Jetblue Airways SWOT and Financial Analysis

Jetblue personal line of creditways SWOT and Financial AnalysisExecutive summaryIn this report, the m whiztary position of JetBlue Airways Corpo dimensionn, a hapless(prenominal)-f atomic number 18, unkept-cost passenger Airline beau monde serving the US market, is studied in fiat to provide recommendations to the smart set with regards to its enthronizations plans.By the year 2003, the beau monde is intending to chthonianpin its set roughlyth through with(predicate) the learnedness of several cutting aircraft over the coming 13 years. The caller-up go away thereof need a broad(prenominal) capital expenditure to live on those acquisitions, as well as several related coronations.For the purpose of this study, a SWOT analysis of JetBlue as by its position in June 2003 is performed. A background research is conducted in browse to assess how new(prenominal)(a) air hose companies argon pecuniary backing their aircraft acquisitions and early(a) investments, an d in a broader aspect, study the specificities of their financial twists.The different financing alternatives avail open to the attach to ar presented and studied in relation to the financial position of the attach to.A non-financial analysis of the debt and equity choices is conducted, in order to assess the relevance of each of those options with regards to all atomic number 18as of the business other than finance.The outcomes of those analyses are combined and a recommendation is issued to the Chief Financial moroseiceholder of JetBlue It is recommended that the bon ton issues crude stock in order to finance the require investments in the minute half of 2003. In a longer-term perspective, it is recommended to the beau monde to routine leases and secured debt for the upcoming aircraft acquisitions when complimentary terms are avail adequate to the social club, and to finance the remain purposes of the investments through currency gene pointd from operations and through matter of fresh equity, in order to compensate for the increasing financial and operational risks of the telephoner. bother DefinitionJetBlue Airways Corporation is a low-fare, affordable passenger respiratory tract society serving the US market. The ac smart set completed an IPO in April 2002, rough two years after it was founded.JetBlue has had a successful business clay sculpture and strong financial results during that period, and performed well in comparison to other air hose business companies in the US during the period between 2000 and 2003.The comp either, as by July 2003, is beholding several opportunities to grow by adding new markets and new flight of stepss to existing destinations. To meet this growth, the company is seeking to purchase 65 new Airbus A320, with an option to debase surplus 50 ones, and besides perpetrate to purchase 100 Embraer E190 aircraft, with the option to purchase 100 superfluous ones.The company demand therefrom to ju dge about a way to finance those acquisitions, as well as other needed investments such as spare parts, new engines, extra hangars and a flight breeding center.John Owen, the Chief Financial military officer of JetBlue, is in aid of finding the scoop out financing scheme for the company.The puzzle facing John Owen is twofold First, he needs to finance the acquisitions intend for the second half of 2003. Indeed, for the period from July 1 to December 31, 2003, the company has committed to purchase 8 Airbus A320 aircraft, for a total add together of $305 million to be paid in 2003 (Exhibit 8). The company is generating cash from its operate activities that heart and souled to $129,725 megabyte for the archetypical half of 2003, and already generated $238,989 potassium from financing activities (Exhibit 6). This impart cover for part of this capital expenditure estimated at $570 million for 2003 (Exhibit 9). So John Owen needs to finance the remaining part of this capita l expenditure.Second, John Owen needs to look at back about a long-term financing strategy. Indeed, JetBlue is committed to the purchase of 207 additional aircraft for a total amount of $6.86 billion over 8 years. Owen has to think about the best capital social organisation for the company and indeed the best financing strategy for JetBlues investments, including the aircraft acquisitions and the related investments.SWOT AnalysisStrengthsThe inaugural volume of JetBlue is its creative activity teams background. Indeed, the company was founded by a veteran in the low-fare airline industry, backed by a group of private equity firms. The oversight of the company has overly the expertise of leading a publicly held company, pastime the IPO in 2002.The company has a successful business symbol and presents strong financial results, as well as strong revenue enhancement growth despite the downturn in the industry following the terrorist attacks of kinfolk 11, 2001. gum olib anum, JetBlue is a perceived as a solid and growing company by the investors.The low operation costs of JetBlue are one of the nigh important strengths of the company. The company is utilizing aircraft efficiently generating a good deal revenue per plane. The company is also operating one persona of aircraft, the Airbus A320, thus lowering alimony and training costs and spare parts needs.The workforce of JetBlue is non-unionized and does non benefit from stringent work regulations.The distribution costs of JetBlue are also low. Indeed, the company does not provide any paper tickets.The company operates whole new airplanes, thus minimizing maintenance costs and offering a proficient flying date to its customers. The company also benefits from its reliable on-time performance, comfortable airplanes, and friendly flying military force to take out and secure its customer base.The company serves densely populated cities in underserved airports, with high fares. This strategy helps the company capture market share in these segments.The company is financing its existing aircraft through secured debt and operating leases, on favorable terms. Those financing possibilities are still available for the company for additional aircraft purchase.WeaknessesA considerable weakness of JetBlue is its tiny size. The company is operating 42 aircraft, for 73 flights per day and annual revenues of $635 million.The company scum bag probably not imprecate on its personnel loyalty, due to the non-advantageous working conditions and regulation.The company is operating solo one type of airplane, the Airbus A320. This represents a weakness for the company as well. Indeed, the planes make up the identical age and might all suffer at the same time from an ultimate re topical technical problem on this type of aircraft, which should be catastrophic for the company.JetBlue does not bring in a line of credit, or short-term bearing facility. on that pointfore, the company depends on its operating cash ply to finance its short-term and working capital obligations. The balance sheet of the company also needs to be strengthened.JetBlue also faces one of the airlines principal risks which is the cost increase enkindle price. The company is spending a considerable amount of specie in hedgerow for provide prices volatility. In addition, as the company is relatively consuming low volumes of give notice, it scum bag suffer from signifi send packingtly high prices in episode of burn down shortage.JetBlue is a levered company. With a short-term debt of $26,580 thousand and a long-term debt of $731,740 thousand as by June 2003, and equity of $480,594 thousand, the companys leverage ratio is 157.8%, whereas the industry average is around 129.46% (Infinancials).OpportunitiesInternalThe purchase of the new 100-seat Embraer E190 aircraft would reserve JetBlue to enter smaller markets while maintaining low operating costs, and increase flight frequenc y on existing routes.The private placement of redeemable debt proposed by JetBlues investment bankers would provide sufficient capital at relatively low interest rates.JetBlue is a fast growing company, and should thus bear having less debt. The company has thus the luck to raise additional equity. orthogonalThe low fares offered by JetBlue would allow it to attract new passengers who might otherwise not fly.The mid-sized market that JetBlue intends to enter allow for represent a new opportunity for growth to the company.By expanding its activities, the company will purchase larger volumes of tarry fuel and would thus project more leverage in procuring fuel than today. The company will thus suffer relatively less from fuel shortages.ThreatsInternalThe company is intending to grow and become an airline company comparable the others. JetBlue might thus lose its advantages from being low-cost, small and highly profitable.The company is clearly departing from its strategy, which ha s been the source of its strengths up to 2003.JetBlue plans to purchase a new type of aircraft, the Embraer E190. This is again a departure from the companys initial strategy which is to operate only one type of aircraft. JetBlue might thus feel higher maintenance and training costs, higher spare parts and engines costs, and nearly negative violation on the maintenance scheduling.JetBlue plans to increase its aircraft put across from 45 to 252. In addition, the company plans to invest in other domains such as spare parts, new engines, additional hangars and a flight training center. This represents a very thumping investment and thus a consequent threat for the company. Such an investment will let the company more exposed to financial suffering and raises the question of the heed ability to cope with such a speedy expansion.The company board members are very concerned about dilution. There is a threat that they will not support John Owen, the CFO, if he recommends to raise ne w equity capital.With the rapid expansion of the company, the jet fuel expenses, as well as the cost of their hedging will grow rapidly. The company will be more exposed to both the fuel price volatility and the growing cost of hedging it.As the company will get bigger, with higher manpower, those might want to be unionized.ExternalThe fuel price is also an external factor due to its non-predictable volatility.JetBlue plans to be the launch customer for the new Embraer E190 aircraft. Although this allowed probably the company to have a price discount, it is also a threat. JetBlue might be exposed to technical and/or non-technical problems that have been not detected by the manufacturer or other users of the jet.The reason for the company to go public was to wean off its dependence on the venture capital and private equity industries. payoff private debt securities represent a threat for JetBlue as this might jail back the company to such private investors. In addition, those inves tors and the private investors in general might not be interested by the eventual similar debenture issued by the company.JetBlue is a small client of Morgan Stanley, the investment bank in charge of proposing financing alternatives for the company. Morgan Stanley might thus charge heavily JetBlue, and/or try to bias the companys choice for its benefit.The competition from other low-cost and first-string airline companies which might try to counter JetBlues expansion.The revenues of the company and its growth aspirations are put down to the frugal conditions. An economic downturn or additional terrorist attacks might impact negatively JetBlues ability to finance its debt obligations.The company will also have to secure additional airport gate which will represent a threat for the company in case it cannot negotiate advantageous conditions as with underserved airports.The alternativesIn order to finance the acquisitions plan for the remaining part of 2003, JetBlue received two f inancial propositions from the investment banks.The first alternative is to issue additional 2.6 million shares at an estimated $42.50 per share. JetBlue will thus be able to raise up to $110.5 million. The fees and commissions of the bank for this proposal amount to $3,591,250 which represents a cost of 3.25%.The second proposal from the investment banks is to issue $ one hundred fifty million in a private placement of convertible debentures. The debentures will be a 30-year convertible debt with a coupon rate of 3.5%. In addition, the debt will be convertible into shares of JetBlue at $63.75 per share, which represents a conversion rate of 15.6863 shares per $1,000 principal amount of notes.The notes will be unfastened obligations and will rove equal in right of payment with all other unsecured debt. Currently, all of JetBlues debt is secured.The bank will not charge any additional fees for this alternative.JetBlue can consider some other alternatives as well. Indeed, the compan y can issue some preferred stock. This stock might be considered as equity in accounting, to strengthen the balance sheet of the company, but will at the same time accommodate the board members concern about dilution. This preferred stock option might however fail to attract investors.Another alternative might be the issuance of simple collective bonds. The coupon rate for those will however be higher than the 3.5% of the convertible bonds. This option will thus cost more for JetBlue than convertible bonds, especially before the companys shares price eventually exceeds $63.75.Issuing public corporate bonds will have higher cost for the company as well. Indeed, those need to be ranked by some ranking agencies and will have higher coupon rates (Exhibit 12).Two other alternatives exist for JetBlue, for the aircraft acquisitions financing The operating lease and the secured debt (each acquisition debt is secured by the acquired aircraft). Those two options are available for JetBlue at advantageous conditions.Thus, the alternatives that will be retained for the remaining of the analysis are the operating lease and secured debt for the aircraft acquisitions, and the equity issuance and the convertible private bonds for the acquisitions and the other investments.Background ResearchSome background research has been performed in order to assess how other airline companies are financing their aircraft acquisitions and other investments, and in a broader aspect, study the specificities of their financial organizes. This study included some regular as well as low-cost airline companies.British airway, for example, is financing its aircraft acquisitions through debt, all of which being asset related. The group is chiefly utilize finance leases and hire purchases contracts to acquire aircraft (British Airways annual Report 2010, p.104).Delta Airlines, on its side, is victimization pass-through certificates to finance aircraft (Delta Airlines Annual Report 2010, p.34). In addition, the company has $5.2 billion of loans secured by 287 aircraft (Delta Airlines Annual Report 2010, p.72).United Continental Holdings has a high amount of obligations, including debt, aircraft leases and financings (United Continental Holdings Annual Report 2010, p.53). A substantial portion of the companys assets, principally aircraft, are pledged under various loans and other obligations. The company also uses secured notes, equipment notes, pass-through certificates and multiple financings secured by certain aircraft spare parts, aircraft and spare engines (United Continental Holdings Annual Report 2010, p.55).United Continental Holdings also raises cash from issuance of common stock (United Continental Holdings Annual Report 2010, p.56).The low-cost airline companies count to be, on their side, more conservative. Indeed, EasyJet is adopting a conservative capital structure policy, including a liquidity target of 4 million cash per aircraft, and a 50% limit on net gea ring (EasyJet Annual Report 2010, p.9). each of the companys debt is asset related (EasyJet Annual Report 2010, p.85). The company holds 62 aircraft under operating leases and 8 aircraft under finance leases, out of 196 total aircraft, principally Airbus (EasyJet Annual Report 2010, p.87).RyanAir, another low-cost airline company, has a fleet of 232 Boing 737-800s. The company makes its firm-order purchases through a combination of bank loans, operating and finance leases and cash prey generated from the companys operations (RyanAir Annual Report 2010, p.42). Both RyanAir and EasyJet exhibit a capital structure that relies less on debt than the regular companies counterparts, as illustrated by the following tableIt is important to mention that some small airline companies choose to issue bonds for their investments as well. SpiceJet, an Indian airline company operating to Mumbai, Bangalore, Ahmedabad, Pune, Goa and Delhi issued in 2005 foreign currency convertible bonds worth $90 million to fund aircraft acquisitions (IndiaAviation, 2005).All in all, airline companies are utilise both debt and equity (together with other financing means, including cash flows generated from operations) to raise money. In its Airlines return to capital markets article, David Knibb (2009) summarizes the ways several companies found financings Lufthansa, Air-France KLM, British Airways, Air Canada, Australias Virgin Blue, Avianca and Indian carrier Kingfisher all issued bonds during 2009.AMR utilise private lenders to borrow money.Some other companies, smaller, chose to issue shares SAS, Virgin Blue, AirAsia, Kingfisher, and Icelandair.From this study, it appears that the majority of airline companies are financing their aircraft acquisitions, apart from using cash flow generated by operations, through debt, either leases or secured debt. Other investment needs are financed either through debt or equity, depending on the companies. However, a common trend to low-cost companie s seems to be their conservative financial structures, in comparison to bigger, regular airline companies.Financial Analysis of the AlternativesAs per June 2003, JetBlue Corporation has a short-term debt of $26,580 thousand, a long-term debt of $731,740 thousand and equity of total $480,594 thousand (Exhibit 5a).In order to compute an average interest rate for the company, data from 2002 are usedThe interest expenses for this year equaled $10,370 thousand (exhibit 4), for a total long-term debt of $690,252 thousand (Exhibit 5a), thus an interest rate of 1,5%.The tax expenses as per June 2003 are of $40,188 thousand for a total earnings before tax of $95,503 thousand (exhibit 4), thus a corporate tax rate of 0.42.From exhibit 1, the JetBlues equity beta during the period from April 2002 to June 2003 is 0.69. As per the data from Exhibit 5a for June 2003, the financial structure of the company was as followsFrom the Hamadas formula, we can compute the unlevered beta of JetBlue as fol lowsBeta(u)=Beta(l)/1+(1-T)*(Wd/We)With Beta(l)=0.69, T=0.42, Wd=61.21 and We=38.79Thus Beta(u)=0.36In addition, from exhibit 12, the Treasury bill interest rate as of June 30, 2003 is 1.09%, this will be used as the safe rate of return. expect a market rate of return 9 points higher than the risk-free return, we can use the WACC spreadsheet in order to estimate the financial structure of JetBlue that minimizes the WACC of the company Appendix 1.It turns out that the company has an best financial structure, minimizing its plodding average cost of capital, following those estimated figures.Any of the two options, either the convertible debt or the equity, will probably pull the financial structure from its current optimal position.For the first alternative, the convertible debenture, the coupon rate of this bond is 3.5%, for a total amount of $150,000 thousand.The weighted average cost of debt for JetBlue, if they issue such bonds, will be (3.5%*150,000)+(1.5%*731,740)/(150,000+ 731,740), thus 1.84%.The financial structure of JetBlue will be as follows employ the WACC spreadsheet, we can see the companys financial position with regards to the optimal financial structure of JetBlue following the new cost of debt Appendix2.If JetBlue chooses the debt option, the financial structure of the company will no more be the one offering the minimal WACC.The same analysis can be done for the second alternative. Following the shares issuance, the financial structure of JetBlue will be as followsUsing the WACC spreadsheet, we can see the companys financial position with regards to the optimal financial structure of JetBlue following the raise in equity Appendix3.From this analysis, it can be note that JetBlue will still have a financial position that minimizes the companys weighted average cost of capital, thus maximizing the overall cheer of the companys stock.It can be concluded, from a financial point of view, that the best alternative for the investments mean for 2003 is the equity issuance.Non-Financial AnalysisJetBlues passenger revenues knew a steady growth from 2000 ($101,665 thousand) to 2002 ($615,171 thousand). The revenues are forecasted to continue to grow up to a take aim of $1,796.9 million in 2005 (Exhibit 9). This revenue stableness and expected high growth provide a strong confidence to JetBlue in its ability to meet its financial obligations, thus having the opportunity to issue either debt or equity.The companys assets amount to $1,565,322 thousand as per June 2003. Those assets are principally composed by operating property and equipment, which are pledged under the operating leases and secured debt of the company. If JetBlue chooses to finance its future aircraft acquisitions by debt, the acquired aircraft can be used to secure the corresponding debt.JetBlue, as any airline company, incurs very high fixed costs due to its high value operating property and equipment. The company has thus a very high operating leverage and is greatly exposed to the risk of cash flow projections errors in case it does not meet the projected revenues figures. Any variate in the estimated revenues, might lead the company to a position where it could not meet its financial obligations related to debt. From this point of view, JetBlue needs to secure its cash flows.As stated earlier, the company revenues knew a high growth for the designer years and are expected to continue growing steadily. This high level of growth allows the company to rely on equity.JetBlue is a profitable company, in comparison to peers, as stated in the following graphJetBlue exhibits good levels of gross margin and operating margin.Furthermore, the companys return on sales, return on assets and return on equity are higher than industry averages and the company can be said to be quite profitable in comparison to company peers. This offers some flexibility to the company to rely on debt.JetBlue has a high level of tax rate (0.42), this allows the co mpany to have an even lower cost of debt and offers the company the advantage of being able to rely more on debt in order to minimize its weighted average cost of capital.All of the companys debt is secured. In addition, the company does not have any line of credit, or short-term borrowing facility. The company does therefore not have any control restrictions or obligations towards its creditors.The shareholders of the company are on their side very concerned about any dilution. This timidity of losing the control of the company limits the possibility of the CFO to issue new equity.The founding and managerial team of JetBlue is issued from the airline industry. They are used to manage a highly leveraged and public company. They should thus have a positive military posture towards high levels of debt. They should be able to deal with the opposite aspect (issuing more equity) as well.JetBlue does not need any rating agency for the issuance of the bonds, as those are private. The alt ernative of issuing public bonds has been eliminated as this one will incur higher costs for the company. The lenders of the company seem on their side to have a positive attitude towards the company, which should be able to issue additional secured debt for its aircraft acquisitions with advantageous conditions.The company has been performing well in the recent years. However, many major US air carriers struggled between 2000 and 2003, and some of them filed for bankruptcy protection. The market is impacted by a general economic slowdown caused partly by the terrorist attacks of September 11, 2001. The market is also subject to big variations depending on several unpredictable factors, like political stability, put up conditions, natural disasters, terrorist attacks etc. All of this calls for some financial conservatism for the airline industry.The internal stability of JetBlue will probably continue to hold, unless the company faces some financial distress, or if the shareholders are no more supporting the management team. From a short-term point of view, John Owen might lose the shareholders support if he goes for equity issuance. From a mid to long-term point of view, he might as well negatively impact the internal stability of the company if he is not conservative enough to avoid any financial distress situation.The debt offering will afford JetBlue less financial flexibility, especially due to the jet fuel prices. If fuel prices rise, this will incur less operating income and thus some difficulties to the company to meet its additional debt service payments. Owen has also to review his hedging strategy of the fuel prices volatility If the company chooses to hedge more of its fuel consumption, it will incur much higher hedging costs. If on the contrary the company chooses to reduce hedging costs, it will be more exposed to financial distress when the prices increase. refinement The best solutionJetBlues market capitalization can be estimated at around $3 .12 billion (74,423,693 * $41.98) as per June 30, 2003.The company is intending to grow heavily in the following years, and has plans to acquire 207 new aircraft for a total $6.86 billion up to 2011,