기업분석#(JetBlue Airways-2)

Economy Analysis 

         

           Currently, There are many forces that affect the airline industry's profits some of these include Social, Global, Legal, Demographic and technological forces. The social and demographic forces that would affect this industry are the aging of generations and growing population. As the baby boomers age and the millennial generation join the workforce and this change is expected to increase business travel by 50% by 2020. The airline industry had $807.1 billion dollars in GDP 2015 5.1% of the U.S. GDP it created 11,282 thousand jobs which is 8.4% of U.S jobs. When GDP increases, it allows for more buying power among buyers. The increase in GDP in the third quarter of 2014 was driven by a 3.2% rise in consumer spending and a growth in business investment.

 

       Global forces can affect demand for low cost carries for example the attacks on September 11th. The terrorist attack occurred on September 11th in the United States. Terrorist attacked the World Trade Center by using airplane. The airplane crashed against the World Trade Center. As the result, airplane industries received much damage. Specifically, just after the attack, the nation’s aviation system was shut down and this produced a cash burn rate for the industry in excess of $330 million per day for the duration of the stoppage. After receiving attack, the number of passengers rapidly decreased. Declined passenger demand combined with the increased cost lead the industry to face accumulated net losses. Also, after the attack, business travel, which accounts for much profit to American airlines, declined.

 

    There are many different laws, regulations, restrictions, and security codes that affect the airline industry. After September 11th, the industry had to adopt the Transportation Security Administration or TSA. The TSA would now supply all security to airports screening passengers with metal detectors, pat downs and strip searches before entering the aircraft. Technological forces that would affect the industry would be any technology that could increase efficiency, lower fuel consumption, improve the quality of flying to the customer and anything that could lower costs of logistics. As new more efficient aircrafts are made the more airlines can cut down on operational spending.

 

     The oil also has an effect on the airline industries. Every one-cent increase in the cost of a gallon of jet fuel will cost the industry $180 million per year. The airlines have done everything to conserve the fuel. Unfortunately, by the end of February 2002, spot prices had increased from 57 cents in February 2001 to $1.20, a 108 percent jump. The great increase overwhelms the effort in conserving the fuel usage.

 

      The government closed airports and canceled thousands of flights.  Despite the government-funded measure, some popular American airlines declared bankruptcy after the September 11 attacks, including US Airways and United Airlines. As a result of the enormous financial loss because of lack of passenger demand, which canceled flights and increased expenditures for security, even airlines that did not have prior financial issues were forced to renegotiate labor contracts. These airlines laid off high numbers of employees, such as the 7,000 employees laid off by American Airlines. JetBlue also received much loss. However, JetBlue focused on maintaining their passengers in order to increase their revenue. Specifically, the strategy of JetBlue was to focus on point to point service to large metropolitan areas with low fare.

Analysis of Problem 

 

       In order to obtain the most appropriate stock price range for the IPO, there are two valuation models to use. The first method is ‘discounted cash flow (DCF) method’ and the other is ‘price to earnings (P/E) multiple method’. In order to calculate the stock price range through DCF method, it is necessary to find JetBlue’s cost of capital (WACC) and its free cash flows.

 

       JetBlue’s equity beta should be obtained first to calculate JetBlue’s cost of capital. However, because there is no information about JetBlue’s equity beta, it is required to find the most similar company to JetBlue in the low-cost airlines industry. This is because the most similar company’s equity beta can be used to derive JetBlue’s equity beta. Among several companies in the low-cost airlines industry, Southwest Airlines would be the most similar company to JetBlue, because JetBlue adopted much of Southwest’s low-cost model.

 

      According to Exhibit 5, Southwest’s equity beta is 1.10. Their total debt is $1,842 (in millions) and their total market value of equity is $16,072 (in millions). As a result, Southwest’s debt to equity ratio is 0.115. By using Southwest Airlines’ equity beta and its debt to equity ratio, JetBlue’s asset beta could be calculated, and the value would be derived as 0.987. After obtaining JetBlue’s asset beta, it should be re-levered by the company’s own debt to equity ratio. However, since JetBlue has no debt, it would be impossible to re-lever by its debt to equity ratio. Therefore, JetBlue’s asset beta itself could be used to calculate the cost of capital. Both the market risk premium and the risk-free rate are 5%. Then, the cost of equity could be calculated based on all the values above, and the number would be 9.934%. Because JetBlue does not have any debt, the cost of equity, 9.934%, should be the same as the company’s cost of capital.

 

        For finding JetBlue’s free cash flows, the data in the JetBlue financial forecast in Exhibit 13 can be used. First of all, the operating cash flows are equal to the net operating profit after tax (NOPAT) plus depreciation. After calculating the operating cash flows, the final free cash flows can be obtained by deducting the capital expenditures and the changes in net-working capitals from the operating cash flows. The final free cash flows can then be used with the expected growth rates to find the terminal value in 2010. Based on the historical GDP growth rate, the expected growth rate for the low-cost airlines would be assumed to be around 4% to 5%.

 

       First of all, when the growth rate during the future period would be 4%, the terminal value in 2010 could be calculated by using the cost of capital, 9.934%, and the estimated growth rate, 4%. The free cash flow would be estimated as $227 million in 2010. Therefore, the terminal value would be derived as $3,980 million (227(1+4%)/ (9.934%-4%)). Finally, JetBlue’s discounted free cash flows could be obtained, and the sum of the discounted cash flows (NPV), $1,039 million, could be used to find the most appropriate stock price for JetBlue’s IPO.

 

        As mentioned above, JetBlue has no debt. As a result, the NPV should be equal to the company’s total equity value. This NPV should be divided by the number of shares, which is 40.6 million, and the resulting price per share would be $25.60. On the other hand, when the growth rate would be 5%, the terminal value in 2010 and the NPV would be $4,833 million and $1,403 million respectively. Finally, the resulting price per share would be $34.55. In conclusion, if the growth rate would be from 4% to 5%, the most appropriate range of stock price per share would be from $25.60 to $34.55, which means JetBlue should consider this price range for its IPO.

                                                                                  

         Instead of the DCF method, using ‘the trailing P/E multiple method’ and ‘the leading P/E multiple method’ would be another way to obtain the most appropriate stock price range for the IPO. In Exhibit 7, there are several companies’ trailing and leading P/E multiple values. However, only low-cost airlines with positive earnings, such as AirTran, Frontier, Ryanair, Southwest and WestJet, should be considered in order to limit the scope of the relative values. By using JetBlue’s earnings per share, $1.14, in 2001, JetBlue’s potential prices per share can be calculated by multiplying the company’s earnings per share by each similar companies’ P/E multiples respectively. In the case of the trailing P/E multiple method, after calculating JetBlue’s potential prices per share and averaging all the prices, the most appropriate price per share for the IPO would be derived as $28.46. On the other hand, when using the leading P/E multiple values, the most appropriate price per share would be $35.40, which is higher than $28.46. Consequently, the range of the stock price per share for JetBlue’s IPO would be from $28.46 to $35.40 based on the P/E multiple method.

Recommendation

 

          It is recommended that JetBlue Airways increases the range of the stock price per share for the IPO from their initial price range, $22 to $24. Based on ‘the discounted cash flow (DCF) method’, the company could increase the range from ‘$22~$24’ to ‘$25.60~$34.55’. On the other hand, JetBlue could also increase the range of the stock price per share for the IPO from ‘$22~$24’ to ‘$28.46~$35.40’ based on the P/E multiple method.