Cash-Flow Forecast
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sf_f-1415.pdf
UVA-F-1415 Rev. Jun. 30, 2011
This case was prepared by Professor Michael J. Schill with the assistance and cooperation of John Owen (JetBlue),
Garth Monroe (MBA ’05), and Cheng Cui (MBA ’04). It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright 2003 by the University of
Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
[email protected]. No part of this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden School Foundation.
JETBLUE AIRWAYS IPO VALUATION
My neighbor called me the other day and she said, “You have an interesting little
boy.” Turns out, the other day she asked my son Daniel what he wanted for
Christmas. And he said, “I want some stock.” “Stock?” she said. “Don’t you want
video games or anything?” “Nope,” he said. “I just want stock. JetBlue stock.”
—David Neeleman
CEO and Founder, JetBlue Airways
It was April 11, 2002, barely two years since the first freshly painted JetBlue plane had
been rolled out at the company’s home base at New York City’s John F. Kennedy Airport (JFK).
JetBlue’s first years had been good ones. Despite the challenges facing the U.S. airline industry
following the terrorist attacks of September 2001, the company remained profitable and was
growing aggressively. To support JetBlue’s growth trajectory and offset portfolio losses by its
venture-capital investors, management was ready to raise additional capital through a public
equity offering. Exhibit 1 through Exhibit 4 provide selections from JetBlue’s initial public
offering (IPO) prospectus, required by the SEC to inform investors about the details of the equity
offering.
After nearly two weeks of road-show meetings with the investment community, the
JetBlue management team had just finished its final investor presentation and was heading for
Chicago’s Midway Airport. With representatives of co-lead manager Morgan Stanley and the
JetBlue board patched in on a conference call, it was time for the group to come to an agreement
on the offering price of the new shares. The initial price range for JetBlue shares, communicated
to potential investors, was $22 to $24. Facing sizable excess demand for the 5.5 million shares
planned for the IPO, management had recently filed an increase in the offering’s price range ($25
to $26). But even at that price range, most of the group thought the stock faced “blow-out”
demand. After months of preparation, it was time to set the price. The underwriters were anxious
to distribute the shares that evening, and NASDAQ was prepared for JBLU (the company’s
ticker symbol) to begin trading on the exchange in the morning.
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JetBlue Airways
In July 1999, David Neeleman, 39, announced his plan to launch a new airline that would
bring “humanity back to air travel.” Despite the fact that the U.S. airline industry had witnessed
87 new-airline failures over the previous 20 years, Neeleman was convinced that his
commitment to innovation in people, policies, and technology could keep his planes full and
moving.1 His vision was shared by an impressive new management team and a growing group of
investors. David Barger, a former vice president of Continental Airlines, had agreed to become
JetBlue’s president and COO. John Owen had left his position as executive vice president and
former treasurer of Southwest Airlines to become JetBlue’s CFO. Neeleman had received strong
support for his business plan from the venture-capital community. He had quickly raised $130
million in funding from such high-profile firms as Weston Presidio Capital, Chase Capital
Partners, and Quantum Industrial Partners (George Soros’s private-equity firm).
In seven months, JetBlue had secured a small fleet of Airbus A320 aircraft and initiated
service from JFK to Fort Lauderdale, Florida, and Buffalo, New York. By late summer of 2000,
routes had been added to two other Florida cities (Orlando and Tampa), two other northeastern
cities (Rochester, New York, and Burlington, Vermont), and two California cities (Oakland and
Ontario). The company continued to grow rapidly through early 2002, and was operating 24
aircraft flying 108 flights per day to 17 destinations.
JetBlue’s early success was often attributed to Neeleman’s extensive experience with
airline start-ups. As a University of Utah student in his early 20s, Neeleman began managing
low-fare flights between Salt Lake City and Hawaii. His company, Morris Air, became a pioneer
in ticketless travel, and was later acquired by low-fare leader Southwest Airlines. Neeleman
stayed only briefly at Southwest, leaving to assist in the launching of Canadian low-fare carrier
WestJet while waiting out the term of his “noncompete” agreement with Southwest.
Simultaneously, Neeleman also developed the e-ticketing system Open Skies, which was
acquired by Hewlett-Packard in 1999.
Neeleman acknowledged that JetBlue’s strategy was built on the goal of fixing
everything that “sucked” about airline travel. He offered passengers a unique flying experience
by providing new aircraft, simple and low fares, leather seats, free LiveTV at every seat,
preassigned seating, reliable performance, and high-quality customer service. JetBlue focused on
point-to-point service to large metropolitan areas with high average fares or highly traveled
markets that were underserved. JetBlue’s operating strategy had produced the lowest cost per
available-seat-mile of any major U.S. airline in 2001—6.98 cents versus an industry average of
10.08 cents.
With its strong capital base, JetBlue had acquired a fleet of new Airbus A320 aircraft.
JetBlue’s fleet not only was more reliable and fuel-efficient than other airline fleets, but also
afforded greater economies of scale because the airline had only one model of aircraft. JetBlue’s
management believed in leveraging advanced technology. For instance, all its pilots used laptop
1 Jeff Sweat, “Generation Dot-Com Gets Its Wings,” Information Week (January 1, 2001).
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computers in the cockpit to calculate the weight and balance of the aircraft and to access their
manuals in electronic format during the flight. JetBlue was the first U.S. airline to equip cockpits
with bulletproof Kevlar doors and security cameras in response to the September 11 hijackings.
JetBlue had made significant progress in establishing a strong brand by seeking to be
identified as a safe, reliable, low-fare airline that was highly focused on customer service and by
providing an enjoyable flying experience. JetBlue was well positioned in New York, the nation’s
largest travel market, with approximately 21 million potential customers in the metropolitan area.
Much of JetBlue’s customer-service strategy relied on building strong employee morale through
generous compensation and passionately communicating the company’s vision to employees.
The Low-Fare Airlines
In 2002, the low-fare business model was gaining momentum in the U.S. airline industry.
Southwest Airlines, the pioneer in low-fare air travel, was the dominant player among low-fare
airlines. Southwest had successfully followed a strategy of high-frequency, short-haul, point-to-
point, low-cost service. Southwest flew more than 64 million passengers a year to 58 cities,
making it the fourth-largest carrier in America and in the world. Financially, Southwest had also
been extremely successful—in April 2002, Southwest’s market capitalization was larger than all
other U.S. airlines combined (Exhibits 5 and 6 provide financial data on Southwest Airlines).
Following the success of Southwest, a number of new low-fare airlines emerged. These
airlines adopted much of Southwest’s low-cost model, including flying to secondary airports
adjacent to major metropolitan areas and focusing on only a few types of aircraft to minimize
maintenance complexity. In addition to JetBlue, current low-fare U.S. airlines included AirTran,
America West, ATA, and Frontier. Alaska Air, an established regional airline, was adopting a
low-fare strategy. Many of the low-fare airlines had been resilient in the aftermath of the
September 11 attacks. (Exhibit 7 shows current market-multiple calculations for U.S. airlines.)
Low-fare airlines had also appeared in markets outside the United States, with Ryanair and
easyJet in Europe and WestJet in Canada. (Exhibit 8 provides historical growth rates of revenue
and equipment for low-fare airlines.)
The most recent IPOs among low-fare airlines were of non-U.S. carriers. Ryanair,
WestJet, and easyJet had gone public with trailing EBIT multiples of 8.5×, 11.6×, and 13.4×,
respectively, and first-day returns of 62%, 25%, and 11%, respectively.2
2 The “first-day return” was the realized return based on the difference between the IPO share price and the
market share price at the close of the first day of exchange-based trading. The term “trailing EBIT (earnings before
interest and taxes) multiple” was defined as (Book debt + IPO price × Post-IPO shares outstanding)/(Most recent
year’s EBIT). The term “leading EBIT multiple” referred to an EBIT multiple based on a future year’s forecast
EBIT.
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The IPO Process
The process of “going public” (selling publicly traded equity for the first time) was an
arduous undertaking that usually required about three months. Exhibit 9 provides a timeline for
the typical IPO.3 A comment on the IPO process by JetBlue CFO John Owen can be found at
http://it.darden.virginia.edu/JetBlue/streaming_links.htm.
Private firms needed to fulfill a number of prerequisites before initiating the equity-
issuance process. Firms had to generate a credible business plan; gather a qualified management
team; create an outside board of directors; prepare audited financial statements, performance
measures, and projections; and develop relationships with investment bankers, lawyers, and
accountants. Frequently, firms held “bake-off” meetings to discuss the equity-issuance process
with various investment banks before selecting a lead underwriter. Important characteristics of
an underwriter included the proposed compensation package, track record, analyst research
support, distribution capabilities, and aftermarket market-making support.
After the firm satisfied the prerequisites, the equity-issuance process began with an
organizational or “all-hands” meeting, which was attended by all the key participants, including
management, underwriters, accountants, and legal counsel for both the underwriters and the
issuing firm. The meeting was designed for planning the process and reaching agreement on the
specific terms. Throughout the process, additional meetings could be called to discuss problems
and review progress. Following the initiation of the equity-issuance process, the Securities and
Exchange Commission (SEC) prohibited the company from publishing information outside the
prospectus. The company could continue established, normal advertising activities, but any
increased publicity designed to raise awareness of the company’s name, products, or
geographical presence in order to create a favorable attitude toward the company’s securities
could be considered illegal. This requirement was known as the “quiet period.”
The underwriter’s counsel generally prepared a “letter of intent,” which provided most of
the terms of the underwriting agreement but was not legally binding. The underwriting
agreement described the securities to be sold, set forth the rights and obligations of the various
parties, and established the underwriter’s compensation. Because the underwriting agreement
was not signed until the offering price was determined (just before distribution began), both the
firm and the underwriter were free to pull out of the agreement anytime before the offering date.
If the firm did withdraw the offer, the letter of intent generally required the firm to reimburse the
underwriter for direct expenses.
The SEC required that firms selling equity in public markets solicit its approval. The
filing process called for preparation of the prospectus (Part I of the registration statement),
answers to specific questions, copies of the underwriting contract, company charter and bylaws,
3 This section draws from Michael C. Bernstein and Lester Wolosoff, Raising Capital: The Grant Thornton LLP
Guide for Entrepreneurs; Frederick Lipman, Going Public; Coopers and Lybrand, A Guide to Going Public; and
Craig G. Dunbar, “The Effect of Information Asymmetries on the Choice of Underwriter Compensation Contracts in
IPOs” (PhD diss., University of Rochester, n.d.).
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and a specimen of the security (all included in Part II of the registration statement), all of which
required the full attention of all parties on the offering firm’s team. One of the important features
of the registration process was the performance of “due-diligence” procedures. Due diligence
referred to the process of providing reasonable grounds that there was nothing in the registration
statement that was significantly untrue or misleading, and was motivated by the liability of all
parties to the registration statement for any material misstatements or omissions. Due-diligence
procedures involved such things as reviewing company documents, contracts, and tax returns;
visiting company offices and facilities; soliciting “comfort letters” from company auditors; and
interviewing company and industry personnel.
During this period, the lead underwriter began to form the underwriting “syndicate,”
which comprised a number of investment banks that agreed to buy portions of the offering at the
offer price less the underwriting discount. In addition to the syndicate members, dealers were
enlisted to sell a certain number of shares on a “best-efforts” basis. The dealers received a fixed
reallowance, or concession, for each share sold. The selling agreement provided the contract
among members of the syndicate. The agreement granted power of attorney to the lead
underwriter, and stipulated the management fee that each syndicate member was required to pay
the lead underwriter, the share allocations, and the dealer reallowances or concessions. Because
the exact terms of the agreement were not specified until approximately 48 hours before selling
began, the agreement did not become binding until just before the offering. The original contract
specified a range of expected compensation levels. The selling agreement was structured so that
the contract became binding when it was orally approved via telephone by the syndicate
members after the effective date.
The SEC review process started when the registration statement was filed and the
statement was assigned to a branch chief of the Division of Corporate Finance. As part of the
SEC review, the statement was given to accountants, attorneys, analysts, and industry specialists.
The SEC review process was laid out in the Securities Act of 1933, which aspired to “provide
full and fair disclosure of the character of securities sold in interstate commerce.”4 Under the
Securities Act, the registration statement became effective 20 days after the filing date. If,
however, the SEC found anything in the registration statement that was regarded as materially
untrue, incomplete, or misleading, the branch chief sent the registrant a “letter of comment”
detailing the deficiencies. Following a letter of comment, the issuing firm was required to correct
and return the amended statement to the SEC. Unless an acceleration was granted by the SEC,
the amended statement restarted the 20-day waiting period.
While the SEC was reviewing the registration statement, the underwriter was engaged in
“book-building” activities, which involved surveying potential investors to construct a schedule
of investor demand for the new issue. To generate investor interest, the preliminary offering
prospectus, or “red herring” (so called because the prospectus was required to have “Preliminary
Prospectus” on the cover in red ink), was printed and offered to potential investors. Underwriters
generally organized a one- or two-week “road-show” tour during this period. The road shows
allowed managers to discuss their investment plans, display their management potential, and
4 Preamble, Securities Act of 1933.
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answer questions from financial analysts, brokers, and institutional investors in locations across
the country or abroad. Finally, companies could place “tombstone ads” in various financial
periodicals announcing the offering and listing the members of the underwriting syndicate.
By the time the registration statement was ready to become effective, the underwriter and
the offering firm’s management negotiated the final offering price and the underwriting discount.
The negotiated price depended on perceived investor demand and current market conditions
(e.g., price multiples of comparable companies, previous offering experience of industry peers).
Once the underwriter and the management agreed on the offering price and discount, the
underwriting agreement was signed, and the final registration amendment was filed with the
SEC. The company and the underwriter generally asked the SEC to accelerate the final pricing
amendment, which was usually granted immediately over the telephone. The offering was now
ready for public sale. The final pricing and acceleration of the registration statement typically
happened within a few hours.
During the morning of the effective day, the lead underwriter confirmed the selling
agreement with the members of the syndicate. Following confirmation of the selling agreement,
selling began. Members of the syndicate sold shares of the offering through oral solicitations to
potential investors. Because investors were required to receive a final copy of the prospectus
with the confirmation of sale and the law allowed investors to back out of purchase orders upon
receipt of the final prospectus, the offering sale was not realized until underwriters actually
received payment. Underwriters would generally cancel orders if payment was not received
within five days of the confirmation.
SEC Rule 10b-7 permitted underwriters to engage in price-stabilization activities for a
limited period during security distribution. Under this rule, underwriters often posted stabilizing
bids at or below the offer price, which provided some price stability during the initial trading of
an IPO.
The offering settlement, or closing, occurred seven to ten days after the effective date, as
specified in the underwriting agreement. At this meeting, the firm delivered the security
certificates to the underwriters and dealers, and the lead underwriter delivered the prescribed
proceeds to the firm. In addition, the firm traditionally delivered an updated comfort letter from
its independent accountants. Following the offering, the underwriter generally continued to
provide valuable investment-banking services by distributing research literature and acting as a
market maker for the company.
The IPO Decision
There was some debate among the JetBlue management team regarding the appropriate
pricing policy for the IPO shares. Morgan Stanley reported that the deal was highly
oversubscribed by investors (i.e., demand exceeded supply). Analysts and reporters were
overwhelmingly enthusiastic about the offering. (Exhibit 10 contains a selection of recent
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comments by analysts and reporters.) Given such strong demand, some members of the group
worried that the current pricing range still left too much money on the table. Moreover, they
believed that raising the price would send a strong signal of confidence to the market.
The contrasting view held that increasing the price might compromise the success of the
deal. In management’s view, a successful offering entailed not only raising the short-term capital
needs, but also maintaining access to future capital and providing positive returns to the crew
members (employees) and others involved in directed IPO share purchases. Because maintaining
access to capital markets was considered vital to JetBlue’s aggressive growth plans, discounting
the company’s IPO price seemed like a reasonable concession to ensure a successful deal and
generate a certain level of investor buzz. Being conservative on the offer price seemed
particularly prudent considering the risks of taking an infant New York airline public just six
months after 9/11. (Exhibit 11 provides forecasts of expected aggregate industry growth and
profitability; Exhibit 12 shows the share-price performance of airlines over the past eight
months.)
By April 2002, the U.S. economy had been stalled for nearly two years. The Federal
Reserve had attempted to stimulate economic activity by reducing interest rates to their lowest
level in a generation. Current long-term U.S. Treasuries traded at a yield of 5%, short-term rates
were at 2%, and the market risk premium was estimated to be 5%.
Based on the JetBlue management team’s forecast of aircraft acquisitions, Exhibit 13
provides a financial forecast for the company.5
5 In pricing IPO shares, it was appropriate to divide the total equity value of the firm by the premoney shares
outstanding. In the case of JetBlue, the number of premoney shares outstanding was 35.1 million. This number
included the automatic conversion of all convertible redeemable preferred shares into common shares.
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Exhibit 1
JETBLUE AIRWAYS IPO VALUATION
Selections from JetBlue Prospectus
The Offering
Common stock offered 5,500,000 shares
Use of proceeds
We intend to use the net proceeds, together with existing cash, for working
capital and capital expenditures, including capital expenditures related to the
purchase of aircraft.
Dividends
We have not declared or paid any dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the further
expansion and continued growth of our business.
Proposed NASDAQ National Market symbol
JBLU
Results of Operations
Three Months Ended
Dec 31, 2000 Mar 31, 2001 Jun 30, 2001 Sep 30, 2001 Dec 31, 2001
(unaudited)
Operating Statistics:
Revenue passengers 523,246 644,419 753,937 791,551 926,910
Revenue passenger miles (in thousands) 469,293 600,343 766,350 863,855 1,051,287
Available seat miles (in thousands) 623,297 745,852 960,744 1,131,013 1,370,658
Load factor 75.3% 80.5% 79.8% 76.4% 76.7%
Breakeven load factor 79.4% 73.2% 70.6% 74.6% 76.2%
Aircraft utilization (hours per day) 11.8 13.1 13.1 12.8 11.8
Average fare $ 90.65 $ 96.15 $ 101.01 $ 101.66 $ 99.37
Yield per passenger mile (cents) 10.11 10.32 9.94 9.29 8.76
Passenger revenue per available seat mile (cents) 7.61 8.31 7.93 7.10 6.72
Operating revenue per available seat mile (cents) 7.85 8.56 8.16 7.30 6.97
Operating expense per available seat mile (cents) 8.03 7.55 7.01 6.93 6.68
Departures 4,620 5,283 6,332 6,936 7,783
Average stage length (miles) 833 871 937 1,007 1,087
Average number of operating aircraft during period 9.2 10.5 13.2 15.9 19.4
Full-time equivalent employees at period end 1,028 1,350 1,587 1,876 2,116
Average fuel cost per gallon (cents) 103.38 86.03 83.24 79.53 60.94
Fuel gallons consumed (in thousands) 8,348 9,917 12,649 14,958 17,571
Percent of sales through jetblue.com during period 32.6% 37.6% 39.4% 45.1% 51.3%
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Exhibit 2
JETBLUE AIRWAYS IPO VALUATION
Balance Sheets of JetBlue Airways
(in thousands of dollars)
December 31 December 31
2001 2000 2001 2000
ASSETS LIABILITIES
Cash and cash equivalents $117,522 $34,403 Accounts payable $24,549 $12,867
Receivables, less allowance 20,791 21,633 Air traffic liability 51,566 27,365 Inventories, less allowance 2,210 1,133 Accrued salaries, wages and benefits 18,265 5,599 Prepaid expenses and other 3,742 2,744 Other accrued liabilities 15,980 5,255
Total current assets 144,265 59,913 Short-term borrowings 28,781 15,138 Flight equipment 364,681 163,060 Current maturities of long-term debt 54,985 24,800
Predelivery deposits for flight
equipment
125,010 91,620
Total current liabilities 194,126 91,024
489,691 254,680 Long Term Debt 290,665 137,110 Less accumulated depreciation 9,523 2,334 Deferred Credits & Other Liabilities 10,708 6,595
480,168 252,346 Convertible Redeemable Preferred Stock 210,441 163,552 Other property and equipment 29,023 18,290
Less accumulated depreciation 4,313 1,632 COMMON STOCKHOLDERS’ EQUITY 44 44
24,710 16,658 Additional paid-in capital 3,889 487
Total property and equipment 504,878 269,004 Accumulated deficit (33,117) (54,684) Other Assets 24,630 15,211 Unearned compensation (2,983) —
Total Assets
$673,773 $344,128
Total common stockholders’ equity
(deficit) (32,167) (54,153)
Total Liabilities & Common Stockholders’
Equity $673,773 $344,128
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Exhibit 3
JETBLUE AIRWAYS IPO VALUATION
Statements of Operations of JetBlue Airways
(in thousands of dollars, except per-share amounts)
Year Ended December 31
2001 2000 1999
Operating Revenues
Passenger $310,498 $101,665 $ —
Other 9,916 2,953 —
Total Operating Revenues 320,414 104,618 —
Operating Expenses
Salaries, Wages and Benefits 84,762 32,912 6,000
Aircraft Fuel 41,666 17,634 4
Aircraft Rent 32,927 13,027 324
Sales and Marketing 28,305 16,978 887
Landing Fees and Other Rents 27,342 11,112 447
Depreciation and Amortization 10,417 3,995 111
Maintenance Materials and Repairs 4,705 1,052 38
Other Operating Expenses 63,483 29,096 6,405
Total Operating Expenses 293,607 125,806 14,216
Operating Income (Loss) 26,807 (21,188) (14,216)
Other Income (Expense)
Airline Stabilization Act Compensation 18,706 — —
Interest Expense (14,132) (7,395) (705)
Capitalized Interest 8,043 4,487 705
Interest Income and Other 2,491 2,527 685
Total Other Income (Expense) 15,108 (381) 685
Income (Loss) Before Income Taxes 41,915 (21,569) (13,531)
Income Tax Expense (Benefit) 3,378 (239) 233
Net Income (Loss) 38,537 (21,330) (13,764)
Preferred Stock Dividends (16,970) (14,092) (4,656)
Net Income (Loss) Applicable to
Common Stockholders $21,567 ($35,422) ($18,420)
Earnings (Loss) Per Common Share:
Basic $9.88 ($27) ($37)
Diluted $1.14 ($27) ($37)
Pro forma basic (unaudited) $1.30
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Exhibit 4
JETBLUE AIRWAYS IPO VALUATION
Statements of Cash Flows of JetBlue Airways
(in thousands of dollars)
Year Ended December 31
2001 2000 1999
Cash Flows From Operating Activities
Net income (loss) $38,537 ($21,330) ($13,764)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 9,972 3,889 111
Amortization 445 106 -
Deferred income taxes 3,373 - -
Other, net 5,960 3,892 619
Changes in certain operating assets and liabilities:
Decrease (increase) in receivables 430 (21,622) -
Increase in inventories, prepaid expenses and other (2,120) (3,354) (340)
Increase in air traffic liability 23,788 26,173 -
Increase in accounts payable and other accrued liabilities 30,894 15,070 6,818
Net cash provided by (used in) operating activities 111,279 2,824 (6,556)
Cash Flows From Investing Activities
Capital expenditures (233,775) (205,759) (12,463)
Predelivery deposits for flight equipment, net (54,128) (27,881) (50,713)
Increase in security deposits (1,952) (7,939) (5,302)
Purchases of short-term investments - (20,923) -
Proceeds from maturities of short-term investments - 21,392 -
Other, net - (20) 1,026
Net cash used in investing activities (289,855) (241,130) (67,452)
Cash Flows From Financing Activities
Proceeds from issuance of convertible redeemable preferred stock 29,731 51,322 80,671
Proceeds from issuance of common stock 25 130 69
Proceeds from issuance of long-term debt 185,000 137,750 -
Proceeds from short-term borrowings 28,781 15,138 -
Proceeds from aircraft sale and leaseback transactions 72,000 70,000 -
Repayment of long-term debt (35,254) (18,577) -
Repayment of short-term borrowings (15,138) - -
Other, net (3,450) (1,300) -
Net cash provided by financing activities 261,695 254,463 80,740
Increase In Cash And Cash Equivalents 83,119 16,157 6,732
Cash and cash equivalents at beginning of year 34,403 18,246 11,514
Cash and cash equivalents at end of year $117,522 $34,403 $18,246
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Exhibit 5
JETBLUE AIRWAYS IPO VALUATION
Selections from Value Line Tear Sheet for Southwest Airlines
Recent stock price
$20.69
P/E ratio 49.3
Dividend yield 0.1%
Beta 1.10
Financial statement forecast 2001 2002E 2003E 2005E/2007E
Total debt (in millions) $1,842
Revenue (in millions) $5,555 $6,000 $7,100 $10,300
Operating margin 17.1% 18.0% 24.5% 27.0%
Tax rate 31.0% 38.5% 38.5% 38.5%
Common shares outstanding (in
millions)
776.8 785.0 795.0 815.0
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Exhibit 6
JETBLUE AIRWAYS IPO VALUATION
Southwest Airlines: Current Debt Outstanding
Issue
Moody’s
Rating
Amount
Outstanding
Maturity
Date
Yield to
Maturity
Short-term bank debt
NA
$475 million
NA
NA
Floating rate secured notes
NA $200 million 2004 NA
Private notes 5.10-6.10
NA $614 million 2006 NA
Floating rate French Bank debt
NA $52 million 2012 NA
8.75 Note
Baa1 $100 million
Oct-2003 5.65%
8.00 Note
Baa1 $100 million Feb-2005 5.91%
7.875 Debenture
Baa1 $100 million Sep-2007 7.41%
7.375 Debenture Baa1 $100 million Feb-2027 8.68%
Capital leases
NA $109 million NA NA
Data source: Mergent’s Bond Record; Southwest Annual Report.
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Exhibit 7
JETBLUE AIRWAYS IPO VALUATION
Recent Valuation Multiples
Actual for 2001 Estimates for 2002
Price/
Share
Book Equity/
Share
Book Debt/
Share
EBITDA*/
Share
EBIT/
Share
Earnings/
Share
EBIT/
Share
Earnings/
Share
(1) (2) (3) (4) (5) (6) (7) (8)
AirTran 6.6 0.5 4.0 1.2 0.8 0.3 0.8 0.3
Alaska Air 29.1 32.1 33.8 3.3 (1.7 ) (1.5) 2.7 (0.8)
America West 3.5 12.5 10.2 (4.3) (6.2) (4.4) (4.5) (4.1)
AMR 22.3 35.1 69.3 (7.0) (16.2) (11.5) 12.4 (3.9)
ATA 15.0 10.8 32.9 8.5 (2.0) (2.6) (6.4) (7.2)
Continental 26.2 20.9 82.0 9.8 1.4 (1.6) 11.1 (1.2)
Delta 29.3 32.7 70.3 (1.4) (11.8) (9.9) 8.4 (3.1)
Frontier 17.0 5.4 0.0 3.2 3.0 2.0 0.6 0.4
Midwest 14.6 8.3 2.7 (0.1) (1.6) (1.1) 1.6 0.8
Northwest 15.7 (5.1) 66.9 1.6 (4.4) (5.0) 7.2 (2.5)
Ryanair 32.1 5.5 3.3 1.3 0.9 0.7 1.2 0.9
Southwest 18.5 5.3 1.8 1.5 1.1 0.7 1.4 0.7
United 13.5 59.6 186.2 (37.0) (56.1) (39.6) N/A (15.4)
WestJet 15.9 2.8 1.0 2.1 1.3 0.8 1.6 0.6
Trailing Leading
Market to
book multiple
Total capital
multiple
EBITDA
multiple
EBIT
multiple
PE
Multiple
EBIT
multiple
PE
Multiple
[1/2] [(1+3)/(2+3)] [(1+3)/4] [(1+3)/5] [1/6] [(1+3)/7] [1/8]
AirTran 13.5 2.4 8.6 13.0 25.3 13.9 20.0
Alaska Air 0.9 1.0 19.2 (37.1) (19.3) 23.3 (38.8)
America West 0.3 0.6 (3.2) (2.2) (0.8) (3.0) (0.8)
AMR 0.6 0.9 (13.1) (5.7) (1.9) 7.4 (5.7)
ATA 1.4 1.1 5.6 (23.8) (5.7) (7.5) (2.1)
Continental 1.3 1.1 11.0 77.0 (16.7) 9.8 (22.4)
Delta 0.9 1.0 (71.6) (8.4) (3.0) 11.8 (9.4)
Frontier 3.2 3.2 5.3 5.7 8.4 26.6 45.9
Midwest 1.8 1.6 (298.3) (11.0) (13.5) 11.2 17.4
Northwest (3.1) 1.3 51.6 (18.8) (3.1) 11.5 (6.3)
Ryanair 5.8 4.0 26.4 38.5 44.0 30.3 34.1
Southwest 3.5 2.9 13.4 18.6 27.6 14.3 28.4
United 0.2 0.8 (5.4) (3.6) (0.3) N/A (0.9)
WestJet 5.6 4.4 8.1 12.7 19.6 10.6 26.9 Data source: Actual numbers for 2001 are from company annual reports. Estimates for 2002 are from Value Line when available, otherwise
consensus analyst estimates are used. All stock prices are quoted as of December 31, 2001. Ryanair figures are based on the respective American
Deposit Receipt prices. Westjet figures are in Canadian dollars. One US dollar = 1.5870 Canadian dollars as of March 31, 2002. The calculation
procedure for the valuation multiples is defined in the lower panel based on the numbered variables defined in the upper panel.
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Exhibit 8
JETBLUE AIRWAYS IPO VALUATION
Historical Annual Growth Rates for Low-Fare Airlines
$ Revenue Growth $ Gross Equipment Growth
Year AirTran ATA Frontier Ryanair Southwest AirTran ATA Frontier Ryanair Southwest
1972 –20% 177%
1973 5% 55%
1974 28% 61%
1975 32% 54%
1976 51% 35%
1977 101% 59%
1978 42% 66%
1979 46% 68%
1980 32% 57%
1981 35% 27%
1982 45% 23%
1983 18% 35%
︾ 1990 10% 17%
1991 14% 11%
1992 20% 28%
1993 1% 21% 11% 36%
1994 456% 21% 18% 2204% 24% 13%
1995 186% 18% 49% 13% 175% 23% 186% 11%
1996 –4% 2% 125% 20% 10% –40% 5% 66% 25% 19%
1997 49% 20% 39% N/A 16% –4% 4% 26% 15% 12%
1998 18% 21% 56% N/A 19% 108% 17% 50% 29% 9%
1999 –20% 39% 105% 39% 19% 15% 22% 50% 11% 14%
2000 35% 23% 79% 68% 16% 24% 15% 43% 21% 19%
2001 –22% –58% 237% N/A 12% 7% –1% –6% N/A –2%
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-16- UVA-F-1415
Exhibit 9
JETBLUE AIRWAYS IPO VALUATION
Life Cycle of a Typical U.S. IPO Transaction
Event time (in days) Event
<0 Underwriter selection meeting.
0 Organizational “all-hands” meeting. “Quiet period” begins.
15–44 Due diligence. Underwriter interviews management, suppliers, and customers;
reviews financial statements; drafts preliminary registration statement. Senior
management of underwriter gives OK on issue.
45 Registration (announcement) date. Firm files registration statement with SEC;
registration statement is immediately available to the public.
45–75 SEC review period. SEC auditor reviews for compliance with SEC regulations.
Underwriter assembles syndicate and prepares road show.
50 Distribute preliminary prospectus (red herring).
60–75 Road show. Underwriters and issuing firm’s management present offering to
interested institutional investors and build book of purchase orders.
75–99 Letters of comment received from SEC; amendments filed with SEC.
99 Effective date. Underwriter and firm price offering. SEC gives final approval of
registration statement.
100 Public offering date. Stock issued and begins trading.
108 Settlement date. Underwriter distributes proceeds to issuing firm.
After market Underwriter may support new equity by acting as market maker and distributing
research literature on issuing firm.
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-17- UVA-F-1415
Exhibit 10
JETBLUE AIRWAYS IPO VALUATION
Selected Quotations of Analysts and Reporters
“The bottom line is really very simple. Neeleman saw a gaping hole and flew a plane through it. Get on this baby,
because this is as close to a sure thing as it gets.” —Lisa DiCarlo, Forbes
“People are going to have a high appetite for [JetBlue stock].”
—Ray Neidl, ABN Amro
“JetBlue took to the skies in 2000 and surprised the airline sector when it reported its first profit only a year later.
Passengers are drawn to the low fares, leather seats and free live TV on board. And Wall Street admires JetBlue for
its experienced management team and winning formula, one made popular by the success of Southwest Airlines.”
—Suzanne Pratt, Nightly Business Report
“JetBlue is off to a good start. But to say it deserves the valuation of Southwest, which has not had a year without
profits for 27 years, might be a stretch.” —Jim Corridore, Standard & Poor’s
“[JetBlue] has a management team with real expertise, and they’re executing very well.”
—Marc Baum, IPO Group
“It’s a very young company that’s still going to need to make a lot of investment over the next 5 to 10 years, There’s
not going to be a lot of free cash flow.” —Jonathan Schrader, Morningstar
“What’s important here is that the business model is solid and they aren’t deviating from it.”
—Helane Becker, Buckingham Research
“Everyone I’ve talked to that’s flown with them has been delighted.”
—Jim Broadfoot, Ivy Emerg. Growth Fund
“This is an industry where the failure rate is very high for new entrants.”
—Patrick Murphy, former Assistant
Secretary, Department of Transportation
“It’s a fantastic airline. It’s also something that you need to personally experience... There’s live TV, all-leather
seats that are comfortable, and the crew has an attitude that is one of service. It’s ingrained and installed in them and
as a result, they treat passengers differently. I think they have cornered the market on perhaps the way flying ought
to be.”
—Clark Snyder, LiveTV
Sources: BusinessWeek, BBC News, Nightly Business Report, New York Metro.
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Exhibit 11
JETBLUE AIRWAYS IPO VALUATION
Historical Financial Performance and Analysts’ Financial Forecasts for Air-Transport Industry
Source: Adapted from Value Line Investment Survey, March 2002.
-15%
-10%
-5%
0%
5%
10%
15%
20%
1999 2000 2001 2002 2003 2004 2005 2006
Revenue growth Operating margin Net asset growth
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Exhibit 12
JETBLUE AIRWAYS IPO VALUATION
Recent Share-Price Performance for Airlines
Notes:
1. High-growth airlines include Southwest Airlines, Ryanair, easyJet, and WestJet.
2. Quality regional airlines include Atlantic Coast and SkyWest.
3. Big six airlines include American, Continental, Delta, Northwest, United, and US Airways.
0
20
40
60
80
100
120
140
Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02
P ri
c e i
n d
e x
High Growth (1) Quality Regional (2) Big 6 (3) S&P 500
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Exhibit 13
JETBLUE AIRWAYS IPO VALUATION
JetBlue Financial Forecast
(dollars in millions)
2001
2002E
2003E
2004E
2005E
2006E
2007E
2008E
2009E
2010E
Number of aircraft
21
34
48
62
74
86
98
108
113
117
$ Revenue/plane
Expected inflation rate
$15.3 $17.6
16%
$18.4
4%
$19.2
4%
$20.1
4%
$21.0
4%
$21.9
4%
$22.8
4%
$23.8
4%
$24.9
4%
Operating margin
8.4% 13.3% 15.2% 15.2% 15.2% 15.2% 15.2% 15.2% 15.2% 15.2%
$ Depreciation per aircraft $0.5 $0.5 $0.5 $0.6 $0.6 $0.6 $0.7 $0.7 $0.7 $0.8
$ Net capex per incremental aircraft
Expected inflation rate
$21.3
$22.3
5%
$23.5
5%
$24.6
5%
$25.9
5%
$27.1
5%
$28.5
5%
$29.9
5%
$31.4
5%
$33.0
5%
NWC turnover (revenue/NWC) 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4
Financial forecast
Revenue $320 $600 $884 $1,192 $1,485 $1,802 $2,114 $2,466 $2,694 $2,912
Cash expenses 283 502 723 975 1,215 1,474 1,753 2,016 2,202 2,380
Depreciation 10 18 26 36 45 54 65 75 83 90
EBIT 27 80 134 181 226 274 326 375 410 443
Taxes (Tax rate = 34%) 9 27 46 62 77 93 111 127 139 151
NOPAT 18 53 89 120 149 181 215 247 270 292
Capital expenditure 234 290 328 345 310 326 342 299 157 132
Net working capital 34 63 94 126 157 191 227 261 285 308
Fixed assets
530 802 1,104 1,413 1,679 1,950 2,227 2,451 2,526 2,568
Data source: JetBlue management forecast and case writer analysis.
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