What is an IPO and why is it such a big deal? Is this a good idea for JetBlue? 2. What do you think JetBlue stock is worth? 3. Does the financial forecast in Exhibit 13 seem reasonable? What are the...

What is an IPO and why is it such a big deal? Is this a good idea for JetBlue?
2. What do you think JetBlue stock is worth?
3. Does the financial forecast in Exhibit 13 seem reasonable? What are the key assumptions? Is the length of the forecast period reasonable?
4. What discount rate is appropriate for the cash flow forecast?
5. What was your approach for terminal value? How do your terminal value assumptions affect the estimated value of JetBlue shares?
6. What are the pros and cons of using a comparable multiple approaches in valuation?

Please no plagiarism. Do not used Wikipedia references. Please use book, articles, but legitimate references. Create a case study report that presents your analysis and conclusions. Make sure to Use Free Cash Flow valuation to estimate the value of JetBlue and its price per share. Please use APA format. 1. What is an IPO and why is it such a big deal? Is this a good idea for JetBlue? 2. What do you think JetBlue stock is worth? 3. Does the financial forecast in Exhibit 13 seem reasonable? What are the key assumptions? Is the length of the forecast period reasonable? 4. What discount rate is appropriate for the cash flow forecast? 5. What was your approach for terminal value? How do your terminal value assumptions affect the estimated value of JetBlue shares? 6. What are the pros and cons of using a comparable multiple approaches in valuation? JetBlue Airways IPO Valuation UVA-F-1415 Rev. Aug. 3, 2017 This case was prepared by Professor Michael J. Schill with the assistance and cooperation of John Owen (JetBlue), Garth Monroe (MBA ’05), and Cheng Cui (MBA ’04). It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2003 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e- mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. JetBlue Airways IPO Valuation My neighbor called me the other day and she said, “You have an interesting little boy.” Turns out, the other day she asked my son Daniel what he wanted for Christmas. And he said, “I want some stock.” “Stock?” she said. “Don’t you want video games or anything?” “Nope,” he said. “I just want stock. JetBlue stock.” —David Neeleman CEO and Founder, JetBlue Airways It was April 11, 2002, barely two years since the first freshly painted JetBlue plane had been rolled out at the company’s home base at New York City’s John F. Kennedy Airport (JFK). JetBlue’s first years had been good ones. Despite the challenges facing the U.S. airline industry following the terrorist attacks of September 2001, the company remained profitable and was growing aggressively. To support JetBlue’s growth trajectory and offset portfolio losses by its venture-capital investors, management was ready to raise additional capital through a public equity offering. Exhibit 1 through Exhibit 4 provide selections from JetBlue’s initial public offering (IPO) prospectus, required by the SEC to inform investors about the details of the equity offering. After nearly two weeks of road-show meetings with the investment community, the JetBlue management team had just finished its final investor presentation and was heading for Chicago’s Midway Airport. With representatives of co-lead manager Morgan Stanley and the JetBlue board patched in on a conference call, it was time for the group to come to an agreement on the offering price of the new shares. The initial price range for JetBlue shares, communicated to potential investors, was $22 to $24. Facing sizable excess demand for the 5.5 million shares planned for the IPO, management had recently filed an increase in the offering’s price range ($25 to $26). But even at that price range, most of the group thought the stock faced “blow-out” demand. After months of preparation, it was time to set the price. The underwriters were anxious to distribute the shares that evening, and NASDAQ was prepared for JBLU (the company’s ticker symbol) to begin trading on the exchange in the morning. JetBlue Airways In July 1999, David Neeleman, 39, announced his plan to launch a new airline that would bring “humanity back to air travel.” Despite the fact that the U.S. airline industry had witnessed 87 new-airline failures over the previous 20 years, Neeleman was convinced that his commitment to innovation in people, policies, and technology could keep his planes full and moving.1 His vision was shared by an impressive new 1 Jeff Sweat, “Generation Dot-Com Gets Its Wings,” Information Week (January 1, 2001). DardenBusinessPublishing:239137 P le as e do n ot c op y or r ed is tr ib ut e. C on ta ct p er m is si on s@ da rd en bu si ne ss pu bl is hi ng .c om f or q ue st io ns o r ad di tio na l p er m is si on s. T hi s do cu m en t i s au th or iz ed f or u se o nl y by C ar m en P hi lli ps a t E m br y- R id dl e A er on au tic al U ni ve rs ity . Page 1 of 19 file:///C:/Users/lemleya/Desktop/MM%20INVENTORY%20FINAL/DOCS/[email protected] Page 2 UVA-F-1415 management team and a growing group of investors. David Barger, a former vice president of Continental Airlines, had agreed to become JetBlue’s president and COO. John Owen had left his position as executive vice president and former treasurer of Southwest Airlines to become JetBlue’s CFO. Neeleman had received strong support for his business plan from the venture-capital community. He had quickly raised $130 million in funding from such high-profile firms as Weston Presidio Capital, Chase Capital Partners, and Quantum Industrial Partners (George Soros’s private-equity firm). In seven months, JetBlue had secured a small fleet of Airbus A320 aircraft and initiated service from JFK to Fort Lauderdale, Florida, and Buffalo, New York. By late summer of 2000, routes had been added to two other Florida cities (Orlando and Tampa), two other northeastern cities (Rochester, New York, and Burlington, Vermont), and two California cities (Oakland and Ontario). The company continued to grow rapidly through early 2002, and was operating 24 aircraft flying 108 flights per day to 17 destinations. JetBlue’s early success was often attributed to Neeleman’s extensive experience with airline start-ups. As a University of Utah student in his early 20s, Neeleman began managing low-fare flights between Salt Lake City and Hawaii. His company, Morris Air, became a pioneer in ticketless travel, and was later acquired by low- fare leader Southwest Airlines. Neeleman stayed only briefly at Southwest, leaving to assist in the launching of Canadian low-fare carrier WestJet while waiting out the term of his noncompete agreement with Southwest. Simultaneously, Neeleman also developed the e-ticketing system Open Skies, which was acquired by Hewlett- Packard in 1999. Neeleman acknowledged that JetBlue’s strategy was built on the goal of fixing everything that “sucked” about airline travel. He offered passengers a unique flying experience by providing new aircraft, simple and low fares, leather seats, free LiveTV at every seat, preassigned seating, reliable performance, and high-quality customer service. JetBlue focused on point-to-point service to large metropolitan areas with high average fares or highly traveled markets that were underserved. JetBlue’s operating strategy had produced the lowest cost per available-seat-mile of any major U.S. airline in 2001—6.98 cents versus an industry average of 10.08 cents. With its strong capital base, JetBlue had acquired a fleet of new Airbus A320 aircraft. JetBlue’s fleet not only was more reliable and fuel-efficient than other airline fleets, but also afforded greater economies of scale because the airline had only one model of aircraft. JetBlue’s management believed in leveraging advanced technology. For instance, all its pilots used laptop computers in the cockpit to calculate the weight and balance of the aircraft and to access their manuals in electronic format during the flight. JetBlue was the first U.S. airline to equip cockpits with bulletproof Kevlar doors and security cameras in response to the September 11 hijackings. JetBlue had made significant progress in establishing a strong brand by seeking to be identified as a safe, reliable, low-fare airline that was highly focused on customer service and by providing an enjoyable flying experience. JetBlue was well positioned in New York, the nation’s largest travel market, with approximately 21 million potential customers in the metropolitan area. Much of JetBlue’s customer-service strategy relied on building strong employee morale through generous compensation and passionately communicating the company’s vision to employees. The Low-Fare Airlines In 2002, the low-fare business model was gaining momentum in the U.S. airline industry. Southwest Airlines, the pioneer in low-fare air travel, was the dominant player among low-fare airlines. Southwest had successfully followed a strategy of high-frequency, short-haul, point-to-point, low-cost service. Southwest DardenBusinessPublishing:239137 P le as e do n ot c op y or r ed is tr ib ut e. C on ta ct p er m is si on s@ da rd en bu si ne ss pu bl is hi ng .c om f or q ue st io ns o r ad di tio na l p er m is si on s. T hi s do cu m en t i s au th or iz ed f or u se o nl y by C ar m en P hi lli ps a t E m br y- R id dl e A er on au tic al U ni ve rs ity . Page 2 of 19 Page 3 UVA-F-1415 flew more than 64 million passengers a year to 58 cities, making it the fourth-largest carrier in America and in the world. Financially, Southwest had also been extremely successful—in April 2002, Southwest’s market capitalization was larger than all other U.S. airlines combined (Exhibits 5 and 6 provide financial data on Southwest Airlines). Following the success of Southwest, a number of new low-fare airlines emerged. These airlines adopted much of Southwest’s low-cost model, including flying to secondary airports adjacent to major metropolitan areas and focusing on only a few types of aircraft to