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Friday April 5, 8:05 am Eastern Time
BusinessWeek Online
Thinking of Taking Off with JetBlue?

Daily Briefing: STREET WISE

By Amy Tsao

For the most part, investors have been skittish about initial public offerings this year. Big IPOs like that of Citibank's Traveler's Property Casualty (NYSE:TPK-news) have attracted buyers, but smaller deals involving lesser-known companies have had a harder time getting off the ground. The exception may turn out to be upstart discount airline JetBlue Airways.
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The IPO already is generating lots of buzz on Wall Street, and it could get a warm reception when it hits the market sometime in mid-April. ``People are going to have a high appetite for [JetBlue stock],'' says Ray Neidl, analyst with ABN Amro.

The expected growth at JetBlue is enticing. The company now has a relatively small fleet of 23 Airbus 320s flying among 19 cities including Tampa and Rochester, N.Y. But it plans to add 60 planes by the end of 2007.

FLYING HIGHER. With the IPO of 5.5 million shares, JetBlue will raise around $116 million on top of the $175 million Chief Executive David Neeleman took in from big-name investors such as hedge-fund legend George Soros. The money will go toward purchasing new planes and other expansion costs. Even as airline stocks get hit by speculation that turmoil in the Middle East may result in a spike in jet-fuel prices, analysts expect the JetBlue IPO to go off as planned around Apr. 15.

Granted, you can't be risk-averse to be invested in the volatile airline sector. All the hype aside, JetBlue could be a good investment for those who are drawn to long-term growth. If the new stock is sold in the planned range of $22 to $24 per share, the price is right. Anywhere above that would be overpaying, analysts caution.

At the planned offering price, JetBlue's shares would have a forward-looking multiple of around 15, figures Neidl. Compare that to the multiple on Southwest Airlines, a 30-year veteran in the discount-carrier business, which trades at a price-earnings ratio in the range of 16 to 25. ``JetBlue is off to a good start. But to say it deserves the valuation of Southwest, which has not had a year without profits for 12 years, might be a stretch,'' says Jim Corridore, Standard & Poor's airline analyst.

TERRIFIC PROSPECTS. In other ways, the comparison between Southwest and JetBlue might be a little premature. But it is fair to say JetBlue has taken a lot of cues from its older and more successful rival, and that's probably a good thing. Like Southwest, JetBlue keeps its cost structure low by using nonunion labor, stays focused on point-to-point travel between secondary airports on highly traveled routes, and has streamlined its equipment.

Considering how much the airline is already doing right, Corridore and other analysts agree that JetBlue has terrific prospects. It has been winning customers with its unconventional approach to air travel -- cheap fares combined with luxury features such as leather seats and satellite television. These added touches have been crucial in attracting new customers and keeping them.

Eliminating expenses like in-flight meals and paper tickets also has chipped away at costs. And its easily navigable Web site is another competitive feature.

ALL'S FARE... JetBlue estimates that its advance-purchase tickets are typically 30% to 40% lower than other airlines' nonsale prices. And walk-up fares, often used by business travelers, are 60% to 70% lower.

A comparison of prices posted on the JetBlue and United Airlines Web sites shows dramatic differences. While a roundtrip ticket puchased one month in advance from New York's JFK airport to Oakland, Calif., went for $265 on JetBlue, the same ticket [flying into San Francisco International] sold for $396 on United. That's a modest savings if you figure the cab fare from Oakland to San Francisco. However, the same flight with a few days' notice and no Saturday stay was still $265 on JetBlue but a stratospheric $2,264 on United.

Neeleman adds credibility to his idea of a ``local hometown airline'' for New York. He already has made the concept work out of Salt Lake City with Morris Air, which he sold to Southwest in 1993 for $130 million. JetBlue ``has a management team with real expertise, and they're executing very well,'' says Marc Baum, CEO of IPO Group, which tracks activity in IPOs, venture capital, and private equity. The group includes veteran airline execs such as President and Chief Operating Officer Dave Barger, who earlier was with Continental Airlines, and Chief Financial Officer John Owen, Southwest's former treasurer.

FASTEN YOUR SEATBELTS. Adding to its credibility as a tough competitor, the airline was among an elite trio [Southwest (NYSE:LUV-news) and AirTran (NYSE:AAI-news) are the others] that escaped last year's financial difficulties and ended 2001 with profits. JetBlue pulled it off after less than two full years of operation, without resorting to layoffs during one of the worst periods for air travel on record. The company posted a profit of $38.5 million, up from a loss of $21.3 million in 2000.

Investors should take heed that JetBlue's growth is unlikely to continue without some turbulence. Over the long term, as it gets bigger, it'll have to walk a fine line between keeping operating costs low, differentiating itself from the majors, and still selling cheap tickets. That will be a challenge.

``It's a very young company that's still going to need to make a lot of investment over the next 5 to 10 years,'' says Morningstar analyst Jonathan Schrader, who expects higher costs as JetBlue's business matures. ``There's not going to be a lot of free cash flow.''

POSSIBLE PITFALLS. Inevitably, JetBlue will have to spend more on maintenance as its planes age, Schrader notes. And as it grows, fuel costs will become a bigger portion of expenses. It recently began hedging against price increases in fuel, but a prolonged rise in oil prices as a result of violence in the Middle East could squeeze airlines across the board.

And if JetBlue stumbles on keeping employees satisfied, it could end up mired in the complicated and expensive world of union contracts that are a heavy cost burden for the national carriers. Growth also means more pricing pressure from other carriers once they return to better operating health.

Buying shares of the New York-based airline may seem like a high-risk idea amid the federal government's $15 billion bailout of the airline industry following the September 11 terrorist attacks. And predictions persist that the airline majors likely will be unprofitable until 2003. But investors who want a foothold in this industry could do a lot worse than JetBlue, analysts say.

Clearly, JetBlue will be an airline to watch closely. And its shares should do well if it can pull off the difficult juggling act of keeping costs low and customer satisfaction high.

Go to www.businessweek.com to see all of our latest stories.

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hernan

Zzzzzzzzzzzzzzzzzzzzzzzzzzzzz

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b737gearboy

Thank you for your thoughtful informative post Hernan. Sorry it had nothing to do with SWA or Boeing, I'll try and keep you in mind next time.

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hernan

Thanks!

__________________
FLY SOUTHWEST. THE ONLY WAY TO FLY !
COLLECT STAR JETS. THE BEST MODELS!

TL925

This goes a bit off topic from the above subject, but it still revolves around JetBlue. I was watching the news last night, and it was mentioning how JetBlue is installing surveillance cameras in the cabin so that pilots can keep an eye on passengers during flight. The news soon follows that other airlines are likely to follow. Does anyone here think that this is a bit much??

b737gearboy

Reuters Business
IPO View: JetBlue Woos Investors

By Jake Keaveny

NEW YORK (Reuters) - In this sluggish market for initial public offerings, intangibles like brand name and reputation carry a high premium.

Discount carrier JetBlue Airways Corp. (Nasdaq:JBLU - news) , after just two years in business, gets high marks in both of those areas, say prospective investors, one reason the roughly $130 million of its shares to be sold this Wednesday are expected to be in high demand, despite the aviation industry's hard times.
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``Everyone I've talked to that's flown with them has been delighted,'' said Jim Broadfoot, who manages about $600 million at Ivy Emerging Growth Fund.

The Florida-based fund manager said he was impressed enough by the buzz to book his wife on a flight. He also expects to place an order for some of the shares in the offering managed by Morgan Stanley and Merrill Lynch.

BLUE BUZZ

In what is probably the most talked about IPO of the year, JetBlue intends to sell 5.5 million shares priced between $22 and $24 per share. The Nasdaq ticker symbol will be ``JBLU''.

In a short time, the carrier has developed a reputation for on-time service. Management has brought it to profitability by keeping costs low with a non-hub flight organization and direct Internet ticketing, while wooing customers with cheap flights and a fleet of Airbus 320A jets with all the frills.

Investors, though, will have to weigh JetBlue's early success against a growing debt load, rising fuel prices, higher post-Sept. 11 security costs, and fierce competition from other airlines trying to stay afloat.

The equity sale will help set the stage for the success or failure of other airlines hoping to come to market, including Continental Airlines Inc.'s (NYSE:CAL - news) ExpressJet Holdings and Republic Airways Holdings Inc.

SOUTHWEST MODEL

The Kew Gardens, New York-based carrier had profits of $38.5 million on $320.4 million of revenue in 2001, a year when the airline industry in general lost $9 billion.

JetBlue executives aren't embarrassed to say they've copied much of its business model from Southwest Airlines Co. (NYSE:LUV - news)

Drawing the parallel can't hurt with investors, said Helane Becker, an aviation analyst at Buckingham Research Group. Dallas-based Southwest trades at a huge premium: its market capitalization is larger than the sum of all other airlines traded in the United States.

``What's important here is that the business model is solid, and they aren't deviating from it,'' said Becker, who thinks the stock will perform well.

The carrier operates a new fleet of the same type of aircraft -- only Airbus 320As -- which saves money on things like training and repair costs. It flies point-to-point routes rather than using a hub, focuses on underserved markets and contracts nonunion labor, a rarity in the industry.

The model has kept operating costs to just 7 cents per seat per mile in 2001, almost a third lower than the industry average, according to its prospectus. Travelers aren't fed meals, but they're compensated with leather seats and satellite TV piped in to televisions on every seat.

Another consideration is management's track record, something of particular importance to investors in upstart companies.

Chief Executive David Neeleman was a founder of Morris Air, a low-fare airline that was sold to Southwest. Before that he founded WestJet Airlines Ltd. (Toronto:WJA.TO - news), a Calgary-based carrier that's risen 247 percent since going public on the Toronto Stock Exchange in 1999, and 65 percent since Sept. 11.

PITFALLS

Investors wanting a piece of the action will probably have to pay.

The average valuation of publicly traded airlines is about 10 times the earnings expected for the future 12 months. JetBlue will likely be priced closer to Southwest's valuation, 19 times earnings, said Buckingham's Becker.

By some measures it may even be more expensive. The enterprise value -- market capitalization plus debt minus cash flow -- to sales ratio for the trailing year, a valuation used by analysts at Renaissance Capital's IPO Plus Fund, is expected to be 3.3, more than the 2.6 of Southwest.

The company also has a rising debt load, as it finances the planned tripling of its fleet from 24 to 83 in five years. Using one measure, its long-term debt is equal to about 50 percent of its overall capital, according to Renaissance Capital's analyst Melanie Hase, double the debt ratio that Southwest has.

``That kind of debt is a reality for a company that plans to grow that ambitiously,'' said Hase.

Overall, the airline industry has hit hard times. While traffic is picking up again from post-Sept. 11 lulls, the costs of security have risen and turmoil in the Middle East has sent fuel costs soaring.

In the last six weeks jet fuel has risen by about 15 percent, which translates into about $1.2 billion of new annual costs for the industry.

Even so, those costs will probably be passed onto the customer and won't likely stop this stock from performing, said Renaissance Capital's Hase.

``This is a hot company,'' she said

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b737gearboy

IPO REPORT

JetBlue IPO taking flight Friday
Airline, plus biotech firm Ribapharm slated for takeoff

By Steve Gelsi, CBS.Marke****ch.com
Last Update: 8:27 AM ET April 8, 2002




NEW YORK (CBS.MW) - JetBlue is expected to make its debut Friday, marking the first U.S. IPO from an airline in three years.

"There's definitely a lot of interest in it," said Linda Killian, a co- manager of the IPO Fund (IPOSX: news, chart, profile), run by Renaissance Capital. "There are so many buy-side people in New York and so many of us have flown JetBlue."

Air France was the last airline to offer shares in the U.S. back in 1999, according to IPO tracking firm Dealogic. Back in 1997, seven airlines debuted including Midway and Virgin Express (VIRGY: news, chart, profile).



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Kew Gardens, N.Y.-based Jet Blue plans to offer 5.5 million shares at an estimated price range of $22 to $24.

In a sign of strong investor interest, JetBlue (JBLU: news, chart, profile) recently upped the top payoff of the deal to $132 million, from a maximum of $125 million in its original IPO filing in December.

Institutional stock buyers -- the big players in the IPO market -- are already quite fond of airline stocks.

Discount airline Southwest Airlines (LUV: news, chart, profile), a leader in the discount airline sector inhabited by JetBlue, has a marquee list of stockholders including State Street, which owns 12 percent; Fidelity, American Express Financial, Barclays Global Investors, TCW Group, Banc of America, Primecap Management, Janus, Vanguard, Alliance Capital and Putnam Investments, according to Multex.

JetBlue is the first of a series of airline IPOs planning to tempt investors this year. Earlier this week, ExpressJet, a unit of Continental (CAL: news, chart, profile), increased the size of its IPO in a bullish move. See full story.

Killian said the IPO sector, along with the broader market, continues to be stymied by uncertainty over the war in the Mideast, the threat of terrorism and rising fuel prices.

Nevertheless, JetBlue has caught Wall Street's fancy with its flat price structure and crisp flight schedule, Killian said.

Overall, airline stocks have been gaining ground from their lows following the Sept. 11 terror attacks.

Deutsche Banc Alex. Brown analyst Susan Donofrio said in a note on Friday that recent March traffic results for the major airlines paced ahead of capacity reductions. A 9.1 percent decrease from year-ago traffic was logged, but activity rose from February

Jet Blue is working with underwriters Morgan Stanley Dean Witter and Merrill Lynch.

The company, which was launched February 2000 out of John F. Kennedy Airport, operated 108 flights a day as of Feb. 28. It has already turned a profit

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CAL 757-300

Great posts about the Jet Blue IPO. It will be interesting to see how the offering fares this month. With all the turmoil in the Middle East and the roller coaster ride Wall St. has been on in recent weeks, I wouldn't expect a great return on your investment initially but it'll be a good investment in the longer term. We'll see how long they remain successful before they really piss off AA in JFK and a real war begins.

Sentinel Chicken

Hmmmm, you know I think a lot of IPOs are hyped up and the real test of stock valuation is around a year after the IPO filing. Then we'll see what sort of value jetBlue is then. Besides, I don't think I can have two airlines in the stock portfolio as I'm in LUV already.

I seem to remember from somewhere that jetBlue is got some very generous financing terms on their A320s that basically are cut rate early on and then kick up to more realistic rates further down the road. Is this true? If so, that puts the current profits in a slightly different light.

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Stanman

I've noticed that most IPO's drop about 30% in value within a week of the first day of buying. I'd wait a bit and see. Interesting thought about the A320 purchase details. We'll have to see what evolves.

b737gearboy

Chicken,
That has been the rumor I have heard as well. The rumor goes like this; zero payments for the first two years. Evidentally Leisure Air did that and did well till it was time to pay the piper, ie pay Airbus. I have been to two AirInc job fairs, one in DFW and one in DCA, with jetBlue in attendance at both. The story they tell is due to the tremendous amount of capital raised to start the company they were able to put a large sum of money down and get a sweetheart deal. They are the most well financed upstart in aviaition history for what it's worth.I know quite a few pilots there, and I am trying like hell to get a job with jetBlue, and none of them have been able to substantiate the aforementioned rumor. My money, if I had any, would be on Neelman. He has been successful in his endeavors so far (I believe CEO at Morris Air and help start Westjet) and seems to be on track with jeBlue. Only time will tell.



All this reminds me of an old joke: How do you make a million bucks in aviation, start with five million!
Just do a couple of more sphincter exams this week Chicken and use the money on some JBLU stock.

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Sentinel Chicken

Neeleman set a new standard in the amount of capital he raised to start jetBlue- if there's one common thread amongst the failures of startup airlines since deregulation, being undercapitalized is one of the biggest and often the primary factor in their demise.

It only makes sense to my birdbrain that going public would provide an infusion of capital when they are headed for expansion with their current debt load.

Their stock is worth watching, but I'll want to see its value after the IPO hype subsides. National was planning an IPO last year I think, but that was more out of a need for, that's right, more capital- not for expansion, but to pay the bills. Not a good sign and definitely not a good reason for an IPO!

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