The stunning Nasdaq IPO of low-fare airline JetBlue Airways Corp on April 11 generated extraordinary excitement in an industry plagued by losses and retrenchment, and in the sleepy IPO market.
The IPO, for which Morgan Stanley was the sole bookrunner, consisted of an offering of 5.87 million shares, equivalent to about 14% of the company, and raised $158.4 million. It priced at $27, outside the expected $25 to $26 price range, which had already been increased from an initial range of $22 to $24. The offering attracted an incredible $3.9 billion-worth of demand, outstripping supply by about 26 times.
The shares rose by 50% within the first half-hour and closed up $18 at $45, a one-day increase of 66.7%. The rise was the most substantial one-day increase since Simplex Solutions’ 77% rise following its debut in May last year, and compares with an average first-day trading gain of less than 1% for IPOs so far this year.
“Demand was so strong because JetBlue’s case is just so exceptional”, says Melanie Hase, an analyst with Renaissance Capital’s IPO Plus fund. She says JetBlue has several advantages over its low-fare competitors and the traditional carriers. “As well as having a low cost structure, a strong brand, a new single-model fleet, and a non-unionized workforce, unlike the other low-fare carriers that are planning IPOs it is also independent.”
Most of the other low-fare carriers in the US, with the notable exception of Southwest Airlines, are regional subsidiaries of the major airlines that act more as feeders to them than as competitors. Another two of those, Pinnacle Airlines and Republic Airways, the low-fare subsidiaries of Northwest Airlines and AMR Corp’s American Airlines respectively, also have plans for IPOs.
The stellar success of JetBlue’s offering contrasts markedly with that of ExpressJet, Continental Airlines’ much larger low-fare regional spin-off. Launched the week following JetBlue and managed by Citigroup and Morgan Stanley, ExpressJet’s offering was increased three times to 30 million shares and priced at the top of its $14 to $16 range. Its first-day performance came nowhere near matching JetBlue’s, however, rising just 8%. ExpressJet’s IPO was somewhat dimmed by its unfortunate coincidence with the Milan air crash but according to Hase its comparatively weak performance was more to do with the difference in the two airlines’ business models.
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Although the shares of both airlines have steadily fallen from their first-day peaks, JetBlue’s remains well above its offer price while ExpressJet’s soon began trading below. “There was a lot of mania attached to JetBlue, so the price is just settling down”, says Glen Engel, a managing director at Goldman Sachs. “The people who bought ExpressJet thought they were on to a hot deal just because of JetBlue,” adds Engel.
JetBlue stands out as an island of profitability and growth in an airline industry suffering from record losses and cutbacks. The two year-old airline, which came to profitability after just one year of operation, reported a net income of $38.5 million for 2001 and predicts earnings growth of 50% in 2002. It has also just announced first-quarter earnings of $13 million.
This is in stark contrast to the top eight US airlines, which reported combined first-quarter losses of $2.4 billion on top of 2001 losses of $9 billion. Air traffic has started to rebound for the major US carriers but still remains well below its pre-September level.
Losses at UAL, the parent company of the world’s second-largest carrier, United Airlines, widened 63% to $510 million, and US Airways announced that it was considering applying for assistance under the government’s loan guarantee programme.
JetBlue has only 24 aircraft but its $1.8 billion market capitalization makes it the fourth-largest airline in the US, overtaking the $810 million of United Airlines and the $372 million of US Airways, which has 329 aircraft.
JetBlue plans to use the money raised through its IPO primarily to finance the purchase of another 13 aircraft this year and a total of 60 by 2007.
Hase sees the company’s high leverage and exposure to oil price increases as a potential concern should the management fail to achieve its growth targets but is nevertheless confident in their abilities. “The fact that JetBlue made a profit in its first year is very unusual, and the airline that the CEO David Neeleman co-founded in Canada earlier is still doing very well,” she says.
The outlook for the US air travel industry remains difficult. But the industry can increasingly be divided into two: the traditional and the low fare. This is dramatically illustrated by the divergent directions that share prices have taken over the past year. While shares in the traditional airlines have fallen between 27% and 84%, shares in Southwest Airlines, the largest low-fare carrier, have risen 4%.
In the short term at least, the division looks set to continue. As Engel points out: “The big airlines’ problems are the low fares’ advantage.”
