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Module 12 Regional Airlines – JetBlue

Module 12 Regional Airlines – JetBlue. Michelle Kelly. Background. 15 mainline carriers and 70 regional carriers Industry Revenue: $138.3 billion Profit: $6.9 billion (5%) Largest Competitors Delta – 18.1% United – 16.1% Southwest – 12.4% American – 10.3% US Air– 7.7%.

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Module 12 Regional Airlines – JetBlue

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  1. Module 12Regional Airlines – JetBlue Michelle Kelly

  2. Background • 15 mainline carriers and 70 regional carriers • Industry Revenue: $138.3 billion • Profit: $6.9 billion (5%) • Largest Competitors • Delta – 18.1% • United – 16.1% • Southwest – 12.4% • American – 10.3% • US Air– 7.7%

  3. Current Environment • Decrease in Demand • 9/11 caused a large decline in air travel • Market recovered over the next 7 years • 2009- decline in revenue of 16.3% • Causes: • Financial Crisis • Global Health Epidemics (Swine Flu) • Slow recovery • Increased costs • Crude oil prices increasing • Employee wages and benefits plans

  4. Future outlook • Revenues are expected to continue to grow as the industry recovers from the financial crisis • Increased oil prices continue to be a threat • Offset by additional fees and charges • Decrease in the number of routes offered • Stick to profitable routes/hubs • More consolidation expected

  5. jetBlue • Low Budget Airline • Headquartered in Queens, NY • Major Airport: JFK • Market Share: 5.1% • Serve 84 destinations in 24 states

  6. Strategy • Offer distinctive flying experience • Low cost but high value • “jetBlue experience” – try to build brand loyalty • Try to offer superior customer service • Serve high value areas: • New York • Boston • Florida

  7. Expanded Balance Sheet and Income Statement • Added information for years ended 2010-2013 including • Deferred tax assets and liabilities • Details about PP&E • Intangible Assets • Revenue Breakdown by type of revenue and by geographic area

  8. Operating Lease Adjustment

  9. Present Value of Operating Leases • Remaining Life: 1088/114 = 5.32 years

  10. Adjustments • NEA : Increased by $1,088 • NFL: Increased by %1,088 • EPAT: (205-(1088/10.325))(1-.39) = $61 • FEAT: (1088*5.25%)(1-.39) = $35

  11. NEA

  12. NEA

  13. NFL

  14. EPAT

  15. FEAT

  16. Growth Forecast • New planes are increasing passenger capacity over the next 3 years • However, current revenue growth is unsustainable • Eventually capacity will stabilize • Other Revenue is grown at the same rate as passenger revenue because it is a product of capacity • Revenue from LiveTV has experienced a downturn and but is expected to stabilize next year

  17. Growth Forecast

  18. Common Sized Income Statement

  19. EPM Forecast • Aircraft fuel expense is supposed to decrease due to hedging and increased efficiency of newer planes • Salaries and wages are supposed to increase approximately 2% in the next five years • Maintenance and repairs is gradually increasing as the fleet grows and as it gets older

  20. EPM Forecast

  21. Common Sized Balance Sheet

  22. Common Sized Balance Sheet

  23. EATO Forecast • Flight Equipment is expected to decrease as JetBlue sells off more of the planes it owns • Assets constructed for others will decrease now that construction on JFK is completed

  24. EATO Forecast

  25. EATO Forecast

  26. Forecast Assumptions

  27. Determining WACC:Beta-Bloomberg

  28. Determining Beta- Other Sources • www. google.com 1.24 • www.nasdaq.com 1.44 • http://investing.money.msn.com 1.24 • http://www.reuters.com 1.02 • http://finance.yahoo.com 0.55 • http://research.scottrade.com 1.00 • http://research.tdameritrade.com 1.00 • http://www.firstrade.com 0.55 • http://finance.comcast.net 1.02 • http://www.zacks.com 1.24 • http://www3.valueline.com 1.25 • http://data.cnbc.com 1.02

  29. Determining Beta – Regression Analysis of Monthly Data

  30. Determining Beta – Regression Analysis

  31. Determining Beta • Beta: 1.24 • Supported by Regression Analysis • Supported by other analyst estimates • Higher than Bloomberg Beta but middle ground for other beta estimates

  32. Cost of Equity Capital • Based on the Capital Asset Pricing Model • Jet Blue Cost of Equity: • -.413% +1.24 (8.5%) = 9.755% • 8.5% is the average monthly return on the S&P 500 for the last five years

  33. Cost of Debt Capital • Annual RNFL • Average: 3.59%

  34. Cost of Enterprise Capital • VD = $3,445 million • VEq = $2,450 million • Implied VEnt = $5,895 million • 3.59% (3,445/5895) + 9.755%(2,450/5,895) WACC = 6.15%

  35. Bloomberg WACC

  36. DCF Model

  37. Residual Income Model

  38. Abnormal Growth Model

  39. Model Comparison

  40. Adjustments • Enterprise Value: $5,992 • Midyear Adjustment • $5,992 * (1+6.15%)^.5 = $6,173 • Adjusted Valuation Date • $6,173 * (1+6.15%)^(4/12) = $ 6,297 • Subtract the value of debt (NFL) • $6,297 - $3,445 = $ 2,852 • Equity Value per Share • $2,852 / 295.63 = $9.65 • Current Share Price: $8.56 BUY

  41. Questions?

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