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Report On JetBlue Airways IPO Valuation

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Report On JetBlue Airways IPO Valuation

Prepared for: M. Sadiqul Islam Professor Department of Finance University of Dhaka

Prepared by:

Group no: Sec: A BBA 23rd Batch Department of Finance University of Dhaka

Date of submission: 16 august, 2020

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Group Profile

Serial

Name

Roll

1

Sabrina Rahman Supti

23-028

2

Md. Meraj Hossain Khan

23-059

3

Rudra Saha

23-080

4

Farzana Fariha Lima

23-095

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Remarks

Letter of Transmittal 16 August, 2020 M. Sadiqul Islam, Professor, Department of Finance, University of Dhaka. Subject: Submission of the Report on JetBlue Airways IPO Valuation

Dear Sir: With due respect, it is our pleasure to present this report on “JetBlue Airways IPO Valuation”. We have prepared this report as a part of the course Investment Banking and Lease Financing (F-403). To make this report up to the standard we tried our best by implementing the knowledge we have gathered from the course. Thank you very much for providing us this type of opportunity and giving us the necessary guidance and direction needed for preparing the report. We have tried our level best to make this report holistic and informative enough. Besides this, there may be some shortcomings. We would be grateful if you would consider those from excusable point. Sincerely Yours, Md. Meraj Hossain Khan ID: 23-059 On behalf of the members of Group No. Sec: A BBA 23rd Batch Department of Finance University of Dhaka

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Table of Contents Executive summary ................................................................................................................................. 7 1.0 Introduction ...................................................................................................................................... 9 1.1 Product of JetBlue.......................................................................................................................... 9 1.2 Management of JetBlue ................................................................................................................. 9 2.0 Economic analysis ............................................................................................................................ 11 2.1 Preview of US economy: 1990-2000 ............................................................................................. 11 3.0 Forecast of Industry ......................................................................................................................... 14 3.1 Porter’s Five Forces Model ........................................................................................................... 14 3.2 PESTEL Analysis:........................................................................................................................... 15 4.0. Analysis of Jet Blue Airway:............................................................................................................. 18 4.1. Financial Risk Ratio: .................................................................................................................... 18 4.2 Liquidity Ratio .............................................................................................................................. 19 4.3. Activity Ratio .............................................................................................................................. 19 4.4. Operating Profitability Ratios ...................................................................................................... 21 4.5. Business Risk Ratios .................................................................................................................... 22 4.6. SWOT Analysis: ........................................................................................................................... 23 4.6.1. Strength: .............................................................................................................................. 23 4.6.2. Weakness: ........................................................................................................................... 24 4.6.3. Opportunities:...................................................................................................................... 24 4.6.4. Threats:................................................................................................................................ 24 5.1 Problem Statement ......................................................................................................................... 26 5.2 Alternative courses of action ........................................................................................................... 26 5.2.1 Market multiple: ................................................................................................................... 26 5.2.2 Discounted Cash Flow Valuation Approach............................................................................ 28 6.0 Analysis of each alternative: ............................................................................................................ 30 6.1 Market Multiple Approaches: ...................................................................................................... 30 6.2 Discounted Cash Flow Valuation Approach .................................................................................. 32 7.0 Recommendation: ........................................................................................................................... 35 Conclusion: ........................................................................................................................................... 37 References: ........................................................................................................................................... 38 5

Appendix ............................................................................................................................................... 39 1.

Balance Sheet ............................................................................................................................ 39

2.

Income Statement ..................................................................................................................... 40

3.

Valuation Multiple ..................................................................................................................... 41

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Financial forecast ....................................................................................................................... 42

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Price Earning Multiple ................................................................................................................ 43

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Market to book equity ............................................................................................................... 44

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Total Capital Multiple................................................................................................................. 44

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EBIT Multiple ............................................................................................................................. 45

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WACC Calculation ...................................................................................................................... 46

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DCF Valuation ........................................................................................................................ 47

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Ratio analysis ......................................................................................................................... 48

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Executive summary JetBlue, founded in 1999, experienced a rapid growth in early 2002. So, the management and board member has decided to going to public by IPO process. Either this decision is helpful or not and determining the correct pricing and other decision criteria some models and approaches are applied after analysing the macroeconomy of the country, forecasting the future condition of industry and analysing the company financial position. Though the lead underwriter of the JetBlue IPO had calculated that the price per share should be in $22 to $24, for the reason of excess demand of 5.5 million shares had been offered, the price had been adjusted to $25 to $26. After applying P/e Multiple, EBIT multiple approach and discounted cash flow model, we conclude that the JetBlue offering price should be $27 to $32.

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Chapter 1 Introduction

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1.0 Introduction JetBlue is a a global and award-winning low cost travel company whose mission and vision is safety of customers, diversity and sustainability. It has founded on 1999, Devid Neelman was the CEO and the headquarters are sitruated in New York. JetBlue growing aggressively despite of critical situation like September terrorist attack.

1.1 Product of JetBlue: The main product of JetBlue is low fare air travel services. Other products includes the entertainment services, refreshment services etc.

1.2 Management of JetBlue: CEO David Neelman convinced his commitment to bring innovation in people, policy and technology and this vision was shared by implementing an impressive new management team. David Barger then became the president and John Owen, former vice president of Southwest airlines became the CFO of JetBlue. Success of management of JetBlue was mostly contributed by CEO David Neelman himself. He had managed to raised $130 million from venture capital from high profile firms, successfully secured a small fleet of airbus within seven months. For this reason, JetBlue was rapidly growing in early 2002 with 24 aircraft flying. Moreover, successful management had managed to provide better services like unique flying experience leather seats etc.

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Chapter 2 Analysis of Economy

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2.0 Economic analysis Every company belongs to a specific industry and every industry is a part of the economy. To know a company or an industry, economic analysis is a prerequisite. Here the economic analysis is done on the basis of provided case to understand the US economy along with aviation industry. For estimating the future economic trends past information have also been considered.

2.1 Preview of US economy: 1990-2000 The US economy was faced with recession in early 90s which cause the GDP to fall from 1.86% in 1990 to -0.26% in 1992. This recession caused nearly 1.621 million job loss, unemployment rose from 5.4% to 6.8% from 1990 to 1991. The scenario after the recession is different. The economy had seen the longest expansion until the Dot-com bubble burst. The economic expansion created approximately 23.67 million new jobs, nearly 10% increase in the hourly wages, GDP rose from 3.4% to 4.87% from 1992 to 1999. Federal Reserve increased the interest rate from 3% to 6.5%. The economic expansion ended with the beginning of the bubble burst. In late 90s with the expansionary economic situation people excessively invested in internetbased companies which create a bubble in the market. The bubble burst caused the stock market to crash. NASDAQ Composite Index was 400%, the burst caused the index to fall 78% by 2002. Nearly $6.2 trillion wealth had been destroyed as a result of this burst. Approximately 5.08 million jobs were lost and unemployment rose from 4.2% to 6.3% from 2001 to 2003. The historical 9/11 terrorist attacks that occurred on 11 September, 2001 left the whole world specially the U.S in a panicking situation because of the immense loss and the act of terrorism that left many destructive grievances. A huge amount of negative instantaneous impact fell on the overall U.S economy which includes, falling of market share rate, loss of jobs and wages, damage of world trade center, etc. When the attack occurred many wall street institutions along with the New York Stock Exchange was evacuated and the impact of all this was evident in the first trading after the attack. The whole market saw a downturn in the market share by 7.1% or 684 points which caused huge loss for all of the trading companies and its related shareholders. Around 143,000 people became unemployed in a month after this tragedy which increased the rate of unemployment along with a loss of $2.8 billion wages within three months. The heaviest damage was faced by the finance and air transportation sector of the economy because of this whole disaster, i.e. almost 60% of the total damage was taken by these two sectors. All of these circumstances are providing a negative signal for the upcoming years because if these damages are not handled properly with efficient strategies, the economy will not able to recover from it. In this meantime, the U.S economy did not make enough amount of progress in bringing out the economy from the damage that occurred by the 9/11 attacks. Hence to bring improvement and stimulating the economy the Federal Reserve took some steps which include, bringing the short-term interest rates down to 2%, trading the U.S treasuries at a rate of 5%. Federal Reserve 11

reduced the interest rates to their lowest level. As the interest rate is lower there will be more supply of money in the economy that will increase the level of investment which will eventually increase the GDP. Market risk premium was estimated to be 5 percent. All these steps were taken for implementing the expansion strategy taken for improving the state of the economy through boosting up all the economic activities, for instance, investing in various companies, spending a lot, making employment opportunities, etc. So, these steps taken by the Fed together with various steps taken by the government for stabilizing the economy hopefully will bring development in the whole economy. This development of economy in turn will provide benefits for various sectors and industries of the U.S country as a whole and the people and businesses who were greatly damaged will be able to heal through this and hopefully the economy will continue to expand till next five year.

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Chapter 3 Forecast of Industry

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3.0 Forecast of Industry Industry analysis is a market analyzing tool that helps to determine the position of a company in a specific industry. It also helps to understand a specific industry well. Here industry analysis is done on the basis of the provided case. For analyzing the aviation industry different tools like Five Forces Model, PESTEL analysis, have been used. This analysis will help to develop a good understanding of the aviation industry of United States.

3.1 Porter’s Five Forces Model To understand the competitive forces which are shaping the aviation industry of US and to determine the strengths and weaknesses of the industry Porters Five Forces Model have been used. From this model the industry structure can be understood also. Here we will consider five different forces that are affecting the US aviation industry. Competition in the Industry: The aviation industry of United States is highly competitive. There are more than 50 airlines in the country. Southwest airlines, Airtran, America West, Frontier etc. are all low fare airlines. Ryanair and Easyjet are low fare airlines in Europe. All these airline companies are competing in the aviation industry of US. So it is easily understood the industry is highly competitive so the market participants have lesser power to make change in the price level or in market structure. Potential of New Entrance: After the terrorist attacks of September 2001, the aviation industry is facing challenges. The challenges become double when the market notices 87 new airline failures over the previous twenty years. Also, the industry requires huge amount of capital. So it is difficult for new ventures to enter into this industry. Power of Suppliers: The aviation industry of US has enough suppliers as a result the airline companies cannot be ruled by the suppliers. Fuel and aircraft are two major elements in this industry. Fuel price is fully regulated by government so it is working on behalf of the users. There are also many aircraft manufacturers in the country so the power of the supplier is moderate to low. Power of Customers: Southwest airlines, one of the major airlines, carried more than 64 million passengers in 58 different cities in 2002. There are approximately 21 million potential customers in the metropolitan area. Though the industry has a huge number of customers but the customers barely have any influence in the price of the market. So it can be said that power of the customer is low in the aviation industry. Threat of Substitute: As the competition is high the threat of substitute is also high. But as the industry needs more investment in fixed asset it is difficult for the competitors to make changes in the product. As this is a service industry competitor can include new services or change their services. So, the threat of substitute is moderate.

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3.2 PESTEL Analysis: Aviation industry which is an industry that do not possess a history of doing well by not getting affected by the external various factors. The effects of these factors are so dominant and deep on this industry on an overall basis that they need to be carefully analysed individually: Political factors: The existing political factors create a profound impact on the whole industry because of certain important things. The main of those things is that the whole needs to manage its operations or provide services to its customers by following all those heavy regulations, determined by the government of the country. These regulations are mainly determined for ensuring the safety of passengers who can belong from both home country and foreign country. Thus, the government impose these heavily regulated environments for the industry because if anything happens to these customers of the industry, then it will create a huge political turbulence for the whole nation. Though all of these factors are existing, in 1978 the U.S. government deregulated certain restrictions for the company which helped to increase the popularity of travelling through the airlines boosted. These deregulations helped the whole industry to offer more and more flight services and hence increased the potentiality of the industry to progress through earning higher revenue than before. Economic factors: The economic factors have always been impacting on the overall style, i.e. how the industry conducts its businesses or offers services to its customers. Whenever the economy faced downturns, it impacted the airlines industry by a great deal because these downturns usually changes the lifestyle of the people who take services from this industry. The economy saw several downturns recently, amongst which the most impactful ones were the recessions that were brought by the downturn in 1930 and the terrorist attack in 2001. Though these downturns have negatively impacted the industry, these also brought many positive changes in the industry, for instance, customer friendly flight services, low fare pricing for providing airlines services, etc. These positive impacts are expected to bring expansion in the whole industry by attracting more customers. Social factors: There is a mutual relationship between the aviation industry and various social factors that affects the operations of the industry. To explain briefly, by lowering pricing levels the industry has been successful in creating demand for air travel between the people of customers. This demand for air travel in turn created employment for many jobless people and all of these have helped the industry to create a good image socially. Moreove...