Southwest Case Study

In: Business and Management

Submitted By jasun
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JetBlue is a low-fare airline established in 1999 by David Neeleman, a veteran in airline start-up. By adopting a high frequency, short-haul, point to point strategy that leverage on technology advantage, together with an experience management board. In April 2002, JetBlue Management decided to price the IPO of JetBlue at despite that it was during one of the worst periods in airline history.

The IPO was initially priced at $22-24 per share, it was later adjusted to $25 to $26 per share due to excessive demand. On the first day of trading in April 2002, shares of JetBlue (JBLU) closed at $45, up $18 from the offer price of $27, a gain of 67% in one day. On August 1, 2013 JBLU closed at $6.59.

The decision to go public
As noted in the JetBlue Prospectus, the main purpose for the IPO is for working capital and capital expenditure. Hence, the decision to go public can be seen as a financing decision. Besides going public, the company may raise equity by private placement or through investment bankers and underwriters. However, there are several reasons to go public. First, going public is able to raise large amount of capital that may not be possible in other means. This is especially important as Airline industry is a capital-intensive industry and companies in their initial years has high asset growth. The total assets of JetBlue almost doubled from 2000 to 2001. Furthermore, going public is able to increase credibility, this is vital for an airline company where reputation is paramount. Other advantages of going public includes, increasing liquidity and hence lower cost of capital, creating an exit strategy for existing shareholders, a decrease of debt to equity ratio which means that company can negotiate its debt obligations in more favourable terms and to raise future capital via right issues or private placements.

On the other…...

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