* Service defined by close connection with customers
* Higher costs, investor questions pose challenges
* Pilot incident adds to JetBlue headlines
* Travel system wound tight; surveillance cameras on planes
By John Crawley and Patricia Kranz
WASHINGTON/NEW YORK, April 5 (Reuters) - JetBlue’s emergency response team barely had time to locate the Incident Operations Center at their new headquarters in Long Island City, Queens when they were summoned there to handle an emergency on March 27, a day after they moved in.
JetBlue pilot Clayton Osbon was behaving erratically on Flight 191 from New York to Las Vegas, running through the cabin screaming about religion and terrorists. Passengers tackled him in the galley. The plane had to be diverted to Amarillo, Texas, where a co-pilot guided it to a safe landing.
As the airline’s emergency response team gathered around a 24-seat conference table, the shades were lowered to darken the room. Soon, all eyes shifted to the main wall, where the company’s Twitter feed was projected in large letters.
“That’s how we got a lot of the early customer responses and their experiences,” said JetBlue spokeswoman Jenny Dervin. “As customer stories started coming in, we knew it was far more than just a medical emergency.”
Close connections with customers and a willingness to embrace popular technology is vintage JetBlue. It was the first airline to equip its entire fleet with seatback TV screens. Flight attendants pass out food during a delay; some even offer massages.
Into its second decade, however, JetBlue is not the darling it once was, with passengers or with Wall Street. Previously known for being inventive, contrarian and taking customer service to a new level, JetBlue has more recently made headlines for long delays that caused passengers to be stranded for hours.
While last week’s pilot meltdown was viewed as a rare incident that could happen on any airline, it could chip away at JetBlue’s reputation even though the carrier still maintains a relatively high level of customer service.
JetBlue loses few bags. Nor does it cancel many flights or oversell seats, government figures show. But its planes are older and require more work, competitors have shaped up, and the business is as tough as ever, with soaring fuel costs, higher fares, crowded markets and a weak economy.
“I think in many respects they’ve matured and part of the maturation process is when you’re a ten-year-old company, you have ten-year-old company costs. You’re not growing as rapidly as you used to,” said Robert Mann, an industry consultant and former airline executive.
Jet Blue shares were trading at under $5 this week, far below their peak of about $30 in October 2003 after adjusting for stock splits.
JetBlue is well managed and financially healthy, experts say, with a market value of roughly $1.4 billion. The airline captures about 5 percent of the U.S. market by revenue through 750 daily flights to 70 cities on 172 Airbus and Embraer jets.
But JetBlue is now facing head winds that will further test its strategic vision, employee morale and its service culture.
For starters, JetBlue’s big overseas shareholder, Lufthansa , floated notes last week that give investors the option of a cash payout or JetBlue stock in 2017. The $311 million offering signaled possible willingness by Lufthansa to cut its nearly 16 percent stake in its New York partner, depressing JetBlue’s stock. JetBlue posted higher-than-expected profit of $23 million for the fourth quarter of 2011. But rivals who used to lose tens of millions of dollars each quarter have made money, too. JetBlue’s stock trades at roughly 9.4 times projected 2012 earnings, while multiples for other major carriers range from 12.4 for Southwest Airlines, to 5.1 at United Continental to 3.9 for US Airways.
A leading airline analyst, Dahlman Rose & Co’s Helane Becker, has a “sell” rating on shares of JetBlue, one of only two airlines with that recommendation from her. The other had been Pinnacle Airlines, which filed for bankruptcy on Monday.
Becker says JetBlue has a respectable balance sheet and good management, and she believes the company has potential to do better. Bu t for now, she is sticking with early first-quarter analysis that noted competitive pressures JetBlue faces from Delta Air Lines at New York’s John F. Kennedy airport.
Becker also said maintenance requirements on JetBlue’s aging fleet would likely affect earnings growth this year.
JetBlue said it is sticking to its growth strategy despite heightened competition. “I am respectful of healthy competition, but I also believe there are plenty of customers in this industry,” said JetBlue’s chief administrative officer, Jim Hnat. “If you do it right you can win customer loyalty based upon brand and experience.”
JetBlue was founded in 1998 by David Neeleman, a frenetic former executive of Southwest Airlines, which succeeded with a simple operating philosophy and low fares. At JetBlue, Neeleman stressed better travel through informality and customer service for its core leisure markets.
JetBlue was aggressively marketed, costs were kept low, and it grew fast - a new plane every 10 days from 2000 to 2005. Unions, a force in the airline business, were not part of the mix. Neeleman wanted a team-based culture.
JetBlue went public in April 2002 and won the affections of Wall Street, with the company’s shares more than doubling in their first year and a half on the Nasdaq.
Planes were new, and routes were direct and not always contested. JetBlue made money while much of the industry collapsed into insolvency. Attempts by rivals to mimic it with spinoffs failed. JetBlue was a “giant slayer.”
Then its operational shortcomings caught up with it.
A 2007 Valentine’s Day ice storm in New York led to nearly 1,200 flight cancellations over several days and stranded passengers on planes with no food, water and overflowing toilets. A humbled Neeleman lost his job.
JetBlue was again in the news in August 2010 when a flight attendant, upset after an altercation with a passenger, bolted from a plane by deploying and sliding down an inflatable chute.
Then in October 2011, five JetBlue planes sat on a snowy tarmac in Hartford for hours, dredging up difficult memories for the company of Neeleman’s downfall.
Explanations vary as to why JetBlue makes unwanted headlines - three times now in less than two years. Joanna Geraghty, JetBlue’s chief people officer, said geography plays a role.
“The Northeast market is highly congested and highly competitive,” she said. “And the concentration of our network is Northeast and South focused, so if you get something like a Hurricane Irene, that can have a pretty strong impact on our operations.”
JetBlue’s huge Twitter following also plays a role, Geraghty said. “If there’s a hiccup, it gets played out in the media far more than other airlines’,” she said.
Two of the events, including last week’s emergency landing, involved the emotional health of workers during a stressful time for the airline industry.
“In the last year or two, passengers and crew members are acting as if they’re under a lot of stress,” Mann said. “There’s nothing about JetBlue, but it suggests to me that the entire transportation system is just wound a little too tight.”
JetBlue noted that it is the only airline that has video surveillance inside some of its planes (Airbus A320s). Cameras were installed primarily to keep tabs on passenger behavior (or misbehavior). But when Osbon left the cockpit last week, those cameras proved invaluable for another reason - the copilot was able to see the tumult in the cabin and galley on a video display without leaving the cockpit, and make the pivotal decision to lock the cockpit door.
“The cabin surveillance system is a huge asset,” said JetBlue Captain David Scott, who until recently was chairman of the airline’s pilot values committee.
Hnat said JetBlue’s growing pains were “natural” and helped it refocus. He characterizes its current state as a “growing-up phase” during which JetBlue will still seek to shake things up but not merge with another airline or change its culture.
Gary Chaison, a labor expert at Clark University, believes non-union employees at JetBlue must feel more pressure with profits shrinking, airline bankruptcies again making headlines, and more industry consolidation still possible.
“I think the workers are operating under some stress because they know the corporate culture says they are a joint partner in the company. They enjoy a special status, but I think they see it as not going to last forever,” Chaison said.
JetBlue’s Scott said pilots feel more secure after negotiating a new deal with management last November that built new safeguards into every pilot’s contract with management.
“The biggest fear of a pilot is to be furloughed or let go,” Scott said. “We’re scared of a sale.” One of the new provisions gives JetBlue pilots a voice in managing the seniority lists if the company is bought or merged. “It was a big deal,” he said.
In the past, JetBlue grew just by adding new destinations. That’s become tougher now. Former Continental Airlines Chief Executive Gordon Bethune said many attractive markets are already pretty full, and JetBlue’s biggest rivals are in better shape and much tougher competitively than they were a decade ago.
“There is no place to put an airplane where they don’t have competition. It’s harder to grow,” he said.