Integrated Company Analysis Jet Blue

8/9/2019 Integrated Company Analysis Jet Blue

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Integrated Company Analysis

JetBlue Airways

Team A8:Doug Bennett, Tess Gruenstein, Ramya Raman, Tyler Sachse, Aaron Walsh

On my honor, I have neither given nor received unauthorized aid in completing this academic work.


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Target Business Travelers................................................................................................................... 12

Appendix A: Cost Structure ....................................................................................................................... A-1

Appendix B: Profitability Measures and Market Share .............................................................................. B-1

Appendix C: Valuation Assumptions and Exhibits ..................................................................................... C-1

Appendix D: Marketing Position and Program ......................................................................................... D-1

Appendix E: Marketing Mix Comparison ................................................................................................... E-1

Appendix F: Accounting Practices of Competitive Set ............................................................................... F-1

Appendix G: JetBlue Airways Corporation Situation Analysis................................................................... G-1

Appendix H: JetBlue SWOT Analysis ......................................................................................................... H-1


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Team A8 Integrated Company Analysis: JetBlue 1

Introduction

JetBlue: The Low Cost, High Expectation Airline

Founded by discount airline veteran David Neeleman in 2000, JetBlue Airways (JetBlue) has quickly

become one of the largest discount airlines in the United States. Starting primarily by serving the East

coast, the airline has since expanded throughout the country and entered the international market.

Growthboth financial and geographicalhas continued despite a challenging economy in recent years.

The reasons for this early success are numerous: JetBlue entered the market with one of the largest

levels of liquidity of any start-up airline; it met the needs of customers whose primary concerns are

price and route; and it successfully defined its brand and differentiated itself from competitors by

offering an above average customer experience and amenities for a discounted price.

Looking ahead, JetBlues competitive advantages are increasingly at risk. The company must find a way

to deal with a much heavier debt load and industry reorganization while competing with leaner and

stronger legacy airlines.

Industry Overview

JetBlue operates under the constraints of the airline industry and its unique dynamics: intense federal

regulation, customers driven mainly by price and route with low brand loyalty, heavy capital costs, and

monopolistic conditions among its suppliers. These challenges are examined below.

Legacy vs. Discount Airlines

Airlines are typically described as traditional (legacy) or low-cost (discount). Legacy airlineswere

operational prior to industry deregulation in the 1980s and typically have high debt-to-asset ratios and

high overhead costs due to labor contracts, defined benefit pension plans, and older fleets. Discount

airlines entered the picture in the more competitive environment created by deregulation; not saddled

by the same overhead costs, they could offer fares for slightly less for similar service and serve markets


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not viable to legacy airlines. The most successful discount airlines were primarily regional until

Southwest and JetBlue became national players, now capturing 16 percent of total market share (see

Appendix B, Figure 10for details).

Competitive Set

For purposes of this analysis, JetBlues competitive set has been defined using a mix of discount airlines

and legacy airlines of a similar size to JetBlue. Southwest and AirTran are the dominant discount airlines

in the national market1. US Airways and Alaska Airlines both have legacy issues and have similar market

cap and network sizes which make them better comparables than the larger legacy carriers.

Bankruptcies and Consolidations

Bankruptcies and consolidations in the airline industry have helped erode the competitive advantage of

discount airlines over the last five years. Bankruptcy courts allowed several legacy airlines to renegotiate

labor contracts and pension obligations and emerge with stronger balance sheets. 2A glut of

consolidations has also concentrated market share and provided new, larger-scale companies with the

ability to leverage economies of scale. For example, Delta and Northwest both filed for bankruptcy in

2005, citing high fuel prices and the crushing impact of the low fares offered by discount carriers such as

Southwest and JetBlue.3Their eventual merger created a larger hub and spoke network through which

passengers have access to more destinations on a single airline (the two airlines had very little route

overlap).

1AirTran is used for historical comparison only as it is in the process of consolidating with Southwest Airlines.

2Delta used bankruptcy to reconfigure by retiring the oldest part of its fleet and renegotiating many union

contracts and pension obligations.3Source: Delta, Northwest See Bankruptcy as Key to Revival(Wall Street Journal), How Delta climbed out of

bankruptcy(Bloomberg)


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Airplanes

Boeing and Airbus, as the worlds two dominant airplane suppliers, have the ability to largely control

pricing and force airlines into long-term contracts. The long lead time required to manufacture airplanes

means airlines must determine their capital needs far in advance, which requires taking on long-term

liabilities.

Fuel

Fuel has been the largest expense on most airlinesIncome Statements for the last five years (averaging

roughly a third of operating expenses among JetBlues competitive set). Given recent volatility in the

energy market, fuel costs have had a major impact on airlines financial performance. In 2008, the price

of crude oil averaged $99.50 per barrel (peaking at $147.00), a 37.7% increase over the previous year. 4

This resulted in fuel expenses as a percentage of passenger sales and operating expenses to rise by 69

and 23 percent respectively. As profits fell across the domestic airline industry, the industrys market

value shrunk by 13.7 percent for the year and several regional airlines filed Chapter 11.

Price-Sensitive Customers

A recent study found that there was no correlation between satisfaction and price paid for a flight,

which causes passengers to seek out the most inexpensive ticket with a favorable route (a bleak picture

for an airline).5Further, online search engines provide consumers a mechanism for immediate

comparison shopping between all airlines (legacy and discount). The result is increased promotions and

price wars between carriers except in underserved markets where airlines can still charger relatively

higher fares.

4Source: IBIS Domestic Airlines

5Source:JetBlue, Southwest beat big carriers for service, quality(USA Today)


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JetBlue Analysis

Cost Structure

Fuel

On average, since 2005, jet fuel purchases have comprised 34 percent of JetBlue's operating costs

(please see Appendix A, Figure 1for a graph of JetBlue's historical fuel costs). Fuel expenses for JetBlue

were impacted significantly by the spike in energy prices from 2003 to mid-2008; and furthermore, it

incurred significant losses on hedges when prices began to drop sharply in Q3 2008.

JetBlue hedges6on a discretionary basis when it is possible to cap the liquidity and profitability risks of

sharply rising prices. Currently less than a fifth of its projected quarterly fuel usage is hedged past mid-

2011 (see Appendix A, Figure 2for details), exposing the company to a spike in prices. Conversely, such

hedges expose JetBlue and other airlines to potential short-term liquidity issues when oil and fuel prices

drop sharply. We reasonably assume that no airline has a particular advantage, thus fuel prices impact

them all similarly.

Excluding Fuel

Apart from fuel, changes in airline operating expenses are driven primarily by changes in capacity

(measured by "available seat miles" or "ASMs"). Airline management teams and industry observers

typically calculate operating costs per available seat mile(CASM)7 in order to the gauge the efficiency

with which a given airline serves its customers.

JetBlues current cost structure is a source of competitive advantage(see Appendix A, Figure 3), as it

allows the company to offer lower fares than many of its competitors. However, JetBlue's cost

advantage relative to peers has deteriorated since 2005, especially relative to low-cost peer AirTran,

6Hedging options include a variety of crude oil call options, heating oil collar contracts, and jet fuel swap

agreements.7Cost per available seat mile (CASM) calculated by dividing each expense line item by the total number of

available seat miles in a given period


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which recently agreed to be acquired by Southwest. The combined Southwest will likely maintain a close

operating cost profile to that of JetBlue, lessening JetBlue's ability to compete on fare price alone.

To better analyze the compression of operating cost spread between JetBlue and competitors, the

following table describes the four drivers of historic advantage identified by company management.

High Aircraft

Utilization

JetBlue has historically spread fixed costs over a greater number of flights

and ASMs thanks to efficient scheduling and operation of aircraft. US Airways

and Southwest do not report aircraft utilization; but JetBlue's competitive

advantage in this area has shrunk relative to AirTran in the past five years

(see Appendix A, Figure 4). Some factors behind declining utilization are out

of the company's control (weather, security, congestion, and maintenancedelays), but others are controllable. As JetBlue's aircraft are spending less

time in the air each day, they also have more empty seats on recent flights

(see Appendix A, Figure 5for more details on JetBlue's shrinking passenger

load factor). Finally, the proportion of non-revenue passengers is likely to

grow due to recent changes to the TrueBlue loyalty program that make it

easier for members to earn, keep, and redeem points for free flights.

Low Distribution Costs JetBlue sells only electronic tickets, reducing paper, postage, and back-office

processing expenses. In addition, it sells tickets primarily through its website,

the lowest-cost distribution channel available. See Appendix A, Figure 6for

JetBlue's sales and marketing expense per ASM relative to its peers over the

last few years.

The cost spread versus competitors is converging as 1) more airlines move

away from paper tickets, and 2) JetBlue's distribution costs rise as it utilizes

global distribution systems (GDSs)8 in an effort to pursue more business

customers.

8JetBlue participates in three major GDSs (Sabre, Travelport and Amadeus) and four major online travel agents

(Expedia, Travelocity, Orbitz, and Priceline). The company notes that the higher average fares realized through the

GDS channel typically offset the increased distribution costs.


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Productive Workforce Flexible and productive work rules, effective use of part-time employees, and

the use of technology to automate tasks are cited by management as

generators of employee efficiency.

JetBlue has generated cost advantages through the use of entirely non-union

labor (see Appendix A, Figure 7). However, FAA-licensed employees have

secured significant concessions including higher compensation and

guaranteed salary/benefits in the event of reduced customer demand,

suggesting they are in a strong position to negotiate. Labor costs per ASM

have risen 7 percent annually since 2005 and 15 percent in the last 9 months.

New and Efficient

Aircraft

JetBlue's fleet consists of two types of planes (Airbus A320 and Embraer

190). This strategy reduces maintenance expenses by simplifying processes,

scheduling, and training, and minimizing spare part inventories. However,

management has indicated costs will rise as the company's relatively young

fleet of planes continues to age (see Appendix A, Figure 8).

Profitability

Despite generating the lowest revenue per ASM among its competitors at 10.83 cents, JetBlue maintains

the second highest operating margin (9.7 percent) due to its low-cost operating structure (see Appendix

B, Figure 9for a comparison of profitability measures among competitors). Given the recent

deterioration in this cost advantage, JetBlues recent push into the business traveler segment to capture

higher revenue customers appears to be a sensible strategy for maintaining profitability.

Leverage and Growth

Airlines historically carry high levels of debt, due in large part to the amount of capital required to start

operations and then expand. JetBlue is no exception; from 2005-2010 it has maintained a debt-to-value

ratio between 65 and 75 percent. Most competitors have maintained similar ratios, with the exceptions

being Southwest (20-40 percent) and US Airways (75-115 percent). JetBlue also has the highest level of


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debt as a percentage of sales among its competitive set. For the year ending 12/31/09, its debt-to-sales

ratio was slightly over 100 percent while competitors averaged 48 percent.

JetBlues primary use of debt has been for the acquisition of aircraft. It increased its fleet size by 65

percent (to 155 planes) between 2005 and 2010. Incrementally, 44 percent (or $22 million) of each

plane acquisition is financed by debt. JetBlue expects to grow its fleet another 60 percent (to 248

planes) by 2016. The company will be unable to finance this growth through free cash flow and will need

to raise cash through issuance of debt or equity. Using historical averages, they will need to raise $225

million through equity and $2.1 billion through debt. This would raise their overall debt levels to $5.128

billion or 96 percent of projected sales and 68 percent of total value.

Dividends

JetBlue has historically paid no dividends. Given future financing needs we do not expect them to do so

in the next five to ten years.

Valuation

Factoring in JetBlues aggressive growth strategy and calculating a weighted average cost of capital of

9.4 percent, a discounted cash flow analysis demonstrates that JetBlues stock price ($6.69 close on

12/09/10) is overvalued by approximately 18 percent. Please see Appendix Cfor a complete list of

assumptions made in our valuation analysis.

Successful execution of their strategy over the next six years will increase revenues and earnings before

interest and taxes by 45 percent and 115 percent respectively. This results in a current enterprise value

of $6.9 billion and equity value of $1.6 billion. During this period, JetBlue will generate $2.4 billion in

free cash flow, excluding aircraft capital expenditures which will require the additional $2.3 billion in

outside funding we mentioned above.


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Marketing and Brand Position

Target Market

JetBlue's target customers are fare-conscious travelers who might otherwise have used alternate forms

of transportation or would not have traveled at all.9The current base consists primarily of leisure

travelers, the most price sensitive class of travelers. However, JetBlue is increasingly courting a higher

class of passengers who have the resources to pay more for a business or first-class ticket, but

appreciate a lower fare without sacrificing high-class customer service, especially when corporations are

looking to reduce business travel due to tough economic conditions.

Brand Identity

In the airline industry, few players have managed to build a unique brand identity and achieve

significant differentiation. JetBlue, however, has done so by taking up the vacant position of a low-cost

provider that also offers a top notch experience that legacy airlines don't deliver (through features such

as leather seating, DirecTV for each seat, XM satellite radio, etc.). JetBlue received the #1 Airline Brand

rating10even while keeping its advertising costs significantly lower than Southwest Airlines (see

Appendix D, Figure 23for advertising costs).

Marketing Program

The following table describes how JetBlue's marketing program supports its brand position.

Social Media Extensive use of social media allows JetBlue to create buzz with very little

cost. It has over 400,000 fans on Facebook and operates two Twitter feeds

a standard corporate feed and a JetBlue Cheeps feed that is dedicated to

letting customers know about pricing deals.

9Source: JetBlue 2009 10K SEC Filing

10Brand Keys Customer Loyalty Engagement Index looks at category drivers that engage customers, engender

loyalty and drive real profits.


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Website Visitors towww.jetblue.comcan browse an Experience JetBlue section that

features videos of consumers talking about the various benefits of flying

JetBlue (e.g., space, entertainment, etc.).

You Above AllCampaign

"You Above All" replaced "Happy Jetting" as the company's tagline in Q42010 as part of a new advertising campaign. The campaign features

humorous ads on YouTube that directly attack the practices of competing

airlines (e.g., fees for baggage) and tells viewers "if you wouldnt take it on

the ground, dont take it in the air.

Promotions Recent "All You Can Jet" promotions allowed consumers to buy a monthly

pass for unlimited travel to JetBlue destinations in the U.S. and the

Caribbean. JetBlue believes half of the buyers had not flown them before.

Brandspace The flagship terminal at JFK International airport serves as a "brandspace"

for JetBlue, much like a brand-specific retail store (e.g., NikeTown).

TrueBlue This loyalty program was redesigned in 2009 to address customers' desire for

the elimination of blackout dates, an extended lifespan for points, and a shift

to points for miles flown rather than money spent.

Please seeAppendix Dfor samples of JetBlue's marketing efforts.

Please seeAppendix Efor a marketing mix comparison with JetBlues competitive set.

Accounting

JetBlue uses standard industry practices for accounting and utilizes sound methods (see Appendix Ffor

full comparison with competitive set). JetBlue is publicly traded and has no subsidiary groups.

Noteworthy accounting issues are discussed below.

Fleet

Deciding how to finance a plane is a key concern for an airlines financial statements. Taking on

additional debt to purchase planes may not be feasible due to debt covenant constraints but leases have

higher average costs due to overhead charged back through the lease from the leasing company.

Further, there are tax benefits that a firm must weigh. JetBlue owns 94 planes and leases 61 (57 in
http://www.jetblue.com/http://www.jetblue.com/http://www.jetblue.com/http://www.jetblue.com/


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operating, 4 in capital). They have used leasing as a way to fuel their rapid growth without increasing the

debt load beyond a manageable level. By contrast, US Airways has been forced to lease the majority of

its planes due to its high debt to asset level and inability to take on additional debt (see Appendix Ffor

fleet details for both JetBlue and competitors).

Further, JetBlue has firm forward commitments for 110 additional airplanes, accounting for $4.4 billion

of total capital over the next eight years. This future liability is not represented on the balance sheet.

Air Traffic Liability and Loyalty Rewards

JetBlue maintains an Air Traffic Liability account on its balance sheet as a reserve for tickets sold but not

yet used (essentially an "unearned revenue" account). As of Q3 2010, this account had a balance of $545

million.

This account includes liabilities for the True Blue loyalty program totaling $54 million; the company

reserves an amount equal to the estimated cost of outstanding rewards points. The company also sells

points for utilization via a JetBlue-branded credit card. As the company does not disclose how many

points are outstanding it is not possible to analyze whether or enough there is enough reserve to

account for this liability. JetBlue noted that recent changes to the loyalty program will increase point

redemption, so any underestimation of this liability could result in an overstatement of retained

earnings.

Preferred Stock Authorized in 2009

In 2009 the company authorized the issuance of 25 million shares of preferred stock at $0.01 par value.

None of those shares have yet been issued; we assume they are on reserve should a cash infusion be

necessary.


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Recommendations

Financing

Line of Credit and Term-Loan Option Facility

We recommend JetBlue finance capital expenditures related to aircraft via one large debt facility with a

follow-on equity offering as needed. This would offer JetBlue the lowest possible cost of capital (see

Appendix Cfor calculations related to WACC), eliminate the need raise debt or issue equity annually,

and maximize managements flexibility to adapt its growth strategy.

Optimally, JetBlue should work with lenders to establish a $2.1 billion, 5-Year Aircraft Acquisition Line

of Credit and Term-Loan Option Facility. This would allow JetBlue to acquire aircraft as needed and roll

the principal balance into a 30-year term facility at expiration. Interest rates would continue to reset

after a specified period and remain fixed during the term portion. Interest rates could be lowered by

choosing a term that renews more frequently, but it would be subject to more volatility in interest rate

movements. The company could also lock in a forward fixed rate on the term-out portion to minimize

future interest rate risk.

Overall, this strategy will ensure JetBlue has the capital to realize growth initiatives and allow

management to remain focused on creating value for shareholders.

Marketing

Leverage Social Media to Contain Costs

JetBlue has built a solid following on Facebook and Twitter, and used YouTube to host videos for its

latest campaign. Continuing to rely on these media greatly reduces the costs associated with marketing.

Continue to Stress Differentiation

JetBlues new You Above All campaign is built upon stressing the idea that the flying experience is

significantly better with JetBlue than with other airlines. Continuing this focus is the best way to ensure


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customer know what JetBlue stands for, especially as the companys ability to continually provide a

significantly lower price comes into question.

Leverage Integrated Customer Service System

JetBlues new customer servicesystem11provides a great way for the company to profile its customer

base, investigate customer actions, and understand key loyalty drivers. Using this tool to build a

targeted marketing program that tailors messages to customers will enable JetBlue to increase

effectiveness.

Target Business Travelers

JetBlue is in a unique position to target business travelers during tough economic times. As a discount

provider who also focuses on customer service, they can appeal to cost-sensitive business people that

need to cut travel costs but dont want to sacrifice comfort, convenience, and modernity. JetBlue should

investigate opportunities to increase corporate travel partnerships.

11SEC Filings: JetBlue implemented a new customer service system, which includes a reservations system, revenue

management system, revenue accounting system, and customer loyalty management system.


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Team A8 Integrated Company Analysis: JetBlue A-1

Appendix A: Cost Structure

Figure 1. Fuel Costs

Figure 2. Hedging of Fuel Costs

Figure 3. Operating Expenses Compared to Competitive Set

Projected fuel costs currently hedged

Crude oil caps Heating oil collars Jet fuel swaps Total

Q4 2010 - 14% 24% 38%

Q1 2011 17% 5% - 22%

Q2 2011 21% - - 21%

Q3 2011 16% - - 16%

Q4 2011 5% - - 5%

Source: SEC fil ings


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Figure 4. Aircraft Utilization Compared to Competitive Set

Figure 5. Passenger Load Factor Compared to Competitive Set

Note: Load factor represents the percentage of aircraft seating capacity that is actually utilized (revenue passenger miles

divided by available seat miles). Revenue passenger miles represents the number of miles flown by revenue passengers.


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Figure 6. Sales and Marketing Expense Compared to Competitive Set

Notes

Advertising expenses included in calculation as each airline reports sales and marketing expenses in different

groupings.

Southwest excluded as it does not break out sales and marketing expenses in the income statement.

Figure 7. Labor Expenses Compared to Competitive Set


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Figure 8. Maintenance Expenses Compared to Competitive Set


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Team A8 Integrated Company Analysis: JetBlue B-1

Appendix B: Profitability Measures and Market Share

Figure 9. Profitability Comparison

Profitability Measures(Last 9 months, excluding Return on Assets and Return on Equity)

JetBlue Southwest AirTran US Airways Alaska Air

Mainline Operations1:

Passenger Revenue per ASM (cents) 9.79 11.60 9.76 10.71 11.37

Total Revenue per ASM (cents) 10.83 12.21 10.84 12.72 12.73

Operating Expense per ASM (cents) 9.78 11.16 10.13 11.63 11.03

Operating Margin 9.7% 8.6% 6.5% 8.6% 13.4%

Combined Operations2:

Net Income Margin 3.1% 3.6% 1.9% 5.3% 6.5%

EBITDA Margin 15.5% 13.8% 8.8% 9.6% 18.2%

Operating Cash Flow Margin 17.3% 14.4% 8.5% 8.8% 17.6%

Return on Assets (Last 12 months) 1.5% 3.0% 2.4% 5.0% 4.2%

Return on Equity (Last 12 months) 6.3% 7.9% 10.8% NA 22.3%1Excludes regional operations of US Airways Expres s a nd Alas ka Air's Horizon Air

2Includes regional operations of US Airways Express a nd Alas ka Air's Horizon Air


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Team A8 Integrated Company Analysis: JetBlue B-2

Figure 10. U.S. Airline Market Share

Figures based on company reports and J.P. Morgan estimates in July 2010. 12

Note: ASM = Available Seat Miles

12 Airline Industry Overview / Considerations, J.P. Morgan. 2010.


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Team A8 Integrated Company Analysis: JetBlue C-1

Appendix C: Valuation Assumptions and Exhibits

Passenger Sales

Due to strong variances in seat revenues, capacity utilization, and available seats, there is no clear

measurement with which to forecast consistent passenger sales. We chose to standardize these

variables and create a metric called Average Daily Revenue per Available Seat Mile (ADR/ASM). This

metric uses historical total seat capacity and passenger sales to forecast passenger sales given JetBlues

growth strategy.

Other Sales

Since 2005, other sales have increased at a declining rate as a percent of passenger sales. Other revenue

has increased from fees JetBlue charges customers for baggage and other services. We expect this trend

to flatten and then decline in future years as competition among airlines puts pressure on fees airlines

can charge.

Expenses

Fuel and related taxes is the largest single expense for JetBlue; over the last twelve months fuel has

averaged 32 percent of passenger sales. We expect annual growth in fuel related costs to revert to its

historical average of 3 percent13.

Maintenance expenses as a percentage of passenger revenues have increased year-over-year for the

past four years, but at a declining rate. We anticipate this trend to continue and eventually flatten out as

JetBlues fleet ages.

Since 2005, expenses from employee compensation, landing fees, depreciation, aircraft rent, sales and

marketing, and other expenses have been relatively consistent as a percentage of sales. We forecast

these expenses using a 5-year average as a percentage of passenger sales. We analyzed these expenses

13Source: IBIS WorldGasoline & Petroleum Wholesaling in the US (November 2010)


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in respect to passenger revenues rather than total revenues because these expenses are directly related

to passenger revenues and not other revenues.

Operating Cash Flow

Operating cash flow is calculated by taking earnings before interest and after taxes, adding depreciation

and amortization, and subtracting non-aircraft capital expenditures and additions to working capital.

Aircraft capital expenditures were not included in our calculation because JetBlue will be raising debt

and equity to finance these purchases and these values are accounted for in the final common stock

value. Working capital as a percent of total revenues was normalized to JetBlues four-year average from

2006-2009 because of large year-to-year variances.

Enterprise Value

Cash flow projections for 2011-2016 were discounted by JetBlues weighted average cost of capital.

Terminal value was discounted using JetBlues weighted average cost of capital and perpetual growth

rate14.

JetBlues weighted average cost of capital is 9.4%, which represents a weighted average of their cost of

debt and equity. JetBlues cost of debt is the product of their most recent placement of debt in June

2009 at 6.75 percent and their tax shield15. The components of JetBlues cost of equity are the 10-year

Treasury Bond as of 12/07/10 (3.165 percent)16as well as the annual return of the S&P 500 from 1950-

2010 (11.94 percent)and raw company beta (1.482) 17. Weights were assigned based on JetBlues

current percentages of debt and equity-to-value. JetBlues net debt as of 09/30/10 is the sum of their

long and short-term debt, capital leases, and subtracting cash.

14Source: IBIS WorldDomestic Airlines in the US (September 2010)

15Source: SEC Filing

16Source: Google Finance

17Source: Bloomberg


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Figure 11. Debt-to Value Ratio Compared to Competitive Set

Note: Values include capital leases and short-term maturities

0%

20%

40%

60%

80%

100%

120%

12/01/05

12/01/06

12/01/07

12/01/08

12/01/09

Jet Blue Competitor Debt-to-Value Comparison

Jet Blue: Southwest: Airtran: Alaska Airlines: US Air:


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Figure 12. Pro-Forma Income Statement and Discounted Cash Flow Model

Jet Blue Airlines

Pro-Forma Income Statement & Discounted Cash Flow Model

$'s in millions TTM as of,

09/30/10 2011 2012 2013 2014 2015 2016

SalesPassenger 3,304.0$ 3,312.0$ 3,528.4$ 3,789.4$ 4,162.4$ 4,602.5$ 4,945.7$

Other 367.0 364.32 388.12 378.94 374.62 368.20 395.65

Total Sales 3,671.0 3,676.3 3,916.5 4,168.4 4,537.0 4,970.7 5,341.3

Operating Expenses

Aircraft Fuel and Related Taxes 1,057.0 1,088.7 1,121.4 1,155.0 1,189.7 1,225.4 1,262.1

Salaries, Wages, & Benefits 864.0 828.6 882.7 948.0 1,041.4 1,151.5 1,237.3

Landing Fees & Other Rents 226.0 229.4 244.4 262.5 288.3 318.8 342.6

Depreciation & Amortization 223.0 227.7 242.6 260.6 286.2 316.5 340.1

Aircraft Rent 124.0 148.6 158.3 170.0 186.7 206.5 221.9

Sales & Marketing 168.0 161.4 171.9 184.7 202.8 224.3 241.0

Maintenance Materials & Repairs 162.0 183.1 203.2 225.5 250.4 272.9 297.5

Other Operating Expenses 507.0 445.0 474.1 509.2 559.3 618.4 664.5

Total Operating Expenses 3,331.0 3,312.5 3,498.6 3,715.5 4,004.8 4,334.2 4,606.9

EBIT 340.0$ 363.8$ 417.8$ 452.9$ 532.2$ 636.5$ 734.4$

Interest Expense 184.0 220.3 236.8 257.7 286.2 319.1 346.1

Other Income/(Expenses) 10.0 8.3 8.8 9.5 10.4 11.5 12.4Pretax Income 166.0 151.8 189.9 204.6 256.5 328.9 400.6

Income Tax Expense 67.0 91.1 113.9 122.8 153.9 197.3 240.4

Net Income 99.0$ 60.7$ 76.0$ 81.8$ 102.6$ 131.6$ 160.3$

EBIAT 218.3$ 250.7$ 271.7$ 319.3$ 381.9$ 440.6$

Plus: Depreciation & Amort 227.7 242.6 260.6 286.2 316.5 340.1

Less: Non-Aircraft Capital Expenditures 123.1 131.7 140.9 150.7 161.3 172.6

Less: Additions to Working Capital 1.5 40.6 49.0 70.0 82.6 64.4

Operating Cash Flow 321.5$ 321.0$ 342.4$ 384.8$ 454.5$ 543.7$

Terminal Value 8,690.6

Discounted Value 293.7$ 268.0$ 261.2$ 268.2$ 289.4$ 5,373.6$

Current Enterprise Value 6,754.1$

Less: Debt, as of 12/31/16 5,127.5

Equity Value 1,626.6$

Shares Outstanding, as of 12/31/16 295.6

Common Share Value 5.50$Stock Price 12/09/10 6.69$

% Undervalued/(overvalued) -17.8%

Assumptions:

Passenger Sales (Growth %) 0.2% 6.5% 7.4% 9.8% 10.6% 7.5%

Other Sales (% Passenger Sales) 11.0% 11.0% 10.0% 9.0% 8.0% 8.0%

Aircraft Fuel and Related Taxes (Growth %) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Salaries, Wages, & Benefits (% Sales) 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Landing Fees & Other Rents (% Sales) 6.9% 6.9% 6.9% 6.9% 6.9% 6.9%

Depreciation & Amortization (% Sales) 6.9% 6.9% 6.9% 6.9% 6.9% 6.9%

Aircraft Rent (% Sales) 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%

Sales & Marketing (% Sales) 4.9% 4.9% 4.9% 4.9% 4.9% 4.9%

Maintenance Materials & Repairs (Growth %) 13.0% 11.0% 11.0% 11.0% 9.0% 9.0%

Other Operating Expenses (% Sales) 13.4% 13.4% 13.4% 13.4% 13.4% 13.4%

Other Income (% Sales) 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

Tax rate 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%

WC (% Sales) 18.8% 18.8% 18.8% 18.8% 18.8% 18.8%

WACC (Rate of return) 9.4%

Perpetual Growth Rate 3.0%


26/45


Figure 13. WACC Analysis

Figure 14. Capital Expenditures and Fleet Analysis

Jet Blue Airlines

Weighted Average Cost of Capital Analysis

$'s in millions

Cost of Debt: Capital Structure:

Cost of Debt 6.8% Market value Weight

Marginal Tax Rate 40.0% Net Debt 2,566$ 55.5%

Cost of Debt Post Tax Shield 4.1% Equity 2,058 44.5%

Total 4,624$

Cost of Equity: Share Outstanding Analysis:

Risk-Free Rate 3.2% Current Stock Price 6.96$

Market Risk Premium 8.8% Options Data:

Raw Company Beta 1.48 Total # In-the-Money Options 2.6

Cost of Equity 16.2% Weighted Avg. Strike Price 2.25$

Total Dollar Proceeds 5.9

Calculation of Net Debt, as of 09/30/10: Total Shares Repurchased 0.9Class G-1, due through 2016 245$ New Shares from Options 1.8

Class G-2, due 2014 and 2016 373 Basic Shares Outstanding 293.8

Class B-1, due 2014 49 Total Share Outstanding 295.6

Fixed rate spec ial facility bonds, due through 2036 84

6.75% convertible debentures due in 2039 201 Weighted Average Cost of Capital:

5.5% convertible debentures due in 2038 123 WACC 9.4%

Floating rate equipment notes, due through 2020 696

Fixed rate equipment notes, due through 2025 1,162

Captial Leases 131

Less: Excess Cash (498)

Total Debt, as of 09/30/10 2,566$

Jet Blue Airlines

Cap-Ex & Fleet Analysis

$'s in millions Est

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Aircraft 975.0$ 1,013.0$ 671.0$ 643.0$ 353.0$ 205.0$ 450.7$ 550.8$ 701.0$ 951.4$ 1,101.6$ 901.3$

Non-aircraft 125.0 89.0 74.0 60.0 108.0 115.0 123.1 131.7 140.9 150.7 161.3 172.6

Total Cap-Ex 1,100.0$ 1,102.0$ 745.0$ 703.0$ 461.0$ 320.0$ 573.7$ 682.5$ 841.9$ 1,102.1$ 1,262.9$ 1,073.9$

% Chage -28.8% -16.9% -18.9% 80.0% 6.5% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Fleet Size 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Beginning Fleet 77 94 119 133 142 151 155 164 175 189 208 230

Additions 17 30 17 18 11 4 9 11 14 19 22 18

Divestitures - 5 3 9 2 - - - - - - -

Total Fleet Size 94 119 133 142 151 155 164 175 189 208 230 248

Net Change 25 14 9 9 4 9 11 14 19 22 18

$/Additional Aircraft 40.5$ 47.9$ 71.4$ 39.2$ 51.3$ 50.1$ 50.1$ 50.1$ 50.1$ 50.1$ 50.1$

Anual Aircraft Cap-Ex 1,013.0$ 671.0$ 643.0$ 353.0$ 205.0$ 450.7$ 550.8$ 701.0$ 951.4$ 1,101.6$ 901.3$

06-10 Avg Incramental Cost 50.07

Total Debt/Aircraft 24.05 23.54 22.59 21.30 21.88 19.77

Average Increase 22.19

Fleet Analysis

Airbus A320 85 96 104 107 110 112 116 123 130 142 157 167

Net Change 11 8 3 3 2 4 7 7 12 15 10

Embraer 190 9 23 30 35 41 43 48 52 59 66 73 81

Net Change 14 7 5 6 2 5 4 7 7 7 8

Actual Projected


27/45


Figure 15. Revenue Analysis

Jet Blue Airlines

Revenue Analysis

$'s in millions

Passenger Revenue2005 2006 2007 2008 2009 2010

Passenger Revenue: Historical 1,620.0$ 2,223.0$ 2,636.0$ 3,056.0$ 2,928.0$ 3,304.0$

Airbus A320 Fleet 85 96 104 107 110 112

Available Seats 150 150 150 150 150 150

Embraer 190 Fleet 9 23 30 35 41 43

Available Seats 100 100 100 100 100 100

Total Daily Available Seats 13,650 16,700 18,600 19,550 20,600 21,100

Total Annual Avail Seats 4,982,250 6,095,500 6,789,000 7,135,750 7,519,000 7,701,500

Avg Daily Rev/Available Seat 0.000325$ 0.000365$ 0.000388$ 0.000428$ 0.000389$ 0.000429$

Annual Rev Increase % 37.2% 18.6% 15.9% -4.2% 12.8%

2011 2012 2013 2014 2015 2016

Passenger Revenue: Projected 3,312.0$ 3,528.4$ 3,789.4$ 4,162.4$ 4,602.5$ 4,945.7$

Airbus A320 Fleet 116 123 130 142 157 167

Available Seats 150 150 150 150 150 150

Embraer 190 Fleet 48 52 59 66 73 81

Available Seats 100 100 100 100 100 100

Total Daily Available Seats 22,200 23,650 25,400 27,900 30,850 33,150

Total Annual Avail Seats 8,103,000 8,632,250 9,271,000 10,183,500 11,260,250 12,099,750

Avg Daily Rev/Available Seat 0.000409$ 0.000409$ 0.000409$ 0.000409$ 0.000409$ 0.000409$

Annual Rev Increase % 0.2% 6.5% 7.4% 9.8% 10.6% 7.5%

Other Revenue:2005 2006 2007 2008 2009

Other Rev 81.0$ 140.0$ 206.0$ 332.0$ 358.0$

Passenger Rev 1,620.0 2,223.0 2,636.0 3,056.0 2,928.0

% of Passenfer Rev 5.0% 6.3% 7.8% 10.9% 12.2%


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Figure 16. Operating Expense Analysis

Jet Blue Airlines

Operating Expense Analysis

$'s in millions

Maintenance Exp as a % of Revenue:

2005 2006 2007 2008 2009

Passenger Rev 1,620.0$ 2,223.0$ 2,636.0$ 3,056.0$ 2,928.0$

Maintenance Exp 64.0 87.0 106.0 127.0 149.0

Maint Exp % Inc 35.94% 21.84% 19.81% 17.32%

4-year Average 23.7%

Sales & Marketing Exp as a % of Revenue:

2005 2006 2007 2008 2009

Passenger Rev 1,620.0$ 2,223.0$ 2,636.0$ 3,056.0$ 2,928.0$

Sales & Marketing Exp 81.0 104.0 121.0 151.0 151.0

Sales & Market Exp % Sales 5.0% 4.7% 4.6% 4.9% 5.2%

5-year Average 4.9%

Aircraft Rental Exp as a % of Revenue:

2005 2006 2007 2008 2009

Passenger Rev 1,620.0$ 2,223.0$ 2,636.0$ 3,056.0$ 2,928.0$

Aircraft Rental Exp 74.0 103.0 124.0 129.0 126.0

Aircraft Rental Exp % Sales 4.6% 4.6% 4.7% 4.2% 4.3%

5-year Average 4.5%

Depr Exp as a % of Revenue:

2005 2006 2007 2008 2009

Passenger Rev 1,620.0$ 2,223.0$ 2,636.0$ 3,056.0$ 2,928.0$

Depr Exp 115.0 151.0 176.0 205.0 208.0

Depr Exp % Sales 7.1% 6.8% 6.7% 6.7% 7.1%

5-year Average 6.9%

Landing Fees Exp as a % of Revenue:

2005 2006 2007 2008 2009

Passenger Rev 1,620.0$ 2,223.0$ 2,636.0$ 3,056.0$ 2,928.0$

Landing Fees Exp 112.0 158.0 180.0 199.0 213.0

Landing Fees Exp % Sales 6.9% 7.1% 6.8% 6.5% 7.3%

5-year Average 6.9%

Salaries Exp as a % of Revenue:

2005 2006 2007 2008 2009

Passenger Rev 1,620.0$ 2,223.0$ 2,636.0$ 3,056.0$ 2,928.0$

Salaries Exp 428.0 553.0 648.0 694.0 776.0

Salaries Exp % Sales 26.4% 24.9% 24.6% 22.7% 26.5%5-year Average 25.0%

Other Operating Exp as a % of Revenue:

2005 2006 2007 2008 2009

Total Revenue 1,701.0$ 2,363.0$ 2,842.0$ 3,388.0$ 3,286.0$

Other Operating Exp 291.0 328.0 350.0 377.0 419.0

Other Op Exp % Sales 17.1% 13.9% 12.3% 11.1% 12.8%

5-year Average 13.4%


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Figure 17. Capital Structure Analysis

Figure 18. Working Capital Analysis

Jet Blue Airlines

Capital Structure Analysis

$'s in millions

Additional Debt Raises & Int Exp:

09/30/10 2011 2012 2013 2014 2015 2016

Increase in Aircraft (Actual) 9 11 14 19 22 18

Additional Debt/Aircraft 22.2$ 22.2$ 22.2$ 22.2$ 22.2$ 22.2$

Incramental Debt 199.7 244.1 310.6 421.6 488.1 399.4

Total Debt 3,064.0 3,263.7 3,507.8 3,818.4 4,240.0 4,728.1 5,127.5

Interest PMT 220.3 236.8 257.7 286.2 319.1 346.1

Total Debt Issuance 2,063.5

Future Interest Rate 6.8%

New Equity Offerings:

2011-2016

Aircraft Cap-Ex Required 4,656.8$

Cash flow from Op's (2,367.8)

Debt Financing (2,063.5)

Equity Shortfall 225.5$Share Issuance Price (actual) 6.69$

Shares Issued 33.7

Total Funding 2,289.0$

Jet Blue Airlines

Working Capital Analysis

$'s in millions

Changes in Working Capital:

2005 2006 2007 2008 2009Deferred income taxes (4.0)$ 10.0$ 19.0$ (6.0)$ 40.0$

Decrease (Increase) in receivables (28.0) (12.0) (14.0) 4.0 3.0

Decrease (Increase) in inventories, prepaid and other (20.0) (28.0) 3.0 (10.0) (43.0)

Increase in air traffic liability 69.0 97.0 86.0 19.0 10.0

Increase (Decrease) in AP and other accrued liabilities 54.0 33.0 36.0 15.0 (66.0)

Other, net (7.0) 8.0 30.0 31.0 40.0

Additions to Working Capital 64.0$ 108.0$ 160.0$ 53.0$ (16.0)$

Sales 1,701.0$ 2,363.0$ 2,842.0$ 3,388.0$ 3,286.0$

Working Cap Additions/Change in Sales % 16.3% 33.4% 9.7% 15.7%

4-year average 18.8%


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Figure 19. Historical Debt-to-Total Value Comparisons

Figure 20. Historical Debt-to-Sales Comparisons

Jet Blue Airlines

Historical Debt-to-Total-Value Competitor Comparison

S's in millions

For the Year Ending & 9-Months Ending

Jet Blue: 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 09/30/09 09/30/10 12/31/16

Total Debt* 2,261.0$ 2,801.0$ 3,005.0$ 3,024.0$ 3,304.0$ 3,304.0$ 3,064.0$ 5,127.5$

Total Equity 911.0 952.0 1,036.0 1,266.0 1,539.0 1,541.0 1,623.0 2,461.4

Debt-to-Total Value 71.3% 74.6% 74.4% 70.5% 68.2% 68.2% 65.4% 67.6%

Southwest:

Total Debt* 2,012.0$ 1,705.0$ 2,110.0$ 3,684.0$ 3,552.0$ 3,510.0$ 3,228.0$

Total Equity 6,675.0 6,449.0 6,941.0 4,953.0 5,466.0 5,454.0 5,950.0

Debt-to-Total Value 23.2% 20.9% 23.3% 42.7% 39.4% 39.2% 35.2%

Airtran:

Total Debt* 811.1$ 900.1$ 1,057.9$ 1,104.1$ 1,214.0$ 1,112.2$ 955.6$

Total Equity 382.8 379.3 446.4 281.1 501.9 414.8 515.2


Alaska Airlines:

Total Debt* 1,082.6$ 1,150.8$ 1,300.5$ 1,841.2$ 1,855.2$ 1,623.9$ 1,806.0$

Total Equity 827.6 885.5 1,024.0 661.9 872.1 1,073.5 773.8


US Air:

Total Debt* 3,005.0$ 3,002.0$ 3,148.0$ 3,985.0$ 4,526.0$ 4,626.0$ 4,428.0$

Total Equity 420.0 970.0 1,439.0 (494.0) (355.0) (260.0) 74.0


* Includes Capital Leases & Current Maturities

Jet Blue Airlines

Historical Debt-to-Sales Competitor Comparison

S's in millions


Jet Blue: 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 09/30/09 09/30/10 12/31/16

Total Debt* 2,261.0$ 2,801.0$ 3,005.0$ 3,024.0$ 3,304.0$ 3,304.0$ 3,064.0$ 5,127.5$

Total Sales 1,701.0 2,363.0 2,842.0 3,388.0 3,286.0 2,454.0 2,839.0 5,341.3

Debt-to-Sales 132.9% 118.5% 105.7% 89.3% 100.5% 134.6% 107.9% 96.0%

Southwest:

Total Debt* 2,012.0$ 1,705.0$ 2,110.0$ 3,684.0$ 3,552.0$ 3,510.0$ 3,228.0$

Total Sales 7,584.0 9,086.0 9,861.0 11,023.0 10,350.0 7,638.0 8,990.0

Debt-to-Sales 26.5% 18.8% 21.4% 33.4% 34.3% 46.0% 35.9%

Airtran:

Total Debt* 811.1$ 900.1$ 1,057.9$ 1,104.1$ 1,214.0$ 1,112.2$ 955.6$

Total Sales 1,449.7 1,892.1 2,310.0 2,552.5 2,341.4 1,743.0 1,973.6

Debt-to-Sales 56.0% 47.6% 45.8% 43.3% 51.8% 63.8% 48.4%

Alaska Airlines:

Total Debt* 1,082.6$ 1,150.8$ 1,300.5$ 1,841.2$ 1,855.2$ 1,623.9$ 1,806.0$

Total Sales 2,975.3 3,334.4 3,069.9 3,221.3 3,006.0 2,553.7 2,873.8Debt-to-Sales 36.4% 34.5% 42.4% 57.2% 61.7% 63.6% 62.8%

US Air:

Total Debt* 3,005.0$ 3,002.0$ 3,148.0$ 3,985.0$ 4,526.0$ 4,626.0$ 4,428.0$

Total Sales 5,069.0 11,557.0 11,813.0 12,244.0 10,609.0 7,945.0 9,110.0

Debt-to-Sales 59.3% 26.0% 26.6% 32.5% 42.7% 58.2% 48.6%

* Includes Capital Leases & Current Maturities


31/45


Figure 21. Historical Interest Expense-to-Total Revenue Comparisons

Jet Blue Airlines

Historical Competitor Interest Expense-to-Total Revenue Comparison

S's in millions


Jet Blue: 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 09/30/09 09/30/10

Total Interest 107.0$ 173.0$ 235.0$ 242.0$ 197.0$ 148.0$ 135.0$

Totat Revenue 1,701.0 2,363.0 2,842.0 3,388.0 3,286.0 2,454.0 2,839.0

Interest-to-Total Rev 6.3% 7.3% 8.3% 7.1% 6.0% 6.0% 4.8%

Southwest:

Total Interest 122.0$ 128.0$ 119.0$ 130.0$ 186.0$ 140.0$ 126.0$

Totat Revenue 7,584.0 9,086.0 9,861.0 11,023.0 10,350.0 7,638.0 8,990.0


Airtran:

Total Interest 30.8$ 50.9$ 81.9$ 85.5$ 84.0$ 63.6$ 61.1$

Totat Revenue 1,449.7 1,892.1 2,310.0 2,552.5 2,341.4 1,743.0 1,973.6


Alaska Airlines:

Total Interest 63.0$ 78.0$ 86.2$ 92.5$ 88.1$ 77.8$ 81.4$

Totat Revenue 2,975.3 3,334.4 3,069.9 3,221.3 3,006.0 2,553.7 2,873.8


US Air:

Total Interest 147.0$ 295.0$ 229.0$ 218.0$ 241.0$ 189.0$ 179.0$

Totat Revenue 5,069.0 11,557.0 11,813.0 12,244.0 10,609.0 7,945.0 9,110.0



32/45

Team A8 Integrated Company Analysis: JetBlue D-1

Appendix D: Marketing Position and Program

Figure 22. Market Position

C

o

s

t

Experience

Low-cost/

Discount Airlines

Traditional/

Legacy Airlines


33/45


Figure 23: Advertising Spend

Figure 24: JetBlue Website (Experience JetBlue)

$53

$204

$31$17 $11

$0

$250

JetBlue

Airways

Southwest

Airlines

AirTran

Airways

Alaska

Airlines

U.S.

Airways

AdvertisingCosts

(inmillions)

Advertising Spend in 2009

Source: SEC Filings


34/45


Figure 25: Twitter

Figure 26: Facebook


35/45

Team A8 Integrated Company Analysis: JetBlue E-1

Appendix E: Marketing Mix Comparison

All information presented in this appendix is from the respective companies 10k reports.

Product

JetBlue Airways Southwest Airlines AirTran Airways US Airways Alaska Airlines

ModelPrimarily point-to-

point routes

Locations

60 destinations in 20

states, Puerto Rico,

and eleven countries

in the Caribbean and

Latin America

Focus Cities

Boston, Fort

Lauderdale, Los

Angeles/Long Beach,

New York/JFK,

Orlando

Average Stage Length

1,064 miles

ModelPrincipally point-to-

point routes

Locations

69 cities in 35 states


639 miles

ModelHub and network

system; 50% of flights

originate or terminate

in Atlanta (hub)

Locations

Serves 63 locations

including Puerto Rico,

Aruba, Mexico and

Bahamas; majority of

markets served are in

the eastern United

States

Focus Cities

Baltimore, Milwaukee,

Orlando


738 miles

ModelHubs in Charlotte,

Philadelphia, and

Phoenix and a focus

city at Ronald Reagan

Washington National

Airport

Locations

Serves more than 200

communities in the

U.S., Canada, Mexico,

Europe, the Middle

East, the Caribbean,

Central and South

America; member ofthe Star Alliance

network which offers

flights to 181

countries


972 miles

ModelHubs in Anchorage,

Seattle, Portland, and

Los Angeles

Locations

59 cities in United

States, Canada and

Mexico


1,058 miles


36/45


Price


2009 Revenue Per

Passenger

$102

Yield/Passenger Mile

11.28 centsAncillary Fees

Reservation changes,

baggage limitations,

TrueBlue frequent

flyer point sales,

concession

2009 Revenue Per

Passenger

$119



Pets, service charge

for unaccompanied

minor, third or

overweight bag fee

2009 Revenue Per

Passenger

$97



Pets, liquor sales,

excess baggage

charges,

transportation of

unaccompanied

minors, frequent

travel credits, optional

fees for advance seat

assignments and a fee

for call center

services, priority seat

selection, the

extension or transfer

of A+ Miles Rewards,

purchase of A+ Miles

Rewards, checked

baggage

2009 Revenue Per

Passenger

$118



First and second

checked bag service

fees, processing fees

for travel awards,

Choice Seats program,

and call center/airport

ticketing fees

2009 Revenue Per

Passenger

$157

Yield/ Passenger Mile


Reservations fees,

ticket change fees, and

baggage service

charges

Note: Yield/Passenger Mile represents the average amount one passenger pays to fly one mile.


37/45


Place (Distribution)


JetBlue website

GDS (Sabre,

Travelport and

Amadeus)

Online travelagent sites

(Expedia,

Travelocity,

Orbitz, and

Priceline)

Southwest

website

AirTran web site

AirTran Bye-Pass

airport self-service

kiosks

Mobile Webprogram

Travel agency web

sites (e.g.

Travelocity,

Expedia)

Corporate booking

agencies

Traditional travel

agencies

US Airways

website

Online travel

agent sites (e.g.,

Orbitz,

Travelocity,

Expedia and

others)

Traditional travel

agents (GDS

Sabre)

Reservations

centers and airline

ticket offices

Alaskaair website

Traditional and

online travel

agents (GDS-Sabre,

Orbitz)

Reservation call

centers.


38/45


Promotion


Message/Tagline

You above all

2009 Advertising

Costs

$53MTarget

Primarily leisure;

increasingly business

travelers

Media

Newspapers,

magazines, television,

radio, internet, social

media, outdoor

billboards, targeted

public relations, local

events and

sponsorships, and

mobile marketingprograms, strong

word-of-mouth

Highlighted Features

Happy Jetting,

JetBlue Experience,

brand name snacks

and drinks

Message/Tagline

Bags fly free

2009 Advertising

Costs

$204MTarget

Leisure and business

travelers

Media

Television, internet,

social media

(Facebook, Twitter)


Southwest

Difference, Rapid

Rewards frequent

flyer program, in-flight

Internet connectivity,

EarlyBird check-in,

Business Select

enhancements

Message/Tagline

Go. Theres nothing

stopping you.

2009 Advertising

Costs

$31.3M

Target

Business and leisure

travelers

Media

Newspapers; satellite,

Internet, social media

(Facebook: AirTranU-

Home of the really

cheap standby flight),

and over-the-air radio;

broadcast, cable, and

satellite television;

out-of-home media;direct mail; e-mail;

movie theatres; and

the Internet, as well as

public relations efforts

Message/Tagline

Fly with US

2009 Advertising

Costs

$11MTarget

Business and leisure

travelers

Media

Internet, social media

(Facebook, Twitter)


Dividend Miles

frequent flyer

program, customer

feedback

Message/Tagline

North of Expected

2009 Advertising Costs

$16.8M

TargetBusiness and leisure

travelers

Media

Television, internet,

social media

(Facebook, Twitter,

YouTube)


Mileage Plan travel

awards


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Continued

Onboard boxed meals,

R&R, planes (young

fleet), award-winning

service, Customer

loyalty program,DirecTV programming,

XM Satellite Radio,

Movies & more, NFL

Sunday Ticket, Free

wireless, Customer Bill

of Rights


Destinations, quality,

business Class, XM

radio, young Boeing

aircraft fleet, assigned

seating, everyday

affordable fares,special sales

promotions, frequent

flier program A+

Rewards


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Team A8 Integrated Company Analysis: JetBlue F-1

Appendix F: Accounting Practices of Competitive Set

Note: AirTran excluded from analysis as its financials will be incorporated into Southwests methodology as the completion of

the acquisition.

Revenue Recognition

JetBlue Airways Alaska Airlines US Airways Southwest Airlines

Uses Air Traffic

Liability account to

reserve for unused

tickets before tickets

are utilized and the

revenue is recognized.

Same as JetBlue. Same as JetBlue. Same as JetBlue.

Airplane Ownership/Leasing


Primarily owned

151 planes total; 61

percent owned, 36

percent operating

leased, 3 percent

capital leased.

Primarily owned.


percent owned, 39

percent leased (lease

structure not

disclosed)

Primarily operating

leased.


percent operating

leased, 29 percent

owned, 9 percent

capital leased.

Primarily owned.


percent owned, 16

percent operating

leased, 2 percent

capital leased.

JetBlues Plane Ownership/Leasing

# of Planes Category Accounting Notes

94 Owned Depreciated straight line over 25 years; 20 percent residual value

57 Operating Lease Keeps future lease obligations off of balance sheet

4 Capital LeasePresent value of lease recorded and then amortized/depreciated

throughout the term in order to obtain tax benefits


41/45

Team A8 Integrated Company Analysis: JetBlue F-2

Equipment Depreciation


Planes are

depreciated over 25

years with 20 percent

residual value.

Similar.

Long range planesdepreciated over 20

years, regional planes

depreciated over 15

years.

Unspecified.

Depreciated over lifeof assetranging

from five to thirty

years.

Similar.

Depreciated over 23-25 years with 10-15

percent residual

value.

Fuel Hedges


Gains/losses incurred

due to hedging are

recognized in the

Fuel Expense

account at the time

the underlying fuel is

consumed. It there is

any other value

change beyond

consumption, it is

recognized as an

Other Income or

Other Expense.

Qualifies for Hedge

Accounting Rules.

Different.

Marked to market as

value changes. Allows

unrealized

gains/losses to be

recognized as the

hedge is marked to

market.

Does not qualify for

Hedge Accounting

Rules.

Different.

Marked to market as

value changes. Allows

unrealized

gains/losses to be

recognized as the

hedge is marked to

market.

Does not qualify for

Hedge Accounting

Rules.

Same as JetBlue.

Loyalty Rewards


Liability reserved as

part of Air Traffic

Liability account, asincremental cost (no

contribution to

overhead). JetBlue

does not disclose the

amount of points

outstanding and value

cannot be evaluated.

Same as JetBlue. Same as JetBlue. Same as JetBlue.


42/45

Team A8 Integrated Company Analysis: JetBlue G-1

Appendix G: JetBlue Airways Corporation Situation Analysis

Company JetBlue is a midsize U.S. passenger "value airline" that started operating in 2000

from New York's JFK International Airport, its principal hub. In 2009, JetBlue was

the seventh largest passenger carrier.

Founder David Neeleman is a former Southwest Airlines employee. JetBlues

original approach mirrored Southwests model in many aspects: low-cost travel,

point-to-point routes, flexible work rules, and one-aircraft-model fleet.

Today, JetBlue operates primarily on point-to-point routes with its fleet of 110

Airbus A320 aircraft and 41 EMBRAER 190 aircraft serving over 60 destinations in

20 states, Puerto Rico and eleven countries in the Caribbean and Latin America.

Focus cites are Boston, Fort Lauderdale, Los Angeles/Long Beach, New York/JFK,

and Orlando.

Value proposition: Competitive fares and quality air travel need not be mutually

exclusive.

JetBlues differentiation is its amenities such as in-flight entertainment, (e.g. Live

TV on every seat, premium movie channel offerings and satellite radio), free and

unlimited snacks and beverages, and leather seats with extra legroom. Its mission

is "to bring humanity back to air travel" through the JetBlue experience. It

established the Customer Bill of Rights in 2007 which provides compensation to

customers who experience avoidable (and some unavoidable) inconveniences.

In November 2009, JetBlues improved customer loyalty program, TrueBlue, was

launched.

Customers Mostly domestic leisure passengers (rather than business or international

travelers) looking for value.

Collaborators Marketing alliances with Deutsche Lufthansa AG, Cape Air (an airline that services

destinations out of Boston and San Juan, Puerto Rico), and Aer Lingus (an airline

based in Ireland).

Primary distribution is through www.jetblue.com; also participates in three major

Global Distribution Systems (Sabre, Travelport and Amadeus) and four major

online travel agents (Expedia, Travelocity, Orbitz, and Priceline).

In-flight entertainment: DirecTV, XM satellite radio, movie studios, etc.

Agreement with American Express which allows card members to earn TrueBlue

points.

Competitors Key competitors are United Continental, Delta/Northwest, American Airlines, US

Airways, Alaska Airlines and specifically in the low-cost category are Southwest

Airlines, and AirTran Airways (now under Southwest).

The principal competitive factors are fares, customer service, routes served, flight

schedules, types of aircraft, safety record and reputation, code-sharing

relationships, capacity, in-flight entertainment systems and frequent flyer

programs.


43/45

Team A8 Integrated Company Analysis: JetBlue G-2

Context The industry has traditionally been dominated by the major U.S. airlines such as

Delta/Northwest Air Lines, American Airlines, United Airlines, Continental Airlines,

Southwest Airlines and US Airways.

All airlines are subject to regulation by the DOT, the FAA, the Transportation

Security Administration, or TSA, and other governmental agencies.

Low-cost airlines largely developed after deregulation of the U.S. airline industry

in 1978. Southwest pioneered the low-cost model.

The industry is characterized by low profit margins, high fixed costs and significant

price competition.


44/45

Team A8 Integrated Company Analysis: JetBlue H-1

Appendix H: JetBlue SWOT Analysis

Strengths Weaknesses

Profitable in six of the last seven quarters;

growing faster than most other U.S. airlines (6-8%in 2009 according to management).

Low operating costs (cost per available seat mile,

excluding fuel, is among the lowest reported) -

high aircraft utilization, low distribution costs (all

electronic), productive workforce (flexible work

rules, no union), new and efficient aircraft

(youngest fleet of any major U.S. airline).

High brand awareness; rated as top low cost

airline for customer satisfaction by J.D. Power

and Associates for six straight years. Also, Best

Large Domestic Airline (economy class), Best

Inflight Entertainment (domestic flights) and

Most Eco-friendly Airline in the 2009 Zagat

Airline Survey.

Highly leveraged financial profile; 2009: debt of

$3.30 billion accounted for 68% of totalcapitalization.

Significant fixed obligations: leases related to

aircraft, airport terminal space, other airport

facilities and office space.

Financing costs to support growth. Limited in

ability to obtain additional equity (limited shares

of common stock currently available for issuance).

Opportunities Threats

Further develop social media marketing program

highlighting experience and explore targeted

marketing opportunities using its new integrated

customer service system.

Increase promotions to business travelers.

Expand in underserved markets and increase

flight connections. JetBlues fastest growing

markets are Boston and Caribbean.

More amenities; e.g., in-flight broadband using

satellite technology is being tested. JetBlue

expects to begin rollout on the fleets more than

160 planes by mid-2012.

Price and availability of fuel, U.S. economic

condition, terrorist attacks.

Diminishing competitive advantage as larger

traditional airlines restructure financially to reduce

their cost structure.

Limited number of suppliers for aircraft, engines

and components of in-flight entertainment system.


45/45

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Carr, Sustin. (October 14, 2010). JetBlue Goes Populist for New Ad Campaign. Fast Company(fastcompany.com);

Mansueto Ventures LLC.http://www.fastcompany.com/1695138/jetblue-you-above-all

Foust, Dean. (May 14, 2009). How Delta climbed out of bankruptcy. Business Week(Bloomberg LP).

http://www.businessweek.com/magazine/content/09_21/b4132036798289.htm

J.P. Morgan Chase Chase & Co. Airline Industry Overview/Considerations. 2010.

JetBlue Airways. SEC Filings.

Mintel Oxygen Database. AirlinesUSMay 2010.

Molavi, Justin. (October 2010). IBISWorld Industry Report 42272 - Gasoline & Petroleum Wholesaling in the US.

Parekh, Rupal. (July 6, 2010). How JetBlue Became One of the Hottest Brands in AmericaQ&A With Airlines

Marketing Chief Marty St. George.Advertising Age(adage.com); Crain Communications.

http://adage.com/cmostrategy/article?article_id=144799

Quinton, Brian. (October 1, 2010). Brand, Buzz and BookingsWhy Fly the Other Guy? Chief Marketer

(chiefmarketer.com).http://chiefmarketer.com/disciplines/branding/jetblue-marketing-success-plan-

1001/index1.html

Samadi, Nima. (September 2010). IBISWorld Industry Report 48111b - Domestic Airlines in the US.

Sisario, Ben. (October 20, 2010). Catching a Flight, and a Show. The New York Times(nytimes.com).

http://www.nytimes.com/2010/10/21/arts/music/21swift.html

Stoller, Gary. (September 15, 2010). JetBlue, Southwest beat big carriers for service, quality. USA Today

(usatoday.com); Gannett Co., Inc.http://www.usatoday.com/travel/flights/2010-09-15-

1Aairlinecomplaints15_ST_N.htm

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Documents

Integrated Company Analysis Jet Blue