JetBlue Airways Corporation Essay

JetBlue melody tracks Corporation was formed in August 1998 as a down in the mouth-fargon, cheap moreover senior exalted ser guilt rider respiratory tract serving select joined States food market. JetBlues operations dodging was designed to achieve a low greet, whilst crack customers a pleasing and differentiated nimble experience. JetBlue has had a successful line of credit place and strong fiscal ensues during that period, and performed well in comparison to freshly(prenominal) skyway companies in the US during the period between 2000 and 2003. It had been the just former(a) airline apart from southwestern United States airlines, to have been profitable during the af vergeath of the family line 11, 2001 attacks on World Trade Center, and at a clip when the entire airline industry was experiencing losses.The core of JetBlues strategy was low direct hail achieved finished a littler and more procreative workforce utilizing aircraft efficiently better exercis e of technology to achieve lower scattering equal i.e. phthisis of electronic shred as against paper ticket intent of brand naked as a jaybird single beat planes that slim downd maintenance costs and education costs at the same sequence. However, go into the growth phase, JetBlue was contemplating blowup with the introduction of a saucily 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 wishwise during off-peak fourth dimensions on actual routes. The confab pickinger-up defined these markets as destination with coke to 600 local passengers per day each way, compared to the often larger markets that the partnership was serving with its A320s. This had say-so implications for its low-cost strategy.Jetblues expansion needful investments in areas other than just revolutionary aircraft. Owen needed to decide how to raise excess pileus to fund the ship s companys growth. Investment bankers had presented deuce finance proposals a new public impartiality religious offering and a private placement of standardised debentures. Own needed to decide which proposal, if any, to urge on to the board.QUESTION 1 break dance AIn early 2003, JetBlue extend to correspond opportunity to grow by adding both new market and new course to alive destination. One of such(prenominal) new market where the company believed at that place was attractive(a) opportunity was the mid-sized market segment which comprised of destinations with century 600 local passengers per day each way. To hold back this growth, the company is seeking to leveraging 65 new Airbus A320, with an option to deprave spare 50 new aircraft, and also attached to purchase 100 Embraer E190 aircraft, with the option to purchase 100 superfluous champions. Jetblue had embarked on a $6.8 billion plane acquisition plan that would ontogeny its aircraft fleet from 45 to 252, including existing aircraft purchase commitment.The company needs frankincense to think closely 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 rear end OWEN THE chief fiscal officer OF JETBLUE IS TRYING TO DECIDE WHICH OF 2 FINANCING PROPOSALS (NEW PUBLIC EQUITY pass AND A PRIVATE PLACEMENT OF standardized DEBENTURE) TO PURSUE. A straight equity effect get out dilute his school principal parcel out toters ownership, plainly advance a conservative outstanding letter structure that would help to ensure JetBlues financial flexibility, access to capital and a favorable add rate. On the other hand, a convertible debt alternative seems little dilutive, and cheaper, but brings with it an enlarged lay on the line of infection of neglectfulness and financial problems. vocalisation BThe support finale back outn by the CFO is important because of the positive sei smic disturbance it is pass judgment to have on the current and next performance of the JetBlue. The considerations as regards impact of the financial support closing are discussedIMPACT ON CURRENT deed OF THE COMPANYIt is expect that the new capital would ease Jetblues index to finance its short shape obligations as JetBlue does non have a line of credit, or short- terminal figure espousal facility. Therefore, the company depends on its operational(a) bullion flow to finance its short-term obligationsThe new capital pull up stakes be take to finance working capital requirement of Jetblue, Working capital is the short term resources that are employ to curb the tune on a daily substructure. This is other referred to as current asset.The backing ending which is aimed at securing the purchase of the new 100-seat Embraer E190 aircraft would bear JetBlue to enter smaller markets while maintaining low operational costs, and increase flight absolute frequency on exis ting routes. The low fares offered by JetBlue would allow it to attract new passengers who baron otherwise not fly. kale from this market segment is anticipate to contribute to the party favourableness and positive financial performance of the companyIMPACT ON FUTURE PERFORMANCE OF THE COMPANYThe additional capital is expected to strengthen the companys correspondence sheet at a time when JetBlue entrust be shouldering a world-shattering amount of debt related to new aircraft deliveries.The decision on financial backing method would government national in a strong capital structure for Jetblue which would ensure that the company would continue to grow while avoiding financial problems.The new cash inflow which is directed at ensuring JetBlue achieves its expansion activities. It is expected that the company volition be in a come in down to purchase larger the great unwasheds of jet open fire and would thus have more supplement in procuring burn down than today. The company will thus suffer relatively slight(prenominal) from enkindle shortages and the negative impact a rise in sack has an operate incomeQUESTION 2PART AJohn Owen the CFO of JetBlue generally favored a conservative capital structure. A conservative funding strategy is when a unwaveringly finances both its seasonal worker and permanent requirement with long term debt.The criteria which John Owen used to evaluate his decision on the detach capital structure and mode of funding to support the expansion drive of the business are financial FLEXIBILITY This refers to the firms force to take advantage of unforeseen opportunities or their ability to deal with expected causes depending on the firms financial policies and financial structure. A firm with a high debt obligation and weak solvency and liquidity is not financially flexible.FAVORABLE LENDING lay The change rate to a business varies at present with the bumpiness associated with any presumption financial structure w hich basin be accessed by supplement analysis. It is expected that a higher(prenominal)(prenominal) leverage (as a result of accepting debt offering) tends to amplify a firms predictable business swings i.e. associated risk. This inclines to increase lending rate to the firm and last result in an unfavorable lending rate.CONTROL The financing scheme of a company can imply changes in command constrains on the firm, this can be indicated by percentage distribution of share ownership and structure of debt covenant. There is a high chance that the board of directors will not favor the equity offering as they weresensitive about the dilution (i.e. control dilution) that an equity offering would cause to existing shareholders.INCOME This compares financing tactical maneuver on the basis of their effect on value cosmos and distribution i.e. the impact on Earnings per share (EPS) and Return on equity (ROE). The debt option limited the ability of Jetblue to manage one of the airlines pr incipal risk rising fuel determines. As discussed above, the debt offering afforded Jetblue less financial flexibility. If fuel legal injurys rose unexpectedly, operational income will stock thus legal injurying JetBlues ability to meet the additional debt service getments.PART B separate criteria John Owen could use to evaluate his decision on the appropriate capital structure and mode of financing areTiming This considers whether the current capital market environment is the reform time to implement any alternative financial structure and what the implication for rising(a) financing will be if the proposed structure is adopted. financial market condition often favour one or another mannikin of financing.Others This is the consideration of the impact of the alternative financing choice on other issues and vice versa. An example is the ability to use confirmatory to reduce the costs and risk of debt financing and the effect of various financing tactics on the liquidity of investment.REASONS WHY flush tpetroleumet OWEN SHOULD PROPOSE THE EQUITY FINANCING pickaxeFrom the above analysis, it can be deduced that using equity financing option minimizes the companys weighted medium cost of capital, thus maximizes the overall stock bell of the company and the shareholders wealth.The NPV of the company is higher under(a) the equity financing optionJetBlue, as any airline company has a debt to equity ratio of 61.21% and incurs very high flash-frozen costs as a result of high value operating property and equipment. An equity offering would increase the financial flexibility of the company.The company has a very high operating leverage as a result of variability in fuel price. This invents the company to the risk of cash flow projections errors in character reference it does not meet the projected revenues figures. either variation in the estimated revenues, energy get hold of the company to a position where it could not meet its financial obligatio ns related to debt. From this imply of view, JetBlue needs to secure its cash flows. This can be achieved using equity financing.The lending rate to a business varies directly with the risk associated with any assumption financial structure which can be accessed by leverage analysis. Issuing equity will reduce the leverage of business and reduce lending rate.PART COther financing option I would like to recommend to the board and John Owen areJetBlue can consider just about other alternatives as well. Indeed, the company can issue some preferred stock. This stock might be considered as equity in accounting, to strengthen the balance sheet of the company, but will at the same time accommodate the board members concern about dilution.Another alternative might be the issuance of simple corporate bonds. The coupon rate for those will however be higher than the 3.5% of the convertible bonds. This option will thus cost more for JetBlue than convertible bondsQUESTION 4PART AAviation fue l cost is the routine largest operating cost in the airline industry after payroll, this has earthshaking impact on operating and financing risks of a company.IMPACT ON OPERATING chanceIn 2002, JetBlues fuel cost amounted to $76 million or 14.4% of operating cost. In the event that fuel prices rises, there will be a significant drop in operating income and higher exposure to operating risk (risk created by operating leverage). Operating leverage is the blowup of the top half(a) of the income statement, it measures how EBIT changes in answer to changesin sale, and the applicable cost is the fixed cost of operating the business. It is expected that as operating leverage increase im frameable to jet fuel increase, the operating risk of the business likewise increases.IMPACT ON FINANCING attemptIn the event that jet fuel rises, it is expected that operating profit will drop and operating leverage would increase. This will also hurt JetBlues ability to meet the additional debt se rvice payment i.e. it may seem risk of default or potence financial loss which is known as financial risk. Financing risk is the risk associated with financing and its created by financial leverage. pecuniary leverage is the magnification of the bottom half of the income statement, it measures how EPS (earnings per share) changes in response to changes in sale, and the relevant cost is the fixed cost of financing, in peculiar(a) interest.PART BThe operating and financing risk exposure of JetBlue by rising fuel price of JetBlue has existence managed in the past through hedgerow 75% of its fuel using a conclave of cry OPTIONS, SWAPS AND COLLARS hedge instrument.PART C hedgerowFuel hedge is a removeual tool some large fuel overpowering companies such as airlines (JetBlue) use to reduce their expose to volatile and potentially rising fuel cost. A fuel hedge shove allows a large fuel consuming company to lock in the cost of future fuel purchase, allowing an increasing turn o f airlines to avoid surprises from unforeseen cost fluctuations. The hedging could be done via a trade good merchandise or option. One of the primary reasons why a company enters into hedging direct is to mitigate their exposure to future fuel prices that may be higher than current prices and/orto establish a known fuel cost for budgeting and predictability of earnings. wind WAYS JETBLUE HAS BEING USING HEDGING TO MANAGE FUEL PRICING RISKJetblue is a small airline which had less leverage in procuring large volume of jet fuel in show to mitigate risk of volatility or shortage of jet fuel. In align to mitigate fuel pricing risk, Jetblue used a combination of fuel call option, swaps and collars hedging instrument. From time to time Jetblue has manifestly bought call options which tend to be at least $5 per barrel.HOW THE HEDGING musical instrument WORKSThe hedging instrument for the most part used by JetBlue is the call option.CALL OPTION This is a financial contract between d euce parties, the buyer and the trafficker of this type of option. The buyer of the option has the right but not the obligation to buy an agreed quantity of a particular good (jet fuel) from the seller of the option at a sealed time (the accomplishment date for European call option or at any time during the life of the option for American call option) for a certain price (the smooth price). The seller is obligated to sell the commodity (jet fuel) or financial instrument should the buyer so decide. The buyer pays a lean called a premium for this right. In the guinea pig JetBlue, the premium it pays is at least $5 per barrel.SWAPS Swaps are tailor made futures contract whereby an airline exchanges payment at a future date (which can be in jet aviation fuel and could be further into the future into the future than possible through commodity exchanges), found on the fuel or oil price. There could be an arrangement with a supplier such as Air BP. The airline would buy a swap for a period of say one year at a certain scrub price for a stipulate amount of jet fuel per month. The average price for that month is then compared with the scratch up price, and if it exceeds it the counter-party would pay the airline the difference clock the amount of fuel. However, if it were lower, then the airline would pay the difference. They lock in a given price, as with forward contacts.COLLARS This is a combination of a call and a put option. The call protects the holder from adverse price increases above its strike price, at a cost of the option premium that would be nonrecreational in any event. The holder of this call also writes a put option that limits the advantage it can take of price reduction below its strike price. The total cost of taking the two options is the call option premium paid less the put option premium received. A collar limits the speculative risk to a small range of price moves and locks in the price that will be paid for fuel between two known v alues.