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Case Study Presentation Immaculate Mary Sackey Bridget Fosuhemaa Naa Ayongo Mensah Paa Kwesi Fynn Benjamin Nii Mensah Yemoh Jeroen Van Puyvelde 1

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Page 1: Final Ppt 4 April JetBlue

1

Case Study Presentation

Immaculate Mary SackeyBridget FosuhemaaNaa Ayongo MensahPaa Kwesi FynnBenjamin Nii Mensah YemohJeroen Van Puyvelde

Page 2: Final Ppt 4 April JetBlue

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Incorporated in Delaware in 1998 and founded by David Neeleman in 1999.

Started operations in 2000 at JKF (NY)

Start-up capital of more than $100m.

Listed on the stock exchange in 2002 (NASDAQ)

Company goals

leading low-fare/low-cost airline company and a differentiated product

Background of Jetblue

Source: www.jetblue.com

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In 2002: 108 daily flights

Stock in 2002 $20, in 2005 Already $26.4, now $ 5.10

Revenue in 2004 was $1.26billion, end of 2006 $2.36 billion,in 2010 $3.78 Billion.

In mid 2005:

Jetblue operated 77 new planes. 316 flights daily, serving 32 destinations in 13 states.

Background of Jetblue

Sources: www.jetblue.comwww.investor.jetblue.com

Page 4: Final Ppt 4 April JetBlue

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Trend Analysis (per revenue)

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

20

40

60

80

100

120

OPERATING INCOME

OPERATING EXPENSES

STAFF COSTS

FUEL COSTS

Page 5: Final Ppt 4 April JetBlue

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Trend analysis of fuel costs

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Fuel cost compared to operating expenses

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

05

1015202530354045

Fuel cost as a Percentage of Operating Expenses

As a Percentage of Operating Expenses

Page 7: Final Ppt 4 April JetBlue

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Financial performance of Jetblue

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

ROCE ROSF

Page 8: Final Ppt 4 April JetBlue

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Jetblue vs competitors2003 2005 2008 2011

Southwest

Airlines

ROCE 4.76% 7.14% 3.99% 5.12%

ROSF 12.01% 11.67% 5.61% 4.79%

AMR Corp.

ROCE (5.61)% (0.44)% (17.94)% 6.93%

ROSF(408.41)

% (58.25)% 51.60% 27.83%

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Financial performance of Jetblue cont’d

ROCE 2003 (Highest ROCE)

Increase in revenue Increase in daily flights from 43% increase in number of passengers. Installation of satellites TV systems on non Jet Blue aircrafts. Reduction in operating expenses due to a 5% decrease in Selling, General and Admin expenses.

2005 and 2008 (Lowest ROCEs) Decrease due to natural disaster (3 hurricanes), high fuel prices and global economic meltdown.

2011 Drop in ROCE by 0.36% from 2010 due to severe weather storms and cancellation of 1400 bookings over 3 day period.

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ROCE CONT’D COMPETITORSCompared to direct competitors on a 4 year average.AMR Corporation – (4.27)%Jet Blue Airways – 4.69%Southwest Airlines – 5.25%

ROSF Average return for 10 years – 5.79% as compared to 3.75% from bank

deposits over the same period. Return over the 4 year period compared Southwest Airlines and AMR

Corporation. Jet Blue – 3.52% Southwest Airlines – 8.50% AMR Corporation – (96.81)%

Financial performance of Jetblue cont’d

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Profitability

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-5

0

5

10

15

20

Operating Income MarginNet Profit Margin

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2003

2005 First loss recorded since becoming a public company. Due to natural disastersInability to raise air fares due to high competition.Increase in fuel prices by 52% caused $167m increase in total fuel cost compared to year 2004. 2008 – Loss in net profit margin due to: Additional cost of $400m resulting from unprecedented spike in fuel prices. $8m write-off related to temporary terminal facility at JFK. Additional expense of $13m in interest expense related to early conversion of portion 5.5% convertible debentures due 2038. $18m loss in interest income related to gain on extinguishment of debt. Other-than-temporary impairment of $53m related to write-down of value on auction rate securities.

2011Drop in operating and net income margins compared to 2009 and 2010 due to:

$6m loss related to the repurchase of $39m principal amount of their 6.75% convertible debentures due 2039.Increase in total operating expenses by 1.66% margin compared to 0.15% increase in 2010.

Profitability cont’d

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Measure of liquidity

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

00.20.40.60.8

11.21.41.61.8

2

Current RatioAcid Test Ratio

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Liquidity cont’dCURRENT RATIO

Average of 1.14 for review period indicates ability to pay off obligations. Lowest CR’s recorded in 2005, 2007 and 2008 of 0.94, 0.84 and 0.84

respectively.

ACID TEST RATIO Average of 0.88 for review period indicates inability to pay off obligations. Lowest ATR’s of 0.03 and 0.02 recorded in 2011 and 2010 respectively

however show company’s preference for medium/long term investments as seen in huge purchases of available-for-sale-securities and held-to-maturity investments worth $1,052m and $1,935m compared with cash and cash equivalent holdings of $637m and $465m respectively.

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Capital structure

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

GEARING INTEREST COVER

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Jetblue vs competitorsGEARING

Gearing levels for the period under review higher than recommended benchmark of 30% - 50% indicating company is highly geared.

Average gearing level of 57.91% for the period, Shows long term lenders have high stake in company thus have an ability to restrict company’s

finances based on high exposure. Not good for actual shareholders as it shows Jet Blue to be high risk investment.

Gearing level assumes downward trend from 2006 (65.83%) with current level for 2011 recorded to be 50.36%.

Average gearing level of 57.45% for Jet Blue for significant 4 years compared with levels for Southwest and AMR Corp whose average of 21.11% and 50.40%, Jet Blue must strive to do better in order to increase shareholders’ confidence in investment in company.

INTERST COVER Interest cover ratio of less than 1.5 for years 2005 to 2009 show that Jet Blue’s income generation

ability was not sufficient enough to meet its interest expenses. Improvement in ability to meet interest expense as evident in ratios recorded for 2010 and 2011.2003 2005 2008 2011Southwest Airlines 16.71% 13.73% 31.06% 22.96%

AMR Corporatio

n45.06% 59.17% 53.31% 44.04%

Page 17: Final Ppt 4 April JetBlue

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Investor ratio’s

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-150

-100

-50

0

50

100

P/EEPS

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Investor ratio cont’dEPS

Jet Blue’s highest EPS of 1.07 was recorded in 2003 when the company had a strong financial position for the period under review such that for every share held, shareholders received 107 cents.

Lowest EPS ratios of (0.13) and (0.37) in 2005 and 2008 respectively indicating that for every share held, Jet Blue’s shareholders lost 13 cents and 37cents respectively due to loss of revenue and high operating expenses incurred from high fuel prices, natural disasters and the global economic crisis.

Jet Blue’s average of 22 cents is lagging behind Southwest (who has an average EPS of 39 cents) but is ahead of AMR Corp. (who has an average of -676 cents) for the 4 significant years compared. Jet Blue was thus able to bring a higher return to its shareholders when compared to AMR Corp.

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P/E RATIO Investors confidence in the airline industry has been waning: Evident in decreasing and further unstable trend shown in the graph due to

the uncertainty of the airline business most especially the US industry. Natural disasters (Hurricanes) Rising nature of fuel prices Passenger Behaviour due to the general state of the economy at any

point in time, international events, industry capacity and pricing actions taken by other airlines.

Jet Blue’s average P/E ratio of -24.71 for the selected 4-Year period lags behind compared to Southwest (34.55) and AMR Corporation’s (-1.49) implying less confidence in Jet Blue.

RATIO2003(in

times)

2005(in

times)

2008(in

times)

2011(in

times)Southwest Airlines

EPS 0.48 0.61 0.24 0.21P/E 38.42 27.08 33.04 39.67

AMR Corporatio

n

EPS (7.76) (5.21) (8.16) (5.91)

P/E (1.66) (3.26) (0.98) (0.06)

Page 20: Final Ppt 4 April JetBlue

20Source: finance.yahoo.com

Industry analysisJET BLUE AIRWAYS

SOUTHWEST AIRLINES

AMR CORPORATIO

NINDUSTRY

No. Of EMPLOYEE

S11, 733 45, 392 80, 100 9.85k

REVENUE (ttm) 4.50b 15.66b 23.98b 3.65b

OPERATING MARGIN

(ttm)7.15% 5.28% -1.24% 9.07%

NET INCOME

(ttm) 86.00m 178.00m -1.98b N/A

EPS (ttm) 0.28 0.23 -5.91 0.21P/E (ttm) 18.23 38.96 N/A 17.18

(ttm) – trailing twelve months (as of 31 Dec 2011), b=Billions, m=Millions, k=Thousands, N/A= Not Available, Industry = Regional Airlines

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Efficiency

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

5

10

15

20

25

30

ASSET TURNOVERRECEIVABLES PERIODPAYABLES PAYMENT PERIOD

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In general

Offering greater value By means of lower prices.

Providing greater benefits and service that justifie higher prices.

For Jetblue

Low prices combined with great service in order to gain competitive advantage.

What is competitive advantage?

Sources: www.jetblue.comcase study Jetblue Airways

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Elements of organisational resources:

Strong HR-policy, hiring the best people and support them with excellent training and equipping them with the best tools. Employees are highly motivated to be service oriented.

Technology: live satellite tv at every seat.

Infrastructure: keeping the fleet up-to-date.

Efficient and on time when arriving and departing, better than the competitors.

IT: Their website is a real revenue generator and a significant cost saver.

Advertising and promotion through media channels, although they mostly rely on word-of-mouth advertising.

Organisational resources

Source: www.jetblue.com

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Tangible resources

Asset-acquisition of new planes Labour-stringent recruitment policies CEO

Non-tangible

Reputation low fare and low cost airline Time efficient Customer service

Organisational culture

All employees seen as crew members and all passengers as customers.

Resources

Sources: www.jetblue.comCase study Jetblue Airways

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Resources needed to meet customer’s requirement, to stay in the business.

A. Provision of comfortable accommodations.B. Bullet proof cockpit doors across the fleet.C. Provide every day the same complete service.

Treshold resources

Sources: www.jetblue.comCase study Jetblue Airways

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Underpinning competitive advantage and difficult to imitate.

100% ticketless

24 channels of live tv

Broadcast of Olympic games during flights.

Installation of security camera’s in passenger cabins for customer and crew security.

Unique resources

Sources: www.jetblue.comCase study Jetblue Airways

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Strong focus on vision of low-fare/ low-cost passenger airline and providing high customer services.

Direct marketing skills and database management.Design and deliver a ‘customer interface’ that personalises online booking making it more efficient.

Reliability and efficiency

These competences are activities and processes which underpin competitive activities.

Core competences

Sources: www.jetblue.comCase study Jetblue Airways

Page 28: Final Ppt 4 April JetBlue

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HR: hiring and training the best people

Online booking system

New fleet

Activities and processes required to produce the product/services.

Threshold competency

Sources: www.jetblue.comCase study Jetblue Airways

Page 29: Final Ppt 4 April JetBlue

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A resource or competency to be a source of competitive advantage needs to be:

ValuableFirst airline to use security camera’s for customers and crew safety. Bullet proof cockpit doors.

RareBroadcasting satellite tv, 100% ticketless.

Non-imitableImitable but at a very high cost. (high entry barriers)

Effectively organisedYes, because of the trained staff, use of new technologies, e-commerce,…

Barney’s Vrio-model

Source: Barney 1995Lecture 6

Page 30: Final Ppt 4 April JetBlue

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Pestel AnalysisPolitical/legal

Reformation after 9/11Extending daylight saving

time

Economic

Oil pricesUnions and strikes

Labor wagesDelays & security

Socio-cultural

Increase of obesityEnvironmental

CO² emission

LEGAL

Increasing security fees on airline tickets

Employement law differsLots of regulations

National airline policy

Technological

Luggage-tracking technologyNew planesE-commerce

Sources: www.cdc.govwww.faa.gov

https://ec.europa.euwww.deredactie.be

Page 31: Final Ppt 4 April JetBlue

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Swot AnalysisStrengths

• The product itself• Customer service• Strong mkt policy and brand• New Fleet• Training of staff & equipment

Weaknesses

• Spoilage rates• Break-even load factor• Figures worse in recent years

Opportunities• National Airline Policy• Further expansion of their partnerships• Market growth• Technology advancements

Threaths• Economic downturn• Ever increasing costs of fuel and labor.• Governmental intervention• Unions and strikes

Sources: www.ehow.comCase study Jetblue ariways

www.faa.govwww.nytimes.com

Page 32: Final Ppt 4 April JetBlue

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Porter’s 5-forces • Potential entrants

* Capital requirements Startup costs Fixed costs

* High risk nature of the industry.

* Legislation and governmental actions.

* Access to distribution channels.

Only 2 have been successful in recent years.

Sources: www.ehow.comCase study jetblue airways

Page 33: Final Ppt 4 April JetBlue

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Porter’s 5-forces • Buyer Power

* Struggle in ongoing price wars* Strenghts and weaknesses

• Supplier power

* High power for delivering materials.

• Threat of substitutes

* No threat beyond 500 miles.* Planes win in every factor.

Sources: www.ehow.comCase study jetblue airways

Page 34: Final Ppt 4 April JetBlue

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Porter’s 5-forces • Rivalry/competition

* Entry and substitutes: no

* Buyers and suppliers: high

* Market growth

* Costs

Competitive business

Sources: www.ehow.comCase study Jetblue airways

Page 35: Final Ppt 4 April JetBlue

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Strategic group analysisHigh

Low

National International

Posit

ioni

ng p

rice/

serv

ice

Geographical Sources: nationsonline.orgHome sites of het different

airline companies

Page 36: Final Ppt 4 April JetBlue

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Bowman’s strategy clock

Jetblue is low price strategy

* Lower prices than competitors

* With good service

* Positioning of competitors

Sources:www.mindtools.com (logo)Lecture 9

Page 37: Final Ppt 4 April JetBlue

37Source:www.airbornesurfer.wordpress.com

RecommendationsFor LT financial and strategic development of the organisation.

Look for other suppliers to promote competition among them.

Consider partnerships in order to provide Canada And Mexico to enhance their northern American coverage and build up their market share.

Review the fuel hedging policy .

Expansion of domestic route network.

Page 38: Final Ppt 4 April JetBlue

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Thank you for your attention!

Questions?

Page 39: Final Ppt 4 April JetBlue

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References AMR Corporation Annual Report (2003) [Online] available from

http://southwest.investorroom.com/sec-filings [ March 29 2012] AMR Corporation Annual Report (2005) [Online] available from

http://southwest.investorroom.com/sec-filings [ March 29 2012] AMR Corporation Annual Report (2008) [Online] available from

http://southwest.investorroom.com/sec-filings [ March 29 2012] AMR Corporation Annual Report (2011) [Online] available from

http://southwest.investorroom.com/sec-filings [ March 29 2012] AMR Corporation Historical Share Prices [Online] available from <

http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-stocklookup> [March 29 2012]

Atrill, P. and Atrill, P. (2012) Financial Management for Decision Makers. Harlow, UK; Harlow, England ; New York: Harlow, UK : FT Prentice Hall/Financial Times

Grundy, T. and Grundy, T. (1998) Exploring Strategic Financial Management. London: London : Prentice Hall Europe

Jet Blue Airways Annual Report (2003) [Online] available from http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual [ March 13 2012]

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Jet Blue Airways Annual Report (2004) [Online] available from http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual [ March 13 2012]

Jet Blue Airways Annual Report (2005) [Online] available from http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual [ March 13 2012]

Jet Blue Airways Annual Report (2006) [Online] available from http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual [ March 13 2012]

Jet Blue Airways Annual Report (2007) [Online] available from http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual [ March 13 2012]

Jet Blue Airways Annual Report (2008) [Online] available from http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual [ March 13 2012]

Jet Blue Airways Annual Report (2009) [Online] available from http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual [ March 13 2012]

Jet Blue Airways Annual Report (2010) [Online] available from http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual [ March 13 2012]

Jet Blue Airways Annual Report (2011) [Online] available from <http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual > [March 13 2012]

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Jet Blue Airways Annual Report (2011) [Online] available from <http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnual> [March 13 2012]

Jet Blue Historical Share Prices [Online] available from http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-stockLookup> [March 13 2012]

Johnson, G. and Johnson, G. (2005) Exploring Corporate Strategy. Harlow, Essex, England ; New York: Harlow, Essex, England ; New York : FT/Prentice Hall

Reuters.com (2012) Market Data Home [online] available from <http://uk.reuters.com/business/quotes/overview?symbol=JBLU.OQ> [March 13 2012]

Southwest Airlines Co. (2003) [Online] available from http://southwest.investorroom.com/sec-filings> [March 29 2012]

Southwest Airlines Co. (2003) [Online] available from http://southwest.investorroom.com/sec-filings> [March 29 2012]

Southwest Airlines Co. (2003) [Online] available from http://southwest.investorroom.com/sec-filings> [March 29 2012]

Southwest Airlines Co. (2003) [Online] available from <http://southwest.investorroom.com/sec-filings> [March 29 2012]

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Southwest Historical Share Prices [Online] available from <http://southwest.investorroom.com/historical-stock-price > [March 29 2012]

US Department of the Treasury , Data and Charts Centre - Interest Rate Statistics - Historic Long Term Rates. [Online] available from <http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx> [March 28 2012]

Wendy, M. 1. and McKenzie, W., 1950- (2010) FT Guide to using and Interpreting Company Accounts. Harlow: Harlow : Financial Times Prentice Hall

Yahoo Finance [Online] available from <http://uk.finance.yahoo.com/> [March 03 2012]

www.jetblue.com

www.investor.jetblue.com

www.cdc.gov

http://www.ehow.com/way_5982659_strategic-analysis-airline-industry.html

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http://www.ehow.com/about_5347649_airline-industry-swot-analysis.html#ixzz1oMO1mdpg

http://www.ehow.com/list_7576197_barriers-entry-airline-industry.html

www.faa.gov

http://www.infrastructurereportcard.org/fact-sheet/aviation

http://www.nytimes.com/2008/10/07/business/07outlook.html?_r=2

http://www.nationsonline.org/oneworld/Airlines/airlines_north_america.htm

http://www.deredactie.be/cm/vrtnieuws/economie/1.1243203

http://airbornesurfer.wordpress.com/2011/06/17/

http://www.mindtools.com/pages/article/newSTR_93.htm

https://ec.europa.eu/employment_social/anticipedia/document/showFile.do?id=3043&idDigest= 75ebd98cbdaba186785be8499cce6b8bff0df7d6