JetBlue Airway IPO Valuation

Topics: Stock market, Preferred stock, Corporate finance Pages: 15 (2315 words) Published: May 16, 2015


1 Executive Summary

This report discusses whether and how JetBlue should list its shares on public from several angles. Two principal incentives prove that the IPO process could be inevitable, even without an optimal offering price, and valuation models including multiples comparison and income analysis imply the firm may be underpriced. Given the situation and all assumptions, an increment in either offering size or price is suggested.

2 SWOT and Background

JetBlue started by following Southwest's approach of offering low-cost travel, but sought to distinguish itself by its amenities, such as in-flight entertainment, TV on every seat and Satellite radio. Barely two years after its foundation had the company made profit and decided to raise money through IPO. The initial price for JetBlue shares, as by potential investors, was $22 to $24. While facing sizable excess demand for the 5.5 million shares, management was considering an increase in the offering’s price range.

3 Listing Analysis

Theoretically, firms acquire liquidity, monitoring and credibility after going public, and at the same time undertake all costs of time, money or loss of control and any further obligations and responsibilities. The general pros and cons for listing is shown in the table below.

According to the case, the two main reason drove JetBlue going public are: a) Staying in expansion; and b) Bailing out venture-capital investors. These two needs can be both significant and urgent, which could be the causative reason of listing above all other incentives. General advantages of listing

General disadvantages of listing
1. Access to future capital
Going public creates cash for future financing needs and a type of currency in form of stock. 1. Costs and time involved
A firm pays 50-250 thousands to publicize an IPO, counted for 15-20% of proceeds. 2. Public awareness
Info about the firm spreads to whole country. New chances arise with new customers. 2. IPO Risks
An unforeseeable problem could derail the IPO before the sale of stock takes place. 3. “Create” value
Less info asymmetry lowers investment risk hence adds value. Also easier mergers by giving stocks. 3. Underpricing
Underwriter often offer shares at discounted price to ensure initial returns. 4. Increased D/E ratio
The company may be able to obtain more favorable loan terms from lenders. 4. Short-term oriented reporting
Public investors dislike long-term strategic decisions. And earning ability is justified quarterly. 5. Credibility & stability
An image of credibility and stability with firm’s suppliers and lenders, with improved credit terms. 5. Loss of confidentiality
Under requirements by SEC, conflicts arise as competitors and employees know all. 6. Incentive program to employees
Offering stock options as compensation attracts better management, and to provide incentive. 6. Loss of flexibility
Unlikely the Board with independent directors approve all decisions quickly and efficiently. 7. Retain a certain degree of control
For a privately company selling stock to venture capitalists the latter would generally require decision-making authority. 7. Loss of control
Large holders may seek representative on the Board and say in how the firm is run.

The low-fare-low-cost business model of JetBlue is a kind of “small profit but great quality”. The hi-tech equipment, huge compensation and all new Airbus A320s would heavily rely on the capital basis and the size. In other words, the bigger this firm is, the greater the economies of scale. Unlike nowadays low-fare airlines e.g. Tiger and Jet Star that minimize fixed costs and lower service, JetBlue managed to rise the quality of service and to “fix the sucks”, which was also not in concert with Southwest and other low-fare business, and all these fixings needed money.

Airline industry is a typical case of cost management. JetBlue had done pretty well in cost controlling by a) Flying to...
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