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UVA-F-1415-SSRN v 1. 2 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 the first week of April 2002, barely two years since the first freshly-painted JetBlue plane rolled out at the company’s home base at New York City’s John F. Kennedy (JFK) Airport.
JetBlue’s first years had been good ones. Despite the challenges facing the U. S. airline industry following the aircraft terrorist attacks of September 2001, the company remained profitable and was growing aggressively. To support their growth trajectory and offset portfolio losses by their venture capital investors, management had accelerated the decision to raise additional capital through a public equity offering. Exhibits 1 through 4 provides selections from JetBlue’s initial public offering (IPO) prospectus, the name for the document required by the SEC to inform investors about the details of the equity offering.
With less than a week to go until the offering, JetBlue management was preparing for a meeting with IPO co-lead manager, Morgan Stanley. The initial price range for JetBlue shares had originally been targeted at between $22 to $24. Facing sizeable excess demand for the 5. 5 million shares planned in the IPO, the JetBlue management team was considering whether to support an increase in the offering price of the new shares. This case was prepared by Professor Michael J. Schill with research assistance from Cheng Cui.
This case 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 dardencases@virginia. edu. 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 he Darden School Foundation. -2JetBlue Airways UVA-F-1415 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 twenty 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 management team and a growing group of investors.
Ex-Continental Airlines vice-president, David Barger, had agreed to become the new JetBlue President and COO. John Owen, had left his position as Treasurer for Southwest Airlines to fill the CFO role at JetBlue. Neeleman had received strong support for his business plan from the venture capital community. He had been able to quickly raise $130 million in funding from such high profile firms as Weston Presidio Capital, the Chase venture fund, and George Soros’ private equity firm Quantim Industrial partners.
Within 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 2000, routes had been added to two other Florida cities (Orlando and Tampa), two other upstate cities (Rochester and Burlington, Vermont), and two California cities (Oakland and Ontario). The company continued to grow rapidly through early 2002 and now operated 24 aircraft flying 108 flights per day to 17 destinations. JetBlue’s early success was often attributed to Neeleman’s extensive experience with airline startups.
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 with Southwest, leaving to assist in the launching of Canadian low-fare carrier WestJet. 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 ixing everything that “sucks” 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 are underserved. JetBlue operating strategy had produced the lowest cost per available seat mile of any of the major U. S. irlines 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. The JetBlue fleet was not only more reliable and fuel-efficient than other airline fleets but afforded greater economies of scale since the airline only had one model of aircraft. JetBlue management believed in leveraging advanced technology. For instance, all of their pilots used 1 Jeff Sweat, “Generation Dot-Com Gets Its Wings,” Information Week, January 1, 2001. -3-
UVA-F-1415 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 secure cockpits with titanium doors and security cameras in response to the September 11th 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 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 vision with 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 been successful following a strategy of high-frequency, short-haul, point-to-point, low cost air travel service. Southwest flew more than 64 million passengers a year to 58 cities, making it the fourth largest carrier in America. 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 from ValueLine and Mergent. Following the success of Southwest, a flurry of new low-fare airlines had emerged.
These airlines adopted much of the Southwest low-cost model, including flying to secondary airports adjacent to major metropolitan areas and focusing on few aircraft types to minimize maintenance complexity. In addition to JetBlue, current low-fare U. S. airlines included AirTran, America West, ATA and Frontier. Established regional airline, Alaska Air, was adopting a lowfare strategy. A number of the low-fare airlines had been more resilient in the aftermath of the September 11th aircraft disasters.
Exhibit 7 shows current market multiple calculations for U. S. airlines. Low-fare airlines had also appeared in markets outside the United States with Ryanair and easyJet in Europe and WestJet in Canada. Exhibit 8 provides historical growth rates of revenue and equipment for low fare airlines. The most recent IPOs among low-fare airline were of non-U. S. airlines. Ryan Air, WestJet and easyJet had gone public with trailing EBIT multiples of 8. 5 times, 11. 6 times and 13. 4 times, respectively, and first day returns of 62%, 25% and 11%, respectively. 2
The “first day return” was the realized return based on the difference between the IPO share price and the market share price at the close of the first day of exchange-based trading. The term “trailing EBIT (earnings before interest and taxes) multiple” was defined as [Book debt+IPO price*Post IPO shares outstanding]/[Most recent year’s EBIT]. The term “leading EBIT multiple” referred to an EBIT multiple based on a future year’s forecasted EBIT estimate. 2 -4The IPO Process UVA-F-1415 The process of “going public” (selling publicly traded equity for the first time) was an arduous process that typically required about 3 months.
Exhibit 9 provides a timeline for the typical IPO. 3 Private firms needed to fulfill a number of prerequisites prior to initiating the equity issuance process. Firms had to generate a credible business plan, gather a qualified management team, create an outside board of directors, prepare audited financial statements, performance measures and projections, and develop relationships with investment bankers, lawyers, and accountants. Frequently, firms held “bake-off” meetings with potential investment banks to discuss the equity issuance process with a number of candidates before selecting a lead underwriter.
Important characteristics of an underwriter included the proposed compensation package, previous track record, analyst research support, distribution capabilities, and aftermarket market-making support. After establishing the prerequisites, the equity issuance process began with an organization or “all hands” meeting. This meeting was attended by all key participants of the process, including management, underwriters, accountants, and legal counsel for both the underwriters and issuing firm. The meeting was designed to plan the process and agree on the specific terms.
Throughout the process, additional “all hands” meetings could be called to discuss and problems and review progress. Following the initiation of the equity issuance process, the SEC prohibited the company from publishing information outside the prospectus. The company could continue established, normal advertising activities, but any increased publicity designed to raise the awareness of the company’s name, products, or geographic presence which created a favorable attitude towards the company’s securities could be considered illegal. This requirement was known as the “quiet period. The underwriter’s counsel generally prepared a “letter of intent” which provided most of the terms of the underwriting agreement but was not legally binding. The underwriting agreement described the securities to be sold, set forth the rights and obligations of the various parties, and established the underwriter compensation. Since the underwriting agreement was not signed until the offering price was determined (just before distribution began), both the firm and the underwriter were free to pull out of the agreement anytime before the offering date.
If the firm did withdraw the offer, the letter of intent generally required the firm to reimburse the underwriter for direct expenses. This section draws from Michael C. Bernstein and Lester Wolosoff, Raising capital: The Grant Thornton LLP guide for entrepreneurs; Frederick Lipman, Going Public; Coopers and Lybrand, A guide to going public; and Craig G. Dunbar, The effect of information asymmetries on the choice of underwriter compensation contracts in IPOs, Ph. D. Dissertation, University of Rochester. 3 -5- UVA-F-1415
The Securities and Exchange Commission required that firms selling equity in public markets solicit the commission’s approval. The filing process required preparation of the prospectus (Part I of the registration statement), answers to specific questions, copies of the underwriting contract, company charter and by-laws, and a specimen of the security (all included in Part II of the registration statement) all of which required extensive attention by all parties on the offering team. One of the important features of the registration process was the performance of “due-diligence” procedures.
Due-diligence referred to the process of providing reasonable ground that there was nothing in the registration statement which was significantly untrue or misleading and was motivated by the liability to all parties participating in the registration statement for any material misstatements or omissions. The due-diligence procedure involved such things as, reviewing company documents, contracts, and tax returns, visiting company offices and facilities, soliciting “comfort letters” from company auditors, and interviewing company and industry personnel.
During this period the lead underwriter began to form the underwriting “syndicate. ” The syndicate was composed of a number of investment banks who agree to buy portions of the offering at the offer price less the underwriting discount. In addition to the syndicate members, dealers were enlisted to sell a certain number of shares on a “best-efforts” basis. The dealers received a fixed reallowance or concession for each share sold. The selling agreement provided the contract among members of the syndicate.
The agreement provided power of attorney to the lead underwriter, stipulated the management fee that each syndicate member was required to pay the lead underwriter, the share allocations, and the dealer reallowance or concessions. Since the exact terms of the agreement were not specified until approximately 48 hours before selling began, the agreement did not become binding until just before the offering. The original contract specified a range of expected compensation levels.
The selling agreement was structured so that the contract became binding with oral approval of the contract via telephone by the syndicate members after the effective date. The SEC review process started when the registration statement was filed and the statement was assigned to a branch chief of the Division of Corporate Finance. As part of the SEC review, the statement was given to accountants, attorneys, analysts, and industry specialists. The SEC review process was legislated in the Securities Act of 1933 which aspired to “provide full and fair disclosure of the character of securities sold in interstate commerce. 2 Under the Securities Act, the registration statement became effective 20 days after the filing date. However, if the commission found anything in the registration statement which was regarded as materially untrue, incomplete, or misleading, the branch chief sent the registrant a letter of comment detailing the deficiencies. Following a letter of comment, the issuing firm was required to correct and return the amended statement to the SEC. Unless an acceleration was granted by the SEC, the amended statement restarted the 20-day waiting period.
While the SEC was reviewing the registration statement, the underwriter was engaged in book-building activities. Building the book involved surveying potential investors to construct a 2 Securities Act of 1933, Preamble. -6- UVA-F-1415 schedule of investor demand for the new issue. To generate investor interest, the preliminary offering prospectus or “red herring” (since the preliminary prospectus was required to have “Preliminary Prospectus” printed on the cover in red ink) was printed and offered to potential investors.
Underwriters generally organized a one- to two-week “road show” tour during this period. The road shows allowed managers to discuss their investment plans, display their management potential, and answer questions from financial analysts, brokers, and institutional investors in a variety of locations throughout the country or sometimes abroad. Finally, companies could place “tombstone ads” in various financial periodicals announcing the offering and listing the members of the underwriting syndicate.
By the time the registration statement was ready to become effective, the underwriter and offering firm management negotiated the final offering price and underwriters’ discount. The negotiated price depended on perceived investor demand and current market conditions (e. g. , price multiples of comparable companies, previous offering experience of industry peers). Once the underwriters and management agreed on the offering price and discount, the underwriting agreement was signed and the final registration amendment was filed with the SEC.
The company and underwriter generally requested acceleration by the SEC of the final pricing amendment, which was generally granted immediately over the telephone. The offering was now ready for public sale. The final pricing and acceleration of the registration statement generally happened within a few hours. During the morning of the effective day, the lead underwriter confirmed the selling agreement with the members of the syndicate. Following the selling agreement confirmation, selling began. Members of the syndicate sold shares of the offering through oral solicitations to potential investors.
Since investors were required to receive a final copy of the prospectus with the confirmation of sale and the law allowed investors to back out of purchase orders upon receipt of the final prospectus, the offering sale was not realized until underwriters actually received payment. Underwriters would generally cancel orders if payment was not received within five days of the confirmation. SEC Rule 10b-7 permitted underwriters to engage in price stabilization activities for a limited period during security distribution.
Under this rule, underwriters often post stabilizing bids at or below the offer price which provided some price stability during the initial trading of an IPO. The offering settlement or closing occurred seven to ten days after the effective date, as specified in the underwriting agreement. At this meeting, the firm delivered the security certificates to the underwriters and dealers and the lead underwriters delivered the prescribed proceeds to the firm. In addition, the firm traditionally delivered an updated comfort letter from the company’s independent accountants.
Following the offering the underwriter generally continued to provide valuable investment banking services by providing research literature and market making services for the company. -7The IPO Decision UVA-F-1415 There was some debate among the JetBlue management team regarding the appropriate pricing policy for the IPO shares. Morgan Stanley reported that the deal was highly oversubscribed by investors (i. e. , demand exceeded supply). Analysts and reporters were overwhelmingly enthusiastic about the offering.
Exhibit 10 contains a selection of recent analyst and reporter comments. With such strong demand, management worried that the current pricing range left too much money on the table. The contrasting view held that increasing the price might compromise the success of the deal. Since maintaining access to capital markets was considered vital to JetBlue’s aggressive growth plans, discounting the company’s IPO price seemed like a reasonable concession to insure a successful deal and a certain level of investor buzz.
Being conservative on the offer price seemed particularly salient considering the risks of taking an infant New York airline public just six months after the 9/11 disaster. Exhibit 11 provides expected aggregate industry growth and profitability forecasts from the Value Line Investment Survey. By April 2002, the U. S. economy had been stalling for nearly two years. The Federal Reserve had attempted to stimulate economic activity by reducing interest rates to their lowest level in a generation. Current long-term U. S.
Treasuries traded at a yield of 5%, short-term rates were at 2%, and the market risk premium was estimated to be 5%. Based on the JetBlue management team’s forecast of aircraft acquisitions, a first pass financial forecast for the company is provided in Exhibit 12. -8Exhibit 1 JETBLUE AIRWAYS IPO VALUATION Selections from JetBlue Prospectus The Offering Common stock offered Common stock estimated to be outstanding immediately after this offering Over-allotment option 5,500,000 shares 40,578,829 shares 825,000 shares
UVA-F-1415 Use of proceeds We intend to use the net proceeds, together with existing cash, for working capital and capital expenditures, including capital expenditures related to the purchase of aircraft. We have not declared or paid any dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the further expansion and continued growth of our business. JBLU Dividends Proposed Nasdaq National Market symbol Results of Operations
Three Months Ended Dec 31, 2000 Operating Statistics: Revenue passengers Revenue passenger miles (000) Available seat miles (000 ) Load factor Breakeven load factor Aircraft utilization (hours per day) Average fare Yield per passenger mile (cents) Passenger revenue per available seat mile (cents) Operating revenue per available seat mile (cents) Operating expense per available seat mile (cents) Departures Average stage length (miles) Average number of operating aircraft during period Full-time equivalent employees at period end Average fuel cost per gallon (cents) Fuel gallons consumed (000) Percent of sales through jetblue. om during period 523,246 469,293 623,297 75. 3% 79. 4% 11. 8 $ 90. 65 10. 11 7. 61 7. 85 8. 03 4,620 833 9. 2 1,028 103. 38 8,348 32. 6% 644,419 600,343 745,852 80. 5% 73. 2% 13. 1 $ 96. 15 10. 32 8. 31 8. 56 7. 55 5,283 871 10. 5 1,350 86. 03 9,917 37. 6% 753,937 766,350 960,744 79. 8% 70. 6% 13. 1 $ 101. 01 9. 94 7. 93 8. 16 7. 01 6,332 937 13. 2 1,587 83. 24 12,649 39. 4% 791,551 863,855 1,131,013 76. % 74. 6% 12. 8 $ 101. 66 9. 29 7. 10 7. 30 6. 93 6,936 1,007 15. 9 1,876 79. 53 14,958 45. 1% 926,910 1,051,287 1,370,658 76. 7% 76. 2% 11. 8 $ 99. 37 8. 76 6. 72 6. 97 6. 68 7,783 1,087 19. 4 2,116 60. 94 17,571 51. 3% Mar 31, 2001 Jun 30, 2001 (unaudited) Sep 30, 2001 Dec 31, 2001 UVA-F-1415 Exhibit 2 JETBLUE AIRWAYS IPO VALUATION JetBlue Airways Corporation Balance Sheets (In Thousands)
December 31, 2001 ASSETS Cash and cash equivalents Receivables, less allowance Inventories, less allowance Prepaid expenses and other Total current assets Flight equipment Predelivery deposits for flight equipment Less accumulated depreciation Other property and equipment Less accumulated depreciation Total property and equipment Other Assets Total Assets $117,522 20,791 2,210 3,742 144,265 364,681 125,010 489,691 9,523 480,168 29,023 4,313 24,710 504,878 24,630 $673,773 2000 LIABILITIES $34,403 21,633 1,133 2,744 59,913 163,060 91,620 Total current liabilities 254,680 2,334 252,346 18,290 1,632 16,658 269,004 15,211 $344,128 COMMON STOCKHOLDERS’ EQUITY Additional paid-in capital Accumulated deficit Unearned compensation Total common stockholders’ equity (deficit) Total Liabilities & Common Stockholders’ Equity Long Term Debt Deferred Credits & Other Liabilities Convertible Redeemable Preferred Stock Accounts payable Air traffic liability Accrued salaries, wages and benefits Other accrued liabilities Short-term borrowings Current maturities of long-term debt December 31, 2001 $24,549 51,566 18,265 15,980 28,781 54,985 194,126 290,665 10,708 210,441 44 3,889 (33,117) (2,983) (32,167) $673,773 2000 $12,867 27,365 5,599 5,255 15,138 24,800 91,024 137,110 6,595 163,552 44 487 (54,684) ??? (54,153) $344,128 UVA-F-1415 Exhibit 3 JETBLUE AIRWAYS IPO VALUATION JetBlue Airways Corporation Statements of Operations (In thousands, except per share amounts) Year Ended December 31, 2001 2000 1999
Operating Revenues Passenger Other Total Operating Revenues Operating Expenses Salaries, Wages And Benefits Aircraft Fuel Aircraft Rent Sales And Marketing Landing Fees And Other Rents Depreciation And Amortization Maintenance Materials And Repairs Other Operating Expenses Total Operating Expenses Operating Income (Loss) Other Income (Expense) Airline Stabililization Act Compensation Interest Expense Capitalized Interest Interest Income And Other Total Other Income (Expense) Income (Loss) Before Income Taxes Income Tax Expense (Benefit) Net Income (Loss) Preferred Stock Dividends Net Income (Loss) Applicable To Common Stockholders Earnings (Loss) Per Common Share: Basic Diluted Pro forma basic (unaudited) $9. 88 $1. 14 $1. 0 ($27) ($27) ($37) ($37) $21,567 ($35,422) ($18,420) 18,706 (14,132) 8,043 2,491 15,108 41,915 3,378 38,537 (16,970) ??? (7,395) 4,487 2,527 (381) (21,569) (239) (21,330) (14,092) ??? (705) 705 685 685 (13,531) 233 (13,764) (4,656) 84,762 41,666 32,927 28,305 27,342 10,417 4,705 63,483 293,607 26,807 32,912 17,634 13,027 16,978 11,112 3,995 1,052 29,096 125,806 (21,188) 6,000 4 324 887 447 111 38 6,405 14,216 (14,216) $310,498 9,916 320,414 $101,665 2,953 104,618 $ ??? ??? ??? -11Exhibit 4 JETBLUE AIRWAYS IPO VALUATION JetBlue Airways Corporation Statements of Cash Flows (In thousands) Year Ended December 31, 2001 Cash Flows From Operating Activities Net income loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation Amortization Deferred income taxes Other, net Changes in certain operating assets and liabilities: Decrease (increase) in receivables Increase in inventories, prepaid expenses and other Increase in air traffic liability Increase in accounts payable and other accrued liabilities Increase in accounts payable and other accrued liabilities Net cash provided by (used in) operating activities Cash Flows From Investing Activities Capital expenditures Predelivery deposits for flight equipment, net Increase in security deposits Purchases of short-term investments Proceeds from maturities of short-term investments Other, net Net cash used in investing activities Cash Flows From Financing Activities Proceeds from issuance of convertible redeemable preferred stock Proceeds from issuance of common stock Proceeds from issuance of long-term debt Proceeds from short-term borrowings Proceeds from aircraft sale and leaseback transactions Repayment of long-term debt Repayment of short-term borrowings Other, net Net cash provided by financing activities Increase In Cash And Cash Equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 29,731 25 185,000 28,781 72,000 (35,254) (15,138) (3,450) 261,695 83,119 34,403 $17,522 51,322 130 137,750 15,138 70,000 (18,577) (1,300) 254,463 16,157 18,246 $34,403 (233,775) (54,128) (1,952) (289,855) (205,759) (27,881) (7,939) (20,923) 21,392 (20) (241,130) 430 (2,120) 23,788 30,894 30,894 111,279 (21,622) (3,354) 26,173 15,070 15,070 2,824 9,972 445 3,373 5,960 3,889 106 3,892 $38,537 ($21,330) 2000 UVA-F-1415 1999 ($13,764) 111 619 (340) 6,818 6,818 (6,556) (12,463) (50,713) (5,302) 1,026 (67,452) 80,671 69 80,740 6,732 11,514 $18,246 -12Exhibit 5 JETBLUE AIRWAYS IPO VALUATION
Value Line Tear Sheet for Southwest Airlines (March 15, 2002) UVA-F-1415 -13Exhibit 6 JETBLUE AIRWAYS IPO VALUATION Southwest Airlines: Current Debt Outstanding Moody’s rating NA NA NA NA Baa1 Baa1 Baa1 Baa1 NA Amount outstanding $475 million $200 million $614 million $52 million $100 million $100 million $100 million $100 million $109 million Maturity date NA 2004 2006 2012 Oct-2003 Feb-2005 Sep-2007 Feb-2027 NA UVA-F-1415 Issue Short-term bank debt Floating rate secured notes Private notes 5. 10-6. 10 Floating rate French Bank debt 8. 75 Note 8. 00 Note 7. 875 Debenture 7. 375 Debenture Capital leases Yield to maturity NA NA NA NA 5. 65% 5. 91% 7. 41% 8. 68% NA
Source: Mergent’s Bond Record; Southwest Annual Report -14Exhibit 7 JETBLUE AIRWAYS IPO VALUATION Valuation Multiples Actual for 2001 Price/ Share Book Equity/ Share Book Debt/ Share EBITDA*/ Share EBIT/ Share Earnings/ Share UVA-F-1415 Estimates for 2002 EBIT/ Share Earnings/ Share AirTran Alaska Air America West AMR ATA Continental Delta Frontier Midwest Northwest Ryanair Southwest United WestJet (1) 6. 6 29. 1 3. 5 22. 3 15. 0 26. 2 29. 3 17. 0 14. 6 15. 7 32. 1 18. 5 13. 5 15. 9 (2) 0. 5 32. 1 12. 5 35. 1 10. 8 20. 9 32. 7 5. 4 8. 3 -5. 1 5. 5 5. 3 59. 6 2. 8 (3) 4. 0 33. 8 10. 2 69. 3 32. 9 82. 0 70. 3 0. 0 2. 7 66. 9 3. 3 1. 8 186. 2 1. 0 (4) 1. 2 3. 3 -4. 3 -7. 0 8. 5 9. 8 -1. 4 3. 2 -0. 1. 6 1. 3 1. 5 -37. 0 2. 1 (5) 0. 8 -1. 7 -6. 2 -16. 2 -2. 0 1. 4 -11. 8 3. 0 -1. 6 -4. 4 0. 9 1. 1 -56. 1 1. 3 (6) 0. 3 -1. 5 -4. 4 -11. 5 -2. 6 -1. 6 -9. 9 2. 0 -1. 1 -5. 0 0. 7 0. 7 -39. 6 0. 8 (7) 0. 8 2. 7 -4. 5 12. 4 -6. 4 11. 1 8. 4 0. 6 1. 5 7. 2 1. 2 1. 4 N/A 1. 6 (8) 0. 3 -0. 8 -4. 1 -3. 9 -7. 2 -1. 2 -3. 1 0. 4 0. 8 -2. 5 0. 9 0. 6 -15. 4 0. 6 AirTran Alaska Air America West AMR ATA Continental Delta Frontier Midwest Northwest Ryanair Southwest United WestJet Market to book multiple [1/2] 13. 4 0. 9 0. 3 0. 6 1. 4 1. 3 0. 9 3. 2 1. 8 -3. 1 5. 8 3. 5 0. 2 5. 6 Trailing Total capital EBITDA multiple multiple [(1+3)/(2+3)] [(1+3)/4] 2. 8. 6 1. 0 19. 2 0. 6 -3. 2 0. 9 -13. 1 1. 1 5. 6 1. 1 11. 0 1. 0 -71. 6 3. 2 5. 3 1. 6 -298. 7 1. 3 51. 6 4. 0 26. 4 2. 9 13. 4 0. 8 -5. 4 4. 4 8. 1 EBIT multiple [(1+3)/5] 12. 9 -37. 1 -2. 2 -5. 7 -23. 8 77. 0 -8. 4 5. 7 -11. 0 -18. 8 38. 3 18. 5 -3. 6 12. 7 PE Multiple [1/6] 25. 2 -19. 3 -0. 8 -1. 9 -5. 7 -16. 7 -3. 0 8. 4 -13. 5 -3. 1 44. 0 27. 6 -0. 3 19. 6 Leading EBIT PE multiple Multiple [(1+3)/7] [1/8] 13. 9 20. 1 23. 7 -38. 6 -3. 0 -0. 8 7. 4 -5. 7 -7. 5 -2. 1 9. 8 -22. 4 11. 8 -9. 4 26. 5 45. 9 11. 3 17. 4 11. 5 -6. 3 30. 2 34. 1 14. 3 28. 5 N/A -0. 9 10. 6 27. 0 Data source: Actual numbers for 2001 are from company annual reports.
Estimates for 2002 are from Valueline when available, otherwise consensus analyst estimates are used. All stock prices are quoted as of December 31, 2001. Ryanair figures are based on the respective American Deposit Receipt prices. Westjet figures are in Canadian dollars. 1 US dollar = 1. 5870 Canadian dollars as of March 31, 2002. The calculation procedure for the valuation multiples is defined in the lower panel based on the numbered variables defined in the upper panel. Exhibit 8 JETBLUE AIRWAYS IPO VALUATION Historical Annual Growth Rates for Low Fare Airlines UVA-F-1415 $ Revenue Growth $ Gross Equipment Growth Year 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 ? 990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 AirTran ATA Frontier Ryanair Southwest -20% 5% 28% 32% 51% 101% 42% 46% 32% 35% 45% 18% 10% 14% 20% 21% 18% 13% 10% 16% 19% 19% 16% 12% AirTran ATA Frontier Ryanair Southwest 177% 55% 61% 54% 35% 59% 66% 68% 57% 27% 23% 35% 17% 11% 28% 36% 13% 11% 19% 12% 9% 14% 19% -2% 456% 186% -4% 49% 18% -20% 35% -22% 1% 21% 18% 2% 20% 21% 39% 23% -58% 49% 125% 39% 56% 105% 79% 237% 20% N/A N/A 39% 68% N/A 2204% 175% -40% -4% 108% 15% 24% 7% 11% 24% 23% 5% 4% 17% 22% 15% -1% 186% 66% 26% 50% 50% 43% -6% 25% 15% 29% 11% 21% N/A UVA-F-1415 Exhibit 9 JETBLUE AIRWAYS IPO VALUATION Life Cycle of a Typical U. S. IPO Transaction Event time (in days)