JetBlue case v XXXXXXXXXX
UVA-F-1415 (revised)
Version 2.1
A previous version of this case was prepared by Professor Michael J. Schill with research assistance from Cheng
Cui. Copyright ã 2003 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
eserved. Amended version 2.1, dated 2022, includes changes by Jonathan M. Karpoff. This case was written as a
asis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
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 te
orist 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 provide 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 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.
JetBlue Airways
In July 1999, David Neeleman, 39, announced his plan to launch a new airline that would
ing “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
1 Jeff Sweat, “Generation Dot-Com Gets Its Wings,” Information Week, January 1, 2001.
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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’s private equity firm, Quantim Industrial partners.
Within seven months, JetBlue had secured a small fleet of Ai
us 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, Mo
is Air, became a pioneer
in ticketless travel and was later acquired by low-fare leader Southwest Airlines. Neeleman
stayed only
iefly with Southwest, leaving to assist in the launching of Canadian low-fare
ca
ier 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 fixing
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, pre-
assigned 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 operating strategy had produced the lowest cost per
available seat mile of any of the major U.S. airlines 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 Ai
us A320 aircraft.
The JetBlue fleet was not only more reliable and fuel-efficient than other airline fleets but also
afforded greater economies of scale, because the airline only had one model of aircraft. JetBlue
management believed in leveraging advanced technology. For example, all their 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 – something that was new at the time.
JetBlue was the first U.S. airline to secure cockpits with titanium doors and security cameras in
esponse to the September 11th hijackings.
JetBlue had made significant progress in establishing a strong
and 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
vision to employees.
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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 ca
ier in America. Financially, Southwest had also
een 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 flu
y of new low-fare airlines 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, cu
ent low-fare U.S. airlines included AirTran, America
West, ATA and Frontier. Another established regional airline, Alaska Air, was adopting a low-
fare strategy. A number of the low-fare airlines had been more resilient in the aftermath of the
September 11th aircraft disasters. (Exhibit 7 shows cu
ent 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
ates of revenue and equipment for low fare airlines.)
The most recent IPOs among low-fare airlines 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 percent, 25 percent and 11 percent,
espectively.2
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” refe
ed to an EBIT multiple based on a future year’s forecasted EBIT
estimate.
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The IPO Process
The process of going public – that is, 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 (The IPO process involves its own lingo, so in the following paragraphs I
italicize new terms that frequently are used to describe this process.)
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 so-called 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 after-
market 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
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 that 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 that 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.
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
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 Ly
and, 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.
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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 refers to the process of providing reasonable ground
that there was nothing in the registration statement that was significantly untrue or misleading
and was motivated by the liability to all parties participating in