CONFIDENCE IN AIRLINE PERFORMANCE IN DIFFICULT MARKET CONDITIONS: AN ANALYSIS OF JETBLUE'S FINANCIAL MARKET RESULTS

Journal of Air Transportation, 2005 by Flouris, Triant, Walker, Thomas

ABSTRACT

This paper examines the stock market's reaction to JetBlue's Initial Public Offering (IPO) and subsequent price movements of the stock. In particular, we examine whether the euphoria surrounding JetBlue's IPO carried over to other firms in the sector by testing whether the shares of JetBlue's competitors showed a significant price reaction to JetBlue's IPO. JetBlue's IPO took place just a few months following September 11, 2001. These events resulted in dramatic changes in the airline industry and had significant implications on the economic gains of airlines. We examine JetBlue's accounting and stock performance and compare it to the relative performance of Southwest Airlines (SWA), a representative of the low-cost carrier group. In addition, we compare both JetBlue's and SWA's financial condition and the relative performance of their stock to two mainline U.S. carriers, Continental and Northwest, representatives of the conventional-cost carrier group. We analyze whether there are any performance differences among the low-cost carriers and between low-cost carriers and conventional-cost carriers. In particular, we examine whether low-cost carriers were able to sustain the economic impacts of 9/11 better than the conventional-cost carriers.

"Keep an eye on JelBlue. That could prove to be a successful operation" Herb Kelleher, Co-founder, Southwest Airlines (Top Entrepreneurs, 2001, p. 84)

INTRODUCTION

JetBlue Airways was one of the best-funded start-up airlines in U.S. aviation history. Its initial capitalization was $130 million. The airline was founded in early 1999 by David Neelman, who is currently its Chief Executive Officer. Before JetBlue David Neelman founded Morris Air and after selling Morris Air to Southwest Airlines (SWA) served as an executive vice president of SWA. He also worked as a consultant for West Jet Airlines.

JetBlue started operations in February 2000 and went public in April 2002, in what was described as one of the most successful initial public offerings (IPO) of the year. Following a very successful road show for its IPO, JetBlue, in connection with its lead underwriters Morgan Stanley and Merrill Lynch, filed several amendments to its initial S-I filing with the securities and Exchange Commission (sec), in which it revised its offering price upward from an initial price range of $22 - $24 to $27 per share. JetBlue sold 5.87 million shares at this price, raising more than $158 million for the firm. Despite the upward revisions in the firm's offering price, JetBlue's stock soared another 67 percent and closed at $45 on its first day of trading (Boorstin, 2002).

During 2001, JetBlue's second year of operation, and arguably one of the worst in U.S. aviation history, the airline turned profitable, earning $38.5 million on revenues of $320 million. This fact alone may explain why JetBlue's shares were in very high demand. Only two other airlines in the U.S. were also profitable in 2001 : SWA and AirTran. Although experiencing a stock price decline since its highs in June 2002, JetBlue has stood up well to its expectations, increasing sales in 2002 to $635 million with a year-end profit of $49 million.

This paper examines the stock market's reaction to JetBlue's IPO and subsequent price movements of the stock through the present. In particular, we look at whether the euphoria surrounding JetBlue's IPO carried over to other firms in the sector by examining whether the shares of JetBlue's competitors showed a significant price reaction to JetBlue's successful IPO. We focus on the relative performance of the stock and compare it with the stock performance of a similarly successful low-cost carrier, SWA, and two mainline full-service U.S. carriers, Continental and Northwest. These airlines are used as comparison baselines. The mainline full-service carriers were picked randomly and based on the fact that, to date, neither has filed for bankruptcy protection as a result of the systemic shocks of the events of September 11,2001 (9/11).

We find JetBlue's accounting and stock performance to be significantly better than that of its mainline conventional-cost rivals, Continental and Northwest, but in similar lines with its low-cost rival SWA. Based on this finding, we assert that there is something unique to the low-cost model, which both SWA and JetBlue follow, that sets them apart from their conventional-cost competitors and renders them more successful in difficult market conditions. We do not advocate that the low-cost model is monolithic. In many ways JetBlue resembles a younger, smaller version of SWA (Boorstin, 2002). Like SWA, JetBlue flies busy routes between secondary airports, has a low-cost structure, and emphasizes customer service. But while SWA usually sticks to a single region, JetBlue flies crosscountry. And while SWA is based at Dallas' smaller airport, Love Field, JetBlue is based at New York's Kennedy International Airport (JFK). Furthermore, SWA can be characterized as a low-frills airline, whereas JetBlue is a lifestyle seller with more finesse, even though both are low-fare.