In 1903, the Wright brothers first successful flight in Kitty Hawk, North Carolina, marked the beginning of

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In 1903, the Wright brothers‘ first successful flight in Kitty Hawk, North Carolina, marked the beginning of the aviation industry. Although using airplanes for travel purposes did not become popular until after WWI, a new industry was born. The first air transport company was The American Aviation Corporation, which largely transported goods and materials all over the country. This would later grow into American Airlines and United Airlines. A major factor in the growth of the air transportation industry during this time was the development of a mail transport system by the U.S. Postal Service. The Kelly Airmail Act of 1925 gave private airlines the opportunity to function as mail carriers through involvement in a competitive bidding system. These private carriers, through the airmail revenue, could then expand into carrying other forms of cargo, including passengers. With the United States’ entry into World War II, commercial fleets and pilots were sent to Europe to participate in the war effort. The war also helped to generate support for research and development of aircraft, which extended beyond the war to commercial aviation. A major post–war development was the four-engine aircraft, such as the Lockheed Constellation. This innovation substantially cut the flying time for ocean and continent crossings. The 1950s saw dramatic improvements in the capacity and comfort of commercial flights. Planes were modernized, and jet service was introduced in 1959, enabling even faster cross-country service. The most rapid change for the U.S airline industry came in 1976 when the Civil Aeronautics Board asked Congress to dismantle the economic regulatory system and allow the airlines to operate under market forces. This changed the face of commercial aviation in the United States. Congress passed the Airline Deregulation Act in 1978, easing the entry of new companies into the business and giving them freedom to set their own fares and fly whatever domestic routes they chose. And thus, the battle of the airlines began. New entrants swarmed the market, offering lower fares and new routes. However, in the late 1970s into the 1980s, a few major airlines dominated the U.S market. Continental, United, Delta PanAm, Eastern and American were household names. Smaller, low cost airlines were having trouble breaking into the market, and rarely survived. But change was on the horizon. In 1989, events began to unfold which severely damaged the economic foundations of the industry. The Gulf War crisis and economic recession in the United States caused the airlines to lose billions of dollars. The industry experienced the first drop in passenger numbers in a decade; by the end of the three-year period of 1989–1992 it had lost almost $10 billion. It became apparent that airlines would have to change radically to ensure their survival and prosperity. With this revelation, the “low-cost carrier” sector of the airline industry started to gain popularity.

Low-Cost Carriers

A low-cost carrier, also known as a “no-frills' ' or discount airline, offers low fares in exchange for eliminating many traditional passenger services. These airlines have a lower cost structure than competitors. They often operate a single passenger class (coach) and fleet, reducing training and servicing costs and have simplified routes and turnaround times. They tend to fly to cheaper, less congested airports, and offer customers a simple fare scheme and unreserved seating. They also have labor costs that are 30% to 40% lower than mainline carriers. The main target of these airlines are price-conscious consumers. Services such as complimentary food and beverages are traded for the option to buy snacks and soft drinks, as well as alcohol at a low price. Although low-cost carriers are a relatively new offering in air travel, the concept was actually formed and implemented in 1971, when Southwest Airlines launched its first airplane, providing service between major cities in Texas. However, it would take 20 years before the idea of low-cost carriers operating flights all over the country would take root. Southwest Airlines remained relatively unchallenged in the U.S. low-cost carrier sector of air travel until the inception of JetBlue in 1999. Until then, Southwest was going head to head with the major U.S. airline carriers. The major carriers attempted to fend off Southwest through allegedly anticompetitive behavior and by creating low-cost subsidiaries such as United Express, Continental Lite, and Delta Express, which eventually all failed. Even with new competition, Southwest remains the most successful low-cost airline in the United States and the most copied in the world. The founders of RyanAir in Europe and JetBlue in the United States actually flew to Texas to observe how the company was operated, taking this knowledge with them to start their own low-cost airlines.

JetBlue Airways

Founded in February of 1999, JetBlue Airlines was the darling of former CEO David Neeleman. JetBlue entered the airline industry with a multitude of advantages that even Southwest did not have. The company started with the largest initial capitalization of any airline, with over $160 million dollars. Likewise, powerful New York politicians, upset with high intra-New York state fares, provided JetBlue with a remarkable 75 slots at JFK airport. The airline’s home base was JFK, and in 2001, it began operations out of California’s Long Beach Airport. From the beginning, JetBlue competed with major air carriers on the East Coast (and later West Coast) and was formidable. JetBlue had a very similar business model to that of Southwest, yet its fleet was newer and was outfitted with live satellite TV at every leather seat. The company also did not have labor relations issues to deal with, as its workforce is non-unionized. In the months following September 11, 2001, terrorist attacks proved to be the most profitable for the company. JetBlue was one of only a few U.S. airlines that made a profit during the sharp downturn in airline travel following the attacks. The stock price was growing and so were profits. Financial results were strong for the airline throughout the 2002–2004 years, but they would not last. In October 2005, JetBlue announced that its quarterly profit had plunged from $8.1 million to $2.7 million largely due to rising fuel costs and “growing pains.” The growth rate for the company was becoming unsustainable, yet despite this, JetBlue kept expanding, buying new aircraft and adding routes. It was this rapid growth that led JetBlue into one of the most embarrassing and unforgettable fiascos in the company’s lifetime, one that would raise questions about customers’ rights and the ethical and moral obligations of companies in this industry. It was known as the “Valentine’s Day Nightmare.”

The Valentine’s Day “Customer Disaster”

On February 14, 2007, a severe ice storm hit the New York area. Many airlines had canceled flights ahead of time as a precaution for passengers and aircraft. One airline that did not cancel flights was JetBlue. The company thought the weather would break and it would be able to fly, keeping its revenue flowing and its customers happy. This decision was a costly error. As the storm progressed, 10 JetBlue airplanes found themselves full of passengers and unable to take off. Planes literally became frozen to the tarmac and could not get back to the gates. Information from air traffic controllers was not coming in and the pilots had no instruction. Some planes sat for more than 10 hours on the runway. Toilets on the planes began to back up, overflowing into the aisles, air ventilation was stopped, and passengers had little to no food. Many of these passengers were families with young children who were on their way to numerous destinations for the school vacation week. The flight crew gave no answers, and there were no buses dispatched to rescue the passengers. Frustration and anger began to mount. For some, this ordeal would end short of the record, held by Northwest Airlines, who in 1999 held their passengers on board for 11 hours. The situation inside the airport was not much better. Hundreds of passengers waited in hours-long lines for information on their flights. There were not enough JetBlue associates to direct and inform the mass of people, and JetBlue’s 1–800 number could not handle the flood of calls. Passengers who had not yet boarded planes were stranded and slept in the airport. Most flights had been canceled. It was chaos. When it was all over, JetBlue was left to deal with irate customers, overwhelmed employees, more than 1,000 canceled flights (23% of overall flights as a result of the February 14 event), $30 million in losses for refunds and travel vouchers issued to passengers, and incremental costs such as hiring overtime crews. JetBlue also had one very large blemish on its reputation. The company had some answering to do. It was a corporate and public relations nightmare.

The Aftermath

Then-CEO David Neeleman immediately took responsibility for the crisis, apologizing in a formal letter, stating that he was “humiliated and mortified” by the breakdown in the airline’s operations and that the company had “learned a huge lesson” and vowed to do right by the company’s customers. Neelman called the fallout of the ice storm a “defining moment” for the airline and said the company was implementing new policies and adding management to improve operations. One of these new policies was the “Customer Bill of Rights,” which stated that JetBlue, among other things, vowed to reimburse passengers impacted by ground delays and to remove passengers from planes left on the runway for more than 5 hours. The company also reviewed and published its code of ethics. Neeleman stated that “This is going to be a different company because of this.” Yet, some customers and members of the public felt this admission and implementation of new policies was too little, too late. Some called for Neeleman’s resignation, but he stated he had no intention of stepping down from his post. So, what exactly led to this disaster for JetBlue? There are many theories, but the company admitted that it had made mistakes, especially in regard to its communications system. Neeleman stated that “the company’s management was not strong enough” to handle the fi asco largely due to the “shoestring communications system that left pilots and flight attendants in the dark, and to an undersized reservation system.” This system became overwhelmed, with customers unable to get through to human agents to check on a flight.” Additionally, the company admitted that it “lacked the trained staff to find all of the attendants and pilots and tell them where to go.” JetBlue was often cited as a favorite among passengers and had expanded rapidly, but its systems to deal with the consequences of bad weather did not keep up with the growth. The company’s low-cost operating structure, a source of great pride, may have ultimately led to this unfortunate event. Since Valentine’s Day Nightmare, JetBlue has followed through with its promises, training existing corporate office employees to work in operational modes during an emergency, beefing up the company’s management, and enforcing the Customer Bill of Rights. Yet, one year later, questions still remain about the obligations that airlines have to their customers. In extreme situations, do airlines have a moral or ethical obligation to their passengers? How can a company like JetBlue bring “humanity back to air travel,” when the bottom line and cutting costs and fares in this industry is paramount?

Questions for Discussion

1 What went wrong with JetBlue on Valentine’s Day, 2007?

2 Was this event a “business-as-usual” problem, or was it something out of the ordinary? Explain.

3 Who was to blame for the problems that occurred? Why?

4 Were there any pre-crisis signs that the company would respond the way it did? If so, what were the indicators of a potential crisis reaction?

5 Evaluate JetBlue’s handling of the “aftermath” of the event.

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