Why is JetBlue adding First Class?
Business and Marketing Strategy in 20 Slides or Less
By Dexter King
September 4, 2013
Agenda
• Hypothesis: JetBlue’s introduction of 1st class is a natural response to
competitive and economic stimuli – pg. 3...
“THE ANNOUNCEMENT OF FIRST CLASS ISN’T THE BEGINNING OF CHANGE AT
JETBLUE, IT’S THE END OF IT. IT SIGNALS THAT JETBLUE IS ...
Ty Montague, CEO at Co-Collective, wrote an article*
stating why he thought JetBlue’s addition of 1st class was
a big mist...
“WHEN YOU’RE BROUGHT INTO A PROBLEM, YOU SHOULD FIRST ASK WHAT’S
WRONG WITH THE PROFIT-AND-LOSS STATEMENT. IT’S CRUCIALLY ...
In order to understand JetBlue’s tactics, you must first
understand the airline’s true competitive set
JetBlue’s true comp...
“DELTA, UNITED AIRLINES AND AMERICAN AIRLINES HAVE ALL OUTLINED
LARGE INVESTMENTS TO INSTALL NEW BUSINESS CLASS SEATS, FOR...
Value has migrated away from JetBlue to its competitors
as JetBlue’s costs have increased while its average one
way fares ...
THE ECONOMIC POLICY INSTITUTE ESTIMATES THAT BETWEEN 2007 AND
2012, WAGES FELL FOR THE LOWEST 70%OF ALL WAGE EARNERS, DESP...
The uneven economic recovery and growing income
inequality means businesses selling high ticket items and
looking for incr...
“THE BUSINESS AND CORPORATE TRAVEL MARKET IS BY FAR THE MOST LUCRATIVE
ONE FOR THE AIRLINES. BUSINESS TRAVELERS ARE EXPECT...
Offering upgraded service to compete on high volume and
high profit transcontinental routes is precisely the move a
discou...
YOU'VE GOT TO EAT WHILE YOU DREAM. YOU'VE GOT TO DELIVER ON SHORT-
RANGE COMMITMENTS, WHILE YOU DEVELOP A LONG-RANGE STRAT...
JetBlue is adding first class as a means to drive higher
profits and growth, thus allowing it fund the innovation
needed t...
About the Author – Dexter King
Education:
• BA, Economics, University of Virginia
• MBA, The Fuqua School at Duke Universi...
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Why JetBlue Added First Class to its Transcontinental Flights

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Ty Montague's (CEO at Co:Collective) article "Why JetBlue does not need First Class" inspired me to write a response that tries to understand why JetBlue actually does need First Class. I try to keep these strategic musings to under 20 slides.

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Why JetBlue Added First Class to its Transcontinental Flights

  1. 1. Why is JetBlue adding First Class? Business and Marketing Strategy in 20 Slides or Less By Dexter King September 4, 2013
  2. 2. Agenda • Hypothesis: JetBlue’s introduction of 1st class is a natural response to competitive and economic stimuli – pg. 3 • Understanding JetBlue’s true competitive set is key to understanding its move to introduce 1st class – pg. 5 • JetBlue’s financial situation is showing signs of decline & weakness – pg. 7 • JetBlue original brand story was based on a consumer target that is in decline and can no longer drive the airline’s growth – pg. 9 • Offering 1st class, sold as business class to corporations, makes perfect sense – pg. 11 • Conclusion: JetBlue has to pursue short term profit growth in order to fund long term innovation around its brand story – pg. 13
  3. 3. “THE ANNOUNCEMENT OF FIRST CLASS ISN’T THE BEGINNING OF CHANGE AT JETBLUE, IT’S THE END OF IT. IT SIGNALS THAT JETBLUE IS OUT OF INNOVATIVE IDEAS AND HAS NOW RESIGNED ITSELF TO BEING PRETTY MUCH INDISTINGUISHABLE FROM ANY OTHER MAJOR AIR CARRIER, WHICH IS SAD. BUT IT’S ALSO BAD BUSINESS. WHILE MARGINS MAY BENEFIT IN THE SHORT TERM, COMMODITIZATION IS THE INEVITABLE RESULT.” Ty Montague, Quartz.com, “Why JetBlue does not need First Class”
  4. 4. Ty Montague, CEO at Co-Collective, wrote an article* stating why he thought JetBlue’s addition of 1st class was a big mistake ―JetBlue recently announced a seemingly minor change to its service—it is adding first class cabins on transcontinental flights. This will almost certainly add profit margin in the short run and increase options for customers… But in the long run, we will look back at this event and recognize it marked the end of one of the great brand narratives spanning the last decade.‖ • Ty also believes that, over the long term, adding first class to JetBlue will result in commoditization of the carrier. • Ty’s points have validity but do not recognize that JetBlue is already facing financial and competitive pressure in the short term – Its weakening financial results demonstrate a compelling need for JetBlue to update its strategy in the short term. – The consolidation of its competitors, giving them an advantageous cost structure and increased buying power, puts JetBlue at a disadvantage. – The economic decline of its original target consumer provides a compelling need to shift its target to one that is growing and profitable. *Source: Ty Montague, Quartz.com ―Why JetBlue does not need first class‖ August 23, 2013
  5. 5. “WHEN YOU’RE BROUGHT INTO A PROBLEM, YOU SHOULD FIRST ASK WHAT’S WRONG WITH THE PROFIT-AND-LOSS STATEMENT. IT’S CRUCIALLY IMPORTANT TO FRAME THE PROBLEM IN THE CONTEXT OF THE P&L RATHER THAN SOMETHING NEBULOUS, LIKE THE CULTURE, THE STRUCTURE, THE PROCESSES, AND ALL THESE OTHER THINGS.” Idris Jala, CEO Malaysia Airlines, Interview with McKinsey & Co, November 2008
  6. 6. In order to understand JetBlue’s tactics, you must first understand the airline’s true competitive set JetBlue’s true competitive set is comprised of the major carriers and not other discount airlines. Most people compare JetBlue to other discount airlines, but JetBlue is a major carrier and is faced with responding to the strategies and tactics of other major carriers. • The passenger airline market in highly fragmented in the US but is rapidly consolidating. • JetBlue is the 6th largest passenger airline in the US. • On January 1, 2005, JetBlue became a major US airline as categorized by the US Dept of Transportation. United 17% Delta 16% American 13% Southwest 10% US Airways 8% JetBlue 5% Other 31% Playersin Airline Market Based on Revenue Passenger Miles Source: S&P Capital IQ Report on JetBlue Airways Corp; August 10, 2013
  7. 7. “DELTA, UNITED AIRLINES AND AMERICAN AIRLINES HAVE ALL OUTLINED LARGE INVESTMENTS TO INSTALL NEW BUSINESS CLASS SEATS, FOR… TRANSCONTINENTAL LEGS – FROM NEW YORK TO LOS ANGELES OR SAN FRANCISCO” The New York Times “The Race to Build a Better Business Class,” August 3, 2013
  8. 8. Value has migrated away from JetBlue to its competitors as JetBlue’s costs have increased while its average one way fares have declined* 0 M 5 M 10 M 15 M 20 M 25 M 30 M 35 M $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 8/29/2011 11/8/2011 1/23/2012 4/3/2012 6/14/2012 8/24/2012 11/7/2012 1/22/2013 4/4/2013 6/14/2013 SharesTradedinMillions SharePrice JetBlue Price-Volume Graph 0 M 10 M 20 M 30 M 40 M 50 M 60 M 70 M 80 M 90 M $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 29-Aug-11 8-Nov-11 23-Jan-12 3-Apr-12 14-Jun-12 24-Aug-12 7-Nov-12 22-Jan-13 4-Apr-13 14-Jun-13 SharesTradedinMillions StockPice US Airways Price-Volume Graph 0 M 10 M 20 M 30 M 40 M 50 M 60 M 70 M 80 M $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 29-Aug-11 8-Nov-11 23-Jan-12 3-Apr-12 14-Jun-12 24-Aug-12 7-Nov-12 22-Jan-13 4-Apr-13 14-Jun-13 SharesTRadedinMillions SharePrice Delta Price-Volume Graph • Q2, 2013 JetBlue announced declining earnings + increased operating costs. JetBlue also saw its one way fares fall.* • Major airlines are using business class as a revenue and profit driver. • Increased profitability allows airlines to invest in innovation and upgrade passenger experience. Charts Data Source: Google Finance; ―Share Price vs Volume Traded‖ August 27, 2013 *Source: The Columbus Dispatch; August 6, 2013 $7.50 $20.12 $4.36 $6.36 $5.55 $16.16
  9. 9. THE ECONOMIC POLICY INSTITUTE ESTIMATES THAT BETWEEN 2007 AND 2012, WAGES FELL FOR THE LOWEST 70%OF ALL WAGE EARNERS, DESPITE PRODUCTIVITY GROWTH OF 7.7%. The New York Times “Not Really Labor Day” September 2, 2013
  10. 10. The uneven economic recovery and growing income inequality means businesses selling high ticket items and looking for incremental revenue have to cater to corporations or affluent consumers JetBlue’s original brand story was based on catering to a consumer, bargain hunting vacationer, i.e. the middle class, that can no longer fuel its growth. • According to Joseph Stiglitz, over the past decade the top 1% has seen their incomes rise 18% while the incomes of the middle class has declined.1 • Stiglitz also stated the top 1% control 40% of wealth and 20% of income.1 • According to the Wall Street Journal, Procter & Gamble has reduced its focus on middle-market items and is focusing on luxury and bargain items Corporations have large amounts of cash on their balance sheets allowing them to increase travel and client entertainment budgets. • Corporations are holding a record $1.7 trillion in liquid assets (cash, etc) on their balance sheets.2 • In 2012, 45% of a corporation’s short term liabilities was in liquid assets and sharp increase from 2001 when the number was 25-30%.2 1 Source: Vanity Fair ―Of the 1%, by the 1%, for the 1%‖ May 2011 2 Source: US Federal Reserve as of June 6, 2013
  11. 11. “THE BUSINESS AND CORPORATE TRAVEL MARKET IS BY FAR THE MOST LUCRATIVE ONE FOR THE AIRLINES. BUSINESS TRAVELERS ARE EXPECTED TO SPEND $273 BILLION THIS YEAR ON AIRFARES, ACCORDING TO A FORECAST BY THE GLOBAL BUSINESS TRAVEL ASSOCIATION, A 4.3% GAIN FROM 2012.” The New York Times “The Race to Build a Better Business Class,” August 3, 2013
  12. 12. Offering upgraded service to compete on high volume and high profit transcontinental routes is precisely the move a discount carrier should make • The transcontinental routes… are among the most popular domestic routes in the US. Over 3 million passengers flew from LA to NY in the year ending in April 2013.* • ―Round-trip tickets on business and first-class seats on cross-country flights sell for $3,000 to $5,000 on Virgin America, Delta and United Airlines, while economy seats for the same routes are priced at about $600 to $700.‖* Upgraded business class offerings for transcontinental flights are becoming the price of entry for airlines competing for the US business customer. • In November 2013, American plans to take delivery of Airbus A321 jets with 20 lie-flat seats in the business-class section for its transcontinental flights.* • In March 2013, Delta began offering lie-flat seats in its Business Elite section on fights from LA and SF to New York.* • In May 2013, United announced plans to install lie-flat seats in its Premium Service on flights from LA and SF to NY, with rollout completed by the end of the year.* *Source: LA Times ―JetBlue to add lie-flat seats on cross-country flights‖ August 5, 2013
  13. 13. YOU'VE GOT TO EAT WHILE YOU DREAM. YOU'VE GOT TO DELIVER ON SHORT- RANGE COMMITMENTS, WHILE YOU DEVELOP A LONG-RANGE STRATEGY AND VISION AND IMPLEMENT IT. …SUCCESS [IS] …DOING BOTH. WALKING AND CHEWING GUM IF YOU WILL. GETTING IT DONE IN THE SHORT-RANGE AND DELIVERING A LONG-RANGE PLAN, AND EXECUTING ON THAT. Jack Welch
  14. 14. JetBlue is adding first class as a means to drive higher profits and growth, thus allowing it fund the innovation needed to evolve and update its brand story JetBlue’s original business model, or ―story,‖ is fundamentally being pulled apart by economic forces. • JetBlue’s brand story was built on appealing to a consumer base that is being decimated by the economic downturn. • To retain its ability to tell a compelling ―story‖ and pursue innovation, JetBlue must pursue higher profit growth strategies. • Transcontinental routes are both high volume and high profit drivers for JetBlue’s competition and ideal for a competitive response from the airline. • JetBlue’s competitive response, first class sold as business class at a lower price, fits perfectly with an evolved version of its brand story. Innovation is not free and corporations need profitable cash flow to fund it while also growing its core business. JetBlue is generating the necessary profits to provide a platform for growth and evolving its brand story.
  15. 15. About the Author – Dexter King Education: • BA, Economics, University of Virginia • MBA, The Fuqua School at Duke University Experience: • Brand Marketing and Management: Procter & Gamble, Coca-Cola, LVMH and Diageo • Marketing and Growth Strategy: McKinsey and Company The Fun Stuff I Love: • Photography, Cinema, Food (Bacon Cheeseburger Enthusiast) Contact • E: dexterking@gmail.com

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