Jet Blues Financial Performance - Case Study Example

Case Study Analysis – Application of analytical tools Name: Professor: Institution: Course: Date: There are several business and economic characteristic of the airline industry which include: Degree of product differentiation The airline industry is composed of many companies producing less differentiated or similar products or services. The services in this industry are becoming increasingly similar and hence causing increased competition on prices. (Thompson et al 2010, p. 58) Economies of scale Economies of scale are another entry barrier created by the major airlines as a result of brand identities already created. As a result of establishing brand identities, the major airlines are able to sell tickets in large volumes which make it possible for them to offer relatively lower prices to their customers. This is indeed a barrier to the new firms intending to enter this industry as they would have to sell tickets in large volumes right from the time they join the industry. They would have to make a lot of sales to as to stay at pace with the other companies and be able to maintain their costs. As a result, the new entrants are at a disadvantage as they will find it difficult to conquer this barrier (Thompson et al 2010, p. 58) Number of buyers The airline industry serves a large group of clients and therefore if one airline decides to leave the industry, this will not have any impact on the industry. This means that if an airline is unable to differentiate its services from other airlines, then the customers will be the determining factor. Consequently, the airline which will be in a position to offer high quality services at a reasonable price will definitely be the favourite to the customers (Thompson et al 2010, p. 58) Learning Curve Cost Advantage The learning curve is a barrier to the new firms intending to enter the industry since as they are starting the business, problems arise and how the company is able to tackle those issues is a key determinant to its success in the industry (Barney, 2008). For the airlines that have been in business for some time, they have developed some valuable experience crucial in tackling particular situation and also in controlling costs. A good example of such a situation is the turnaround time for the airlines and mostly for those airlines in the short haul flight market. This refers to the time a firm takes to prepare their airplanes for takeoff after landing from the previous flight. For the major airlines that have been in the industry for some time such as Southwest, through experience, they have come up with strategies to cut the turnaround time which makes it possible for them to make more flights in a day (Thompson et al 2010, p. 58) Growth through merger Merging refers two when two or three companies come together to form one large company. Merging increases a company’s market share sustainability as well as allowing the company to enjoy economies of scale. Merging also eliminates competition between carriers as well as bankruptcy in case one carrier was about to be declared bankrupt. To the consumers, they stand to gain the most when two or three airlines are operating as a single company due to improved quality from the combination of all the companies’ resources. Other business and economic characteristics include: high fuel and labour expenses, close government regulation, sensitivity to fluctuations in the economy, high technology turnover, and financial assistance from the government, mutual dependence, low marginal cost and excessive capacity. (Thompson et al 2010, p. 58) The porter’s model provides basis for assessing channels of competition. By analyzing the industry using this model, one will be able to understand the strategic positioning, get insight into the expected profit margin and be in a position to decide to either enter or exit the industry (Morrison 2011). The diagram below shows an industrial analysis of the airline industry. Porter’s five factor model Source: Author (2011)   Threat of New Entrants Capital Requirements Capital requirement for entering this industry pose a high entry barrier for the new entrants. If a company intends to enter this industry, it has to consider costs of buying or leasing aircrafts, hiring qualified personnel, acquiring computer reservation systems and renting gate space. Together with the other start up cost, the firm must also consider cost of aircraft maintenance such as fuel and repairs. All these costs combined pose a very strong entry barrier to the new companies intending to enter the industry. However, depending on the access of bank loans to the new firms, this might not be a big problem. However, it will take a lot of charisma and innovation to convince an investor or even a bank to lend capital since airlines lines like Southwest and JetBlue have made the bank industry to undergo a lot of scrutiny due to irresponsible lending. Learning Curve Cost Advantage The learning curve is a barrier to the new firms intending to enter the industry since as they are starting the business, problems arise and how the company is able to tackle those issues is a key determinant to its success in the industry (Barney, 2008). For the airlines that have been in business for some time, they have developed some valuable experience crucial in tackling particular situation and also in controlling costs. A good example of such a situation is the turnaround time for the airlines and mostly for those airlines in the short haul flight market. This refers to the time a firm takes to prepare their airplanes for takeoff after landing from the previous flight. For the major airlines that have been in the industry for some time such as Southwest, through experience, they have come up with strategies to cut the turnaround time which makes it possible for them to make more flights in a day (Thompson et al 2010, p. 58) For the new companies entering the industry, they will have to learn ways on how to motivate their workers or come up with strategies of reducing turnaround time. They will also have how to cope with situational issues and create positive public relations to overcome these situations. In the recent past, companies such as JetBlue and Delta have been under criticism on situations where customers were forced to wait for hours on grounded planes (Furse, 2008). This situation lead to loss of passengers and should it happen to a new entrant, it would ruin its reputation completely forcing them out of business. Brand Identity This barrier poses the most significant threat for all new firms intending to join the industry as they have to launch their product alongside companies that have already established their brand. In airline travel, many clients would prefer to travel with the brand that they trust as a result of the risk perceived with flying. The passengers concerns heightened as a result of the tragic events on 9/11 which ended up affecting the entire industry (Barney, 2008). At the moment, it is very possible to penetrate the market and launch a new brand that passengers can trust even if it will be difficult as they will be forced to offer the consumers something different that will make them trust your brand over a particular brand. Economies of Scale Economies of scale are another entry barrier created by the major airlines as a result of brand identities already created. As a result of establishing brand identities, the major airlines are able to sell tickets in large volumes which make it possible for them to offer relatively lower prices to their customers. This is indeed a barrier to the new firms intending to enter this industry as they would have to sell tickets in large volumes right from the time they join the industry. They would have to make a lot of sales to as to stay at pace with the other companies and be able to maintain their costs. As a result, the new entrants are at a disadvantage as they will find it difficult to conquer this barrier (Thompson et al 2010, p. 58) Government Regulations Federal Aviation Agency (FAA) also poses a threat to entry for new companies. FAA has very strict rules and regulations which must be followed to the letter by any firm in the airline industry. These rules require all firms to hire certified personnel ranging from flight attendants, pilots, mechanics and all other workers. These regulations demand that the Human Resource Department should keep track of all the workers and make sure that they meet the required standards set by FAA. FAA also requires that all planes meet set standards and that all work must be completed and documented by a professional who has been certified (FAA 2008). Although new entrants will be aware of this rules and regulations, it would still have to allocate additional cost of resources which is unavoidable. Threat of Suppliers The suppliers in the airline industry have high bargaining power. Depending on the level of employees’ unity, this can create a substantial expenditure to any firm operating in this industry. If pilots go on strike, then airlines can lose revenue resulting to low profits. Also, aircrafts manufactures have a high bargaining power since switching cost from one manufacture to the other is high (Airlines Industry Profile, 2007). However, this power can be reduced if an airline firm decides to acquire secondhand airplanes. Fuel providers also pose a great threat to airline companies. With the fluctuation of the fuel prices and with no viable substitute for airline fuel suppliers have a higher power over the industry. Generally, the airline industry has many suppliers who have high bargaining and subsequently poses a threat to airline’s profitability. Threat of Buyers Customers demand for fair prices has lead to rise of Low Cost Carriers (LCC). If an airline company intends to make some good profit from this industry using price as a strategy, then, they must be sure to maintain a large market share in the industry. The airline industry serves a large group of clients and therefore if one airline decides to leave the industry, this will not have any impact on the industry. This means that if an airline is unable to differentiate its services from other airlines, then the customers will be the determining factor. Consequently, the airline which will be in a position to offer high quality services at a reasonable price will definitely be the favourite to the customers (Thompson et al 2010, p. 58). Other factors such as slowing or unstable economy can have an effect on the threat of buyers as they affect the financial viability of customers to travel by air. Threat of Substitutes All other means of transportation pose a threat of substitution, where in this case we are excluding the competition among airlines carries. Rail, water, highway and transit satisfy the same need of a consumer in a different way. Other factors such as distance, convenience, price and immediacy determines the mode of transport chosen by customer and may also poses a great threat. Short distance travel makes up 89.8 % of the travels total and is considered as 499 miles or less. Bus transportation and personal vehicles are the ones that dominate the short distance group. The airline industry focuses more on long distance travel which is referred to as 500 miles or more. Personal vehicles and airline firms are exposed to high level of substitution in the categories of 750-999, 1000-1499 and 1550 and more miles. Passengers’ vehicles have dominated the transportation sector since they have the highest portion of the market share making and as a result, mode of transport by vehicle poses the greatest threat of substitution to the airline industry. Distance Group 50-499 miles 500-749 miles 750-999 miles 1000-1499 miles 1500+ miles Transportation Mode Personal Vehicle 95.4 61.8 42.3 31.5 14.8 Air 1.6 33.7 55.2 65.6 82.1 Bus 2.1 3.3 1.5 1.5 1.4 Train 0.8 1.0 0.9 0.7 0.8 Other 0.2 0.1 0.1 0.7 1.0 Total 89.8 3.1 2.0 2.3 2.8 Source: Bureau of Transportation Statistics [U.S. profile], 2008 Threat of Rivalry This threat is probably the greatest of the other Porter’s Five Forces within the airline industry. Airlines firm such as JetBlue and southwest operate in a profitable market referred to as Low Cost Carriers (LCC). The main purpose of LCC is to offer consumers with flights at a lower price. Operating LCC successfully is highly profitable and therefore there have been several successful as well as unsuccessful competitions within a profitable market. Some of the direct competitors of JetBlue Company are Southwest airlines, Airtran, Alaska, Virgin America, Frontier and Sun country Airlines. Most LCC’s use similar strategies to gain and increase their market share which creates rivalry among them. As a result of this, product differentiation is essential in maintaining customers. It is easier to maintain a customer than to gain one. Some of the services and amenities that were ones considered as luxurious for LCC have now become a necessity in achieving customer satisfaction. Skybus and Song are both good examples of LCC that did not succeed in entering the niche market and clearly depicts the threat of rivalry. Companies such as Jet Blue operate within USA. However it is important for the airlines to also focus on international competition. A conclusion about the attractiveness of the industry as a result of your analysis Industry attractiveness refers to the ease of making profit in an industry in relation to the risk involved. This analysis is mostly undertaken by new entrance to determine whether to invest or not in a particular business. From the above analysis, the airline industry is not an attractive industry to invest in. To start with, there are many entrance barriers to this industry which include: high start up cost, brand name recognition, established distribution channels and post-entry competition. If a company intends to enter this industry, it has to consider costs of buying or leasing aircrafts, hiring qualified personnel, acquiring computer reservation systems and renting gate space. Together with the other start up cost, the firm must also consider cost of aircraft maintenance such as fuel and repairs. These entire costs combined pose a very strong entry barrier to the new companies intending to enter the industry. Brand identity poses the most significant threat for all new firms intending to join the industry as they have to launch their product alongside companies that have already established their brand. In airline travel, many clients would prefer to travel with the brand that they trust as a result of the risk perceived with flying. The buyer power is also high. The airline industry serves a large group of clients and therefore if one airline decides to leave the industry, this will not have any impact on the industry. This means that if an airline is unable to differentiate its services from other airlines, then the customers will be the determining factor. Finally, threat of supplier and rivalry is very high in the airline industry. Aircrafts manufactures have a high bargaining power since switching cost from one manufacture to the other is high and also Fuel providers pose a great threat to airline companies. A strategic group map of the airline industry Quality and price were listed as the key factors that are important to success in the airline industry. In the airline industry today, service quality is viewed as a key success factor and a competitive strategy which encompasses innovation, customer focus, creating service as well as striving to excel in service excellence (Albrecht 1992). In-flight services, flight schedule, ticket prices, ticketing procedures are all part of service quality. In the airline industry, price is another key success factor. Due to the homogeneous nature of the airline industry, and high level of undifferentiated products, the airline companies have to compete on prices. On this basis, airline companies are categorized into two groups: Low Cost Carriers (LCC) and Full service Carriers. LCC are known to serve the heavily travelled routes and are known to charge low average fares. Full Service Carriers on the other hand are known to offer extensive service nationally and internationally and are known to charge a relatively high price. Jet Blue, South west, Alaska and Airtran fall under LCC while Full Service Carriers include America and United airlines. In the strategic group map below, southwest and JetBlue is viewed to offer quality services at a cheaper prices as compared to its competitors. Source: Author (2011) Since JetBlue is said to have higher value when it comes to quality and the company should exploit this advantage to a specific target market through effective advertising. From the analysis the companies which are in the best position are JetBlue and southwest airlines while the worst positioned include Airtran and Alaska airline companies. Factors that determine the success for airlines Attracting and maintaining customers Just like any other business, an airline must attract and maintain customers so as to be successful. New clients can be attracted to a particular airline possibly through their mode of advertising as well as the special offers they have for their customers. Existing customers on the other hand can be maintained through loyalty schemes like airline clubs offering rewards and miles (McCabe, 2006; p1) Personnel management The success or failure of all airlines is determined by the way the airline manages its employees or personnel (Morrison & Winston, 1951; p101). Good employee management can be determined by the morale and productivity of workers. Productivity is determined by the airline employee’s effectiveness and efficiency in conducting their jobs. Morale on the other hand is immeasurable and can only be determined by the overall satisfaction of the airline industry. Fleet management This refers to airline uses its fleet of airplanes effectively. In particular, in North America where there are many short flights between cities and only take about an hour or two, it is very important to maximize usage of each airplane as well as the revenue generated. For example, JetBlue airline aim at maximizing the revenue by using two types of airplanes, A320 which has a capacity of 150 seats which is used during the peak season and the Embraer 190 which has a capacity of 100 seats which is deployed during the off-peak season as well as short flights. Use of IT By using IT effectively in sales and distribution, the airline industry can have a great impact on both maximization of revenue and reduction of cost through improved customer loyalty schemes and enhanced revenue management. IT innovations should be incorporated in all areas of airline operations from ticket booking, to revenue accounting, aircraft maintenance, crew roistering and even gate allocation in the airport (Doganis, 2006; p196). Route Network Operating a designed route network works as a major success factor. This means that it is very important to operate a flight schedule that is configured to meet customer’s need. Such a schedule offers direct flight connection and high frequencies (Delfmann, 2005; p229) Ratio analysis on JetBlue Company Ratios Years 2003 2004 2005 2006 2007 Debt-to-equity 2.94 2.98 2.59 2.05 1.66 Long-term debt to capital 0.75 0.75 0.72 0.67 0.67 Cover ratio 0.93 0.87 0.53 2.47 6.96 Revenue on sales 0.06 0.052 0.03 0.09 0.17 Net profit 0.00063 -0.004 -0.01 0.04 0.10 Return on total assets 0.10 -00.7 -0.22 1.02 4.29 Current ratio _ _ _ _ 0.87 Return on equity 0.02 -00.1 -0.02 0.06 0.15 Debt to assets 0.54 0.59 0.60 0.55 0.51 Earns per share 0.10 _ -0.13 0.28 0.64 Source: Author (2011) Despite having a strong organization culture, JetBlue has not deliver value to its shareholders for the last five years (2003-2007). The firm increased its revenue by 185% indicating an increase in passengers, however its operating expenses grew by 222% and this contributed to its poor financial performance in those five years as indicated in the financial ratio analysis above. The financial ratios above are classified into: gearing ratios, profitability ratios, liquidity ratios, activity ratios and other important financial measurement ratios. Gearing ratios measures the extent to which the firm is financed by the owners (shareholders) in comparison with external creditor (Steffy et al1974). JetBlue’s creditworthiness and its balance sheet are very weak as indicated by the Long-term debt to capital and debt-to-equity ratios. This is also illustrated by debt-to-equity ratio which changes from 2.94 in 2003 to 1.66 in 2007 but it’s still below 1 which means that the firm’s balance sheet is weak and relies excessively on debt. However there is still hope for the company since the ratios have been improving from bad to good. Profitability ratios measures how the company is managing and efficiently using its assets to generate its profit (Peavler 2010). From the analysis, JetBlue has not been using its assets efficiently to generate profit since their profits are low. This is indicated by the net profit and Return on total assets ratios where the net profit ratio changes from 0.00063 in 2003 to 0.10 in 2007 and return on total assets ratio changed from 0.10 to 4.29 which shows that that JetBlue is making low profit from its activities. Also, the earning for each common stock holder was very low even though the trend was upward (0.10 in 2003 to 0.64 in 2007) but indicated low profits. Liquidity ratios are used to gauge the company’s quantity of its current assets to its current liability. (Peavler 2010). JetBlue can not be able to pay its current liabilities using the assets that can be converted into cash in the short run. The firm’s current ratio was at 0.87 in 2007 which is below 1 indicating its inability to meet its short term debt. In the case of JetBlue, debt to asset ratio has decrease from 0.54 in 2003 to 0.51 which show that the firm’s assets are not that much funded by borrowed fund and are not in a great risk of bankruptcy since the ratio is going downwards. In conclusion, Jet Blue’s financial performance during fiscal years 2003-2007 was poor as indicated by the financial ratios analysis undertaken but its good to note that there is still hope. In 2003, the firm’s financial performance was very poor but as time went its financial performance improves making it a promising company to airline investors. References Airlines Industry Profile. (2007). In Business Source Premier online. Retrieved on 28th February 2011 from http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=27967383&site=bsi-live Barney, J. B., and Hesterly, W. S. (2008). Strategic Management and Competitive Advantage Pearson Prentice Hall. Doganis, R 2006, ‘The Airline Business, Routledge, p 196. Delfmann , W 2005, ‘Strategic Management in the Aviation Industry ,Ashgate Publishing Ltd., pp 229-230. Federal Aviation Agency website, 2008. Regulations and Policies Washington DC. Retrieved on 28th February 2011 from http://www.faa.gov/regulations_policies/ Furse, J. 2008. The Daily-News Retrieved on 28th February 2011 from http://www.nydailynews.com/news/2008/07/27/2008-07 27_vegasbound_passengers_stuck_7_hours_aboa-2.html JetBlue Airlines Website (2008, June 13). About JetBlue. JetBlue’s Customer Bill of Rights. Retrieved 28th February 201from http://www.jetblue.com/about/ourcompany/promise/index.html JetBlue Airlines Website (2008, June 13). About JetBlue. Why you’ll like us. Retrieved 28th February 2011 from http://www.jetblue.com/about/whyyoulllike/index.htm McCabe, RM 2006, Graziadio Business Report, vol. 9, no.4, pp1-3 Mike Morrison 2011 Porters Five Forces, Competitor Analysis retrieved on 28th February 2011 from file:///C:/Documents%20and%20Settings/USER/Desktop/strategy/Michael%20Porter%27s%20Five%20Forces%20-%20Competitor%20Analysis%20_%20RapidBI%20-%20Rapid%20Business%20Improvement.htm Morrison, SA & Winston, CM 1995, The Evolution of the Airline Industry, Brookings Institution Press, p 101. Peavler, R2010. Use profitability ratios in Financial Ratio Analysis. Retrieved on 28th February from http://bizfinance.about.com/od/financialratios/a/Profitability_Ratios.htm Thompson, AA, Strickland, AJ & Gamble, JE 2010, Crafting and Executing Strategy: Concepts and Cases, 17th edn, McGraw-Hill Irwin, Boston. Steffy, W.Zearley, T.,Strunk J.1974 Financial Ratio Analysis: an effective Management Tool Read More