JetBlue Valuation PDF

Domestic Airline Industry
David Fisher
Valuation Date: 11.15.2018
Industry Analysis! 5!
Industry Definition! 5!
Industry Background! 6!
Industry Overview! 9!
Selected Key Financials! 9!
Airline Industry Ratios! 10!
Environmental Impact! 14!
Cost Structure! 15!
Revenue! 15!
Costs! 15!
Porter’s Five Forces Analysis! 15!
Barrier To Entry! 15!
Power of Buyers! 17!
Threat of Rivals! 18!
Threat of Substitutes! 18!
D.E.P.E.S.T. Analysis! 19!
Demographic! 19!
Economic! 20!
Political! 21!
Environmental! 21!
Socio-Cultural! 22!
Technology! 22!
Industry S.W.O.T. Analysis! 23!
Strengths! 23!
Weaknesses! 23!
Opportunities! 24!
Threats! 25!
Market Analysis! 25!
Demand! 25!
Industry Trends! 27!
Projected Growth! 28!
Industry Performance! 30!
Risk Factors! 32!
Weather! 32!
Fuel Cost! 33!
Labor! 34!
Airplane Capacity! 34!
Obesity! 35!
Technology! 35!
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Other Factors! 36!
Key External Drivers! 37!
Per Capita Disposable Income! 37!
Corporate Profit! 37!
World Price of Crude Oil! 37!
Industry Structure! 38!
Government Regulation! 38!
Key Success Factors! 39!
Industry External Economic Drivers! 41!
Competition! 42!
Life Cycle Stage! 43!
Industry Outlook! 44!
Company Analysis! 45!
Company Background! 45!
Mission Statement! 47!
JetBlue S.W.O.T. Analysis! 48!
Strengths! 48!
Weaknesses! 49!
Opportunities! 49!
Threats! 50!
Mergers & Acquisitions! 50!
Recent Material News! 50!
Growth! 50!
Stock Value! 52!
Airline Technology! 52!
JetBlue vs. Industry Players! 54!
Analyst Reports! 54!
Individual Analysis! 56!
Trend Analysis! 59!
Income Statement! 59!
Balance Sheet! 60!
Statement of Cash Flows! 61!
Financial Ratios! 63!
Historical Stock Performance! 65!
Valuation Analysis! 67!
Comparable Companies! 67!
Methodology! 67!
Reasons for Exclusion! 68!
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Business Enterprise Value (BEV) Multiples! 70!
Multiple Selection Criteria! 70!
Derivation of the Comparable Multiple! 71!
Quartile Analysis! 72!
Implied Share Value! 73!
Equity Multiples! 74!
Multiple Selection Criteria! 74!
Derivation of the Comparable Multiple! 75!
Quartile Analysis! 76!
Implied Share Value! 76!
Comparable Mergers and Acquisitions! 76!
Methodology! 76!
Selection Criteria for Comparable Company Transactions! 77!
Exclusion of Comparable M&A! 79!
Comparable M&A Implied Value Per Share! 80!
Control Premium Calculation! 81!
Control Premium – New Implied Value per Share! 82!
Discounted Cash Flow Analysis! 82!
Methodology! 82!
Discount Rate! 83!
Cost of Equity: Regression Method! 83!
Comparable Beta Model! 86!
Choosing the Beta Model! 87!
Size Premium Analysis! 88!
Capital Asset Pricing Model! 89!
Revenue! 89!
Income Statement Assumptions! 90!
Revenue! 90!
SG&A! 90!
Other Operating Items! 91!
Interest Expense! 91!
Income Tax! 91!
Income Statement Projections! 1!
Balance Sheet Assumptions! 1!
Cash and Cash Equivalents & Short-Term Investments! 1!
Net Receivables! 1!
Inventory! 1!
Fixed Assets! 1!
Liabilities! 1!
Accounts Payable, Other Current Liabilities! 1!
3
Short-Term Debt, Long-Term Debt! 2!
Equity! 2!
Common Stock! 2!
Capital Surplus! 2!
Treasury Stock, Other Equity! 2!
Balance Sheet Projections! 1!
Net Working Capital Analysis! 2!
Operating Cash Flows! 3!
Unlevered Free Cash Flow Projection! 3!
Weighted Average Cost of Capital! 4!
Cost of Debt! 4!
Cost of Equity! 4!
Discounted Cash Flow Computation! 5!
Weighted Value Per Share! 5!
Valuation Summary! 6!
Investment Recommendation! 6!
Citations! 1!
4
Industry Analysis
Industry Definition
The airline industry, a subset of the
broader aviation industry, generates over
$700BB annually. The industry, focused on
aircraft operation and flight service, serves
over 3.1 billion passengers every year.1
Generally, the airline industry contains three
subsectors: Resource Acquisition,
Manufacturing, and Airlines. Resource
Acquisition generates the raw materials
necessary for operation, such as jet fuel, oil,
and raw metal. Further processing of the raw
materials occurs in the Manufacturing
subsector, focused on three primary products: aircrafts, specialized aircraft tires, and
the propulsion system (typically jet engines).2 The airline firms themselves are the
final subsector, where manufactured materials are sold for operational use in either
domestic or international flights.
Domestic airline firms cover a broad range – sales revenues across domestic
focused organizations typically range from $1MM to $50BB.3 These firms do not
only include passenger flights, but domestic mail and cargo flight providers. The
industry is linked by clearly defined travel routes and transportation timeframes.
While domestic firms refer to large brand carriers with whom we associate (ex.
JetBlue and Delta) and are non-regional specific, there are numerous regional
1
"Future of Aviation Industry 2035 - IATA." https://www.iata.org/policy/Documents/iata-future-airline-industry.pdf. Accessed 26 Oct. 2018.
2
"Aviation Sector Report - Parliament UK." https://www.parliament.uk/documents/commons-committees/Exiting-the-European-Union/17-
19/Sectoral%20Analyses/5-Sectoral-Analyses-Aviation-Report.pdf. Accessed 25 Oct. 2018.
3
"Marketcraft: How Governments Make Markets Work."
https://books.google.com/books?id=uD9FDwAAQBAJ&pg=PA173&lpg=PA173&dq=https://clients1.ibisworld.com/reports/us/industry/default.
aspx?entid%3D1125&source=bl&ots=0Di7z2tWzk&sig=xf1-mSapXWsudLOD9I-1OJMG7ig&hl=en. Accessed 4 Nov. 2018.
5
carriers with focused services (for example, Hawaiian Airlines, which is focused on
serving the various Hawaiian Islands).
Flights spanning multiple continents with multiple airline hubs (typically
large airports) are considered international flights. Typically, the corresponding
organizations are larger in order to support the expected increase in expenses. While
most international flights focus on passenger or cargo transport, mail-specific flights
also occur.
Current statistics on the global airline industry show the market consists of
over 5,000 firms worldwide.4 However, the ten largest airlines (led by American
Airlines, Southwest Airlines, Delta Air Lines, and United Airlines) account for
89.3% of the domestic market share. These leading domestic firms alone hold over
66% of the global airline industry market share.
Industry Background
Aviation’s roots can be traced to the early construction of a hot air balloon in
1783.5 Over time, hydrogen gas replaced hot air. Regardless, hot air balloons were
difficult to navigate, as they relied on a strongly defined and consistent wind (a
rarity) to properly control. At the turn of the 19th century, Sir George Cayley of
Yorkshire, England developed an early airplane, defined by three key characteristics:
wings, propulsion system and movable controls. These components now provide the
definition for modern day airplanes.
World War I brought more developed airplanes to the battlefield. These then-
revolutionary pieces of technology could transport food, water and soldiers to the
battlefield in an efficient matter.6 Early military aircraft were expensive – the
4
"Leading airlines in the U.S. - domestic market share 2017-2018 - Statista." https://www.statista.com/statistics/250577/domestic-market-share-
of-leading-us-airlines/. Accessed 2 Nov. 2018.
5
"Aviation Fuel - Centennial of Flight." https://www.centennialofflight.net/essay/Evolution_of_Technology/fuel/Tech21.htm. Accessed 2 Nov.
2018.
6
"First airplane flies - HISTORY." 24 Nov. 2009, http://www.history.com/this-day-in-history/first-airplane-flies. Accessed 4 Nov. 2018.
6
necessary materials to create specialized craft were difficult to acquire and the proper
aviation engineers necessary to operate the finished planes were uncommon.
Developments of aircraft by World War II focused on streamlining cost of airplane
construction and operation.
By the turn of the 20th century, planes became a vital transportation tool for
consumer use, be it for business travel, leisure, or transporting retail goods.
Airplanes grew larger in order to accommodate increased demand. In the last twenty
years crossing into our current 21st century, domestic passenger planes have
increased in size by 135%.7 Firms are continuously designing new planes to
accommodate more passengers, minimize the weight, and to bolster profits.8
As part of bolstering profits, airlines continue to innovate new systems to
decrease cost. The spoke system, developed in the 1970’s, grouped flight distribution
within the same terminal spaces, creating consistency and minimizing in-airport
employees.9
In the last ten years, providing services at as low a cost possible to increase
efficiency has been of chief concern, both for profits and customers. For example,
recent emphasis has been placed on efficient boarding methodologies.10 With such
high rental costs for a terminal (as much as $9,500 per minute), a quick boarding
process helps cut costs. Each methodology differs – for example, Southwest Airlines
divides a flight’s passengers into three groups based on general seat location. Each
passenger is allowed, when their group is called, to pick their own seats. Such a
model minimizes computer automation and upfront sear selection, but the overall
boarding time may increase with freedom of seats. Another method, the Outside-In
7
"(PDF) Optimization Applications in the Airline Industry - ResearchGate."
https://www.researchgate.net/publication/302316370_Optimization_Applications_in_the_Airline_Industry. Accessed 2 Nov. 2018.
8
"Cost Economics of Aircraft Size - JStor." https://www.jstor.org/stable/20053934. Accessed 4 Nov. 2018.
9
"10 technology trends for airlines and airports in 2018." 9 Jan. 2018, https://www.futuretravelexperience.com/2018/01/10-technology-trends-
airlines-airports-2018/. Accessed 2 Nov. 2018.
10
"How to Board Planes Faster - Thrillist." 6 Feb. 2017, https://www.thrillist.com/travel/nation/boarding-planes-faster. Accessed 2 Nov. 2018.
7
Method, was developed in connection with the television series, MythBusters. This
statistically efficient model seats all window passengers, followed by middle seat
(when applicable) and finally aisle passengers. While promising, the method has yet
to be implemented commercially. Finally, the current method of boarding is the
Steffen Method, where passengers board alternating rows from farthest seats to
nearest seats. This alternating method created as many as 30 groups for an average
flight, making the method more confusing. Thus, the airline industry continues to
experiment with other means of increasing revenue.
One such area is in-flight entertainment and leisure, which have become
important with the boost of content and social media. In-flight purchases of films
began around 2009, which has led to an increase in in-flight sales. The addition of
in-seat televisions improves entertainment quality, but at the cost of airplane quality.
Bulkier seats to hold the technology shrink already-small legroom, diminishing
comfort level. With each problem solved or new method to cut costs and boost
profits, another issue presents itself.
Finally, jet fuel plays a pivotal role in the airline industry. Generally, gasoline
is rated by the level of octane present. Early “high” ratings of gasoline, 87, were
easily combustible due to a low flashpoint temperature. During World War II, Major
Jimmie Doolittle developed a higher octane fuel, Aviation Gasoline, with a 100
octane rating. This gasoline, also known as AvGas, was the first airplane-specific
gasoline. Later developments of fuels led to the first mass-produced jet propellant
fuel, JP-1 to its more current iteration of JP-8. The later versions contain higher
flashpoints, enabling heavier aircrafts to safely fly while minimizing risk of
combustion. Commercial jet fuel made of pure kerosene, Jet-A, was developed in
1994. It’s anti-freezing properties have assisted in areas where planes fly through
colder temperatures. And throughout the 20th century onwards, an additional
complication arose as the Organization of Petroleum Exporting Countries (OPEC)
8
was formed to regulate oil supply chain, leading to oil now being considered a
precious commodity.11 The global regulations of OPEC and others have driven the
near 16% compound annual growth rate (CAGR) of jet fuel, with future increases
predicted to continue to rise with the use of precious raw fuel materials.
Industry Overview
Selected Key Financials
The domestic airline industry has seen consistent growth in revenues over the
last five years, with a median increase at an annual rate of 2.25% (average of 2.02%).
Such a rate shows industry demand is growing at a slow, but consistent rate. The
recent strengthening of the US economy, as seen by the increase per capita in
available disposable income, may also be a growth factor.
As revenues grow, wages have also increased from $20.9BB in 2009 to
approximately $28.6BB12 in 2017. But while revenues have increased by 36.6
percent, the number of employees has only increased 15.2 percent. Pressure from
labor unions on per-employee wage increases are the primary factor in this disparity.
In addition, the number of operating firms has decreased from 367 to 321. The
main factor accounting for this reduction is industry consolidation, mergers, and
acquisitions (such as Continental Airlines no longer being operated as a standalone
business). Firms have also focused on increasing market share as a means to increase
profitability, diversifying sales revenue while lowering costs through economies of
scope and economies of scale.
11
"IATA - Jet Fuel Price Monitor." https://www.iata.org/publications/economics/fuel-monitor/Pages/index.aspx. Accessed 2 Nov. 2018.
12
"IBIS World Domestic Airlines Industry Report." IBIS World. N.p., n.d. Web.
9
Finally, these drastic changes have been offset by a general increase in net
operating income over the last five years. The leading domestic providers,
(American Airlines Group (21.6%), Delta Air Lines Inc (18.7%) and United
Continental Holding Inc (17.6%)13, roughly doubled their net operating income from
2013 to end of 2017 alone.
Airline Industry Ratios

In order to analyze profit potentials, the following three ratios are commonly
used14:
!"#$%#&%'()'#*(+$%' = #(./(0'#*0(123$45(*3#406.3*(7(#(./(8$%'0(/%.94(123$45(*ℎ'(6'3$.1
;'"'42'(<#00#45'3(+$%' = #(./(3'"'42'(6#=$45(>20*.8'30(7(#(./(8$%'0(/%.94(123$45(*ℎ'(6'3$.1
;'"'42'
;'"'42'(<'3(!"#$%#&%'()'#*(+$%' = (
#(./()'#*0(!"#$%#&%'
In attempting to maximize the ratios, firms may modify airplane shapes or

seat sections. A recent example of plane modification was the general industry
decrease in average legroom from twenty-three inches to eighteen inches, creating
an additional five rows of seats on the airline. By replacing first-class seats with
economy and doing away with associated barriers, airlines have been able to increase
capacity by nearly 20%.
On the other hand, financial analysts use ratios rooted in financial data to
offset potential fluctuations in airline ratios associated with seasonal flight
differences. Energy price and economic outlook also affect these projections,
13
Id.
14
"The Industry Handbook: The Airline Industry - Investopedia." https://www.investopedia.com/features/industryhandbook/airline.asp. Accessed
4 Nov. 2018.
10
enabling more accuracy in the short term towards firm solvency and liquidity. They
are as follows:
!>>.24*0(;' $'"#&%' + ?#0ℎ(AB2$"#%'4*0 + ?#0ℎ ?233'4*(!00'*0
?233'4*(;#*$. = =(
!>>32#%0 + !>>.24*0(<#=#&%' + C.*'0(<#=#&%' ?233'4*(D$#&$%$*$'0
C'*(F4> 8' C'*(<3./$*(!/*'3(G#7

;'*234(.4(!00'*0( ;E! = ( =(
!"'3#5'(G.*#%(!00'*0 !"'3#5'(G#45$&%'(!00'*0
D.45 − G'38(D$#&$%$*$'0 G.*#%(D$#&$%$*$'0

H'&* − G. − ?#6$*#%$J#*$.4 = =(
D.45 − G'38(D$#&$%$*$' + )ℎ#3'ℎ.%1'3(AB2$*= G.*#%()*.>Kℎ.%1'3(AB2$*=
The current ratio provides a concise measure of liquidity. A highly liquid firm
can cover debt obligations with cash-available or other easily-sold (within 60-90
days) assets. Analyst suggest that twice as many assets to debt, or a ratio of 2.0 to
2.3, is ideal, especially in times of economic contraction or even depression.15
Historically, flights, as determined by the New York Times, are near perfectly (93%)
correlated with economic downturns. In times of economic depression, liquid assets
such as the physical aircraft are significantly devalued. Large sums of available cash
and diverse liquid assets ensure debt obligations can be met even with devalued
assets.
The return on assets (ROA) ratio examines the economic utility of profits
based on price and capacity. Ideally, increases in either price or capacity for profit
increases the ROA ratio.16 However, ROA with high-profit airline will be low as
assets are valued at exponentially higher-than-normal appraisals. Therefore, this
ratio is often left unused, or substituted with an operating profit or EBITDA margin
ratio.
Finally, the Debt-to-Capitalization Ratio evaluates the airline’s debt to its
overall financial soundness of all capital expenditures, such as the ability to
withstand economic downturn. Historically, economists agree that an ideal ratio of
15
"What is considered a good net debt-to-equity ratio? | Investopedia." https://www.investopedia.com/ask/answers/040915/what-considered-
good-net-debttoequity-ratio.asp. Accessed 4 Nov. 2018.
16
"Travel Industry Shaken by Economic Downturn - The New York Times." 6 Oct. 2008,
https://www.nytimes.com/2008/10/07/business/07outlook.html. Accessed 4 Nov. 2018.
11
0.9 to 1.3 enables the company to maintain debt while minimizing systematic risk
exposure.
Value Chain
The value of a domestic airline is a multi-step chained process. First, there are
“Pre-Flight Operation”. In this category, an airline purchases the raw and
manufactured materials necessary for operations. This includes purchasing and
preparing an aircraft, hiring and training staff, as well as designing, creating, and
purchasing branded uniforms, meals, drinks, and entertainment content..17
Next, airlines must develop “Pre-Flight Logistics”. Efficiency models and
cost-benefit analysis tend to provide the framework for these tasks. They include
route development, staff scheduling, and pricing. Minimizing these costs allows
some of these savings to be passed onto the consumer. This is attributable to the
extremely elastic price demand for these services.
Lastly, and most importantly, are “Flight Services”. These encompass the
entire consumer experience from the first steps in the origin airport to the final steps
off the tarmac. Such tasks include baggage processing, in-flight services, and intra-
airport transportation. “Post-Flight Logistics” are intricately linked and included
here – this can include ensuring passengers make on-time connections, baggage
support, and lost-luggage support.
Finally, the chain ends with “Post-Flight Services”, emphasizing consumer
loyalty to the airline.18 Partnerships with car rental and shuttle services, credit cards
and points/miles-based rewards fall into this category. A wealth of relevant and
17
"Product life cycle analysis in the airline industry - University of South ...."
http://www.unisa.edu.au/Global/business/centres/cags/docs/apcea/APCEA_2006_12(3)_Loftus_Purcell.pdf. Accessed 4 Nov. 2018.
18
"Connecting with the customer: How airlines must ... - Strategy - PwC." 15 Nov. 2016, https://www.strategyand.pwc.com/reports/connecting-
with-the-customer. Accessed 4 Nov. 2018.
12
value-added services and benefits for ease post-flight build consumer and brand
loyalty.
Product Lifecycle
The vast complexity of the industry and the various products and services
makes it difficult to assign a single life-cycle. With constant revisions to regulations
being a major issue, three products emerge as items that are subject to a measurable
life cycle: food, beverages, and the airplane itself.
The Food and Drug Administration (FDA) strictly regulates the airline
industry. All in-flight food may be purchased by one of six vendors and stored
onboard for no more than thirty to forty-five days. This leads to greater-than-
expected waste. Studies have shown that per-year airline beverage waste alone can
cover roughly fifteen football fields and produce losses of over $150MM.19
Also, the Federal Aviation Administration (FAA) regulates the life-cycle of
physical aircraft. Airlines have estimated an original Boeing 747 airline jet will be
in service for twenty-to-thirty years.20 However, a 2015 FAA regulation required
747-style planes, currently the most common in service, to be modified along new
safety and policy standards. This is the fifth such change since the start of the twenty-
first century, leading to large upfront costs and correlating reductions to the airline’s
bottom line. Once a plane is decommissioned (be it for age or due to lack of
alignment with regulations), the plane carries only twelve to fifteen percent of its
original value of approximately $370MM.21
19
"In A Dangerous World, US Commercial Aviation Is On A ... - Forbes." 28 Dec. 2016, https://www.forbes.com/sites/danielreed/2016/12/28/in-
the-last-7-years-you-were-more-likely-to-be-run-over-by-a-car-than-to-die-in-an-airline-crash/. Accessed 4 Nov. 2018.
20
"Price Elasticity & Air Fares: Analysing the Low Cost Long Haul ...." https://partners.skyscanner.net/price-elasticity-a-long-haul-low-cost-
opportunity-awaits/thought-leadership/. Accessed 4 Nov. 2018.
21
"How Are Planes Decommissioned and How Much Value ... - Flexport." 12 Apr. 2016, https://www.flexport.com/blog/decommissioned-
planes-salvage-value/. Accessed 4 Nov. 2018.
13
Environmental Impact
A recent industry concern is potentially harmful effects on the environment,
especially pertaining to the development and discharge of jet fuel and associated
release. Environmentalists voice extreme backlash on this controversial issue.
According to the Inventory of US Greenhouse Gas Emissions and Sinks, a
national inventory that the US prepares annually under the United Nations
Framework Convention on Climate Change, transportation account for the largest
portion (28%) of total US greenhouse gas emissions (CHG).22 Transportation emits
more CHG than agriculture, commercial, and residential emissions combined.
When examining the emissions by source, aircraft usage was third on
emissions (9%), behind light-duty vehicles (60%) and trucks (23%). However, five
years prior, aircraft carriers were less than 1%, and was the lowest categorized
emission form of transportation. This drastic increase creates immense concern for
the industry.
These results have been the impetus for FAA and Environmental Protection
Agency (EPA) regulations. As a result, firms must now track and report
environmental emissions, incur additional expenses to comply with policy
regulations or risk severe fines.
As a result of this alarming environmental issue, significant regulations have
been enacted. As a result, firms have incurred fines and additional expenses, forcing
them to comply with a myriad of items, ranging from creating environmental
emission forms to following the everchanging plane safety regulations.
22
"Fast Facts on Transportation Greenhouse Gas Emissions - EPA." 27 Aug. 2018, https://www.epa.gov/greenvehicles/fast-facts-transportation-
greenhouse-gas-emissions. Accessed 4 Nov. 2018.
14
Cost Structure
Revenue
Ticket sales are the primary form of revenue for this industry. Statistics report
the average airline domestic ticket costs $379, a twenty percent increase over the last
five years.23 With four large firms dominating the industry, there is a high rate of
competition differentiated only by price. Price increases therefore tend to occur at a
rate still helpful to consumers while allowing an airline to reach a small percentage
of profit per ticket.
Costs
Airlines tend to incur three forms of cost: Direct Operating Costs, Indirect
Operating Costs, and Overhead Costs. This holds true for both domestic and
international fights. Direct Operating Costs cover costs directly attributable on a per
passenger and per-airplane basis. Passenger costs may include the cost per person of
in-flight meals and catering, airport load fees, and commissions on cargo. This
category also includes airplane-related fuel costs, maintenance and repairs, landing
fees, handling, navigation and staff expenses. Indirect Operating Costs cover those
charges incurred by a passenger not during the services of their flight. These costs
include customer airport parking fees, and crew member salary. Finally, Overhead
costs are defined as the fixed costs attributable to the operation of the airline itself
or a flight generally. These costs are typically categorized as the managerial
expenses towards airline sales, costs of marketing campaigns, executives, Human
Resources, and other corporate staff.
Porter’s Five Forces Analysis

Barrier To Entry
Because of various difficulties in entering and maintaining brand market
share, the airline industry has a rather low threat of entry. First, consumers are free
23
"Airline cost structure traveltrotter - SlideShare." 25 Jul. 2012, https://www.slideshare.net/traveltrotter/airline-cost-structure-13749344.
Accessed 4 Nov. 2018.
15
to choose the best price for their flight among competitors. With such little-to-no
switching costs, airlines attempt to counteract this by generating revenue through
added-value rewards and loyalty programs. Airline affiliated credit cards and miles-
based rewards points are the key to generating such revenue with little additional
cost and increases in customer/brand loyalty. Second, airlines only maximize
revenue with full flights. Industry experts suggest that on an average flight of 100
people, 97% percent of passenger ticket sales “break even” relative to their per-
passenger cost, leaving an airline with 3% profit. This can be combatted by
enhancing service alongside price increases, creating higher entry cost while
increasing perceived value.
Next, airlines require significant start-up capital. To purchase a single Boeing
747 plane and rent the proper terminal space in 2018, US Today [correct name of
publisher? Not USA Today? Citation?] estimates the cost at $1.2BB, an extremely
large amount of funding. Thus, it would be difficult to quickly and easily establish a
new competitor at even the smallest scale.
Moreover, there is a distinct lack of proprietary service or product in the
airline industry. Because of significant competition, each airline quickly duplicates
a new product or service announced by a rival. Experts estimate that this duplication
process may occur in as little as three to four days [citation].
Finally, FAA regulation and certification provides inherent limits on the
available marketplace.24 Airlines must obtain licenses from both the FAA and the
Department of Transportation (DOT), whose application process take over one year
for initial certification.[citation] Airlines are subject to constant inspection, strict
regulation, and hefty fines for infractions from both agencies, thus limiting potential
entry to those able to withstand such scrutiny.
24
"JET FUELS JP-4 AND JP-7 75 4. PRODUCTION, IMPORT/EXPORT ...." https://www.atsdr.cdc.gov/ToxProfiles/tp76-c4.pdf. Accessed 4
Nov. 2018.
16
Power of Suppliers
As illustrated in the Value Chain discussion, airlines are unable to operate
without the acquisition of aircraft, currently monopolized by the two major aircraft
manufacturers: Boeing and Airbus.25 Both companies build according to standard
configurations with minimal customization as to available amenities. Most
importantly, airlines frequently enter into long term agreements with the
manufacturers with guaranteed minimum orders and no buyout clause [cite on no
buyout?]. Aircraft manufacturers are also subject to FAA and DOT regulation and
incur significant costs to create aircraft, severely limiting new entries into the
manufacturing space.
Another key pre-flight supply is jet fuel. Most jet fuel is refined from oil
obtained from the northern regions of Africa and southern Europe. Both areas are
controlled or regulated by OPEC, whose member nations include Iran, Iraq, Saudi
Arabia, and Venezuela. OPEC limits the supply of this finite resource.26 BP and
Shell dominate the few organizations capable of refining OPEC oil into the jet fuel,
creating an oligopoly-like market structure with corresponding high prices.27 Most
airlines must therefore buy fuel in extremely large quantities in order to bring their
costs to an affordable level, creating extremely high leverage and demand for
suppliers.
Power of Buyers
Airline services are bought either as individuals or as groups. Individuals buy
in multiples of one ticket, regardless of business or leisure, typically via travel
agency or online search-based portal. Purchasing from an airline directly is
25
"Airline Economics - Avjobs.com." https://www.avjobs.com/history/airline-economics.asp. Accessed 4 Nov. 2018.
26
"Start-Ups Airlines Try to Find Room at Airports - The New York Times." 25 Jan. 2010,
https://www.nytimes.com/2010/01/26/business/26slots.html. Accessed 4 Nov. 2018.
27
"OPEC : Brief History." https://www.opec.org/opec_web/en/about_us/24.htm. Accessed 4 Nov. 2018.
17
considered rare today, with the advent of search engines devoted to obtaining the
best price for your criterion, such as Kayak. Because of this, these search sites and
travel agencies are considered “middle-men” in terms of buying power.
In addition, variances among cost and time of flight drive competition among
airlines. As the two main areas where buyers find value, there are low switching
costs – each airline provides the same general service, but it’s niche of quality,
amenities and cost drive buying power to consumers, not airline firms.
Threat of Rivals
Airline services are bought either as individuals or as groups. Individuals buy
in multiples of one ticket, regardless of business or leisure, typically via travel
agency or online search-based portal. Purchasing from an airline directly is
considered rare today, with the advent of search engines devoted to obtaining the
best price for your criterion, such as Kayak. Because of this, these search sites and
travel agencies are considered “middle-men” in terms of buying power.
In addition, variances among cost and time of flight drive competition among
airlines. As the two main areas where buyers find value, there are low switching
costs – each airline provides the same general service, but it’s niche of quality,
amenities and cost drive buying power to consumers, not airline firms.
Threat of Substitutes
The threat of substitution among the domestic airline industry is medium, as
consumers have a variety of transportation options: car, bus, train, or boat. In
addition, there has been an introduction to ride-sharing applications such as Uber
and Lyft. However, distance of travel is the key factor in selecting a method of travel
transportation.28 Flying is typically efficient and economical in a long-distance travel
28
"So you want to start an airline? - USA Today." 15 Mar. 2017, https://www.usatoday.com/story/travel/columnist/mcgee/2017/03/15/start-new-
airline/99202234/. Accessed 4 Nov. 2018.
18
situation, whereas trains, boats, cars, buses, or ride-sharing services such as Uber
and Lyft would be most effective in shorter-distance travel. Other key factors include
price, and convenience.
Timing is key in selecting among different modes of transportation. Air
transportation is typically most economical with a longer time frame, as prices will
likely be cheaper than last minute increases and buyers would be more willing to
purchase at lower costs. As the time frame to decide becomes shorter and prices of
airfare increase, it is more likely that alternative options such as trains or automobiles
will be considered.
D.E.P.E.S.T. Analysis
The D.E.P.E.S.T. Analysis is an alternative methodology of industry analysis.
While Porter’s Five Forces does account for some trends of the recent past in its
analysis, D.E.P.E.S.T. focuses on multiple trends and their effects in connection with
recent advances in the industry.
Demographic
The key demographics for airline consumers have changed significantly over
time. Airlines first served the military, then commercial use of aircrafts was limited
to businesspeople and upper-middle class who could afford higher fares.
Competition among airlines for a broader consumer base have led to dramatic price
decreases, attracting other demographics.29 In our post 9-11 world of increased
security, we have also seen changes affecting demographics. For example, young
children flying without an adult must now be escorted by an airport official. Officials
help the elderly with boarding and alternative security procedures are offered for
29
"When to book your holiday travel to score the cheapest flights." 6 Sep. 2018, https://www.cnbc.com/2018/09/06/when-to-book-your-holiday-
travel-to-score-the-cheapest-flights.html. Accessed 4 Nov. 2018.
19
their comfort. Of recent note, medical flights have begun on specialty planes in order
to transport larger groups of patients requiring medical assistance under supervision
of a physician.
Finally, the once ever-present use of business class has slowly dwindled,
leaving first class and economy/general cabin. This has broadened the demographic
from the rich who can afford more luxurious travel to those of a lower socio-
economic status.
Economic
The high economic costs as discussed in the Five Forces analysis hold true
under this analysis. As airlines consolidate and fight back against rising operating
costs, the market structure has shifted from that of typical competition to an
oligopoly ruled by a handful of large firms. Airlines focus on larger profit margins
as their primary objective. The push for financial solutions ranged from the large
(notable changes in carry-on size limits and bag weight decreases) to the small
(removal of one olive from in-flight salads). The latter may seem on its face as a
change with little impact, but the volume of salads created for airlines could save up
to forty-thousand dollars a year.30
Most notably, a push for profits is the main driver for significant rises of prices
in time of consumer distress. Every consumer wishes to travel for the holiday season
(Thanksgiving, Christmas, and New Year’s Days), leading to an average increase of
nearly 100% on typical ticket prices over the last five years.
30
"The $40,000 Olive: How Entrepreneurs Can Spend Time Saving Money." 4 Jun. 2015,
https://www.forbes.com/sites/moiravetter/2015/06/04/the-40000-olive-how-entrepreneurs-can-spend-time-saving-money/. Accessed 4 Nov. 2018.
20
Political
Politics and national security play a crucial role in the airline industry. After
the horrible attacks of September 11, 2001 using airplanes as vehicles for terrorism,
the Transportation Security Administration (TSA) was created to enact and regulate
new strict security standards for airports and airlines.31 These include new consumer
inconveniences, such as arriving to the airport early to walk long lines of enhanced
security procedures, and the restriction of outside water in airports, forcing
consumers to buy fresh after security.
The US Government and OPEC’s regulation on oil to ration this commodity
have in turn led to a competitive fuel market among airlines. Firms now may incur
greater expense to obtain and secure fuel so it may be used to serve consumers,
creating a significant detriment to an airline’s true profit potential.
Environmental
The recent rise in environmental consciousness among airline movements is
new. Smaller airlines (>$500MM in Revenue) focus on manufacturing planes and/or
certain amenities using recyclable materials as a way of enticing eco-friendly
consumers to choose a particular airline, thereby increasing their market share. As
research focuses on climate change, the ozone layer and increased weather
fluctuations, new emissions laws from the EPA provide additional regulatory
obligations to airlines and have incited research into alternative fuel solutions.
Failure to become eco-friendly may incur activist backlash and loss of consumers.
All of these factors are in addition to the natural issues of weather – severe weather
and environmental disasters prevent operations, damaging an airline’s financial
bottom line.
31
"How Transportation, Security Changed After 9/11 - Yahoo Finance." 11 Sep. 2018, https://finance.yahoo.com/news/transportation-security-
changed-9-11-130158030.html. Accessed 4 Nov. 2018.
21
Socio-Cultural
Safety of flight is of the utmost socio-economic concern, as twelve plus plane
crashes have killed over two-hundred passengers over the last twenty-four months
alone.32 Since trains and buses are considered safer alternatives, this drives the Five
Force’ Threat of Substitution to medium.
Next, the national concern over obesity has also played a role into the threat
of substitution. Controversially, airlines have taken the position that if a body part
breaches into the space of another seat, the additional seat must be purchased by the
consumer.33 Consumers in support of this idea justify that with diminishing seat sizes
to increase capacity, it is logical for a larger consumer to pay for additional space.
However, many critics believe that this merely provides airlines with additional
revenue -per person, a “lining of the pockets” at the expense of the health of others.
Finally, customer service has been the biggest change in the recent era.
Specifically, automation of services has created convenience for firms, but an
inconvenience to buyers.
Technology
Technology has provided benefits to the airlines, but simultaneously has hurt
their bottom line. Technology has provided better experiences and convenience to
the consumer. For instance, the Apple Wallet has enabled passengers to no longer
carry around a physical boarding pass. Televisions have been installed in the backs
of headrests to create better amenities to consumers on flights.
32
"Airlines, including Southwest, are so safe it's hard to rank ... - USA Today." 19 Apr. 2018,
https://www.usatoday.com/story/tech/2018/04/19/airlines-including-southwest-so-safe-its-hard-rank-them-safety/533166002/. Accessed 4 Nov.
2018.
33
"Airlines, including Southwest, are so safe it's hard to rank ... - USA Today." 19 Apr. 2018,
https://www.usatoday.com/story/tech/2018/04/19/airlines-including-southwest-so-safe-its-hard-rank-them-safety/533166002/. Accessed 4 Nov.
2018.
22
However, the technology has also created some areas of concern and hurt the
bottom line of firms. Installing televisions into the backs of headrests have created
better amenities, but also increased the weight of the overall aircraft carrier.
Technology has also created greater substitutes for firms. For instance, the
introduction of FaceTime and Skype has enabled businessman to travel less.
Industry S.W.O.T. Analysis

Strengths
The airline industry is currently the fastest and most efficient form of
transportation. For passengers, it currently is the only method of efficiently traveling
over major bodies of water.
In addition, another strength is the quality of the product. By being regulated
heavily by multiple governmental agencies, the safety of these aircrafts are
extremely high. The reputation of these industries are extremely important, resulting
in greater amenity offerings and rewards platforms to retain customers. This
customer loyalty also creates returning customers.34
With a highly competitive platform, prices are favorable to consumers.
Airlines are competing for the same generic customer base, while being most
affected being the price. Therefore, airlines try to provide their products at the most
affordable prices.
Weaknesses
Airlines have what is defined as a high “spoilage” rate. Specifically, spoilage

is referring to the missing revenue and deficiencies. The primary result of this
“spoilage” is when a flight is empty. Once a flight departs, the empty seat is non-
34
"A Competitive Analysis of Airline Industry: A Case ... - IOSR Journals." http://www.iosrjournals.org/iosr-jbm/papers/Vol17-issue4/Version-
2/C017422333.pdf. Accessed 4 Nov. 2018.
23
revenue producing. Although some firms attempt to resolve this issue by decreasing
their prices just hours before takeoff, firms often see that these seats remain unsold.
On the other hand, there is another “spoilage” issue of overbooking flights. When
flights overbook, they must provide unexpected compensation in order to have
customers take another flight. This process overall lowers the return on the firm’s
investment.
Another recurring issue is the high fixed expenses with rather high risk and
volatility. Purchasing planes and renting terminal space is extremely expensive.
Moreover, with weather issues and delays, the volatility and ability to create profit
is extremely difficult and hard to predict—something that capital markets frown
upon. Constantly changing aircrafts and even boarding issues can result in extreme
profit losses.
Opportunities
Airline industries have opportunity to prosper as there are few to no
alternatives in the marketplace. Whether it is leisure or business, airlines continue to
expand their spoke system to domestic and international destinations.
Technological advances continue to support opportunities within this sector.
With more economical as well as weight saving products for aircrafts, their potential
for profit increases exponentially.35 Alternative supply chain sources have also been
created in the airline industry. For example, artificial intelligence or offshoring
customer service has significantly reduced employee salaries, which is one of the
highest expenses of any airline firm. On another note, in flight experience
technology has maximized revenue. With many in flight purchase opportunities,
35
"Airline Industry SWOT Analysis | Getaway USA - Getaway Tips." https://getawaytips.azcentral.com/airline-industry-swot-analysis-
12208038.html. Accessed 4 Nov. 2018.
24
airlines are expanding into a greater market while simultaneously increasing their
profits.
Threats
The primary threats of the industry are two categories: resources and
governmental regulation. With respect to resources, the price of jet fuel is the largest
expense of a firm. Although long term contracts are typically established, the
increasing cost of shipping to deliver this resource limits the overall bottom line of
firms.
Government intervention is another concern. While the standards and safety
regulations are continuously being modified, this often results in planes that are in
working condition being taken out of service to have additional enhancements added
to meet these ever-changing rules.
Market Analysis
Demand
The airline industry is affected
by three types of demand: leisure
travel, business travel and cargo
transportation36. Leisure travel and
business travel are categorized under
passenger transportation, which makes
up roughly 97.7% of total industry
revenues. Cargo transportation, on the
other hand, only makes up 1.5% of industry revenues.
36
25
Demand for leisure travel is affected by per capita disposable income and
available leisure time. When disposable income and available leisure time increases,
families and individuals tend to spend more on vacation and interstate travel. The
recent growth in the US economy has resulted in low unemployment and an
increasing per capita disposable income of 1.9% over the last five years. This has
resulted in a growing trend of leisure time availability to employees, demand for
domestic air travel increases. The general preference for domestic travel in
comparison to international travel also favors this industry.
Demand from business travel on the other hand is not largely affected by price
but more affected by corporate performance. When corporations are not performing,
management tends to cut back on business travel budgets to save costs. However,
the strong growth in US economy recently allows greater corporate spending and
flexibility to send their executives on first class and business class seats, resulting in
an increase in the purchase of premium classes of seats and other amenities that
airlines provide. However, due to rapid developments in communications
technologies and the trend to switch to online video conferences, these forces create
a substitute for business travel and decreases demand as corporations and employees
may sometimes prefer this substitute over traveling. The availability of this
alternative typically serves as a check on rising prices for business travel.
Demand for cargo transportation is typically comprised of the need to
transport high value items and time-sensitive items to the marketplace. Corporations
and individuals generally choose this service over substitutes such as ground
shipments due to its speed and efficiency in delivering goods to the marketplace and
designated locations. With waterborne transportation services cutting down their
rates, demand for cargo transportation has slumped recently due to competition.
26
Industry Trends
In the modern airline industry, decades after the deregulation of airlines, the
industry is impacted by both social trends and technological improvements.
Based on a report on CNBC, Americans are making the most out of their
allotted annual vacation days in 7 years37. Following this trend, there is also a
growing trend of leisure travelers due to the increase in available time off from work.
This is also supported by the projected increase in domestic trips (including trips
involving land transport and maritime transport) by 3.3% annually38, which would
further increase demand for air travel.
Due to the rise in e-commerce and the success of companies such as Amazon,
there has been an increase in the need for transportation due to the trend of
purchasing goods outside a customer’s local region. Because these online
transactions generally involve high value goods, the airlines cargo services are
typically businesses’ top choice to bring their goods to the market as efficiently as
possible. Furthermore, as e-commerce companies compete to provide as much value
to their customers as possible, they often offer 2-5 days shipping options for their
customers. Because land and sea transportation are incapable of moving product
with such speed, the airline industry captures a solid majority of the potential profits
from this trend.
Aside from these social trends, technological improvements also heavily
impact airlines profitability. The constant innovation in aircraft manufacturing
brings a constant change in a firm’s competitive advantage within the industry.
Changes such as new onboard entertainment systems provide added value to an
airlines’ consumer. By having better onboard entertainment, an airline can attract
customers by promoting their new aircraft and new technology, increasing their
37
Reid, David. “Vacation Days Taken by US Workers Hit Highest Level since 2010, Study Says.” CNBC, CNBC, 9 May 2018,
www.cnbc.com/2018/05/09/vacation-use-by-us-workers-hits-highest-level-for-7-years.html.
38
27
market share, and also charge slightly higher prices to increase their profit margins.
This trend causes industry pressures for airlines to consistently invest in newer
offerings and technologies to gain and/or maintain an edge over their competitors.
Furthermore, due to innovation, newer aircrafts also have longer asset lives and
operate more efficiently on less fuel than older models, hence providing operational
advantage and cost savings to airlines who have recently invested in them.
Technological advancements in sales platforms also affect profitability within
the industry. As airlines develop their online sales platform, they capture profits
through forward vertical integration by omitting agency costs. However due to
technological improvements within web development, many new travel fare
aggregator websites and travel fare metasearch engines have entered the market.
These new companies provide customers with more information regarding the
services provided by different airlines, including its associated price tags, the flight
duration, travel route and aircraft models. This allows customers to compare
different flights in the market and leads to increased price competition between
airline rivals due to the price sensitive nature of the consumers within this industry.
Projected Growth
Based on the historical data of the previous twenty years, analysts have
predicted that the future of the airline industry with continue to prosper, particularly
as technological advances create more efficient travel. Statisticians have predicted
that the worldwide growth rate of airline passengers will grow at a 4.52% CAGR till
2037.39 The primary growth opportunities are being indicated by the newly
developing regions of the world, most notably Africa and Latin America.
39
"IATA - 2036 Forecast Reveals Air Passengers Will Nearly Double to ...." 24 Oct. 2017, https://www.iata.org/pressroom/pr/Pages/2017-10-24-
01.aspx. Accessed 4 Nov. 2018.
28
North America region is predicted to grow at a 3.1% CAGR, and with this
great increase in demand, passengers will continue to see more affordable flight
rates.40 Reports by the International Air Transport Association predict that 7.8 billion
passengers will travel in 2036, near doubling of 4 billion air travels expected to fly
this year. For the United States passenger, this increase rate is even quicker, as
passenger travel is expected to double by 2031.
With this extreme growth in demand, the power of buyers is expected to
substantially increase, which is one of the explanations behind the more affordable
air fares. In addition, experts predict that the acquisition of greater oil from
uninhabited regions of Alaska and Africa will continue to increase supply, thereby
lowering the price point. This will allow airlines to continue to establish longer-term
relationships with their raw material acquisition suppliers, particularly for the oil and
jet fuel, yielding lower price points.
However, some reports have indicated that airlines have hit their peak, and
that their financial growth and prosperity will fall with this drastic growth in
passengers. John Sterman, professor of MIT Sloan School of Management produced
a paper titled Cyclical Dynamics of Airline Industry Earnings.41 Sterman speculates
that by 2025, airline firms will no longer be sustainable due to the external factors
uncontrolled by airlines. In particular, the paper examines the growth expectations
of wages and inflation, stating that the growth in wages, utilities, and other factors
associated with airlines, along with the increase in buyers’ power will result in the
elimination of profits.
Although some research indicates the airline industry has reached its peak,
there is greater support for the proposition that even more economic prosperity is in
40
"• Air traffic - passenger growth rates 2018| Statistic - Statista." https://www.statista.com/statistics/269919/growth-rates-for-passenger-and-
cargo-air-traffic/. Accessed 4 Nov. 2018.
41
"Cyclical Dynamics of Airline Industry Earnings - John Sterman - MIT."
http://jsterman.scripts.mit.edu/docs/Cyclical%20Dynamics%20of%20Airline%20Industry%20Earnings%20131003.pdf. Accessed 4 Nov. 2018.
29
the future for the airlines. Mathematicians, including economists from The Wall
Street Journal, indicate that due to greater rising transportation costs of alternative
transportation methods (such as trains and vehicles), airlines will continue to
dominate the marketplace.42 In fact, Sarah Chaney speculates that in the short-term,
trains, cruises, buses, and most transportation prices will become the same price
point as aircraft carriers. With airplanes being the most efficient transportation
medium, if all transportation methods are offered at substantially the same price
point, then airlines will have even greater success than anticipated based on their
efficiency of travel time.
Industry Performance
There are numerous techniques to interpret the performance of the airline

industry. At first glance, one would examine the historical growth rates, while other
performance metrics include a beta or alpha analysis.
Stern, New York University’s School of Business, developed a model which
examines the historical growth rates by sector. The air transportation industry was
ranked in the top eight sectors, with the highest CAGR in Net Income over the
previous years at 21.49%.43 When comparing this to the industry standard, in this
case, The Standard & Poor’s 500, the five-year CAGR is ~15.8%. This 120% greater
return for the airline industry indicates that the airline industry has not only
performed extremely well, but has in fact outperformed a widely diversified
portfolio of businesses. In addition, according to this model, expected growth in
revenues will be at a 3.98% CAGR.
42
"Rising Transportation Costs Help Drive Up U.S. Business Prices - WSJ." 11 Jul. 2018, https://www.wsj.com/articles/u-s-producer-prices-rose-
in-june-1531312286. Accessed 4 Nov. 2018.
43
"Historical Growth Rates - NYU Stern." http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histgr.html. Accessed 4 Nov. 2018.
30
In addition, the IATA (the International Air Transport Association) releases a
quarterly report analyzing the entire industry. [add citation] One of its most
promising conclusions was airlines’ operating margin was greater than expected for
the 14th straight quarter. This analytical report also indicates the greatest costs and
risks growths that these firms have experienced over the past twenty-four months.
In particular, fuel had the greatest growth, a 51% increase, followed by labor and
infrastructure, at 30% and 11% respectively.44
Another industry performance metric compares the Worldwide Gross
Domestic Product (GDP) growth versus the worldwide aviation growth, abbreviated
as RPK. [add citation] Since the financial crisis of 2008, RPK has outperformed the
GDP in every quarter. Moreover, focusing on the timeframe of 2010 to 2017, this
growth difference becomes even greater, with the median worldwide GDP growth
at ~4.82%, while Worldwide RPK growth is 7.83%.
Other industry performance metrics compare the Cost of Capital, also known
as WACC, to the return on capital (ROIC). From 1993 to 2014, the airline industry
has not created value, as WACC was greater than ROIC. Post 2014, for the 4th
consecutive year, Return on Capital has significantly provided value at ~9.41%,
while WACC has been at ~6.7%45.
One of the industry performance methods is to examine profitability among
regions. With respect to the airline industry, operating margin by region is drastically
different over the past five years. For instance, North America has a blended average
margin of ~11%, while Europe, Asia Pacific and Latin America each has a return of
~6%. US rates become even more impressive when examining other regions, such
as Africa, with its it is ~1% rate of return. This clearly illustrates that the domestic
airlines within the United States have an extremely prosperous future.
44
"MoneyChimp Financial Calculators." http://www.moneychimp.com/calculator/. Accessed 4 Nov. 2018.
45
"Economic performance of the airline industry: mid-2018 update - IATA." https://www.iata.org/publications/economics/Reports/Industry-
Econ-Performance/Economic-Performance-of-the-Airline-Industry-slides-Mid-Year-2018.pdf. Accessed 4 Nov. 2018.
31
Risk Factors
All industries are subject to potential risks. For the airline industry, the
primary risk factors are weather, fuel costs, labor costs, airport capacity and
technology.
Weather
Weather encompasses a variety of factors, not only for the airlines, but for the
airports. For example, more than 60% of airlines [or airports?] are built near sea
level, putting them at substantial risk of more frequent flooding when oceans rise.
[citation] Moreover, many airports have not established evacuation plans for airlines
and airplanes during times of extreme floods, heat advisories, and other extreme
weather conditions. One instance of this occurred was this past July in Phoenix,
where the airport and airlines had more than sixty cancelled flights due to airlines’
operational manuals not including any information or guidance for temperatures
above 118 degrees Fahrenheit, which Phoenix experienced for the first time.46
Additionally, when planes are in flight and an unexpected weather event
occurs, the planes must compensate by using more fuel than expected. When
examining the airlines profitability, often margins per plane are quite small--less
than 5% per plane. Thus, if a weather event occurs in the sky, the aircrafts must
compensate, using up to 50% more fuel. As a result, this unexpected cost turned a
profitable venture into an extremely unprofitable one. This then in turn puts
additional pressure for the airline to make up for this loss with its other planes and/or
travel routes, just to maintain what the airline industry had predicted to Wall Street
to be its performance.
46
"How hot weather – and climate change – affect airline flights." 2 Aug. 2017, http://theconversation.com/how-hot-weather-and-climate-
change-affect-airline-flights-80795. Accessed 4 Nov. 2018.
32
Fuel Cost
In order for firms to keep costs at a minimum, most airlines secure longer term
jet fuel contracts with OPEC or the raw material acquirers of octane. Typically, firms
sign contracts for this resource to be available for between ten and thirty years in
order to limit their risk of inflation and to assure supply of this precious ingredient.
However, there are a variety of issues and risks associated with jet fuel. Most
suppliers of jet fuel when signing these long-term arrangements deliver the jet fuel
either quarterly or annually. With such large shipments, airlines must incur
additional expenses to store the jet fuel. On top of this incurred expense is the
liability associated with the jet fuel itself.47 Jet fuel is highly combustible, so airline
companies must incur another additional expense associated with their proper
storage and insurance coverage. There are very few agencies that assure jet fuel,
and these firms charge between fifteen to twenty percent of the current market price
of oil. [citation]. Thus, this commodity, although it is a precious resource to the
operations of the airline, also presents extremely high risk and costs to maintain.
Another issue with signing long term contracts for jet fuel is the price point
itself. Physicists have indicated that more than two-thirds of the world's oil supply
has not been harvested and refined, with the majority of the oil originating from
Alaska.48 With this knowledge, economists are concerned that at any point in the
future (and perhaps with no warning), extreme supply of jet fuel can be introduced
into the market, dramatically driving down the market price of the jet fuel. Since
these long-term contracts are binding, with minimum purchase orders in large
quantities, airlines could then be paying a high premium over the then prevailing
market prices, losing out on potential profits.
47
"Avsurance Insurance Products - Avfuel." http://www.avfuel.com/Avsurance/Insurance-Products. Accessed 4 Nov. 2018.
48
"How much oil have we used? - Phys.org." 7 May. 2009, https://phys.org/news/2009-05-oil.html. Accessed 4 Nov. 2018.
33
Labor
Surprisingly, the majority of expenses faced by the airline industry originate
from the labor component. There are a variety of players that create this cost.
Between the ticket counter, terminal advisors, flight attendants, pilots, and the
baggage transporters, the average domestic flight service involves more than twenty
employees and their salaries. With rising inflation rates, as well as consumer price
index (CPI) rates at an all-time high, labor expenses are also at an all-time high.
Furthermore, with interest rate and CPI projected to rise, this aspect of the airline’s
costs is also estimated to continue to increase.
Airlines have been attempting to address this labor costing issue through a
series of solutions. As described earlier, many of the larger airlines have instituted
offshoring of customer service, as well as using proprietary artificial intelligence
software to contain their labor costs. However, there have been no advancements in
terms of replacing flight attendants or pilots, so these labor costs will only continue
to increase and become more of a concern for airlines profitability.
Airplane Capacity
Another growing concern for this industry is airplane capacity. Many firms
have attempted to implement solutions including the removal of first class, as well
as decreasing the leg room. However, the current solutions are doing one thing--
driving customers away. When American Airlines, one of the largest players,
announced that they were shrinking the leg room, their stock fell more than 3%. For
the next thirty days, sales missed projections by more than one-tenth, as customers
went to alternative options with similar prices. Firms continuously attempt to resolve
the airline capacity issue, but increasing capacity seems to create additional risks for
consumer satisfaction and the resulting risk of switching airlines.
34
Obesity
Surprisingly, obesity is a growing concern in the airline industry, solely do
the ideology of weight. Since the inception of the aviation industry, firms have been
redesigning and shaping their planes to be aerodynamic and as light as possible.
When firms calculate the weight on a plane, they assume an average weight of 170
pounds per customer. However, obesity in US has raised this average weight to 185
pounds. [citation] As a result, mathematicians have determined that each 100 pounds
of increased weight on a plane increases the cost for the plane to fly by $60. With
such miniscule margins, obesity is a risk that could determine if a flight makes or
losses money.49
Technology
Technology is considered to be a great risk for two main purposes: the cost of
acquiring the technology, and the cost of technology failing. In order to remain
competitive, airlines must acquire the greatest technology, primarily the products
that are exposed to consumers. For instance, a common industry product adapted is
the headrest television sets. American Airlines reported that this technological
advancement would cost each plane $3MM, and would result in even greater losses
as it would take planes out of commission for approximately ten days.50 In fact,
American Airlines is currently repealing seat-back entertainment, as the additional
weight and expenses of partnering with cable providers created losses on the
majority of their domestic flights.51
49
"Air Traffic By The Numbers - Federal ...." 14 Nov. 2017, https://www.faa.gov/air_traffic/by_the_numbers/. Accessed 4 Nov. 2018.
50
"American Airlines does away with seat-back entertainment - Take your ...." https://www.economist.com/gulliver/2017/01/25/american-
airlines-does-away-with-seat-back-entertainment. Accessed 4 Nov. 2018.
51
"How Can Airlines Reduce Fuel Costs? | WIRED." 17 Sep. 2012, https://www.wired.com/2012/09/how-can-airlines-reduce-fuel-costs/.
35
Another concern is more systematic for the airline industry: the cost of the
technology failing.52 When technology is installed, airlines are putting human lives
at risk that the technology will perform without being hacked, or that a malfunction
will not occur. Within the past ten years, more than a dozen crashes have occurred,
and half of them were due to technological errors. Airline organizations have
determined that 20% of all crashes are due to technological failure. When a plane,
especially a larger aircraft with many passengers, crashes, not only does the airline
lose the multi-hundred million dollar aircraft itself, but they are also responsible for
all the passengers lives. The cost of a human life, statistically calculated by the
Globalist, is between $6MM and $9.1MM.53 With an average plane seating
approximately 125 passengers, the airline can be responsible for more than $1BB of
damage and legal fees. Moreover, once a disaster occurs, the reputation for the firm
is forever ruined.
Other Factors
Mercer, a leading business
analyst firm, examines industries and
depicts their risk by four broad
categories--Strategic, Financial,
Operational and Hazard, in each case in
relation to the number of events that
have occurred.54 As seen in the
diagram, due to the competitive nature
of the airline industry, as well as customer expectations, strategic events account for
52
"Plane Crashes, Software Failures, and other Human ... - Hacker Chick." https://hackerchick.com/plane-crashes-software-failures-and/.
53
"The Cost of a Human Life, Statistically Speaking - The Globalist." 21 Jul. 2012, https://www.theglobalist.com/the-cost-of-a-human-life-
statistically-speaking/. Accessed 4 Nov. 2018.
54
"The Pursuit of Sustainable Returns | Mercer." https://www.mercer.com/our-thinking/the-pursuit-of-sustainable-returns.html. Accessed 4 Nov.
2018.
36
almost half of the airlines overall risk. About one quarter of the overall risk is
financial, affected mostly by economic depressions. Moreover, as previously
discussed, labor is the largest risk within the operational category. And safety,
liability and war have created approximately one-tenth of the overall risk within the
industry.
Regardless of category, the risks incurred by these airlines are financial. It will
either increase their costs, or will force the airline to decrease its overall price to stay
competitive, and eventually hurt their overall bottom line.
Key External Drivers

Per Capita Disposable Income
This industry generates most of its revenue from discretionary consumer
spending on leisure travel. There is a direct relationship between disposable income
and domestic flights. As disposable income is expected to rise for the next five
years, this trend should continue.
Corporate Profit
One of the most critical factors for this industry is the economic stability of
the airlines themselves. When these organizations yield high returns, they are more
likely to be flexible on their airline tickets, in particular the ones with high margins
(Ex. First-class tickets). By examining the current performance of the airlines shown
earlier, it is clear that the airline industry still has growth potential. Therefore, there
is opportunity for corporate profits to increase.
!
World Price of Crude Oil
As discussed previously, much of the oil supply chain is currently regulated
by OPEC. Jet fuel is refined through crude oil; therefore, when crude oil is relatively
low in price, jet fuel will be as well. However, as stated, many firms seek lower price
points by purchasing in massive quantities. This behavior limits the fuel supply,
37
which will put pressure on the market, eventually pushing prices higher.
Furthermore, since this is a precious resource with no alternative, airlines have no
choice but to continue to be subject to significant threats of oil price surges and
supply limitations.
Industry Structure
Government Regulation
Although this industry does not face as many regulations as the International
Airlines Industry, it is still one of the most heavily regulated industries in the United
States. The Federal Aviation Administration (FAA) oversees this industry and issues
regulations to address the following concerns: aircraft safety and national security55.
FAA relies on inspections and imposition of taxes and fines to enforce these
regulations56.
Following the deregulation of the commercial aviation industry as a whole in
1978, commercial airlines have gained more control over the prices they can set for
their customers and experience greater flexibility in their day to day operations and
in aircraft design57. This has led to innovation in this industry, which has resulted in
net lower costs of air travel for its consumers. For example, through market research
and design innovations, airlines have integrated different classes of seats in their
cabin, giving them greater profitability in premium classes while providing
affordable, lower costs economy seats. This can only be achieved after the
deregulation of the airline industry which allowed airlines to charge differentiated
prices to their customers. Hence, airlines can deliver greater value to their customers
through premium seats such as first class and business class seats, to reflect the
55
56
Investopedia. “How Does Government Regulation Impact the Aerospace Sector?” Investopedia, Investopedia, 13 Apr. 2015,
www.investopedia.com/ask/answers/041315/how-does-government-regulation-impact-aerospace-sector.asp.
57
“History of US Airline Deregulation.” The Effects of US Airline Deregulation 1970 - 2010,
thetravelinsider.info/airlinemismanagement/airlinederegulation2.htm.
38
increase in the price of these seats and also fulfil the needs of the large portion of
flyers through economy class seats.
Nonetheless, the government still heavily impacts prices set for consumers
through taxes, costs which is ultimately passed on to the air travel consumers. Taxes
serve not only to control the added economic impact of interstate travel to the US
economy, but also serve to provide greater safety and security for air travel. This
includes the costs required to run the Transportation Security Association (TSA). In
2016, the industry and its consumers were subject to 17 different federal taxes, which
totaled approximately $23BB (including international flights)58. Some of these taxes
include Passenger Facility Charges, Federal Excise Tax, and September 11 Security
Fee. The FAA also maintains control of navigable airspace, checks aircraft
operations certifications, flight personnel and aircraft maintenance to ensure that
airlines operate within safety standards.
In addition to the FAA, the Domestic Airlines industry is also overseen by
other governmental agencies and subject to other policies. For instance, the US
Environmental Protection Agency regulates aircraft emissions and noise pollution.
It is also subject to policies such as the Occupational Health and Safety Act to ensure
workers safety within this industry.
Key Success Factors

As shown in the Five Forces Analysis, rivalry within this industry is high due
to industry characteristics such as little product differentiation, low switching costs,
price sensitive customers that make strong buyer power accompanied with strong
supplier power to squeeze profits from both sides of the industry.
In order to increase profitability and stay sustainable, airlines must optimize
capacity utilization by selecting the right aircraft, minimizing empty seats for
58
“POLICY PRIORITY: TAXES.” Airlines For America Policy Priorities Learn More Comments, airlines.org/policy-priorities-learn-more/.
39
different routes, and considering factors such as demand for the route, size of cabin,
and the premium classes offered by cabin.
Airlines need effective cost controls especially in times of economic
instability and uncertain demand levels. Following the trend of “no frill” services,
airlines also tend to cut costs at the expense of customer experience. For example,
Spirit Airlines does not offer complimentary baggage allowance and is known to
have poor customer service. This strategy reflects airlines’, especially within the
domestic industry, focus on quantity over quality and the importance of capturing
price sensitive customers from competitors and their conversion rate into their
frequent flyer and loyalty programs. This is crucial to airlines because customers in
frequent flyer programs have higher switching costs which reduces their buyer
power, ultimately increasing profitability within the industry.
This strategy also falls in line with airlines’ need to be able to increase
capacity during high demand peak seasons and the ability to rapidly decrease
capacity during low demand seasons, due to the cyclical nature of the industry and
its vulnerability to volatility in the US economy. This capability will allow airlines
to increase profits during peak seasons, and avoid or minimize operating losses
during trough seasons.
The industry also requires airlines to have prompt delivery to the market, as
failure to do so results in the potential loss of consumers to competitors. This include
both on time cargo transportation and minimizing delays for passenger flights.
Furthermore, airlines need new technological integration and improved
internal processes, such as online booking and check in systems, to provide
customers easy access to their services and increased value by reducing the
customers cost of time in the booking process. This applies not only to sales
platforms but also investing in new operation and database software to increase
operational efficiency. Additionally, airlines must invest in new aircrafts to provide
40
increased value to customers through better cabin entertainment systems, reduce
costs such as jet fuel costs using newer aircrafts that cover distances with less fuel.
Several of these strategies would also provide environmental-conscious customers
added value from reducing emissions and negative environmental impact.
Industry External Economic Drivers!

This industry began in 1914, when the first commercial airline took off. In the
last five years, the industry grew with a median growth of 2.25% (average of 2.05%),
growing from a net revenue of $125BB in 2013 to a net revenue of $140BB in
201859. There are three major economic drivers that impact demand within this
industry: oil prices, unionized workers, and Gross Domestic Product (GDP)60.
As fuel costs make up 20% to 40% of airline costs, the airline industry is
heavily impacted by volatility in the oil market. Typically, every dollar increase in
fuel prices drives up total costs within the airlines industry by approximately
$450MM61. However, the airline industry is generally able to increase revenues
during a bullish oil market by shifting increased jet fuel costs to consumers.
Conversely, the airline industry typically experiences lower revenues during a bear
market in jet fuels, although several outliers have been able to increase profits. Due
to the effects of this volatility, several companies which have been unable to generate
positive profits have had to reduce their fleet sizes and are vulnerable to acquisitions.
As a result, the industry now operates as an oligopoly, with the largest five
companies amassing a total market share of 75.6% of the domestic airlines industry.
Companies who have gone through a merger or an acquisition are largely able to
reduce costs due to greater economies of scale.
59
Sharp, Tim. “World's First Commercial Airline | The Greatest Moments in Flight.” Space.com, Space.com, 22 May 2018,
www.space.com/16657-worlds-first-commercial-airline-the-greatest-moments-in-flight.html.
60
61
41
The US economy also heavily impacts the airline industry. When GDP and
per capita disposable income grows, leisure travelers, as mentioned above, tend to
spend more on traveling and consequently, a portion of this spending is captured by
the airlines industry. GDP also affects business travelers by increasing costs
flexibility in corporate budgets to send executives on premium class flights.
Furthermore, GDP also affects cargo transportation which moves in correlation to
GDP. When the economy grows, there are increased levels of trade, causing an
increase in the need to move goods around. Due to the unique capability of airlines
to deliver products with speed and efficiency, essential to high value goods including
high tech products, time-sensitive goods, dangerous and hazardous goods, the
industry is able to create value and capture more profits in the midst of a bullish US
economy. The opposite applies to falling GDP when lower levels of trade translate
to lower demand and hence, lower profits.
Competition
As mentioned in the Five Forces Analysis, competition within this industry is
high. In order to stay sustainable, airlines have implemented strategies as mentioned
in Key Success Factors to achieve optimum operational efficiency. However, there
are other external strategies that airlines implement and other factors affecting the
Domestic Airlines industry.
Achieving a long-term competitive advantage is extremely difficult in the
airline industry. One way of doing so is to have exclusive coverage of a route.
Although the airline industry generally functions as an oligopoly, exclusive coverage
of a route creates a small region completely monopolized by that airline, allowing
airlines to charge higher prices.
Another external strategy is airline alliances. Due to the saturation of firms
within this industry, most routes have several airlines operating on each individual
42
route. This makes it difficult for any specific airline to expand into new routes. In
addition, the constant overbooking of flights requires an airline, under federal law,
having to find a flight for overbooked passengers. Airlines have combatted this with
alliance partnerships. Under these alliances, airlines can rebook overfilled flights
onto partner flights, allowing both airlines to increase the possibility of profits by
filling both flights.
With the rise of online media platforms, such as YouTube, and the global
nature of today’s business, we have seen a general rise in interest for tourism abroad.
Given the increase in disposable income and the trend of increased available time
mentioned above, the Domestic Airlines industry is losing a portion of existing
consumers to International Airlines industry due to increased tourism abroad. There
is an apparent relationship between the domestic airlines industry and the local
tourism industry as 48% of domestic airlines demand consists of leisure travelers.
Life Cycle Stage

The Domestic Airlines
industry is at its mature stage of
the life cycle. There is a full
market acceptance of the
services provided by this
industry including both
passenger and cargo airline services. Furthermore, this industry’s contribution to the
US economy is expected to grow at a rate of 2.3% from 2013 to 2023, just 0.1%
above the 2.2% forecasted growth for US GDP62. This shows that the industry is
experiencing a relatively stable but low growth and stable profits, and has passed its
62
43
growth stage of the life cycle. The industry is also experiencing high levels of
competition and market saturation, causing the industry to move towards
consolidation, where larger airlines are acquiring smaller airlines or where airlines
are merging with one another, to gain market share. Different airlines are also
forming alliances such as Star Alliance and One World, to share costs such as access
to gates and runways, and to gain customer network benefits by sharing their
customers with other airlines operating in cities outside their domain of operations.
Industry Outlook !
In summary, industry revenue within the Domestic Airlines industry is
expected to grow in the next five years. As mentioned in Market Analysis, this
growth will be fueled by an increase in demand caused by an increasing number of
domestic trips, rising per capita disposable income, healthy corporate performance
and rising US economy.
However, as the industry is in its mature stage, profit margins are expected to
slowly decline in the long run. This is caused by poor industry conditions, such as
increased wage expenses due to unionized workers, as described in the Five Forces
Analysis. The forces within this industry, such as high buyer and supplier power,
will eventually reduce profitability and force less profitable airlines to exit this
industry.
44
Company Analysis
Company Background
JetBlue Airways Corporation was created by David Neeleman.63 A Utah
entrepreneur, Neeleman envisioned to “bring humanity back to air travel.” He did
this by focusing on simplicity, friendly people, technology, design and
entertainment. This is embodied in the five core values representing the firm's
culture: Safety, Caring, Integrity, Fun, Passion.
Daniel Neeleman was a part of the airline industry before starting JetBlue.
Neeleman has always been fascinated with the aviation industry. When Neeleman
started studying accounting at the University of Utah, Neeleman didn’t like being
controlled by the school’s curriculum, eventually dropping out in favor of
entrepreneurial pursuits. With time, Neeleman established his first company, Morris
Air. Morris Air focused on low-fare tickets with ticketless reservations, eventually
being acquired by Southwest Airlines in 1993. When closing the deal, Southwest
forced Neeleman to sign a five-year non-competition agreement for the United
States as the territory. This allowed Neeleman to focus his energies on Canada,
leading to a Canadian airline organization being started, known as WestJet Airlines.
Once WestJet became sustainable, Neeleman looked for his next adventure,
labeling it “New Air.” With this new organization, Neeleman knew it was not going
to be an overnight success. In fact, it took 30 months to plan, with over $130MM in
start-up capital, with investors including Chase Capital Partners and Massachusetts
Mutual Life. With powerful backers, Neeleman focused on talent acquisition for
executives. Continental Airlines operations leader David Barger eventually become
President and Chief Operating Officer, with the majority of the executives being
63
"JetBlue Airways Corporation - Reference For Business." https://www.referenceforbusiness.com/history2/38/JetBlue-Airways-
Corporation.html. Accessed 15 Nov. 2018.
45
recruited from Southwest. Leveraging his new talent and previous airline experience,
WestJet copied their competition—namely, Southwest.
One thing to note is that being a startup in the 1990’s was an extremely
difficult era, particularly in the intensive capital market of the airline industry. To
gain market share in the airline space, most firms at this time focused on a ‘low fare
formula.’ However, examples such as Kiwi Air Lines and Peoples Express, along
with 85 other failed airlines, show that this model creates tremendous risk.
Although Neeleman was aware of these risks, he continued to press forward,
eventually beating all odds. In mid-July 1999, “New Air” was unveiled at a press
conference as JetBlue. JetBlue focused on undercutting airline fares by as much as
65% compared to its leading competitors. As discussed prior, many of the firms
focused on a spoke system, or a hub from where the majority of their flights would
operate. JetBlue decided that its hub would be John F. Kennedy International
Airport, as the hub of its biggest competitor (Southwest) was the nearby airport,
LaGuardia.
From its creation, JetBlue focused on continuous expansion. It began to lease
gates from other firms. It then focused on creating better technology to lower costs,
leading to the electronic reservation system. Neeleman continued to look at
innovative techniques, leading to a partnership with Hewlett Packard Co. and a new
system (unprecedented at that time) which allowed passengers to make reservations
via Internet or touch-tone phone.
As the company continued to show signs of success, Neeleman continued to
reinvest money into the business and innovate. In-flight entertainment system
streamed 24 channels of satellite television at every seat, providing equality in that
every customer, regardless of how much they paid or where they sat, is a valuable
customer. Simultaneously, Neeleman continued to focus on a low-fare platform. One
of the largest cost savers was substituting meals with gourmet potato chips and soda.
46
These innovations, alongside the JetBlue’s low profit, high volume model disrupted
the entire aviation industry, forcing its competitors to adapt.
The early 2000’s continued to be successful for JetBlue with its continuous
expansion. With JetBlue acquiring two Airbus A320’s (then the most advanced and
safest plane), the company gained the ability to offer long distance flights.
The company continued to expand. By the end of year 2000, JetBlue had
caught up to the demand and hit some major milestones. It hit its millionth customer
and third profitable month, while still having no profits on an annual basis. Luckily,
JetBlue was only flying to ten destinations, and was only using 79.9% of its available
seat capacity, providing tremendous opportunities for the firm to expand.
A major concern of the general aviation industry at that time was the slowing
of the general economy and increasing costs of the terminals. However, JetBlue was
one step ahead. In July 2001, JetBlue controlled its own terminal at JFK, and would
then profit by transferring gates to United and other firms. By the end of the calendar
year, Long Beach Airport in California became the firm’s second hub. During the
downturn of airline travel from September 11th, JetBlue was one of only three
domestic airline firms to make a profit, with strong financial growth between 2002
to 2004. JetBlue customer milestones continued to grow: in 2002 there were 5
millionth customers, and by 2004, JetBlue flew its 25 millionth customer.64
Mission Statement
JetBlue’s mission is to “bring humanity back to air travel.” Whereas many of
JetBlue’s competitors, primarily Southwest, focus on providing low quality
experiences for customers, JetBlue focuses on providing value, service, style, and
comfort for their customers.65 JetBlue has a unique company view known as the
64
"History of JetBlue Airways | SeatMaestro." https://www.seatmaestro.com/airlines-seating-maps/jetblue-airways/history/. Accessed 15 Nov.
2018.
65
"Customer assurance | Our Promise | JetBlue." https://www.jetblue.com/customer-assurance/our-promise. Accessed 24 Nov. 2018.
47
JetBlue Airways Customer Bill of Rights, which states that JetBlue Airways exists
to provide superior service in every aspect of our customer's air travel experience.
This embodiment truly values the customer, and along with the technological
innovations provided to customers, JetBlue has consistently been rated as a fair and
respected organization by various third parties.[citation]
JetBlue S.W.O.T. Analysis

Strengths
JetBlue has strength in two main areas which create its success: Exceptional
Customer Service and Attractive Amenities.66
With regards to customer service, JetBlue is well known for its strong
customer service, with 2014 being the tenth consecutive year for the company to be
named “Highest in Airline Customer Satisfaction among Low-Cost Carriers” award
by J.D. Power and Associates. In addition, it has received 7/7 stars and 5/5 starts
from Airline Ratings and Airline Economies, which are two of the most respected
annual studies in the industry. [citation] In addition, it is the only firm in the United
States that has a Customer Bill of Rights.
Another hallmark of the firm is its highly technological amenities. The
“JetBlue Experience” attempts to provide these amenities in many formats. For
instance, it provides free brand name snacks and non-alcoholic beverages. In
addition, it provides the most legroom in the main cabin of all US Airlines. With
respect to technology, they offer 36 channels of free DirectTV and 100 channels of
free SiriusXM satellite radio.
66
"SWOT Analysis: JetBlue Airways Corporation - Value Line." 29 Jun. 2015,
http://www.valueline.com/Stocks/Highlights/SWOT_Analysis__JetBlue_Airways_Corporation.aspx. Accessed 24 Nov. 2018.
48
Weaknesses
One of the most common weaknesses plaguing JetBlue is that its earnings
strongly correlate with fuel prices. While JetBlue does enter into a variety of
derivative instruments to help hedge the expenses such as oil futures, they do not
fully protect the company against higher prices.
Another weakness is the firm’s high debt levels, making liquidity and
expansion difficult. In 2015, JetBlue’s debt and capital lease obligations consumed
41% of the firm’s total capital. These debt instruments have rather high interest
payments, which JetBlue is attempting to resolve by repaying the debts as early as
possible. As a result, this hurts the overall bottom line of the firm.
Opportunities
With its two spoke system, JetBlue has the ability to expand in current markets
while entering new areas of the United States and the world. The company has been
focusing on growing its Boston, Caribbean, and Latin American Connections, which
have now become their most profitable ventures. This had led to expansion into Fort
Lauderdale-Hollywood area, which could potentially become the third hub for the
organization in order to limit costs and explore more international flight options.
Moreover, there are still heavily populated parts of the United States that JetBlue
has not entered, such as Ohio and Nevada.
Most importantly, there are entire continents across the globe that JetBlue has
not even touched. Unlike most of JetBlue’s competitors, it has no presence currently
in Europe and Asia. These are long-term opportunities with tremendous growth
potential.
Another area that JetBlue has not been explored is premium services. Last
year, the company introduced its premium transcontinental product called Mint. The
service, from New York City to Los Angeles and San Francisco, includes 16 fully
49
lie-flat seats, four of which are in suites with a privacy door, a first in the U.S.
domestic market. It recently expanded Mint to select Caribbean destinations. The
service has been well received by customers, and has helped the company boost
margins. [citation] JetBlue has also upgraded its Wi-Fi service, Fly-Fi, which gives
customers access, for a fee, to significantly faster Wi-Fi than most competitors.
Threats
One of the common threats within the airline space is the competition. Most
firms experience high fixed cost and an increasing concentration of firms. The
primary competitors of JetBlue, such as Southwest Airlines and Delta Air Lines, are
larger and have greater financial resources and name recognition.
In addition, since JetBlue is solely domestic firm, expanding internationally
into the Latin American regions poses extensive risks.
Mergers & Acquisitions

Within the domestic airline industry, mergers occur often. However, JetBlue
has been unable to consummate any acquisitions in its short lifespan. The airline’s
one attempt to acquire Virgin America was unsuccessful, and the business was
instead sold to Alaska Airlines.67
Recent Material News

JetBlue has been in the news for a variety of reasons. The main areas of
discussion are its growth, its stock value, and its leadership in airline technology.
Growth
As an organization, JetBlue continues to expand precariously in order to
minimize its risk. As stated, JetBlue was cautious to master Northeast of the United
67
"How Virgin America Merger with JetBlue, Alaska Impacts Travelers ...." 31 Mar. 2016, http://time.com/money/4275393/virgin-america-
merger-jetblue-alaska/. Accessed 24 Nov. 2018.
50
States before setting up a secondary spoke system in the California area. Recently,
JetBlue’s approach is to have a greater footprint within the United States, and
continue to examine international destinations.
One of its expansion methods is to create flights to greater international
locations, with its most intriguing destination being Ecuador.68 On October 25th
2018, JetBlue announced that flights between Fort Lauderdale/Hollywood
International Airport and Guayaquil, Ecuador Jose Joaquin de Olmedo International
Airport are now on sale, with its first flight taking place in February 2019. Within
the past twenty-four months, JetBlue has reached its sixth destination in South
America and second in Ecuador, looking to continuously meet new needs of its
clientele. However, once again showing its cautious nature, JetBlue chose to either
entirely eliminate or drastically curtail the amount of flights from its current trips in
order to minimize the operating costs. These areas include Washington, Daytona
Beach, St. Croix, and the US Virgin Islands.
Beyond expanding routes, as stated previously, growth can be examined by
the industry specific metrics. Seeking Alpha, a renowned financial analyst tool,
indicates that based on the PRASM metric (Passenger Revenue per Available Seat
Mile), JetBlue has ranked second or third in the industry for the past twenty-four
months.69 Specifically, Seeking Alpha states that “PRASM (passenger revenue per
ASM) has averaged a respectable $11.57 per quarter since 1Q16, having deteriorated
the least YOY in 2Q18 compared to its low-cost peer group. Helping to sidestep the
revenue squeeze is a load factor of 86.2% reported last quarter, higher by an
impressive 100 bps YOY, that only trails Delta's sector-high metric.” This industry
68
"JetBlue confirms Ecuador expansion - New York Business Journal." 25 Oct. 2018,
https://www.bizjournals.com/newyork/news/2018/10/25/jetblue-confirms-ecuador-expansion.html. Accessed 24 Nov. 2018.
69
"JetBlue: Plenty To Appreciate About This Well-Rounded Airline ...." 27 Sep. 2018, https://seekingalpha.com/article/4208600-jetblue-plenty-
appreciate-well-rounded-airline. Accessed 24 Nov. 2018.
51
specific metric stands for the proposition that JetBlue is still considered to be in its
growth phase of its life cycle.
Stock Value
One of JetBlue’s key assets is its the brand recognition, creating tremendous
buzz and success in its stock price. Since JetBlue is in an
extremely competitive industry, many analytic firms
announce reports about projections that help bolster the
stock. For instance, Montley Fool, a well regarded firm on
investor information, published a recent article titled: Why
I’m Not Selling Any JetBlue Stock.70 This report concludes
that although second and third quarter outlooks were disappointing due to pilot
contract pay raises, the stock is a long-term winner.
Another analytics view has come from NASDAQ.71 NASDAQ has indicated
that the stock is undervalued. NASDAQ has created a consensus EPS forecast for
JetBlue. The predictions have been been beaten by JetBlue’s released Earnings Per
Share by a median of 5.56%, and an average of 11.36%. With this in mind, it is clear
that there are growth opportunities for the firm.
Airline Technology
JetBlue is always regarded as being one of the most innovative airline
organizations, and therefore is consistently mentioned in the news for its
technological accomplishments. More of the most recent inventions that has resulted
in great customer reactions is the establishment of Biometrics. JetBlue recently
published an article titled: Your Face is Your Boarding Pass: JetBlue Introduces its
70
"Why I'm Not Selling Any JetBlue Stock -- The Motley Fool." 8 Aug. 2018, https://www.fool.com/investing/2018/08/08/why-im-not-selling-
any-jetblue-stock.aspx. Accessed 24 Nov. 2018.
71
"JetBlue Airways Corporation (JBLU) Analyst Stock Recommendation ...." https://www.nasdaq.com/symbol/jblu/recommendations. Accessed
24 Nov. 2018.
52
First Integrated Biometric Self-Boarding Gate at New York’s John F. Kennedy
International Airport.72 This report indicates that JetBlue is the first airline to
integrate biometrics into self-boarding, with its latest biometric enhancement builds
on the success of the airline’s expanding biometric boarding programs in Boston,
New York, Fort Lauderdale and Washington, D.C.. Since the program’s launch in
2017, more than 50,000 customers have participated in biometric boarding on 500+
flights across all four cities. There is no pre-registration required. Customers can
simply step up to the camera for a photo match and make their way onto the aircraft.
Another technological development JetBlue has been working on is the noise
of the overall aircraft. With this in mind, JetBlue is retrofitting Airbus Fleets with
Vortex generators. Vortex generators will be installed on 130 existing JetBlue A320
aircraft and eight JetBlue A321 planes. This process is expected to be complete in
2021. All future Airbus orders will be delivered with Vortex generators already
installed. The cost to retrofit the full Airbus fleet is less than $1 million, but will
decrease the overall noise level by more than 73%. This investment in customer
experience by JetBlue is showing that it is focusing on continuously enhancing the
customer experience—staying true to its original mission values.
Another cost-effective technological innovation involves renewable jet fuel.
The fuel for flights, exclusively partnered with Airbus and certified by Air BP,
consists of 15.5% renewable jet fuel blended with traditional jet fuel. As Frederic
Eychenn (the Head of New Energies at Airbus) explains, “Our goal is to source
sustainable fuels in the southeastern United States. It is an opportunity to work
closely with local stakeholders to scale-up production and the commercialization
of sustainable aviation fuels in the region. This technological innovation also
72
"Your Face is Your Boarding Pass: JetBlue Introduces Its ... - Media Room." 15 Nov. 2018, http://mediaroom.jetblue.com/investor-
relations/press-releases/2018/11-15-2018-184045420. Accessed 24 Nov. 2018.
53
provides environmental benefits, attacking a new market segmentation that JetBlue
has not yet encountered.“73
JetBlue vs. Industry Players

Analyst Reports
JetBlue as of recently has been underperforming versus the industry average.
One of the contributing factors to this is the consistent geographical expansion to
new territories, as well as research and development (R&D) costs. One of the
primary indicators is from industry leader NASDAQ, that produces a consensus of
analyst reports to determine the overall state of JetBlue in comparison to the
industry.74
One of the metrics determined by NASDAQ is the 12-Month Price Target
range. As of the valuation date (November 15th 2018), JetBlue has been
considered underperforming. The consensus of analysts is $20.05, whereas the
close on the valuation date is ~10% less at $18.17. Therefore, based on their
underpriced current stock predictions, seven of the ten NASDAQ analysts say to
buy, one indicates a must by, one indicates a hold, and one indicates a do not
purchase.
One of the common analyst trends to
determine the success of the firm is the Price
to Earnings ratio (P/E). JetBlue’s P/E is
currently at 12.51 versus the industry is
average at 15.20, evidencing that the firm is
underperforming at this time. However, as
discussed above, this has been impacted by the geographical expansion as well as
73
"JetBlue And Airbus Take to the Sky Using Renewable ... - Media Room." 19 Sep. 2018, http://mediaroom.jetblue.com/investor-
relations/press-releases/2018/09-19-2018-171436162. Accessed 24 Nov. 2018.
74
"JetBlue Airways Corporation (JBLU) Analyst Research - NASDAQ.com." https://www.nasdaq.com/symbol/jblu/analyst-research. Accessed
24 Nov. 2018.
54
the incurrence of higher piloting costs and R&D. With this in mind, analysts have
predicted that for the coming twelve months, JetBlue will have its best EPS levels
the organization has ever seen.
Another way to analyze JetBlue versus competitors is to examine their market
cap and customer usage. As of the valuation date, JetBlue had a market capitalization
of ~$5.6BB. In comparison to the domestic airline industry, the average market
capitalization is ~$2.37BB, with the median market capitalization being
~$1.78BB.75 One item to note is that the average is higher than the median due to
the fact that the four largest firms dominate more than 75% of the industries sales.
Therefore, the average is an improper statistic for this information. When comparing
the firm statistically to the median, it is clear that JetBlue is larger than the typical
firm, but not large enough to be considered an industry giant (top four players
average ~$18BB in market cap, with their median being ~$17.2BB).
An interesting metric to examine in the airline industry is employees. Due to
the fact that JetBlue is an innovator in airline technology, is it not surprising that
JetBlue is 3rd highest in the number of employees, while having the 8th largest
domestic airline industry market capitalization. This information can explain why
the EPS for JetBlue is not higher. Since there are more employees than the industry
average (JetBlue ~15,500 vs. average ~4,780), the firm occurs much higher
operating costs, therefore lowering the multiple.76
JetBlue’s unique positive attribute is the organization’s risk, as analyzed by
the Beta.77 JetBlue surprisingly has an extremely low beta at 0.35. When comparing
this to the top ten players, the industry average beta is 1.34, an astonishing ~300%
difference. When comparing it to the industry median of 0.896 via NASDAQ
75
"30 Largest Airlines by Market Cap (and 20 Largest Listed Airport ...." 4 Jan. 2017, https://gfmasset.com/2017/01/30-largest-airlines-by-
market-cap-2017/. Accessed 24 Nov. 2018.
76
"Airline Industry Data, Revenue, Income, Employees ... - CSIMarket." https://csimarket.com/Industry/Industry_Data.php?ind=1102. Accessed
24 Nov. 2018.
77
"JBLU Stock Quote - JetBlue Airways Corporation Common ... - Nasdaq." https://www.nasdaq.com/symbol/jblu. Accessed 24 Nov. 2018.
55
analytic reports, it is clear that not only is JetBlue less volatile, but its innovations
and extensive investments in R&D actually create a lower volatility for the firm. One
of the analysts predicts that one of the reasons behind the low volatility is that
JetBlue is extremely consistent in its mission and ideas, with keen focus on long-
term plans and potential. This is supported by the annual reports for JetBlue, where
the largest sections of their overall reports are devoted to their ten year plan rather
than their current and five year plan analysis.
Individual Analysis
One of the reasons to compute an individual analysis is to check the analysts’
reports. When examining the analysis titled Airline Industry Statistical Analysis,
although many of the analyst reports were correct, there were a few discrepancies.
To begin, the criteria established was examining the prominent domestic
airline flyers. This was determined by examining the most flown domestic
passengers in 2018, providing ten data points including JetBlue. With this, a series
of comparisons were developed: Market Capitalization, TTM Sales, 5 Year Sales
CAGR, 5 Year Average Gross Margin and 3 Year Average EPS.
When examining the market capitalization, it is clear that JetBlue is one of the
midsize players, as it is slightly below the median. The average in this instance is
obscured and an invalid data point, as it is skewed by the large market capitalizations
of Delta (~39) and Southwest (~29.6). With this in mind, since the firm is considered
mid-size in market, it is a common trend that it has midsize sales, as it once again is
slightly below the median, and the average being skewed by Delta’s large sales.
One of the things not inclusive of the analyst report was the strong sales
growth of JetBlue. JetBlue is outperforming the industry average and industry
median by almost 200%. Moreover, almost half of the organizations have either
56
negative growth or zero growth, proving that JetBlue’s marketing strategy and
industry innovations are achieving great success.
When examining the three-year EPS, the analysts were correct. In fact, this
analysis indicates that JetBlue has the lowest EPS in the industry, which is
particularly surprising at it has one of the highest growths in sales with a slightly
better than average Gross Margin. With that said, it is clear that JetBlue stock is
undervalued, hence the consensus of analysts suggests that the stock should be
purchased as it is undervalued.
57
Airline Industry Statistical Analysis
Market TTM 5 Year 5 Year 3 Year
Company
Ticker Capitalization Sales Sales Average Average
Name
($BB) ($BB) CAGR Gross Margin EPS
Alaska Air
ALK 8.55 8.18 2.52% 67.50% 1.0825
Group, Inc.
Allegiant
Travel ALGT 1.933 1.63 7.22% 23.41% 1.4225
Company
American
Airlines AAL 17.479 43.8 -2.97% 51.38% 1.1208
Group, Inc.
Delta Air
DAL 39.041 44.03 0.30% 34.44% 1.3175
Lines, Inc.
Hawaiian
Holdings, HA 1.857 2.84 3.88% 31.26% 1.385
Inc.
SkyWest,
SKYW 2.841 3.27 -0.26% 26.10% 1.21
Inc.
Southwest
Airlines LUV 29.622 21.54 3.28% 34.60% 0.965
Company
Spirit
Airlines, SAVE 3.52 3.13 6.31% 36.31% 0.9375
Inc.
United
Continental
UAL 25.84 40.21 -0.76% 33.99% 2.0475
Holdings,
Inc.
Median 6.04 8.18 2.52% 34.52% 1.21

(Average) (13.11) (18.74) (2.17%) (37.66%) (1.28)
JetBlue JBLU 5.593 7.45 4.79% 37.64% 0.79
58
Trend Analysis
Income Statement
One of JetBlue’s impressive trends is its growth in sales. As stated above, the
growth in sales has beaten the industry average by almost 200%, confirming that
customers are responding well to not only the geographical expansion, but the
continuous innovations by the firm.
However, these innovations seem to come at a sizable cost to the firm. When
examining the line item for Sales, General and Administrative, which is supposedly
between 60% and 65% dedicated to Research and Development, it is growing at an
8.75% CAGR, whereas the industry is growing at about a 1.75% CAGR78. This
drastic growth can be interpreted in two ways. First, it could indicate that there is an
efficiency issue, where there can be less job openings or increases in salary so that
people internally can have greater responsibility to create these new technologies.
Another interpretation could mean that the firm is not outsourcing enough work.
From customer service to automatic kiosks, it is clear that this SG&A line item has
hurt their bottom line, and will only continue to hurt the firm’s valuation unless
something drastic changes.
Another interesting trend was the introduction of non-recurring items.
Throughout the history of JetBlue, there has been no line item for Non-Recurring
items until the second quarter of this calendar year. In addition, these line items for
the second and third quarters are significant, at $319MM and $112MM respectively.
When examining the footnotes, there is no explanation of these items. But with some
further research, it seems that it can be one of four things: Discontinued operations
and the disposal of a portion of a business segment, extraordinary items, unusual or
infrequent items, or asset impairment charges.79 Since the firm is not discontinuing
78
"JetBlue Airways Corporation (JBLU) Income Statement - NASDAQ.com." https://www.nasdaq.com/symbol/jblu/financials?query=income-
statement. Accessed 24 Nov. 2018.
79
"Income Statement: Non-Recurring Items - CFA Level 1 | Investopedia." https://www.investopedia.com/exam-guide/cfa-level-1/financial-
statements/income-statement/non-recurring-items/. Accessed 24 Nov. 2018.
59
operations, has no extraordinary items nor unusual or infrequent items, it is likely
that the items are for asset impairments. As stated earlier, governmental regulation
for this industry still exists, with laws changing as quickly as every sixty to ninety
days. This line item seems to be used for impairment of many of the planes, which
could include things discussed earlier, such as the renewable jet fuel or the additional
expense of adding Vortex generators to reduce noise. Either way, these expenses are
significant and affect the free-cash-flow (FCF) of the firm.
Balance Sheet
Since the airline industry is heavily affected
by the oil industry, it is reasonable for airline
industries to have large accounts payable line items,
as well as short-term debt / Current Portion of Long-
term debt items. However, JetBlue is unique as it
seems to be the only domestic airline firm involved
in large portions of treasury stock.
This 63.35% CAGR in treasury bond
expenses is important for JetBlue in two aspects. First, it provides guaranteed
positive cashflow for the firm, which allows a greater budget for innovative
technology that they develop. In addition, it provides a safe investment to protect
against the downside and potential issues of rising oil prices (which affect Jet fuel),
plane prices, oil insurance, and gate/terminal rental.
An interesting item to note is the drastic decrease in Cash and Cash
Equivalents over the past twenty-four months. Prior to 2017, Cash was growing at
~3.5% CAGR; however, since 2017, Cash has been declining. Specifically, Cash has
decreased from $433MM to $303MM, causing concern about liquidity. However,
one explanation is the funds are being used in the firm’s geographical expansion,
60
which requires more plans. This is supported by the Balance Sheets growth in
inventory by ~10MM annually since 2015.
Lastly, the Long-Term investments is surprising. From 2014 to 2017, the
long-term investment grew 150%, but from 2016 to the present, it has decreased
more than 4,000%. This investment could originate from a few areas. First, JetBlue
could be renegotiating with its suppliers for the oil and the planes, and since an
agreement has not been reached, nothing has been set aside for it. Another
explanation could be that the firm’s technological innovations were considered long-
term items, particularly the five-year investment into the renewable jet fuel program.
Since that program has been going live, the investment or research and development
is no longer needed, hence the drastic decline.
Statement of Cash Flows

The statement of cash flow evidences three main trends about JetBlue: The
change in Accounts Receivable, heavy Sale and Purchase of Stock, and the
inconsistent investment efforts.
Accounts receivable within JetBlue is surprising. When it originally started,
and until about 2013, accounts receivable was zero or slightly positive, with a peak
of $11M. But since 2015, accounts receivable was negative. This means that JetBlue
sold more on credit that it collected from customers who owed them money. Your
profit or loss for that year includes sales that have not actually been collected yet.
This could originate from a variety of things. One of the common trends in the airline
space is purchasing tickets far in advance to save on costs. Tickets by JetBlue since
2014 have changed from a six month advance to a twelve month advance. Since
customers can now purchase tickets one-year in advance, it provides an explanation
for an extremely negative accounts receivable option. Especially with JetBlue's
recent expansion efforts, customers want to instantly use their service to these new
61
destinations, creating this unique negative line item. However, this could also
represent another, extremely negative issue. It could mean that some customers are
late in paying the invoices they owe JetBlue, meaning that they purchased the ticket,
the flight occurred, but the airline could not actually collect the funds from the credit
card organization. This means that the firm is poorly managing its customer, and
rather than spending expenses on technological enhancements, the firm should
instead be focused on recovering the debt.
Another Statement of Cash Flow item to examine was the sale and purchase
of stock. In 2017, JetBlue announced that it would repurchase $750MM in stock.
This was the first time in the organization’s history that it would repurchase stock.
80
This repurchase seems to originate from the third-quarter conference call in 2017,
which states that JetBlue has returned in excess of 7% of its average market
capitalization to its shareholders in a year. This ideology has been a recent trend of
airline organizations. For instance, United Continental Holdings, a competitor of
JetBlue, announced a $2BB share repurchase program in July 2016.
The inconsistent investments of the firm are the most concerning on The
Statement of Cash Flows. Within the past five years, the firm has gained in one year
as much as $236MM, but also lost $187MM. JetBlue’s inconsistent investment
efforts seems to truly hurt the overall performance of the firm's free-cash-flow. For
the years where the firm is profitable, its investments make its cash flow negative.
In the long-term, the firm must adjust its investments to more consistent efforts and
levels (possibly in treasury bills or an investment with a relatively low beta) to ensure
that the firm’s investments can help the firm flourish in good time, and be an
assistant in financial hardship.
80
"JetBlue Boosts Shareholder Returns, OK's $750M Share Buyback ...." 14 Dec. 2017, https://www.nasdaq.com/article/jetblue-boosts-
shareholder-returns-oks-750m-share-buyback-cm891589. Accessed 24 Nov. 2018.
62
Financial Ratios
The most troubling aspect of JetBlue is the firm’s financial ratios, in particular
the liquidity ratios of the firm. These can be examined through three principles:
Current Ratio, Quick, Ratio and Cash Ratio.
The current ratio measures a company’s ability to pay short-term and long-
term obligations. Its current ratio has been declining, with its lowest ever being this
past year. Analysts, as suggested above, state that the current ratio should be between
2 and 2.3, whereas JetBlue is a mere quarter of that. This overwhelming deficiency
will continuously make expansion of the firm difficult.
Another metric is the quick ratio.81 However, JetBlue is in sound financial
share. Although it is declining, it is still higher than the industry average quick ratio
of 0.38. However, this trend of decline exemplifies that there is still a liquidity issue
that is dominating this firm.
With respect to the firm’s profitability, the one thing that is clear is the profit
margin of the firm is growing. This high margin is contributed to the continuous
innovation of the firm, as well as the deep understanding of its clientele. When the
firm realizes that a sector is no longer profitable, that spoke or unprofitable venture
is removed from JetBlue services. Therefore, JetBlue being technologically savvy
has enabled the sustainability of its profits.
81
"Airline Industry financial strength, leverage ...." https://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=1102. Accessed
24 Nov. 2018.
63
Financial Ratio Analysis
FY '17 FY '16 FY '15 FY '14
Liquidity Ratios
Current Ratio 0.5 0.63 0.6 0.62
Quick Ratio 0.48 0.61 0.58 0.6
Profitability Ratios
Operating
0.14 0.2 0.19 0.09
Margin
Pre-Tax
0.13 0.18 0.17 0.11
Margin
Profit Margin 0.16 0.11 0.11 0.07
Pre-Tax ROE 0.19 0.3 0.34 0.25
After Tax
0.24 0.19 0.21 0.16
ROE
64
Historical Stock Performance
When looking since inception, the history of JetBlue does not look promising,
with an annual CAGR of 2.85%. However, one should look at some historical
context to understand the full picture. For instance, from 2007 to early 2009, the
entire airline industry was hurt from the financial crisis of 2008. Therefore, that time
frame should be discounted. If one were to examine a more realistic timeframe, for
instance the past sixty months, one can see that the return of the stock was much
better at 26.91%, which would be the highest return of any airline industry stock in
that same timeframe.82 As of evaluation date, the stock price was $18.17, where
analysts predict that the stock should be $20.05, showing that JetBlue stock is
undervalued. This is supported by the repurchase of stock by the organization within
the past twenty-four months.
Another analysis performed was comparing it to the ticker XAL. XAL is the
Arca Airline Index, which essentially is the
industry composite similar to the S&P 500
or the Dow Jones Industrial Average (DJIA).
With that said, when examining the returns
over the sixty-month span starting on
November 25th 2013, one might think that
82
"Airline Industry Stock Performance, Stock Quotes - CSIMarket." https://csimarket.com/Industry/Industry_Performance.php?ind=1102.
65
from the chart, XAL is superior to JetBlue. However, XAL is only returning at
7.61%, whereas JetBlue is growing at a clip of 14.86%. Because of this, it is clear
that the stock performance of JetBlue is strong in comparison to the industry.
66
Valuation Analysis
Comparable Companies
Methodology
Realistically speaking, no company in the domestic airline industry is similar
to JetBlue. JetBlue is an innovator with an extremely specific geographic expansion
policy that is unique. The purpose and establishment of this organization was to be
unique and different, and continues to exist due to its differentiating factors.
With that said, if one were to compare JetBlue to another organization, one
would have to examine a variety of factors, ranging from market capitalization to
revenue milestones. Based on the 2018 annual report by JetBlue, I performed a
screening process on Capital IQ with screen criteria listed below83:
1.! Industry Classification: Aviation

2.! Industry Sub-Classification: Airlines
3.! Country of Incorporation: United States
4.! Geographic Locations: United States and Canada
5.! Business Segment: LTM (Last Twelve Months) Revenue in airlines segment
greater than 85%
6.! Revenue: Total LTM Revenue at least $500MM
7.! Market Capitalization: Greater than $1BB as of valuation date (11/15/2018)
8.! SIC Code – 4512 (Airlines for Travel)
To begin, the airline industry on Capital IQ can be considered an Industry

Classification or an Industry Sub-Classification. With this, I wanted to be as specific
as possible, and from the original market segmentation analysis, airlines are a sub-
sector of the aviation market. In addition, JetBlue truly is a domestic airline;
therefore, the Country of origin, as well as Geographic locations should focus on
doing business in the United States. With respect to the business segment, I decided
to focus on revenue being at least 85%, because there are some airline organizations
83
"Annual Reports - JetBlue | Investor Relations." http://investor.jetblue.com/investor-relations/financial-information/reports/annual-reports.aspx.
67
that do private jets that do not fall under the airline segment, as airline in Capital IQ
is defined as being something of a public good and for the average aviation
transporter.
With respect to revenue, I decided to focus on revenue being at least $500MM
as firms that are smaller will have skewed financial ratios, as well as only serving
one segment of the market. For instance, there are over 300 firms that have revenue
less than $500MM, but they only fly in one state or in one sector of the United States
(Ex. Northeast). Because of this, $500MM should be the minimum, as firms of this
size would be in one location and would really be considered an active player in the
industry. Lastly, market capitalization should be considered at least $1BB, as firms
of smaller size do not have an impact on the industry. They do not have the capital
to lease from major airports; they do not have the clientele to be considered a big
player; and their pricing does not have much or any effect on how the rest of the
industry prices their airline tickets.
With this initial screening, I have retrieved nine results: American Airlines,
Southwest Airlines, Delta Air Lines, United Airlines, Alaska Airlines, Spirit,
Frontier, SkyWest, and Hawaiian.
!
Reasons for Exclusion
After gathering the comparable companies, I decided to focus on the business
descriptions, reviewing their geographic platform, and looking at how many
customers each firm serves. This process led to the exclusion of Frontier, SkyWest,
Hawaiian, Alaska and Spirit. With regards to Frontier Airlines, their geographic
range is solely in the Midwest region. The destinations it served are under 100,
making them extremely narrow in scope. When examining SkyWest, it serves 254
destinations. However, a tremendous amount of SkyWest destinations are due to
their partnerships with United Airlines, Delta Air Lines, American Airlines and
68
Alaska Airlines. Due to the fact that it is aligned with so many organizations, the
financials were going to be skewed and provide inconsistent conclusions, and thus
was not a comparable. Lastly, Hawaiian Airlines flies to only 28 destinations, with
many of its destinations going between the Hawaiian Islands and California. With
this small geographic scope, it was not a valid comparison. When examining Alaska
Airlines, although it had 116 destinations, more than 50% of them were
international. Having locations from Canada to Mexico, it was quite difficult to
compare a company with the majority of its business occurring internationally versus
domestically. Lastly, Spirit was not an applicable comparison as the majority of its
business originated from the Caribbean and other international destinations.
With respect to business strategy, I began to see a contradiction between
JetBlue and Southwest. Southwest is clearly in a different league than JetBlue, as it
has a $30.4BB market capitalization, more than five times’ JetBlue’s market cap of
$6BB.84 Moreover, Southwest provides a minimalist customer experience, as they
try to provide cheap tickets with no technological enhancements for the flying
experience.
Therefore, the final list of comparable became American Airlines, United
Airlines and Delta Airlines.
84
"• Market value of airlines worldwide 2018 | Statistic - Statista." https://www.statista.com/statistics/275948/market-capitalization-of-selected-
airlines/. Accessed 24 Nov. 2018.
69
Market
Company Exchange Ticker Incorporation Revenue ($BB) Capitalization
($BB) – Valuation Date
American Fort Worth,

NASDAQ AAL 11.56 17.42
Airlines TX
United
NASDAQ UAL Chicago, IL 11.00 25.07
Airlines
Delta Air
NYSE DAL Atlanta, GA 11.95 38.46
lines
JetBlue NASDAQ JBLU New York, NY 2.01 5.68
Business Enterprise Value (BEV) Multiples

Multiple Selection Criteria
When valuing an organization, there are a variety of methods. Here are the
most commonly used Enterprise Value Multiples:85
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=
A#34$450(M'/.3'(F4*'3'0*, G#7'0, H'63'>$#*$.4(#41(!8.3*$J#*$.4 AMFGH!
A4*'363$0'(L#%2' AL
=
A#34$450(M'/.3'(F4*'3'0*(#41(G#7'0 AMFG
AL
)#%'0((;'"'42')
A4*'363$0'(L#%2'
Q4%'"'3'1(R3''(?#0ℎ(R%.9
With these standard valuation multiples in mind, the airline industry slightly
modifies these multiples. Specifically, airlines tend to look at multiples that include
their main expenses, leasing terminal space. Therefore, the Enterprise value per
EBITDA multiple is slightly modified to be Enterprise Value per EBITDAR
(Earnings before interest, taxes, depreciation, amortization and rent). Besides this
85
"Valuation Multiples - Macabacus." http://macabacus.com/valuation/multiples. Accessed 23 Nov. 2018.
70
multiple, the only standard multiple calculated in the airline sector is Enterprise
Value per EBIT.86
Derivation of the Comparable Multiple

In order to calculate JetBlue’s Business Enterprise Value (BEV), we must find
a series of data points: Share Price, Shares Outstanding, Short-Term Debt, Long-
Term Debt and Excess cash. Business Enterprise Value is calculated by first
constructing the market value of the equity. The market value of the equity is
calculated by taking the closing share price as of the valuation date (November 15th,
2018) and multiplying it by the shares outstanding. Then, we must calculate the Net
Debt. This is calculated by taking the short-term debt, summing it with the long-term
debt, and subtracting the firms excess cash. Once the net debt and market
capitalization are calculated, these values are summed to create the business
enterprise value. In this case, this process was calculated for each of the comparable
as well as JetBlue. To find these pieces of information, one would typically search
through a firms 10-K, looking at their balance sheet.87888990
Once these pieces of information is derived, each firms EBITDAR and EBIT
will be calculated. Then, the business enterprise value will be divided by the
calculations creating a ratio.
86
"Valuation and Value Drivers for US Based Airlines ... - Trace: Tennessee." 8 May. 2017,
http://trace.tennessee.edu/cgi/viewcontent.cgi?article=3137&context=utk_chanhonoproj. Accessed 24 Nov. 2018.
87
"Annual Reports - JetBlue | Investor Relations." http://investor.jetblue.com/investor-relations/financial-information/reports/annual-reports.aspx.
88
"Investor Relations | American Airlines." https://americanairlines.gcs-web.com/. Accessed 21 Nov. 2018.
89
"SEC Filings – United Continental Holdings, Inc.." http://ir.united.com/financial-performance/sec-filings. Accessed 21 Nov. 2018.
90
"Delta Air Lines, Inc. - Financial Information - SEC Filings." https://ir.delta.com/stock-and-financial/sec-filings/. Accessed 21 Nov. 2018.
71
As seen from the dataset above, since JetBlue’s EBIT is relatively small in
comparison to its business enterprise value, it had the smallest effect on its ratio. On
the other hand, when examining American Airlines and United Airlines, as a result
of their high EBIT (~1/3 of BEV), their EV/EBIT shrunk significantly.
Once the ratios have been calculated (EV/EBITDAR & EV/EBIT), the ratios
must be examined under a more specified microscope. In this case, I decided to focus
on looking at the lower, upper, and middle quartiles. Using the average did not seem
to be the best approach as the average with such a small sample size will easily be
affected by outliers.
Quartile Analysis
To determine whether to choose the median or a specific quartile, I began to
examine the Airline Price Index returns in comparison to JetBlue. As stated in the
Historical Stock performance section, JetBlue over a five year span has returned
14.86%, whereas the Price Index has returned 7.61%.
If we assume that the Price Index (XAL) as the median of the industry, we
can determine the additional benefit by investing directly into JetBlue by
determining the excess returns over a period of time. Therefore, I established the
following equation:
S'*M%2'(;'*2340 − F41'7(;'*2340
<'3>'4*$%'(M'4'/$*(;#4K$45 = ( F41'7(;'*2340
C28&'3(./(T'#30
72
14.86% − 7.61%
7.61%
<'3>'4*$%'(M'4'/$*(;#4K$45 = ( = +19.04
5
With this additional return of 19.04% on the Airline Price Index, I decided to
round the additional return to 20%, and after adding it to the median (50th), I
calculated the 70% percentile (Median [50th Percentile] + JetBlue Benefit [20]).
Another explanation as to
why JetBlue should be considered
greater than the median percentile
it that the organization is in its own
niche. It is one of only two
domestic airline organization that has a market capitalization between $5BB and
$15BB.91 Being in this unique position allows JetBlue can compete with the large
player pricing, yet create the intimacy and customer benefits of a smaller firm.
Lastly, this market capitalization is hinged on JetBlue’s technological presence in
the airline industry. Being the industry leader in technology allows it to be the first
to enter the market with new products, creating a differentiating factor that attracts
consumers and yields the firms longevity of higher returns.
Implied Share Value

With the 70th percentile calculated for both the EBITDAR and EBIT
multiples, we then multiply the ratios with JetBlue’s corresponding values, once
91
"Airlines Industry Snapshot - NYTimes.com - Markets Overview - The ...."
https://markets.on.nytimes.com/research/markets/usmarkets/industry.asp?industry=52421. Accessed 23 Nov. 2018.
73
again creating Business Enterprise Value. We can then convert BEV into value per
share by subtracting the Net Debt and dividing by the shares outstanding.
Whether you are calculating by either of the two industry trends, it is clear
that JetBlue is slightly undervalued. At the date of the valuation, the stock was
trading at $18.17, and with an implied share value between $23 and $24, there is
more than a 20% delta.
The largest contributing factor with the value per share is the choice of using
the 70th percentile. If JetBlue is considered to be a median based firm, the value per
share would be slightly less, between $20 and $21 per share. Similarly, one of the
contributing factors is the choice of comparable. If some of the other firms were
included in the analysis, then the ratios could have been less, creating a value per
share price closer to the price of the stock on the date of the valuation. Regardless,
this analysis proves that the price of the stock is valued fairly.
Equity Multiples
Multiple Selection Criteria
When valuing an organization, there are a variety of methods. Here are the
most commonly used Equity Value Multiples:92
<3$>'
<3$>' AB2$*=(L#%2' A#34$450
, ,
A<) M..K(L#%2' _3.9*ℎ
Within the airline industry, the most commonly used multiples are Price Per
Earnings-Per-Share (EPS), as well as Equity Value per Book Value (EV/BV).
Analysts do not perform the PEG Ratio (Price Per Earnings Per Growth) as the
growth calculation skews data. For many of the firms that have a market
capitalization of $15BB or more, growth is often flat or between 1% and 3%.93
92
93
"Airline Industry Overview." http://www.columbia.edu/cu/consultingclub/Resources/Airlines_Eric_Henckels.pdf. Accessed 24 Nov. 2018.
74
Similarly, firms with a rather small market capitalization are extremely sensitive to
small changes and growth. Similarly, firms stay away from Equity Value per Book
Value as the Book Value continuously changes. Firms balance sheets are easily
affected by the purchasing of planes, oil, and other raw materials. Similarly, firms
often expand to new terminals and destinations, often varying their liabilities. For
the reasons, Price per EPS was the only multiple calculated.
Derivation of the Comparable Multiple

In order to calculate the multiple, we need two pieces of information: the price
as of the valuation date, and the Earnings Per Share. We then gathered the Earnings
Per Share by taking the company’s net income over the previous 12 months, account
for any stock splits, and then divided by the number of shares outstanding. Below is
the calculations:
One item to note from this analysis is that JetBlue’s ratio is significantly less
than the comparable calculated. One of the primary factors behind this difference is
the rather low stock price of $18.17, where as the other stocks are between ~2x and
~8x in size.
75
Quartile Analysis
The same analysis for the Business
Enterprise Value multiple is applied. Thus the
70th percentile is calculated, to then be used to
calculate JetBlue’s Implied Value Per Share.
Implied Share Value

With the ratio and quartile analysis complete, we can then multiple the ratio
by JetBlue’s EPS to get its value per share.
As seen by the diagram above, $24.69 is JetBlue’s implied value per share
(where the valuation date price was $18.17). This Value Per share seems to be
drastically affected by the choice of comparable organizations. Based on the fact that
the organizations have drastically higher share prices, the firms typically will have
higher Earnings Per Share.94 However, even with this drastic difference, either
comparable company valuation method (Enterprise Value or Equity Value) implies
that the share price is between $23 and $24.
Comparable Mergers and Acquisitions

Methodology
Comparable Mergers and Acquisitions, also known as Comp M&A, is another
valuation method. Similar to a comparable company analysis, Comparable Mergers
94
"Comparing P/E Ratio, EPS and Earnings Yield | Investopedia." 1 Jun. 2018,
https://www.investopedia.com/articles/investing/120513/comparing-pe-eps-and-earnings-yield.asp. Accessed 23 Nov. 2018.
!
76
and Acquisitions involves looking at multiples of closed transactions. The
methodology of CompM&A consists of three basic steps:
1.! Gather completed comparable mergers and acquisitions that are similar in
JetBlue to its industry, competitive positioning and size
2.! Use given multiples from Comp M&A and multiply them by the values
JetBlue contains
3.! Analyze the implied share value in comparison to the valuation date
Selection Criteria for Comparable Company Transactions

For selecting Mergers and Acquisitions, I used Bloomberg Terminal’s
mergers and acquisitions database. When selecting criteria, I kept a few pieces of
information in mind:
•! M&A must be relatively new (previous 60 months), as firms beyond this
timeframe would be considered in a different era, using different valuation
methods that would provide inaccurate present day information
•! The transaction must be completed. Firms that are currently closing on a deal
are inaccurate (as firms can pull out or renegotiate terms) or may have
incomplete information (not containing the proper multiples)
•! The firm must be in the same scope as JetBlue. In this case, the target company
and acquirer must be in the same incorporation location (United States). Firms
that are in different continent would be considered international flights and
therefore would not be useful in this analysis
With these pieces of information, I began to examine Bloomberg Terminal M&A
database. Below is the specific criteria and results from each criteria:
77
To begin, the country or incorporation must occur in North America to be
considered a domestic airline. As stated prior, the deal status must be completed to
provide accurate information. For the dates, I went from ~60 months from the
valuation date, to provide what would be considered as ‘recent’ deals. With respect
to the industry, it is considered to be Airlines. Lastly, with respect to the SIC Code,
the code I used is 4512, which is defined as, “Establishments primary engaged in
furnishing air transportation over regular routes and on regular schedules.”95 As a
result of these criteria, I had thirty results to examine.
Once the thirty results were created, I had to redefine the criteria to meet
certain restrictions. My adjusted criteria included the following:
•! Undisclosed: The financial information and or acquire must be disclosed. If
the financial information or acquire is not provided, then doing comparable
valuations is incomputable.
•! Multiple Acquirers: A firm cannot have multiple acquirers. Particularly in the
airline industry, when a firm is acquired by multiple parties, there is one key
issue. Oftentimes, the acquirers originate from different continents, paying
with numerous currencies. Including foreign exchange analysis over multiple
payments is too complex and unnecessary.
95
"Description for 4512: Air Transportation, Scheduled ... - OSHA." https://www.osha.gov/pls/imis/sic_manual.display?id=923&tab=description.
78
•! No Financial Information: Bloomberg must provide financial information
about the closed M&A transaction. This means that the multiples must be
provided, as well as the payment type, Value, and Deal Attributes.
Once I added in this additional layer of criteria, there was a dramatic revision in
the criteria. Undisclosed information accounted for six of the thirty results.
Moreover, multiple Acquirers accounted for three, while no financial information
accounted for sixteen transactions. This left five overall transactions listed below:
Exclusion of Comparable M&A

After reaching five comparable M&A transactions, I began to examine the
transactions further. I decided to include specific data points:
•! Value (MM): Value of the transaction
•! EQV/EBITDA & EQV/EBIT: Two of the most common multiples in the
industry
•! Percentage Sought: The percentage of the company purchased
•! Deal Attributes: What was the purchase of the transaction
o! Company Takeover: Purchasing the entire firm
79
o! Tender Offer: Public, open offer or invitation by a prospective acquirer
to all stakeholders of a publicly traded corporation to buy their stock
during a specific time and price
o! Minority Purchase: Purchasing less than the majority of the company
(50%)
o! Cross Border: Arrangement that crosses national borders
Upon the discovery of the cross border deal attributes, I decided to eliminate
any of the transactions that had contained this piece of information. Therefore, only
one pure domestic transaction occurred (as highlighted in grey). Since there is only
one transaction, this will be considered the sole comparable, and thus no percentile
ranking or median needs to be calculated.
Comparable M&A Implied Value Per Share

After determining that there is only one suitable transaction for the airline
industry, the comparable mergers and acquisitions implied value per share was
calculated. In this case, we took the Virgin America & Alaska Air Group Merger
and used its two ratios of EQV/EBITDA (10.04) and EQV (11.20). With these two
ratios, JetBlue’s EBITDA and EBIT were multiplied to get JetBlue’s Equity Value.
Once Equity Value was calculated, it was divided by the outstanding shares of the
firm to get its Implied Value Per Share as shown below:
At first glance, JetBlue’s implied value per share is ~$36. However, this result
is extremely flawed by two reasons. First, there is only one transaction. Because
80
there is only one domestic transaction, it is extremely difficult to determine what is
a fair multiple in the industry. Similarly, JetBlue has a different business model than
both the target company as well as the acquirer. Therefore, the implied value per
share should be treated with minimal weight.
Control Premium Calculation

As stated prior, the SIC code for the airline industry and JetBlue is 4512. After
determining the ratios and implied value per share, we must analyze the control
premium, or the amount that a buyer is sometimes willing to pay over the current
market price of a publicly traded company in order to acquire a controlling stake.96
According to the MergerStat review, which is a global mergers and acquisitions
information platform (also known as FactSet), the Mergerstat Industry Group is
transportation. When examining the control premium for the transportation sector
(see table below), it is clear that the control premiums are volatile due to the minimal
transactions and broad industry terminology.
Due to the inconsistency of the Control Premium for the transportation

industry group, I have decided to take the median. In addition, since there are so few
transactions, outliers during each individual year can yield an usual premium.
96
"FactSet Mergerstat/BVR Control Premium Study | Business Valuation ...." https://www.bvresources.com/products/factset-mergerstat-bvr-
control-premium-study. Accessed 27 Nov. 2018.
81
According to MergerStat, the median control premium would be 53.4%. With
this information, I can now apply it to the implied value per share for both of the
financial ratios gathered earlier (EQV/EBITDA, EQV/EBIT).
Control Premium – New Implied Value per Share

With the control premium’s median calculated, we can now apply the
premium to the implied value per share calculated earlier.
As stated prior, due to the fact that there is only one comparable, the new
implied value per share is even more irrelevant. Being at a price per share of ~$55
means that the stock price at the day of the valuation was undervalued by 300%.
Therefore, this methodology will be discounted during the final implied value per
share.
Discounted Cash Flow Analysis

The Discounted Cash Flow analysis (DCF) analysis is a method of valuation
using the concept of the time value of money. It estimates the firm’s future cash
flows, and is discounted using the cost of capital to give their present values.
Methodology
In order to create a DCF model, a series of pieces need to be calculated. To
begin, a discount rate must be analyzed to determine how much the value of a future
cash flow is presently. Thereafter, projected Income Statements, Balance Sheets and
Statement of Cash Flows will be constructed. Combining these pieces of information
82
will determine the value of the firm, which can then be converted to the value per
share.
Discount Rate
The first necessity to perform a Discounted Cash Flow valuation is to examine
a firm’s discount rate. A discount rate is designed to take future cash flows and
provide an equivalency to its values in the present time. For the discount rate, I will
be using the weighted-average-cost-of-capital, also known as WACC. Since JetBlue
does have any preferred equity and only one stock, there are only four elements
needed to be derived: the cost of equity, the cost of debt, the market value of debt,
the market value of equity. For the cost of equity, two methodologies were
performed: the regression model, as well as the comparable companies’ beta model
Cost of Equity: Regression Method

In order to calculate the cost of equity, one uses the Capital Asset Pricing
Model, also known as CAPM. This model is used to determine a theoretical required
rate of return on an asset. It is used to make decisions about adding assets or
investments into a portfolio. The formula for the CAPM Model is provided below:
A76'>*'1(;'*234 = (;$0K (R3''(;#*' + M'*# ∗ A76'>*'1(;'*234(./(+#3K'* − ;$0K(R3''(;#*'

A76'>*'1(;'*234 = (;$0K (R3''(;#*' + M'*# ∗ +#3K'*(;$0K(<3'8$28
A;$ = ;/ + ß$ (A;8 − ;/)
In order calculate the Expected Return, we must find beta. For calculating beta
via the regression model, we generally run sixty data points, with monthly data
points. The data points will begin from the valuation date, with every data point
being one month away, with the last data point being sixty months from the valuation
date.
83
The Risk-Free Rate will be calculated from FRED, also known as the Federal
Reserve Economic Data from St. Louis.97 In this instance, we will be focusing on
the twenty-year treasury bond. A twenty-year bond is necessary as the industry is a
long-term industry, having lasted for over a century, with projections that the airlines
will continue to exist.
In terms of the expected market return, I have decided to use NASDAQ, as
the majority of the domestic airline firms are on the NASDAQ exchange including
JetBlue.
bc dbe
In order to calculate the return, I used the equation ;'*234 = ( , where
bf
P2 is defined as the current month’s price and P1 was the previous months price.
Below is a result of the data and regression:
Beta%Regression%-%Data%Set%
Date% Risk-Free% Stock%Return% NASDAQ%Return% Re-Rf%[Y]% Rm-Rf%[X]%
11/15/18% 3.27%% 10.25%% ,2.31%% 6.985%% ,5.58%%
10/15/18% 3.27%% ,13.67%% ,6.57%% ,16.942%% ,9.84%%
9/15/18% 3.07%% 3.19%% 2.30%% 0.119%% ,0.77%%
8/15/18% 2.95%% ,4.93%% ,0.56%% ,7.883%% ,3.51%%
7/15/18% 2.91%% 1.41%% 0.92%% ,1.503%% ,1.99%%
6/15/18% 2.98%% 0.95%% 5.37%% ,2.033%% 2.39%%
5/15/18% 3.14%% ,3.84%% 3.12%% ,6.984%% ,0.02%%
4/15/18% 2.91%% ,11.19%% ,4.72%% ,14.096%% ,7.63%%
3/15/18% 2.94%% 9.66%% 3.10%% 6.715%% 0.16%%
2/15/18% 3.04%% ,9.25%% 0.19%% ,12.293%% ,2.85%%
1/15/18% 2.70%% 5.07%% 4.42%% 2.373%% 1.72%%
12/15/17% 2.52%% 5.66%% 3.44%% 3.138%% 0.92%%
11/15/17% 2.58%% ,0.79%% 1.38%% ,3.368%% ,1.20%%
10/15/17% 2.58%% 4.80%% 2.58%% 2.219%% 0.00%%
9/15/17% 2.52%% ,11.18%% 1.82%% ,13.702%% ,0.70%%
8/15/17% 2.60%% ,7.11%% 0.32%% ,9.709%% ,2.28%%
7/15/17% 2.66%% 2.00%% 2.39%% ,0.663%% ,0.27%%
6/15/17% 2.52%% 8.33%% 0.26%% 5.805%% ,2.26%%
5/15/17% 2.76%% 2.02%% 5.51%% ,0.745%% 2.75%%
4/15/17% 2.63%% 3.73%% ,1.21%% 1.103%% ,3.84%%
97
!https://fred.stlouisfed.org/series/DGS20!
84
3/15/17% 2.87%% 0.90%% 1.39%% ,1.966%% ,1.48%%
2/15/17% 2.84%% ,7.61%% 4.74%% ,10.450%% 1.90%%
1/15/17% 2.69%% ,4.18%% 1.82%% ,6.870%% ,0.87%%
12/15/16% 2.89%% 10.03%% 3.44%% 7.139%% 0.55%%
11/15/16% 2.64%% 14.77%% 1.30%% 12.127%% ,1.34%%
10/15/16% 2.20%% 1.60%% ,0.79%% ,0.603%% ,2.99%%
9/15/16% 2.13%% 2.82%% ,0.23%% 0.685%% ,2.36%%
8/15/16% 1.90%% ,8.53%% 4.62%% ,10.430%% 2.72%%
7/15/16% 1.90%% 11.88%% 4.03%% 9.985%% 2.13%%
6/15/16% 1.99%% ,8.96%% 1.85%% ,10.952%% ,0.14%%
5/15/16% 2.16%% ,12.15%% ,3.87%% ,14.306%% ,6.03%%
4/15/16% 2.14%% 2.81%% 4.43%% 0.673%% 2.29%%
3/15/16% 2.33%% ,5.06%% 6.60%% ,7.391%% 4.27%%
2/15/16% 2.17%% 3.14%% ,1.17%% 0.972%% ,3.34%%
1/15/16% 2.44%% ,10.82%% ,10.15%% ,13.259%% ,12.59%%
12/15/15% 2.62%% ,7.61%% 0.61%% ,10.227%% ,2.01%%
11/15/15% 2.72%% 2.99%% 1.95%% 0.274%% ,0.77%%
10/15/15% 2.46%% ,7.55%% 0.20%% ,10.006%% ,2.26%%
9/15/15% 2.73%% 8.97%% ,4.23%% 6.237%% ,6.96%%
8/15/15% 2.53%% 8.57%% ,0.47%% 6.039%% ,3.00%%
7/15/15% 2.83%% 14.07%% 1.37%% 11.244%% ,1.46%%
6/15/15% 2.83%% ,8.78%% ,0.36%% ,11.607%% ,3.19%%
5/15/15% 2.66%% 10.24%% 0.74%% 7.582%% ,1.92%%
4/15/15% 2.30%% 5.54%% 2.27%% 3.240%% ,0.03%%
3/15/15% 2.46%% 9.45%% 0.08%% 6.993%% ,2.38%%
2/15/15% 2.45%% 14.03%% 7.11%% 11.584%% 4.66%%
1/15/15% 2.12%% ,1.27%% ,0.75%% ,3.392%% ,2.87%%
12/15/14% 2.45%% 19.62%% ,1.58%% 17.166%% ,4.03%%
11/15/14% 2.78%% 21.26%% 11.00%% 18.482%% 8.22%%
10/15/14% 2.64%% ,8.53%% ,6.72%% ,11.166%% ,9.36%%
9/15/14% 3.09%% ,5.46%% 1.21%% ,8.548%% ,1.88%%
8/15/14% 2.86%% 10.07%% 1.10%% 7.214%% ,1.76%%
7/15/14% 3.10%% 4.95%% 2.00%% 1.847%% ,1.10%%
6/15/14% 3.14%% 17.83%% 6.41%% 14.689%% 3.27%%
5/15/14% 3.05%% 5.29%% 0.87%% 2.245%% ,2.18%%
4/15/14% 3.20%% ,5.35%% ,5.23%% ,8.553%% ,8.43%%
3/15/14% 3.32%% 3.78%% ,0.07%% 0.463%% ,3.39%%
2/15/14% 3.41%% ,5.79%% 1.07%% ,9.201%% ,2.34%%
1/15/14% 3.55%% 2.39%% 4.98%% ,1.155%% 1.43%%
12/15/13% 3.62%% ,0.11%% 0.73%% ,3.734%% ,2.89%%
11/15/13% 3.50%% 27.43%% 3.48%% 23.931%% ,0.02%%
85
Thus, based on the regression analysis, the beta for JetBlue would be ~1.045.
Comparable Beta Model

Another model to determine beta is through comparable companies. The way
to calculate the comparable company is to gather the following information:
•! Levered Beta: The risk of the firm (derived from Bloomberg)
•! Market Value of Debt: the market price investors would be willing to buy a
company’s debt at
•! Market Value of Equity: Number of shares outstanding multiplied by the price
per share
•! Tax Rate: The rate at which the organization pays taxes
Once these pieces of information are gathered. They can then be unlevered
through the following equation:
H'&*
ßgh( ßi( [1 + 1 − *
AB2$*=
Once the beta’s are calculated, the median, as well as various percentile’s will be
analyzed. Below is the analysis performed based on the methodology expressed
above:
86
As shown from the diagram above, each of the
comparable organizations (American, United, Delta)
went through the un-levering process. After this was
complete, a beta percentile analysis was conducted. After
examining the risk that JetBlue is taking, primarily
through its high expenses in research and development to create innovative aviation
products, I decided to use the .75th percentile. Technology, particularly in this
industry is extremely risky, as there are not only financial barriers, but federal
regulation barriers. For this reason, the 75th percentile would be the ideal metric.
With this calculation, we can then re-lever JetBlue’s beta, which is enclosed
below:
Choosing the Beta Model!

When evaluating the comparable beta versus the regression beta, the analysis
seems to be that the regression is more accurate. This is due to the fact that the
regression is analyzing sixty points of data, whereas the comparable beta is only
87
analyzing three organizations that do not exactly fit the same organization as
JetBlue.
Similarly, one could argue that the regression beta is more accurate based on
fundamental principles of finance. With regards to beta, having a value of more than
one means that a security is more volatile, or riskier than the market. Therefore,
having a beta less than one means that it is less risky than the market average. In this
case, when comparing JetBlue to its price index (XAL), it produces a significantly
higher return. A stock at with a greater return should have a higher risk, thus
justifying a beta being greater than one.
Because of these reasons, the regressional beta will be used through the
remaining steps of the DCF model.
Size Premium Analysis

Another important element
when creating the Discounted
Cash Flow model is to examine the
size premium. The size premium is
the historical tendency for socks of
firms with smaller market
capitalizations to out-perform
larger market capitalization firms.
With this is mind, I then calculated
the size premium via the 2017 Stocks, Bonds, Bills and Inflation Performance By
Asset Class by Duff & Phelps.98 In order to do this, we must examine the market
capitalization decile that JetBlue falls into. Based on the market capitalization
98
2017 Stocks, Bonds, Bills and Inflation Performance By Asset Class – Duff & Phelps, QuestromTools, November 14th 2018
88
performed throughout this analysis, JetBlue is in the fourth decile. With this
information, we then examine the size premium from the chart below:
Based on JetBlue being part of the fourth decile, the size premium that will be
added to the capital asset pricing model, also known as CAPM, will be .98%.
Capital Asset Pricing Model

In order to calculate the Capital Asset Pricing Model, we need to evaluate the
market risk premium, as well as the risk free rate. With respect to the risk premium,
this value is derived again form the 2017 Stocks, Bonds, Bills and Inflation
Performance By Asset Class by Duff & Phelps. The Equity Risk Premium in this
case is 6.94. Similarly, as stated earlier in the analysis, due to the fact that the airline
industry has long term returns and sustainability, a long-term (20-year) U.S.
Treasury Coupon Bond Yield, which is 2.72%. With both of these factors defined,
as well as using the regressional beta, the CAPM model can be defined:
A;$ = ;/ + ß$ (A;8 − ;/ )
A;$ = 2.72% + 1.045(6.94)
A;$ = 9.9723( → 9.97%
With the Capital Asset Pricing Model being utilized, the size premium must
be added to define the cost of equity
?.0*(./(AB2$*= = ?!<+ + )$J'(<3'8$28
?.0*(./(AB2$*= = 9.973% + ( .98%
?.0*(./(AB2$*= = 10.953%
Revenue
In order to determine the determine the free cash flows for JetBlue, one must
first analyze the revenue projections. To calculate this metric, I have decided to focus
examine the continuous annual growth rate, also known as CAGR or JetBlue, as well
as analyzing the CAGR of the general domestic airline industry, as well the
comparable companies. I will then create a median analysis in order to determine the
89
revenue growth of the organization, using the median CAGR to project revenue for
the five years of the firm.99
To calculate the median CAGR, each group/party had the median CAGR
taken of each of its years. Then, all of the organizations had their median CAGR
taken, producing a 2.45% growth.
Income Statement Assumptions

With the revenue of JetBlue projected, I have made some assumptions for
some of the Income Statement line items. These assumptions will help create the
income statement.
Revenue
As stated prior, revenue will grow at a CAGR of 2.45%, which is a fairly
conservative estimate, as JetBlue’s CAGR is growing at 6.1% CAGR. This will be
counterbalanced by some of the size effected costs.
SG&A
Selling, General, and Administrative Costs, also known as SG&A have
increased directly with sales. However, due to the fact that the organization is
exploring offshoring for customer service, as well as minimize employees in the
workplace, the median weight with respect to revenue was calculated. Due to the
99
https://www.statista.com/statistics/197680/total-operating-revenues-in-us-airline-industry-since-2004/#0
90
quarterly report projected by JetBlue, stating the firm will attempt to decrease its
costs by an annual CAGR of 15%, this assumption was used in the DCF analysis.100
Other Operating Items

Other operating expenses have been rather stable throughout the existence of
JetBlue, floating between $350MM and $450MM. Therefore, the median weight
with respect to revenue was used in the DCF.
Interest Expense
Due to the immense growth of JetBlue, it has continued to pay off the interest
to the debtors and creditors. Thus, I have decided to implement a declining CAGR
of 5%, as the firm hopes that by the 2024, it will be the only domestic airline to no
longer have debt obligations. 101
Income Tax
Income tax within the airline industry falls under two brackets, a lower tax
rate and a higher tax rate. Since JetBlue has surpassed $5BB in revenue, it has
reached the higher tax rate, which is ~35%. Therefore, for simplicity, a 35% tax rate
was used.
100
Jetblue Narrows Unit Revenue Guidance Investors, Montey fool, https://www.fool.com/investing/2018/06/13/jetblue-narrows-unit-revenue-
guidance-investors-ar.aspx
101
Ibid
91
Income Statement Projections
(BB's) Current Projections
2014 2015 2016 2017 2018 2019 2020 2021 2022
Revenue $5.82 $6.42 $6.63 $7.02 $7.19 $7.36 $7.54 $7.73 $7.92
COGS $2.78 $2.30 $2.10 $2.48 $2.56 $2.62 $2.69 $2.75 $2.82
Gross Income $3.04 $4.11 $4.53 $4.53 $4.63 $4.74 $4.86 $4.97 $5.10
SG&A $2.21 $2.55 $2.82 $3.09 $1.62 $1.41 $1.23 $1.07 $0.93
Other Operating
Items $0.32 $0.35 $0.39 $0.45 $0.41 $0.42 $0.43 $0.44 $0.45
Operating Income $0.52 $1.22 $1.31 $1.00 $2.60 $2.91 $3.20 $3.46 $3.71
Additional Expenses $0.24 $0.00 $0.01 $0.01 $- $- $- $- $-
EBIT $0.76 $1.22 $1.32 $1.01 $2.60 $2.91 $3.20 $3.46 $3.71
Interest Expense $0.13 $0.12 $0.10 $0.09 $0.04 $0.04 $0.05 $0.05 $0.05
Pretax Income $0.62 $1.10 $1.22 $0.92 $2.55 $2.86 $3.15 $3.42 $3.66
Income Tax $0.22 $0.42 $0.46 -$0.23 $0.89 $1.00 $1.10 $1.20 $1.28
Net Income $0.40 $0.68 $0.76 $1.15 $1.66 $1.86 $2.05 $2.22 $2.38
Assumptions (% of Value
Revenue) Median Used
COGS 47.71% 35.88% 31.72% 35.38% 35.63% 35.63%
(-1.15)
SG&A 37.94% 39.79% 42.57% 44.01% 41.18% CAGR
Other Operating
Items 5.50% 5.38% 5.93% 6.36% 5.71% 5.71%
(-1.05)
Interest Expense 2.30% 1.87% 1.55% 1.21% 1.71% CAGR
Assumptions Value
(% of Pretax Income) Used
Income Tax 35.00%
1
Balance Sheet Assumptions
For simplicity, I have broken down the balance sheet into its three
components: Assets, Liabilities and Stockholder Equity. All other values not
discussed are considered constant. Below are the assumptions:
Assets
Cash and Cash Equivalents & Short-Term Investments
The firm has consistently been growing cash at ~5%. 2017 was an outlier, as
the firm purchased an array of newer planes, as well as paid fines for safety recall
issues. Therefore, the median value of cash was determined, and then grew at a 5%
CAGR.
Net Receivables
JetBlue’s mission has consistently to remain receivables at nine-tenths of
cash. Thus, this assumption was carried throughout all projections.
Inventory
Inventory is growing at a 2.5% CAGR as according to the 10K, the firm is
focusing on purchasing a new plane every month.
Fixed Assets
Fixed assets has been growing consistently, so I have extended the trend for
all timeframes.
Liabilities
Accounts Payable, Other Current Liabilities
Accounts payable has consistently been growing at a 5% CAGR, thus the
trend has been continued.
1
Short-Term Debt, Long-Term Debt
The firm has made an announcement that it wishes to pay off 5% of debt
annually till at least 2020. Thus, a -5% CAGR has been applied.
Other Liabilities
The other liabilities has been rather consistent, so I used the same value from
2017.
Equity
Common Stock
Common stock has been the name every year, so that trend has continued
Capital Surplus
The capital surplus has been growing consistently developing a trend, which
I have continued for the projected years.
Treasury Stock, Other Equity

The firm is seeking to move away from these methods, and thus, these have
been derived to be zero in value.
2
Balance Sheet
Projections
1
Net Working Capital Analysis
! 2014% 2015% 2016% 2017% 2018% 2019% 2020% 2021% 2022%

Assets% %
Net%Receivables% 0.31% 0.28% 0.17% 0.25% 0.31% 0.33% 0.34% 0.36% 0.38%
Inventory% 0.05% 0.04% 0.05% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06%
Other%Current%Assets% 0.14% 0.17% 0.21% 0.21% 0.21% 0.21% 0.21% 0.21% 0.21%
Liabilities% %
Accounts%Payable% 0.70% 0.77% 0.91% 0.98% 1.03% 1.08% 1.14% 1.20% 1.26%
Other%Current%
0.97% 1.05% 1.12% 1.22% 1.28% 1.34% 1.41% 1.48% 1.55%
Liabilities%
%
Net%Working%Capital% H1.18% H1.33% H1.59% H1.69% H1.73% H1.83% H1.93% H2.04% H2.15%
% 0.151% 0.263% 0.093% 0.042% 0.098% 0.103% 0.109% 0.114%
%
Table% %
Color% Meaning% %
%% Increase%in%NWC% %
Decrease%in%
H% NWC% %
2
Operating Cash Flows
! 2018% 2019% 2020% 2021% 2022%
Operating%Activities% %
Net%Income% %1.66%% %1.86%% %2.05%% %2.22%% %2.38%%
D&A% %0.81%% %0.71%% %0.61%% %0.53%% %0.47%%
Changes%in%Working%Capital% H0.04%% H0.10%% H0.10%% H0.11%% H0.11%%
Net%Operating%Cash%Flow% %2.43%% %2.47%% %2.56%% %2.65%% %2.73%%
%
Investing%Activities% %
Capital%Expenditures% H0.8049% H0.88539% H0.973929% H1.0713219% H1.17845409%
Net%Investing%Cash%Flow% %
Cash%Flow%from%Operations%&%Investing% %1.62%% %1.58%% %1.58%% %1.57%% %1.55%%

%
Financing%Activities% %
H H
Repayment%of%Long%Term%Debt% H0.05015% H1.0476425% H0.00891% 0.042997356% 0.040847488%
%
Net%Financing%Cash%Flow% %1.57%% %0.53%% %1.57%% %1.53%% %1.51%%
Unlevered Free Cash Flow Projection

Unlevered Free Cash Flow is defined as after-tax EBIT plus Depreciation & Amortization, less Capex and
increase in Net Working Capital.
3
! 2018% 2019% 2020% 2021% 2022%
EBIT% %2.60%% %2.91%% %3.20%% %3.46%% %3.71%%
D&A% %0.81%% %0.71%% %0.61%% %0.53%% %0.47%%
Capex% H0.80%% H0.89%% H0.97%% H1.07%% H1.18%%
Changes%in%NWC% H0.04%% H0.10%% H0.10%% H0.11%% H0.11%%
Unlevered%FCF% %2.56%% %2.63%% %2.73%% %2.82%% %2.89%%
Weighted Average Cost of Capital

Cost of Debt
JetBlue only has one debenture at 6.75% rate, so its pre-tax cost of debt is 6.75%. Since the tax rate is ~35%,
the after-tax cost of debt is ~4.39% (6.75% * 35%).
Cost of Equity
Both methodologies were computed earlier, but the regression method seems to provide greater accuracy.
This provided a cost of equity of 10.953%
& ,
!"## = % ∗ )* + ∗ )- ∗ (1 − 1)
' '
E = Market Value of Equity
D = Market Value of Debt
V = Debt + Equity
Re = Cost of Equity
Rd = Cost of Debt
T = Tax Rate
4
5.68 1.1199
!"## = % ∗ 10.953% + ∗ 4.3875
5.68 + 1.1199 5.68 + 1.1199
!"## = 9.8717%
Discounted Cash Flow Computation

! 2018% 2019% 2020% 2021% 2022%
EBIT% %2.60%% %2.91%% %3.20%% %3.46%% %3.71%%
D&A% %0.81%% %0.71%% %0.61%% %0.53%% %0.47%%
Capex% H0.80%% H0.89%% H0.97%% H1.07%% H1.18%%
Changes%in%NWC% H0.04%% H0.10%% H0.10%% H0.11%% H0.11%%
Unlevered%FCF% %2.56%% %2.63%% %2.73%% %2.82%% %2.89%%
Terminal%Value% % 15.15543316%
FCF% %2.56%% %2.63%% %2.73%% %2.82%% %18.04%%
%
Implied%Value% $19.77% %
Terminal Value was calculated through the liquidation method.
Weighted Value Per Share

The value per share of JetBlue stock is $24.66, $23.89, $24.69, $55.63, $55.25, $36.26, $36.02 and $19.77
based on the Comparable Companies, Comparable M&A, and Discounted Cash Flow Methods. Since the DCF
contains a tremendous amount of research with minor assumptions, I decided to weigh it as 35%. For the comparable
Companies, I decided to weigh it at the remaining 65%, as the most accurate depiction of an organization is directly
comparing it to existing firms in the industry. All of the other calculations contained either a flaw, or an overall
5
concern based on limited informational knowledge. Therefore, the implied value per stock would be
(.65*(($24.66+$23.89)/2) + $19.77*.35 = $22.70.
Valuation Summary
Although the valuation was extremely thorough, it was extremely difficult creating assumptions for the DCF
(this also was difficult when I ran the entire analysis on a billion’s basis and not a millions basis). Similarly, it is
difficult to compute a valuation of mergers and acquisitions with such minimal public information. Therefore, this is
why the comparable companies seem to be the most accurate representation about the state of JetBlue
Investment Recommendation
Based on the ideologies calculated, and receiving an overall implied value per stock of $22.70, it is clear that
JetBlue is undervalued ($18.17). As JetBlue continues expand is borders, while simultaneously developing new and
improving technology, the long-term potential of this organization portrays enough reasoning, along with this
analysis, to add this stock to ones portfolio.
6
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Domestic Airline Industry

Airline Industry Ratios

In attempting to maximize the ratios, firms may modify airplane shapes or

C'*(F4> 8' C'*(<3./$*(!/*'3(G#7

D.45 − G'38(D$#&$%$*$'0 G.*#%(D$#&$%$*$'0

Porter’s Five Forces Analysis

Industry S.W.O.T. Analysis

Airlines have what is defined as a high “spoilage” rate. Specifically, spoilage

There are numerous techniques to interpret the performance of the airline

Key External Drivers

Key Success Factors

Industry External Economic Drivers!

Life Cycle Stage

JetBlue S.W.O.T. Analysis

Mergers & Acquisitions

Recent Material News

JetBlue vs. Industry Players

Median 6.04 8.18 2.52% 34.52% 1.21

JetBlue JBLU 5.593 7.45 4.79% 37.64% 0.79

Statement of Cash Flows

FY '17 FY '16 FY '15 FY '14

Current Ratio 0.5 0.63 0.6 0.62

Quick Ratio 0.48 0.61 0.58 0.6

Profit Margin 0.16 0.11 0.11 0.07

Pre-Tax ROE 0.19 0.3 0.34 0.25

1.! Industry Classification: Aviation

To begin, the airline industry on Capital IQ can be considered an Industry

American Fort Worth,

JetBlue NASDAQ JBLU New York, NY 2.01 5.68

Business Enterprise Value (BEV) Multiples

Derivation of the Comparable Multiple

Implied Share Value

Derivation of the Comparable Multiple

Implied Share Value

Comparable Mergers and Acquisitions

Selection Criteria for Comparable Company Transactions

Exclusion of Comparable M&A

Comparable M&A Implied Value Per Share

Control Premium Calculation

Due to the inconsistency of the Control Premium for the transportation

Control Premium – New Implied Value per Share

Discounted Cash Flow Analysis

Cost of Equity: Regression Method

A76'>*'1(;'*234 = (;$0K (R3''(;#*' + M'*# ∗ A76'>*'1(;'*234(./(+#3K'* − ;$0K(R3''(;#*'

Comparable Beta Model

Choosing the Beta Model!

Size Premium Analysis

Capital Asset Pricing Model

Income Statement Assumptions

Other Operating Items

Treasury Stock, Other Equity

! 2014% 2015% 2016% 2017% 2018% 2019% 2020% 2021% 2022%

Cash%Flow%from%Operations%&%Investing% %1.62%% %1.58%% %1.58%% %1.57%% %1.55%%

Unlevered Free Cash Flow Projection

Weighted Average Cost of Capital

Discounted Cash Flow Computation

Terminal Value was calculated through the liquidation method.

Weighted Value Per Share

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"Airline Industry Overview." http://www.columbia.edu/cu/consultingclub/Resources/Airlines_Eric_Henckels.pdf. Accessed 24 Nov. 2018.

"Airlines Industry Snapshot - NYTimes.com - Markets Overview - The ...."

"Annual Reports - JetBlue | Investor Relations." http://investor.jetblue.com/investor-relations/financial-information/reports/annual-reports.aspx. Accessed 24

"Aviation Fuel - Centennial of Flight." https://www.centennialofflight.net/essay/Evolution_of_Technology/fuel/Tech21.htm. Accessed 2 Nov. 2018.

C'(F4> 8' C'(<3./$(!/'3(G#7

D.45 − G'38(D$#&$%$$'0 G.#%(D$#&$%$*$'0

A76'>'1(;'234 = (;$0K (R3''(;#' + M'# ∗ A76'>'1(;'234(./(+#3K'* − ;$0K(R3''(;#*'