JetBlue's Friendly Skies

In recent columns, I've discussed how JetBlue's (NASDAQ:JBLU) low cost structure and outstanding customer service give it an edge over other carriers. At the root of both is JetBlue's corporate culture, which, nurtured properly, could provide an enormous long-term competitive advantage.

Two years ago, I addressed this topic in "Corporate Culture Impacts Profits:"

What is culture? The word has many definitions, but Merriam-Websters has the one I'm looking for: "The set of shared attitudes, values, goals, and practices that characterizes a company."

It's easy to think of companies -- Wal-Mart (NYSE:WMT), Home Depot (NYSE:HD), Starbucks (NASDAQ:SBUX), and Southwest Airlines (NYSE:LUV) come to mind -- with strong cultures. At such firms, I find, employees care about the company, each other, and customers. They share information and cooperate. They feel good about their jobs and are willing to go the extra mile.

I can't stress enough the importance of a strong culture in a tremendously labor- and service-intensive industry like the airlines. In the words of one long-time United Airlines (NYSE: UALAQ  ) pilot:

People can focus on CASM, RASM, yield, stage length, turns, you name it. The real reason things are going well at JetBlue, at least looking at it from the other side of the fence, is the human relations and values of management. Why are Southwest and JetBlue profitable, when much of the rest of the industry is unprofitable? There are many factors, but among the most overlooked are their motivated, passionate workforces. By focusing energy on their employees, Southwest and JetBlue may have found the secret ingredient to airline success.

The dysfunctional airline industry
I've studied countless industries in my career and have never encountered such awful labor-management relations and dysfunctional cultures as we find in the airlines (though steel is a close second). Stanford Business School Professor Jeffrey Pfeffer agrees, noting in a 1994 article:

In the United states, with few exceptions (Southwest and Delta being two), most airlines have followed practices with respect to their employees that are, for the most part, diametrically opposite of what would be required to achieve competitive advantage through people -- and this in a service industry.

One doesn't have to look far to find examples. Rick Dubinsky, until recently head of United Airlines' pilots' union and board member of UAL Corp., once wrote to his fellow pilots: "The forces marshalling against you [e.g., management] are deadly and determined. They are cold, calculating, powerful, well-schooled, professional, patient, and they do have endurance." He also famously quipped of his negotiating philosophy: "We don't want to kill the golden goose. We just want to choke it by the neck until it gives us every last egg."

Problems are not unique to United. A long-time pilot for Delta (NYSE: DAL  ) , long regarded among the major carriers for its relationships with employees, wrote recently in a letter to an Atlanta newspaper: "How befuddling that a corporation would spend money to hire a consulting firm to improve its image with its employees. Seems like just treating the employees in a fair and honest manner would have accomplished the same thing. The Delta pilot group consists of about 90% former military officers. Rule one for an officer is that you take care of your troops before you take care of yourself."

And what did American Airlines (NYSE: AMR  ) do in April? At a time when the airline was hemorrhaging cash, CEO Don Carty called for "shared sacrifices" to avoid bankruptcy. Yet only days after the unions narrowly voted to accept $1.62 billion in annual concessions, they discovered that management had just paid itself large executive retention bonuses and pension protections. This unbelievable burst of insanity cost Carty his job and speaks to the "let's-look-out-for-ourselves-and-to-hell-with-the-employees" attitude that pervades the industry.

A good company
On a cross-country flight earlier this year, I had a long talk with a JetBlue flight attendant who used to work for United. She told me that while her base pay is lower, she makes it up by working overtime and participating in the stock purchase plan. She likes working for JetBlue because the company treats her well, she is already quite senior (meaning that she has her pick of routes), and her fellow flight attendants work as hard as she does.

By contrast, at United, she said relations with management were terrible, and she was often frustrated by burnt-out, unmotivated colleagues who -- knowing that their union would protect them -- were rude to passengers or simply sat at the back of the plane during the bulk of the flight. I also interviewed a JetBlue telephone reservations agent when I booked a flight a few weeks ago. She had been with JetBlue for a year and said "I enjoy working for them very much. The people are very nice. It's a good company with good benefits."

Cultural differences
When it comes to building and nurturing a strong corporate culture, there is no magic bullet -- rather, it depends on doing dozens of little things right every day. Here are the keys to JetBlue's success:

  • Culture begins with a set of values. Early on in the planning process, 20 members of JetBlue management met for two days and settled on five core values: safety, caring, integrity, fun, and passion. Today, JetBlue's web site notes, "These five values not only differentiate JetBlue's product; they result in a superior customer and crew member experience."

  • Leadership at the top is critical, and JetBlue's CEO David Neeleman is a master motivator. He takes every opportunity to acknowledge and thank his employees, reinforcing his words in the latest annual report: "At JetBlue, we operate under the belief that great People drive solid operating Performance which yields continued Prosperity. Our People are the foundation on which our success is built." Another time, he noted, "We didn't build our company on the backs of our people, and we never will. We will always put our people first, before our customers and our shareholders."

  • The rest of JetBlue management is on the same page. For example, President Dave Barger, who worked for Continental (NYSE: CAL  ) and New York Air and whose father was a United pilot, notes, "In this business you look at the landscape of shrapnel that's out there between labor and management, and if you can't learn from that, you're brain dead."

  • Neeleman and Barger attend most new employee orientation sessions, fly the airline frequently, help load baggage, take tickets, and so forth. Sure, much of this is public relations, but image matters.

  • JetBlue hires very carefully. With so many major carriers laying off tens of thousands of employees, JetBlue has the luxury of being extremely selective.

JetBlue is no doubt benefiting from the excitement and esprit de corps associated with a new, rapidly growing company. It will be a tremendous challenge to maintain this strong culture as JetBlue ages. Still, management provides the right incentives: JetBlue contributes 15% of its pre-tax income to a profit-sharing plan, which last year translated into a 15.5% bonus for all employees. In addition, there's a generous stock purchase plan, with nearly 70% participation overall, plus new pilots get 6,000 stock options.

Bringing it on home
Thinking about corporate culture might sound "touchy feely," but I would argue that few factors are more important to a company's -- and its stock's -- success. This is especially true in the airline industry, where a long-time pilot assures me:

Network airlines like United and American have lost sight of the people behind the numbers. In a service industry, motivated employees can help generate a profit, while unmotivated employees can contribute to a loss.

In need of impassioned leadership to overcome an epidemic of low employee morale, too many major airlines focus on self-preservation rather than solid corporate vision. So long as they continue to do so, with each cultural misstep, Southwest, JetBlue, and others will gain market share, one dissatisfied customer at a time.

Whitney Tilson is a longtime guest columnist for The Motley Fool. He did not own shares of the companies mentioned in this article at press time, though positions may change at any time. Under no circumstances does this information represent a recommendation to buy, sell, or hold any security. Mr. Tilson appreciates your feedback at Tilson@Tilsonfunds.com. The Motley Fool is investors writing for investors.


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