over timeinallcity-pair markets within North America. torical number of passengers, capacity, and average fares Departmentthe of Transportation, outlines which his- the pattern, executives study information madeavailable from citiesdetermine which JetBlue should include inits flight kets usually by served higher-cost, higher-fare airlines. To destinationsthe and already entering served, mar- new onflights existing routes, connecting city new pairs among year versus 18to the 20percent originally forecasted. to growpects between 14and 17percent over thenext dium, and long haul). capacity, and reprioritizing of segments flight (short, me- were revisions to fare structures, corrections to flight “Return to Profitability.” Items included initiative inthis JetBlue executives announced aturnaround plan called In first quarter the of 2006,due to operating losses, Current Strategies growth and revenue. consistent basisupdates its business strategy to increase and JetBlue increased awareness by 41percent. indicated marketing this survey campaign wassuccessful rewarded with airline tickets through drawings. A2005 where students were encouraged towear blue and were marketing Other efforts include “Blueservices. Days,” to educate students about of various airline’s the aspects unconventional of posters, methods flyers, and chalk art a public relations team calledCrewBlue. Thisgroup used direct marketing used also to target college students with enter acontest (or lottery) for ticket giveaways. JetBlue JetBlue Embraer to new the tocre- use fleet expects The firm is also optimistic isalso that recentThe firm moves toex- In addition, asmentioned previously, JetBlue isinthe JetBlue plans growth tothis fuel by adding anumber of The growth rate slowed. hasbeen Thecompany ex- In addition to marketing initiatives, JetBlue on a 88 91 92 87 89 90

available on any other online travel site.” ning and ending on JetBlue not Airways—something our customers level of anew value with vacations begin- fare with hotel thebest or resort rate, we are able to offer latestthe to combine technology lowest the JetBlue air- customers only properties finest the at great prices. Using than through an intermediary, we are able to offer our commented, “By working with hotels the directly, rather Tim Claydon, vicepresident of Salesand Marketing, When JetBlue Getaways launched inNovember 2005, and hotel packages, it which terms “JetBlue Getaways.” In addition to air travel, JetBlue combined sells flight Associated ProductsandServices has established complementary products and services. vious two inches. inches of legroom between each row rather than thepre- of March first 11rows 2007the cabin inthe feature four As of providing methods new customer service. superior gies, JetBlue monitors its situation financial regularly. bers. “JetBluethe Card,” earns which TrueBlue points for mem- 2 percent of JetBlue’s total revenue passenger miles. for one year. In 2006,award travel accounted for only round trips), customer the earns afree round-trip valid points (equivalent to approximately five medium-length memberships. When acustomer 100TrueBlue amasses movieflights, tickets, sporting event tickets, and gym toils to consistently turn aprofit. JetBlue hasmaintained Long-term stability financial an willbe issue as JetBlue Long-Term Stability over ratios are shown inExhibit 10.) past. (Liquidity ratios are shown inExhibit 9and turn- incollecting asefficient not receivables been asinyears able to pay its suppliers at afaster rate eventhough it has increasing,been indicates which that JetBlue hasbeen current However, assets. payables the turnover ratio has 2003 to 2006issignificant, compared to thegrowth of mance since2005.Thegrowth of current liabilities from in Exhibit 2.JetBlue with financial perfor- hasstruggled JetBlue’s balance sheetover pastfive the years isshown Short-Term Liquidity meeting its stockholders’ expectations. itability. Stockholder profitability JetBlue signals whether is short-term liquidity, long-term stability, and company prof- JetBlue’s current situation financial ishighlighted by its Financial Condition Moreover, JetBlue isconstantly striving to introduce In order tosustain its business and corporate strate- An American Express card wasissuedin2005called 95 Customers TrueBlue earn points purchasing when 93 To augment JetBlue its services, flight 97 94 96 Case 16 • JetBlue Airways: Challenges Ahead 217 2006 2005 2004 2003 2002 This change will hinder a popular will hinder a popular This change 102 Profitability at the end of April 2002. In addition to the lack- to addition In 2002. April the end of at 101 100 Maintaining the JetBlue culture will be difficult to culture the JetBlue Maintaining Gross marginsOperating margins 5.4%Net profit margins 20% on equityReturn 0.4% 27% 3% on assets 33%Return –1% 0.97% 9% 40% –2% 4% 17% 2% 45% 10% 6% 17% 2% 19% 9% 19% 3% 6% 6% Exhibit 13 Exhibit 2006 Annual Report; 2007; Source: JetBlue Airways Corporation http://www.finance.yahoo.com. charges as shown in Exhibit 12. Salaries, landing fees, fees, landing Salaries, 12. in Exhibit as shown charges of as a percent stable fairly expenses other remain and 1). see decreased, actually Exhibit (most have revenues (see 23 percent remained margins 2006, gross For expense has a nega- interest earlier, stated 13). As Exhibit effecttive on profitability. Stockholder Profitability $11.01 versus at was trading the 2007, stock July In $14.90 Strategic Challenges oper- to continues as it challenges faces many JetBlue The main industry. airline in the highly competitive ate grows, as it culture JetBlue’s maintaining are challenges fleet two of complexities the surfacing with dealing expenses and as airplanes maintenance types, managing increasingly an with dealing and begin age, engines to a concern, fuel are prices pool. Although labor senior airlines and they affect the industry in the way, same these risks. Southwest mitigate to opportunities have other than effectively more fuel position its hedged everyone will and will expire these hedges but airlines, to fuel field comes when it playing level a more have prices. luster stock movement, JetBlue has never paid dividends, dividends, has never paid JetBlue stock movement, luster is 5.5 years percent. the past four for return so the overall the Finance, Yahoo! and to moneycentral.com According JetBlue. for is “Hold” recommendation analyst average net of inconsistency and equity on return The declining for implications negative be to having appears income JetBlue. do as the airline grows. The explosive increase in em- increase The explosive grows. do as the airline high sustain utiliza- to hinder the ability may ployees The environment. work a positive maintain and tion individ- with interact has to management top time that that stated Neeleman will decrease. ual crewmembers every to respond crew- to be able no longer he would e-mail. member’s 2006 2005 2004 2003 2002 2006 2005 2004 20034.1 2002 3.3 2.7 2.3 2.3 JetBlue’s first quarter 2007 assets/ quarter first JetBlue’s 98 2006 2005 2004 2003 2002 Fuel Expenses Fuel Stability Ratios Receivables and Payables Receivables Liquidity Ratios (See Exhibits 3 and 11 for details.) 11 for 3 and (See Exhibits 99 Operating revenue fuelAircraft $2363 fuel %Aircraft $1701 $1265 $998Other Costs % Revenue $635 Salaries and benefits % rent %Aircraft 752 23 31 %Sales and Marketing 488 25 29 255Maintenance % 4 147 27 20Source: JetBlue Airways Corporation 2006 Annual Report. 4 27 76 5 15 26 4 4 12 5 6 4 5 6 4 7 6 2 1 Exhibit 12 Debt/Asset ratioDebt/Asset Asset/Equity ratioDebt/Equity (financial 0.8leverage) 5.1 0.8 ratioInterest coverage 4 0.7 0.7Source: JetBlue Airways Corporation 2006 Annual Report. 0.7 3.5 0.7 2.7 3.3 0.7 8.4 3.5 7.1 Source: JetBlue Airways Corporation 2006 Annual Report. Source: JetBlue Airways Corporation Exhibit 11 Current ratioCurrent ratio 1.1Quick Annual Report. Airways Corporation 2006 Source: JetBlue 1.05 0.94 0.91 1.05Exhibit 10 1.03Receivables 1.75 turnoverReceivable 1.72 1.05 30.6 to collectDays 1.03 26 2006Payables 2005 11.9 47.1turnover Payable 14.1 2004 69.7 to payDays 16.4 38.8 2003 7.8 13.8 2006 2002 5.2 12.9 2005 11.5 9.4 2004 9.5 26.4 2003 28.3 2002 31.7 38.5 Exhibit 9 Exhibit a fairly consistent debt-to-asset mix as most of the cash mix as most of debt-to-asset consistent a fairly as- in capital has been issuances invested from received rate floating are issuances JetBlue’s of sets. The majority exposing thebonds, firm in the increases Federal to rate. prime Reserve’s Company Profitability in recent decline to continued margins gross JetBlue’s fuel increasing to attributed be which can mainly years, equity ratio stood at 5.4 compared to the industry to aver- 5.4 compared stood at ratio equity 3. of age Case 16 • JetBlue Airways: Challenges Ahead 218 work. dayas $700per extrafor people to monitor quality the of “seven figures” planes eachyear and inferrying asmuch ing employees to work facilities. inthese JetBlue spends additionalhas to spend planes money and ferrying pay- not co-located with any ofJetBlue its scheduled service, Aeroman Salvador. inEl operations these Because are to Air CanadaTechnical inWinnipeg, and Services Furthermore, JetBlue to decided outsource maintenance months/6,000 hours/3,000 cycles. expensive, and longer. 18 The C-check schedule isevery on avehicle. C-and D-checks are more extensive, more 400–500hours and every arecur similar to an oil change uled maintenance and inspection A-checks intervals. oc- in maintenance costs. same time, JetBlue asignificant willexperience increase of planes new comes due for maintenance heavy at the respectively Exhibit (see 1);however, asthelarge fleet cant in2005and 2006at 36percent and 42percent, inmaintenanceThe increase costswasnot assignifi- tem. delays and cancellations throughout JetBlue the sys- factors plane.caused flight These new understand the and mechanics neededadditional timeand training to perienced a94percent inmaintenanceperienced increase costs. arethey covered underwarranty. In 2004,JetBlue ex- planes rarely needmaintenance anddo, they when JetBlue incoming years. As car, with anew air- new Maintenance asignificant willbe expense concern for Increased MaintenanceExpenses rate employees. different, requires which additional support from corpo- 10 days, compared to just 4days for regular C-checks. fourth C-check consists of more inspections, and takes modate types. two fleet inventories, training programs, and facilities to accom- and integration procedures. JetBlue willneedseparate tendants. Thedifferent aircraft require unique training that JetBlue must two staff groups of pilots and at- flight acteristics wereacteristics different from Airbus. the day, similar to its A-320s. However, theairplane char- JetBluefleet. wanted planes new the to 14hours fly a back it when incorporated Embraer the E190into its two different of types aircraft. suffered aset- Thefirm JetBlue willhave achallenge asit continues to integrate Multiple AircraftTypes may asaccessible. nolonger seen be cultural component chairperson the because and CEO Airplane operators have A,C,and Dlevels of sched- Another issueassociated with of two types aircraft is 105 110 JetBlue hadto reevaluate its plans. As JetBlue’s planes enter more extensive service, 106 In addition, thepay are scales 108 103 Additionally, the 104 Both pilots Both 107 109

force (refer to Exhibit 1). cent, or $125million, due primarily to an work- increased per- wages,During 2006salaries, and 29 increased benefits Payroll costswillmultiply at JetBlue company asthe ages. Increased PayrollExpenses ofsets inventory and people. cilities, and willhave they to employ and house multiple multiplebecause aircraft require types multiple repair fa- tain willincrease. JetBlue may economies lose of scale mental systems, avionics, and controls. flight powerauxiliary units, landing gear systems, environ- arrange for contract maintenance support. have They tors have additional equipment must they maintain and from $1million to $1.5million heavyvisit. per Typical charges for acomparable engine overhaul range maintain (including its 23E190airplanes and engines). inventory, JetBlue hasasignificant number of engines to craft, and with two engines plane per and ahealthy spares At year-end 2006,JetBlue hadmore than 90A-320 air- costs. of hours flight month, per and on—resulting so inhigher such ashotel requirements, timeoff,minimum number pushwill then for wages increased and other amenities— JetBlue succumb to union pressure, union negotiators unions for representation. If by chance employees the of gate agents receive willalso pressure from other national pilots, attendants, flight mechanics, ground crews, and Pilot Association hasJetBlue asatarget. In addition to have not gained afoothold inJetBlue, but AirLines the disgruntledbecome and demand representation. Unions will have to pay its employees well to ensure donot they companythe paying willstart wages. higher the company Exhibit (see 15).Amore means senior staff of aircraft and on depending number the of years with members are paid for eachhour according flown, to type will salaried employees get annual pay raises, but crew- with thecompany theirpay level willincrease. cost labor However, pool. people attain asthese seniority tom of thepay and scales, JetBlue enjoys arelatively low- riers for total number of employees United inthe States. percent growth staff and ranks third among low-cost car- Transportation Exhibit (see 14),JetBlue a212 experienced scheduled and unscheduled repair for allA-320 engines. agreement with aGerman company, MTU. It covers all for JetBlue. In July 2005,JetBlue signeda10-year service nance willincrease. amountthe airplanes of and timeto ferry actualmainte- As number the of aircraft costtomain- the increases, In addition to engines and airframes, airplane opera- Because JetBlueBecause desires to remain nonunionized, it Currently, allof crewmembers the are near bot- the Engine expense isanotherEngine expense huge maintenance cost 113 According to Bureau the of 114 Not only only Not 112 111

Case 16 • JetBlue Airways: Challenges Ahead 219 Crain’s Crain’s otes 56.9 70.6 2002–2006 N Percent Change Percent Change carrier in mid-2004, are lights on January 5, 2006. October 30, C1. February 13, 22(7):4. 13, February Wall Street Journal, Wall rivals, rivals, it into a loser, turn fuel costs, intense competition Ballooning Business, York New people wanted and how much they would pay for it. it. for pay they would much how and wanted people the because of employees high-quality attracted JetBlue service customer stressed dif- that and culture unique reservations at-home Allowing offerings. ferentiated easy ac- crewmembers’ and cockpits, paperless agents, with environment an has created executives cess to pur- by addition, In associate. to want which people junior a having and airplanes new Airbus brand chasing maintenance and has minimized labor staff, JetBlue several years. expenses, for operating costs, both major be- aircraft its market, in the domestic slows growth As the senior, becomes more the workforce and gin to age, Neeleman and Barger will increase. challenges of number con- to how about questions persistent faced with are attack Does JetBlue profitably. the airline grow to tinue Continental or American, Delta, United, Southwest, smaller airports? and/or the in Midwest strongholds inter- into expand to in order alliance an form Does it minimize To Asia? and as Europe such markets national to return JetBlue should airplanes, to expenses related prevalent are while unions type? Finally, airplane one an maintain JetBlue every can at how airline, other committed, remain employees where environment satisfied? and dedicated, 2. outfly discount Airlines may 2006, Legacy Carey, & S. Trottman M. 3. harder to fly; 2006, finds it’s Middle-aged JetBlue Fredrickson, T. FO EMB190 356810212.4 55667 33445 22222–14.4 A443N/AN/A FO A-320 International Directory of Captain EMB190 Corporation, Vol. 44. St. James Press. 2006, in Press. Reproduced 44. St. James Vol. ways Total**** 65 71 72 71 71 9.3 Pay Scale Table Scale Pay Low-Cost Carrier Full-Time Equivalent Employees, August 2002–2006August Employees, Equivalent Full-Time Carrier Low-Cost A-320 Captain Not applicable because carriers did not meet the standard for filing. Not applicable because carriers 987 $1256 $1245 $123 $844 $122 $823 $121 $80 $752 $118 $79 $741 $116 $77 $74 $50 $113 $76 $73 $49 $110 $74 $72 $48 $72 $67 $47 $71 $61 $46 $56 $44 $51 $42 $40 $37 11 $126 $87 $76 $52 10 $126 $85 $76 $51 12 $126 $89 $76 $53 Company Histories, Company Hills, Mich.: Farmington Center. Resource Business and Company Gale Group. Rank1 –61.5 234 Southwest5 America West6ATA77743 JetBlue 7 AirTran 8 34 Frontier 12 2002 2003* Spirit Independence 33 2004* 11 N/ 2005* 31 11 2006 31 12 32 13 –4.5 7.0 Note: Guarantee of 70 hrs/month; above 70 hours paid at 150%. Note: Guarantee of 70 hrs/month; above 70 hours paid Source: 2006, Will fly for food, http://www.willflyforfood.cc/Payscales/ PayScales.htm. *Employment numbers in 2003, 2004, and 2005 for Independence Air, which changed its business model from a regional to low-cost 2004, and 2005 for Independence Air, which changed *Employment numbers in 2003, Source: Bureau of Transportation Statistics. included with low-cost carriers. The carrier did not meet the standard for filing in previous years. The airline discontinued f The carrier did not meet the standard for filing in included with low-cost carriers. N/A 2004 Year Exhibit 15 Exhibit 14 Exhibit (Numbers in thousands) (Numbers in 1. 1. Air JetBlue 2002, JetBlue’s Challenge in Coming Years started based previous airline an on Neeleman David knew what He spirit. entrepreneurial experience an and Case 16 • JetBlue Airways: Challenges Ahead 220 9 C.Palmeri, D. Frost, &L. Woellert, DougParker 2006, wants tofly 29. 28.2007, US Air C.Jones, JetBlue 2006, seeksinternationalpartnerships, 26. K.Iatrou &N.Skourias, 2005, An attempt tomeasurethetraffic 25. Star Alliance, http://www.staralliance.com/en/travellers/index 2006, 24. J. Schoen, dogfight,http://www 2006, Airline woes sparkindustry 23. scheduled. 2006, Air transportation, 22. R.M.Schneiderman, Legacy 2006, carriers flyback into 21. 7 D. Rosato,How 2006, toscoreacheap airlineticket, 27. Hoover’s 2006, Company Records, JetBlue Air 20. scheduled, 2006, Air transportation, 19. 8 2007, JetBlue announcestheJetBlue Customer BillofRights, 18. J. Bailey, 2007, JetBlue’s C.E.O. ismortifiedafter fliersarestranded, 17. 16. Ibid. 2006, Third JetBlue quarterof2006, Air 15. 14. 2006, Fourth 2006, JetBlue quarterof2005, Air 14. 1 W. Zellner, Southwest: 2005, Dressed tokill.competitors, 31. Southwest 2006, Airlines Co. Annual Report. 30. JetBlue’s 2005, New Terminal 5willmore thandoubleairline’s JFK 13. JetBlue 2002, announcesinitialpublicoffering ofitscommonstock, 12. 2 R.E.Hoskisson,M. A. Hitt, &R.D. Ireland,2003, 32. S. Overby, 10. Ibid. JetBlue skiesahead. 9. 2006, Airbus, http://www.airbus.com/en/aircraftfamilies/a320/a320/. 8. S. Overby, JetBlue 2002, skiesahead, 7. 8 R.M.Schneiderman, Report: 2006, UAL lookingtomerge, 38. 37. Ibid. Hoover’s 2006, Company Reports: In-depthrecords,UAL 36. Report. Corp Annual AMR 2006, 35. Hoover’s 2006, Company Reports: In-depthrecords, AMR 34. D. Reed, 2006, At 35,Southwest’s strategygetsmorecomplicated, 33. 6 JetBlue Air 6. J. 2006, H.Dobrzynski, We’re stillagrowth airline, 5. 42. 2006, Hoover’s 2006, Company Reports: In-depthrecords,Continental 42. 40.2006, USAir C.Palmeri, D. Frost, &L. Woellert, DougParker 2006, wants tofly 39. 41. 2006, 2006, Airline DomesticMarket Share:September2005–August 2006, 41. 4 J. Bernstein,JetBlue 2006, postsquarterlyloss, 4. 11. 2002, JetBlueearnings—Low-fare 2002, announcessecondquarter2002 11. Delta, Delta, http://www.usair http://www.cnnmoney.com, October27. News, impact ofairlinealliances, .html. .msnbc.com, July 31. Forbes, October 31. Industries, JetBlue Air 2007, JetBlue damagecontrol,http://www.foxnews.com, February 27. New York Times, release, October24. release, February 1. release, December7. BusinessWeek, withinthreeyears,capacity JetBlue Air JetBlue Air Corporation pressrelease,July 25. carrier achieves recordoperatingmarginof18.6%, JetBlue Air Advantage, .com, July 1. .lib.asu.edu/servlet/BCRC. Journal, Corporation, November 28. Corporation, November 28. USA Today,July Airlines Inc.,November 28. Delta. December 1. Database, Bureau of Transportation Statistics—TheIntermodal Transportation SaltLake City, March 16. BusinessWeek, http://www.forbes.com, October20. November 4, A6. http://www.transtats.bts.gov/, December6. onlineed., Thomson Gale. ways ways ways ways ways ways Mason,OH:South-Western, 24. ways ways ways ways 11. 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25.

68. 2006, JetBlue 2006, Announces 6.6Percent OperatingMarginfor Third 68. 9 J. Miner, http://luxuryresorttravel.suite101.com/article/cfm./ 2006, 69. 8 S. Salter, CallingJetBlue, 2004, 78. R. Valdes, How VoIP works, http://electronics.howstuffworks.com/ 77. 76. Ibid. S. Overby, JetBlue skiesahead. 75. 83. 2005, 83.2005, JetBlue B. Harrell, http://www.yaleeconomicreview.com/issues/fall2005/ Air 82. 81. Ibid. D. Sacks, Rehab: 2006, An advertising love story, 80. JetBlue 2005, soarswithOmniture Research Center, Omniture, Inc., 79. 67. 2005, JetBlue Air 60.2005, JetBlue Air D. Bond, 2006, The FAA’s demand-managementplansfor LaGuardia 59. 58.2000, http://www.house.gov/transportation/aviation/hearing/ 66. 2002, United States DistrictCourtEasternofNew UnitedStates 2002, York, 66. R.Singal, 2003, Army admitsusingJetBlue data, News,Wired http:// 65. J. Scott, http://www.aerospaceweb.org/question/planes/ 2005, 64. Significantsafety 2006, eventsfor JetBlue since2000 Airlines, 63. S. Lott, IAMfails 2006, infirstattempt toorganize JetBlue rampstaff, 62. S. Overby, JetBlue 2002, skiesahead. 61. 0 S. Salter, 2004, And now thehardpart, 70. 74. 2005, JetBlue B. http://www.yaleeconomicreview.com/issues/ Harrell, 2005, Air 73. 72.Ibid. 71. Ibid. 57. 2005, JetBlue Air

56. 2006, 56.2006, 55.Ibid, 9. 8 E.Roston,Hedgingtheircosts: 2005, Whether oilpricesgoupor 48. 47. Ibid. 46.Ibid. Congressionaltestimony, 2006, R.M.Schneiderman, packs Continental 2006, ‘em45. in, 44. 3 R.Fozard, Continental’s 2006, surprisingascent, 43. 54. 2005, 54.2005, K.Johnson,Fuel 2005, hedginggetstricky, JetBlue 53. Air C.Jones,JetBlue 2006, founder pushesfor alternative fuel,http:// 52. Oilpriceswillprune 2005, revenue gainsbutSouthwest, JetBlue 49. 51. 2006, JetBlue 2007, FAA aerospaceforecast fiscalyearshttp://www 2007–2020, Air 50. Quarter 2006, JetBlueQuarter 2006, Air December 31,2. December 31,3. jetblue_air ip-telephony.htm. December 31,3. davidneeleman. http://www.fastcompany.com, June, 106. http://www.omniture.com, December2. .fastcompany.com, May, 82. decision_0705.pdf. 04-MD-1587 (CBA), http://www.epic.org/privacy/airtravel/jetblue/ Memorandum &Order, JetBlue Air www.wired.com, September23. q0245a.shtml, October2. AirSafe.com, LLC,http://www.airsafe.com, May 6. Aviation Daily, December 31,69. fall2005/davidneeleman. .fastcompany.com, May, 82:67. Space Technology, call for biggeraircraft, market-based slotturnover, 12-05-00/12-05-00memo.html. December 31,2. December 31,4. down, smartairlinecompaniesarecovered, February 8. www.timesdispatch.com, November 15. December 31,21. look good, .faa.gov/data_statistics/. Wall StreetJournal ways_pros_and_cons, November 13. Airline BusinessReport, July 20. ways ways ways ways ways ways ways ways ways ways ways ways ways ways September4. Corporation Form 10-K, Fiscalyear ending Corporation Form 10-K, Fiscalyear ending Corporation Form 10-K, Fiscalyear ending Corporation Form 10-K, Fiscalyear ending Corporation Form 10-K, Fiscalyear ending Corporation Form 10-K, Fiscalyear ending Corporation Form 10-K, Fiscalyear ending ways ways (Easternedition),November 22. Corporation pressrelease,October24. Fast Company, Congressional Quarterly, Inc., July 4,23(12). ways ways Fast Company, Corp: Privacy Litigation: Wall StreetJournal, Time, BusinessWeek, http://www Aviation Week& Fast Company, July 27. Forbes, http://www October May 19. July 31.

19. Case 16 • JetBlue Airways: Challenges Ahead 221 http:// Magazine October/ Forbes, 101. http://www.fastcompany some airlines turning to fuel to fuel turning some airlines away, away, Overhaul & Maintenance, Overhaul Fast Company, Fast Corporation, Form 10-Q, October 24. October 10-Q, Corporation, Form Corporation Form 10-K, Fiscal year ending Fiscal year 10-K, Corporation Form nway, nway, ways ways Aircraft Technology, Engineering & Maintenance, Technology, Aircraft Aircraft Technology Engineering & Maintenance, Engineering Technology Aircraft December 31, 41. &b=18&c=2001&d=10&e=30&f=2006&g=m. hedging again, Associated Press State & Local Wire, September 4. State Press & Local Associated hedging again, (82). .com, May 22. Feb http://www.usatoday.com, www.forbes.com, June 10. June www.forbes.com, January 6. transportation/10260392.html, 99. November, for MRO Management, October 2. MRO for 111. 2006, JetBlue Air JetBlue 2006, 111. 112. Air 112. JetBlue 2006, 113. 114. 114. http://www.thestreet.com. Reed, T. 99. 2006, Industry data from www.moneycentral.msn.com. 100. http://finance.yahoo.com/q/hp?s=JBLU&a=03 Finance, Yahoo! 2006, 101. backing After 2006, K. Prentice, 102. 102. On the ru Salter, S. 103. part, 67. the hard And now Salter, S. 104. into black, to climbing back focus JetBlue’s 2006, shifts Reed, Loss D. Ibid. 105. 106. plans, 2003, lands expansion JetBlue M. Bobelian, 107. 107. http://www.thestreet.com/stocks/ TheStreet.com, 2006, Reed, T. 2006, 108. 109. Companies 2005, McGraw-Hill 110. Ibid, 5. Ibid, 110. Prism Prism ways Corporation Media Life Media Life ways etBlue Air aways, J Corporation press release, October 24. Corporation press release, Corporation Form 10-K, Fiscal year ending Fiscal year 10-K, Corporation Form Corporation Form 10-K, Fiscal year ending Fiscal year 10-K, Corporation Form Corporation Form 10-K, Fiscal year ending Fiscal year 10-K, Corporation Form Corporation Form 10-K, Fiscal year ending ending Fiscal year 10-K, Corporation Form ways ways ways ways ways http://www.livedesignonline.com, June 7. 7. June http://www.livedesignonline.com, Http://www.medialifemagazine.com, May 15. May Http://www.medialifemagazine.com, August August 11. Magazine, Business Media, Corporation press release, April 1. April release, Corporation press Air JetBlue quarter, December 31, 10. Forbes, flightlog, December 14. press release, November 3. press release, November December 31, 1. December 31, 19. December 31, 17. 84. story. love advertising An Rehab: Sacks, D. 85. kiosks, interactive 2006, lights JetBlue & sound XS Lighting 87. Ibid. 87. 88. Air results, JetBlue announces first quarter 2005, JetBlue 90. 2005, JetBlue Air JetBlue 90. 2005, 89. third operating margin for announces 6.6 percent 2006, JetBlue 86. ad, taking to the streets, it client’s Your K. Prentice, 91. Ibid. 91. 92. America, 2006, courts Corporate JetBlue R. M. Schneiderman, 93. 2006, Neeleman, http://www.jetblue.com/about/ourcompany/ D. 94. get 2005, Introducing JetBlue 95. 2005, JetBlue Air JetBlue 95. 2005, 96. 2006, JetBlue Air JetBlue 96. 2006, 98. 2005, JetBlue Air 97. JetBlue Module 3. Accounting Financial 98. 2005, This page intentionally left blank