Mavis Lei

JetBlue Airways IPO Valuation

Introduction and Recommendation

In July 1999, David Neeleman had announced his plan to launch a new airline company that would bring “ humanity back to air travel” despite the fact that U.S. airline industry had lot failures over the past 20 years. JetBlue had target its strategy and operating philosophy by offering customers low –fares tickets, high performance of customer service, providing new aircrafts and focused on point-to-point service to large metro areas. JetBlue’s operating strategy had produced the lowest cost per available-seat-per-mile of any major U.S. airline in 2001- 6.98 cents versus an industry average of 10.08 cents. JetBlue’s early success was often attributed to his extensive experience with airline start-ups.

In 2002, Southwest airline was the pioneer in low-fare air travel. It was also the fourth-largest carrier in America and in the world. JetBlue remained profitable during the recession in the airline industry in the terrorist attacks of September 2001. To support the company’s growth, management was ready to raise additional capital through a public equity offering. With co-lead manager Morgan Stanley, the initial price range for JetBlue shares, was $22 to $24. The demand had excess the supply, 5.5 million of shares planned for the IPO while management had recently filed an increase in the IPO range ($25 to $26).

The most recent IPOs among low-fare airlines were of non-U.S. carriers. Ryanair, WestJet, and easyJet had gone public with trailing EBIT multiples of 8.5X, 11.6X, and 13.4X, respectively, and first-day returns of 62%, 25%, and 11%, respectively.

It is recommended to use DCF stock valuation method because it makes investors to think of how the company’s cash flow is moving instead of the focusing on earnings only. Benchmark comparable to other in the industry by P/E