This article discusses the importance of investor perspective when thinking about leading during a crisis, and uses JetBlue as a case study.
All businesses that require capital to operate—just about all businesses, that is—will be watched closely by those who provided the capital. This is simply a reality of business.
As the Valentine’s Day winter storm approached, how did JetBlue leaders view the interests of their investors? How did these interests influence the decisions of the leadership team?
It would be easy to look at JetBlue’s decision to try and operate, in very difficult conditions, while all of its competitors had ceased operations for the first two days of the President’s Day holiday, as a purely financial decision. In reality, of course there was pressure on the JetBlue leadership team to deliver some financial returns to their investors.
For some perspective on this pressure, JetBlue had delivered a total net loss of $20M in 2005, due largely to increases in fuel costs. In 2004, the airline had paid, on average, $1.06 per gallon of jet fuel. In 2005, the price had risen to an average of $1.61 per gallon. This 52% increase in fuel prices multiplied by the 303 million gallons that JetBlue burned during the year meant that the company spent almost $167M more on fuel than it would have at the prior year’s price. The airline was able to raise prices moderately and find other efficiencies to offset some of the increase in fuel costs, but were still left with a $20M loss. In 2006, JetBlue again faced increasing fuel costs. For the year, on average, the fuel price per gallon was $1.99, significantly higher than the prior year’s average price of $1.61 per gallon. This added, all in, about $145M in costs to the company’s balance sheet. In an industry with typically thin margins and very little power to increase ticket prices as costs increase, it was somewhat miraculous that JetBlue was able to trim its net loss for the year to $1M.
The message to JetBlue’s investors going into 2007 included references to how the company’s operating margins for the past two years had been better than all but one of the major airlines operating in the United States – and that was Southwest Airlines. Company leaders also told investors that JetBlue’s load factor (i.e., percentage of seats filled by paying customers) was higher than all major US carriers for the two prior years and that the company’s flight completion factor (i.e., scheduled flights that were actually completed), incident and accident rates, denied boarding rates, and mishandled or lost baggage rates were all the very best of any airline operating in North America. JetBlue leaders were talking a pretty big game because, in performance categories other than profitability, JetBlue was objectively the best airline in the country. This is not to suggest that profitability isn’t important, because clearly it is. But if JetBlue’s performance in virtually every category was better than its competitors and the company was still unable to make a profit, something would have to change for the entire industry to survive – and when it did, JetBlue was in a great position to benefit from it.
Thus, going into 2007, investor expectations of JetBlue were on the rise. The airline was well positioned and performance metrics were all trending in the right direction. Two years had been spent leaning out operations and developing new procedures in all areas of the company to drive cost efficiencies. Fuel prices were still somewhat volatile, but after the last two years of significant increases, the consensus was that the forward-looking pricing curve was projected to flatten. Things were looking very promising.
Most people understand how the investor market tends to view company performance by quarter. And, yes, while today’s market has more traders than ever that make investment decisions on periods much shorter than three months, financial reporting is still typically anchored to quarterly updates. So, for JetBlue, the first quarter of 2007 was going to be very important for investors.
At that time, JetBlue was still very much a leisure airline. Most customers flew JetBlue for vacations, not necessarily for business. What does that say about when JetBlue generates most of its revenue? JetBlue typically operated with negative margins during the week, and with positive margins on weekends and holidays. The summer season was always very good for JetBlue, while the first quarter of every year was driven by how well the company performed over what are typically two Q1 holidays in the United States – President’s Day weekend in the middle of February, and Easter, which falls toward the end of March or in very early April each year. Unfortunately for JetBlue, given investor expectations, Easter 2007 was going to fall on April 8th, which meant the entire Easter Weekend holiday was going to contribute to second quarter earnings, not first.
Why is all of this so important to review when talking about high stakes leadership? Two reasons. One, as an illustration of how important it is for an organizational leader to understand the company’s financials. If you are going to engage investors as true stakeholders and not just stockholders, you need to understand their interests and how to communicate with them in terms of those interests. The second reason is to help you understand the financial circumstances for JetBlue leading up to the President’s Day holiday weekend. Was the company’s decision to fly that weekend, while its competitors had cancelled everything, a financial decision? Of course, it was. But it wasn’t exclusively a financial decision. JetBlue leaders truly believed that other stakeholders – customers, crewmembers, and politicians who represent communities that depend on tourism, in particular – wanted JetBlue to operate if it could do so safely.
From an investor perspective, not operating – especially if the weather ultimately didn’t deteriorate to the point that would have precluded flying – was not in their best interests. So, JetBlue attempted to operate, and failed. As the failure was playing out, what do you suppose investors wanted to know? As JetBlue’s operation deteriorated, how were investors calculating the threat to their value proposition with the airline? The answer is not rocket science. As the crisis escalated, investors first thought about lost revenue. As delays began to extend and flight cancellations became a requirement simply due to unavailable crews and equipment, investors saw short-term lost revenues.
As cancellations increased and a public relations crisis began to form, investors now started to worry not only about lost revenues, but about remuneration, regulatory penalties and fines, and after a couple of days, they began to question the long-term potential brand damage as seen through the eyes of customers, employees, and other investors.
As the Valentine’s Day Massacre played out, JetBlue leadership could almost sense the collective gasp from their investors. In the spirit of effective crisis management, what does a company tell investors when it’s in the middle of something like this? Perhaps most importantly, the company can’t relax its total focus on stopping the bleeding just to communicate with stockholders. That said, as soon as the tourniquet has been applied and the primary crisis has been extinguished, company leaders should do what they can to address this stakeholder group’s concerns.
In messages sent through the company’s own channels – such as general and targeted emails and through various media channels – JetBlue informed investors why they should still have confidence in the company. JetBlue corporate communications shared timing details of when the crisis was largely resolved, so short-term losses could be calculated. Investors were used to, although they didn’t like, the short-term impact of weather or air traffic-related cancellations. Therefore, three days of lost revenue to the storm of the century was easy to explain. The other three days, however, and the long-term potential brand damage, on the other hand, were much more difficult to justify.
JetBlue leaders ultimately owned the issue, demonstrating integrity. They explained what went wrong and why it wouldn’t happen again; hopefully easing concerns about re-occurrences and impact on mid-term earnings. Also, for what it was worth, they reminded investors that Easter was a bonus holiday in the second quarter and that the airline expected Q2 earnings to be solid as long as – and this was a big question in the minds of investors – the company could restore the confidence of customers (and employees, and politicians – but mostly the confidence of customers). This was one big reason JetBlue brought forward the first ever Customer Bill of Rights. JetBlue’s CEO had taken the concept to the US Congress prior to this, as an effort to raise levels of accountability among airlines for their poor customer service. But now was a chance to bring it forward again as a mechanism to restore trust.
It seemed to work. Customers and investors alike beat up JetBlue for the meltdown, but largely applauded the company’s response. Decision-making leading up to the crisis was questioned for many months afterwards, but decision-making during the airline’s recovery is still, to this day, regarded as some of the best ever seen in the sector.
This somewhat longwinded story offers a good sense of how JetBlue understood and engaged investors during and after the meltdown. Hopefully, it also generates some thinking about how leaders at any company might build relationships with their investors to demonstrate an understanding of their interests and to build a reserve account of trust that may have to be drawn upon during a particularly challenging time in the future.