Module 4 and 5 Regional Airlines - jetBlue

1. Module 4 and 5Regional Airlines - jetBlue Michelle Kelly

2. Mod 4-Calculation of 2013 Values • Compared Q3 2013 to Q3 2012 to get growth rate • Applied to December 31, 2012 numbers to compute 2013 values • Exception: Operating Expenses (% of revenue)

3. Mod 4-Calculation of 2013 Values

4. Mod 4 – Return on Net Enterprise Assets (RNEA) • Growing from year to year • Stable

5. Mod 4 – RNEA Comparison • Cannot compare to Spirit because they are in growth stage • Significantly below competitors

6. Mod 4 – Breaking Apart RNEA – Enterprise Profit Margin (EPM) • EPM is stable • Indicates that the firm is doing a good job of keeping costs steady and • maintaining their operating profit margin.

7. Mod 4 – Breaking Apart RNEA – Enterprise Asset Turnover (EATO) • EATO is stable but growing • Being more productive with assets • Fairly Low

8. Mod 4 – RNEA Comparison • JetBlue has the lowest RNEA of the four firms because it has a lower EPM and EATO than most competitors. • Indicates that the company has lower operating margins and is not as effective at using assets to generate revenue.

9. Mod 4 – Forecasting Sales Growth

10. Mod 4 – Forecasting Sales Growth • Assumption – Sales Growth of 9% • Conservative compared to average of 12.5% • Slightly higher than Southwest and Delta but much lower than Spirit • Reflects the company’s desire to expand and grow in the next five years

11. Mod 4 – Forecasting EPM

12. Mod 4 – Forecasting EPM • Assumption – EPM of 4.46% • Average of the last three years • Reasonable in comparison to competitors • Slightly above Southwest because they have lower costs • Much lower than Spirit which as a “barebones” airline has minimal costs • Delta’s EPM is to volatile to compare against

13. Mod 4 – Forecasting EATO

14. Mod 4 – Forecasting EATO • Assumption – EATO of 1.15 • Average of the last three years • Conservative as the company will probably use assets more effectively as they grow. • Continues to be lower than all other competitors

15. Mod 4 - Forecast • Assumptions: • Sales Growth – 9% • EPM – 4.46% • EATO – 1.15

16. Mod 5 – Valuing JetBlue

17. Mod 5 – Discounting Back FCF • Discount rate of 10% • Sum of PV FCF is ($942)

18. Mod 5 – Present Value of Perpetuity • Expected FCF for 2019 is ($242) • Value of perpetuity is equal to the expected cash flow divided by the required rate of return minus the growth rate • ($242)/(.1-.05) = ($4,833) • The expected growth rate in perpetuity has been decreased from 9% to 5% in order to provide a more conservative and realistic expectation of growth • Must discount the total value of the perpetuity to the present • ($4,840)/(1.1)^5 = ($3,001)

19. Mod 5- Present Value of Enterprise • Sum of the PV FCF + PV of Perpetuity = Enterprise Value • ($942)+($3001) = ($3,943) • For Comparison, the Enterprise Value of the Firm per the Balance Sheet is $5,047.

20. Mod 5 – USING DCF Analysis • Benefits • Easy to calculate and understand • Evaluates projects which enhance shareholder value • Disadvantages • Very subjective analysis based on inputs for growth etc. • Focused more on long term projects • Not good at valuing companies with a negative FCF • Makes companies seem like a bad investment which will not generate a profit. However, many companies with negative case flows generate increasing earnings and increased stock prices.

21. Questions?