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?
• 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
• Positioned in New York with 21 million potential customers in the metropolitan
• In early 2002, operated 24 aircraft flying 108 flights per day to 17 destinations.
• 87 new-airlines failures over the previous 20 years
• 9.11, US airlines industry lost $7.7 billion in 2001
Underwriter selection meeting
“Quiet period” begins
Letter of comment
received from SEC;
Public offering date
• The IPO process takes approximately 3-4
• 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
• Going out on Road Show to seek interest in
• Finalizing the IPO
• Distributing the IPO Shares
• Financial benefit in the form of raising capital
• Capital can be used to fund R&D, capital expenditure or even to pay off
• Increased public awareness of the company
• 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
IPO Advantages and Disadvantages
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.
• 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?
• 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 - Comp multiple
multiples 1.2 6.85 3.92**
multiples* 2.9 8.1 12.7
Value - Overall 808,527 762,261 1,042,474
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.
Valuation Approaches - Comp multiple
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.
Valuation Approaches - DCF
• 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
Rf and premium: both 5.00%
Outstanding debt: 495 million
Market value of BV: 871 million
Terminal growth rate: 4.5%
Scenario analysis for:
- Revenue growth and capex
- Revenue/NWC maintain at 9.4x
Valuation Approaches - Sensitivity analysis
Revenue Growth Scenario
Under different scenario, the average stock price we have in conclusion
is $26.07 per share via DCF method.
As a result, our valuation will be at $18.82 per share.
Valuation - Equity Value Per Share
• 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.
Valuation - Summary