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Angela Chandler JetBlue Airways IPO Individual Case February 5, 2013

JetBlue Airways, IPO Valuation I. Statement of problem JetBlue airways are a low cost airline established in July 1999 by David Neeleman. Neeleman, was very experienced in the operations of airlines and start up airlines, having previously started his own small airline company. JetBlue Airways is a new and low-fare airline that promised to bring humanity to air travel back in 1999. Their primary goal was provide high-quality customer service for passengers flying in new aircrafts that had leather seating, reliable performance and simple low fares. JetBlue in April 2002 thought that it needed to raise equity by issuing an IPO in order to allow the company to expand. JetBlue was planning to go public in 2002 and was having trouble deciding what its stock price should be. One of the main advantages of a company going public is the additional capital the company can gain. With going public, JetBlue, may raise substantially more capital than it would raise through other options, such as debt financing or private sources. Another huge benefit of IPOs is that the capital raised from going public does not have to be repaid. It serves also as a means of attracting and retaining quality personnel. A company with publicly traded stock has a powerful tool to attract and retain staff. Employees that own stock in the company often have a strong incentive to act in its best interest in order to gain a return on their investment. The stock of a public company can be used to finance future acquisitions, which is important for the longterm strategy plans for l expansion or other strategic opportunities. Just as there are benefits to going public, there are high costs associated with it as well. First off being that an IPO is expensive. The underwriters commission is typically around 7 percent of the total offering proceeds. In addition, there are substantial out-of-pocket expenses, in-

cluding fees paid to lawyers, accountants, and investment banks who underwrite the IPO. Also the underwriter can pull from the agreement at any time before the agreement is signed. The process of going public requires a great deal of time from both the company owner and the management, the IPO process can take from 3-4 months on average. Bank borrowings are a much cheaper option for a company to raise capital, but the difference being these options have to be repaid. The decision is not whether to go public, the issue is where to set the IPO price. There were 5.5 million shares planned for the IPO and demand was thought to exceed supply. The initial price given to investors of JetBlue shares, was $22-$24. Management decided they wanted to take a chance and increase the price range to somewhere between $25 to $26. II. Alternative Solutions A.Discounted Cash Flow Method B.Comparison between similar company III. Analyze Alternative Solutions A.Discounted Cash Flow: Discounted cash flow analysis involves the forecasting of future cash flows expected in the company. These projections are based on expected revenues growth and associated expected cost increases. The forecasted future cash flows are then calculated back to the present values of the future cash flows using the discount rate or the WACC. This allows for the placing of a present cost on the future value of the company, this value can then be divided by the amount of shares to be issued to give present cash value per share based on future growth and earning potential. B.Compare IPO prices for similar companies like Southwest. This method of valuation is based on similar prices in the industry. So the IPO price of a similar company, could be applied to set

that of JetBlue IPO pricing. Southwest, as the comparison company helps JetBLue get a feel for where the market price is for other IPO prices, and with Southwest controlling a huge portion of this market they would be a good choice to follow. Using the P/E ratio, net income, common stock both obtained and outstanding I came up with an offer price of $23.07 for Southwest. IV. Final Recommendations There has been a high failure rate of new entrants into the airline market, over the past 20 years the US airline industry has had 87 new airline failures. This statistic makes investing in an IPO for JetBlue very unpredictable and some felt that taking the company public so soon after September 11 was too high-risk. Morgan Stanley stated that they thought the deal was hyped up by investors and felt the conclusion that demand exceed supply was exaggerated. The future cash flows seem promising, I would recommend that JetBlue proceed with the IPO and value the price around $25.

V. Appendix Discounted Cash Flow Method: Free Cash Flow Forecast = NOPAT +Depreciation - Change in NWC - Cap Ex NPV 2001 - 2012 = -$429.78 Terminal Value = FCFF 2012 x (1+g) / (wacc-g) ---- g is growth rate @ 3% Terminal Value = $5,026.44 M ---- Present value of TV $1,955.62 M Total Value of Firm = PV of TV + NPV of FCFF = $1,525.84 Net Debt = 263.916 ---Total Equity of firm $1,261.92 M Price Per share using DCF Method $35.97 Comparing with competitors: Southwest P/E earnings ratio: 49.3

Net income: $21,567 Common Stock: 5,500,000 Common Stock Outstanding: 40,578,829 Offering Price = (net income * p/e ratio) / (common stock + common stock outstanding) =($21,567 * 49.3) / (5,500,000 + $40,578,829) = $23.07

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