Allan Sloan: Lessons From JetBlue's Meltdown

In its brief but glorious life, JetBlue Airways has become a business-school case study. Business junkies everywhere have praised the customer service, new planes and clever marketing that turned JetBlue from a concept into the nation's eighth biggest airline in only eight years. But now that JetBlue has bungled its way into a Valentine's Day customer massacre and become the butt of late-night comics' jokes, there are two more lessons it has to teach us. First, if you're going to screw up, don't do it in the nation's biggest media market during a slow news week. Second, airlines are an unforgiving, financially dreadful business that have been net money losers for 60 years.

Here's the deal. Unless you haven't watched TV since mid-February, you know that on Feb. 14, JetBlue ended up with thousands of passengers trapped at New York's JFK airport, the hub of its operations. This became continuous TV fodder because it was a slow week for news and New York's got lots of camera crews. Inexcusably, JetBlue let its problems repeat like a bad pastrami sandwich: it had up to 5,000 angry customers at JFK's Terminal 6, some of whom were stuck there for days. There were also 2,500 pieces of misplaced—and oh-so-telegenic—luggage.

"We ran into an operational death spiral," says JetBlue spokeswoman Jenny Dervin. "We let our customers down, and we're terribly sorry it happened." The company is saying all the right things, and trying to do them. It's adopted what it calls a "customer bill of rights" that provides varying levels of compensation to customers depending on how badly JetBlue screws up their travel plans. But it remains to be seen if JetBlue can recover its major asset: its reputation for awesome customer service.

There's been lots of focus on how much the debacle will cost JetBlue, which last week reduced its profit projections for this year. JetBlue projects its cash outlay for the storm problem at $14 million—$10 million in passenger refunds, the rest for overtime and such. Even when you include those apologetic ads the company bought, it's small change: JetBlue had $699 million of cash at year-end and revenue of $2.4 billion. So you're talking about a loss of 2 percent of its cash and a few days of business—nothing approaching a mortal blow. JetBlue also gave customers $16 million in travel vouchers, but vouchers aren't the same as cash.

JetBlue had run into financial headwinds well before the February ice storm hit. In its high-flying days of 2003, it earned more than $100 million. But as the company expanded rapidly, it became harder to manage. Fuel costs started rising, profits lost altitude, losses hit in 2005 and 2006. I think JetBlue's fundamental problem is that despite its advantages—it started life with a ton of cash from investors like George Soros, it bought new planes rather than old relics, it's got a smart and charismatic leader in David Neeleman—it's in a truly terrible business.

Consider this: since 1947, the first year for which the Air Transport Association has profit-and-loss figures, the U.S. airline industry has lost a cumulative $14 billion. And that's after including the up to $3 billion the association estimates that airlines made last year.

"Grocery stores give you better returns [than airlines]," says the Boyd Group's Michael Boyd, a Colorado-based airline expert. "Airlines are a crummy business, and will always be a crummy business." When people ask about starting an airline, Boyd told me, "first, we say no. Then, if they still want to do it, we say, 'Only if you're using your ex-wife's money'."

I'll spare you the details of how JetBlue got into big operational problems when the huge ice storm hit New York on Feb. 14, and didn't turn to rain and snow as JetBlue expected. What still intrigues me is how a smart, customer-focused outfit like JetBlue shut down service to markets like Richmond, Va.; Raleigh-Durham, N.C.; and Portland, Maine, that are an easy one-day drive from New York and let those passengers sit in JFK for days instead of chartering buses. JetBlue's Dervin says it's because the company felt that roads were still unsafe for days after the storm.

A final note: Amtrak runs trains from New York to Richmond, Raleigh and Portland. I should have asked JetBlue why it didn't put its passengers on trains, but even I—an Amtrak Select Plus customer, yet—never considered rail service as an option. The lesson: we think of government-owned Amtrak as money-losing socialism, but the money-losing airline industry as a bunch of noble capitalists. Maybe we should re-examine our national transportation policies the way JetBlue is rethinking its customer-service policies.

Allan Sloan: Lessons From JetBlue's Meltdown | News