Submitted To:

Mr. Alan Brillantes, CPA, MBA

Submitted By:
Basalo, Kimberly S.
Blanco, Eugine John F.
Esquillo, Rosvel A.
Noble, Jenyl Mae T.
Real, Katrina P.
March 3, 2015

INTRODUCTION
Armed with extensive experience in Airline start-ups, David Neeleman at 39 first
announced his plan to launch a new airline dubbed to bring humanity back to air
travel in July 1999. In between the current issue concerning the airline industry failures
at that time, Neeleman together with an impressive new management team and a
growing group of investors believed that through their commitment to innovation in
people, policies, and technology could keep their planes full and moving, and thus the
vision of JetBlue Airways Incorporated materialized with. With the whopping $130
million dollars of capital raised from high-profile firms such as Western Presidio Capital,
Chase Capital Partners, and Quantum Industrial Partners, JetBlue had secured a small
fleet of Airbus320 aircraft and initiated service was from JFK to Fort Lauderdale, Florida,
and Buffalo, New York in a span of seven months from the time it was incorporated.
The start of the companys astonishing growth commenced in the early summer
of 2000, adding routes in two other Florida cities, two other northeastern cities, and two
California cities. By 2002 the company was operating 24 aircraft flying 108 flights per
day to 17 destinations. With the growing success of the Airline, Neeleman
acknowledged that JetBLues strategy was built on the goal of fixing everything that
sucked about air travel. This strategy was fixated on offering passengers with 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. Another secret in their success was an effective business plan
execution by elevating their strategies through focusing on a point-to-point service to
large metropolitan areas with high average fares or highly traveled markets that were

underserved. And such resulted to the lowest cost per available-seat-mile of any major
U.S airline in 2001, with 6.98 cents versus an industry average of 10.08 cents.
Now pioneering the Low- Fare business model among airlines following after
Southwest Airlines, JetBlue further expanded through acquiring a fleet of new Airbus
A320 aircraft. More so, not only was JetBlues fleet 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 has been very effective in establishing a strong
brand by identifying their company among the safest, most reliable, and one with a lowfare air travel that was focused on high customer service and by providing an enjoyable
flying experience.
Currently JetBlues management is faced with a new highlight in the life of the
company as a growing entity. Along with an impressive growth trajectory of the company
is the expectation from its management to support such path and to offset the portfolio
of losses by its venture- capital investors. With such situation at hand the management
of the company was ready to raise additional capital through a public equity offering.
After a series of necessary procedures done by the Airline executives, the next
dilemma that faced JetBlues board was to come to an agreement on the offering price
of the new shares. At an authorized stock issuance approved by the SEC of 5.5 million
JBLU shares, the initial price range communicated to potential investors was at $22 to
$24. Faced with a sizeable excess demand even at the mentioned volume of shares,
management has filed an increase in the offerings price range reflected at $25 to $26.
But even at that the new price range, most of the group thought the stock faced blowout demand. Now, the task at hand left to the analysts is to determine the most suitable

price range for the IPO shares that would ensure successful investor deals and at the
same time would align to the companys aggressive growth plans.

Mission Statement
Jet Blues mission is to be the leading low-fare, low-cost passenger airline
offering high quality customer service to underserved markets and customer who are
looking for the best value in their flight. We have the newest most advanced planes that
are reliable, fuel efficient, utilizes paperless cockpit technology, live in-flight satellite TV
and security cameras. Our philosophy is to give customers the best price value for their
ticket, offering things our competitors dont offer. At JetBlue we feel that hiring educated
employees that are highly motivated and well trained will provide a better experience to
the customers. We feel that our high-value, high quality service philosophy will lead the
way to our becoming the number one in the industry.

Vision Statement
At JetBlue our goal is to provide the best, most affordable flight experience of any
air carrier while providing superior service.

STATEMENT OF THE PROBLEM

What is the most suitable price range that the company should set for its initial
public offering shares that would ensure successful investor deals and at the same time
would align to the companys aggressive growth plans?

OBJECTIVES OF THE STUDY

To identify a price range for IPO shares that would align with company goals
To make use of appropriate pricing models that would suggest a price that fits the
suitable price range for the IPO shares

AREAS FOR CONSIDERATION

Stock valuation can be accomplished by using a few different ways: namely the
Dividend Discount Model, Gordon Growth Model (constant growth model), or by market
multiples. It is to be noted however, that in the case of JetBlue Airways, neither can the
Dividend Discount Model nor the Gordon Growth Model can be used for valuing JetBlue
stocks, also EVA cannot be used in valuing JetBlue stocks. This is due to the statement
of the companys management indicating the intentions of management to retain future
earnings to finance the further expansion and continued growth of the business, and
thus opting not to declare and pay dividends on common stock.
So, to get a proper range for JetBlues offering price, we will look at market
multiples for the Low-Cost Airline Industry and use the Discounted Cash Flow Model to
come up with a number that makes sense, once we compare those other financials to
JetBlues. Below are the areas to be considered in coming up with the most suitable
price range for the companys stocks:
Market to Book Equity

Airline

Price/Share

Airtran
Alaska Air
America West
ATA
Frontier
Ryanair
Southwest
WestJet
Median

6.60
29.10
3.50
15.00
17.00
32.10
18.50
15.90

Book
Equity/Share
0.50
32.10
12.50
10.80
5.40
5.50
5.30
2.80

Market to Book Equity

Multiple
13.50
0.90
0.30
1.40
3.20
5.80
3.50
5.60
3.35

5.08
Jetblue
(Trailing)

17.01

1. Sample size is reduced to low-cost airlines.

2. The median Market to Book Equity multiple will be used for interpolating
JetBlue's stock price since it disregards outlying performances.
3. Formula used:
Price/Share
Market Book Equity Multiplier=
Book Equity /Share
4. Book equity per share is derived by dividing the total equity disregarding which is
not a part of the equity component and the convertible redeemable preferred
stock by the outstanding shares of 35.1 million which includes the convertible
redeemable preferred stock (refer to the footnote on page 623).

Price/Earnings Multiple
Price-earnings multiple is the current market price of a corporation share divided
by the earnings per share of the company. The group opted to utilize only low-cost
airline companies that have positive earnings because they have almost the same

performance and operations as JetBlue and in addition, the inclusion of airlines with
negative earnings will greatly affect the P/E multiples as they are considered extremes.
It is also important to note that Frontier has an outlying value and thus, averaging will
not represent the appropriate values for this computation. The median P/E ratio of the
sample size provided a more accurate figure.
Trailing
Airline
1.

Price/Share EPS P/E Multiple

EPS

Leading
P/E
Multiple
22.00
42.50
35.67
26.43
26.50
26.50

Airtran
6.60 0.30
22.00 0.30
Sam
Frontier
17.00 2.00
8.50 0.40
ple
RyanAir
32.10 0.70
45.86 0.90
Southwest
18.50 0.70
26.43 0.70
size
WestJet
15.90 0.80
19.88 0.60
Median
22.00
is
Trailing
P/E Multiple Median
22.00
JetBlue-Basic EPS
217.36 9.88
JetBlue-Diluted EPS
25.08 1.14
JetBlue-Proforma
28.60 1.30
EPS
Leading
P/E Multiple Median
26.50
JetBlue-Basic EPS
274.91
10.37
JetBlue-Diluted EPS
31.72
1.20
JetBlue-Proforma
36.17
1.37
EPS
reduced to low-cost airlines with positive EPS because a negative EPS would

pose as an outlying performance.

2. The median P/E multiple will be used for interpolating JetBlue's stock price
because of an outlier present (Frontier's P/E multiple).
3. Leading EPS is adjusted for inflation (increase in earnings and increase in
outstanding shares due to IPO).

4. Instead of the basic EPS, the diluted EPS will be utilized for interpolating
JetBlue's stock price because of its complex equity (presence of convertible
redeemable preference shares/possible diluters).
5. Formula used:
Price Earnings Multiple=Price per Share/ EPS

Total Capital Multiple

The group still utilized the figures of low-cost carrier airlines in order to arrive at
the JetBlue trailing price per share. The value of the median was most representative
since it disregarded the outliers. It resulted to a figure of $27.04 for JetBlue.
Airline
Airtran
Alaska Air
America West
ATA
Frontier
RyanAir
Southwest
WestJet
Median
JetBlue (Trailing)

Price/Share
6.60
29.10
3.50
15.00
17.00
32.10
18.50
15.90

Book Equity/Share
0.50
32.10
12.50
10.80
5.40
5.50
5.30
2.80

Book Debt/Share
4.00
33.80
10.20
32.90
0.00
3.30
1.80
1.00

27.04

5.08

8.59

Total Capital Multiple

2.36
0.95
0.60
1.10
3.15
4.02
2.86
4.45
2.61
2.61

1. Sample size is reduced to low-cost airlines.

2. The median Total Capital multiple will be used for interpolating JetBlue's stock
price since it disregards outlying performances.
3. Formula used:
( Price per Share+ Book Debt per Share)
Total Capital Multiplier=
( Book Debt / Share+Book Equity /Share)
4. Current liabilities are not considered in the computing the book debt per share
because they constitute working capital and are not representative of the
contribution directly from investors.

5. Book debt per share is derived by dividing the total long term debt and
deferred credits and other liabilities by the outstanding shares of 35.1 million
which includes the convertible redeemable preferred stock (refer to the
footnote on page 623).
6. Book equity per share is derived by dividing the total equity the convertible
redeemable preferred stock by the outstanding shares of 35.1 million which
includes the convertible redeemable preferred stock (refer to the footnote on
page 623)
7. Refer to Exhibit 7 for the price/share, trailing and leading EPS and Total
Capital Multiple for the low-cost airlines.

EBIT Multiple

1. Sample size is reduced to low-cost airlines with positive EPS because a negative
EPS would pose as an outlying performance.
2. The median EBIT multiple will be used for interpolating JetBlue's stock price
since it disregards outlying performances.
3. Trailing EBIT/Share is computed by dividing the Income (Loss) Before Income
Taxes after adding back the interest expense (refer to Exhibit 3) by the 35.1
million which includes the convertible redeemable preferred stock (refer to the
footnote on page 623).
4. Leading EBIT/Share is computed by dividing the EBIT as forecasted in Exhibit 13
by the outstanding shares after the IPO which will be 40.6 million.
5. Formula used:
( Price per Share+ Book Debt per Share)
EBIT Multiple=
EBIT per Share

Discounted Cash Flows

To derive D/E Ratio of JBLU:

2.61=

(20.69776800000)+1842000000
Equity+1842000000

Equity=

(20.69776800000)+1842000000(18420000002.61)
2.61

Equity=5,021,598,467.43

Debt=1,842,000,000

Total=

(based on Exhibit 5)

6,863,598,467.43

D/E Ratio of Industry (based on SW) = 37%

48

62

74

86

98

108

113

117

51.7
88.6118.4
150.1
183.5
216.6
245.1
266.9
292.6
295.

NOPAT

N et Working 63.0
Capital
94.0126.0
157.0
191.0
227.0
261.0
285.0
308.0
322.

D iscounted
FCF
-227.3818646
-203.41
-168.9849248
-101.0517235
-77.40303671
-55.55001526
-6.769434398
81.0068142
99.568530
2028.
13

Free C ash Flow

s
-249.3
-244.4
-222.6
-145.9
-122.5
-96.4-12.9
168.9
227.6
4636.

N et Working
29.0
31.0
C
32.0
apital
31.0 34.0 36.0 34.0 24.0 23.0 14.3

Less: C apital
290.0
Expenditure
328.0
345.0
310.0
326.0
342.0
299.0
157.0
132.0
138.

D epreciation
18.0
26.0 36.0 45.0 54.0 65.0 75.0 83.0 90.0 94.5

26.7
45.6 61.0 77.3 94.5111.6
126.3
137.5
150.7
152.

Tax (34% )

Add:

78.4
134.2
179.4
227.4
278.0
328.2
371.4
404.4
443.3
448.

EB IT

D epreciation
18.0
26.0 36.0 45.0 54.0 65.0 75.0 83.0 90.0 94.5

Less: C ash Expenses

502.0
723.0
975.0
1215.0
1474.0
1753.0
2016.0
2202.0
2380.0
2487

Total R evenue
598.4
883.2
1190.4
1487.4
1806.0
2146.2
2462.4
2689.4
2913.3
3029

Revenue per 17.6

Plane
18.4 19.2 20.1 21.0 21.9 22.8 23.8 24.9

N o. of Aircraft
34

Te rm i
na
20022003
20042005200620072008
2009
2010
N

1. Southwest's capital structure is mainly used because it is considered the pioneer

for low-cost strategy airlines and due to the limited amount of data.
2. D/E Ratio is derived from Southwest's capital structure using the total capital
multiple formula.
3. The unlevered beta of Southwest is also utilized in deriving the levered beta of
JetBlue.
4. Since it is assumed that all convertible redeemable preferred stock will be
converted to common stock (refer to footnote on page 623), it would be
impracticable to derive the cost of preferred stock and also because the
preferred stock is not explicitly stated in Southwest's capital structure.
5. A growth rate of 5% for CAPEX and 4% for revenue is utilized. Depreciation will
follow the rate for CAPEX while for other line items, an average of 4.5% is used.
6. Net Working Capital is forecasted through the use of a net working capital
turnover of 9.4 which is constant every year.

ALTERNATIVE COURSES OF ACTION

$22-$24
Pros:

Due to the positive reviews regarding JetBlue Airways, this range will encourage
investors to buy the companys stocks

Is at a level which is relatively in between the prices of other companies in the

low-cost airline industry; Not too low and not too high

Cons:
-

The range is not enough to fund JetBlues capital expenditures

The price range is said to result in a sizable excess demand for the JetBlue
shares, which may eventually cause a decline in the companys stock price

$24-$26
Pros:
-

Relative to the share prices of other companies in the low-cost airline industry,
this price range is still advantageous for potential investors, considering the
current status of JetBlue Airlines

Cons:
-

Even though this range is higher than $22-$24, this is still not enough to fund

JetBlues capital expenditures

At this price, most of the managements group thought that the stock still faced a
blow-out demand

Higher than $26

Pros:
-

This range will enable JetBlue to fund its capital expenditures

This is the price range that reflects the prices computed using the different areas

considered
-

At $26, the companys share price is still at par with other low-cost airlines with
relatively high prices while maintaining an advantage

Cons:
-

Some risk averse investors might consider the price too high for the benefit they

see from investing in the company

The demand from JetBlue shares might decline to a number below than
companys expectation

CONCLUSION AND DECISION

Generally, underwriters modify the price of IPOs. It should be competitive enough

to raise funds for capital expenditures and support growth but should not be too high
that it would reduce demand and investor buzz regarding JetBlues initial public offering.

Thus, the group used several pricing techniques and applied conservatism to attain a
suitable price for the companys shares. Basing from the computations on the different
multiples and the discounted cash flows, the group concludes that the best possible
price of JetBlues stock is higher than $26. This is because this price is at par with that
of the other low-cost airlines and can best compensate the companys capital
expenditures while still be relatively lower than the resulting figures from the multiple
estimates. More specifically, the group approximates that the range to be between $27$30 is most suitable for JetBlues Initial Public Offering.