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CASE STUDY

JetBlue: High-Flying Airline Melts Down in Ice Storm

Joe Brennan, Ph.D. , Ohio University

Felicia Morgan, Ph.D., University of West Florida

Introduction

On Wednesday, February 14, 2007, JetBlue Airways Corp. (NYSE:JBLU)

suffered the most severe service disruption in its seven-year history. A winter storm

snarled operations at the regional carrier‟s JFK International Airport in New York, its

main East Coast hub, forcing the airline to cancel more than half of its flights. Ten planes

sat unable to move on icy runways in New York, trapping passengers inside for up to 10

hours. JetBlue‟s ordeal continued for nearly a week. The airline had trouble resuming

normal operations when additional storms struck, leaving planes and crews out of

position. The carrier ultimately cancelled nearly 1,900 flights, affecting 130,000

travelers, before it was able to restore normal operations on February 20. The

unprecedented service failure would force the airline to grant $26 million in passenger

refunds and vouchers and to spend another $4 million on employee overtime and other

storm-related costs (Wong).

Although the massive Valentine‟s Day storm affected every airline flying East

Coast routes, the news media focused their attention on JetBlue‟s problems.

Commentators wondered if the company that had once promised to “bring humanity back

to air travel” had abandoned its commitment to stellar customer service and become yet

another uncaring airline. Stranded passengers wasted no time publicizing their complaints

on blogs and in the media, and skittish investors began unloading JBLU stock. This was

the worst crisis in the young company‟s history. JetBlue‟s management had to act quickly

to regain customer loyalty, reverse a barrage of hostile press coverage, and reconfigure

operations to prevent a similar disaster from recurring.

“Making flying happier and easier for everyone”

The airline was founded in 1998 by 38-year-old David Neeleman, who saw

himself as “bringing humanity back to air travel and making the experience of flying

happier and easier for everyone” (Neeleman).

A former Mormon missionary, Neeleman started his first company, a travel

business, while a student at the University of Utah. He went on to establish a regional

carrier, Morris Air, and in 1992 sold it to Southwest, where he became executive vice

president. The entrepreneurial Neeleman lasted for six months at Southwest, where his

fast-paced style didn‟t suit the more cautious corporate culture. As one of his colleagues

there later said, “He didn‟t understand the nuance of the organization. He needed to walk,

not run” (Salter). Still in his 30s, Neeleman moved on to co-found WestJet, a Canadian

regional airline, and after making it profitable, he helped develop Open Skies, an

electronic ticketing system later acquired by Hewlett Packard.

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In 1998, Neeleman gathered a team of investors and seasoned airline industry

executives and founded “New Air Corporation.” The firm changed its name to JetBlue in

July 1999, when it announced that it would offer low-cost, high-quality service to and

from New York City, as “New York‟s hometown airline.” At that time, the CEO

promised that JetBlue would be a “new kind of low fare airline,” offering the types of

amenities reserved for pricier carriers, including wider seats, more legroom and storage

space, and 24 channels of inflight television. The company‟s press release promised

innovations like touch-screen check-in and “fares 65 percent less than other airlines on

identical routes.” JetBlue began flying in February 2000, offering non-stop service

between New York and Fort Lauderdale, Florida.

The traveling public responded favorably to Neeleman‟s offer of excellent

customer service, upscale amenities and low fares. Thanks to its younger fleet and newer

staff, the firm enjoyed lower maintenance and labor costs than its old-school competitors.

It was also well-capitalized; the combination of lower costs and a strong balance sheet

helped JetBlue avoid the major losses its competitors incurred after September 11, 2001,

and positioned it to take market share away from them. Neeleman took the company

public in April 2002. By the end of 2004, JetBlue was flying high. Its revenues had

quadrupled - and the company had made a profit every year of its life thus far. It had

climbed to 11th place in revenue passenger miles generated, and had done so with fewer

planes than many of its bigger competitors (Air Transport Association). Exhibits A, B, C

and D provide data about the airline‟s growth and performance.

Flying high in a turbulent industry

By 2005, Neeleman was leading one of the few successful start-ups in the highly

competitive U.S. airline business. More than 100 airlines had been launched since the

industry was deregulated in 1978, but only a handful had survived the tremendous

competitive pressures in this mature industry (Salter). The events of September 11, 2001,

had a significant impact on the U.S. economy in general and on the airlines in particular.

In 2000, the industry generated total sales of $120 billion; over the next two years,

revenues plummeted to $105 billion, and it would be five years before sales recovered

(see Exhibit E). The airlines also faced strongly rising fuel prices, heavy debt loads and

increasing pension liabilities related to their aging workforces (Weber and Freed). By

September, 2005, four major carriers (United, US Airways, Delta and Northwest),

representing 40 percent of the industry‟s total capacity, were operating under Chapter 11

protection (Weber and Freed; Carpenter).

During this period, JetBlue had effectively established a powerful brand and

carved out a distinct and profitable position as a low-cost airline offering a high level of

service. The firm strove to provide every customer with “the JetBlue Experience,” which

combined value, service and style. Passengers enjoyed free co-branded amenities,

including brand name snacks, Dunkin Donuts coffee, XM satellite radio, DIRECTV

satellite television and Bliss Spa comfort kits. Passengers could watch live television,

listen to satellite radio, purchase 20th

Century Fox inflight movies and sip wines chosen

by “low fare sommelier” Josh Wesson of Best Cellars, a value-oriented chain of retail

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wine shops. The JetBlue Experience also includes innovation. From its inception, all

JetBlue travel has been ticketless, all fares one-way and all seats assigned. It was the first

airline to deploy the new Embraer 190 regional jet and the first to offer free live

television; in 2002 it acquired inflight television provider Live TV LLC and began

marketing the service to other airlines.

Service excellence

JetBlue has sought to provide what it calls “the best customer service in the

business,” and it has won dozens of top awards for its performance

(http://www.jetblue.com/about/ourcompany/history/about_ourhistory.html). In 2007, it

was named the #3 most admired airline by Fortune and best in customer satisfaction by

Market Metrix. In 2006, it was picked as the best domestic airline by both Conde Nast

Traveler and Travel + Leisure, the best low cost/no frills airline by OAG, and the best

U.S. airline in the annual quality ranking survey conducted by the University of

Nebraska-Omaha and Wichita State University. In 2006, JetBlue enjoyed the second-

lowest rate of customer complaints among the 10 largest U.S. airlines (see Exhibit F).

Neeleman‟s vision of a new category of airline, one that would make flying more

fun and more civilized, was as compelling for employees as it was for passengers. A

former missionary to Brazil, Neeleman had an extraordinary ability to connect with

people and to inspire them, like the pilot who told Fast Company, “I would walk through

fire for him” (Salter). He traveled frequently on JetBlue flights, working alongside

employees, talking with pilots in the cockpit, visiting with customers about their

experiences, and asking how the airline could better serve them. Neeleman and his

executive team placed a high value on involving employees in all aspects of the business

and cultivating a sense of team work. All employees are called “crewmembers,” and

supervisors attend “Jet Blue University” for a course in the company‟s principles of

leadership taught by Neeleman and Barger. Al Spain, senior vice president of operations,

said, “There is no 'they' here. It's 'we' and 'us.' We succeed together or we fail together”

(Salter).

Even after the ice storm, employees defended the airline. On February 19,

someone who identified him or herself as a JetBlue employee posted a response to a

blogger who had been critical of the company‟s handling of the situation:

Had you booked a ticket on Delta or American, your flight would have been cancelled and you wouldn't have gotten a refund. You would have had to fly at another time, but you wouldn't have been compensated for your delay -- at all... in no way. In fact, they wouldn't have apologized... at all... EVER! What happened to all of you (including my fellow pilots and flight attendants that were stuck right along with you – and just as miserable as you were) was awful, not cool, uncomfortable, a huge pain in the ass and a really, really, really bad day. That's about it though. See, when you travel it's like buying a lottery ticket: if you get to your destination hassle free -- you win!

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If you have issues along the way... that's life! But if you get a refund for your troubles... that's amazing! … I'm sorry you went through what you went through on Valentine's Day, and I want you to come back to jetBlue so I can give you the jetBlue Experience you've grown accustomed to and we do our best to deliver every day (www.jetbluehostage.com).

Warning lights in the cockpit

In May 2004, Fast Company profiled the young CEO, praising his hands-on

approach and warning that it would be increasingly hard to maintain as JetBlue got

bigger:

Much that's distinctive about this airline--from the enthusiasm of its employees to its relentless customer focus to its hip, slightly countercultural image--is precisely the sort of thing you can pull off when you‟re small, and that becomes far tougher the bigger you get. Can JetBlue maintain those qualities as it morphs from nimble startup into the bureaucracy that's required to manage a vastly more complex operation? It's a question that applies to many truly innovative companies these days. Call them postmodern corporations, perhaps. If they pull off this transition, they become big, but remain in important ways the antithesis of bigness-think Starbucks, Dell, and Amazon. Like JetBlue, they depend on flexibility, speed, and a sense of intimacy with employees and customers alike. Put another-way, the challenge JetBlue now faces is this: Is small scalable? (Salter)

Neeleman began flying into turbulence in 2005. At the same time as Fast

Company was pondering his ability to save his company from the fate of People Express,

a similar concept which failed in the 1980s, rivals Delta and United were launching Song

and Ted, low-cost/high-frills offerings meant to directly compete with JetBlue. Labor and

maintenance expenses began to creep up as JetBlue‟s people and planes got older; the

company experienced problems with the introduction of a brand-new aircraft type, the

Embraer 190; and on-time performance eroded. In addition, Florida and the Gulf Coast,

important markets for JetBlue, were ravaged by Hurricanes Rita, Wilma and Katrina in

the summer of 2005. The demand for air travel to the affected regions fell, petroleum

refineries were closed, and JetBlue‟s fuel costs

soared 52 percent. At the end of 2005, the company reported its first-ever

operating loss, $20 million (JetBlue Airways Corp. Annual Report 2005).

Neeleman and Chief Operating Officer Dave Barger discussed these challenges in

the company‟s 2005 Annual Report and offered a plan for recovery. They planned to

grow revenues by raising average fares, using capacity more efficiently and adding

service to small and medium-sized cities where a relative lack of competition would

allow JetBlue to command a price premium. They also reiterated the airline‟s

commitment to reliable service, which meant “operating flights even with a delay rather

than canceling the flight for the schedule‟s convenience”. To manage costs, they

promised to improve workforce productivity through better training, smarter business

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processes, and more extensive use of automation, and they said they would control the

risk of rising fuel prices through financial hedging strategies. The executive team also

refused bonuses, and Neeleman delayed the delivery of 36 new aircraft (Foust).

By the end of 2006, Neeleman and Barger‟s plan to grow their way out of trouble

seemed to be working. Revenues rose 39 percent in 2006, to $2.36 billion. The firm

enjoyed three successive profitable quarters, ending the year just $1 million in the red. In

January 2007, David Neeleman told investors, “I'm tremendously proud of the efforts our

crewmembers have made in advancing our plan to institutionalize low-cost carrier

spending habits and improve revenue overall.” Dave Barger said that the airline‟s

performance in 2006 “positions us well for 2007, a year in which we plan to grow

capacity 11 to 14 percent, while continuing to enhance the JetBlue Experience.” Investors

appeared to share management‟s confidence. Towards the end of 2006, analysts began to

upgrade their recommendations, and by mid-January, the stock price had soared to a new

52-week high. No one knew the turbulence that lay just ahead.

Stormy weather

On its seventh anniversary, February 11, 2007, JetBlue was operating some 500

flights a day to 50 cities in the U.S., Mexico and the Caribbean. David Neeleman had

built one of the very few successful major new airlines since the industry was deregulated

nearly 30 years before. The company‟s prospects seemed bright. And then, three days

later, JetBlue was hit with the worst crisis in its history.

February 14 began as a normal day at JetBlue‟s Forest Hills, New York

headquarters, near John F. Kennedy International Airport. The company had issued a

routine news release shortly after 9 a.m., announcing that it had formed a partnership

with Cape Air to offer service to four communities on Cape Cod. The day before, a front

had moved into the New York City region from the west, dropping one-tenth of an inch

of snow. Heavy snow was in the forecast for upstate, but it appeared that the city would

be spared the brunt of the storm. At the airport‟s weather station, the barometer started

falling at midnight. By dawn, what had been light snow in the early morning hours had

become ice pellets and light freezing rain, with temperatures hovering in the upper 20s.

No one seemed to know that by lunchtime, barometric pressure would drop nearly an

inch and a full blown nor‟easter would be raking the airport with winds gusting up to 40

miles per hour, coating planes and runways with ice. Early that morning, in keeping with

the airline‟s desire to avoid cancellations, JetBlue gate agents loaded passengers onto six

planes, in hopes that they could get out during a break in the weather. These planes

remained stuck at the gate; while over the course of the morning, four more JetBlue

aircraft arrived and remained on the tarmac, unable to reach the terminal because all gates

were occupied, and ground equipment used to tow planes was frozen in place.

As the hours crept by for the passengers and crewmembers stuck onboard the 10

airliners, JetBlue‟s operations appeared to have become paralyzed. The problems at JFK,

its East Coast hub, rippled throughout JetBlue‟s system. Its 800 number, staffed by home-

based workers in Utah, was overwhelmed by the crush of calls from customers seeking

information or trying to rebook delayed flights. Its New York-based 20-person crew

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services department, which handles the scheduling of crewmembers, was also

overwhelmed.

The storm showed signs of relenting by early afternoon, as freezing snow changed

into light snow, and JetBlue officials kept the loaded planes in place, apparently still

hoping to salvage some of the flights. By 3 p.m., however, they‟d admitted defeat and

asked the Port Authority of New York and New Jersey for help in rescuing stranded

passengers. The last passengers entered the terminal after 7 p.m., having sat onboard for

six to 10 ½ hours.

Television news crews were waiting for the passengers in the terminal. WABC-

TV interviewed some of the 134 passengers on Flight 751, which had been bound for

Cancun, Mexico. “There was no power and it was hot. There was no air. They kept

having to open the actual plane doors so we could breathe,” said one passenger.

“Nobody gave us any answers. They kept telling us we know as much as you do.

And I said, I don't work here, you work here, give me answers,” another passenger said.

“Everybody is incredibly tired and frustrated and we didn't expect to be in New

York tonight, so it's ridiculous. Just sitting there and sitting there and them saying they

were going to pull us into the gate and they never did. There was very little food. It was

just a nightmare," a third passenger was quoted as saying (Lipoff).

JetBlue‟s problems quickly became national headline news. Yossi Glieberman, a

41-year-old Brooklyn man who came in on a flight from Nashville that could not make it

to the gate, told Newsday that the pilots provided frequent updates and flight attendants

distributed snacks liberally, allowed passengers to recharge cell phones and let children

help push the service carts (Strickler). “It could have been worse,” he said of the nine-

hour ordeal. Other fliers were less complimentary. An unnamed man told ABC World

News, “My vacation is canceled. No flights out. I can't go anywhere. They can't get me

out on vacation. My kids are home in four-degree weather when we're supposed to be on

a beach with 90-degree weather” (Gibson). Cheryl Chesner, a bride who had to cancel her

honeymoon trip to Aruba, told the San Francisco Chronicle, “It was the worst. It was

horrific” (Armstrong).

One customer, a New York resident who was angry about missing a much-

anticipated Valentine‟s Day trip home to Los Angeles with her new boyfriend, started a

blog called www.jetbluehostage.com. Using the screen name “Gen Starchild,” she wrote,

“Nothing says „I love you‟ like being held hostage on a frozen plane with the man you

love, 99 strangers, 4 other people you happen to know, 4 screaming babies and 3

rambunctious kids running about, nothing but chips and soda for sustenance, faulty

power, unreliable direct TV and an overfilled sewage system for 11 hours.”

The blog became well-known and led to an interview for Gen and her boyfriend

on CNN. JetBlue‟s public relations department asked her to meet with David Neeleman.

She recapped the March 5 meeting on her blog: It went a lot like this.

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Canned answer Canned answer We’re sorry It’ll never happen again I don’t have the answer, this is who you need to talk to. I’m sorry. Etc. Then he hit a wall and I could actually see the change in him. From the beginning of the meeting, he was playing these passive aggressive “you‟re not important” games, by taking FOUR PHONE CALLS, on his mobile at that. Not from JetBlue employees concerned about the weather cancellations. Calls from his wife. Calls from his neighbor. I‟m the queen of mind games, you can‟t pull that on me.

Gen Starchild and her fellow “hostages” weren‟t the only travelers

inconvenienced by the events of February 14, though they may have been the most

visible. And JetBlue wasn‟t the only carrier grounded by the storm. Between February

13 and 15, American cancelled 914 flights, or 13.4 percent of its schedule; United

grounded 865 flights (17.1 percent); US Airways 728 (19.6 percent); and Contintental

119 (3.7 percent). By comparison, JetBlue‟s 634 cancelled flights represented 39.6

percent of its schedule (Carey and Pasztor).

In all, some 250 flights, nearly half of JetBlue‟s entire schedule, were cancelled

on Valentine‟s Day. The following days were also plagued by problems, because the ice

storm had left airplanes and crews out of position and additional winter weather created

more headaches. Internal communications and coordination between airline staff seemed

to be a problem. A woman who took a JetBlue flight from California to New York on

Feb. 17 posted this report on jetbluehostage.com: “JetBlue's system was completely

overloaded. The staff at Burbank had no clue what was going on - the lack of pilots was a

total shock to them - and there were so few staff actually at JFK that no passengers could

get answers. A man with a bullhorn finally came out (because the baggage carousel board

was completely inaccurate) to tell people which flights were coming out on which

carousels.”

In an effort to restore order, the airline cancelled some of its flights on February

15 and 16, but problems persisted, so managers took the unprecedented step of

“precancelling” 23 percent of all flights over the next two days in order to reposition

planes and allow pilots and crews to rest. Announcing the move on February 17,

spokeswoman Jenny Dervin told The New York Times: “Sometime in the afternoon, it just

fell apart. The folks running the operation are just exhausted. We said, „Let‟s stop the

madness‟” (Bailey). “We ran into an operational death spiral,” Dervin told Newsweek

(Sloan). The pre-cancellations, which fell over the President‟s Day long weekend,

worked, and by Monday, February 20 JetBlue was back to normal.

JetBlue works to rebuild public trust

As the airline‟s executives struggled to climb out of the operational death spiral,

its public relations staff got busy trying to repair the firm‟s damaged image. On the

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evening of February 14, JetBlue issued a public apology and announced that it would

give a full refund and a free roundtrip ticket to any passenger detained onboard for more

than three hours; it would also give refunds to any passenger whose flight was cancelled.

Over the next few days, the airline announced that it was relaxing its policies about

rebooking so that customers who were affected by the storm would not be penalized for

re-booking new flights. Throughout the ordeal, top executives practiced their

commitment to “visible leadership.” Dave Barger went to JFK on the 14th

to oversee the

operational response and speak with passengers and crewmembers. David Neeleman

became the company‟s public face, granting dozens of media interviews, in which he

accepted responsibility, expressed remorse and pledged to prevent this kind of problem

from happening again. In a front-page New York Times story on Sunday, February 19,

Neeleman said he was “humiliated and mortified” and promised that JetBlue would pay

penalties to customers if they were the victims of mistakes by the airline (Bailey).

One week after the Valentine‟s Day ice storm, the operations were finally back to

normal. Neeleman had issued a personal apology, which appeared in his blog and in full-

page ads in major newspapers (see Exhibit G). The airline also published a Customer‟s

Bill of Rights, specifying how and when it would compensate passengers for delays and

other problems (see Exhibit H). Reactions to Neeleman‟s apology and the Bill of Rights

were generally positive. On February 21, USA Today published an editorial calling

JetBlue‟s service failure “inexcusable” but praising its response. The paper contrasted

JetBlue‟s handling of the Valentine‟s Day snafu to similar, smaller-scale strandings by

American and United in December and wrote that it hoped this would touch off “a round

of competition over customer-service guarantees, instead of the usual cost-cutting.”

The business press, however, was far less kind. In a stinging rebuke, Business

Week struck JetBlue from its list of “customer service champs.” The magazine‟s March 5

cover (see Exhibit I) was headlined “Our first-ever ranking of companies where the

consumer is king. Here‟s the magnificent 25 – and one extraordinary stumble.” The cover

graphic was a numbered list of the top four companies, with a squiggly blue line drawn

through JetBlue‟s name. The editors said kicking the airline off the list was a “tough

call.” Despite Neeleman‟s candid, public apologies, “the road to recovery isn‟t paved

with TV appearances,” the magazine cautioned.

What matters most is execution – doing the deep, hard organizational work to ensure the crisis never happens again. While JetBlue recognizes that fact, it still has plenty to prove … JetBlue has piled up service accolades faster than most airlines collect complaints … plus JetBlue‟s trumpeting of its own customer-friendly approach, means its passengers‟ expectations are inevitably higher. Other airlines, after all, had long waits at JFK … but interminable delays, cancellations and service snafus, says UNC Kenan-Flagler Business School professor Valarie Zeithaml, can be „more detrimental [to JetBlue] than to a larger airline. It runs totally counter to who they are coming out and saying they are and what they live‟ (McGregor).

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Other observers raised questions about Neeleman‟s leadership. On February 20, Larry

Kudlow, host of CNBC‟s Kudlow and Co., said:

The guy's a great entrepreneur. He created and built and grew this company. OK, no question about it. But how many times in the past do we know that entrepreneurial CEOs are not necessarily the ones that take these companies to the next stage where management and administration are really the keys? He clearly struck out on management, information, communications, where's this equipment, where were the pilots, how to get in touch with one another, where are the flight attendants? And I know he's made a lot of mea culpas, and I appreciate his character in doing that, but the fact remains: Can he manage a large airline company?

Earlier that day, the embattled CEO held a news conference at which said he had no

intention of stepping down from his post. "I'm the founder of the company, I'm the CEO,

and I think I'm uniquely qualified to deal with these issues" (Wong).

The incident also spurred calls by passenger advocates for tougher oversight by

the federal government. The Coalition for Airline Passengers' Bill of Rights, a newly

formed group, used JetBlue‟s woes to again demand relief. The coalition was formed by

Tim and Kate Hanni, a Napa, California couple who were trapped on the ground for nine

hours in Austin, Texas by American Airlines in late December 2006. The Hannis

described their experience in a February 4 letter to the Mobile (Ala.) Press-Register (see

Exhibit J). These angry, frustrated travelers demanded that Congress pass new laws to

force airlines to refund 150 percent of the ticket price to passengers stranded more than

three hours and inform passengers about what‟s going on within 10 minutes of a

prolonged delay. They launched a web site, strandedpassengers.blogspot.com, and within

its first month reportedly collected 4,200 signatures on a petition (Martinez).

A similar incident in 1999, when Northwest Airlines detained passengers for

seven hours on a snow-covered runway in Detroit, had sparked calls for action by

Congress. The airline industry staved off new regulations then by promising to take care

of the problem. Now, in the wake of the Hannis‟ experience and the JetBlue debacle, it

appeared that federal lawmakers were ready to act. Over the President‟s Day weekend,

before JetBlue issued its own Bill of Rights, U.S. Senators Barbara Boxer (D-Calif.) and

Olympia Snow (R-Maine) proposed a new law to prevent airlines from holding

passengers onboard for more than three hours and to require them to provide food, water

and clean toilets. Congressman Mike Thompson, a Democrat who represented the

Hannis‟ district, promised to introduce a similar bill in the House. Sen. Boxer told

National Public Radio:

We have to protect the people of the United States of America. We have to protect their families. We have to protect our children. And now, post-9/11, it‟s very difficult for passengers to complain about anything because of the seriousness of what happened on 9/11. Passengers who cause any trouble at all can get themselves in a lot of trouble. So when you‟re on an aircraft,

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you‟re pretty much - have to comply with everything. And here you‟re in a situation where you‟re in a lock-down, almost a hostage situation. It‟s just unacceptable. This is a very simple thing we‟re talking about. It‟s common sense. The airlines, I think, will benefit from it, and I hope we can get it done. I‟m not naive about it. Every single time there‟s a regulation we propose, there‟s an outcry. The automobile industry didn‟t want to do seatbelts. They didn‟t want to do airbags. Now they take credit for it. So, you know, there is a role for the government, since we are really responsible for licensing these airlines (Block).

Aviation experts warned that the proposed new regulations could actually make things

worse for passengers by depriving the airlines of flexibility. Daryl Jenkins, a consultant

who teaches airline management, told USA Today that the proposal was “ totally

impractical …What if a plane is ordered after three hours to go back to the terminal when

they are second in line to take off? That doesn't make sense.” John Cox, a former airline

pilot, said that it would reduce the reliability of the system because airlines need to keep

flights ready to take off as soon as the weather permits. Returning them to the terminal

could increase delays (Levin).

What’s ahead for JetBlue? Three weeks after the crisis, Neeleman was still communicating with customers

about the company‟s response. It appeared that some customers were confused by the

conditions for when the company would and would not offer compensation for delays.

Neeleman explained the differences between “controllable” and “uncontrollable” delays

on his blog, “David‟s Flight Log.”

On March 8, the company announced that John Owen, executive vice president –

supply chain and information technology, had resigned but would remain with the

company as a “senior advisor” through the end of 2008, and that Russell Chew had been

hired to serve as chief operating officer. Chew, a veteran of American Airlines and the

Federal Aviation Agency, “brings a big-airline perspective to JetBlue… Russ will be in

charge of making sure our operations run on time and as scheduled, so that you don't

have to rely on our Bill of Rights for compensation,” Neeleman told customers. “Because

let's face it – getting a $25 voucher or more is nice, but it's better to arrive or depart on

time.” Chew will report to Dave Barger, who would remain with the company as

“President and Founding Crew Member.” See Exhibit K for executive biographies.

The press continued to raise questions about JetBlue‟s long term viability,

however. On March 12, Business Week cited unnamed “industry sources” as saying that,

as part of its 2006 cost cutting moves, the company had sacrificed needed upgrades to its

reservations, call center and crew scheduling systems. It also warned that the market may

be tapped out, quoting a consultant who said, “there aren‟t too many markets you can

throw 150-seat airplanes into,” and raised the specter of a unionization drive among pilots

who have watched the value of their stock options fall.

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The market appeared to have lost confidence in the once high-flying company. By

March 14, JetBlue‟s stock price had fallen to $11.75, 11 percent below its February 14

closing price of $13.23.

One month after the ice storm, JetBlue‟s management team was still digging out.

Conclusion

JetBlue was confronted with some serious issues as it continued to try to recover

from its Valentine‟s Day meltdown. Although operations had returned to “normal,” the

company had spent millions of dollars on passenger refunds and vouchers, employee

overtime, and other storm-related costs. JetBlue executives had spent countless hours

practicing “visible leadership” and David Neeleman, the public face of the airline, had

accepted responsibility, expressed remorse repeatedly, and promised that this type of

problem would never happen again. But, could JetBlue depend on Neeleman to lead the

company out of trouble? Did the executives at JetBlue learn enough from their service

failure to fix what was wrong and prevent it from happening again? If not, what further

action should be taken? What, if any, strategic and operational changes should be made to

ensure the company‟s full recovery?

NOTE: This case is based entirely on published sources and has been prepared for

teaching purposes.

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SOURCES

Air Transport Association. 2004 Economic Report. www.airlines.org, accessed

March 10, 2007.

Armstrong, David. “Beleaguered air passengers want new laws.” San Francisco

Chronicle, Feb. 16, 2007.

Associated Press. “JetBlue to have customer bill of rights.” AFX.com, Feb. 20, 2007.

Bailey, Jeff. “JetBlue Cancels More Flights in Storm‟s Wake.” The New York Times,

Feb. 18, 2007.

_____. “Chief „Mortified‟ by JetBlue Crisis.” The New York Times, Feb. 19, 2007.

Block, Melissa. “Air Passengers Rights Bill Introduced in Senate.” National Public

Radio, Feb. 20 , 2007.

Boessenkool, Antonie and Michael Reid. “JetBlue sings the blues: Its stock is

unlikely to soar to previous levels because it no longer has a big cost advantage

over its rivals.” The National Post (Canada), Feb. 27, 2007.

Carey, Susan and Andrew Pasztor. “Behind Travel Mess: New Rules for Sleet.” The

Wall Street Journal, March 23, 2007.

Carpenter, Dave. “Leaner United might be bankruptcy model for Delta, Northwest.”

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2007.

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13

Koenig, David. “Air Travel Returns Almost to Normal.” The Associated Press, Feb.

15, 2007.

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APPENDIX

Exhibit A. Jet Blue Financial Data

JetBlue Airways Corp. Nasdaq:JBLU

Source: Standard & Poor's Net Advantage Company Profiles, 3/10/07

Revenues (Million $) for Fiscal Year Ending Dec. 2006 2005 2004 2003 2002 2001

1Q 490 374.2 289 217.1 133.4 63.85

2Q 612 429.1 319.7 244.7 149.3 78.4

3Q 628 452.9 323.2 273.6 165.3 82.61

4Q 633 446 334 262.9 187.3 95.56

Year 2,363 1,701 1,266 998.4 635.2 320.4

Earnings Per Share ($) for Fiscal Year Ending Dec. 2007 2006 2005 2004 2003 2002

1Q E-0.15 -0.18 0.04 0.09 0.11 0.1

2Q E0.22 0.08 0.08 0.13 0.24 0.1

3Q E0.20 NI 0.01 0.05 0.17 0.08

4Q E0.16 0.1 -0.25 0.01 0.11 0.1

Year E0.43 NI -0.13 0.29 0.65 0.37

Income Statement (Million $). 2006 2005 2004 2003 2002 2001

Net Inc. -1 -20 47.5 104 54.9 38.5

Depr. 154 117 77.4 50.4 26.9 10.4

Int. Exp. 146 91 44.6 23.7 15.7 6.1

Eff. Tax Rate NM NM 38% 41% 42% 8.10%

Pretax Inc. 9 -24 76.8 175 95 41.9

Oper. Inc. 281 165 190 219 132 37.2

Revs. 2,363 1,701 1,266 998 635 320

Other Financial Data (Million $). 2006 2005 2004 2003 2002 2001

Cash 10 6 410 571 247 263

Curr. Liab. 854 676 486 370 270 0

LT Debt 2,626 2,103 1,396 1,012 639 291

% Ret. on Equity NM NM 6.7 19.1 25.6

Total Cap. 3,714 3,130 2,275 1,782 1,093 615

Total Assets 4,843 3,892 2,799 2,186 1,379 820

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% Net Inc.of Revs. NM NM 3.7 10.4 8.6 12

% LT Debt of Cap. 70.7 67.2 61.4 56.8 58.5 47.3

Curr. Assets 927 635 515 646 283 0

Curr. Ratio 1.1 0.9 1.1 1.7 1 0

Cash Flow 153 97 125 154 75.9 32

Cap. Exp. 996 941 617 573 544 0

% Ret. on Assets NM NM 1.9 5.8 5.3 0

Common Equity 952 911 756 671 415 324

Data as originally reported; before results of discontinued operations and/or specific items.

Per share data adjusted for stock dividends as of ex-dividend date.

E - Estimated. N/A - Not Available. NM - Not Meaningful. NR - Not Ranked.

Exhibit B. JetBlue’s Growth

Revenue Passengers (000s)

Revenue Passenger Miles (millions)

Operating Revenues (million $)

Employees (full- and part-time)

Operating Aircraft Destinations

2000 1,144 1,005 320.4 1,174 10 12

2001 3,117 3,282 320.4 2,361 21 18

2002 5,752 6,836 635.2 4,011 37 20

2003 9,012 11,527 998.4 5,433 53 21

2004 11,783 15,730 1,266 7,211 69 30

2005 14,729 20,200 1,701 9,021 93 33

2006 18,565 23,320 2,363 10,377 119 49

Sources: Jet Blue 10K reports, Air Transport Association of America, Standard & Poor's.

“Revenue passengers” represents the total number of paying passengers on all flight segments flown.

“Revenue passenger miles” represents the number of miles flown by revenue passengers.

Employee count does not include LiveTV LLC employees.

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Exhibit C. Passengers per Employee

Passenger to employee ratio

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2000 2001 2002 2003 2004 2005 2006

Reven

ue P

assen

gers

Source: authors’ calculations

Exhibit D. Top 25 U.S. Airlines, 2003

Source: Air Transport Association of America Annual Report, 2004.

Exhibit E. Total Revenues, U.S. Airlines Year $ billion % Growth 2000 120.0 2001 111.9 -6.8% 2002 105.0 -6.1% 2003 110.2 4.9% 2004 116.3 5.6% 2005 125.0 7.5%

Source: Datamonitor Industry Profiles, 2005, 2006

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Exhibit F. Customer Complaint Rates For the 10 Largest U.S. Airlines (2006)

Airline Complaints per 1 million passenger emplanements

United Airlines 13.60

US Airways 13.59

American Airlines 10.87

Delta 10.35

Northwest Airlines 8.84

Continental Airlines 8.83

AirTran Airways 6.24

Alaska Airlines 5.24

JetBlue Airways 3.98

Southwest Airlines 1.82

Average of all airlines 8.67

Source: U.S. Department of Transportation Air Travel Consumer Report, Feb. 2007; Wall

Street Journal, March 27, 2007.

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Exhibit G. David Neeleman’s Apology

Dear JetBlue Customers, We are sorry and embarrassed. But most of all, we are deeply sorry. Last week was the worst operational week in JetBlue‟s seven year history. Many of you were either stranded, delayed or had flights cancelled following the severe winter ice storm in the Northeast. The storm disrupted the movement of aircraft, and, more importantly, disrupted the movement of JetBlue's pilot and inflight crewmembers who were depending on those planes to get them to the airports where they were scheduled to serve you. With the busy President‟s Day weekend upon us, rebooking opportunities were scarce and hold times at 1-800-JETBLUE were unusually long or not even available, further hindering our recovery efforts. Words cannot express how truly sorry we are for the anxiety, frustration and inconvenience that you, your family, friends and colleagues experienced. This is especially saddening because JetBlue was founded on the promise of bringing humanity back to air travel, and making the experience of flying happier and easier for everyone who chooses to fly with us. We know we failed to deliver on this promise last week. We are committed to you, our valued customers, and are taking immediate corrective steps to regain your confidence in us. We have begun putting a comprehensive plan in place to provide better and more timely information to you, more tools and resources for our crewmembers and improved procedures for handling operational difficulties. Most importantly, we have published the JetBlue Airways Customer Bill of Rights – our official commitment to you of how we will handle operational interruptions going forward – including details of compensation. We invite you to learn more at jetblue.com/promise. You deserved better - a lot better - from us last week and we let you down. Nothing is more important than regaining your trust and all of us here hope you will give us the opportunity to once again welcome you onboard and provide you the positive JetBlue Experience you have come to expect from us. Sincerely, David Neeleman Founder and CEO

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Exhibit H. JetBlue Customer Bill of Rights

21

Exhibit I. Cover of BusinessWeek, March 5, 2005

Exhibit J. Letter to Mobile Press-Register by Kate and Tim Hanni

Traveling with our two sons, we were trying to make it from Napa Valley, Calif., to Mobile for a business trip coupled with a family vacation. But after being diverted to Austin, Texas, because of heavy storms in Dallas (where we had our connecting flight), we waited on the plane for nearly nine hours on the tarmac in Austin. At first, we hoped that we could get to Dallas. Eventually, we wished we simply would be cleared to go to an open gate. The only food on the plane was a few snack bags of pretzels. Gradually, cell phones and music players slowly went dead. The air became stale and later polluted when the toilets overflowed. When we finally got off the plane in Austin after 9 p.m. that day, we had hardly eaten a bite since we'd left home at 3 a.m. Everyone was famished. But as we stepped into the terminal, the last of the restaurants were rolling down their metal security cages and refused to serve us food. Then, after waiting another frustrating two hours to find out that our luggage would not be unloaded, the line for a measly $10 discount on a hotel room was impossibly long and all of the hotel shuttle services were done for the night. We gave up and checked into a cheap hotel, ending a 22-hour day of travel. We slept for only four hours so that we could be back at the airport at 6 a.m. We boarded a flight for Dallas 21/2 hours later. But when we reached Dallas, we were told by one gate assistant that we wouldn't be able to get on the next flight to Mobile "unless you're the Queen of

22

England." Four and a half hours later, we check into another airport hotel - still without toiletries and clean clothes. We had left Napa Valley at dawn on Friday, Dec. 29. We did not make it to Mobile until Sunday afternoon, Dec. 31 - 21/2 days late, angry, frustrated, exhausted and grimy.

Source: Mobile Press-Register, Feb. 4, 2007.

Exhibit K. Executive Biographies David Neeleman, Chief Executive Officer and Director

David Neeleman is our Chief Executive Officer and a member of our board of directors. He has served in both capacities since August 1998. Mr. Neeleman was a co-founder of WestJet and from 1996 to 1999 served as a member of WestJet's board of directors. From October 1995 to October 1998, Mr. Neeleman served as the Chief Executive Officer and a member of the board of directors of Open Skies, a company that develops and implements airline reservation systems and which was acquired by the Hewlett Packard Company. From 1988 to 1994, Mr. Neeleman served as President and was a member of the board of directors of Morris Air Corporation, a low-fare airline that was acquired by Southwest Airlines. For a brief period, in connection with the acquisition, he served on the Executive Planning Committee at Southwest Airlines. From 1984 to 1988, Mr. Neeleman was an Executive Vice President of Morris Air. Mr. Neeleman attended the University of Utah.

David Barger, President, Chief Operating Officer and Director

David Barger joined our board of directors in September 2001. Mr. Barger is our President and Chief Operating Officer and has served in this capacity since August 1998. From 1992 to 1998, Mr. Barger served in various management positions with Continental Airlines, including Vice President, Newark hub. He held various director level positions at Continental Airlines from 1988 to 1995. From 1982 to 1988, Mr. Barger served in various positions with New York Air, including Director of Stations. Mr. Barger attended the University of Michigan.

Thomas Kelly, Executive Vice President and Secretary

Thomas Kelly, age 50, is our Executive Vice President and Secretary and has served in this capacity since August 1998. From August 1998 until February 2003, he was also our General Counsel. From December 1995 to October 1998, Mr. Kelly served as the Executive Vice President, General Counsel and a member of the board of directors of Open Skies. From 1990 to 1994, Mr. Kelly served as the Executive Vice President and General Counsel of Morris Air Corporation and served as a member of the board of directors of Morris Air from 1991 to 1993. Mr. Kelly received his Bachelor of Arts degree in University Studies from Brigham Young University and a Juris Doctorate degree from Harvard Law School.

John Owen, Executive Vice President – Supply Chain & Information Technology

John Owen is our Executive Vice President – Supply Chain & Information Technology and has served in this capacity since January 1999. From August 1998 to December 1998, Mr. Owen served as the Vice President for Operations Planning and Analysis for Southwest Airlines. From October 1984 to August 1998, Mr. Owen served as the Treasurer for Southwest Airlines. Mr. Owen received his Bachelor of Arts degree in Economics from Southern Methodist University and a Master of Business Administration degree from the Wharton School at the University of Pennsylvania.

Source: www.jetblue.com, accessed March 19, 2007