Analyze the industry environment of JetBlue.
To answer this question, the instructor can choose to steer the discussion toward the factors in the
general environment, and then toward the competitive environment.
In the general environment of domestic airline industry, the discussion can address the
political/legal, technological, economic and other factors. Under the legal factors, the deregulation of
the airline industry in 1978 provided an opportunity to several players to enter the market. It allowed
new market segments such as that of the low cost, point-to-point services to emerge. It thus
changed the industry landscape. Also, the bankruptcy laws have a significant role to play as they
allow even non-profitable operators to continue in the industry when they are protected. The
emergence of Internet technology and other technological breakthroughs have had an impact on the
way the airlines conduct their businesses. For example, Internet reduced the dependence on
ticketing agents. Most of the low-fare airlines sell tickets through their websites. Customer service
is being extended by personnel working from their homes’. All these have made it possible to
reduce the costs of operations making it favorable for the low-cost airlines to operate. Also, with the
Internet, customers now search and compare prices of air tickets much more easily than earlier and
this accentuates the price competition.
The airline industry is susceptible to upturns and downturns with the trends in the economy. A
growing economy and booming business mean greater demand for air travel, and a slow-down in
the economy means reduced demand, consequent unutilized capacity and intensified
competition. The availability of venture capital, and other capital sources have an impact on the
number of new entrants into the industry. Interest rate fluctuations have an impact on the cost of
operations for companies that have high levels of debt.
The airline industry is also highly susceptible to the extreme events such as the September 11, 2001
attacks on the World Trade Center. These create fears in the minds of customers toward air travel
and have a severe adverse impact on the industry. It also means increased security concerns,
delayed flights, reduced turnaround times, and all these have an impact on airline profitability. Also,
wars with other nations and increases in fuel prices have a strong impact on profitability.
These are only some pointers, and the instructor can choose to elaborate, extend the issues or
make a more detailed analysis.
In order to deal with the analysis of the competitive environment, the instructor might find it useful to
use the Porter five-force framework. A brief analysis is presented below.
Threat of new entrants: The extent of threat due to new entrants is determined by how high or low
are the barriers to entry into an industry. In the airline industry, deregulation and availability of
alternate sources of funding reduced the barriers to entry.
Economies of scale did not work out well for the players in the airline industry. The hub-and-spoke
model developed by the major players, led to more of diseconomies of scale than
economies. However, the large investments already made by the major airlines, and their
established networks do pose a significant threat to new entrants unless they counter it with highly
efficient operations.
Product differentiation. Airlines try to create strong brand identification and customer loyalty by
using the frequent flyer programs. When there is strong brand identification, it forces the new
entrants to spend heavily on weaning away customers from the existing players, thus discouraging
their entry. However, in the airline industry the brand identification has not proved to be so strong as
to prevent people from switching to other airlines. Some low-cost players are trying to achieve some
product differentiation (e.g., JetBlue providing more legroom, directTV at each seat, etc., Southwest
emphasizing commitment to customer service). However, these are not very strong barriers to entry
as the other entrants are imitating them rather pretty easily.
Switching costs. There are virtually no switching costs for customers. The frequent flier programs
attempt to create switching costs. However, when the customers are presented with low-cost
options, there is nothing strong enough that could prevent them from switching to other airlines.
Thus, the airline industry faces a high threat of new entrants particularly in the low-cost
segment. The barriers can be heightened only when they have very closely tied and ultra-efficient
operating routines that competitors find it difficult to copy or imitate.
Bargaining power of suppliers is high when there are few suppliers in the industry, there are no
easy substitutes to supplier’s products, when the buyer industry is not an important customer of the
supplier group, the supplier’s product is an important input to the buyer’s business, the supplier
products are differentiated or built up switching costs, the supplier group poses a credible threat of
forward integration. There are the only two major suppliers i.e., Boeing and Airbus, to the industry
and when the airline trains its pilots on either Boeing or Airbus, switching costs get built in terms of
pilots’ training in the event the airline decides to change the supplier. Thus the supplier does enjoy
considerable bargaining power. However, there is no credible threat of forward integration by the
suppliers such as Boeing or Airbus.
Bargaining power of buyers is low to moderate as the buyers are not concentrated. While the
buyer does not have any switching costs, and there are several choices available, they still lack
concentration. Internet impacted in increasing the buyer bargaining power because the buyers can
compare the prices more easily and in view of no switching costs, they could choose whichever
airline offers a low price. Thus, the buyers may be able to influence the airlines to reduce their
prices over time. Another important point to note is that with the recession in the economy, business
travelers were becoming more price sensitive. There is no threat of backward integration from the
buyers.
Threat from substitutes is high when the distances traveled are shorter. In such cases, the
customer can choose to travel by land, by car/bus/rail as they might prove to be cheaper
alternatives. However, for longer distances and for more hurried customers, the airlines do not face
significant threat from substitute modes of travel.
The intensity of rivalry among existing competitors in the airline industry is very high. There are
numerous competitors, and in times of low or moderate industry growth, the competition gets fiercer
as each one tries to nab customers from the other in order to keep their capacity utilizations at
acceptable levels. The exit barriers are high because it is difficult to dispose off grounded planes’ as
there would be few buyers. Also, due to the bankruptcy laws, even the loss-making companies
might still be around for a long time thus intensifying competition. So, it is easier to get into the
industry but might be difficult to get out[1].
2. Analyze the internal environment of JetBlue.
The instructor can make use of Porter’s Value Chain analysis and also introduce the students to
analysis from a resource-based perspective. The limitations of SWOT analysis in directing attention
to the bases of competitive advantage, and the merits of the other two approaches can be driven-
home with such an analysis.
A sample analysis is presented below.
How does JetBlue create value for the customer?
Value chain activity
Primary:
Inbound logistics Web-based booking instead of booking through
ticketing agents gives greater control on managing seat
sales. Customers won’t get bumped.
Operations Paperless cockpit, no meals served, no paper tickets--
all reduce time and costs. Single aircraft type keeps
training costs low and manpower utilization high.
Outbound logistics New A320s are larger and more fuel-efficient. Less
congested airports help quicker and on-time flight
departures.
Marketing and Sales Web-based ticketing as a distribution channel. Market segment
properly identified i.e., business travelers flying point-to-
point. Effective pricing.
Service Constant communication with customer to keep them informed
of changes or inconveniences. Customers are refunded
sometimes when there are inconveniences. CEO travels
regularly to get customer feedback first-hand. Investments in
training for service orientation.
Secondary:
Procurement Well-conceived aircraft procurement plan to support growth.
Technology development. Investments in technology from the beginning of the
airline. Process initiatives such as automated baggage
handling, web-based ticketing, paperless cockpit etc.,
Human resource Non-unionized workforce, reward systems such as stock-option
management plans, profit sharing, innovative recruitment policies and culture
promoting camaraderie…employees called ‘crewmembers’.
General Administration Top management with expertise in airline business, ability to
coordinate and integrate activities across the value system, and
highly visible to inculcate organizational culture, reputation and
values.
The instructor can take the discussion further to identify and discuss the interrelationships among
the various activities in the Value-chain.
A sample analysis is also presented below using the resource-based approach. There can be great
divergence in how various groups would mark these resources as valuable, rare, inimitable and non-
substitutable. The instructor will probably be able to engage the students in debate and encourage
discussion as to whether or not the individual value chain activities can lead to advantages that are
sustainable. The instructor may also pose questions about how the interrelationships among such
activities would be the source of sustainable competitive advantage. That would help drive home
the idea of ‘unique bundles of activities/resources’ as the basis of sustainable competitive advantage
much more strongly.
Resource/Activity Is it Valuable? Is it rare? Are there few Is it difficult to
substitutes? imitate?
Inbound logistics Yes Yes Yes No
Operations Yes Yes Yes Yes
Outbound logistics Yes Yes Yes No
Marketing and Yes No No No
sales
Service Yes No Yes No
Procurement Yes No Yes No
Technology Yes Yes Yes No
development
Human resource Yes No Yes No
management
General Yes No No No
adiminstration
In case of JetBlue, it is too early to say whether its resources are inimitable. This is because there is
not much of path dependency or causal ambiguity and social complexity developed at this point in
time that could make the resources inimitable. As can be noticed, its efficient low-cost operations
can lead to a sustainable competitive advantage in future. However, the low-cost operations
themselves are interrelated to other activities such as technology development, better human
resource management etc. Therefore, JetBlue should be able to develop an interlocking system of
mutually reinforcing competencies that would make it simultaneously valuable, rare, inimitable and
non-substitutable, thereby providing a competitive advantage.
The instructor may choose to complement these analyses with a detailed analysis of the financial
statements of the company. To draw meaningful conclusions, the analysis can be longitudinally for
JetBlue to identify the changes in the various ratios and margins or alternatively, the student could
be encouraged to collect information related to other competing airlines and do a comparative
financial statement analysis.
3. Discuss the bases of JetBlue’s competitive advantage, and the merits and demerits of both the
components. Are combination strategies better? Is JetBlue’s competitive advantage sustainable?
The two bases of JetBlue’s competitive advantage are ‘cost leadership’ and ‘differentiation’.
JetBlue achieves cost leadership by attaining efficient operations. New planes minimize
maintenance and fuel costs, larger planes ensure more revenue per flight, longer hauls on an
average as compared to other point-to-point services keep planes longer in air. No-meals served
helps quicker turnarounds and reduce costs. Reservation agents working from home reduce need
for physical infrastructure, and thereby reduce overhead costs.
Firms pursuing low-cost strategy generally get trapped in focusing on too few of value chain
activities, or lack parity on differentiation with competitors. The low-cost advantage also gets eroded
when the competitive pricing information becomes available more easily. The strategy can be
imitated too easily.
The other component of JetBlue’s strategy is differentiation. Differentiation is achieved through a
strong brand image, the various features such as DirectTV at each seat, more legroom etc.,
The problem with differentiation strategy is that differentiating features could be easily imitated.
Firms may also get entrapped in too much differentiation, which customers may not value.
Firms employing combination strategies would have a much stronger strategy to outperform rivals.
They can achieve superior performance by successfully integrating low-cost operations with
differentiation, thereby avoiding the pitfalls of either of the strategies.
JetBlue employed a combination of these two strategies and that gives it a distinctive competitive
advantage. It combined low-cost services with a differentiated offering. The company invested in
technology for efficient operations right from its inception and, therefore, is able to provide high
quality services at low-cost. Going forward, the extent to which JetBlue can maintain this integration
of ‘low-cost’ and ‘differentiation’ will determine whether its competitive advantage is
sustainable. The mutually reinforcing components of JetBlue’s strategy can be shown as in the
figure on next page. Any change in one of the components has an impact on all interconnected
activities. That is the prime reason why there are doubts being raised over JetBlue’s idea of serving
mid-sized markets, and also departing from its single aircraft business model.
