For all the enmity airlines have sown in our hearts, upstart JetBlue Airways' (JBLU
) soaring initial public offering of stock in April was a sight to behold. People just love two-year-old JetBlue. "You can't beat it," Anthony Gigliotti, a four-time JetBlue passenger from Harrison, N.Y., told me the other day as he checked his bags at Orlando International Airport before a flight home. "The service, the planes, the courtesy--everything is great."
Such warm sentiments helped to make JetBlue the hottest IPO in two years. First expected to go public at $23 a share, underwriters led by Morgan Stanley wound up doing the deal at $27. From there, the public took over, lofting the stock nearly to $48. The IPO enriched anyone who got in early, including venture units of some big banks, a George Soros partnership, and even such notable individuals as former New York Knicks exec (and JetBlue director) Dave Checketts and Morgan Stanley airline analyst Kevin Murphy. The day of the deal, Murphy found himself $1,029,795 richer.
Can you get rich on JetBlue, too? I hate to argue with a company selling a good thing, and lots of fliers told me that JetBlue's classy service and cheap fares are terrific. But what the numbers say (CEO David Neeleman isn't talking) is this: At a recent price near $45 a share, JetBlue's shares are susceptible to acrophobia.
That's true despite JetBlue's admirable record in 2001, its first full year of operation. It collected $320 million in revenue and netted $39 million. In an industry where profits are as common as the California condor, JetBlue's black ink is no small showing. Yet there's less black ink here than meets the eye. First, JetBlue's share of the $5 billion in post-September 11 compensation Uncle Sam paid to the airline industry raised pretax income by $18.7 million. Next, a one-time tax maneuver saved $14.7 million.
As JetBlue pursues its plan to expand from 24 Airbus A320s to 83 by 2007, it will spread its fixed expenses over sales to more paying passengers. But two key costs, maintenance and insurance, are sure to rise sharply. Heavy maintenance, which JetBlue has avoided so far because its fleet is nearly new, will rise "significantly," it warns. As for insurance, premiums this year are running $10 million more than JetBlue expected.
If JetBlue can grow fast--and profitably--enough, a few extra millions for insurance won't mean much. But to gauge how far JetBlue must travel to meet investors' hopes, it helps to compare it to its model, Southwest Airlines (table). With a 29-year head start, Southwest is much bigger. It's stronger, too, with a formidable balance sheet. Southwest could pay off its total debt and still count $438 million in cash. Even after $998 million in capital projects last year, it had $487 million left over in free cash flow.
Now look at JetBlue. Capital spending last year outran cash flow by $123 million. Net debt--total debt minus cash, after the IPO--is about $215 million, $84 million of which is due in 2002. Through 2004, it's set to buy $1.5 billion in new jets, most of which still must be financed.
So, how is the market valuing these two? A handy yardstick for companies with similar business plans yet dissimilar capital structures is called "enterprise value." That's their stock-market capitalizations plus net debt. Southwest's comes to $13.8 billion. That works out to less than 15 times last year's EBITDA, or earnings before interest, taxes, depreciation, and amortization. In contrast, at $45 a share, JetBlue's enterprise value is $2 billion, or 55 times its 2001 EBITDA.
Does this mean JetBlue can't grow and prosper? Not at all. Just don't confuse an airline most everybody loves with its soaring stock. Chances are, it will only leave you feeling blue.
Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
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