Softening demand
Increasing fuel prices
Managing the departure from the classical low cost carrier (LCC)
approach of limiting its fleet to just one aircraft
Determining how the reduction in new plane deliveries should be
distributed across the E190s and A320s?
How should JetBlue position itself to counter the competitive
challenges that it faced in 2007?
The case provides some data that students can use to assess the cost
structures of JetBlue and the major players in the industry. This is a
valuable exercise for students. Combined with the suggested exercise
below of having students collect and compare JetBlue and competitors
prices on a single route will give them experience is looking at the
fundamental issues in cost leadership.
Study and Preparation Questions:
1. What is your assessment of the attractiveness of the airline
industry?
2. Choose two routes that JetBlue flies. (Compare their fares versus
competitors that fly the same route.) Internet sites such as
Expedia or Orbitz should make this go quickly.
3. Using Exhibit 2, do a thorough analysis of the costs of JetBlue
and its competitors. How does JetBlue compare to its leading
competitors on costs? What factors drive cost differences in the
industry?
4. What is your assessment of the E190 decision?
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Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
Part II
Case 2-1
Part II
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Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
Case 2-1
Sthwst
Contintl
Delta
Amrcn
United
Oper Rev
1701
7584
11208
16191
20657
17304
Oper Exp ($
millions)
Oper Profit ($
millions)
Net Income
($millions)
EPS
1653
6764
11247
18192
21008
17529
48
820
-39
-2001
-351
-225
-20
548
-68
-3836
-892
-21036
-0.13
0.7
-0.96
-23.75
-5.21
428
2702
2649
5058
6173
4014
438
1342
2443
4271
5080
4032
Passengers
(thousands)
Rev passenger
miles (millions)
Avail Seat Miles
14729
77693
44939
118856
20200
60223
71261
119954
138374
114272
23703
85172
89647
156659
176112
140300
Passenger Load
Factor %
Breakeven Load
Factor %
Employment
Fleet
85.2
70.7
79.5
76.5
78.6
81.4
Wage, benefits
(millions)
Fuel/oil ($ millions)
86.1
6797
92
67000
87.0
91729
445
42200
356
55700
649
82.8
88400
699
57000
460
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Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
Part II
RASM
CASM
Wage/ASM
RASM-CASM
Fuel/ASM
Passengers/Plane
ASM / Plane
ASM/Employee
0.072
0.070
0.018
0.002
0.018
160.1
257.6
3.5
0.089
0.079
0.032
0.010
0.016
174.6
191.4
0.9
0.125
0.125
0.030
0.000
0.027
126.2
251.8
2.1
0.103
0.116
0.032
-0.013
0.027
183.1
241.4
2.8
0.117
0.119
0.035
-0.002
0.029
251.9
2.0
0.123
0.125
0.029
-0.002
0.029
145.7
305.0
2.5
Some of the calculations that one can derive from Exhibit 2 are above.
The table shows that JetBlues costs per available seat mile (CASM) are
the lowest among major competitors. However, the table also shows
that their revenues per available seat mile are also the lowest. RASMCASM is positive only for JetBlue and Southwest. There are a number
of other calculations that can be performed. If I divide the class into
teams, I encourage them to generate as many meaningful measures as
they can from the Exhibit and then discuss in their team what insights
they have gained.
What is your evaluation of the E190 decision? Many pilots at
JetBlue believe, if it aint broke, dont fix it. Were doing well
financially with the A320, so why on earth would we put our
company at risk by doing this?
At this point, you may want to divide the class in to two groups: 1) one
side of the class is assigned to argue for the E190; 2) one side of the
class is assigned to argue for limiting the fleet to the A320.
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Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
Case 2-1
What lessons can we draw from this case about applying a cost
leadership strategy?
JetBlue has achieved lower costs than its competitors while
having less scale and experience. They have achieved lower
costs by doing things differently. Much of this difference involves
achieving lower labor costs, but legacy airlines and even
Southwest will find many of these practices difficult to imitate.
Thus, reconfiguring the value chain in ways that are valuable and
difficult to imitate can be a source of sustainable competitive
advantage.
Many growth opportunities come at a cost of strategic
coherence. The market served by E190s looks appealing when
considered in isolation, but it adds complexity to JetBlues
operations that will make it difficult to keep its costs as low as it
typically has. This does not mean that JetBlue should not go
after the E190 market, but they should be aware of the danger of
at least some of their cost advantage eroding.
Implementation and political concerns can undermine what is
otherwise an economically sound strategy. Even if the E190 is
the way to go, the political issues raised by pilots present
problems. JetBlue believes that it has to add A320s at least the
same rate. This may dilute the potential competitive advantage
that it might have in the regional planes (where returns appear
to be higher).
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Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall