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JetBlue Airways
corporation
by-
Praveen Rai
About the company:-
JetBlue Airways corporation was formed
in Aug.1998.. by DAVID NEELMAN , a
veteran in low fair airline industry, with
providing low fair ,low cost, but high
service passenger airline serving in US
market.
The initial investors provided amount of
$175M in start up equity capital. JetBlue
began flying in FEB-2000. & $158M
additional capital was raised through its
IPO in April 2002
.Due to strong financial results & good
value of their shares, Jet blue perceived
successful business model. On 30 June
2003, JetBlue’s shares closed at $41.98
Operations:-
JetBlue’s operation were deigned to achieve low operating
cost and give pleasant flying experience to customers
through-
Utilizing aircraft efficiently- JetBlue operated its aircrafts
average 12.9 hrs a day rather than 9 hrs as competitor
done, it generate more revenue per plane.
Operating one type aircrafts- JetBlue used single type of
Airplane, that’s why it reduced maintenance cost, lowered
required investment on parts and lower training cost.
Developing more productive work force- JetBlue’s have
multitasking employees, they could perform multiple task ,
so fewer employees were needed in comparison of other
airline companies with more restricted work rules.
Lowering distribution cost- JetBlue didn’t provide paper
tickets. It provided through web site, by this it reduce
printing and back office operation cost.
The company also focused on improving the flying experience
for its customers through more comfortable and additional
things.
JetBlue’s Market-
Choose to fly densely populated cities
( metropolitan cities) where
JetBlue’s low air fares stimulate new demand
from passengers.
Finacial results-
At the time of 2000-2003 when US carriers
struggled and giant players were
demolished, at that time JetBlue posted
strong revenue growth and became more
profitable airlines.
Growth opportunities-
In early 2003 , JetBlue tends to grow by adding both new
markets(middle cities-100 to 600 passengers per day) and
new flight to existing destination.
JOHN OWEN, Chief Financial Officer of JetBlue at time of
expansion of business, sign contract to purchase additional
new aircraft from Airbus and Embraer ,the main features were-
For purchasing of 65 new airbus A320 (120 seats) aircrafts
delivered till 2011,which costs $2.5 b.
For purchasing 100 Embraer E190 (100 seats) aircrafts delivered
from 2005-2011 which costs$ 3b.
For purchasing of these aircrafts company needed $5.5b. for
which John Owen got two suggestion from investor bankers
.which were-
1. Offering a new public equity of 2.6 m shares at an
estimated $42.50 per share. It enabling to raise $110.5 m.
2. Issuing $150m in a private placement of 30 years
convertible debentures which have coupon rate of 3.5% and it
will be convertible into share of JetBlue @$63.75 per share.
Financial alternatives-
According to company’s policy it has option to choose secured debt or
operating leases.
Owen believed that there were some reasons to raise additional capital-
1. New capital would ease JetBlue’s ability to finance short term
obligations.
2. Additional capital would strengthen the company’s balance sheet at
time when JetBlue’s would be carrying amount of debt for new
aircraft.
• Describe the existing business and future
prospects of JetBlue?
Current business:-
1.Net income($ thousands)-55315
2.Net revenue($ thousands)-461831
3.Operating 73 flights per day.
4.Useing in single type of airplane,
that’s name is airbus-A320, which
has 120 seats. It provide high
service at low cost.
It focuses on highly condensed
populated area.
1.
Future prospects of JetBlue:-
Increase the no. of planes( from 45 to 252)and
flight,
2. Targeting new customers by giving more
facilities.
3. Focusing on new middle segment market or
small cities , with Embraer E190 (100 seats
capacity) In small cities where 100-600
passengers travelled daily.
4.Increasing no of employees and enhancing the
skills of existing staff.
Need of financing
Aircraft Purchases
Airbus Aircraft Purchase (2004 to 2011)
Embracer Aircraft Purchase(2005 to 2011 )
Airbus A 320 Embracer E190 Estimated value
(millions)
To raise additional
capital
New capital would
Equity vs debt consideration
Equity consideration Debt consideration
$ 110.5 million $ 150 million
Distributio n o f Owne rship Remain same
Dividends / floating rates Interest 3.5% *
Low cost Burden of regular interest
Growth in its share price Adverse Effect of hiking fuel
prices
Good balance sheet will attract Due to market interest prevailing
subscription to equity rates on higher side can affect the
subscription of debentures on
comparatively low rate
It will help in expansion of
business
Enhance financial flexibility Less financial flexibility
Availability of liquidity for Money is blocked for 30 years for
shareholders the holders
Financial Forecast prepared by Morgan Stanley
(in $ millions)
2003 2004 2005
Operating revenue 999.5 1397 1846.7
Total operating 822.1 1,144.9 1,846.7
expenses
EBIT 177.4 252.1 333.3
Market interest rats as of June 30, 2003
30 years Treasury bonds @ 4.70%
Corporate bonds
AA @ 5.19%
A @ 5.35%
BBB @ 6.84%
Positive and negative points of equity
+ive points
Raise $110million
Dividends
Retained earnings
Financial forecast
Finanacial flexibility
-ive points
Distribution of ownership
Retained earnings
Positive and negative points about
debt consideration
+ive points
Conversion at $63.56
-ive points
Q.Which proposal should be preferred ?
Mr. Owen should go for second proposal
because…..
1.Board of directors are highly sensitive about
dilution so they would not prefer equity
consideration.
2.“Retained earnings” or no dividend is the major
reason which can let down the firs proposal.
3.In the second proposal investors will a have an
option to convert it into shares, this gives an
edge to second proposal over first.
4.For acquiring assets long term borrowings are
preferred.
5.Although second proposal seems good but it will
reduce financial flexibility of firm because
Quantitative analysis
Quantitative analysis.
1. net income approach
ke
ko
Cost of capital
kd
Degree of leverage
This approach says cost of debt is lesser than cost of equity ,
so this approach supports second proposal
Mm hypothesis and NOI approach
Ke
Cost of capital
Ko
Kd
degree of leverage
This approach says that cost of equity
increases with increase in degree of
leverage
(debt equity ratio) , so firms financing
should look this issue that equity share
capital is slightly more risky and costly
while debt is safer and cheaper.
Suggestions for the firm
As funds are needed for working capital
and acquiring assets, a single method
would not be fruitful because
Ø equity will not get right valuation ,
Ø on the other hand debt consideration
will reduce financial flexibility
Ø so the company should go for the
mixture of both thing
i.e. working capital should be acquired
by equity and for purchasing planes debt
should be considered.