As a giant in the airline industry, JetBlue Airways, with record-breaking operating revenue of over $320 million in the last quarter of 2001, has become resolute in issuing stock for the first time in the U.S. Stock market via an Initial public offering (IPO). John Owen, CFO of JetBlue Airways, alongside financial management plans to issue 5.5 million shares and is in pursuit of establishing an appropriately priced IPO. In the early twenty first century, the U.S. economy was devastated for a substantial amount of time due to the dire, malevolent attacks of September 11, 2001. However, it would be an insult to the savvy financial managers of JetBlue, if acknowledgment was not given to the fact that the company showed immense profits and growth, given the economic turmoil of the time. The inherent question that surrounds this company is not whether to issue stock for the first time in the market, but what price will satisfy all three parties of this process: JetBlue airways, the investment bankers and the investors themselves.
Initiated in 1999 by David Neelman, JetBlue Airways was conceived as a way to be the avant-garde in air travel in the 21st century (Bruner, 2010). Prior to his rise to stardom with JetBlue, Neelman had established himself in his early-20s with his startup airline Morris Air, which was bought out in the market by Southwest Airlines. Soon afterwards Neelman found himself as an innovator by introducing an e-ticketing system, which Hewlett Packard acquired in 1999. These milestones in Neelman’s experience, formulated a brilliant strategy and philosophy that eventually propelled him to greatness in JetBlue. It was quite elementary, yet brilliant in its own right: a luxurious flight, coupled with low fares and reliable service. In fact, operating figures indicated that the company was readily proving itself to be a shining example in its industry in that the cost per seat availability per mile (6.98 cents) was 44% lower than the industry average in the United States (10.08 cents).
In a rapid turn of events during, the 2002 fiscal year, industry-wide financials reported immense upward trends in the airline industry with respect to low-fare strategic pricing. The pioneer of this concept, Southwest Airlines, has dominated the market servicing 64 million passengers in 58 major cities in the U.S. catapulting themselves to the fourth-largest carrier in the United States. JetBlue amongst few airline carriers have readily adopted this business strategy; especially amongst low fare airline startup companies, have embraced this concept. Counter-intuitive, is the notion that a significant portion of IPOs among startup companies in the airline industry were that of non-U.S. carriers (Bruner, 2010).
JetBlue from the late 20th century to the early 21st has witnessed a tremendous growth in both their Net Income and Operating Revenue figures. Exemplifying this would be the immense increase in Total Operating Revenues from 2000 to 2001, of approximately 205%; this is, especially true given that 87 new airline startups have been complete and utter failures within the last two decades. Likewise, Net income has increased by 379%, in which the company reported a loss of $13,764,000 in 1999 and in 2001 reported a positive $38,537,000 in net income.
Liquidity in the company has steadily increased from 2000 to 2001; a brief comparative analysis of JetBlue’s current ratio between 2000 and 2001 shows a 13.8% increase in the company’s overall ability to meet short term debt obligation payments. Though in lieu of this significant increase in short-term debt management, the current ratio has potential to improve, which is justified by initiating an IPO to provide the company with the liquidity that it has sought after.
Optimal IPO pricing
The recommended course of action in determining an optimal price, at which JetBlue should price their IPO, is a function of a variety of factors: price multiples of industry peers, prior IPO performances with respect to the airline industry, operating performance history, growth prospects, alongside long term profitability. Given the aforementioned factors, to consider an optimal pricing of JetBlue’s IPO, the greatest arsenal in a financier’s tool set in evaluating a corporation’s projected IPO pricing would be the using EEBITDA Multiple. This ratio is a computation that is derived from the basis of understanding and analyzing, in this case, Jet Blue from four primary facets: economic and industry trends, company background, financial statement analysis and market valuation (Kelly, 2009).
The first facet of determining IPO pricing, is understanding rates of growth, both in real and nominal terms, is imperative in understanding consumer demand over the longevity of the company’s existence. Alongside this, is analyzing a company with respect to its industry peers; which involves taking a profound look at revenue, EBITDA and corporate expenses (Kelly, 2009). The EBITDA multiple involves two primary components. First, the EV or the Enterprise valuation which is a function of summing the market value of common equity, the market value of preferred stock, the market value of debt, with the difference of cash on hand. Second, the EBITDA (or the Earnings before interest, taxes and depreciation) is as a key performance indicator of how well a company is generating profit, especially if a firm is engaged in a leveraged buyout. The EBITDA multiple computed by dividing EV into EBITDA is a measurement that measures the value of a given company; it’s often used in collaboration with the P/E multiple in determining the market value of a company. Below, is a caption of the EBITDA multiple calculations per varying price of the pending IPO issue:
The table selection above illustrates the varying EBITDA multiple given five different IPO pricings that are currently pending. The lowest EBITDA multiple of 14.016 is a function of issuing an IPO price of $22.00, while the multiple of 14.62 is as a result of an IPO price of $26.00. The EBITDA multiple as a gauge of company valuation is viewed from a variety of different perspectives and angles. Typically, a low EBITDA multiple translates to a company being undervalued; however, it is imperative to put that into the context of the industry that the company (in this case JetBlue) finds itself in. For example, given that JetBlue is in an industry that experiences high growth, then it is understood and expected for its multiple values to be high alongside that of its industry peers.
EBITDA multiple performs quite well account for shortcomings that are inherent in P/E and EPS, such as taking into account the degree of financial leveraging. It is undoubtedly imperative to put the EBITDA multiple in context to the industry that JetBlue industry is situated in; it is observed that industries that required a high degree of capital investment will typically possess a low multiple, which is why comparing the multiple to other competitors who are found in the same industry. Below is a ranking of the EBITDA multiple of JetBlue Airways with respect to the airline industry in the early 2000s:
According to the table above, the projected EBITDA multiple for JetBlue based on five differing IPO prices, rank in the top ten comparative to the rest of the industry in this snapshot in time. Based on this projection any IPO amount would be sufficient enough to provide evidence to deter any notion that JetBlue is an undervalued, underpriced IPO. Therefore the ideal price the will sufficiently strike a balance between both the company and long-term investors, would be an IPO priced at $26.00. The avoidance here is that of under pricing the IPO, likewise deterring investors by pricing itself out of the market. Based on the figures above, an IPO price of $26.00 will rank high amongst its peers in the airline industry; the justification is that the EBITDA multiple of 14.62 corresponds and attests to the high value and worth of JetBlue airways.
In summation, JetBlue has elected the route of going public for the first time in company history. The decision of financial management to elect the route of issuing stock for the first time in company history, results in profound positive consequences for the company as a whole. Benefits such as expanded liquidity, access to capital and achieving the optimal value of the company. As a startup airline, it is essential for the company to raise the necessary capital to combat unintended and unexpected occurrences in the macro-economy, as well as future expenses incurred, and maintaining overall fiscal solvency of the company.
The optimal IPO price of $26.00 per share at 5.5 million shares outstanding will produce $143 million dollars less a 7 % spread (industry standard), would provide the necessary capital to expand and grow JetBlue to a promising airline. As an airline with an IPO underway, JetBlue will continue to pride itself in providing low-cost, yet quality flight experience both domestically and overseas as well. JetBlue has the potential to be a global leader in the air transportation business, but can only be achieved by financial management competence coupled with investor confidence and avidness in the equities market.
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