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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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Team A8 Integrated Company Analysis: JetBlue 2
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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Team A8 Integrated Company Analysis: JetBlue 3
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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Team A8 Integrated Company Analysis: JetBlue 4
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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Team A8 Integrated Company Analysis: JetBlue 5
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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Team A8 Integrated Company Analysis: JetBlue 6
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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Team A8 Integrated Company Analysis: JetBlue 7
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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Team A8 Integrated Company Analysis: JetBlue 8
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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Team A8 Integrated Company Analysis: JetBlue 9
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
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Team A8 Integrated Company Analysis: JetBlue 10
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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Team A8 Integrated Company Analysis: JetBlue 11
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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Team A8 Integrated Company Analysis: JetBlue 12
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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Team A8 Integrated Company Analysis: JetBlue A-2
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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Team A8 Integrated Company Analysis: JetBlue A-3
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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Team A8 Integrated Company Analysis: JetBlue A-4
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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Team A8 Integrated Company Analysis: JetBlue C-2
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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Team A8 Integrated Company Analysis: JetBlue C-3
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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Team A8 Integrated Company Analysis: JetBlue C-4
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%
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Team A8 Integrated Company Analysis: JetBlue C-5
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
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Team A8 Integrated Company Analysis: JetBlue C-6
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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Team A8 Integrated Company Analysis: JetBlue C-7
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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Team A8 Integrated Company Analysis: JetBlue C-8
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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Team A8 Integrated Company Analysis: JetBlue C-9
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
Debt-to-Total Value 67.9% 70.4% 70.3% 79.7% 70.7% 72.8% 65.0%
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
Debt-to-Total Value 56.7% 56.5% 55.9% 73.6% 68.0% 60.2% 70.0%
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
Debt-to-Total Value 87.7% 75.6% 68.6% 114.2% 108.5% 106.0% 98.4%
* Includes Capital Leases & Current Maturities
Jet Blue Airlines
Historical Debt-to-Sales 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 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
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Team A8 Integrated Company Analysis: JetBlue C-10
Figure 21. Historical Interest Expense-to-Total Revenue Comparisons
Jet Blue Airlines
Historical Competitor Interest Expense-to-Total Revenue 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
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
Interest-to-Total Rev 1.6% 1.4% 1.2% 1.2% 1.8% 1.8% 1.4%
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
Interest-to-Total Rev 2.1% 2.7% 3.5% 3.3% 3.6% 3.6% 3.1%
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
Interest-to-Total Rev 2.1% 2.3% 2.8% 2.9% 2.9% 3.0% 2.8%
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
Interest-to-Total Rev 2.9% 2.6% 1.9% 1.8% 2.3% 2.4% 2.0%
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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
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Team A8 Integrated Company Analysis: JetBlue D-2
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
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Team A8 Integrated Company Analysis: JetBlue D-3
Figure 25: Twitter
Figure 26: Facebook
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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
Average Stage Length
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
Average Stage Length
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
Average Stage Length
972 miles
ModelHubs in Anchorage,
Seattle, Portland, and
Los Angeles
Locations
59 cities in United
States, Canada and
Mexico
Average Stage Length
1,058 miles
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Team A8 Integrated Company Analysis: JetBlue E-2
Price
JetBlue Airways Southwest Airlines AirTran Airways US Airways Alaska Airlines
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
Yield/Passenger Mile
13.29 centsAncillary Fees
Pets, service charge
for unaccompanied
minor, third or
overweight bag fee
2009 Revenue Per
Passenger
$97
Yield/Passenger Mile
11.24 centsAncillary Fees
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
Yield/Passenger Mile
13.52 centsAncillary Fees
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
13.28 centsAncillary Fees
Reservations fees,
ticket change fees, and
baggage service
charges
Note: Yield/Passenger Mile represents the average amount one passenger pays to fly one mile.
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Team A8 Integrated Company Analysis: JetBlue E-3
Place (Distribution)
JetBlue Airways Southwest Airlines AirTran Airways US Airways Alaska Airlines
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.
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Team A8 Integrated Company Analysis: JetBlue E-4
Promotion
JetBlue Airways Southwest Airlines AirTran Airways US Airways Alaska Airlines
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)
Highlighted Features
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)
Highlighted Features
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)
Highlighted Features
Mileage Plan travel
awards
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Team A8 Integrated Company Analysis: JetBlue E-5
JetBlue Airways Southwest Airlines AirTran Airways US Airways Alaska Airlines
Highlighted Features
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
Highlighted Features
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
JetBlue Airways Alaska Airlines US Airways Southwest Airlines
Primarily owned
151 planes total; 61
percent owned, 36
percent operating
leased, 3 percent
capital leased.
Primarily owned.
137 planes total; 61
percent owned, 39
percent leased (lease
structure not
disclosed)
Primarily operating
leased.
442 planes total; 62
percent operating
leased, 29 percent
owned, 9 percent
capital leased.
Primarily owned.
537 planes total; 82
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
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Team A8 Integrated Company Analysis: JetBlue F-2
Equipment Depreciation
JetBlue Airways Alaska Airlines US Airways Southwest Airlines
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
JetBlue Airways Alaska Airlines US Airways Southwest Airlines
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
JetBlue Airways Alaska Airlines US Airways Southwest Airlines
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.
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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.
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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.
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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.
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