jetBlue Airways Corporation Firm Valuation Travis Steele jetBlue is overvalued by 2.4% • The current market price for jetBlue is $6.84, our valuation prices the company at $6.68 • jetBlue’s performance to date has been driven by offering innovative amenities and lower fares for consumers • Strong trend towards increasing operating margins and efficiency • In the long term jetBlue will lose its competitive advantage, but will maintain market share through brand loyalty • jetBlue’s creative marketing strategy will help maintain strong revenue growth 2 The Airline Industry The Company Marketing Outlook Valuation Key macro drivers of industry profitability and demand Oil Prices Economic Conditions Substitutes Regulatory Environment Airline Industry Profitability & Demand Health/Safety Concerns The Airline Industry The Company Marketing Outlook Valuation 4 Airlines are emerging from the worst decade in industry history Revenue per Avg. Seat Mile vs. Cost per Avg. Seat Mile $0.15 $0.14 $0.13 $0.12 $0.11 $0.10 $0.09 $0.08 $0.07 $0.06 $0.05 7/11/08- Oil Reaches record high of $147.27 per barrel RASM CASM Financial Crisis 9/11 Terrorist Attacks Data Source: US DOT Form 41 via BTS, Schedule P12; US DOT Form 41 P-12, Account 9899. The Airline Industry The Company Marketing Outlook Valuation 5 In the past decade, low cost carriers have gained market share Total Market Share by Revenue All Sectors Low Cost Carriers, 16% Other, 4% Low Cost Carriers Frontier, 6% Virgin America, 3% AirTran, 13% Legacy Carriers, 80% Southwest, jetBlue, 19% 59% Data Source: US DOT Form 41 via BTS, Schedule P12. The Airline Industry The Company Marketing Outlook Valuation 6 The Airline Industry The Company Marketing Outlook Valuation jetBlue offers a distinctive flying experience High Quality Customer Service • Highest overall consumer satisfaction rating from JD Power five years in a row • jetBlue promise: “To continue to bring humanity back to air travel” Unique Amenities • Live TV • 4” extra leg room than traditional carriers • Free snacks • Youngest fleet in the industry (avg. age 4.3 years) Geographic Differentiation • Strong presence around NY/Boston area • Growth into underserved routes, including international destinations The Airline Industry The Company Marketing Outlook Valuation 8 jetBlue’s profits trend upwards jetBlue Net Income and Operating Margins 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% $80.00 $60.00 $40.00 $20.00 $$(20.00) $(40.00) $(60.00) $(80.00) $(100.00) 2005 2006 2007 Operating Margin 2008 2009 Net Income The Airline Industry The Company Marketing Outlook Valuation 9 jetBlue’s margins outperformed the industry in 2009 Operating Margins 10% 8% 6% 4% 2% 0% -2% Delta United Southwest The Airline Industry The Company Marketing Outlook Valuation jetBlue 10 jetBlue is in a strong cash position today 800 700 600 500 400 300 200 100 0 -100 2005 2006 Debt Acquired 2007 2008 2009 Cash Acquired The Airline Industry The Company Marketing Outlook Valuation 11 The Airline Industry The Company Marketing Outlook Valuation Capturing business travelers is essential to jetBlue’s growth Business traveler demand is becoming more price sensitive as businesses strive to cut costs Since 2009, jetBlue has positioned itself well to appeal to this customer class Launched ad campaign and promotional programs aimed at business travelers The Airline Industry The Company Marketing Outlook Valuation 13 jetBlue relies on social media as part of its innovative marketing strategy The Airline Industry The Company Marketing Outlook Valuation 14 The Airline Industry The Company Marketing Outlook Valuation As competition increases among low cost carriers, jetBlue will lose its competitive advantage jetBlue Southwest Virgin America 2002 Frontier AirTran Low Fares Satellite TV Leg Room Free Snacks No Bag Fees Premium Music Wi-Fi Ambience Lighting The Airline Industry The Company Marketing Outlook Valuation 16 jetBlue may lose some of its competitive advantage, but will benefit from strong brand loyalty jetBlue Southwest Virgin America 2010 Frontier AirTran Low Fares Satellite TV Leg Room Free Snacks No Bag Fees Premium Music Wi-Fi Ambience Lighting The Airline Industry The Company Marketing Outlook Valuation 17 jetBlue is well positioned for future growth, but faces risks Influences on growth: Fuel hedging High utilization rate Low operating costs Brand loyalty Delivery of new planes Potential risks: High level of debt Unionization of labor Industry consolidation Substitutes to air travel The Airline Industry The Company Marketing Outlook Valuation 18 We recommend buying jetBlue Airways The Airline Industry The Company Marketing Outlook Valuation jetBlue’s revenue growth depends on the size of its fleet Number of Planes 350 300 250 200 150 100 50 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 The Airline Industry The Company Marketing Outlook Valuation 20 jetBlue’s operating margin averages around 6% jetBlue Operating Margin 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2005 2006 2007 2008 The Airline Industry The Company Marketing Outlook Valuation 2009 21 After accounting for fuel and other operating costs jetBlue averages about 6% operating margins 100% 90% 80% Total Revenue 70% 60% 50% Salaries 40% 30% Fuel Costs 20% 10% 0% 2005 2006 2007 2008 The Airline Industry The Company Marketing Outlook Valuation 2009 22 Discounting our future cash flows to present value we get a share price of $6.68 The Airline Industry The Company Marketing Outlook Valuation 23 P/E Future P/E Recommend ation PEG Ratio JetBlue 34.23 10.89 2.1 2.22 Southwest 43.28 13.77 2.3 0.97 400.33 5.67 1.9 2.59 N/A 8.99 2.3 -1.88 Delta American 24 jetBlue is overvalued by 2.4% • The current market price for jetBlue is $6.84, our valuation prices the company at $6.68 • jetBlue’s performance to date has been driven by offering innovative amenities and lower fares for consumers • Strong trend towards increasing operating margins and efficiency • In the long term jetBlue will lose its competitive advantage, but will maintain market share through brand loyalty • jetBlue’s creative marketing strategy will help maintain strong revenue growth 25 Price of jet fuel is projected to continue rising, as the economy grows and demand increases Projected future price of jet fuel $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $- Source: US Energy Information Administration 26