JetBlue Tries to Bounce Back from Storm of Trouble

NEW YORK -- When 130,000 JetBlue passengers had their February travel plans derailed by the airline's botched response to a winter storm, Russ Chew couldn't do anything but watch from his post as operations chief for the Federal Aviation Administration.

Now, Chew is JetBlue's COO. And he and a nearly all-new management team are working to make sure the 7-year-old carrier doesn't go the way of past start-ups whose promise faded when fast growth and intense competition unmasked perilous flaws at the first sign of adversity.

Before that widely reported and widely lampooned Valentine's Day debacle at New York John F. Kennedy Airport, change was already afoot at the airline that developed a fanatical following as it grew to be the USA's ninth-largest carrier in just seven years. But when ice-induced gridlock stranded planeloads of passengers on the JFK tarmac for up to nine hours, and thousands of passengers were stuck inside the carrier's terminal, the pace of change went into warp drive. The decision to hire Chew, an operations guru, is just the most visible sign of that.

While Chew goes about the job of whipping JetBlue operations into shape, newly named CEO Dave Barger, the only holdover from JetBlue's original senior management team, is focusing on financial performance. On May 10, company directors voted to remove founder and former CEO David Neeleman from the day-to-day operation of the airline. Neeleman remains as non-executive chairman, but last week, sold nearly a quarter of his JetBlue shares for more than $27 million.

JetBlue's financial performance had been slipping long before Valentine's Day. To make things right again at the once-profitable airline, Wall Street analysts say -- and Barger concurs -- that he'll have to get the airline's operating costs back under control, and in all likelihood, slow its growth.

JetBlue now is at "the point where it knows it has to make some changes if it wants to be around long term" says analyst Henry Harteveldt, who follows airlines for Forrester Research. "They have to evolve from a scrappy start-up to a more mature carrier."

Some of the changes:

*Customer rights. JetBlue has instituted the industry's first written guarantee detailing how passengers caught up in lengthy taxiway delays will be cared for and compensated. Vouchers for future travel will range from $25 to the full price of their ticket, depending on the length of the delay.

*Growth. To allow its management skills to match its fleet size, JetBlue has slowed its growth rate by stretching out the delivery of new planes coming from Europe's Airbus and Brazil's Embraer, and selling five Airbus A320s.

*Tickets. To make JetBlue more accessible to customers, it has begun selling tickets via conventional reservations systems used by travel agents and corporate travel managers, and third-party websites. Executives also are considering making tickets refundable, another move that would make flights more appealing to high-fare-paying business travelers.

*Strategy. JetBlue is looking to grow more in medium- and smaller-size markets that it already serves, such as Austin, Jacksonville, Fort Lauderdale and Pittsburgh, and similar markets where it does not yet fly. JFK will remain JetBlue's home and largest service point, if for no other reason than that metropolitan New York is the world's largest air market.

The carrier plans to open its new, larger terminal there in late 2008. But its growth strategy is changing subtly to markets such as Boston, Long Beach and Washington's Dulles Airport, where competition or congestion is less.

A maturing moment

Barger says the Valentine's Day chaos was probably a painful but necessary step in JetBlue's maturation, and vows, "We're going to be a stronger company as a result."

Already, "a lot of good things have happened since Valentine's Day." One month later, on March 16, he says, an ice storm shut down operations at JFK. Yet, because of operations changes made before Chew arrived, Barger says, "The next day ... we had a flight completion factor of 98%. I'm very proud of that."

That didn't happen Feb. 14.

JetBlue's astonishingly slow response to a surprisingly severe storm stranded more than 1,000 passengers on nine planes stuck on taxiways at JFK for six or more hours.

Less noticed was the fact that several thousand travelers were stuck for hours -- days in some cases -- inside JetBlue's terminal, where food, water and clean restrooms were quickly in short supply.

The nightmare spilled over into a second, then a third, then a fourth day. It was a week before JetBlue's operations returned to normal. In all, about 1,200 flights were canceled. It cost the airline $41 million in lost revenue, extra costs and vouchers for free travel.

A month later, Chew came onboard and began rewiring the airline's central nervous system -- called the System Operations Control center -- with new technology, policies and people.

The airline has beefed up its weather-forecasting capabilities. The first steps have been taken to allow customers who buy their tickets via the company's website to rebook themselves or get refunds in the event of flight disruptions. New managers and procedures are in place at the carrier's key choke point, JFK.

Chew also has set out to change the airline's mindset to instill what he calls "corporate discipline."

For example, JetBlue officials used to proclaim that they rarely canceled flights because of weather. Flights might be hours late, but passengers eventually reached their destinations. That philosophy won the loyalty of many travelers. But while well-intentioned, Chew says, that policy betrayed a lack of corporate discipline.

The old way placed the needs of several hundred people to get to their destinations ahead of the larger imperative of preventing delays from piling up and disrupting the carrier's entire operation, a situation that affects thousands.

"JetBlue had grown so quickly that they were really unaware of how vulnerable they were to what I call a 'zero departure rate,'" Chew says. Unlike its early days, when its departures were few and spaced out, JetBlue today sees about 1,500 passengers arrive at JFK in an hour, and 1,500 others depart. When delays happen, "In two hours, the number of people at the airport goes to 6,000. In three hours, it's like 9,000. Before long, you've gridlocked the entire airport and crippled our entire operation for a day or longer."

Barger says the biggest lesson from the Feb. 14 storm has been that "sometimes, Mother Nature wins," but when she does, "Make sure it's just a one-day event."

Not so shiny now

JetBlue once was a Wall Street darling, both for its promise and its early profitability. Both began fading after its wildly successful 2003, when it earned $103 million. Profits dropped to $46 million in 2004.

Then a $20 million loss in 2005 set in motion the change process already underway when the Valentine's Day disaster struck. Since November 2005, JetBlue has replaced or transferred within the company not only its CEO and COO but executives in charge of marketing, technology, planning, finances, law, purchasing, flight, government affairs and human resources.

Its declining results have been, in part, the result of factors beyond JetBlue's control -- the run-up in fuel prices, the resurgence of conventional airlines that lowered their costs, rapid expansion by rival low-cost airlines and a slowdown in the growth of domestic air travel demand. But JetBlue's missteps have been a factor, too.

It lost money taking on the likes of American, United and Delta on transcontinental routes, and fighting Delta's now-defunct Song unit, US Airways, AirTran and others on leisure-oriented routes along the East Coast. JetBlue actually won or held its own in all those market battles. But during that time, Southwest, the big kahuna of discounters, was able to establish itself in Philadelphia and Denver, potential JetBlue growth markets.

Worse, JetBlue's own costs rose sharply by the industry's key measure: flying a single seat one mile. In the first quarter of this year, JetBlue's cost for every seat mile rose to 8.43 cents, up from 6.1 cents in 2003, a 38% jump in about three years.

Those cost increases are tied to JetBlue's breakneck growth. Its fleet ballooned from 53 planes at the end of 2003 to 119 at the end of 2006. This year, the fleet is expected to reach 141 aircraft.

And despite the steps taken to slow its growth, JetBlue still has firm orders for 76 more 150-seat A320s through 2013, and 73 more 100-seat E190s through 2015. If it exercises all its purchase options, JetBlue's fleet could swell to 451 planes by 2015. By contrast, United, the USA's second-largest airline, has 461 mainline jets.

Still trying to stand out

Harteveldt says the trick for JetBlue will be to somehow hang on to the uniqueness that made it the toast of both Wall Street and Main Street in its early days. But it can't rely solely on its offering of LiveTV at every seat, extra legroom and its signature in-flight snacks to keep customers happy.

"There's more to a positive customer experience than 36 channels of LiveTV and serving blue potato chips," he says. "If the public doesn't believe that JetBlue is reliable, they could have a million channels of LiveTV and nobody would buy a ticket."

Loyal JetBlue customers seem to accept that the airline has to change as it grows, even though only a tiny percentage were directly affected by the carrier's February fiasco.

Yet they worry the carrier they fell in love with might change too much.

"I do wonder if they can keep their service quality high as they grow older," says Sammy Tawil, a sales executive at a Port Reading, N.J.-based importer. "Or will they become just another airline?"

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