In this study, the fiscal place of JetBlue Airways Corporation, a low-fare, low-priced rider Airline Company functioning the US market, is studied in order to supply recommendations to the company with respects to its investings programs.
By the twelvemonth 2003, the company is meaning to back up its growing through the acquisition of several new aircraft over the coming 13 old ages. The company will therefore necessitate a high capital outgo to back up those acquisitions, every bit good as several related investings.
For the intent of this survey, a SWOT analysis of JetBlue as by its place in June 2003 is performed. A background research is conducted in order to measure how other air hose companies are financing their aircraft acquisitions and other investings, and in a broader facet, analyze the specificities of their fiscal constructions.
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The different funding options available to the company are presented and studied in relation to the fiscal place of the company.
A non-financial analysis of the debt and equity options is conducted, in order to measure the relevancy of each of those options with respects to all countries of the concern other than finance.
The results of those analyses are combined and a recommendation is issued to the Chief Financial Officer of JetBlue: It is recommended that the company issues common stock in order to finance the needful investings in the 2nd half of 2003. In a longer-term position, it is recommended to the company to utilize rentals and secured debt for the upcoming aircraft acquisitions when favourable footings are available to the company, and to finance the staying parts of the investings through hard currency generated from operations and through issue of new equity, in order to counterbalance for the increasing fiscal and operational hazards of the company.
Problem Definition
JetBlue Airways Corporation is a low-fare, low-priced rider air hose company functioning the US market. The company completed an IPO in April 2002, around two old ages after it was founded.
JetBlue has had a successful concern theoretical account and strong fiscal consequences during that period, and performed good in comparing to other air hose companies in the US during the period between 2000 and 2003.
The company, as by July 2003, is seeing several chances to turn by adding new markets and new flights to bing finishs. To carry through this growing, the company is seeking to buy 65 new Airbus A320, with an option to purchase extra 50 1s, and besides committed to buy 100 Embraer E190 aircraft, with the option to buy 100 extra 1s.
The company needs therefore to believe about a manner to finance those acquisitions, every bit good as other needed investings such as trim parts, new engines, extra airdocks and a flight preparation centre.
John Owen, the Chief Financial Officer of JetBlue, is in charge of happening the best funding strategy for the company.
The job confronting John Owen is double: First, he needs to finance the acquisitions planned for the 2nd half of 2003. Indeed, for the period from July 1 to December 31, 2003, the company has committed to buy 8 Airbus A320 aircraft, for a entire sum of $ 305 million to be paid in 2003 ( Exhibit 8 ) . The company is bring forthing hard currency from its operating activities that amounted to $ 129,725 1000 for the first half of 2003, and already generated $ 238,989 1000 from funding activities ( Exhibit 6 ) . This will cover for portion of this capital outgo estimated at $ 570 million for 2003 ( Exhibit 9 ) . So John Owen needs to finance the staying portion of this capital outgo.
Second, John Owen needs to believe about a long-run funding scheme. Indeed, JetBlue is committed to the purchase of 207 extra aircraft for a entire sum of $ 6.86 billion over 8 old ages. Owen has to believe about the best capital construction for the company and therefore the best funding scheme for JetBlue ‘s investings, including the aircraft acquisitions and the related investings.
SWOT Analysis
Strengths
The first strength of JetBlue is its founding squad ‘s background. Indeed, the company was founded by a veteran in the low-fare air hose industry, backed by a group of private equity houses. The direction of the company has besides the expertness of taking a publically held company, following the IPO in 2002.
The company has a successful concern theoretical account and exhibits strong fiscal consequences, every bit good as strong gross growing despite the downswing in the industry following the terrorist onslaughts of September 11, 2001. Therefore, JetBlue is a sensed as a solid and turning company by the investors.
The low operation costs of JetBlue are one of the most of import strengths of the company. The company is using aircraft expeditiously bring forthing more gross per plane. The company is besides runing one type of aircraft, the Airbus A320, therefore take downing care and preparation costs and trim parts demands.
The work force of JetBlue is non-unionized and does non profit from rigorous work ordinances.
The distribution costs of JetBlue are besides low. Indeed, the company does non supply any paper tickets.
The company operates merely new aeroplanes, therefore minimising care costs and offering a good “ winging experience ” to its clients. The company besides benefits from its dependable on-time public presentation, comfy aeroplanes, and friendly winging forces to pull and procure its client base.
The company serves dumbly populated metropoliss in underserved airdromes, with high menus. This scheme helps the company gaining control market portion in these sections.
The company is financing its bing aircraft through secured debt and operating rentals, on favourable footings. Those funding possibilities are still available for the company for extra aircraft purchase.
Failings
A considerable failing of JetBlue is its little size. The company is runing 42 aircraft, for 73 flights per twenty-four hours and one-year grosss of $ 635 million.
The company can likely non rely on its forces trueness, due to the non-advantageous on the job conditions and ordinance.
The company is runing merely one type of aeroplane, the Airbus A320. This represents a failing for the company every bit good. Indeed, the planes have the same age and might all endure at the same clip from an eventual recurrent proficient job on this type of aircraft, which should be ruinous for the company.
JetBlue does non hold a line of recognition, or short-run adoption installation. Therefore, the company depends on its operating hard currency flow to finance its short-run and on the job capital duties. The balance sheet of the company besides needs to be strengthened.
JetBlue besides faces one of the air hose ‘s chief hazards which is the lifting fuel monetary value. The company is passing a considerable sum of money in fudging for fuel monetary values volatility. In add-on, as the company is comparatively devouring low volumes of fuel, it can endure from significantly higher monetary values in instance of fuel deficit.
JetBlue is a levered company. With a short-run debt of $ 26,580 1000 and a long-run debt of $ 731,740 1000 as by June 2003, and equity of $ 480,594 1000, the company ‘s purchase ratio is 157.8 % , whereas the industry norm is about 129.46 % ( Infinancials ) .
Opportunities
Internal
The purchase of the new 100-seat Embraer E190 aircraft would let JetBlue to come in smaller markets while keeping low operating costs, and increase flight frequence on bing paths.
The private arrangement of exchangeable debt proposed by JetBlue ‘s investing bankers would supply sufficient capital at comparatively low involvement rates.
JetBlue is a fast growth company, and should therefore bear holding less debt. The company has therefore the chance to raise extra equity.
External
The low menus offered by JetBlue would let it to pull new riders who might otherwise non wing.
The mid-sized market that JetBlue intends to come in will stand for a new chance for growing to the company.
By spread outing its activities, the company will buy larger volumes of jet fuel and would therefore hold more purchase in securing fuel than today. The company will therefore endure comparatively less from fuel deficits.
Menaces
Internal
The company is meaning to turn and go an air hose company “ like the others ” . JetBlue might therefore lose its advantages from being low-priced, little and extremely profitable.
The company is clearly going from its scheme, which has been the beginning of its strengths up to 2003.
JetBlue plans to buy a new type of aircraft, the Embraer E190. This is once more a going from the company ‘s initial scheme which is to run merely one type of aircraft. JetBlue might therefore incur higher care and preparation costs, higher spare parts and engines costs, and some negative impact on the care programming.
JetBlue plans to increase its aircraft fleet from 45 to 252. In add-on, the company plans to put in other spheres such as trim parts, new engines, extra airdocks and a flight preparation centre. This represents a really large investing and therefore a consequent menace for the company. Such an investing will allow the company more open to fiscal hurt and raises the inquiry of the direction ability to get by with such a rapid enlargement.
The company board members are really concerned about dilution. There is a menace that they will non back up John Owen, the CFO, if he recommends to raise new equity capital.
With the rapid enlargement of the company, the jet fuel disbursals, every bit good as the cost of their hedge will turn quickly. The company will be more exposed to both the fuel monetary value volatility and the turning cost of fudging it.
As the company will acquire bigger, with higher work force, those might desire to be unionized.
External
The fuel monetary value is besides an external factor due to its non-predictable volatility.
JetBlue plans to be the launch client for the new Embraer E190 aircraft. Although this allowed likely the company to hold a monetary value price reduction, it is besides a menace. JetBlue might be exposed to proficient and/or non-technical jobs that have been non detected by the maker or other users of the jet.
The ground for the company to travel public was to ablactate off its dependance on the venture capital and private equity industries. Publishing private debt securities represent a menace for JetBlue as this might lock back the company to such private investors. In add-on, those investors and the private investors in general might non be interested by the eventual exchangeable unsecured bond issued by the company.
JetBlue is a little client of Morgan Stanley, the investing bank in charge of suggesting financing options for the company. Morgan Stanley might therefore bear down to a great extent JetBlue, and/or seek to bias the company ‘s pick for its benefit.
The competition from other low-priced and regular air hose companies which might seek to counter JetBlue ‘s enlargement.
The grosss of the company and its growing aspirations are capable to the economic conditions. An economic downswing or extra terrorist onslaughts might impact negatively JetBlue ‘s ability to finance its debt duties.
The company will besides hold to procure extra airdrome Gatess which will stand for a menace for the company in instance it can non negociate advantageous conditions as with underserved airdromes.
The options
In order to finance the acquisitions planned for the staying portion of 2003, JetBlue received two fiscal propositions from the investing Bankss.
The first option is to publish extra 2.6 million portions at an estimated $ 42.50 per portion. JetBlue will therefore be able to raise up to $ 110.5 million. The fees and committees of the bank for this proposal sum to $ 3,591,250 which represents a cost of 3.25 % .
The 2nd proposal from the investing Bankss is to publish $ 150 million in a private arrangement of exchangeable unsecured bonds. The unsecured bonds will be a 30-year exchangeable debt with a voucher rate of 3.5 % . In add-on, the debt will be exchangeable into portions of JetBlue at $ 63.75 per portion, which represents a transition rate of 15.6863 portions per $ 1,000 chief sum of notes.
The notes will be unbarred duties and will rank equal in right of payment with all other unbarred debt. Currently, all of JetBlue ‘s debt is secured.
The bank will non bear down any extra fees for this option.
JetBlue can see some other options as good. Indeed, the company can publish some preferable stock. This stock might be considered as equity in accounting, to beef up the balance sheet of the company, but will at the same clip suit the board members ‘ concern about dilution. This preferable stock option might nevertheless neglect to pull investors.
Another option might be the issue of simple corporate bonds. The voucher rate for those will nevertheless be higher than the 3.5 % of the exchangeable bonds. This option will therefore be more for JetBlue than exchangeable bonds, particularly before the company ‘s portions monetary value finally exceeds $ 63.75.
Publishing public corporate bonds will hold higher cost for the company every bit good. Indeed, those demand to be ranked by some superior bureaus and will hold higher voucher rates ( Exhibit 12 ) .
Two other options exist for JetBlue, for the aircraft acquisitions funding: The operating rental and the secured debt ( each acquisition debt is secured by the acquired aircraft ) . Those two options are available for JetBlue at advantageous conditions.
Therefore, the options that will be retained for the remaining of the analysis are the operating rental and secured debt for the aircraft acquisitions, and the equity issue and the exchangeable private bonds for the acquisitions and the other investings.
Background Research
Some background research has been performed in order to measure how other air hose companies are financing their aircraft acquisitions and other investings, and in a broader facet, analyze the specificities of their fiscal constructions. This survey included some regular every bit good as low-priced air hose companies.
British air passage, for illustration, is financing its aircraft acquisitions through debt, all of which being plus related. The group is chiefly utilizing finance rentals and hire purchases contracts to get aircraft ( British Airways Annual Report 2010, p.104 ) .
Delta Airlines, on its side, is utilizing pass-through certifications to finance aircraft ( Delta Airlines Annual Report 2010, p.34 ) . In add-on, 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 sum of duties, including debt, aircraft rentals and fundings ( United Continental Holdings Annual Report 2010, p.53 ) . A significant part of the company ‘s assets, chiefly aircraft, are pledged under assorted loans and other duties. The company besides uses secured notes, equipment notes, pass-through certifications and multiple fundings secured by certain aircraft spare parts, aircraft and trim engines ( United Continental Holdings Annual Report 2010, p.55 ) .
United Continental Holdings besides raises hard currency from issue of common stock ( United Continental Holdings Annual Report 2010, p.56 ) .
The low-priced air hose companies seem to be, on their side, more conservative. Indeed, EasyJet is following a conservative capital construction policy, including a liquidness mark of ?4 million hard currency per aircraft, and a 50 % bound on net geartrain ( EasyJet Annual Report 2010, p.9 ) . All of the company ‘s debt is plus related ( EasyJet Annual Report 2010, p.85 ) . The company holds 62 aircraft under operating rentals and 8 aircraft under finance rentals, out of 196 sum aircraft, chiefly Airbus ( EasyJet Annual Report 2010, p.87 ) .
RyanAir, another low-priced air hose 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 rentals and hard currency flow generated from the company ‘s operations ( RyanAir Annual Report 2010, p.42 ) . Both RyanAir and EasyJet exhibit a capital construction that relies less on debt than the regular companies ‘ opposite numbers, as illustrated by the following tabular array:
( 2010 ) , In Millions
BritishAirways
Delta Airlines
United Continental Retentions
EasyJet
RyanAir
JetBlue
LT debt
3698
13179
11434
1084,6
2690,7
731,740
ST debt
811
2073
2411
127,4
265,5
26,580
Equity
1494
897
1727
1500,7
2848,6
480,594
Capital construction
Debt / Equity+Debt
75,11 %
94,45 %
88,91 %
44,68 %
50,93 %
61,21 %
Equity / Equity+Debt
24,89 %
5,55 %
11,09 %
55,32 %
49,07 %
38,79 %
It is of import to advert that some little air hose companies choose to publish bonds for their investings as good. SpiceJet, an Indian air hose company runing to Mumbai, Bangalore, Ahmedabad, Pune, Goa and Delhi issued in 2005 foreign currency exchangeable bonds deserving $ 90 million to fund aircraft acquisitions ( IndiaAviation, 2005 ) .
All in all, air hose companies are utilizing both debt and equity ( together with other funding agencies, including hard currency flows generated from operations ) to raise money. In its ‘Airlines return to capital markets ‘ article, David Knibb ( 2009 ) summarizes the ways several companies found fundings: Lufthansa, Air-France KLM, British Airways, Air Canada, Australia ‘s Virgin Blue, Avianca and Indian bearer Kingfisher all issued bonds during 2009.
AMR used private loaners to borrow money.
Some other companies, smaller, chose to publish portions: SAS, Virgin Blue, AirAsia, Kingfisher, and Icelandair.
From this survey, it appears that the bulk of air hose companies are financing their aircraft acquisitions, apart from utilizing hard currency flow generated by operations, through debt, either rentals or secured debt. Other investing demands are financed either through debt or equity, depending on the companies. However, a common tendency to low-priced companies seems to be their conservative fiscal constructions, in comparing to bigger, regular air hose companies.
Fiscal Analysis of the Options
As per June 2003, JetBlue Corporation has a short-run debt of $ 26,580 1000, a long-run debt of $ 731,740 1000 and equity of entire $ 480,594 1000 ( Exhibit 5a ) .
In order to calculate an mean involvement rate for the company, informations from 2002 are used:
The involvement disbursals for this twelvemonth equaled $ 10,370 1000 ( exhibit 4 ) , for a entire long-run debt of $ 690,252 1000 ( Exhibit 5a ) , therefore an involvement rate of 1,5 % .
The revenue enhancement disbursals as per June 2003 are of $ 40,188 1000 for a entire net incomes before revenue enhancement of $ 95,503 1000 ( exhibit 4 ) , therefore a corporate revenue enhancement rate of 0.42.
From exhibit 1, the JetBlue ‘s equity beta during the period from April 2002 to June 2003 is 0.69. As per the information from Exhibit 5a for June 2003, the fiscal construction of the company was as follows:
LT debt
731,740
ST debt
26,580
Equity
480,594
Capital construction
Debt / Equity+Debt
61,21 %
Equity / Equity+Debt
38,79 %
From the Hamada ‘s expression, we can calculate the unlevered beta of JetBlue as follows:
Beta ( u ) =Beta ( cubic decimeter ) / [ 1+ ( 1-T ) * ( Wd/We ) ]
With Beta ( cubic decimeter ) =0.69, T=0.42, Wd=61.21 and We=38.79
Therefore Beta ( u ) =0.36
In add-on, from exhibit 12, the Treasury measure involvement rate as of June 30, 2003 is 1.09 % , this will be used as the riskless rate of return.
Assuming a market rate of return 9 points higher than the riskless return, we can utilize the WACC spreadsheet in order to gauge the fiscal construction of JetBlue that minimizes the WACC of the company: Appendix 1.
It turns out that the company has an optimum fiscal construction, minimising its leaden mean cost of capital, following those estimated figures.
Any of the two options, either the exchangeable debt or the equity, will likely draw the fiscal construction from its current optimum place.
For the first option, the exchangeable unsecured bond, the voucher rate of this bond is 3.5 % , for a entire sum of $ 150,000 1000.
The leaden mean cost of debt for JetBlue, if they issue such bonds, will be: [ ( 3.5 % *150,000 ) + ( 1.5 % *731,740 ) ] / ( 150,000+731,740 ) , therefore 1.84 % .
The fiscal construction of JetBlue will be as follows:
LT debt
881,740
ST debt
26,580
Equity
480,594
Capital construction
Debt / Equity+Debt
65,40 %
Equity / Equity+Debt
34,60 %
Using the WACC spreadsheet, we can see the company ‘s fiscal place with respects to the optimum fiscal construction of JetBlue following the new cost of debt: Appendix2.
If JetBlue chooses the debt option, the fiscal construction of the company will no more be the one offering the minimum WACC.
The same analysis can be done for the 2nd alternate. Following the portions issue, the fiscal construction of JetBlue will be as follows:
LT debt
731,740
ST debt
26,580
Equity
591,094
Capital construction
Debt / Equity+Debt
56,20 %
Equity / Equity+Debt
43,80 %
Using the WACC spreadsheet, we can see the company ‘s fiscal place with respects to the optimum fiscal construction of JetBlue following the rise in equity: Appendix3.
From this analysis, it can be noted that JetBlue will still hold a fiscal place that minimizes the company ‘s leaden mean cost of capital, therefore maximising the overall value of the company ‘s stock.
It can be concluded, from a fiscal point of position, that the best option for the investings planned for 2003 is the equity issue.
Non-Financial Analysis
JetBlue ‘s rider revenues cognize a steady growing from 2000 ( $ 101,665 1000 ) to 2002 ( $ 615,171 1000 ) . The grosss are forecasted to go on to turn up to a degree of $ 1,796.9 million in 2005 ( Exhibit 9 ) . This gross stableness and expected high growing provide a strong assurance to JetBlue in its ability to run into its fiscal duties, therefore holding the chance to publish either debt or equity.
The company ‘s assets amount to $ 1,565,322 1000 as per June 2003. Those assets are chiefly composed by runing belongings and equipment, which are pledged under the operating rentals and secured debt of the company. If JetBlue chooses to finance its hereafter aircraft acquisitions by debt, the acquired aircraft can be used to procure the corresponding debt.
JetBlue, as any air hose company, incurs really high fixed costs due to its high value runing belongings and equipment. The company has therefore a really high operating purchase and is greatly exposed to the hazard of hard currency flow projections ‘ mistakes in instance it does non run into the projected grosss figures. Any fluctuation in the estimated grosss, might take the company to a place where it could non run into its fiscal duties related to debt. From this point of position, JetBlue needs to procure its hard currency flows.
As stated earlier, the company revenues cognize a high growing for the case in point old ages and are expected to go on turning steadily. This high degree of growing allows the company to trust on equity.
JetBlue is a profitable company, in comparing to equals, as stated in the undermentioned graph:
Industry
Formula
2002
Average 2010*
Profitableness
Gross border %
Gross border / Grosss
13,81 %
Operating Margin
Operating income / Grosss
17,07 %
Tax return on gross revenues
Net income / Grosss
8,93 %
2.28 %
ROA
Net income / Assetss
3,98 %
1.48 %
Roe
Net income / Equity
13,24 %
6.08 %
Grosss
615A 171,000
COS or Cost of grosss
530A 204,000
Gross border
84A 967,000
Operating income or net income
104A 987,000
net income or net income
54A 908,000
assets
1A 378A 923,000
Equity
414A 673,000
* From Infinancials
JetBlue exhibits good degrees of gross border and runing border.
Furthermore, the company ‘s return on gross revenues, return on assets and return on equity are higher than industry norms and the company can be said to be rather profitable in comparing to company equals. This offers some flexibleness to the company to trust on debt.
JetBlue has a high degree of revenue enhancement rate ( 0.42 ) , this allows the company to hold an even lower cost of debt and offers the company the advantage of being able to trust more on debt in order to minimise its leaden mean cost of capital.
All of the company ‘s debt is secured. In add-on, the company does non hold any line of recognition, or short-run adoption installation. The company does hence non hold any control limitations or duties towards its creditors.
The stockholders of the company are on their side really concerned about any dilution. This fright of losing the control of the company limits the possibility of the CFO to publish new equity.
The initiation and managerial squad of JetBlue is issued from the air hose industry. They are used to pull off a extremely leveraged and public company. They should therefore hold a positive attitude towards high degrees of debt. They should be able to cover with the opposite facet ( publishing more equity ) every bit good.
JetBlue does non necessitate any evaluation bureau for the issue of the bonds, as those are private. The option of publishing public bonds has been eliminated as this one will incur higher costs for the company. The loaners of the company seem on their side to hold a positive attitude towards the company, which should be able to publish extra secured debt for its aircraft acquisitions with advantageous conditions.
The company has been executing good in the recent old ages. However, many major US air bearers struggled between 2000 and 2003, and some of them filed for bankruptcy protection. The market is impacted by a general economic lag caused partially by the terrorist onslaughts of September 11, 2001. The market is besides capable to large fluctuations depending on several unpredictable factors, like political stableness, conditions conditions, natural catastrophes, terrorist onslaughts etc. All of this calls for some fiscal conservativism for the air hose industry.
The internal stableness of JetBlue will likely go on to keep, unless the company faces some fiscal hurt, or if the stockholders are no more back uping the direction squad. From a short-run point of position, John Owen might lose the stockholders ‘ support if he goes for equity issue. From a mid to long-run point of position, he might every bit good negatively impact the internal stableness of the company if he is non conservative plenty to avoid any fiscal hurt state of affairs.
The debt offering will afford JetBlue less fiscal flexibleness, particularly due to the jet fuel monetary values. If fuel monetary values rise, this will incur less runing income and therefore some troubles to the company to run into its extra debt service payments. Owen has besides to reexamine his fudging scheme of the fuel monetary values ‘ volatility: If the company chooses to fudge more of its fuel ingestion, it will incur much higher hedge costs. If on the contrary the company chooses to cut down fudging costs, it will be more open to fiscal hurt when the monetary values addition.
Decision: The best solution
JetBlue ‘s market capitalisation can be estimated at around $ 3.12 billion ( 74,423,693 * $ 41.98 ) as per June 30, 2003.
The company is meaning to turn to a great extent in the undermentioned old ages, and has programs to get 207 new aircraft for a entire $ 6.86 billion up to 2011, with an option to get extra 150 aircraft for $ 5 billion by 2016.
This rapid and dearly-won enlargement can non be financed entirely through hard currency flows from operations and common stock issue.
The best option for such acquisitions is the combination of rentals and secured loans. Indeed, those funding agencies are common in the air hose industry, are those which offer the lowest cost ( JetBlue has favourable footings ) , the rentals offer the flexibleness to JetBlue to go out the contract in instance of troubles, and the debt does non stand for a high hazard for the company as it is secured by the aircraft. The company ‘s direction and stockholders will besides be comfy and supportive of such funding strategy.
JetBlue might nevertheless non hold favourable footings for all of those acquisitions. The company will necessitate to put in other spheres as good, such as trim parts, new engines, extra airdocks and a flight preparation centre.
For all of those other needed investings, the company can of class rely partially on its hard currency flows from operations. For the staying portion, and to supply the company with some fiscal flexibleness ( to finance its hedge costs and cover with any distress state of affairs to run into its debt duties ) , the company needs to publish new equity.
Indeed, JetBlue is confronting several hazard factors with this growing scheme:
There is first the increasing fuel monetary values ‘ hazard, as the company is acquiring bigger and is devouring more and more jet fuel.
Second, the company is going from its initial scheme: new markets, bigger size, increasing hazard of work force disloyalty, new types of aircraftaˆ¦
Third, there are the common market hazards: political stableness, conditions conditions, natural catastrophes, terrorist onslaughts etc.
JetBlue needs therefore to counterbalance for those hazards by being financially conservative. The company needs to protect itself from any fiscal hurt state of affairs by maintaining a balance between debt and equity.
In add-on, and chiefly because of its low beta, the company has the benefit of holding a really “ inexpensive ” equity.
My recommendation would be the followers:
For the capital outgo needed in the staying portion of 2003, JetBlue should publish common stock. To back up this option, John Owen can reason with the board that this option is the 1 that minimizes the company ‘s leaden mean cost of capital, therefore maximizes the overall stock monetary value of the company and the stockholders ‘ wealth.
This option will besides supply the company with more fiscal flexibleness, leting it to trust more easy and with favourable conditions on debt for its approaching acquisitions.
For the coming old ages, and for those approaching acquisitions, JetBlue should trust chiefly on rentals and secured debt. Those are the more favourable options for the company in all facets.
The company has nevertheless, each twelvemonth, to back up some of those acquisitions and the other needed investings, foremost with hard currency generated from operations, but with equity issue every bit good.
The company, for each twelvemonth, needs to counterbalance its increasing degree of debt by publishing new equity, foremost to keep an optimum capital construction, and 2nd to counterbalance for the company ‘s fiscal and operating hazards.
Mentions
British Airways Annual Report ( 2010 ) , Available: hypertext transfer protocol: //www.britishairways.com/cms/global/microsites/ba_reports0910/pdfs/BA_AR_2010.pdf, [ 14 May 2011 ] .
Brown, J. ( 2010 ) , ‘Frontier Airlines parent to purchase extra aircraft, publish new public portions ‘ , helloflight.com, ( 6 December ) , Available: hypertext transfer protocol: //www.helloflight.com/articles/travel/5863/frontier_airlines_parent_to_buy_additional_aircraft_issue_new_public_shares.cfm, [ 14 May 2011 ] .
Delta Airways Annual Report ( 2010 ) , Available: hypertext transfer protocol: //images.delta.com.edgesuite.net/delta/pdfs/annual_reports/2010_10K.pdf, [ 14 May 2011 ] . p46
EasyJet Annual Report ( 2010 ) , Available: hypertext transfer protocol: //2010annualreport.easyjet.com/files/pdf/Full_Report_easyJet_AR10.pdf, [ 14 May 2011 ] . p57
Knibb, D. ( 2009 ) , ‘Airlines return to capital markets ‘ , Air Transport, ( 19 August ) , Available:
hypertext transfer protocol: //www.flightglobal.com/articles/2009/08/19/331195/airlines-return-to-capital-markets.html, [ 14 May 2011 ] .
RyanAir Annual Report ( 2010 ) , Available: hypertext transfer protocol: //www.ryanair.com/doc/investor/2010/Annual_report_2010_web.pdfhttp: //2010annualreport.easyjet.com/files/pdf/Full_Report_easyJet_AR10.pdf, [ 14 May 2011 ] . p134
‘SpiceJet to publish foreign bonds denies Hinduja nexus ‘ , IndiaAviation ( 17 Aug 2005 ) , Available: hypertext transfer protocol: //indiaaviation.aero/news/airline/2192/59/SpiceJet-to-issue-foreign-bonds — denies-Hinduja-link, [ 14 May 2011 ] .
United Continental Holdings Annual Report ( 2010 ) , Available: hypertext transfer protocol: //ir.unitedcontinentalholdings.com/phoenix.zhtml? c=83680 & A ; p=irol-IRHome, [ 14 May 2011 ] . p81
Appendix1: Optimum fiscal construction of JetBlue, as per June 2003
% Debt
K ( D ) -BT
K ( D ) -AT
% PS
K ( PS )
% Equity
Beta
K ( E )
WACC
OPT. CS
Tax Rate:
0,42
Beta ( u ) :
0,36
0
1,50
0,87
0
100
0,36
4,33
4,33
K ( releasing factor ) :
1,09
5
1,58
0,91
0
95
0,37
4,43
4,25
K ( m ) :
10,09
10
1,65
0,96
0
90
0,38
4,54
4,18
15
1,74
1,01
0
85
0,40
4,66
4,11
20
1,82
1,06
0
80
0,41
4,80
4,05
25
1,91
1,11
0
75
0,43
4,96
3,99
30
2,01
1,17
0
70
0,45
5,14
3,94
35
2,11
1,22
0
65
0,47
5,34
3,90
40
2,22
1,29
0
60
0,50
5,58
3,86
45
2,33
1,35
0
55
0,53
5,87
3,83
50
2,44
1,42
0
50
0,57
6,21
3,81
55
2,57
1,49
0
45
0,62
6,63
3,80
Ten
60
2,69
1,56
0
40
0,67
7,15
3,80
Ten
65
2,83
1,64
0
35
0,75
7,82
3,80
Ten
70
2,97
1,72
0
30
0,85
8,71
3,82
75
3,12
1,81
0
25
0,99
9,97
3,85
80
3,27
1,90
0
20
1,20
11,85
3,89
85
3,44
1,99
0
15
1,54
14,98
3,94
90
3,61
2,09
0
10
2,24
21,24
4,01
Appendix2: Optimum fiscal construction of JetBlue, following issue of exchangeable bonds
% Debt
K ( D ) -BT
K ( D ) -AT
% PS
K ( PS )
% Equity
Beta
K ( E )
WACC
OPT. CS
Tax Rate:
0,42
Beta ( u ) :
0,36
0
1,84
1,07
0
100
0,36
4,33
4,33
K ( releasing factor ) :
1,09
5
1,93
1,12
0
95
0,37
4,43
4,26
K ( m ) :
10,09
10
2,03
1,18
0
90
0,38
4,54
4,20
15
2,13
1,24
0
85
0,40
4,66
4,15
20
2,24
1,30
0
80
0,41
4,80
4,10
25
2,35
1,36
0
75
0,43
4,96
4,06
30
2,47
1,43
0
70
0,45
5,14
4,02
35
2,59
1,50
0
65
0,47
5,34
4,00
40
2,72
1,58
0
60
0,50
5,58
3,98
45
2,85
1,66
0
55
0,53
5,87
3,97
Ten
50
3,00
1,74
0
50
0,57
6,21
3,97
Ten
55
3,15
1,83
0
45
0,62
6,63
3,99
60
3,30
1,92
0
40
0,67
7,15
4,01
65
3,47
2,01
0
35
0,75
7,82
4,05
70
3,64
2,11
0
30
0,85
8,71
4,09
75
3,83
2,22
0
25
0,99
9,97
4,16
80
4,02
2,33
0
20
1,20
11,85
4,23
85
4,22
2,45
0
15
1,54
14,98
4,33
90
4,43
2,57
0
10
2,24
21,24
4,44
Appendix3: Optimum fiscal construction of JetBlue, following issue of equity
% Debt
K ( D ) -BT
K ( D ) -AT
% PS
K ( PS )
% Equity
Beta
K ( E )
WACC
OPT. CS
Tax Rate:
0,42
Beta ( u ) :
0,36
0
1,50
0,87
0
100
0,36
4,33
4,33
K ( releasing factor ) :
1,09
5
1,58
0,91
0
95
0,37
4,43
4,25
K ( m ) :
10,09
10
1,65
0,96
0
90
0,38
4,54
4,18
15
1,74
1,01
0
85
0,40
4,66
4,11
20
1,82
1,06
0
80
0,41
4,80
4,05
25
1,91
1,11
0
75
0,43
4,96
3,99
30
2,01
1,17
0
70
0,45
5,14
3,94
35
2,11
1,22
0
65
0,47
5,34
3,90
40
2,22
1,29
0
60
0,50
5,58
3,86
45
2,33
1,35
0
55
0,53
5,87
3,83
50
2,44
1,42
0
50
0,57
6,21
3,81
55
2,57
1,49
0
45
0,62
6,63
3,80
Ten
60
2,69
1,56
0
40
0,67
7,15
3,80
Ten
65
2,83
1,64
0
35
0,75
7,82
3,80
Ten
70
2,97
1,72
0
30
0,85
8,71
3,82
75
3,12
1,81
0
25
0,99
9,97
3,85
80
3,27
1,90
0
20
1,20
11,85
3,89
85
3,44
1,99
0
15
1,54
14,98
3,94
90
3,61
2,09
0
10
2,24
21,24
4,01
Part II:
Creation of a Unique
Case Study
Amine DHIA
MBA Finance
May 2011
Apache Design Solutions: IPO or non IPO?
Andrew T. Yang, Co-Founder, Chief Executive Officer, Chair of the Board and Director of Apache Design Solutions Inc, finished reading in item the S-1 signifier he received this same May 2011 twenty-four hours from the United States Securities and Exchange Commission. He was expecting this papers for hebdomads, as this papers was the accomplishment of several months of a corporate attempt from the company ‘s direction squad.
Now that his company accomplished all of the attempt needed in order to finish its so anticipated IPO, he is inquiring whether the company should hold chosen another path in order to go on to turn.
The Company
History
Apache Design Solutions, Inc. is a taking supplier of advanced power analysis and optimisation solutions for the EDA – Electronic Design Automation – market ( Apache Internet Site, 2011 ) . The company ‘s package solutions help for the design of power-efficient, high-performance, noise-immune ICs and electronic systems.
In 2001, Andrew Yang, a professor at University of Washington, founded Apache Design Solutions, Inc. , with Norman Chang and Shen Lin, both from HP ( Cooley, 2011 ) . The founding squad was quickly joined by early private investors including Andy Bechtolsheim and Intel Capital.
The company ‘s first merchandise was called “ Tomahawk ” and was ab initio a inactive IR-drop tool. The first three clients of the company helped Andrew Yang passage Tomahawk from inactive IR-drop analysis to dynamic to go “ RedHawk ” , shortly the market leader in inactive and dynamic IR-drop analysis.
The company continued its conquering of the power analysis market, successfully geting smaller companies and let go ofing successful tools turn toing temperature impact on escape, timing, dependability, and electromotive force bead, IC-to-package power and EMI analysis and IC-package thermic co-analysis in a 3D-IC environment ( Cooley, 2011 ) .
The market
The EDA market is a mature market dominated historically by three major participants: Cadence Design Systems Inc, Mentor Graphics and Synopsys, Inc. ( ElectroIq.com 2010 ) .
“ No EDA seller has successfully completed an IPO since Magma Design Automation Inc. raised $ 63 million through an IPO in 2001 ” ( EETimes 2011 ) . It took Apache around ten old ages to be able to register for an IPO despite the fact the company has been profitable for many old ages and has had solid grosss and net incomes ( Startup-book 2011 ) .
The EDA market has known a steady growing from the early 80th before fighting during the old ages 2007 and 2008, following the downswing in the semiconducting material industry.
Exhibits 1 a and B illustrate the EDA market tendency and participants in the period 1983, – 2010.
Apache consequences
All of the EDA participants struggled during the period 2007 and 2008 due to the world-wide economic downswing and the semiconducting material industry lag. Cadence Design Systems Inc, which was the market leader for decennaries fell to the 2nd place, so was passed by Mentor which became figure two in merchandise gross revenues in EDA ( ElectroIq.com 2010 ) . Exhibit 2 summarizes the market portions of the major EDA participants for the twelvemonth 2009.
Despite these hard industry kineticss, Apache posted strong gross growing between 2006 and 2010, and became one of the most profitable EDA sellers. The company grosss were consecutively $ 14.7 million, $ 18.7 million, $ 25.7 million, $ 34.6 million and $ 44.0 million in the old ages 2006 to 2010. ( See exhibits 3, 4, 5 and 6 for Apache ‘s fiscal consequences, taken from S-1 SEC signifier ) .
Growth chances
Apache established itself as a market and engineering leader for power analysis in the design of ICs and electronic systems ( Form S-1, 2011 ) . The company plans to go on to put in research and development to keep and widen its engineering leading place.
The company besides plans to increase the deployment of its merchandises to bing clients, and widen its client base every bit good.
Therefore, Apache intends to obtain extra capital, make a public market for its common stock, and ease its future entree to the public equity markets.
The company wants to raise extra capital for working capital and other general corporate intents, and in order to engage extra forces and invest in gross revenues, selling, and research and development. The company besides plans to finance some acquisitions of complementary concerns, engineerings or other assets ( Form S-1, 2011 ) .
The IPO
By March 14, 2011, Apache announced that “ it filed a enrollment signifier with the U.S. Securities and Exchange Commission for a proposed initial public offering ( IPO ) of common stock to be sold by the company and certain of its shareholders. ” ( EETimes 2011 ) .
“ Deutsche Bank Securities is moving as the exclusive book-running director for Apache ‘s IPO [ aˆ¦ ] with Needham & A ; Company LLC, Canaccord Genuity, ThinkEquity LLC and D.A. Davidson & A ; Co. moving as the co-managers of the offering. ”
The offer made by Apache ‘s investing bankers established the company ‘s market value at $ 223,268,900 for a sum of 22,326,890 portions and proposed an initial public offer of 5,000,000 portions for a entire sum of $ 50,000,000 hard currency to be raised by the company, before fees paid to investment bankers.
The market capitalisation of Apache would therefore be $ 273,268,900 after the IPO, with 18.3 % of the company ‘s portions being held by the new public investors.
Andrew T. Yang, who owns 15.1 % of Apache before the IPO ( bulk proprietor ) , will see its portion diluted down to 12.3 % . See Exhibit 7 for the equity tabular array of Apache before and after the IPO.
Apart from the ownership dilution that will be introduced by the IPO, Andrew Yang foresees some extra drawbacks and hazards associated with this operation.
Indeed, the senior executives do non hold experience in pull offing a public coverage company, and Apache has a little internal accounting and finance staff with limited public coverage company experience. This could finally deviate the direction ‘s attending from runing the concern ( Form S-1, 2011 ) .
In add-on, the direction of the company may non be able to efficaciously pull off such a rapid enlargement.
Apache will besides incur important costs if the company chooses to be a public company, as it will necessitate to follow with Nasdaq Global Market listing and other demands, and will besides necessitate to upgrade its internal resources and systems in connexion with going a public company ( Form S-1, 2011 ) .
The company besides plans to utilize some of the returns of the IPO to finance some strategic acquisitions. However, the company has no understandings with regard to any material acquisitions at this clip, and programs to utilize some of the returns from the IPO to put in short-run, investing class, interest-bearing securities until some acquisition chances arise. The company might neglect to place mark companies to be acquired, or hotfoot into unprofitable operations.
Finally, an active trading market for the common stock to be issued by Apache may non develop and the market monetary value for the company ‘s common stock may worsen below the initial public offering monetary value. The stock is besides likely to be volatile, like for all the other technology-related companies, which could ensue in significant losingss to investors and judicial proceeding ( Form S-1, 2011 ) .
Other options?
Andrew T. Yang was likely delighted and quite proud that his company was eventually able to make it. He has spent a batch of attempt during the last decennary to convey his company from a little start-up combat for endurance, up to a fast growth, public-to-be large EDA participant.
But he was inquiring: Is this the right clip for an IPO? Is n’t he making this lone for glorification? Are n’t at that place any other options that might better function the company ‘s involvements and fiscal demands?
Yang knew that his company was really profitable. The company has $ 26 million in hard currency ; the entire operating disbursal is $ 29 million with an runing income of $ 6 million. This means that the company has a twelvemonth ‘s worth of disbursals available in hard currency ( Cooley, 2011 ) .
In add-on, the company has no long-run debt duties. Is n’t raising the money through debt a less expensive and less hazardous option for the company today?
Yang knew that it was excessively late for him to draw back from this IPO offer, but was inquiring about the other options that were available for him and that his company passed over. The company could hold issued debt through either public or private corporate bonds. Those bonds could hold been exchangeable to enable the company to hold lower voucher rates.
Yang besides knew that he could hold negotiated some favourable footings for a bank or a syndicated loan, but this option would likely hold incurred some compacts and control to be given away for the bank.
Yang was believing about the bonds option, in order to see whether this path would hold been more good for his company, from a fiscal point of position, but from a non-financial 1 every bit good.
What if he asked himself this inquiry several months ago: Initial public offering or non IPO?
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