Being the CEO of a publicly traded enterprise requires a delicate balancing act to keep multiple stakeholders happy, namely shareholders, customers and employees. Dave Barger has been walking this tightrope for seven years as CEO of jetBlue, doing an admirable job building a profitable, growing airline that customers love to fly. This year, jetBlue earned the J.D. Power award for highest customer satisfaction among Low Cost Carriers in North America for the 10th straight year, reflecting the airline’s numerous customer-friendly perks:
According to Bloomberg BusinessWeek, “several analysts have consistently suggested the shares are depressed because of Barger’s focus on passenger-friendly initiatives that leave shareholders at a disadvantage.” Fortune Magazine echoed these sentiments, reporting “above all, {analysts} hate that JetBlue provides the most leg room of any domestic U.S. carrier in coach, with a seat pitch of 33 inches standard. By comparison, the legacy carriers have cut their seat pitch in coach down to 30 inches, which has allowed them to stuff more seats on their planes… {Analysts} view Dave Barger, JetBlue’s chief executive, as being “overly concerned” with passengers and their comfort, which they feel, has come at the expense of shareholders.” Wolfe Research chimed in with additional advice to management: “JetBlue has ample opportunities to unlock value including a first checked bag fee, increasing seat density, cutting capex, dropping hedging, simplifying the fleet, and overbooking… to name a few.” Some analysts such as Helane Becker of the Cowan Group have gone even farther, openly calling for Barger’s head: “We believe a management change would lead to a change in philosophy and likely morph the model similar to one of Spirit Airlines although not as extreme.” This week, Wall Street naysayers got their wish, as jetBlue announced that Barger’s contract would not be renewed. In February, Robin Hayes, jetBlue’s COO will succeed Barger as CEO, perhaps presaging a concerted pruning of jetBlue’s signature passenger-friendly perks. This melodrama is reminiscent of Wall Street angst towards Amazon, where many analysts also feel that CEO Jeff Bezos has also been putting the welfare of customers ahead of shareholders. For example, Slate columnist Matthew Yglesias has called Amazon ”a charitable organization being run by elements of the investment community for the benefit of consumers.” Since when has superior customer service become viewed as a management liability? CEO’s like Dave Barger and Jeff Bezos have managed their companies with a decided bias towards long-term value creation, brand distinctiveness and customer loyalty, rather than short-term profit maximization. In this regard, Barger’s track record is actually considerably better than assessed by jetBlue’s critics. In May, 2007, Barger inherited a seriously over-extended airline that was reeling from an existential crisis of mortifying customer service meltdowns. Barger had to engineer a turnaround during a severe depression that wreaked havoc on airline balance sheets and income statements for at least three years, ultimately driving American, Frontier, Aloha and others into bankruptcy. But by 2011, the results of Barger’s transformation of jetBlue were clearly evident. The figure below compares jetBlue’s stock price appreciation vs. the North American airline industry as a whole during Barger’s tenure. As shown, stockholders who invested in JBLU on or after January 3, 2011 have enjoyed returns at or mostly above the industry as a whole through September, 2014. Nonetheless, many on Wall Street have appeared to lose patience with Barger’s inability to convert industry leading levels of customer satisfaction into even higher growth in revenue and profits. Dave Barger is not alone in struggling with this challenge. One would like to believe that superior customer satisfaction is a competitive advantage that can help drive higher customer loyalty, word-of-mouth referrals, increased new customer acquisition, all at higher prices and profit margins. In reality though, demonstrating this linkage has proven difficult for many companies, and at best requires a long timeframe to make the case. Moreover, contrary examples abound. For example, companies with strong monopoly/oligopoly positions often exploit their market power to achieve high margins, despite horrific customer service. Take Time Warner Cable (TWC) for example, a perennial rock-bottom loser in customer satisfaction studies. Despite widespread customer abuse, TWC’s share price has grown >250% over the past five years. More broadly, the American Customer Satisfaction Institute conducts annual surveys of customer satisfaction across multiple industries using a common battery of metrics. Comparing company-specific customer satisfaction measures for 146 companies in 2013 with their stock price appreciation during the year yields the following discouraging results. There is virtually no relation between a company’s measured ability to satisfy customers and its stock price appreciation. In fact, a regression between these two variables yields a slightly negative relationship. As noted at the outset, managing a complex enterprise requires a delicate balancing act to serve the often-competing interests of customers, shareholders and employees.[1] jetBlue undoubtedly can and will find additional mechanisms to raise revenues in the months ahead, but hopefully will do so in a manner consistent with its customer-friendly brand persona that has distinguished the airline since its founding. Calls for jetBlue to jam more seats into their aircraft and to mimic standard industry practice of charging fees for every conceivable service would render jetBlue no different from its peers, whose track record in delivering satisfactory customer service is quite poor. As shown below, jetBlue is currently a US industry leader in airline customer satisfaction. jetBlue has invested heavily in creating an exceptionally strong customer franchise, built on a solid foundation of valued service. The challenge now is to determine how to extract more value from this strong position, without losing jetBlue’s brand essence or corporate soul. Some sage advice from Michael O’Leary, CEO of low cost airline Ryanair is apropos here: “If you don’t approach air travel with a radical point of view, then you get in the same bloody mindset as all the other morons in this industry. This is the way it has always been and this is the way it has to be.” Maintaining meaningful differentiation is essential for jetBlue to build on its distinctive brand character. Finding the right tradeoffs between increased revenue realization and valued customer service offerings will continue to be a delicate balancing act for jetBlue’s new CEO. _____________________________________________________ [1] In April, jetBlue’s pilots voted to join the ALPA union, highlighting another conflict in balancing the objectives of management and the company’s stakeholders.
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Len ShermanAfter 40 years in management consulting and venture capital, I joined the faculty of Columbia Business School, teaching courses in business strategy and corporate entrepreneurship Categories
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