I only need Q4 and Q5 for the case study

UV2512

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 sales@dardenbusinesspublishing.com. 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).

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Page 2 UV251

2

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 10.0

8

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

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Page 3 UV2512

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 minimize maintenance complexity. In addition to JetBlue,
current low-fare U.S. airlines included AirTran, America West, ATA, and Frontier. Alaska Air, an established
regional airline, adopted a low-fare strategy. Many of the low-fare airlines had been resilient in the aftermath
of the September 11 attacks. (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 airlines were of non-U.S. carriers. Ryanair, WestJet, and easyJet
had gone public with trailing EBIT multiples of 8.5×, 11.6×, and 13.4×, respectively, and first-day returns of
62%, 25%, and 11%, respectively.2

The IPO Process

The process of going public (selling publicly traded equity for the first time) was an arduous undertaking
that usually required about three months. Exhibit 9 provides a timeline for the typical IPO.3 A comment on
the IPO process by JetBlue CFO John Owen can be found at
http://www.youtube.com/watch?v=X1SWfL_NI7Y and
http://www.youtube.com/watch?v=p3e_b0GFGdA.4

Private firms needed to fulfill a number of prerequisites before 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
to discuss the equity-issuance process with various investment banks before selecting a lead underwriter.
Important characteristics of an underwriter included the proposed compensation package, track record,
analyst research support, distribution capabilities, and aftermarket market-making support.

After the firm satisfied the prerequisites, the equity-issuance process began with an organizational or “all-
hands” meeting, which was attended by all the key participants, including management, underwriters,
accountants, and legal counsel for both the underwriters and the issuing firm. The meeting was designed for
planning the process and reaching agreement on the specific terms. Throughout the process, additional
meetings could be called to discuss problems and review progress. Following the initiation of the equity-

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
forecast EBIT.

3 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” (PhD diss., University of Rochester, n.d.).
4 “IPO_Process,” YouTube video, 1:30, posted by “DardenPublishing,” July 19, 2011, http://www.youtube.com/watch?v=X1SWfL_NI7Y (accessed
Aug. 1, 2017); and “Timing Decision,” YouTube video, 1:45, posted by “DardenPublishing, July 19, 2011,
http://www.youtube.com/watch?v=p3e_b0GFGdA (accessed Aug. 1, 2017).

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Page 4 UV2512

issuance process, the Securities and Exchange Commission (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 awareness of the company’s name, products, or geographical
presence in order to create a favorable attitude toward 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’s
compensation. Because 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.

The SEC required that firms selling equity in public markets solicit its approval. The filing process called
for preparation of the prospectus (Part I of the registration statement), answers to specific questions, copies
of the underwriting contract, company charter and bylaws, and a specimen of the security (all included in Part
II of the registration statement), all requiring the full attention of all parties on the offering firm’s 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 grounds that there was nothing in the registration
statement that was significantly untrue or misleading, and was motivated by the liability of all parties to the
registration statement for any material misstatements or omissions. Due diligence procedures 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, which comprised
several investment banks that agreed 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 granted power of attorney
to the lead underwriter, and stipulated the management fee that each syndicate member was required to pay
the lead underwriter, the share allocations, and the dealer reallowances or concessions. Because 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 when it was
orally approved 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 laid out in the
Securities Act of 1933, which aspired to “provide full and fair disclosure of the character of securities sold in
interstate commerce.”5 Under the Securities Act, the registration statement became effective 20 days after the
filing date. If, however, the SEC found anything in the registration statement that 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.

5 Preamble, Securities Act of 1933.

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While the SEC was reviewing the registration statement, the underwriter was engaged in book-building
activities, which involved surveying potential investors to construct a schedule of investor demand for the
new issue. To generate investor interest, the preliminary offering prospectus, or red herring (so called because
the prospectus was required to have Preliminary Prospectus on the cover in red ink), was printed and offered
to potential investors. Underwriters generally organized a one- or 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 locations across
the country or 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 the offering
firm’s management negotiated the final offering price and the underwriting 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 underwriter and the 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 the underwriter generally asked the SEC to accelerate
the final pricing amendment, which was usually granted immediately over the telephone. The offering was
now ready for public sale. The final pricing and acceleration of the registration statement typically 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 confirmation of the selling agreement, selling began. Members of the
syndicate sold shares of the offering through oral solicitations to potential investors. Because 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 posted 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 underwriter delivered the prescribed proceeds to the firm. In addition, the firm
traditionally delivered an updated comfort letter from its independent accountants. Following the offering,
the underwriter generally continued to provide valuable investment-banking services by distributing research
literature and acting as a market maker for the company.

The IPO Decision

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 comments by analysts and reporters.) Given such strong demand, some
members of the group worried that the current pricing range still left too much money on the table.
Moreover, they believed that raising the price would send a strong signal of confidence to the market.

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The contrasting view held that increasing the price might compromise the success of the deal. In
management’s view, a successful offering entailed not only raising the short-term capital needs, but also
maintaining access to future capital and providing positive returns to the crew members (employees) and
others involved in directed IPO share purchases. Because 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 ensure a successful deal and generate a certain level of investor buzz. Being
conservative on the offer price seemed particularly prudent considering the risks of taking an infant New
York airline public just six months after 9/11. (Exhibit 11 provides forecasts of expected aggregate industry
growth and profitability; Exhibit 12 shows the share-price performance of airlines over the previous eight
months.)

By April 2002, the U.S. economy had been stalled 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, Exhibit 13 provides a financial
forecast for the company.6

6 In pricing IPO shares, it was appropriate to divide the total equity value of the firm by the premoney shares outstanding. In the case of JetBlue,

the number of premoney shares outstanding was 35.1 million. This number included the automatic conversion of all convertible redeemable preferred
shares into common shares.

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Page 7 UV2512

Exhibit 1

JetBlue Airways IPO Valuation

Selections from JetBlue Prospectus

The Offering

Common stock offered 5,500,000 shares

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.

Dividends
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.

Proposed NASDAQ National Market symbol

JBLU

Results of Operations

Three Months Ended

Dec 31, 2000 Mar 31, 2001 Jun 30, 2001 Sep 30, 2001 Dec 31, 2001
(unaudited)

Operating Statistics:

Revenue passengers 523,246 644,419 753,937 791,551 926,910

Revenue passenger miles (in thousands) 469,293 600,343 766,350 863,855 1,051,287

Available seat miles (in thousands) 623,297 745,852 960,744 1,131,013 1,370,658

Load factor 75.3% 80.5% 79.8% 76.4% 76.7%

Breakeven load factor 79.4% 73.2% 70.6% 74.6% 76.2%

Aircraft utilization (hours per day) 11.8 13.1 13.1 12.8 11.8

Average fare $ 90.65 $ 96.15 $ 101.01 $ 101.66 $ 99.37

Yield per passenger mile (cents) 10.11 10.32 9.94 9.29 8.76

Passenger revenue per available seat mile (cents) 7.61 8.31 7.93 7.10 6.72

Operating revenue per available seat mile (cents) 7.85 8.56 8.16 7.30 6.97

Operating expense per available seat mile (cents) 8.03 7.55 7.01 6.93 6.68

Departures 4,620 5,283 6,332 6,936 7,783

Average stage length (miles) 833 871 937 1,007 1,087

Average number of operating aircraft during period 9.2 10.5 13.2 15.9 19.4

Full-time equivalent employees at period end 1,028 1,350 1,587 1,876 2,116

Average fuel cost per gallon (cents) 103.38 86.03 83.24 79.53 60.94

Fuel gallons consumed (in thousands) 8,348 9,917 12,649 14,958 17,571

Percent of sales through jetblue.com during period 32.6% 37.6% 39.4% 45.1% 51.3%

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For the exclusive use of Y. Li, 2020.
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Page 9 UV2512

Exhibit 3

JetBlue Airways IPO Valuation

Statement of Operations of JetBlue Airways
(in thousands of dollars, except per-share amounts)

Year Ended December 31
2001 2000 1999
Operating revenues
Passenger $310,498 $101,665 $ —
Other 9,916 2,953 —
Total operating revenues 320,414 104,618 —
Operating expenses
Salaries, wages and benefits 84,762 32,912 6,000
Aircraft fuel 41,666 17,634 4
Aircraft rent 32,927 13,027 324
Sales and marketing 28,305 16,978 887
Landing fees and other rents 27,342 11,112 447
Depreciation and amortization 10,417 3,995 111

Maintenance materials and repairs 4,705 1,052 38
Other operating expenses 63,483 29,096 6,405
Total operating expenses 293,607 125,806 14,216
Operating income (loss) 26,807 (21,188) (14,216)
Other income (expense)
Airline Stabilization Act compensation 18,706 — —
Interest expense (14,132) (7,395) (705)
Capitalized interest 8,043 4,487 705
Interest income and other 2,491 2,527 685
Total other income (expense) 15,108 (381) 685
Income (loss) before income taxes 41,915 (21,569) (13,531)
Income tax expense (benefit) 3,378 (239) 233
Net income (loss) 38,537 (21,330) (13,764)
Preferred stock dividends (16,970) (14,092) (4,656)
Net income (loss) applicable to
Common stockholders $21,567 ($35,422) ($18,420)
Earnings (loss) per common share:
Basic $9.88 ($27) ($37)
Diluted $1.14 ($27) ($37)
Pro forma basic (unaudited) $1.30

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Page 10 UV2512

Exhibit 4

JetBlue Airways IPO Valuation

Statements of Cash Flows of JetBlue Airways
(in thousands of dollars)

Year Ended December 31

2001 2000 1999
Cash Flows From Operating Activities
Net income (loss) $38,537 ($21,330) ($13,764)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 9,972 3,889 111
Amortization 445 106 –
Deferred income taxes 3,373 – –
Other, net 5,960 3,892 619
Changes in certain operating assets and liabilities:
Decrease (increase) in receivables 430 (21,622) –
Increase in inventories, prepaid expenses and other (2,120) (3,354) (340)
Increase in air traffic liability 23,788 26,173 –
Increase in accounts payable and other accrued liabilities 30,894 15,070 6,818
Net cash provided by (used in) operating activities 111,279 2,824 (6,556)
Cash Flows From Investing Activities
Capital expenditures (233,775) (205,759) (12,463)
Predelivery deposits for flight equipment, net (54,128) (27,881) (50,713)
Increase in security deposits (1,952) (7,939) (5,302)
Purchases of short-term investments – (20,923) –
Proceeds from maturities of short-term investments – 21,392 –
Other, net – (20) 1,026
Net cash used in investing activities (289,855) (241,130) (67,452)
Cash Flows From Financing Activities
Proceeds from issuance of convertible redeemable preferred stock 29,731 51,322 80,671
Proceeds from issuance of common stock 25 130 69
Proceeds from issuance of long-term debt 185,000 137,750 –
Proceeds from short-term borrowings 28,781 15,138 –
Proceeds from aircraft sale and leaseback transactions 72,000 70,000 –
Repayment of long-term debt (35,254) (18,577) –
Repayment of short-term borrowings (15,138) – –
Other, net (3,450) (1,300) –
Net cash provided by financing activities 261,695 254,463 80,740
Increase In Cash And Cash Equivalents 83,119 16,157 6,732
Cash and cash equivalents at beginning of year 34,403 18,246 11,514
Cash and cash equivalents at end of year $117,522 $34,403 $18,246

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Page 11 UV2512

Exhibit 5

JetBlue Airways IPO Valuation

Selections from Value Line Tear Sheet for Southwest Airlines

Recent stock price $20.69

P/E ratio 49.3
Dividend yield 0.1%
Beta 1.10

Financial statement forecast 2001 2002E 2003E 2005E/2007E

Total debt (in millions) $1,842
Revenue (in millions) $5,555 $6,000 $7,100 $10,300
Operating margin 17.1% 18.0% 24.5% 27.0%
Tax rate 31.0% 38.5% 38.5% 38.5

%

Common shares outstanding (in
millions)

776.8 785.0 795.0 815.0

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Page 12 UV2512

Exhibit 6

JetBlue Airways IPO Valuation

Southwest Airlines: Current Debt Outstanding

Issue Moody’s
Rating

Amount
Outstanding

Maturity
Date

Yield to Maturity

Short-term bank deb

t

NA $475 million NA NA

Floating rate secured notes

NA $200 million 2004 NA

Private notes 5.10–6.10

NA $614 million 2006 NA

Floating rate French Bank debt

NA $ 52 million 2012 NA

8.75 note

Baa1 $100 million Oct. 2003 5.65%

8.00 note

Baa1 $100 million Feb. 2005 5.91%

7.875 debenture

Baa1 $100 million Sep. 2007 7.41%

7.375 debenture Baa1 $100 million Feb. 2027 8.68%

Capital leases

NA $109 million NA NA

Data sources: Mergent’s Bond Record; Southwest annual report.

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Page 13 UV2512

Exhibit 7

JetBlue Airways IPO Valuation

Recent Valuation Multiples

Actual for 2001 Estimates for 2002

Price/
Share

Book Equity/
Share

Book Debt/
Share

EBITDA*/
Share

EBIT/
Share

Earnings/
Share

EBIT/
Share

Earnings/
Share

(1) (2) (3) (4) (5) (6) (7) (8)
AirTran 6.6 0.5 4.0 1.2 0.8 0.3 0.8 0.3
Alaska Air 29.1 32.1 33.8 3.3 (1.7 ) (1.5) 2.7 (0.8)
America West 3.5 12.5 10.2 (4.3) (6.2) (4.4) (4.5) (4.1)
AMR 22.3 35.1 69.3 (7.0) (16.2) (11.5) 12.4 (3.9)
ATA 15.0 10.8 32.9 8.5 (2.0) (2.6) (6.4) (7.2)
Continental 26.2 20.9 82.0 9.8 1.4 (1.6) 11.1 (1.2)
Delta 29.3 32.7 70.3 (1.4) (11.8) (9.9) 8.4 (3.1)
Frontier 17.0 5.4 0.0 3.2 3.0 2.0 0.6 0.4
Midwest 14.6 8.3 2.7 (0.1) (1.6) (1.1) 1.6 0.8
Northwest 15.7 (5.1) 66.9 1.6 (4.4) (5.0) 7.2 (2.5)
Ryanair 32.1 5.5 3.3 1.3 0.9 0.7 1.2 0.9
Southwest 18.5 5.3 1.8 1.5 1.1 0.7 1.4 0.7
United 13.5 59.6 186.2 (37.0) (56.1) (39.6) N/A (15.4)
WestJet 15.9 2.8 1.0 2.1 1.3 0.8 1.6 0.6

Trailing Leading

Market to

book multiple
Total capital

multiple
EBITDA
multiple

EBIT
multiple

PE
Multiple

EBIT
multiple

PE
Multiple

[1/2]
[(1+3)/(2+3)

] [(1+3)/4] [(1+3)/5] [1/6] [(1+3)/7] [1/8]
AirTran 13.5 2.4 8.6 13.0 25.3 13.9 20.0
Alaska Air 0.9 1.0 19.2 (37.1) (19.3) 23.3 (38.8)
America West 0.3 0.6 (3.2) (2.2) (0.8) (3.0) (0.8)
AMR 0.6 0.9 (13.1) (5.7) (1.9) 7.4 (5.7)
ATA 1.4 1.1 5.6 (23.8) (5.7) (7.5) (2.1)
Continental 1.3 1.1 11.0 77.0 (16.7) 9.8 (22.4)
Delta 0.9 1.0 (71.6) (8.4) (3.0) 11.8 (9.4)
Frontier 3.2 3.2 5.3 5.7 8.4 26.6 45.9
Midwest 1.8 1.6 (298.3) (11.0) (13.5) 11.2 17.4
Northwest (3.1) 1.3 51.6 (18.8) (3.1) 11.5 (6.3)
Ryanair 5.8 4.0 26.4 38.5 44.0 30.3 34.1
Southwest 3.5 2.9 13.4 18.6 27.6 14.3 28.4
United 0.2 0.8 (5.4) (3.6) (0.3) N/A (0.9)
WestJet 5.6 4.4 8.1 12.7 19.6 10.6 26.9

Data sources: Actual numbers for 2001 are from company annual reports. Estimates for 2002 are from Value Line 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. One USD = 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.

For the exclusive use of Y. Li, 2020.
This document is authorized for use only by Yutong Li in 4219 Spring 2020 taught by KENNIA PAPADAKIS, The Ohio State University from Dec 2019 to Jun 2020.

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For the exclusive use of Y. Li, 2020.
This document is authorized for use only by Yutong Li in 4219 Spring 2020 taught by KENNIA PAPADAKIS, The Ohio State University from Dec 2019 to Jun 2020.

Page 15 UV2512

Exhibit 9

JetBlue Airways IPO Valuation

Life Cycle of a Typical U.S. IPO Transaction

Event time (in days) Event

<0 Underwriter selection meeting. 0 Organizational all-hands meeting. Quiet period begins. 15–44 Due diligence. Underwriter interviews management, suppliers, and customers;

reviews financial statements; drafts preliminary registration statement. Senior
management of underwriter gives OK on issue.

45 Registration (announcement) date. Firm files registration statement with SEC;

registration statement is immediately available to the public.

45–75 SEC review period. SEC auditor reviews for compliance with SEC regulations.

Underwriter assembles syndicate and prepares road show.

50 Distribute preliminary prospectus (red herring).

60–75 Road show. Underwriters and issuing firm’s management present offering to

interested institutional investors and build book of purchase orders.

75–99 Letters of comment received from SEC; amendments filed with SEC.

99 Effective date. Underwriter and firm price offering. SEC gives final approval of

registration statement.

100 Public offering date. Stock issued and begins trading.

108 Settlement date. Underwriter distributes proceeds to issuing firm.

After market Underwriter may support new equity by acting as market maker and distributing

research literature on issuing firm.

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Page 16 UV2512

Exhibit 10
JetBlue Airways IPO Valuation

Selected Quotations of Analysts and Reporters

“The bottom line is really very simple. Neeleman saw a gaping hole and flew a plane through it. Get on this
baby, because this is as close to a sure thing as it gets.”

—Lisa DiCarlo, Forbes

“People are going to have a high appetite for [JetBlue stock].”
—Ray Neidl, ABN Amro

“JetBlue took to the skies in 2000 and surprised the airline sector when it reported its first profit only a year
later. Passengers are drawn to the low fares, leather seats, and free live TV on board. And Wall Street admires
JetBlue for its experienced management team and winning formula, one made popular by the success of
Southwest Airlines.”

—Suzanne Pratt, Nightly Business Report

“JetBlue is off to a good start. But to say it deserves the valuation of Southwest, which has not had a year
without profits for 27 years, might be a stretch.”

—Jim Corridore, Standard & Poor’s

“[JetBlue] has a management team with real expertise, and they’re executing very well.”
—Marc Baum, IPO Group

“It’s a very young company that’s still going to need to make a lot of investment over the next 5 to 10 years,
There’s not going to be a lot of free cash flow.”

—Jonathan Schrader, Morningstar

“What’s important here is that the business model is solid and they aren’t deviating from it.”
—Helane Becker, Buckingham Research

“Everyone I’ve talked to that’s flown with them has been delighted.”
—Jim Broadfoot, Ivy Emerg. Growth Fund

“This is an industry where the failure rate is very high for new entrants.”
—Patrick Murphy, former Assistant

Secretary, Department of Transportation

“It’s a fantastic airline. It’s also something that you need to personally experience… There’s live TV, all-leather
seats that are comfortable, and the crew has an attitude that is one of service. It’s ingrained and installed in
them and as a result, they treat passengers differently. I think they have cornered the market on perhaps the
way flying ought to be.”

—Clark Snyder, LiveTV

Sources: BusinessWeek, BBC News, Nightly Business Report, New York Metro.

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Page 17 UV2512

Exhibit 11

JetBlue Airways IPO Valuation

Historical Financial Performance and Analysts’ Financial Forecasts for Air-Transport Industry

Source: Adapted from Value Line Investment Survey, March 2002.

–

15%

–

10%

-5%

0%
5%
10%
15%

20%

1999 2000 2001 2002 2003 2004 2005 2006

Revenue growth Operating margin Net asset growth

For the exclusive use of Y. Li, 2020.
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Page 18 UV2512

Exhibit 12

JetBlue Airways IPO Valuation

Recent Share-Price Performance for Airlines

Notes:
1. High-growth airlines include Southwest Airlines, Ryanair, easyJet, and WestJet.
2. Quality regional airlines include Atlantic Coast and SkyWest.
3. Big six airlines include American, Continental, Delta, Northwest, United, and US Airways.

0
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120

140

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High Growth (1) Quality Regional (2) Big 6 (3) S&P 500

For the exclusive use of Y. Li, 2020.
This document is authorized for use only by Yutong Li in 4219 Spring 2020 taught by KENNIA PAPADAKIS, The Ohio State University from Dec 2019 to Jun 2020.

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For the exclusive use of Y. Li, 2020.
This document is authorized for use only by Yutong Li in 4219 Spring 2020 taught by KENNIA PAPADAKIS, The Ohio State University from Dec 2019 to Jun 2020.