INTRODUCTIONArmed with extensive experience in Airline start-ups, David Neeleman at 39 first announced his plan to launch a new airline dubbed to bring humanity back to air travel in July 1999. In between the current issue concerning the airline industry failures at that time, Neeleman together with an impressive new management team and a growing group of investors believed that through their commitment to innovation in people, policies, and technology could keep their planes full and moving, and thus the vision of JetBlue Airways Incorporated materialized with. With the whopping $130 million dollars of capital raised from high-profile firms such as Western Presidio Capital, Chase Capital Partners, and Quantum Industrial Partners, JetBlue had secured a small fleet of Airbus320 aircraft and initiated service was from JFK to Fort Lauderdale, Florida, and Buffalo, New York in a span of seven months from the time it was incorporated.The start of the companys astonishing growth commenced in the early summer of 2000, adding routes in two other Florida cities, two other northeastern cities, and two California cities. By 2002 the company was operating 24 aircraft flying 108 flights per day to 17 destinations. With the growing success of the Airline, Neeleman acknowledged that JetBLues strategy was built on the goal of fixing everything that sucked about air travel. This strategy was fixated on offering passengers with 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. Another secret in their success was an effective business plan execution by elevating their strategies through focusing on a point-to-point service to large metropolitan areas with high average fares or highly traveled markets that were underserved. And such resulted to the lowest cost per available-seat-mile of any major U.S airline in 2001, with 6.98 cents versus an industry average of 10.08 cents.Now pioneering the Low- Fare business model among airlines following after Southwest Airlines, JetBlue further expanded through acquiring a fleet of new Airbus A320 aircraft. More so, not only was JetBlues fleet 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 has been very effective in establishing a strong brand by identifying their company among the safest, most reliable, and one with a low-fare air travel that was focused on high customer service and by providing an enjoyable flying experience.Currently JetBlues management is faced with a new highlight in the life of the company as a growing entity. Along with an impressive growth trajectory of the company is the expectation from its management to support such path and to offset the portfolio of losses by its venture- capital investors. With such situation at hand the management of the company was ready to raise additional capital through a public equity offering. After a series of necessary procedures done by the Airline executives, the next dilemma that faced JetBlues board was to come to an agreement on the offering price of the new shares. At an authorized stock issuance approved by the SEC of 5.5 million JBLU shares, the initial price range communicated to potential investors was at $22 to $24. Faced with a sizeable excess demand even at the mentioned volume of shares, management has filed an increase in the offerings price range reflected at $25 to $26. But even at that the new price range, most of the group thought the stock faced blow-out demand. Now, the task at hand left to the analysts is to determine the most suitable price range for the IPO shares that would ensure successful investor deals and at the same time would align to the companys aggressive growth plans.

Mission StatementJet Blues mission is to be the leading low-fare, low-cost passenger airline offering high quality customer service to underserved markets and customer who are looking for the best value in their flight. We have the newest most advanced planes that are reliable, fuel efficient, utilizes paperless cockpit technology, live in-flight satellite TV and security cameras. Our philosophy is to give customers the best price value for their ticket, offering things our competitors dont offer. At JetBlue we feel that hiring educated employees that are highly motivated and well trained will provide a better experience to the customers. We feel that our high-value, high quality service philosophy will lead the way to our becoming the number one in the industry.

Vision StatementAt JetBlue our goal is to provide the best, most affordable flight experience of any air carrier while providing superior service.

STATEMENT OF THE PROBLEMWhat is the most suitable price range that the company should set for its initial public offering shares that would ensure successful investor deals and at the same time would align to the companys aggressive growth plans?

OBJECTIVES OF THE STUDY To identify a price range for IPO shares that would align with company goals To make use of appropriate pricing models that would suggest a price that fits the suitable price range for the IPO shares

AREAS FOR CONSIDERATIONStock valuation can be accomplished by using a few different ways: namely the Dividend Discount Model, Gordon Growth Model (constant growth model), or by market multiples. It is to be noted however, that in the case of JetBlue Airways, neither can the Dividend Discount Model nor the Gordon Growth Model can be used for valuing JetBlue stocks, also EVA cannot be used in valuing JetBlue stocks. This is due to the statement of the companys management indicating the intentions of management to retain future earnings to finance the further expansion and continued growth of the business, and thus opting not to declare and pay dividends on common stock. So, to get a proper range for JetBlues offering price, we will look at market multiples for the Low-Cost Airline Industry and use the Discounted Cash Flow Model to come up with a number that makes sense, once we compare those other financials to JetBlues. Below are the areas to be considered in coming up with the most suitable price range for the companys stocks:Market to Book EquityAirlinePrice/ShareBook Equity/ShareMarket to Book Equity Multiple

Airtran6.60 0.50 13.50

Alaska Air29.10 32.10 0.90

America West3.50 12.50 0.30

ATA15.00 10.80 1.40

Frontier17.00 5.40 3.20

Ryanair32.10 5.50 5.80

Southwest18.50 5.30 3.50

WestJet15.90 2.80 5.60

Median3.35

5.08

Jetblue (Trailing)17.01

1. Sample size is reduced to low-cost airlines.2. The median Market to Book Equity multiple will be used for interpolating JetBlue's stock price since it disregards outlying performances.3. Formula used:

4. Book equity per share is derived by dividing the total equity disregarding which is not a part of the equity component and the convertible redeemable preferred stock by the outstanding shares of 35.1 million which includes the convertible redeemable preferred stock (refer to the footnote on page 623).

Price/Earnings MultiplePrice-earnings multiple is the current market price of a corporation share divided by the earnings per share of the company. The group opted to utilize only low-cost airline companies that have positive earnings because they have almost the same performance and operations as JetBlue and in addition, the inclusion of airlines with negative earnings will greatly affect the P/E multiples as they are considered extremes. It is also important to note that Frontier has an outlying value and thus, averaging will not represent the appropriate values for this computation. The median P/E ratio of the sample size provided a more accurate figure.TrailingLeading

AirlinePrice/ShareEPSP/E MultipleEPSP/E Multiple

Airtran6.60 0.30 22.00 0.30 22.00

Frontier17.00 2.00 8.50 0.40 42.50

RyanAir32.10 0.70 45.86 0.90 35.67

Southwest18.50 0.70 26.43 0.70 26.43

WestJet15.90 0.80 19.88 0.60 26.50

Median22.00 26.50

Trailing

P/E Multiple Median22.00

JetBlue-Basic EPS217.36 9.88

JetBlue-Diluted EPS25.08 1.14

JetBlue-Proforma EPS28.60 1.30

Leading

P/E Multiple Median26.50

JetBlue-Basic EPS274.91 10.37

JetBlue-Diluted EPS31.72 1.20

JetBlue-Proforma EPS36.17 1.37

1. Sample size is reduced to low-cost airlines with positive EPS because a negative EPS would pose as an outlying performance.2. The median P/E multiple will be used for interpolating JetBlue's stock price because of an outlier present (Frontier's P/E multiple).3. Leading EPS is adjusted for inflation (increase in earnings and increase in outstanding shares due to IPO).4. Instead of the basic EPS, the diluted EPS will be utilized for interpolating JetBlue's stock price because of its complex equity (presence of convertible redeemable preference shares/possible diluters).5. Formula used:

Total Capital MultipleThe group still utilized the figures of low-cost carrier airlines in order to arrive at the JetBlue trailing price per share. The value of the median was most representative since it disregarded the outliers. It resulted to a figure of $27.04 for JetBlue. AirlinePrice/ShareBook Equity/ShareBook Debt/ShareTotal Capital Multiple

Airtran6.60 0.50 4.00 2.36

Alaska Air29.10 32.10 33.80 0.95

America West3.50 12.50 10.20 0.60

ATA15.00 10.80 32.90 1.10

Frontier17.00 5.40 0.00 3.15

RyanAir32.10 5.50 3.30 4.02

Southwest18.50 5.30 1.80 2.86

WestJet15.90 2.80 1.00 4.45

Median2.61

JetBlue (Trailing)27.04 5.08 8.59 2.61

1. Sample size is reduced to low-cost airlines.2. The median Total Capital multiple will be used for interpolating JetBlue's stock price since it disregards outlying performances.3. Formula used:

4. Current liabilities are not considered in the computing the book debt per share because they constitute working capital and are not representative of the contribution directly from investors.5. Book debt per share is derived by dividing the total long term debt and deferred credits and other liabilities by the outstanding shares of 35.1 million which includes the convertible redeemable preferred stock (refer to the footnote on page 623).6. Book equity per share is derived by dividing the total equity the convertible redeemable preferred stock by the outstanding shares of 35.1 million which includes the convertible redeemable preferred stock (refer to the footnote on page 623)7. Refer to Exhibit 7 for the price/share, trailing and leading EPS and Total Capital Multiple for the low-cost airlines.

EBIT Multiple

1. Sample size is reduced to low-cost airlines with positive EPS because a negative EPS would pose as an outlying performance.2. The median EBIT multiple will be used for interpolating JetBlue's stock price since it disregards outlying performances.3. Trailing EBIT/Share is computed by dividing the Income (Loss) Before Income Taxes after adding back the interest expense (refer to Exhibit 3) by the 35.1 million which includes the convertible redeemable preferred stock (refer to the footnote on page 623).4. Leading EBIT/Share is computed by dividing the EBIT as forecasted in Exhibit 13 by the outstanding shares after the IPO which will be 40.6 million.5. Formula used:

Discounted Cash Flows

To derive D/E Ratio of JBLU:

(based on Exhibit 5) 6,863,598,467.43

D/E Ratio of Industry (based on SW) = 37%

1. Southwest's capital structure is mainly used because it is considered the pioneer for low-cost strategy airlines and due to the limited amount of data.2. D/E Ratio is derived from Southwest's capital structure using the total capital multiple formula.3. The unlevered beta of Southwest is also utilized in deriving the levered beta of JetBlue.4. Since it is assumed that all convertible redeemable preferred stock will be converted to common stock (refer to footnote on page 623), it would be impracticable to derive the cost of preferred stock and also because the preferred stock is not explicitly stated in Southwest's capital structure.5. A growth rate of 5% for CAPEX and 4% for revenue is utilized. Depreciation will follow the rate for CAPEX while for other line items, an average of 4.5% is used.6. Net Working Capital is forecasted through the use of a net working capital turnover of 9.4 which is constant every year.

ALTERNATIVE COURSES OF ACTION

$22-$24Pros: Due to the positive reviews regarding JetBlue Airways, this range will encourage investors to buy the companys stocks Is at a level which is relatively in between the prices of other companies in the low-cost airline industry; Not too low and not too highCons: The range is not enough to fund JetBlues capital expenditures The price range is said to result in a sizable excess demand for the JetBlue shares, which may eventually cause a decline in the companys stock price$24-$26Pros: Relative to the share prices of other companies in the low-cost airline industry, this price range is still advantageous for potential investors, considering the current status of JetBlue AirlinesCons: Even though this range is higher than $22-$24, this is still not enough to fund JetBlues capital expenditures At this price, most of the managements group thought that the stock still faced a blow-out demandHigher than $26Pros: This range will enable JetBlue to fund its capital expenditures This is the price range that reflects the prices computed using the different areas considered At $26, the companys share price is still at par with other low-cost airlines with relatively high prices while maintaining an advantageCons: Some risk averse investors might consider the price too high for the benefit they see from investing in the company The demand from JetBlue shares might decline to a number below than companys expectation

CONCLUSION AND DECISION

Generally, underwriters modify the price of IPOs. It should be competitive enough to raise funds for capital expenditures and support growth but should not be too high that it would reduce demand and investor buzz regarding JetBlues initial public offering. Thus, the group used several pricing techniques and applied conservatism to attain a suitable price for the companys shares. Basing from the computations on the different multiples and the discounted cash flows, the group concludes that the best possible price of JetBlues stock is higher than $26. This is because this price is at par with that of the other low-cost airlines and can best compensate the companys capital expenditures while still be relatively lower than the resulting figures from the multiple estimates. More specifically, the group approximates that the range to be between $27-$30 is most suitable for JetBlues Initial Public Offering.