Business Finance Policy: FINA 380-01
Dr. William Brent
February 3rd 2009
JetBlue Airways: IPO Valuation
Table of Content
I. Statement of Problem
II. Alternative Solutions
III. Analysis of the Alternatives
IV. Final Recommendation
V. Appendix
I. STATEMENT OF THE PROBLEM David Neeleman, CEO of JetBlue Airways and his management team have realized that JetBlue is still making profit despite the many challenges facing the airline industry after the September 11th 2001 terrorist attacks. Despite these positive returns; JetBlue plans on raising capital through an Initial Public Offering (IPO) to support its aggressive growth and to also offset portfolio losses to their venture capital
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The Cost of debt is determined by using the average of YTM of the 4 JetBlue debt instruments provided in Exhibit 4. The exact value is 6.91%, and a CAPM cost of equity is determined to be 10.50% using the risk-free rate, market risk premium and comparable beta from Southwest of 1.10. The cost of capital is determined to be 6.90%. Running the DCF analysis, JetBlue is currently valued at $2.7bn. Distributing equity value over the shares outstanding gives a share price of $66.51. This proposed price of the IPO is highly overpriced, considering that the underwriters have priced it within a range of $22-$24. Using Multiples to Price The management of JetBlue and its underwriters can also price the IPO using valuation multiples. JetBlue can employ the most current comparable data of the most appropriate competitors in terms of value in the airline industry. Valuation multiples that can be employed include, but are not limited to P/E multiples, EBIT multiples, EBITDA multiples. In this scenario, I choose to use Southwest airlines and Ryanair as the major benchmarks, because they are both considered as major low –fare airlines, and are key competitors in the United States and Europe. Nevertheless, I believe the P/E ratio is the stronger valuation tool to determine the true value of a firm. Using this method we come up with a share price of $19.32 for Southwest
Before David Neeleman’s non-compete agreement with Southwest Airlines expired, he envisioned the concept of starting a low-fare airline that would combine common sense, innovation, and technology and bring the humanity back into air travel (Gittel & O’Reilly, 2001). In 1998, JetBlue was born. In order for David to fulfill his goal of a “do-it-right” kind of airline, he needed to recruit superior industry veterans who were willing to start from scratch and place an emphasis on employees and customers. Each of these individuals, from the President, General Counsel, CFO, and the HR director, wanted to create an airline that was fun, had
The cost of equity was found using CAPM, with the given market risk premium of 5%, a beta of .88, and risk-free rate of 4.03%. The beta was found by running a regression of Southwest’s percent change in stock price versus the S&P 500’s percent change in stock price for two years (June 28, 2000 to June 28, 2002). The risk-free rate was the return on a ten-year treasury note issued on June 28, 2002, according to the U.S. Treasury’s website. The tax rate of 39% was used to account for tax savings from leverage. In order to calculate the firm’s leverage, the market value of equity was found from the price per share on July 24, 2002 (Yahoo Finance) and the shares outstanding on the balance sheet of the July 10-Q report, as shown in Exhibit X. The debt value was approximated at the book value since data could not be found regarding its market value. This analysis resulted in a debt weight of 11.74% and equity weight of 88.26%. The final approximation for the weighted average cost of capital was 8.64%.
David Neeleman found JetBlue in 1999 with the mission “to bring humanity back to air travel". This goal is achieved by creating a company that offers comfortable, friendly travel at low fares and by this to differentiate themselves from the mass.
JetBlue Airlines, a low-fare commercial airline, has planned to go public towards the end of 2001. During the process the firm had restructured their initial price from $22- 24 per share to $26 – 28 per share.
JetBlue has been one of the most successful airlines since it first entered the industry in December of 1999. Founder, David Neeleman, set out to succeed by offering low-cost air travel in hopes of perpetuating his services to as many people as he could across the US. He was very adamant about having a very customer oriented business that catered to the needs of all. In doing so he wanted to emphatically promote his obligation to safety, caring, integrity, passion, while allowing the customers to have fun while traveling. There motto helps portray Neeleman’s belief stating “You Above All”. His primary goals had been to follow Southwest’s objectives of offering low rates to customers, focusing on customer’s needs and comforts while distinguishing itself with their amenities. Neeleman’s other goal was to establish his low-cost leadership strategy by concentrating his airline in a large popular metropolitan area that already is already correlated with high airfare (Peterson, 2004). He then began operating based out of the New York metropolitan area at John F. Kennedy International airport with his secondary locations in Washington D.C., Boston and Los Angeles.
The financing decision which is aimed at securing the purchase of the new 100-seat Embraer E190 aircraft would allow JetBlue to enter smaller markets while maintaining low operating costs, and increase flight frequency on existing routes. The low fares offered by JetBlue would allow it to attract new passengers who might otherwise not fly. Earnings from this market segment is expected to contribute to the profitability and positive financial performance of the company
4. The article said that K12 was the closest comparable company to Rosetta Stone. Rosetta Stone is marketable to a larger consumer base than K12, so I think that it should be able to charge a higher IPO. The case said that book was more than 25 times oversubscribed during its road show which means Rosetta Stone could charge a much higher price. But these subscriptions are volatile and the economy is recovering, so a price too high could deter many investors. For my analysis I took the EBITDA margin for years 2006-2008 and found the average increase during that time to be 9.93%. I then took the estimated share value from 2008 and multiplied it by 1.0993 to factor in the average increase in share value. This resulted in a price of $19.22. Given this number I would increase the current range from $15-17 to $19-24. The reason for the increased range is because of the
1. JetBlue's strategy for success in the marketplace is based on the cost leadership strategy, as outlined by Michael Porter (QuickMBA, 2010). This strategy relies on delivering products or services at a lower price than competitors, and using that cost leadership as the basis by which to attract customers. JetBlue essentially built their business model after Southwest Airlines, and the company's founders had experience with Southwest that helped them learn about the business. The JetBlue approach to cost leadership is focused on the mass market.
1. Prepare a table comparing the following metrics for Southwest Airlines for the years 2007 - 2009. Use reported numbers from the 2009 10-K.
* Is going public, particularly at the time they did, a good idea for JetBlue?
JETBLUE AIRWAYS IPO VALUATION My neighbor called me the other day and she said, 'You have an interesting little boy. ' Turns out, the other day, she asked my son Daniel what he wanted for Christmas. And he said, 'I want some stock. ' 'Stock? ' she said. 'Don 't you want video games or anything? ' 'Nope, ' he said, 'I just want stock. JetBlue stock. ' --David Neeleman, CEO and Founder, JetBlue Airways It was the first week of April 2002, barely two years since the first freshly-painted JetBlue plane rolled out at the company’s home base at New York City’s John F. Kennedy (JFK) Airport. JetBlue’s first years had been good ones. Despite the challenges facing the U.S. airline industry following the aircraft
•Neeleman offered passengers a unique flying experience by providing new aircrafts, simple and low fares, leather seats, free Live TV at every seat, pre-assigned seating, reliable performance, and high-quality customer service. JetBlue focused on point-to-point service to large metropolitan areas with high average fares or highly traveled markets that were underserved. JetBlue’s operating strategy had produced the lowest cost per available seat mile of any of the major U.S. airlines in 2001—6.98 cents vs. 10.08 cents.
David Neeleman is Chairman and CEO of JetBlue Airways Corporation.He started his career in the airline industry in 1984 when he co-founded Morris Air. As president of Morris Air, he implemented the industry's first electronic ticketing system and pioneered a home reservationist system .JetBlue is Neeleman's third successful launch in the aviation business, His goal is to bring people back to air travel by offering low fares, friendly service and a high quality product. JetBlue is now the largest carrier at New York's John F. Kennedy Airport. And was rated "Best Domestic Airline" at Conde Nast Traveler's 2003 Readers' Choice Awards for the second consecutive year, and was runner-up for "Best Domestic Airline" at
The JetBlue Airways Corporation (JBLU), incorporated in Delaware in 1998, is the fifth largest passenger carrier in the U.S. based on revenue passenger miles. With an average of 800 daily flights, it serves more than 30 million passengers and provides flights to 82 destinations in the U.S., Caribbean, and Latin America (JetBlue, 2016). JetBlue’s operations are concentrated in the domestic market and generates 28% revenues from international routes. Its passenger revenues accounted for 91% of its total operating revenue. During 2013, JetBlue added seven new cities to its network. It also recorded operating revenue of $5.4 billion(Marketrealist,2016). Plus, it reached its highest net income of $168 million by increasing its diluted earnings per share by 30%, from $0.40 to $0.52, in 2012(Marketrealist,2016). The following chart below shows the current stock information on JetBlue.
After computing the current ratio of Jet Blue Airways, there was a decrease from 2014 of 0.62 to 0.60 in 2015. This was a result of an increase of current liabilities that superseded the increase of current assets. The decrease in ratio between the respective years denote the inability for the company to pay off its most recent debts within a short period of time. Jet Blue current ratio falls extremely below the average among the airline industry of 0.81 (CSI Market). In 2015, Jet Blue Airways’ acid test ratio showed a slight increase to 0.45 from its former 0.44 rate in 2014. Consequently, the company’s increased ability to pay off its debt with its most recent assets. Combined the acid test ratio and the current ratio, shows that the even though Jet Blue had a decrease in the current ratio, is had a much higher immediate liquidity status due to the fact of a 52% increase in short term investments. In addition, Jet Blue Airways experienced a 9% increase from 43.7 to 47.2 in its ability to convert its receivables