JET BLUE ; PREPARING FOR FINANCING

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PAU/LBS/2011/10/024

FINANCE - 2 EXAM

ANALYSIS OF JET BLUE CASE: PREPARING FOR FINANCING

SYNOPSIS OF THE CASE

JetBlue Airways Corporation was formed in August 1998 as a low-fare, low-cost but high service passenger airline serving select United States market. JetBlue's operations strategy was designed to achieve a low cost, whilst offering customers a pleasing and differentiated flying experience. JetBlue has had a successful business model and strong financial results during that period, and performed well in comparison to other airline companies in the US during the period between 2000 and 2003. It had been the only other airline apart from Southwest airlines, to have been profitable during the aftermath of the September 11, 2001 attacks on World Trade Center, and at a time when the entire airline industry was experiencing losses.

The core of JetBlue's strategy was low operating cost achieved through a smaller and more productive workforce; utilizing aircraft efficiently; better use of technology to achieve lower distribution cost i.e. use of electronic ticket as against paper ticket; use of brand new single model planes that reduced maintenance costs and training costs at the same time. However, moving into the growth phase, JetBlue was contemplating expansion with the introduction of a new model of planes, i.e. Embraer E190, that are smaller than the A320s that they were using. These planes were to be utilized for penetrating mid-size cities and also during off-peak times on existing routes. The company defined these markets as destination with 100 to 600 local passengers per day each way, compared to the much larger markets that the company was serving with its A320s. This had potential implications for its low-cost strategy.

Jetblue's expansion required investments in areas other than just new aircraft. Owen needed to decide how to raise additional capital to fund the company's growth. Investment bankers had presented two financing proposals; a new public equity offering and a private placement of convertible debentures. Own needed to decide which proposal, if any, to recommend to the board.

QUESTION 1

PART A

In early 2003, JetBlue continue to see opportunity to grow by adding both new market and new flight to existing destination. One of such new market where the company believed there was attractive opportunity was the mid-sized market segment which comprised of destinations with 100 - 600 local passengers per day each way. To accommodate this growth, the company is seeking to purchase 65 new Airbus A320, with an option to buy additional 50 new aircraft, and also committed to purchase 100 Embraer E190 aircraft, with the option to purchase 100 additional ones. Jetblue had embarked on a $6.8 billion plane acquisition program that would increase its aircraft fleet from 45 to 252, including existing aircraft purchase commitment.

The company needs thus to think about a way to finance those acquisitions, as well as other needed investments such as spare parts, new engines, additional hangars and a flight training centre

JOHN OWEN THE CFO OF JETBLUE IS TRYING TO DECIDE WHICH OF TWO FINANCING PROPOSALS (NEW PUBLIC EQUITY OFFERING AND A PRIVATE PLACEMENT OF CONVERTIBLE DEBENTURE) TO PURSUE. A straight equity issue will dilute his principal shareholders' ownership, but favored a conservative capital structure that would help to ensure JetBlue's financial flexibility, access to capital and a favorable lending rate. On the other hand, a convertible debt alternative seems less dilutive, and cheaper, but brings with it an increased risk of default and financial problems.

PART B

The financing decision taken by the CFO is important because of the positive impact it is expected to have on the current and future performance of the JetBlue. The considerations as regards impact of the financing decision are discussed;

IMPACT ON CURRENT PERFORMANCE OF THE COMPANY

It is expected that the new...