Mark Powers has no trouble remembering the exact date when his career in the airline business began: September 23, 1983. That was when he joined Continental Airlines, the same day the carrier filed for Chapter 11 bankruptcy protection. “There’s nothing like learning the importance of cash when you’re the treasurer of a bankrupt company,” says Powers. After 10 years at Continental he served stints at General Electric’s jet engine division and Northwest Airlines, eventually landing at JetBlue Airways in July 2006. He became interim CFO in 2011 and was made full-time finance chief the following April.
In JetBlue, Powers boarded an airline whose growth has soared since it began operations in February 2000. The New York–based carrier (2013 revenues: $5.44 billion) is now the fifth-largest in the United States, with 30 million passengers flying to 82 cities in 25 states (primarily on the East Coast) and 15 countries in the Caribbean and Latin America. JetBlue has won nine straight J.D. Power awards for customer satisfaction and perennially ranks at or near the top in customer loyalty, despite bad weather in the Northeast that occasionally disrupts its flights — as happened in January, when winter storms forced the airline to ground its planes in New York and Boston for 17 hours. With 5% of U.S. market share, JetBlue has recorded 15 consecutive profitable quarters as of year-end 2013.
In December, Powers, 60, talked to CFO about JetBlue and the strong service culture that he says sets the airline apart from others. “I’m passionate about this company,” he says. “I’ve never felt younger in my life, because this place is just amazing.”
Richard Branson of Virgin Airlines once said, “If you want to be a millionaire, start with a billion dollars and launch a new airline.” How does JetBlue stay profitable in a low-margin industry?
Certainly, on a per-passenger and per-departure basis, it is a low-margin business. It’s scale that enables us to make money. If you can save one more minute, or use one less gallon of fuel, or sell one more Even More Space seat over 30 million passengers, 280,000 departures a year — you can drive some good economies. It’s a highly transactional, nickels-and-dimes type of business.
It’s also a service business where the service is rendered in largely an unsupervised environment. This is where JetBlue in particular grows its margins. The culture here is absolutely remarkable. If you had told me 10 years ago that an airline based in New York, in JFK, would have culture as one of its key pillars, I would have said that can’t possibly be, long-term.
Well, you’re a CFO. Finance people tend to be skeptical of things like that.
We are by nature, in our DNA, skeptical. But culture is so important here that part of my challenge as CFO is to be an impetus for change, while at the same time being sensitive to and mindful of the fierce loyalty that this company has to its service culture. It’s the pilot who comes out and greets you, it’s the intense communication, the eye contact — it’s all the things that we hire our 15,000 crew members [employees] for. We hire for attitude.
What else makes JetBlue different from other airlines?
Number one, it’s a very differentiated product. On the physical side, we have more space versus anybody else’s economy or coach class, TVs, satellite radio, snacks. For a nominal premium you can get even more [leg room].
We also have a significant cost advantage over the larger legacy carriers. Largely because of our better cost structure, we have been able to prevail in Boston. It’s the same story in San Juan and Fort Lauderdale. Our competitive costs, coupled with the differentiated product and a strong balance sheet, enable us to come into a great city like Boston and drive profitable growth.
In fact, JetBlue is now the largest airline in Boston. Where is future growth going to come from?
The center of gravity of the company is moving south. Hence our big push to develop increased presence in Fort Lauderdale and Orlando, because that’s where the margins, the people, and the traffic are. That’s where our brand really resonates.
JetBlue has said that one of its goals is to build a stronger balance sheet. Why was this necessary, and how are you going to do it?
Early on the company was growing pretty quickly — it needed to because it had to plant the flag and build the brand in this highly contested area. But we were growing too fast, and not on a sustainable basis. So we slowed the growth down. As we move forward we’ve decided that equity capital markets will no longer fund our growth or activities. That’s a nice way of saying we have enough shareholders — no more dilution. We have imposed a discipline of moderating our growth rate such that cash from operations will exceed capex.
At the same time, we have been very aggressive about prepaying debt. If you look at our adjusted net debt from 2008 through today, we have grown the fleet by over 35%, but at the same time we’ve reduced our adjusted debt by about $600 million.
It’s nice to have those numbers moving in opposite directions.
That’s not the way it’s supposed to work, right? I can recall that when we started the budgeting process in, say, 2008, our interest expense was well in excess of $200 million. You had $200 million of expense that you had to figure out what to do with before you even got to the operating budget. As we entered our planning cycle for , interest expense was in the $160 million range, with a much bigger platform.
Some airlines lease most of their planes. JetBlue owns most of its Airbus A320s and nearly half of its Embraer 190s. Why do you prefer to own instead of lease?
Cost of funds. We are actively managing our cost of capital, and we’re managing in particular our cost of debt. Right now our current weighted average cost of debt is about 4.3%. The implicit cost of debt behind the operating leases is well over two times that. From a tax perspective, throwing off all that depreciation with an owned fleet may not be the most efficient way to go. But it is prudent from a cost-of-funds management perspective.
I will certainly entertain operating leasing when I want to manage future residual values and risk, particularly for airplanes that are near the end of their production cycle. But independent of that, if you have the balance sheet and you have the cash, I’m biased against leasing.
What performance indicators do you pay particular attention to?
Within the leadership team, we look at return on invested capital and free cash flow, for example, and of course operating income and so on. We also look at NPS—net promoter score, a metric commonly used to gauge customer loyalty. And we measure engagement, through surveys of our crew members. If they aren’t engaged in the business, it’s likely you’ll see erosion in your NPS. This is sort of the soft side of finance, the relationship between engagement, NPS, and profitability.
But there are also two or three other key metrics that we use as part of our effort to better communicate our progress to our crew members. A very interesting one is operating profit per departure. It’s well south of $1,000, on a net basis. There’s a lot of work that goes into one departure. What’s exciting about that metric is that as a crew member, I know I can move that number. It reinforces the notion here that everyone can matter.
The other side of that is not only can everybody matter, everyone must matter. You can’t be passive here.
You know, if you feel like you don’t matter, I don’t care what your pay is, it’s hard to get up in the morning.