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selecta · Member Joined: 24 Dec 2006 Posts: 813 Location: ORD

By ALAN MURRAY
The Wall Street Journal
February 21, 2007; Page A13
source

According to his biographers -- at age 47, he already has two -- JetBlue founder and Chief Executive David Neeleman has suffered all his life from attention-deficit disorder, for which he refuses medication.

That could explain why he got into the airline industry. Had he stopped long to think about it, he might have directed his talents elsewhere. Airlines are a lousy business.

Fixed costs are high while the marginal cost of selling one more seat is low, and barriers to new entrants -- at least in the U.S. -- are scant.

The result is ruinous competition, with companies bidding prices too low for anyone to make money. Airlines are left scrambling to find passengers willing to pay above-market prices, and praying they won't be hit by one of the periodic events beyond their control that destroys the business: recessions, terror attacks, oil-price spikes, or, as Mr. Neeleman discovered last week, an ill-timed snowstorm.

It's a testament to the indomitability of the human spirit -- or perhaps the obdurateness of the human ego -- that hardy entrepreneurs keep venturing into this morass. Since the airlines were deregulated in 1978, close to 100 U.S. airlines have come and gone. Meanwhile, most of the big survivors have done a turn in bankruptcy court.

It's that sad history that prompted investor Warren Buffett to quip that capitalism would have been better served if someone had shot down the Wright Brothers over Kitty Hawk. Or Virgin Atlantic owner Richard Branson to say the best way to become a millionaire is to "start as a billionaire, and then buy an airline."

Once upon a time -- a week ago, to be precise -- Mr. Neeleman was regarded as a different breed. His vow to "bring humanity back to air travel" was more than an empty slogan; it was backed by action. Business-school professors praised his egalitarian vision and the company's unique culture, in which all passengers were treated as "Customers" -- capitalized, to emphasize their importance -- and all employees treated as "crew members."

A Harvard Business School case study in 2001 approvingly quoted Ann Rhoades, then the company's "executive vice president for people," as saying: "To me, the most important element was caring. I want JetBlue to care about our people from end to end."

Employees who were treated well, the company believed, would treat customers well.

For a while, that formula worked. The airline grew rapidly and earned the loyalty of passengers and investors alike. Then, in late 2005 and early 2006, rapidly rising costs pushed the company into the red. In response, JetBlue launched a program it called "RTP" -- return to profitability. The company found some $48 million in cost savings and cut employee head count per airplane by 14%.

In response, the stock price soared to nearly $17 a share in mid-January from just above $9 in early October.

Then came the Valentine's Day massacre: 10-hour waits on the runway, a string of last-minute cancellations, and a general systems breakdown that turned "Customers" into a screaming mob, and caused teary-eyed "crew members" to call security for their own safety. In five days, some 1,000 flights were canceled. And when it was over, JetBlue was just another airline -- or worse.

JetBlue's meltdown lasted days after the snow had stopped falling. Mr. Neeleman's promise to bring "humanity back to air travel" went into reverse. Late-night television comic David Letterman joked that passengers who were forced to sit on a runway for 10 hours in New York would be compensated by getting "a free voucher to sit on a runway for 10 hours in Miami."

Yesterday, Mr. Neeleman argued in a flurry of media appearances that there was an "easy fix" to the airline's problems. I doubt it. The cost of reimbursing displaced people will pass, and disgruntled passengers will, in time, return. But my guess is efforts to implement the airline's new "Customer Bill of Rights" will put a crimp in its cost cutting. Preparing for the unexpected, after all, involves redundancy. At some point, there's a trade-off between low costs and customer service.

As a result, JetBlue is likely to float in and out of profitability like its elder brethren, leaving it to yet another hearty pioneer to try and finally discover an airline business model that works.
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