Case study

JetBlue Airways
corporation
 by-
 Praveen Rai
About the company:-
 JetBlue Airways corporation was formed
in Aug.1998.. by DAVID NEELMAN , a
veteran in low fair airline industry, with
providing low fair ,low cost, but high
service passenger airline serving in US
market.

 The initial investors provided amount of
$175M in start up equity capital. JetBlue
began flying in FEB-2000. & $158M
additional capital was raised through its
IPO in April 2002

 .Due to strong financial results & good
value of their shares, Jet blue perceived
successful business model. On 30 June
2003, JetBlue’s shares closed at $41.98
 Operations:-
 JetBlue’s operation were deigned to achieve low operating
cost and give pleasant flying experience to customers
through-
 Utilizing aircraft efficiently- JetBlue operated its aircrafts
average 12.9 hrs a day rather than 9 hrs as competitor
done, it generate more revenue per plane.
 Operating one type aircrafts- JetBlue used single type of
Airplane, that’s why it reduced maintenance cost, lowered
required investment on parts and lower training cost.
 Developing more productive work force- JetBlue’s have
multitasking employees, they could perform multiple task ,
so fewer employees were needed in comparison of other
airline companies with more restricted work rules.
 Lowering distribution cost- JetBlue didn’t provide paper
tickets. It provided through web site, by this it reduce
printing and back office operation cost.
 The company also focused on improving the flying experience
for its customers through more comfortable and additional
things.

 JetBlue’s Market-
 Choose to fly densely populated cities
( metropolitan cities) where
JetBlue’s low air fares stimulate new demand
from passengers.
 


 Finacial results-
 At the time of 2000-2003 when US carriers
struggled and giant players were
demolished, at that time JetBlue posted
strong revenue growth and became more
profitable airlines.

 Growth opportunities-
 In early 2003 , JetBlue tends to grow by adding both new
markets(middle cities-100 to 600 passengers per day) and
new flight to existing destination.
 JOHN OWEN, Chief Financial Officer of JetBlue at time of
expansion of business, sign contract to purchase additional
new aircraft from Airbus and Embraer ,the main features were-
 For purchasing of 65 new airbus A320 (120 seats) aircrafts
delivered till 2011,which costs $2.5 b.
 For purchasing 100 Embraer E190 (100 seats) aircrafts delivered
from 2005-2011 which costs$ 3b.

 For purchasing of these aircrafts company needed $5.5b. for
which John Owen got two suggestion from investor bankers
.which were- 
 1. Offering a new public equity of 2.6 m shares at an
estimated $42.50 per share. It enabling to raise $110.5 m.
 2. Issuing $150m in a private placement of 30 years
convertible debentures which have coupon rate of 3.5% and it
will be convertible into share of JetBlue @$63.75 per share.
 


 Financial alternatives-
 According to company’s policy it has option to choose secured debt or
operating leases.
 Owen believed that there were some reasons to raise additional capital-
 1. New capital would ease JetBlue’s ability to finance short term
obligations.
 2. Additional capital would strengthen the company’s balance sheet at
time when JetBlue’s would be carrying amount of debt for new
aircraft.
 

 Equity and Debt consideration-

 Owen assembled a financial forecast for JetBlue’s and considered
financial policies appropriate for company in the future.
 When Owen go for the equity then it get financial flexibility but it will
make adverse effects on BOD because they sensitive about dilution of
shares.
 Now Owen moves to the debts options ,JetBlue’s investment banker
had proposed private placement of convertible debt ,it will make
happy BOD who were particular concern about dilution but it would be
unsecured and subordinated to the company’s existing secured
debt.
 


• Describe the existing business and future
prospects of JetBlue?
Current business:-
1.Net income($ thousands)-55315
2.Net revenue($ thousands)-461831
3.Operating 73 flights per day.
4.Useing in single type of airplane,
that’s name is airbus-A320, which
has 120 seats. It provide high
service at low cost.
It focuses on highly condensed
populated area.
 1.
Future prospects of JetBlue:-
Increase the no. of planes( from 45 to 252)and
flight,
 2. Targeting new customers by giving more
facilities.
 3. Focusing on new middle segment market or
small cities , with Embraer E190 (100 seats
capacity) In small cities where 100-600
passengers travelled daily.
 4.Increasing no of employees and enhancing the
skills of existing staff.

Need of financing

1.To increase its aircraft

fleet
2.To maintain operational
expenses
3.To raise Additional capital
4.
5.
6.
1 .  To incre ase  aircrafts fle e t(4 5  to 
252)
To accommodate the company’s growth opportunities
                              Adding new markets (mid sized market segment)
                              Adding new flights to existing destinations

Aircraft Purchases
Airbus Aircraft Purchase (2004 to 2011)       
Embracer Aircraft Purchase(2005 to 2011 )
Airbus A 320 Embracer E190 Estimated value
(millions)

Firm orders 65 100 $6,860

Orders on option 50 100 $5,000
2. To Maintain Operational
Expenses
Investment in spare parts
New hangars
Flight training center
Skilled employees
Marketing campaigns



To raise additional
capital
New capital would


ease its ability to finance

its short term obligations
Strengthen the company’s
balance sheet



 Equity vs debt consideration
Equity consideration
$ 110.5 million
Distributio n o f Owne rship
Dividends / floating rates
Low cost
Growth in its share price
Good balance sheet will attract
subscription to equity
It will help in expansion of
business
Enhance financial flexibility
Availability of liquidity for
shareholders
Debt consideration
$ 150 million
Remain same
Interest 3.5% *
Burden of regular interest
Adverse Effect of hiking fuel
prices
Due to market interest prevailing
rates on higher side can affect the
subscription of debentures on
comparatively low rate
Less financial flexibility
Money is blocked for 30 years for
the holders
   Financial Forecast prepared by Morgan Stanley
       (in $ millions)
2003 2004 2005
Operating revenue 999.5 1397 1846.7
Total operating 822.1 1,144.9 1,846.7
expenses
EBIT 177.4 252.1 333.3
 Market interest rats as of June 30, 2003
 30 years Treasury bonds @ 4.70%
 Corporate bonds
 AA @ 5.19%
 A @ 5.35%
 BBB @ 6.84%
Positive and negative points of equity

 +ive points
Raise $110million
Dividends

Retained earnings

Past performance of share price

Financial forecast

Finanacial flexibility

 -ive points
Distribution of ownership
Retained earnings


Positive and negative points about
debt consideration
+ive points


 Low interest rat

 Unsecured Convertible debentures

 Ownership will remain same

 30 years maturity date

 Conversion at $63.56

-ive points


 High market interest rates

 less financial flexibility

 Burden of regular interest


Q.Which proposal should be preferred ?
Mr. Owen should go for second proposal


because…..
1.Board of directors are highly sensitive about
dilution so they would not prefer equity
consideration.
2.“Retained earnings” or no dividend is the major
reason which can let down the firs proposal.
3.In the second proposal investors will a have an
option to convert it into shares, this gives an
edge to second proposal over first.
4.For acquiring assets long term borrowings are
preferred.
5.Although second proposal seems good but it will
reduce financial flexibility of firm because
Quantitative analysis
 Quantitative analysis.
 1. net income approach


ke


ko
Cost of capital

kd

Degree of leverage
This approach says cost of debt is lesser than cost of equity ,
so this approach supports second proposal
 Mm hypothesis and NOI approach


 Ke

Cost of capital


Ko



Kd


 degree of leverage
 This approach says that cost of equity
increases with increase in degree of
leverage
 (debt equity ratio) , so firms financing
should look this issue that equity share
capital is slightly more risky and costly
while debt is safer and cheaper.


 ke= dividend per year * 100/market value of

share


 kd= interest paid per year * 100/market value of

debt



Suggestions for the firm

As funds are needed for working capital
and acquiring assets, a single method
would not be fruitful because
Ø equity will not get right valuation ,
Ø on the other hand debt consideration
will reduce financial flexibility
Ø so the company should go for the
mixture of both thing
 i.e. working capital should be acquired
by equity and for purchasing planes debt
should be considered.