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.

Contents
Introduction .................................................................................................................................................. 1 JetBlue: The Low Cost, High Expectation Airline ...................................................................................... 1 Industry Overview ......................................................................................................................................... 1 Legacy vs. Discount Airlines ...................................................................................................................... 1 Competitive Set .................................................................................................................................... 2 Bankruptcies and Consolidations .............................................................................................................. 2 Airplanes ................................................................................................................................................... 3 Fuel............................................................................................................................................................ 3 Price-Sensitive Customers......................................................................................................................... 3 JetBlue Analysis ............................................................................................................................................. 4 Cost Structure............................................................................................................................................ 4 Fuel........................................................................................................................................................ 4 Excluding Fuel ....................................................................................................................................... 4 Leverage and Growth................................................................................................................................ 6 Dividends................................................................................................................................................... 7 Valuation ................................................................................................................................................... 7 Marketing and Brand Position .................................................................................................................. 8 Target Market ....................................................................................................................................... 8 Brand Identity ....................................................................................................................................... 8 Marketing Program .............................................................................................................................. 8 Accounting ................................................................................................................................................ 9 Fleet ...................................................................................................................................................... 9 Preferred Stock Authorized in 2009................................................................................................... 10 Recommendations ...................................................................................................................................... 11 Financing ................................................................................................................................................. 11 Line of Credit and Term-Loan Option Facility.................................................................................... 11 Marketing ................................................................................................................................................ 11 Leverage Social Media to Contain Costs ............................................................................................ 11 Continue to Stress Differentiation ..................................................................................................... 11 Leverage Integrated Customer Service System ................................................................................. 12

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

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. Growth both 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 airlines were 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 Team A8 Integrated Company Analysis: JetBlue 1

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 10 for 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.2 A 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.3 Their 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).

1 2

AirTran is used for historical comparison only as it is in the process of consolidating with Southwest Airlines. Delta used bankruptcy to reconfigure by retiring the oldest part of its fleet and renegotiating many union contracts and pension obligations. 3 Source: Delta, Northwest See Bankruptcy as Key to Revival (Wall Street Journal), How Delta climbed out of bankruptcy (Bloomberg)

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Integrated Company Analysis: JetBlue

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 airlines Income 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).5 Further, 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.

4 5

Source: IBIS Domestic Airlines Source: JetBlue, Southwest beat big carriers for service, quality (USA Today)

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Integrated Company Analysis: JetBlue

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 1 for 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 hedges6 on 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 mid2011 (see Appendix A, Figure 2 for 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,
6

Hedging options include a variety of crude oil call options, heating oil collar contracts, and jet fuel swap agreements. 7 Cost 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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Integrated Company Analysis: JetBlue

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 maintenance delays), 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 5 for 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 6 for 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.

JetBlue 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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Integrated Company Analysis: JetBlue

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 9 for 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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Integrated Company Analysis: JetBlue

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 C for 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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Integrated Company Analysis: JetBlue

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.9 The 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 rating10 even while keeping its advertising costs significantly lower than Southwest Airlines (see Appendix D, Figure 23 for 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.

Source: JetBlue 2009 10K SEC Filing Brand Keys Customer Loyalty Engagement Index looks at category drivers that engage customers, engender loyalty and drive real profits.
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Integrated Company Analysis: JetBlue

Website

Visitors to www.jetblue.com can 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 All Campaign

"You Above All" replaced "Happy Jetting" as the company's tagline in Q4 2010 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 see Appendix D for samples of JetBlue's marketing efforts. Please see Appendix E for a marketing mix comparison with JetBlues competitive set.

Accounting
JetBlue uses standard industry practices for accounting and utilizes sound methods (see Appendix F for 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 Team A8 Integrated Company Analysis: JetBlue 9

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 F for 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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Integrated Company Analysis: JetBlue

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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 C for 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 Team A8 Integrated Company Analysis: JetBlue 11

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 service system11 provides 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.

11

SEC 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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Integrated Company Analysis: JetBlue

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Appendix A: Cost Structure

Figure 1. Fuel Costs

Figure 2. Hedging of Fuel Costs

Projected fuel costs currently hedged Crude oil caps Heating oil collars Q4 2010 14% Q1 2011 17% 5% Q2 2011 21% Q3 2011 16% Q4 2011 5% Source: SEC fi lings

Jet fuel swaps 24% -

Total 38% 22% 21% 16% 5%

Figure 3. Operating Expenses Compared to Competitive Set

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Integrated Company Analysis: JetBlue

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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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Integrated Company Analysis: JetBlue

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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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Integrated Company Analysis: JetBlue

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Figure 8. Maintenance Expenses Compared to Competitive Set

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Integrated Company Analysis: JetBlue

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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) Total Revenue per ASM (cents) Operating Expense per ASM (cents) Operating Margin Combined Operations2: Net Income Margin EBITDA Margin Operating Cash Flow Margin Return on Assets (Last 12 months) Return on Equity (Last 12 months)
1 2

9.79 10.83 9.78 9.7%

11.60 12.21 11.16 8.6%

9.76 10.84 10.13 6.5%

10.71 12.72 11.63 8.6%

11.37 12.73 11.03 13.4%

3.1% 15.5% 17.3% 1.5% 6.3%

3.6% 13.8% 14.4% 3.0% 7.9%

1.9% 8.8% 8.5% 2.4% 10.8%

5.3% 9.6% 8.8% 5.0% NA

6.5% 18.2% 17.6% 4.2% 22.3%

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Integrated Company Analysis: JetBlue

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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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Integrated Company Analysis: JetBlue

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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
13

Source: IBIS World Gasoline & Petroleum Wholesaling in the US (November 2010)

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Integrated Company Analysis: JetBlue

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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) 16 as well as the annual return of the S&P 500 from 19502010 (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.

14 15

Source: Source: 16 Source: 17 Source:

IBIS World Domestic Airlines in the US (September 2010) SEC Filing Google Finance Bloomberg

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Integrated Company Analysis: JetBlue

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

Jet Blue Competitor Debt-to-Value Comparison
120%

100%
80% 60% 40% 20% 0%

12/01/05

12/01/06

12/01/07

12/01/08

Jet Blue:

Southwest:

Airtran:

Alaska Airlines:

12/01/09
US Air:

Note: Values include capital leases and short-term maturities

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Integrated Company Analysis: JetBlue

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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 Sales Passenger Other Total Sales Operating Expenses Aircraft Fuel and Related Taxes Salaries, Wages, & Benefits Landing Fees & Other Rents Depreciation & Amortization Aircraft Rent Sales & Marketing Maintenance Materials & Repairs Other Operating Expenses Total Operating Expenses EBIT Interest Expense Other Income/(Expenses) Pretax Income Income Tax Expense Net Income EBIAT Plus: Depreciation & Amort Less: Non-Aircraft Capital Expenditures Less: Additions to Working Capital Operating Cash Flow Terminal Value Discounted Value Current Enterprise Value Less: Debt, as of 12/31/16 Equity Value Shares Outstanding, as of 12/31/16 Common Share Value Stock Price 12/09/10 % Undervalued/(overvalued) Assumptions: Passenger Sales (Growth %) Other Sales (% Passenger Sales) Aircraft Fuel and Related Taxes (Growth %) Salaries, Wages, & Benefits (% Sales) Landing Fees & Other Rents (% Sales) Depreciation & Amortization (% Sales) Aircraft Rent (% Sales) Sales & Marketing (% Sales) Maintenance Materials & Repairs (Growth %) Other Operating Expenses (% Sales) Other Income (% Sales) Tax rate WC (% Sales) WACC (Rate of return) Perpetual Growth Rate $ $ $ $ 6,754.1 5,127.5 1,626.6 295.6 5.50 6.69 -17.8% $ $ TTM as of, 09/30/10 $ 3,304.0 367.0 3,671.0 1,057.0 864.0 226.0 223.0 124.0 168.0 162.0 507.0 3,331.0 340.0 184.0 10.0 166.0 67.0 99.0 $ $ $ $

2011 3,312.0 364.32 3,676.3 1,088.7 828.6 229.4 227.7 148.6 161.4 183.1 445.0 3,312.5 363.8 220.3 8.3 151.8 91.1 60.7 218.3 227.7 123.1 1.5 321.5 293.7 $ $ $ $

2012 3,528.4 388.12 3,916.5 1,121.4 882.7 244.4 242.6 158.3 171.9 203.2 474.1 3,498.6 417.8 236.8 8.8 189.9 113.9 76.0 250.7 242.6 131.7 40.6 321.0 268.0 $ $ $ $

2013 3,789.4 378.94 4,168.4 1,155.0 948.0 262.5 260.6 170.0 184.7 225.5 509.2 3,715.5 452.9 257.7 9.5 204.6 122.8 81.8 271.7 260.6 140.9 49.0 342.4 261.2 $ $ $ $

2014 4,162.4 374.62 4,537.0 1,189.7 1,041.4 288.3 286.2 186.7 202.8 250.4 559.3 4,004.8 532.2 286.2 10.4 256.5 153.9 102.6 319.3 286.2 150.7 70.0 384.8 268.2 $ $ $ $

2015 4,602.5 368.20 4,970.7 1,225.4 1,151.5 318.8 316.5 206.5 224.3 272.9 618.4 4,334.2 636.5 319.1 11.5 328.9 197.3 131.6 381.9 316.5 161.3 82.6 454.5 289.4 $ $ $ $

2016 4,945.7 395.65 5,341.3 1,262.1 1,237.3 342.6 340.1 221.9 241.0 297.5 664.5 4,606.9 734.4 346.1 12.4 400.6 240.4 160.3 440.6 340.1 172.6 64.4 543.7 8,690.6 5,373.6

$ $

$ $

$ $

$ $

$ $

$ $

0.2% 11.0% 3.0% 25.0% 6.9% 6.9% 4.5% 4.9% 13.0% 13.4% 0.3% 40.0% 18.8% 9.4% 3.0%

6.5% 11.0% 3.0% 25.0% 6.9% 6.9% 4.5% 4.9% 11.0% 13.4% 0.3% 40.0% 18.8%

7.4% 10.0% 3.0% 25.0% 6.9% 6.9% 4.5% 4.9% 11.0% 13.4% 0.3% 40.0% 18.8%

9.8% 9.0% 3.0% 25.0% 6.9% 6.9% 4.5% 4.9% 11.0% 13.4% 0.3% 40.0% 18.8%

10.6% 8.0% 3.0% 25.0% 6.9% 6.9% 4.5% 4.9% 9.0% 13.4% 0.3% 40.0% 18.8%

7.5% 8.0% 3.0% 25.0% 6.9% 6.9% 4.5% 4.9% 9.0% 13.4% 0.3% 40.0% 18.8%

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Integrated Company Analysis: JetBlue

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Figure 13. WACC Analysis

Jet Blue Airlines Weighted Average Cost of Capital Analysis $'s in millions Cost of Debt: Cost of Debt Marginal Tax Rate Cost of Debt Post Tax Shield Capital Structure: 6.8% 40.0% 4.1% Net Debt Equity Total Market value $ 2,566 2,058 $ 4,624 Weight 55.5% 44.5%

Cost of Equity: Risk-Free Rate Market Risk Premium Raw Company Beta Cost of Equity Calculation of Net Debt, as of 09/30/10: Class G-1, due through 2016 Class G-2, due 2014 and 2016 Class B-1, due 2014 Fixed rate special facility bonds, due through 2036 6.75% convertible debentures due in 2039 5.5% convertible debentures due in 2038 Floating rate equipment notes, due through 2020 Fixed rate equipment notes, due through 2025 Captial Leases Less: Excess Cash Total Debt, as of 09/30/10

3.2% 8.8% 1.48 16.2%

245 373 49 84 201 123 696 1,162 131 (498) 2,566

Share Outstanding Analysis: Current Stock Price Options Data: Total # In-the-Money Options Weighted Avg. Strike Price Total Dollar Proceeds Total Shares Repurchased New Shares from Options Basic Shares Outstanding Total Share Outstanding Weighted Average Cost of Capital: WACC

6.96 2.6 2.25 5.9 0.9 1.8 293.8 295.6

9.4%

Figure 14. Capital Expenditures and Fleet Analysis

Jet Blue Airlines Cap-Ex & Fleet Analysis $'s in millions Aircraft Non-aircraft Total Cap-Ex % Chage Fleet Size Beginning Fleet Additions Divestitures Total Fleet Size Net Change $/Additional Aircraft Anual Aircraft Cap-Ex 06-10 Avg Incramental Cost Total Debt/Aircraft Average Increase Fleet Analysis Airbus A320 Net Change Embraer 190 Net Change 50.07 24.05 22.19 2005 77 17 94 2005 975.0 125.0 $ 1,100.0 $ 2006 $ 1,013.0 89.0 $ 1,102.0 -28.8% 2006 94 30 5 119 25 $ 40.5 $ 1,013.0 Actual 2007 $ 671.0 74.0 $ 745.0 -16.9% 2007 119 17 3 133 14 $ 47.9 $ 671.0 Est 2010 $ 205.0 115.0 $ 320.0 6.5% 2010 151 4 155 4 $ 51.3 $ 205.0 Projected 2013 2014 $ 701.0 $ 951.4 140.9 150.7 $ 841.9 $ 1,102.1 7.0% 2013 175 14 189 14 $ 50.1 $ 701.0 $ $ 7.0% 2014 189 19 208 19 50.1 951.4

2008 $ 643.0 60.0 $ 703.0 -18.9% 2008 133 18 9 142 9 $ 71.4 $ 643.0

2009 $ 353.0 108.0 $ 461.0 80.0% 2009 142 11 2 151 9 $ 39.2 $ 353.0

2011 $ 450.7 123.1 $ 573.7 7.0% 2011 155 9 164 9 $ 50.1 $ 450.7

2012 $ 550.8 131.7 $ 682.5 7.0% 2012 164 11 175 11 $ 50.1 $ 550.8

2015 $ 1,101.6 161.3 $ 1,262.9 7.0% 2015 208 22 230 22 $ 50.1 $ 1,101.6

2016 901.3 172.6 $ 1,073.9 $ 7.0% 2016 230 18 248 $ $ 18 50.1 901.3

23.54

22.59

21.30

21.88

19.77

85 9

96 11 23 14

104 8 30 7

107 3 35 5

110 3 41 6

112 2 43 2

116 4 48 5

123 7 52 4

130 7 59 7

142 12 66 7

157 15 73 7

167 10 81 8

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Integrated Company Analysis: JetBlue

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Figure 15. Revenue Analysis

Jet Blue Airlines Revenue Analysis $'s in millions Passenger Revenue Passenger Revenue: Historical Airbus A320 Fleet Available Seats Embraer 190 Fleet Available Seats Total Daily Available Seats Total Annual Avail Seats Avg Daily Rev/Available Seat Annual Rev Increase % $ 2005 1,620.0 $ 2006 2,223.0 $ 2007 2,636.0 $ 2008 3,056.0 $ 2009 2,928.0 $ 2010 3,304.0

85 150 9 100 13,650 4,982,250 $ 0.000325

96 150 23 100 16,700 6,095,500 $ 0.000365 37.2% 2012 3,528.4

104 150 30 100 18,600 6,789,000 $ 0.000388 18.6% 2013 3,789.4

107 150 35 100 19,550 7,135,750 $ 0.000428 15.9% 2014 4,162.4

110 150 41 100 20,600 7,519,000 $ 0.000389 -4.2% 2015 4,602.5

112 150 43 100 21,100 7,701,500 $ 0.000429 12.8% 2016 4,945.7

Passenger Revenue: Projected Airbus A320 Fleet Available Seats Embraer 190 Fleet Available Seats Total Daily Available Seats Total Annual Avail Seats Avg Daily Rev/Available Seat Annual Rev Increase % Other Revenue: Other Rev Passenger Rev % of Passenfer Rev

2011 3,312.0

116 150 48 100 22,200 8,103,000 $ 0.000409 0.2%

123 150 52 100 23,650 8,632,250 $ 0.000409 6.5%

130 150 59 100 25,400 9,271,000 $ 0.000409 7.4%

142 150 66 100 27,900 10,183,500 $ 0.000409 9.8%

157 150 73 100 30,850 11,260,250 $ 0.000409 10.6%

167 150 81 100 33,150 12,099,750 $ 0.000409 7.5%

2005 81.0 1,620.0 5.0%

2006 140.0 2,223.0 6.3%

2007 206.0 2,636.0 7.8%

2008 332.0 3,056.0 10.9%

2009 358.0 2,928.0 12.2%

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Integrated Company Analysis: JetBlue

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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 Passenger Rev $ 1,620.0 Maintenance Exp 64.0 Maint Exp % Inc 4-year Average 23.7% Sales & Marketing Exp as a % of Revenue: 2005 Passenger Rev $ 1,620.0 Sales & Marketing Exp 81.0 Sales & Market Exp % Sales 5.0% 5-year Average 4.9% Aircraft Rental Exp as a % of Revenue: 2005 Passenger Rev $ 1,620.0 Aircraft Rental Exp 74.0 Aircraft Rental Exp % Sales 4.6% 5-year Average 4.5% Depr Exp as a % of Revenue: Passenger Rev Depr Exp Depr Exp % Sales 5-year Average $ 2005 1,620.0 115.0 7.1% 6.9% $ 2006 2,223.0 151.0 6.8% $ 2007 2,636.0 176.0 6.7% $ 2008 3,056.0 205.0 6.7% $ 2009 2,928.0 208.0 7.1%

2006 2,223.0 87.0 35.94%

2007 2,636.0 106.0 21.84%

2008 3,056.0 127.0 19.81%

2009 2,928.0 149.0 17.32%

2006 2,223.0 104.0 4.7%

2007 2,636.0 121.0 4.6%

2008 3,056.0 151.0 4.9%

2009 2,928.0 151.0 5.2%

2006 2,223.0 103.0 4.6%

2007 2,636.0 124.0 4.7%

2008 3,056.0 129.0 4.2%

2009 2,928.0 126.0 4.3%

Landing Fees Exp as a % of Revenue: 2005 Passenger Rev $ 1,620.0 Landing Fees Exp 112.0 Landing Fees Exp % Sales 6.9% 5-year Average 6.9% Salaries Exp as a % of Revenue: Passenger Rev Salaries Exp Salaries Exp % Sales 5-year Average $ 2005 1,620.0 428.0 26.4% 25.0%

2006 2,223.0 158.0 7.1%

2007 2,636.0 180.0 6.8%

2008 3,056.0 199.0 6.5%

2009 2,928.0 213.0 7.3%

2006 2,223.0 553.0 24.9%

2007 2,636.0 648.0 24.6%

2008 3,056.0 694.0 22.7%

2009 2,928.0 776.0 26.5%

Other Operating Exp as a % of Revenue: 2005 Total Revenue $ 1,701.0 Other Operating Exp 291.0 Other Op Exp % Sales 17.1% 5-year Average 13.4%

2006 2,363.0 328.0 13.9%

2007 2,842.0 350.0 12.3%

2008 3,388.0 377.0 11.1%

2009 3,286.0 419.0 12.8%

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Integrated Company Analysis: JetBlue

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Figure 17. Capital Structure Analysis

Jet Blue Airlines Capital Structure Analysis $'s in millions Additional Debt Raises & Int Exp: 09/30/10 Increase in Aircraft (Actual) Additional Debt/Aircraft Incramental Debt Total Debt Interest PMT Total Debt Issuance Future Interest Rate New Equity Offerings: Aircraft Cap-Ex Required Cash flow from Op's Debt Financing Equity Shortfall Share Issuance Price (actual) Shares Issued Total Funding 2011-2016 $ 4,656.8 (2,367.8) (2,063.5) $ 225.5 $ 6.69 33.7 $ 2,289.0 $ 3,064.0 2,063.5 6.8% 2011 9 22.2 199.7 3,263.7 220.3 $ 2012 11 22.2 244.1 3,507.8 236.8 $ 2013 14 22.2 310.6 3,818.4 257.7 $ 2014 19 22.2 421.6 4,240.0 286.2 $ 2015 22 22.2 488.1 4,728.1 319.1 $ 2016 18 22.2 399.4 5,127.5 346.1

Figure 18. Working Capital Analysis

Jet Blue Airlines Working Capital Analysis $'s in millions Changes in Working Capital: Deferred income taxes Decrease (Increase) in receivables Decrease (Increase) in inventories, prepaid and other Increase in air traffic liability Increase (Decrease) in AP and other accrued liabilities Other, net Additions to Working Capital Sales Working Cap Additions/Change in Sales % 4-year average 2005 (4.0) (28.0) (20.0) 69.0 54.0 (7.0) $ 64.0 $ $ 1,701.0 18.8% 2006 10.0 (12.0) (28.0) 97.0 33.0 8.0 $ 108.0 $ $ 2,363.0 16.3% 2007 19.0 (14.0) 3.0 86.0 36.0 30.0 $ 160.0 $ $ 2,842.0 33.4% 2008 (6.0) 4.0 (10.0) 19.0 15.0 31.0 $ 53.0 $ $ 3,388.0 9.7% 2009 40.0 3.0 (43.0) 10.0 (66.0) 40.0 $ (16.0) $ $ 3,286.0 15.7%

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Integrated Company Analysis: JetBlue

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Figure 19. Historical Debt-to-Total Value Comparisons

Jet Blue Airlines Historical Debt-to-Total-Value Competitor Comparison S's in millions For the Year Ending & 9-Months Ending Jet Blue: Total Debt* Total Equity Debt-to-Total Value Southwest: Total Debt* Total Equity Debt-to-Total Value Airtran: Total Debt* Total Equity Debt-to-Total Value Alaska Airlines: Total Debt* Total Equity Debt-to-Total Value US Air: Total Debt* Total Equity Debt-to-Total Value $ 12/31/05 2,261.0 911.0 71.3% 2,012.0 6,675.0 23.2% 811.1 382.8 67.9% 1,082.6 827.6 56.7% 3,005.0 420.0 87.7% $ 12/31/06 2,801.0 952.0 74.6% 1,705.0 6,449.0 20.9% 900.1 379.3 70.4% 1,150.8 885.5 56.5% 3,002.0 970.0 75.6% $ 12/31/07 3,005.0 1,036.0 74.4% 2,110.0 6,941.0 23.3% 1,057.9 446.4 70.3% 1,300.5 1,024.0 55.9% 3,148.0 1,439.0 68.6% $ 12/31/08 3,024.0 1,266.0 70.5% 3,684.0 4,953.0 42.7% 1,104.1 281.1 79.7% 1,841.2 661.9 73.6% 3,985.0 (494.0) 114.2% $ 12/31/09 3,304.0 1,539.0 68.2% 3,552.0 5,466.0 39.4% 1,214.0 501.9 70.7% 1,855.2 872.1 68.0% 4,526.0 (355.0) 108.5% $ 09/30/09 3,304.0 1,541.0 68.2% 3,510.0 5,454.0 39.2% 1,112.2 414.8 72.8% 1,623.9 1,073.5 60.2% 4,626.0 (260.0) 106.0% $ 09/30/10 3,064.0 1,623.0 65.4% 3,228.0 5,950.0 35.2% 955.6 515.2 65.0% 1,806.0 773.8 70.0% 4,428.0 74.0 98.4% $ 12/31/16 5,127.5 2,461.4 67.6%

* Includes Capital Leases & Current Maturities

Figure 20. Historical Debt-to-Sales Comparisons

Jet Blue Airlines Historical Debt-to-Sales Competitor Comparison S's in millions For the Year Ending & 9-Months Ending Jet Blue: Total Debt* Total Sales Debt-to-Sales Southwest: Total Debt* Total Sales Debt-to-Sales Airtran: Total Debt* Total Sales Debt-to-Sales Alaska Airlines: Total Debt* Total Sales Debt-to-Sales US Air: Total Debt* Total Sales Debt-to-Sales $ 12/31/05 2,261.0 1,701.0 132.9% 2,012.0 7,584.0 26.5% 811.1 1,449.7 56.0% 1,082.6 2,975.3 36.4% 3,005.0 5,069.0 59.3% $ 12/31/06 2,801.0 2,363.0 118.5% 1,705.0 9,086.0 18.8% 900.1 1,892.1 47.6% 1,150.8 3,334.4 34.5% 3,002.0 11,557.0 26.0% $ 12/31/07 3,005.0 2,842.0 105.7% 2,110.0 9,861.0 21.4% 1,057.9 2,310.0 45.8% 1,300.5 3,069.9 42.4% 3,148.0 11,813.0 26.6% $ 12/31/08 3,024.0 3,388.0 89.3% 3,684.0 11,023.0 33.4% 1,104.1 2,552.5 43.3% 1,841.2 3,221.3 57.2% 3,985.0 12,244.0 32.5% $ 12/31/09 3,304.0 3,286.0 100.5% 3,552.0 10,350.0 34.3% 1,214.0 2,341.4 51.8% 1,855.2 3,006.0 61.7% 4,526.0 10,609.0 42.7% $ 09/30/09 3,304.0 2,454.0 134.6% 3,510.0 7,638.0 46.0% 1,112.2 1,743.0 63.8% 1,623.9 2,553.7 63.6% 4,626.0 7,945.0 58.2% $ 09/30/10 3,064.0 2,839.0 107.9% 3,228.0 8,990.0 35.9% 955.6 1,973.6 48.4% 1,806.0 2,873.8 62.8% 4,428.0 9,110.0 48.6% $ 12/31/16 5,127.5 5,341.3 96.0%

* Includes Capital Leases & Current Maturities

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Integrated Company Analysis: JetBlue

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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: Total Interest Totat Revenue Interest-to-Total Rev Southwest: Total Interest Totat Revenue Interest-to-Total Rev Airtran: Total Interest Totat Revenue Interest-to-Total Rev Alaska Airlines: Total Interest Totat Revenue Interest-to-Total Rev US Air: Total Interest Totat Revenue Interest-to-Total Rev 12/31/05 $ 107.0 1,701.0 6.3% $ 122.0 7,584.0 1.6% 30.8 1,449.7 2.1% 63.0 2,975.3 2.1% 147.0 5,069.0 2.9% 12/31/06 $ 173.0 2,363.0 7.3% $ 128.0 9,086.0 1.4% 50.9 1,892.1 2.7% 78.0 3,334.4 2.3% 295.0 11,557.0 2.6% 12/31/07 $ 235.0 2,842.0 8.3% $ 119.0 9,861.0 1.2% 81.9 2,310.0 3.5% 86.2 3,069.9 2.8% 12/31/08 $ 242.0 3,388.0 7.1% $ 130.0 11,023.0 1.2% 85.5 2,552.5 3.3% 92.5 3,221.3 2.9% 218.0 12,244.0 1.8% 12/31/09 $ 197.0 3,286.0 6.0% $ 186.0 10,350.0 1.8% 84.0 2,341.4 3.6% 88.1 3,006.0 2.9% 241.0 10,609.0 2.3% 09/30/09 $ 148.0 2,454.0 6.0% $ 140.0 7,638.0 1.8% 63.6 1,743.0 3.6% 77.8 2,553.7 3.0% 189.0 7,945.0 2.4% 09/30/10 $ 135.0 2,839.0 4.8% $ 126.0 8,990.0 1.4% 61.1 1,973.6 3.1% 81.4 2,873.8 2.8% 179.0 9,110.0 2.0%

$ 229.0 11,813.0 1.9%

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Integrated Company Analysis: JetBlue

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Appendix D: Marketing Position and Program

Figure 22. Market Position

C o s t

Traditional/ Legacy Airlines

Low-cost/ Discount Airlines

Experience

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Integrated Company Analysis: JetBlue

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Figure 23: Advertising Spend

Advertising Spend in 2009
$250
$204

Advertising Costs (in millions)

$53 $31 $0 JetBlue Southwest AirTran Airways Airlines Airways Alaska Airlines U.S. Airways
$17 $11

Source: SEC Filings

Figure 24: JetBlue Website (Experience JetBlue)

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Integrated Company Analysis: JetBlue

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Figure 25: Twitter

Figure 26: Facebook

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Integrated Company Analysis: JetBlue

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Appendix E: Marketing Mix Comparison

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

Product
JetBlue Airways Model Primarily point-topoint 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 Southwest Airlines Model Principally point-topoint routes Locations 69 cities in 35 states Average Stage Length 639 miles AirTran Airways Model Hub 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 US Airways Model Hubs 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 of the Star Alliance network which offers flights to 181 countries Average Stage Length 972 miles Alaska Airlines Model Hubs 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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Integrated Company Analysis: JetBlue

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Price
JetBlue Airways 2009 Revenue Per Passenger $102 Yield/Passenger Mile 11.28 cents Ancillary Fees Reservation changes, baggage limitations, TrueBlue frequent flyer point sales, concession Southwest Airlines 2009 Revenue Per Passenger $119 Yield/Passenger Mile 13.29 cents Ancillary Fees Pets, service charge for unaccompanied minor, third or overweight bag fee AirTran Airways 2009 Revenue Per Passenger $97 Yield/Passenger Mile 11.24 cents Ancillary 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 US Airways 2009 Revenue Per Passenger $118 Yield/Passenger Mile 13.52 cents Ancillary Fees First and second checked bag service fees, processing fees for travel awards, Choice Seats program, and call center/airport ticketing fees Alaska Airlines 2009 Revenue Per Passenger $157 Yield/ Passenger Mile 13.28 cents Ancillary 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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Integrated Company Analysis: JetBlue

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Place (Distribution)
JetBlue Airways JetBlue website GDS (Sabre, Travelport and Amadeus) Online travel agent sites (Expedia, Travelocity, Orbitz, and Priceline) Southwest Airlines Southwest website AirTran Airways AirTran web site AirTran Bye-Pass airport self-service kiosks Mobile Web program Travel agency web sites (e.g. Travelocity, Expedia) US Airways 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 Alaska Airlines Alaskaair website Traditional and online travel agents (GDS-Sabre, Orbitz) Reservation call centers.

Corporate booking agencies Traditional travel agencies

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Integrated Company Analysis: JetBlue

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Promotion
JetBlue Airways Message/Tagline You above all 2009 Advertising Costs $53M Target Primarily leisure; increasingly business travelers Media Newspapers, magazines, television, radio, internet, social media, outdoor billboards, targeted public relations, local events and sponsorships, and mobile marketing programs, strong word-of-mouth Highlighted Features Happy Jetting, JetBlue Experience, brand name snacks and drinks Southwest Airlines Message/Tagline Bags fly free 2009 Advertising Costs $204M Target 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 AirTran Airways Message/Tagline Go. Theres nothing stopping you. 2009 Advertising Costs $31.3M Target Business and leisure travelers Media Newspapers; satellite, Internet, social media (Facebook: AirTranUHome 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 US Airways Message/Tagline Fly with US 2009 Advertising Costs $11M Target Business and leisure travelers Media Internet, social media (Facebook, Twitter) Highlighted Features Dividend Miles frequent flyer program, customer feedback Alaska Airlines Message/Tagline North of Expected 2009 Advertising Costs $16.8M Target Business and leisure travelers Media Television, internet, social media (Facebook, Twitter, YouTube) Highlighted Features Mileage Plan travel awards

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Integrated Company Analysis: JetBlue

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JetBlue Airways 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

Southwest Airlines

AirTran Airways 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

US Airways

Alaska Airlines

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Integrated Company Analysis: JetBlue

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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 Uses Air Traffic Liability account to reserve for unused tickets before tickets are utilized and the revenue is recognized. Alaska Airlines Same as JetBlue. US Airways Same as JetBlue. Southwest Airlines Same as JetBlue.

Airplane Ownership/Leasing
JetBlue Airways Primarily owned 151 planes total; 61 percent owned, 36 percent operating leased, 3 percent capital leased. Alaska Airlines Primarily owned. 137 planes total; 61 percent owned, 39 percent leased (lease structure not disclosed) US Airways Primarily operating leased. 442 planes total; 62 percent operating leased, 29 percent owned, 9 percent capital leased. Southwest Airlines Primarily owned. 537 planes total; 82 percent owned, 16 percent operating leased, 2 percent capital leased.

JetBlues Plane Ownership/Leasing

# of Planes 94 57 4 Category Owned Operating Lease Capital Lease Accounting Notes Depreciated straight line over 25 years; 20 percent residual value Keeps future lease obligations off of balance sheet Present value of lease recorded and then amortized/depreciated throughout the term in order to obtain tax benefits

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Integrated Company Analysis: JetBlue

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Equipment Depreciation
JetBlue Airways Planes are depreciated over 25 years with 20 percent residual value. Alaska Airlines Similar. Long range planes depreciated over 20 years, regional planes depreciated over 15 years. US Airways Unspecified. Depreciated over life of asset ranging from five to thirty years. Southwest Airlines Similar. Depreciated over 2325 years with 10-15 percent residual value.

Fuel Hedges
JetBlue Airways 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. Alaska Airlines 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. US Airways 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. Southwest Airlines Same as JetBlue.

Loyalty Rewards
JetBlue Airways Liability reserved as part of Air Traffic Liability account, as incremental cost (no contribution to overhead). JetBlue does not disclose the amount of points outstanding and value cannot be evaluated. Alaska Airlines Same as JetBlue. US Airways Same as JetBlue. Southwest Airlines Same as JetBlue.

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Integrated Company Analysis: JetBlue

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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. Mostly domestic leisure passengers (rather than business or international travelers) looking for value. 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. 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.

Customers Collaborators

Competitors

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Integrated Company Analysis: JetBlue

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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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Integrated Company Analysis: JetBlue

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Appendix H: JetBlue SWOT Analysis

Strengths 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. Opportunities 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. Threats 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. Weaknesses Highly leveraged financial profile; 2009: debt of $3.30 billion accounted for 68% of total capitalization. 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).

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Integrated Company Analysis: JetBlue

H-1

Sources
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