JetBlue Case Study Analysis
JetBlue Airways Corporation Overview
JetBlue Airways Corporation is an American low-fare airline, which headquartered in the Long Island City near the New York City. Its main base is John F. Kennedy International Airport. Basically, the airline mainly serves destinations in the United States, as well as many Latin American countries. As of October 2013, JetBlue serves 84 destinations in multiple countries.
Low-fare airline is an airline that generally with a lower operating cost structure. In many people’s view, low-are airline also with has low ticket prices and limited services. However, JetBlue is a low-fare airline corporation with a goal of fixing ...view middle of the document...
This will benefit the company for future lending from other lenders. 2> By doing IPO, JetBlue itself can get control to a certain extent. Venture capital company always requires decision-making power. But if going public, JetBlue may avoid from reporting their decision. 3> Increase public awareness of JetBlue. Generally, listed companies are well-known. This is a chance to promote itself. This chance could not only attract customers, but also attract better qualified person to contribute to the company.
Anyway, going public also can lead some disadvantages. 1> It could be costly and time consuming. JetBlue uses more than three months to go public. The process of IPO is an expensive sunk cost, if the offering does not pass, company will loss the money. What’s more, there will be some fees relate to public company regulations. 2> Heavily regulation may impact on its operation. Being a listed company required to report itself in transparency. Prospectus may disclose some information that the company would not reveal; decision-making process may not be flexible as before. 3> Decision-making focus on short-term and becoming short-sighted. Shareholders interested in company’s current earning and invest in short-term, favorable current earning can get more invest. In order to appeal to such investment, listed company needs to make some decision to benefit short-term performance.
JetBlue Airways Corporation IPO Valuation
The biggest issue which impact on JetBlue’ IPO in April 2002 is 9/11 attack. At this time, airline industry was during the worst periods. Mainly based on John F. Kennedy International Airport, which near the attacked place New York City, makes investors anxious about this investment. Nevertheless, there are some facts that encourages JetBlue going public. Recently, there is no US low-fare carriers doing IPO. If JetBlue go public now, it can get more attention. Morgan Stanley found the demand of JetBlue stock exceeded supply. Analysts and reporters have positive view of this IPO, they believe it is possible to raise the price due to this strong demand.
For deciding whether JetBlue should IPO or not, we should value the company in 2002. To do IPO valuation, there are some different approaches, like discounted cash flow and relative valuation techniques.
❖ Discounted Cash Flow
The weight of debt and equity come from Table 1 in appendix. Convertible redeemable preferred stock was included in liability, but it will become to equity later. That’s why it included in total equity.
WACC is for forecasting. So tax rate should be 34%, because it was used in JetBlue Financial Forecast (Exhibit 13).
The return of debt is 8%. It is an average debt of Southwest, JetBlue’s leading competitor. Refer to the cost of debt in Table 2.
Cost of equity is 10.5%. This is calculated from capital asset pricing model (Re=rf+β*MRP). Beta is 1.1, which is the beta of Southwest airline (Exhibit 5) . Risk free rate (5%) and market risk premium (5%)...