Operation Analysis of JetBlue - Research Paper Example

JetBlue Case Study Operation analysis of the case study: The profitability of the company is not consistent and it is not a dividend paying company.Nevertheless, it is believed that over the years, it may gain high incomes and reward its stakeholders substantially. It is seen that its profits/losses for the last five fiscal years have been profits of $103M during 2003, profits of $46M during 2004, losses of $ 20M during 2005, profits of $1M during 2006 and profits of $18M during 2007. (Barnes). The cash inflows with outflows from operating activities are as follows: Year Cash inflows Cash outflows 2005 170 1093 2006 274 1037 2007 358 556 (Barnes). Thus it is seen that there needs to be much improvement in cash flows if it needs to sustain in future years. Statement of Fixed and variable costs for 3 year period Particulars 2005 As % sales 2006 As % sales 2007 As % sales Fixed Costs 1.1. Staff Welfare and Benefits 1.2. Landing Fees 1.3. Dep. and amortization. 1.4. Aircraft rent Sub-total 428 112 115 74 729 25.16 6.58 6.76 4.35 42.85 553 158 151 103 965 23.40 6.68 6.40 4.35 40.83 648 180 176 124 1128 22.80 6.33 6.19 4.36 39.68 Variable Costs 2.1. Aircraft fuels 2.2. Sales and marketing 2.3. Maintenance, repairs etc 2.4. Aircraft rent Sub-total Total fixed and variable cost Sales for three years 2005, 2006 and 2007 488 81 64 291 924 1653 1701 28.68 4.77 3.77 17.10 54.32 97.17 752 104 87 328 1271 2236 2363 31.82 4.40 3.68 13.88 53.78 94.61 929 121 106 389 1545 2673 2842 32.69 4.26 3.73 13.68 54.36 94.04 (Barnes). Analysis of fixed and variable costs as compared to turnover: It is seen that main fixed costs for Jetblue are staff welfare and benefits which form nearly 23% of revenue. However, the expenditure under this head is reducing with each passing year, mainly due to increased revenue which offsets the staff costs. However, a disturbing fact about turnover of Jetblue is that, far from increased percentages of sales over the years, the percentages are actually falling. Sales for 2006 constituted a 36% increase over 2005, but sales proportion of 2007 is only around 20% increase over 2006. It is imperative that sales growth is consistent through larger quantum of sales and revenues over profitable segments. Coming to variable costs, it is seen that the proportion is larger for variable costs rather than fixed. Aircraft fuel, as expected, holds the largest chunk. Rising fuel prices is one of the principal risks in the airline business. Jet fuel costs were considered the second largest operating cost in the airline industry, after staff costs. Coming to hedging it is seen that occasionally the company should purchase crude oil options contract or swap agreements. These commodity prices are connected with aircraft fuel, making derivative of them effective. These are short term measures designed to counteract against steep increases in prices of aircraft fuels. Four possible reasons on how the company has, up to now, managed and achieved low operating costs are as follows. Lower distribution costs, lower selling overheads and higher instance of productive output. This has been brought about by use of electronic ticketing and maximum use of internet services for airliners. Only two types of aircrafts in use: The Company flies only two types of aircrafts, A320 and Embraer 190. Thus, it is possible for Jetblue to plan and control its operations, servicing and maintenance. Moreover, its pilots are more comfortable flying aircrafts whose technical and flight systems are well known to them and this helps in attaining ultimate flight efficiencies and lower chances of accidents or operational malfunctioning. Higher aircraft utilization: By effective and harmonized scheduling of aircrafts, and well- planned movement control, it is able to spread its fixed costs over a larger number of flights and available seat miles. Some of their aircrafts are on day-and-night flights, and are grounded only for refueling, routine repairs and maintenance. Thus optimum usage of aircraft is one of the principal causes for its low operating costs. Efficient staffing: Efficiency is a key word for airlines and Jetblue takes it almost literally. Well-trained, pleasant and courteous staffs make all the difference. Jetblue wished its flights to be an experience rather than a flight and the staff at every level contributes to make this happen. The future financing regime of the Company It is seen that the company is poised for major expansion both in terms of infrastructure, improvements and laying of new tarmacs and runways, airport infrastructure and increased security for air passengers post 9/11 in US and 7/7 in UK. This is imperative since a significant paroxysm of violence could substantively wipe out years of hard work and investments by airline industry, irrespective of in which country the attacks occur. Therefore, pre-emptive measures are more significant. It would be better to avoid risk situations, rather than to overcome them. Coming to Jetblue, it now needs to concentrate on short haul flights to nearby distances, even within the US. It should increase frequency and servicing of flights and take up other smaller and suburban destinations which are non-profitable to other players. The main aspect about Jetblue is that being low cost airlines, it is not burdened with redundant costs which, otherwise would need to be passed on to the ultimate flier. If it wishes, it could even adopt differential fare structures on special occasions, bulk reservations and family bookings, all intended to increase its bottom line. It needs to score both on service and fare if it wished to remain in business for long time to come. Cost of capital and transaction costs of raising capital: It is seen that JetBlue is a highly geared company (proportion of loan funds are higher than own funds). Under such circumstance, going in for a Debenture issue would increase outside liabilities more. Equity issue on the other hand would help realign the gearing of this company and could even out any control aspects that the outside creditors may have. Transaction costs are intrinsic to any public offer and forms a percentage of the total investments in equity. Dilution effects to shareholding and raising equity financing or convertible debentures: The dilution effect in the case of equity shareholding would be in terms of the fact that this would dilute the present holdings of equity shareholders and substantially broaden the equity capital base. Coming to convertible debentures, it is seen that upon redemption, the debentures would be converted into fully paid equity shares. While this would not dilute the equity holdings, it would increase the debt equity ratio, and raise the gearing factor. Debenture holders, unlike equity shareholders (dividend paid on discretion of management- final payout upon liquidation of company) need to be paid interest upon demand and need to be finally settled as per terms of Debenture issue. Interest on debenture is a charge against profits and not an allocation of profits. Thus, Jetblue would have to meet debenture interest on mandatory basis should it opt for this course of mopping funds for its airline business. Banking relationships and the existence of sold lines of credit: It is seen that the lines of credit with banks and financial institutions covenants contain clauses that oblige the company to recompense the bank for any increased costs of holding such line of credits for the benefit of the company in terms of the banks' norms for reserve requirements and adequacy ratios. In the event these loans were called on by the banks, they would have to be repaid with enhanced rate of interests. The company's relationships with banks are such that any time Jetblue wishes it could repay the loans and circumvent the enhanced rate of interests due for servicing the loans. (Barnes). Whether the firm may continue with the existing finance regime without following the investment bankers' suggestions When the present financials are considered, all does not augur well for JetBlue, even with the marginal relief for aircraft fuel spurred by unprecedented fall in oil prices. No financial expert would advocate risking a debenture commitment, at this stage. Even an equity bourse would need some hard thinking by the CEO, since non-payment of dividend and lack of substantive growth of the share (share value rise) does not justify an equity issue at this stage, considering the dilution effect and also that this could limit the company's issue options at a later stage, when funds may be acutely needed. It is believed that continuance of the existing finance regime is the best option, without any further commitments; what Jetblue needs to do is to raise revenues, lift its stock value and give its customers a run for their money. Works Cited Barnes, Edward. JetBlue Airways. JetBlue. 2008. 02 Mar. 2009. . Barnes, Edward. JetBlue Airways. JetBlue. 2008. 02 Mar. 2009. . Read More