Feb 09 2010
on JetBlue
Charisse Jones’ article gives numerous examples of a business maxim: that the airline industry is both lumbering and teetering, and that there is therefore a strong and untapped potential for any agile company who can overcome the (significant) barriers to entry.
Her first example is of SeaPort Airlines, a micro airline that hops between Seattle and Portland. While most leisure travelers will never hear of SeaPort, business travelers know the company for one niche: because they’re small and agile, they can park in any leftover gate; and because they only fly to two airports, they have opinions about which gate to prefer. Long story short, they park where the security line is shortest, saving the average flier a significant amount of hassle.
This agility is not solely required by the stodginess of the industry, but of the bubble of consumer backlash in its various forms. Government representatives are less likely than ever to give bailouts to airlines or their labor unions; the variance in oil prices is carrying an increasing amount of risk; and consumers are increasingly unhappy with the overall experience. It goes without saying that the old-model airlines dominate the industry while being unwilling and unable to compete.
Quest Airlines, yet unlaunched, is specializing only in secondary airports, where the Old Boys’ Network isn’t as pervasive, the competition isn’t as fierce, and the customers expect to pay more. They have a better experience because they have more invested in so many ways.
Still, the odds of success are dismal, and the barriers to entry are steep. Together, this means “it’s a lousy investment,” as The Boyd Group puts it. Until the behemoths are allowed to fail, the only financially significant openings in terms of ROI are for agile niche players, or for the extant regional players scaling upwards (Southwest, Virgin, JetBlue.)
In 2006 I was living in Salt Lake City and working as Night Dean of the college where was seated the last Travel Agent program in the state. My wife was Operations Manager of a VC-funded software company. Thus by day I was helping her negotiate deals with Morris-Murdock Travel, in the afternoons I was helping students get jobs at JetBlue, and at night I was orchestrating the cancellation of their program. Many of my students ended up as the Utahn home-based reps that defined JetBlue. When I look at JetBlue’s board, all I see is a bunch of Mormons I’ve been tangentially connected to at times…
In my opinion, David Neeleman’s handlers (read: his Board) allowed him to lose sight of his ROA, which dwindled from 7.45% in 2003 to 1.88% in 2008. There are many reasons for this, but foremost was perhaps Neeleman’s default insistence on buying off his customers and employees at the expense of profit. Like the CEO of a quintessential dot com company, Neeleman did a brilliant job at managing by the numbers, but when things got stressed, e.g. when oil price hedging became complex, he defaulted back to free pizza and massages. I should disclose that 1.88% in 2008 (2.65% at their most recent release) is still high relative to JetBlue’s competitors—really no one else besides Southwest and Skywest have a positive ROA at all—but the quick-decline was visible to investors as well as customers.
When I make a perfect hamburger, accented perfectly with jack cheese, bacon and avocado; what am I going to do the next time I want a perfect hamburger? If I’m completely rational I’ll duplicate my last burger. But I’m not completely rational, and nine times out of ten I’ll make a burger with a grotesque amount of jack cheese, bacon and avocado; enough so that it’s no longer perfect. That’s what David Neeleman did. He did a brilliant job keeping himself focused on the variables necessary to build a growth-phase company pursuant to his strengths and weaknesses, but then he tried to reuse his epiphanies. He raised the quality of his product, both to his customers and his employees, and lost control of his costs. I believe half the point of the capsim is to teach those who have not run a customer-facing company that there are effective variables other than increasing quality and lowering price, and that even those two backfire if applied haphazardly.
So who were JetBlue’s Board? Who was pulling the strings? Who has the fiduciary duty to stage the needed intervention? All were financial rainmakers; most had been CEOs; most were famous professors and millionaires. They were overseeing a multi-billion dollar organization with a semi-educated 40 year old maverick at the helm. Were they just too busy? It’s hard to believe that Kim Clark or Dave Checketts would spend a lot of time yelling at Neeleman, let alone the patron George Soros. But when oil prices went up, and the company needed complex financial hedging to stay alive, the Board allowed Neeleman to put his head in the sand. They seemed to lazily trust him, or to think his downfall was part of the game. That, in itself, was financially what hurt the company in such a noticeable way. Then when it came “time” to break ties with their friend Dave, the Board made him their Chairman. This is the most common and probably the preferable way to remove a charismatic leader without creating a vacuum of disgruntled fans à la Steve Jobs in 1985. Still, it perpetuated a status quo which was unpopular among investors, and the stock plummeted until Neeleman’s formal removal.
Again, the predominant question in my mind is whether Neeleman should have been more of a puppet to his Board; or whether his being a puppet yielded a planned ochlarchic betrayal—give the customers anything they want, then change CEOs when the company gets too big for a maverick. Just four months after the Valentine’s Day scandal, JetBlue was rated “Highest Customer Satisfaction” by J.D. Power. Neeleman served his purpose, and JetBlue is now a major threat to the industry. I wouldn’t be surprised if the same investors own Azul. (Azul doesn’t release many statistics directly, but from Brazilian public data it can be seen that their December 2009 seat capacity ran at 83.9%, above any sizeable competition.)
I should disclaim that JetBlue’s having really “taken off” in 2002 skews all the data, since JetBlue was guaranteed to have a great year while their competition was paralyzed. Adjusting all the numbers to begin at 2003, JetBlue really wasn’t above the bell curve at all.
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