Jetblue Airline Case Study

Summary

Founded in 1999, under the excellent management of the experienced CEO David Neeleman, Jetblue developed rapidly from 1999 to 2001. And for its further development, it’s the time to find a new way to reverse their operating mode in April 2002.

Doing financial statement we could know, Jetblue has potentiality in this industry as well as good abilities on making profit and managing assets. Firstly, statistics of operating reveals that numbers of passengers and flights increased during 2001 while the unit expense and fuel cost decreased at the same time. Despite other airlines facing challenges following 911, Jetblue still remained profitability. The low-fare business model developed quickly in 2002 and Jetblue’s annual revenue growth rate was 206% in 2001,which performed well compared to other airlines. EPS of Jetblue in 2001 was $1.14, and only one company Frontier’s EPS was higher than it. Also, the indexes of operating ability and profitability were all increased in 2001.

Nevertheless, the solvency of Jetblue was not much positive. Working capital and cash flow excluding financing activities were negative in 2000 and 2001, also current ratio and quick ratio were less than 1, which means Jetblue’s short-term solvency was weak. In addition, total debt ratio decreased from 2000 to 2001. In this situation, creditors would not want to lend more money to Jetblue but shareholder would like to invest to it. That’s why Jetblue should plan its IPO and the current situation offers it prerequisites to make it simultaneously.

There are two methods we choose to price Jetblue’s stock. The first one is PE Valuation. Using Jetblue’s EPS and the average PE multiple of other airlines, we calculated that the stock price should be $28.48 and $40.43, respectively in 2001 and 2002. Another method is NPV Valuation. Based on several assumptions, we got WACC, expected cash flow and terminal value in 2010. The NPV and stock price we calculated is $1103.32 and $28.07....