JetBlue Airways IPO Valuation

This case examines the April 2002, decision of JetBlue management to price the initial public offering of JetBlue stock during one of the worst periods in airline history. The case outlines JetBlue's innovative strategy and the associated strong financial performance over its initial two years. The task is to value the stock and take a position on whether the current $25 ± $26 per share filing range is appropriate.

The Corporate Value Model (By Discounted Cash Flow Method)

FCF = NOPAT+ Depreciation - CAP EXP - NWC

Terminal Value = FCF Steady State / (WACC - g ) = V company at t=n

Terminal Value = FCF / (WACC - g ) = V company at t=n

V = FCF1 / (1+WACC)1 + FCF2 / (1+WACC)2 + «..+FCFn / (1+WACC)n +Terminal Value

V=D+E

Offering Price = $25.59 (worksheet below)

Summary of WACC Calculation for JetBlue Airways and Worksheet

Pretax cost of debt 7.41% Kd =Yield to maturity of Southwest Airlines debenture (Exhibit 6)

Tax rate 34%

After-tax cost of debt 4.89% Kd (1-t)

Dp 169,700 Preferred stock dividends was $16,970 thousands ( Exhibit 3)

Pp 210,441,000 Convertible redeemable preferred stock ( Exhibit 2)

Cost of pref stock 8.06% Kp =Dp / Pp

Equity beta 1.10 Refer Beta of Southwest Airlines was (Exhibit 5)

Rf 5.00% Current long-term U.S. Treasuries traded at a yield of 5%

RM 10.00% Rm =Rf +R

RM-Rf 5.00% Market risk premium is 5%

Cost of common stock 10.50% Ke = Rf +F*(Rm-Rf)

Weight of debt 17.6% Debt = 301,373 (Book value, Long term debt, Exhibit 2)

Weight of pref stock 12.3% Preferred stock= 210,441 (Book value, Exhibit 2)

Weight of com stock 70.1% Common stock= 1,198,049 (App. Market =46,078,829*$26)

WACC 9.21% WACC = Kd (1-t)* Wd + Kp*Wp + Ke* We

WACC = Kd (1-t)* D/(D+P+E) + Kp*P/(D+P+E) + Ke* E/(D+P+E)

Assumption / Estimation

Steady-state growth 7.00%

Operating margin 15.20%

Discount rate (WACC) 9.21%

Tax Rate 34%

Inflation Rate (prices and costs) 4%

$ figures in millions

Actual Estimate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Number of aircraft 21 34 48 62 74 86 98 108 113 117

$ Revenue/plane $15.30 $17.60 $18.40 $19.20 $20.10 $21.00 $21.90 $22.80 $23.80 $24.90

Expected inflation 16% 4% 4% 4% 4% 4% 4% 4% 4%

Operating margin 8.40% 13.30% 15.20% 15.20% 15.20% 15.20% 15.20% 15.20% 15.20% 15.20%

$ Depreciation/plane $0.50 $0.50 $0.50 $0.60 $0.60 $0.60 $0.70 $0.70 $0.70 $0.80

$ CapEx/New planes $21.30 $22.30 $23.50 $24.60 $25.90 $27.10 $28.50 $29.90 $31.40 $33.00

Expected inflation 5% 5% 5% 5% 5% 5% 5% 5% 5%

NWC Turnover 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 $2,144 $2,466 $2,694 $2,912 $3,116