A valuation case study for Corporate Finance (FE820) of Questrom School of Business, Boston University

1. JetBlue Airways
IPO Valuation
Ebad Ashfaque
Sean Lin
Congyi Liu

2. Case Questions
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Case Questions
What are the advantages and disadvantages of going public?
What different approaches can be used to value JetBlue’s shares?
At what price would you recommended that JetBlue offer its shares?

3. Agenda
• Background overview
• IPO process
• Valuation approaches
• Recommendation
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4. Background Overview
• In July 1999, David Neelman announced plan to launch a new airline that
would bring “humanity back to air travel.”
• Hired an impressive new management team
• David Barger, COO, former vice president of Continental Airlines
• John Owen, CFO, former executive vice president and treasurer of Southwest Airlines
• Strategy--”Fixing everything that sucked”
• Point to point service
• Lowest cost per available-seat-mile of any major US airlines in 2001--6.98¢
• Safe, reliable, low-fare airline that was focused on customer service
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5. Background Overview
• Positioned in New York with 21 million potential customers in the metropolitan
area.
• In early 2002, operated 24 aircraft flying 108 flights per day to 17 destinations.
• Concerns
• 87 new-airlines failures over the previous 20 years
• 9.11, US airlines industry lost $7.7 billion in 2001
• Competitors
• Southwest
• Frontier
• WestJet
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6. IPO Process
6In days
Underwriter selection meeting
“Quiet period” begins
108
0
15
45
Due diligence
Registration
(announcement) date
75
SECreviewperiod
99
100
50
60
Red herring
Road show
Letter of comment
received from SEC;
file amendments
Effective date
Public offering date
Settlement date
• The IPO process takes approximately 3-4
months
• Hiring a bank or an underwriter to guide the
company through the process
• Submit the documents to SEC
• Handing out the ‘Red Herring’ to prospective
investors
• Going out on Road Show to seek interest in
the IPO
• Finalizing the IPO
• Distributing the IPO Shares

7. Pros:
• Financial benefit in the form of raising capital
• Capital can be used to fund R&D, capital expenditure or even to pay off
existing debt.
• Increased public awareness of the company
Cons:
• More disclosures to the investors
• High cost incurred in complying with regulatory requirements
• Focus on short term results rather than long term growth due to added
pressure
IPO Advantages and Disadvantages
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8. Relationship between Offering Price and
Opening Price of an IPO
• IPO investors purchase the shares from the company at the offering price.
• The price at which the stock opens for trading is called the opening price.
• Depending on the interest from investors, the opening price can be higher
or lower than the offering price.
• If the opening price is higher, the IPO investors have an immediate gain; if
it is lower, they have an immediate loss.
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9. • Initial price range for JetBlue after first roadshow: $22 - 24
• Management filed an increase in the IPO price: $25 – 26
• Pros for higher IPO price: If the opening price is higher than the offering
price, the company is able to generate higher capital from the IPO.
• Pros for lower IPO price: In some cases, when the opening price is too high,
the demand can be unsustainable and can lead to loss later on.
IPO Price: high or low?
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10. • Comparable companies’ multiples
• Overall airlines’ multiples and low-fare airlines’ multiples
• Total capital multiple, EBITDA multiple and EBIT multiple
• Discounted cash flow
• Key assumptions
• Scenario analysis
Valuation Approaches
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11. 11
Valuation Approaches - Comp multiple
(000’$)
Total Capital
Multiple
EBITDA
Multiple
EBIT
Multiple
Overall airline
multiples 1.2 6.85 3.92**
Low-fare airline
multiples* 2.9 8.1 12.7
Total Business
Value - Overall 808,527 762,261 1,042,474
Total Business
Value - LF 1,953,941 901,359 711,796
* Low-fare airline compas include AirTran, ATA, Frontier, Midwest, Northwest, Ryanair, Southwest and WestJet.
** EBIT Multiple we use average number instead of median number due to negative value in median number.

12. 12
Valuation Approaches - Comp multiple
(million $)
Overall airline
multiples
Low-fare airline
multiples*
Average Business Value 871.09 1,189.00
Less: debt 495.50 495.50
Equity value 375.59 693.53
Equity value / share* 10.70 19.76
* Total outstanding shares: in the last paragraph of the case, using 35.1million outstanding shares.

13. 13
Valuation Approaches - DCF
• WACC
• Cost of equity: CAPM
Beta, Rf and risk premium
• Cost of debt: issuance cost
• D/E ratio
• Terminal growth rate
• Business growth assumption
• Expenditure growth assumption
• Net Working Capital assumption
Beta: 1.5
Rf and premium: both 5.00%
Outstanding debt: 495 million
Market value of BV: 871 million
D/E: 1.3193
Terminal growth rate: 4.5%
WACC: 8.42%
Scenario analysis for:
- Revenue growth and capex
- Revenue/NWC maintain at 9.4x

14. 14
Valuation Approaches - DCF
Price / share via DCF method: $26.00

15. 15
Valuation Approaches - Sensitivity analysis
Revenue Growth Scenario
CapexGrowth
Under different scenario, the average stock price we have in conclusion
is $26.07 per share via DCF method.

16. As a result, our valuation will be at $18.82 per share.
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Valuation - Equity Value Per Share

17. • Although after the second market sounding, $25~26 IPO price per share
for JetBlue is still facing demand or supply, it doesn’t mean the IPO price
should be necessarily higher.
• If the stock price traded below IPO price after a few hours of trading, it
means the investors do not have faith in your company, suggesting that is
nearly impossible for the company to raise additional capital through
follow-on equity offerings.
• As a result, our team would recommend an IPO price at $22, which will
not be too low to raise capital for operations, and not to high to hinder
future capital raising and market liquidity.
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Valuation - Summary

18. THANK YOU
Questions?
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19. Appendix 1
Business forecast by JetBlue
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20. Appendix 2
Free Cash Flow estimates
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21. Appendix 3
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