IPO stands for initial public offering.

It is the process that a company must go through in order initially sell publicly traded equity. It is primarily for raising additional capital or funds for a company that will be used to sustain its growing needs (production, distribution, and others). The term merely applies to initial issuance of common shares to interested public investors (Initial-Public-Offering-Process, para. 5). The process, which takes one hundred days, or more, begins with choosing a bank, or banks, to act as an advisor, and underwriter. The underwriter drafts a letter of intent. A registration statement needs to be filed with the Securities and Exchange Commission, also known as the SEC. There are two parts to the registration statement, the prospectus, and information that is made accessible for public inspection by the SEC. These disclosure requirements make sure that the public has correct information pertaining to the sale of the offered securities. The underwriter needs to verify this information by investigating the company (Ellis, K., et al, 1999). The registration statement, once filed with the SEC, becomes the preliminary prospectus. The primary prospectus is used as a marketing tool. When the registration statement becomes effective, the preliminary prospectus is converted to the prospectus, which is the official offering document. Then, the offering is marketed, which is called a road show. The registration and marketing can take several months (Ellis, K., et al, 1999). The day before the effective date, but after the market closes, the company and the underwriter decide the exact number of shares to be sold, as well as the price those share will be offered to the public. After the final terms are hammered out, the underwriting agreement is executed; the final draft of the prospectus is printed; and a price amendment is filed on the morning of the chosen effective date (Ellis, K., et al, 1999). After SEC approval, the stock distribution begins. On the chosen effective date, the stock offerings are traded for the first time. However, the closing of the transaction occurs several days later, usually eight days. This is when the underwriter deposits the net proceeds from the IPO into the company account. The underwriter now needs to provide after market stabilization, as well as analyst recommendations, and making a market in the stock, which enhances the demand for shares (Ellis, K., et al, 1999). The IPO process is long and arduous. A company needs to be totally committed before beginning the process. However, becoming a publicly traded entity is preferable to, for example, selling debt. This is due to the facts that, with an IPO, only a certain amount of agreed upon shares are to be offered to the public. Control of the organization should remain as it was prior to being publicly traded. JetBlue made a positive choice to become a publicly traded entity. By doing this, JetBlue has increased their capital in order to sustain growth of the company. Growth within the company has increased revenues for the company. The stock price of JetBlue is influenced by different factors from all possible spheres: companys financial performance, customer feedback, companys brand recognition and reputation, industry analysis, financial and industry experts analysis. All these factors sum up the companys well-doing

reputation. After analysis of companys financial performance, it is possible to make optimistic future forecast. Analysis of revenue passenger miles through the period from December 31, 2000 to December 31, 2001 at JetBlue increased rapidly for 55%, from 469.293 to 1.051.287 (Schill, et al, 2003, pp. 350). In other words, it means that even in spite of terrorist attacks in September 2001. JetBlue customers continue using this low-fare airline, which allows an increase the number of flights. It is also improved by the number of departures which increases for the same period from 4,620 to 7,783 (Schill, et al, 2003, pp.350). The fact that the number of the companys full-time employees doubled shows the positive dynamics of JetBlue performance. A substantial increase in operating revenues during one year should guarantee high demand on JetBlue stocks. It is also important to mention that company showed profits even during the first year of operations (Schill, et al, 2003). JetBlue offers its customers a new level of comfort during the flight, including all leather seats, Live TV and friendly and highly-qualified customer service. This is included in the cost of the airfare for their customers. Customers using e-ticket system through the companys official web-site is also increasing (Schill, et al, 2003). It shows that the company is successfully using modern online technologies. This can be counted by possible investors as a positive sign of the companys development. Analysis of financial and industry analytics made a strong impression that JetBlue is a reputable company which is a good target for investors willing to buy its stocks (Schill, et al, 2003). Although most of these reports describe JetBlue as a successful company, offering a wonderful flight experience to its customers, it should be noted that there is a high failure rate for new companies in this area (Schill, et al, 2003). JetBlue chose an operating strategy that allowed it to have the lowest cost per available seat mile of any of the major U.S. airlines in 2001 (Schill, et al, 2003). This evidence sends a strong signal of confidence to the stock market. Morgan Stanley forecast that the deal for the JetBlue stocks is highly oversubscribed by investors will turn to reality (Schill, et al, 2003, pp.348). In evaluating worth of JetBlue stocks it is also important to take into account prices for the stocks in the whole industry. Highest stock prices are offered by Alaska Air ($29.10), AMR ($22.30), Continental ($26.20), Delta ($29.30) and Ryanair ($32.10) (Schill, et al, 2003, pp. 356). Ryanair had gone public with trailing EBIT multiples of 8.5 times and first day returns were 62% shows that stocks of successful members of low-fare airlines pool can be highly profitable for the company and for investors, as well (Schill, et al, 2003, pp. 345). After analyzing all the data above, we come to the decision that in the current conditions of the stock market and the current state of low-fare flights, the industry best offering price is the range from $22 to $24 per share. This price will meet the expectations of investors who are really excited about IPO of JetBlue. However, according to the Morgan Stanley Report, demand exceeded supply (Schill, et al, 2003, pp. 348). This will help to predict if the company may have possible industry and environmental reasons, such as a high level of terrorist threat, increasing competition among low-fare airlines and continuous increase for fuel prices (Schill, et al, 2003). JetBlues management team provided a ten year financial forecast based on aircraft acquisitions. JetBlues financial forecast seems overly optimistic and in some cases, even unreasonable. The

management team assembled this forecast during the IPO process partly in an attempt to reach an initial price for the IPO. With this process in mind and the desire to reflect JetBlues financial future in the most positive light, the management team seems to have created a best case scenario. More analysis seems to indicate this may indeed be the case (Bruner, 2007). The Compound Annual Growth Rate (CAGR) is a useful tool to conduct an initial analysis of a financial forecast. The CAGR calculates the annual growth rate over a period of time. This is not an exact year over year growth rate; rather it is a smoothed rate of growth figured as if there was a steady growth rate. Although CAGR also does not reflect volatility and risk, it is an important tool when evaluating financial options (CAGR, 2009).

The formula for calculating CAGR is:

(CAGR, 2009) Using Exhibit 13 (Bruner, 2007) JetBlue Financial Forecast, the CAGR can be calculated from the following items. JetBlue Airlines Data ($ are in millions) 2001 Aircrafts Revenue/plane Revenue Operating Income $21 $15.3 $320 $26.88 2010 $117 $24.9 $2912 $390 CAGR 21.03% 5.56% 27.81% 34.62%

This analysis yields several interesting facts about JetBlues ten year plan, chief among them is the expectation that revenue will increase year over year by 27.8% for the next ten years. The increasing of the fleet by 21% annually for the next ten years also appears overly aggressive. JetBlue also expects to increase operating income at a faster rate than revenue is expected to rise. The Revenue/plane is expected to increase from $15.3 million in 2001 to $24.9 million in 2010. This is a significant increase in this ten year period. An increase in Revenue/plane can only be accomplished in one of three ways: increase the load factor on the plane, increase the utilization of the plane, or increase passenger fares. JetBlues current load factor is 76.7%, utilization is 11.8 hours per day, and average fare is $99.37. If JetBlues low-cost competitive strategy is to remain in effect, they will not be able to raise fares enough to reach the $24.9 million revenue per plane target. The other two factors seem to have a little room for improvement, but not the needed amount to generate the target revenue/plane. This target could prove to be very difficult to obtain (Bruner, 2007).

While this CAGR seems aggressive, it can sometimes be difficult to judge. It often aids in financial analysis to do a peer group analysis to allow for financial data to be put in context with other firms in the same industry. When doing a peer group analysis, it is best to choose firms that are closely matched. For the peer group analysis, Southwest Airlines has been chosen because it closely matches JetBlues low-cost strategy. By using Southwests CAGR in the same categories over the last ten years, it will put JetBlues ten year forecast in relative terms. Southwest Airlines Data ($ are in millions) 1993 Aircrafts Revenue/plane Revenue Operating Income (Annual Report, 2002) Based on the peer group analysis, JetBlues CAGR revenue of 27.81% seems even more aggressive when compared to Southwests 10.24% CAGR revenue. The other three items yielded a similar result. In each case, JetBlue is predicting a dramatically higher CAGR then Southwest produced in the previous ten years. This analysis seems to indicate that JetBlues financial forecast is unreasonable. It also seems to make many key assumptions. JetBlue does not have any expectations of these normal externalities over the next ten years: * National Recession $178 $12.9 $2297 $292 2002 $375 $14.7 $5522 $417 CAGR 8.63% 1.48% 10.24% 4.04%

* Increases in Fuel Costs. Fuel costs are the second largest expense in the industry (The Industry, 2009).

* Increase in low-cost competition, costing JetBlue market share.

There are also two other assumptions that JetBlue does not account for the possible occurrence of: * Another terrorist attack. The dramatic impact that September 11th had on the airline industry and the possibility of a repeat occurrence should not be altogether discounted.

* Possible unionization of JetBlues work force. Unionization is the standard in the airline industry. Labor is the largest expense in the industry (The Industry, 2009).

Although it is important to have a long-term financial forecast, it seems that JetBlues plan of ten years is too long. The airline industry is an ultra-competitive industry that sees dramatic shifts in fare pricing and fuel costs. The industry is heavily regulated by the federal government. In the wake of the September 11th terrorist attacks, those regulations greatly increased. These and other factors can and will dramatically change financial data; the longer the planning period, the greater the chance for change and the greater the amount of change. A five year plan offers a better mix of long-term planning with the better accuracy of projected revenues and costs. This term should yield more reasonable results (The Industry, 2009). When forecasting financial data, it is critical to assign an appropriate discount rate to the cash flow of the company. A discount rate is assigned to account for the risk associated with the uncertainties of an outcome in the future. The greater the time horizon, the more uncertain the outcome becomes. The discount rate typically will be made up of two factors: the risk-free factor and the risk factor. If a project is risk-free, then the discount rate would simply be the risk-free rate, which is normally the rate of a U.S. government obligation (Block & Hirt, 2009). Determining the appropriate discount for JetBlue because it is not a risk-free project would require both factors in calculating the discount factor. The risk portion of the discount factor is not an exact science; it can be determined many different ways. One method is by multiplying the market risk premium by the beta of the stock. (Discounting, 2009). Using this method and the data provided by JetBlue during the IPO process (Bruner, 2007), the calculation of the risk factor would be: * Risk factor = Market Premium X Beta * Risk factor = 5% X 1.10 * Risk factor = 5.5 %

The Discount Rate would then be calculated as: * Discount rate = Risk-free Rate + Risk Rate * Discount rate = 5% + 5.5% * Discount rate = 10.5%

JetBlues industry is filled with many possible scenarios that may adversely affect their financial projections, such as a sudden increase in oil prices, work stoppages brought about by possible unionization, or terrorist attacks. All these factors increase the risk factor. Because determining the risk factor of the discount rate is not an exact science and can be computed several different ways; the appropriate discount rate is somewhat subjective. Based on the above calculations, I would set the discount rate no lower than 10.5%. However, because of the many adverse scenarios facing the industry, I feel the appropriate discount rate should be 13%. I feel this 25% premium over the calculated discount rate is needed to account for the current industries risks: oil prices, economic slowdown, and possible future terrorist attacks (The Industry, 2009). The idea of using market multiples analysis is to compare comparable assets that should sell, or trade, at comparable prices. A company should be similar, and therefore suitable for comparison, if it shares a comparable risk and growth profile to the company that is to be valued. The steps involved in the application of the market multiple approach include: identifying similar companies; calculating the main ratios for comparison; averages of the main ratios; applying the average ratio to get the indicative value; and, making a judgment on the valuation (Financial Modeling, 2009). There are positive factors, as well as negative factors, in using a comparable multiple approach in valuation. The positive factors to a comparable multiple approach include: it is convenient; shows what the market will pay, or is willing to pay, for a similar company; considerably beneficial when the company is not stable, or secure. The negative factors include: it disregards the need to make specific assumptions in regards to the long term growth and profitability; there is a chance for a miscalculation on the evaluation; there is a chance for accounting misrepresentation; it is a relative measure of the valuation; there may be some difficulty in finding similar companies; the valuation is worthless with a negative value; and, there is the chance that the denominator is more recurring than the numerator (Wibowo, A, 2008). JetBlue Airways is an innovative passenger airline that provides award winning customer service at competitive fares mainly on point-to-point routes. The company offers its customers a high quality service with modern fuel-efficient aircraft, leather seats, and free in-flight entertainment at every seat, pre-assigned seating and reliable performance (JetBlue Corporate Profile, 2009). The company markets its services through advertising and promotions in newspapers, magazines, television, radio, through the internet, outdoor billboards, and through targeted public relations and promotions. It engages in large multi-market programs, as well as many local events and sponsorships, and mobile marketing programs. The competitors and potential competitors include traditional network airlines, low-cost airlines, regional airlines and new entrant airlines, including a new business model known as the 'ultra low cost' carrier. JetBlue has significant projected increases for a ten year period. It is not known if the company can sustain such growth without increases in other areas, such as the load factor, plane usage, or increased fares. The companys load factor, as well as plane usage, has little room for improvement. However, increasing the cost of fares deviates from the companys low cost competitive strategy. Our analysis

also shows that JetBlues financial forecast is unreasonable for such reasons as national recession, increase of competency in low-fare segment of airline market and increase in prices for fuel.