Thinking of Taking Off with JetBlue?


By Amy Tsao For the most part, investors have been skittish about initial public offerings this year. Big IPOs like that of Citibank's Traveler's Property Casualty (TPK) have attracted buyers, but smaller deals involving lesser-known companies have had a harder time getting off the ground. The exception may turn out to be upstart discount airline JetBlue Airways.

The IPO already is generating lots of buzz on Wall Street, and it could get a warm reception when it hits the market sometime in mid-April. "People are going to have a high appetite for [JetBlue stock]," says Ray Neidl, analyst with ABN Amro.

The expected growth at JetBlue is enticing. The company now has a relatively small fleet of 23 Airbus 320s flying among 19 cities including Tampa and Rochester, N.Y. But it plans to add 60 planes by the end of 2007.

FLYING HIGHER. With the IPO of 5.5 million shares, JetBlue will raise around $116 million on top of the $175 million Chief Executive David Neeleman took in from big-name investors such as hedge-fund legend George Soros. The money will go toward purchasing new planes and other expansion costs. Even as airline stocks get hit by speculation that turmoil in the Middle East may result in a spike in jet-fuel prices, analysts expect the JetBlue IPO to go off as planned around Apr. 15.

Granted, you can't be risk-averse and be invested in the volatile airline sector. Yet, all the hype aside, JetBlue could be a good investment for those who are drawn to long-term growth. If the new stock is sold in the planned range of $22 to $24 per share, the price is right. Anywhere above that would be overpaying, analysts caution.

At the planned offering price, JetBlue's shares would have a forward-looking multiple of around 15, figures Neidl. Compare that to the multiple on Southwest Airlines, a 30-year veteran in the discount-carrier business, which trades at a price-earnings ratio in the range of 16 to 25. "JetBlue is off to a good start. But to say it deserves the valuation of Southwest, which has not had a year without profits for 29 years, might be a stretch," says Jim Corridore, a Standard & Poor's airline analyst.

TERRIFIC PROSPECTS. In other ways, the comparison between Southwest and JetBlue might also be a little premature. But it is fair to say JetBlue has taken a lot of cues from its older and more successful rival, and that's probably a good thing. Like Southwest, JetBlue stays focused on point-to-point travel between secondary airports on highly traveled routes, and has streamlined its equipment. Also, JetBlue keeps its cost structure low by using nonunion labor.

Considering how much the airline is already doing right, Corridore and other analysts agree that JetBlue has terrific prospects. It has been winning customers with its unconventional approach to air travel -- cheap fares combined with luxury features such as leather seats and satellite television. These added touches have been crucial in attracting new customers and keeping them.

Eliminating expenses like in-flight meals and paper tickets also has chipped away at costs. And its easily navigable Web site is another competitive feature.

ALL'S FARE... JetBlue estimates that its advance-purchase tickets are typically 30% to 40% lower than other airlines' nonsale prices. And walk-up fares, often used by business travelers, are 60% to 70% lower.

A comparison of prices posted on the JetBlue and United Airlines Web sites shows dramatic differences. While a roundtrip ticket puchased one month in advance from New York's JFK airport to Oakland, Calif., went for $265 on JetBlue, the same ticket (flying into San Francisco International) sold for $396 on United. That's a modest savings if you figure the cab fare from Oakland to San Francisco. However, the same flight with a few days' notice and no Saturday stay was still $265 on JetBlue but a stratospheric $2,264 on United.

Neeleman adds credibility to his idea of a "local hometown airline" for New York. He already has made the concept work out of Salt Lake City with Morris Air, which he sold to Southwest in 1993 for $130 million. JetBlue "has a management team with real expertise, and they're executing very well," says Marc Baum, CEO of IPO Group, which tracks activity in IPOs, venture capital, and private equity. Those execs include veteran airline execs such as President and Chief Operating Officer Dave Barger, who earlier was with Continental Airlines, and Chief Financial Officer John Owen, Southwest's former treasurer.

FASTEN YOUR SEATBELTS. Adding to its credibility as a tough competitor, the airline was among an elite trio (Southwest [LUV

] and AirTran [AAI

] are the others) that escaped last year's financial difficulties and ended 2001 with profits. JetBlue pulled it off after less than two full years of operation, without resorting to layoffs during one of the worst periods for air travel on record. The company posted a profit of $38.5 million, up from a loss of $21.3 million in 2000.

Investors should take heed that JetBlue's growth is unlikely to continue without some turbulence. Over the long term, as it gets bigger, it'll have to walk a fine line between keeping operating costs low, differentiating itself from the majors, and still selling cheap tickets. That will be a challenge.

"It's a very young company that's still going to need to make a lot of investment over the next 5 to 10 years," says Morningstar analyst Jonathan Schrader, who expects higher costs as JetBlue's business matures. "There's not going to be a lot of free cash flow."

POSSIBLE PITFALLS. Inevitably, JetBlue will have to spend more on maintenance as its planes age, Schrader notes. And as it grows, fuel costs will become a bigger portion of expenses. It recently began hedging against price increases in fuel, but a prolonged rise in oil prices as a result of violence in the Middle East could squeeze airlines across the board.

And if JetBlue stumbles on keeping employees satisfied, it could end up mired in the complicated and expensive world of union contracts that are a heavy cost burden for the national carriers. Growth also means more pricing pressure from other carriers once they return to better operating health.

Buying shares of the New York-based airline may seem like a high-risk idea amid the federal government's $15 billion bailout of the airline industry following the September 11 terrorist attacks. And predictions persist that the airline majors likely will be unprofitable until 2003. But investors who want a foothold in this industry could do a lot worse than JetBlue, analysts say.

Clearly, JetBlue will be an airline to watch closely. And its shares should do well if it can pull off the difficult juggling act of keeping costs low and customer satisfaction high. Tsao covers financial markets for BusinessWeek Online in New York


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