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Jetblue Airways Ipo Valuation Essay Typer

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

...

JetBlue is relentlessly focused on making sure that every customer experience lives up to the company slogan, “Happy Jetting.” At JetBlue, customer well-being is ingrained in the culture. The discount airline has focused on providing niceties that are simply not the norm when it comes to commercial air travel. Things like more legroom, comfortable leather seats, gourmet snacks, LCD entertainment at every seat, and free e-mail onboard. These things are sure to delight customers. But JetBlue knows that these tangible amenities are easily replicated. That’s why JetBlue’s real competitive advantage is its culture.

The goal is to provide exceptional customer service at every touch point. To accomplish this, JetBlue starts by hiring the right employees. Then, it trains them according to the company’s core values: safety, integrity, caring, passion, and fun. Loving customers breeds truly loyal customers who share the brand by word-of-mouth. Thus, customers are delighted far more by how they are treated by JetBlue’s employee’s than by what they get in a flight. As JetBlue and Southwest (the other low-fare airline known for excellent customer service) start to overlap on routes serviced, many are watching to see which will be victorious. In the end, the loser might just be “all other airlines.”

Questions

1. Give examples of needs, wants, and demands that JetBlue customers demonstrate, differentiating these three concepts. What are the implications of each for JetBlue’s practices?

2. Describe in detail all the facets of JetBlue’s product. What is being exchanged in a JetBlue transaction?

3. Which of the five marketing management concepts best applies to JetBlue?

4. What value does JetBlue create for its customers?

Is JetBlue likely to continue being successful in building customer relationships?

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