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Module 12 Regional Airlines – JetBlue. Michelle Kelly. Background. 15 mainline carriers and 70 regional carriers Industry Revenue: $138.3 billion Profit: $6.9 billion (5%) Largest Competitors Delta – 18.1% United – 16.1% Southwest – 12.4% American – 10.3% US Air– 7.7%.
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Module 12Regional Airlines – JetBlue Michelle Kelly
Background • 15 mainline carriers and 70 regional carriers • Industry Revenue: $138.3 billion • Profit: $6.9 billion (5%) • Largest Competitors • Delta – 18.1% • United – 16.1% • Southwest – 12.4% • American – 10.3% • US Air– 7.7%
Current Environment • Decrease in Demand • 9/11 caused a large decline in air travel • Market recovered over the next 7 years • 2009- decline in revenue of 16.3% • Causes: • Financial Crisis • Global Health Epidemics (Swine Flu) • Slow recovery • Increased costs • Crude oil prices increasing • Employee wages and benefits plans
Future outlook • Revenues are expected to continue to grow as the industry recovers from the financial crisis • Increased oil prices continue to be a threat • Offset by additional fees and charges • Decrease in the number of routes offered • Stick to profitable routes/hubs • More consolidation expected
jetBlue • Low Budget Airline • Headquartered in Queens, NY • Major Airport: JFK • Market Share: 5.1% • Serve 84 destinations in 24 states
Strategy • Offer distinctive flying experience • Low cost but high value • “jetBlue experience” – try to build brand loyalty • Try to offer superior customer service • Serve high value areas: • New York • Boston • Florida
Expanded Balance Sheet and Income Statement • Added information for years ended 2010-2013 including • Deferred tax assets and liabilities • Details about PP&E • Intangible Assets • Revenue Breakdown by type of revenue and by geographic area
Present Value of Operating Leases • Remaining Life: 1088/114 = 5.32 years
Adjustments • NEA : Increased by $1,088 • NFL: Increased by %1,088 • EPAT: (205-(1088/10.325))(1-.39) = $61 • FEAT: (1088*5.25%)(1-.39) = $35
Growth Forecast • New planes are increasing passenger capacity over the next 3 years • However, current revenue growth is unsustainable • Eventually capacity will stabilize • Other Revenue is grown at the same rate as passenger revenue because it is a product of capacity • Revenue from LiveTV has experienced a downturn and but is expected to stabilize next year
EPM Forecast • Aircraft fuel expense is supposed to decrease due to hedging and increased efficiency of newer planes • Salaries and wages are supposed to increase approximately 2% in the next five years • Maintenance and repairs is gradually increasing as the fleet grows and as it gets older
EATO Forecast • Flight Equipment is expected to decrease as JetBlue sells off more of the planes it owns • Assets constructed for others will decrease now that construction on JFK is completed
Determining Beta- Other Sources • www. google.com 1.24 • www.nasdaq.com 1.44 • http://investing.money.msn.com 1.24 • http://www.reuters.com 1.02 • http://finance.yahoo.com 0.55 • http://research.scottrade.com 1.00 • http://research.tdameritrade.com 1.00 • http://www.firstrade.com 0.55 • http://finance.comcast.net 1.02 • http://www.zacks.com 1.24 • http://www3.valueline.com 1.25 • http://data.cnbc.com 1.02
Determining Beta • Beta: 1.24 • Supported by Regression Analysis • Supported by other analyst estimates • Higher than Bloomberg Beta but middle ground for other beta estimates
Cost of Equity Capital • Based on the Capital Asset Pricing Model • Jet Blue Cost of Equity: • -.413% +1.24 (8.5%) = 9.755% • 8.5% is the average monthly return on the S&P 500 for the last five years
Cost of Debt Capital • Annual RNFL • Average: 3.59%
Cost of Enterprise Capital • VD = $3,445 million • VEq = $2,450 million • Implied VEnt = $5,895 million • 3.59% (3,445/5895) + 9.755%(2,450/5,895) WACC = 6.15%
Adjustments • Enterprise Value: $5,992 • Midyear Adjustment • $5,992 * (1+6.15%)^.5 = $6,173 • Adjusted Valuation Date • $6,173 * (1+6.15%)^(4/12) = $ 6,297 • Subtract the value of debt (NFL) • $6,297 - $3,445 = $ 2,852 • Equity Value per Share • $2,852 / 295.63 = $9.65 • Current Share Price: $8.56 BUY