by Stephanie Overby

JetBlue Skies Ahead

Jul 01, 200215 mins
IT Leadership

nThe founders of JetBlue Airways use IT as the backbone of their "high-tech, high-touch" startup. Can you say, "last-mover advantage"?

Like everyone else in the airline industry, JetBlue Airways saw business drop in the aftermath of September 11–the day the startup was scheduled to unveil its initial public offering. But unlike most others, JetBlue rebounded by year’s end and continued to climb.

The low-cost carrier’s income statement flew against travel industry trends. JetBlue posted a profit of $38.5 million on $320.4 million in revenue in 2001, a year in which the U.S. airline industry lost $7.7 billion. In the first quarter of 2002, the company registered a $13 million profit on $133.4 million in revenue when major airlines lost another $2.4 billion. JetBlue kept on hiring employees, continued to buy jets and upped its IT investments.

And seven months after the scrapped IPO announcement, JetBlue went public on April 12, 2002, posting 67 percent gains in the first day of trading — the best performing stock debut on Wall Street in more than a year.

So how has this startup airline managed to take off when some of the industry’s biggest names have struggled to stay aloft? What makes JetBlue grow in a field where more than 100 new ventures have failed since deregulation in 1978? And how can it manage its future in an industry characterized by low profit margins and high fixed costs, in which a minor revenue shortfall can have a disproportionately major effect on finance (the four-day shutdown after 9/11 providing the most extreme example)?

Call it starting with a fresh canvas. Call it last-mover advantage. And call IT central to the plot.

JetBlue, started four years ago by a duo of airline industry veterans who amassed $160 million in capital, began with a simple

plan to offer high-end customer service at low-end prices (averaging $99 each way). So while passenger-facing elements emphasize service and comfort — JetBlue boasted a new fleet of Airbus A320 planes with all-leather upholstery and seat-back TVs when it first flew in 2000 — executives have invested heavily in automation, from ticket sales that stress direct-sale Web purchases to electronic tagging on bags.

“They’ve redefined what is expected of a startup airline,” says Stuart Klaskin, a Coral Gables, Fla.-based aviation consultant. “They said, Let’s completely wipe the slate clean. And from a technology standpoint and a customer service standpoint, they have done things that most other people in the airline industry have only thought about.”

So far, that combination of being a late arriver and early adopter is serving JetBlue well. The airline operates at 70 percent of the cost of the biggest carriers, while flying significantly fuller planes. It remains a nonunion shop. JetBlue also sees half of its customers return to fly again; and 20 percent of passengers make up 50 percent of the airline’s revenue. And there’s that matter of profits.

A Blue-Sky Idea

David Neeleman, CEO of JetBlue, would have started this new venture earlier if he could have. He’d done it before.

In 1984, Neeleman cofounded Morris Air, a Salt Lake City-based airline that became the first to offer ticketless travel, a program developed in-house. In 1993, Morris Air was snapped up for $130 million by low-cost leader Southwest Airlines, which picked up the e-ticket tack and brought Neeleman on board as an executive planning committee member. But he lasted just six months, frustrated, he says, by the lack of automation there. “When I got to Southwest, you couldn’t even make a reservation on the phone. You were instructed to go to the airport to buy your ticket,” Neeleman says. “And they were still using the old mainframe system they had inherited from Braniff.” When he left the Dallas-based airline, then-CEO Herb Kelleher asked him to sign a five-year noncompete agreement.

While at Morris Air, Neeleman had worked with college student David Evans to develop a unified accounting and reservations system. When he left Southwest, he and Evans decided to create a company to sell the system to small and midsize airlines. Unlike most other reservation systems, it integrated electronic ticketing, Internet booking and revenue management tools, and generated timely operational and financial reports. The company, Open Skies, provided systems for the likes of WestJet and former British Airways’ low-fare subsidiary Go Fly. All the while, Neeleman was developing his next blue-sky idea for a new low-cost, low-price air carrier. “We tested a lot of technologies during that time,” Neeleman says. “Open Skies became a great test laboratory for JetBlue.”

When his noncompete pact with Southwest expired in 1998, Neeleman sold Open Skies to Hewlett-Packard for an undisclosed amount and began working on the launch of his new company. He raised capital from five previous investors in Morris Air and landed investor George Soros to boot. Neeleman decided to base the new airline in New York City — John F. Kennedy International Airport, to be exact — which hadn’t seen a low-cost carrier since People Express hit the skids in 1986.

Neeleman then hired Dave Barger, who led a turnaround at Continental Airlines, as president and COO, and began to build what he saw as a “high-tech, high-touch” airline: all new airplanes of a single body type (more costly to purchase but easier to maintain), paperless business processes (whether it’s at headquarter offices in Kew Gardens, N.Y., or in the pilot’s cockpit) to save both time and money, and enthusiastic employees to deliver good service. “What they set out to do was take the 21st century electronic business model and apply it to aviation,” explains John Kasarda, an airline industry expert at the University of North Carolina’s Kenan-Flagler Business School. “They took what was cutting edge in terms of digital business and translated it to aviation. It was surprising somebody hadn’t done it sooner.”

Neeleman and Barger made a series of decisions to simplify the business and take advantage of their IT bent.

n They developed plans for point-to-point service in high-volume corridors (New York to South Florida, Seattle and L.A.-Long Beach, for example), thus avoiding the costs and business process complications associated with the hub-and-spoke system that major airlines use to reach all markets. “We didn’t want to be all things to all people. We wanted to go where we could make money,” Neeleman says. So no flights to Chicago yet.

n They avoid travel agents (average cost: $14 per ticket). So they set up reservations agents in Utah, where work-at-home operators use voice over IP (VoIP) lines (average cost: $4.50 per ticket). There’s also a big Internet reservations push on (50 cents per ticket). And, of course, all ticketless travel.

n They created the industry’s first paperless cockpit, equipping pilots and first officers with laptops to access electronic flight manuals and make pre-flight load and balance calculations.

“If we didn’t have this, it would delay us 15 or 20 minutes, at least,” says Kevin Carney, a JetBlue first officer typing away on his HP laptop before a recent Friday afternoon flight to Fort Lauderdale, Fla. “I used to work at US Airways, and they didn’t have anything like this. None of the airlines do.”

Overall, the plan was to create a cost structure that could support low fares without doing it on the backs of labor or sacrificing service. “You can be efficient and effective and deliver a great experience at the same time,” says Neeleman. The trickiest thing during the incubation period, he says, was thinking up the name — JetBlue — which in the end Neeleman thought just sounded cool. And don’t forget about finding the right person to help him and Barger computerize every aspect of the airline, which was scheduled to launch in February 2000.

A New CIO’s Clean Slate

Jeff Cohen joined JetBlue as a consultant on Jan. 3, 2000, just a month before the airline was scheduled to take its inaugural flight. Hired to help with the FAA certification of JetBlue as an airline, Cohen also helped to stabilize the network to get it ready for the big Internet reservations push. After three months, Neeleman and Barger asked Cohen to sign on full-time as the company’s first CIO. “It was, ’Enter, stage left…like, now,’” jokes Barger.

Beyond the cockpit and network projects, Cohen had no legacy systems, an open budget and one mandate from Neeleman: Automate everything. “From the beginning, I’ve basically had to wake up every day and figure out how we stay a low-cost airline, without bringing in huge ideas that will cost a huge amount of money and aren’t aligned with our business model,” says Cohen.

To that end, Cohen has removed the acronym ROI — so important to him as a consultant — from his vocabulary. Instead, the acronym you will hear –and hear a lot — is cost per available seat mile (CASM). It’s the industry measurement of the costs incurred by an airline per mile that could be flown. Instead of ROI with new IT projects, says Barger, Cohen’s direct boss, “we ask, Does it drive efficiency?”

That means Cohen and his staff of 36, a quarter of them developers, test out lots of ideas and support a lot of skunk works projects. Initiatives get the go-ahead based on whether the technology application would help JetBlue maintain its cost structure and how it affects the company’s CASM.

Currently, JetBlue has a CASM of under 7 cents per seat mile, about 25 percent less than the average of major carriers. When it comes to creating and keeping that low cost structure, “IT is definitely the enabler,” says Barger. Keeping CASM low was the impetus for Neeleman to charge Cohen to set up and maintain VoIP lines for 600 at-home JetBlue reservation agents, creating the industry’s only virtual call center. It’s why the cost-saving paperless cockpit got the green light before the CIO came aboard.

Keeping CASM low was the reason Cohen chose to standardize on Microsoft products (the decision helps to limit his staff’s size — and the number of technologies they support). He also avoids outsourcing and consultant agreements (except when purchasing a product from a vendor), preferring to do most development in-house. So, you have JetBlue hiring outside help from (the familiar) Open Skies as its reservation and revenue accounting system vendor. And yet the company’s own developers built a program called Blue Performance, to track operational data (updated flight by flight), and created an intranet to share the information with JetBlue’s 2,800 crew members.

“Having that kind of real-time information at your fingers is really more critical than anything,” explains Neeleman. “Other, older airlines spend billions and billions of dollars and use staffs of hundreds to try to pull this stuff, and we have it baked into the system.”

That focus on low costs and efficiency also drove the in-house development of JEMS (JetBlue event management system) to track all safety-related incidents in the company and the decision to use BlackBerry wireless devices to report and respond to irregular operations — anything from weather delays to a passenger injured by his own briefcase when he opened the overhead bin. And that’s why routine tasks, like getting expense approvals or processing payroll, are done digitally.

But in a culture so geared up for gadgets, it’s also Cohen’s responsibility to draw the line between cutting-edge, cool stuff and technology that actually helps pilot JetBlue’s financial performance. For example, Cohen quashed wireless check-in at JFK after the airline took over an entire terminal there starting last Thanksgiving. It turned out agents could move people along faster at its 40 counters. “If it doesn’t make you efficient, it’s not cool,” he says.

Much of this IT strategy is transparent to the traveler. Heavy automation keeps costs low so customers can pay low fares and still enjoy leather seats and real TV (“the opiate of the traveler,” jokes Neeleman). The paperless cockpit allows pilots to calculate the weight and balance of their own plane in a few keystrokes rather than relying on dispatchers at headquarters to crunch the numbers, which helps to keep planes on schedule (and saves an estimated 4,800 hours a year).

But other IT innovations are more visible, such as the simple queue program that lets the next person in line at check-in know which agent is available, adjustments to the Open Skies system to keep average check-in times under a minute, and electronic bag tagging. And the hidden cameras in the cabin with monitors in the cockpit, installed recently as a security measure, is another IT project that pleases passengers. “We used the DirecTV technology we already had, and the plumbing on that was $70,000 per airplane,” explains Barger. “What was the ROI on that IT investment? Zero. But we think it’s something that will make customers say, These guys just get it.”

In the end, IT’s effect on customer service may be almost as important as its effect on CASM. “The customer experience is our biggest success factor,” says Neeleman. “That’s what’s surprised me the most: the amount of customer loyalty we have after being around just two short years.” And that’s not just CEO braggadocio. JetBlue filled 78 percent of its planes last year (industry average is 71 percent), landed the number-two spot among economy airlines in the Zagat 2001 airline survey, and ranks first in the Air Transport Association’s metrics for on-time performance and fewest mishandled bags.

“JetBlue is the way flying should be, and probably the way it was some time ago,” says Albert James, a New York City-based application architect who flies to Florida at least twice a year on the carrier. “The agents at check-in are efficient. In flight, you get first-class service no matter where you sit. Even baggage claim is a breeze. I have yet to have a bad JetBlue experience.”

JetBlue executives insist that the IT projects that make customers happy also benefit employees. “IT has made a huge impact on our number-one cost, which is labor,” says Barger. “It allows us to do more with fewer people, and it also allows us to take better care of the people we do have.” And in this heavily unionized industry (more than 60 percent of airline employees belong to one), it has allowed JetBlue to remain union-free so far.

Up in the Air

JetBlue’s continued commitment to technology was crystal clear following the post-Sept. 11 turbulence that rocked the airline industry. Just eight weeks after the terrorist attacks, Cohen resumed IT spending, even scoring some savings. “There were great values to be had because vendors were really hurting. And we were capable of making some incredibly great deals because we had really boned up on cash,” Cohen explains. And at a time when other airlines cut or level-funded their technology spending, JetBlue’s IT 2001 capital budget of $5.6 million grew to $10 million in 2002.

Upcoming projects include: onboard servers and wireless networks in jetways so that operational and mechanical data can be uploaded and downloaded pre- and post-flight; outfitting mechanics with ruggedized laptops; a paperless frequent flier program. Two security-related programs are also on tap: cockpit-monitoring cameras so that ground crews can monitor activity there via an existing satellite feed, and biometrics applications in airport terminals.

Barger says he emphasizes experimentation in talks with Cohen. “I say to Jeff, ’Let’s find out what we can do next in terms of passenger check-in, talking electronically to the airplane itself and talking to one another. Let’s keep pushing the envelope.’”

Those are exciting words, but the airline industry is a tough field for those seeking a long, smooth ride. “At the moment, they’re successful. But no airline is a long-term success story,” says Michael Boyd, president of The Boyd Group, an Evergreen, Colo.-based aviation business consultancy.

There are systemic challenges to a low-fare carrier like JetBlue. Will the systems it has installed scale with a company that just raised another $158 million through its IPO and plans to buy a new $52 million Airbus A320 every five weeks through 2007? Can it stay efficient as it adds new destinations? As airplanes age? If unions come aboard? Won’t established carriers (or another upstart) try to best JetBlue at its own game?

The company’s early IT strategy decisions will continue to bring benefits for the next several years, says aviation consultant Klaskin. “When you start out small, you could actually operate by doing everything manually or putting in some single-use software systems. Or you could install cool, integrated technology that will cost you a lot more to start. That’s what JetBlue did. And a few years from now, that technology will really start to pay for itself.”

JetBlue leaders say they believe Klaskin’s view is the right one, though Cohen acknowledges, “It’s one thing to build a great organization and a great IT infrastructure, but it’s much, much harder to continue to make it a better organization and make it a better infrastructure.”

And Barger says JetBlue’s IT emphasis won’t flag as revenue hits $1 billion by next year or 2004. “Some people say airlines are powered by fuel, but this airline is powered by its IT infrastructure. We’re always looking at our technology and saying, Is there a way we can improve this? That’s the magic.”