JetBlue Airways IPO ValuationEbad AshfaqueSean LinCongyi Liu

Case Questions

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Case Questions

● What are the advantages and disadvantages of going public?

● What different approaches can be used to value JetBlue’s shares?

● At what price would you recommended that JetBlue offer its shares?

Agenda

● Background overview

● IPO process

● Valuation approaches

● Recommendation

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Background Overview

● In July 1999, David Neelman announced plan to launch a new airline that

would bring “humanity back to air travel.”

● Hired an impressive new management team○ David Barger, COO, former vice president of Continental Airlines

○ John Owen, CFO, former executive vice president and treasurer of Southwest Airlines

● Strategy--”Fixing everything that sucked”○ Point to point service

○ Lowest cost per available-seat-mile of any major US airlines in 2001--6.98¢

○ Safe, reliable, low-fare airline that was focused on customer service

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Background Overview

● Positioned in New York with 21 million potential customers in the metropolitan area.

● In early 2002, operated 24 aircraft flying 108 flights per day to 17 destinations.

● Concerns○ 87 new-airlines failures over the previous 20 years○ 9.11, US airlines industry lost $7.7 billion in 2001

● Competitors○ Southwest○ Frontier○ WestJet

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IPO Process

6In days

Underwriter selection meeting

“Quiet period” begins

108

015

45

Due diligence

Registration (announcement) date

75SEC

revi

ew p

erio

d99

100

50

60

Red herring

Road show

Letter of comment received from SEC; file amendments

Effective date

Public offering date

Settlement date

● The IPO process takes approximately 3-4 months

● Hiring a bank or an underwriter to guide the company through the process

● Submit the documents to SEC● Handing out the ‘Red Herring’ to

prospective investors● Going out on Road Show to seek

interest in the IPO● Finalizing the IPO● Distributing the IPO Shares

Pros:

● Financial benefit in the form of raising capital● Capital can be used to fund R&D, capital expenditure or even to pay off

existing debt.● Increased public awareness of the company

Cons:

● More disclosures to the investors● High cost incurred in complying with regulatory requirements● Focus on short term results rather than long term growth due to added

pressure

IPO Advantages and Disadvantages

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Relationship between Offering Price and Opening Price of an IPO

● IPO investors purchase the shares from the company at the offering price.

● The price at which the stock opens for trading is called the opening price.

● Depending on the interest from investors, the opening price can be higher

or lower than the offering price.

● If the opening price is higher, the IPO investors have an immediate gain; if

it is lower, they have an immediate loss.

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● Initial price range for JetBlue after first roadshow: $22 - 24

● Management filed an increase in the IPO price: $25 - 26

● Pros for higher IPO price: If the opening price is higher than the offering price,

the company is able to generate higher capital from the IPO.

● Pros for lower IPO price: In some cases, when the opening price is too high,

the demand can be unsustainable and can lead to loss later on.

IPO Price: high or low?

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● Comparable companies’ multiples○ Overall airlines’ multiples and low-fare airlines’ multiples

○ Total capital multiple, EBITDA multiple and EBIT multiple

● Discounted cash flow○ Key assumptions

○ Scenario analysis

Valuation Approaches

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Valuation Approaches - Comp multiple

(000’$) Total Capital Multiple

EBITDAMultiple

EBITMultiple

Overall airline multiples 1.2 6.85 3.92**

Low-fare airline multiples* 2.9 8.1 12.7

Total Business Value - Overall 808,527 762,261 1,042,474

Total Business Value - LF 1,953,941 901,359 711,796

* Low-fare airline compas include AirTran, ATA, Frontier, Midwest, Northwest, Ryanair, Southwest and WestJet.

** EBIT Multiple we use average number instead of median number due to negative value in median number.

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Valuation Approaches - Comp multiple

(million $) Overall airline multiples

Low-fare airline multiples*

Average Business Value 871.09 1,189.00

Less: debt 495.50 495.50

Equity value 375.59 693.53

Equity value / share* 10.70 19.76

* Total outstanding shares: in the last paragraph of the case, using 35.1million outstanding shares.

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Valuation Approaches - DCF

● WACC

○ Cost of equity: CAPM

Beta, Rf and risk premium

○ Cost of debt: issuance cost

○ D/E ratio

● Terminal growth rate

● Business growth assumption

● Expenditure growth assumption

● Net Working Capital assumption

D/E: 1.3193

Beta: 1.5

Rf and premium: both 5.00%

Outstanding debt: 495 million

Market value of BV: 871 million

Terminal growth rate: 4.5%

WACC: 8.42%

Scenario analysis for:

- Revenue growth and capex

Revenue/NWC maintain at 9.4x

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Valuation Approaches - DCF

● Price / share via DCF method: $26.00

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Valuation Approaches - Sensitivity analysis

Revenue Growth Scenario

Cap

ex G

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● Under different scenario, the average stock price we have in

conclusion is $26.07 per share via DCF method.

As a result, our valuation will be at $18.82 per share.

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Valuation - Equity Value Per Share

● Although after the second market sounding, $25~26 IPO price per share

for JetBlue is still facing demand or supply, it doesn’t mean the IPO price

should be necessarily higher.

● If the stock price traded below IPO price after a few hours of trading, it

means the investors do not have faith in your company, suggesting that is

nearly impossible for the company to raise additional capital through

follow-on equity offerings.

● As a result, our team would recommend an IPO price at $22, which will not

be too low to raise capital for operations, and not too high to hinder future

capital raising and market liquidity. 17

Valuation - Summary

THANK YOU

Questions?

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Sources and references

https://www.loyal3.com/new-to-investing/ipos/ipo-process

http://www.investopedia.com/ask/answers/06/ipoadvantagedisadvantage.asp

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Appendix 1Business forecast by JetBlue

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Appendix 2Free Cash Flow estimates

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Appendix 3

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