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Answer JetBlue Airways IPO Valuation Case Study 28 E.
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Project Finance:Case Study: JetBlue Airways IPO Valuation
Table of Contents
1 Introduction: 3
2. Case Study Questions: 4
2.1. What are the advantages and disadvantages of going public? 4
2.2. What different approaches can be used to value JetBlue’s shares? 6
2.3. At what price would you recommend that JetBlue offer its shares? 8
2.3.1. The DCF Method: 9
2.3.2. Comparable company valuation method: 12
2.4. What are the steps that a company goes through in advance of a
listing? 13
3. Company current performance 16
1 Introduction:
The following case study is in relation to the Initial Public Offering (IPO) of JetBlue
airways.
JetBlue airways are a low cost airline established in July 1999 by David Neeleman.
David Neeleman was experienced in the operations of airlines and start up airlines. He
started Morris Air which became a pioneer in ticketless travel which was later acquired
by Southwest Airlines. After the sale of Morris Air he joined Canadian low fare airline
West Jet. He also developed the e-ticket system Open Skies which was purchased by
Hewlett-Packard in 1999.
The airline was to provide new levels of service in the airline travel industry,
concentrating on customer service and low fares.
The starting of new airlines had proven to be a very difficult task over the past twenty
years, with 87 new start up airlines failing over the twenty year period.
However Neeleman felt that with his vision for an airline his new company would break
the mould and survive in this highly competitive industry. His plan was to commit to
innovation in people, policies and technology to keep the companies planes full and thus
the company profitable. To ensure this goal and the company’s future Neeleman
assembled an impressive management team and group of investors. JetBlue’s COO was
to be David Barger ex vice president of Continental Airlines. John Owen who was
executive vice-president and treasurer of Southwest Airlines agreed to become JetBlue’s
CFO.
With Neeleman’s record of airline start ups and the assembly of high profile management
team, allowed Neeleman to obtain significant seed capital to enable the airline start up.
Neeleman received $130million form venture capital firms such as Western Presidio
Capital, Chase Capital Partners and Quantum Industrial Partners.
Seven months after start up JetBlue had grown rapidly, after seven months JetBlue had a
small fleet of Airbus A320 planes servicing two routes. By mid 2000 the company had
added 6 other routes, by early 2002 the company had grown to having 24 planes in
operation servicing 17 routes and running 108 flights per day. The company had grown
quickly and aggressively by sticking to its strategic plan of offering high quality service
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, to passengers travelling to high metropolitan areas which had high average fares and
highly travelled markets that were underserved.
The New airline in April of 2002 had decided that the need for raising equity via the
issuing of an IPO was required to enable the company continue to expand.
2. Case Study Questions:
2.1. What are the advantages and disadvantages of going public?
Advantages of going public
* One of the main advantages of going public is the additional capital the company
obtains. A company, in the case, JetBlue, may be able to raise substantially more
capital by going public than it can rise through any other means, such as debt financing
or private sources. The capital raised from going public does not have to be repaid.
* Going public can “raise the profile” of a company. A public market for a company’s
stock can increase its prestige and market recognition, which can generate more interest
from customers, suppliers and business associates. This can frequently lead to additional
business opportunities that might now materialize if the company remains privately held.
* It is a means of attracting and retaining quality personnel. A company with
publicly traded stock has a powerful tool to attract and retain personnel. One can offer
shares or options to purchase these shares as a compensation for incentives.
Employees with an equity interest in the company often have a strong incentive to act
in its best interest.
* It allows for easier acquisition of other companies. Since JetBlue’s revenues
and performance accounts are information readily available to other companies,
* From a shareholder perspective, going public puts a greater discipline on managers.
For example, managers have to keep to their goals as set out in the prospectus. They
have shareholders and directors to answer to if something goes wrong or if growth and
revenues are decreasing in the company.
* Usually there is no obligation to pay dividends. A dividend is a portion of
corporate earnings paid to shareholders. Depending on the performance of JetBlue, the
management of the company can decide whether or not to give a dividend.
* Currency of the future. The stock of a public company can be used as a currency
of finance future acquisitions – a consideration that can be important if your long-term
strategy includes plans for diversification, geographical expansion or other strategic
ventures.
Disadvantages of going public
* There are high costs involved with going public. An IPO is expensive. The under
writer’s commission is typically around 7 percent of the total offering proceeds. In
addition, there are substantial out-of-pocket expenses, including fees paid to lawyers,
accountants, and investment banks who underwrite the IPO. These out-of-pocket
costs vary based on the complexity of the issues, market delays and other factors.
* Increased recurring costs. In addition to the expenses with going public, there are
significant costs that come with being a public company. Such recurring costs include;
establishing and maintaining corporate governance, building an accounting and finance
organisation, complying with federal securities, and legal and accounting fees can
increase significantly.
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