JetBlue Case Study Example | Topics and Well Written Essays - 3000 words

JetBlue - Case Study Example The interest payments would not show on the balance sheet while the increased assets would, making JetBlue look like a viable investment opportunity. Thus a decision needs to be made on the mode of financing that will lend strength to JetBlue's capital structure. However before analyzing the options of financing and recommending the most suitable alternative, it is imperative hat the current situation of the company be analyzed so that the structure can be evaluated for the option most suitable to it. To evaluate the current financial position based on the published data, the company will be evalaluated based on its profitability, its financial strength, the adequacy of its cash flows and its leverage and relationship between the fixed and variable costs of operating the airline. On the basis of profitability, assuming that salaries and related costs along with fuel are variable costs, JetBlue's contribution margin ratio indicates that the contribution of revenue to variable costs was 52% in 2000, 61% in 2001, and 62% in 2002 and by 64% in the first half of 2003. However, a more detailed look at the profitability indicates that the operating margin, which considers the contribution of revenue to total operating costs, is much lower. In fact, operating costs were higher than revenue in 2000. But this is because the revenue earnings of the airline were much lower in 2000, than in consequent years. The shortfall in revenue and its failure to cover operating costs can be attributed to the fact that the airline had just started and customers, wary of trying out a new airline might have preferred travelling on the older airlines. Moreover the airline might not have had the proper connections and incentives in place for travel agents, which it covered for in later periods, leading to an increase in sales revenues. Comparing operating and contribution margin, an analysis of the two indicates that fixed costs account for a large portion of the airlines costs. The operating margins for the years 2000, 2001, 2002 and half year ended June 2003 were -20%, 8%, 17% and 18% respectively, indicating that fixed costs pulled down the profit amounts. The graph below illustrates the Net Profit Margin, before and after taxes and shows the impact that tax has on the net profit margin. As it can be observed, taxes pull down the net profit margin in periods where there is revenue growth but in periods where there is a loss the tax waivers do not further the losses. However the taxes when carried forward in the next year increase the difference in before and after tax margins, the consequent year remedies this. Upon further scrutiny we can observe that the return on assets (ROA) for JetBlue has been positive from 2001 onwards, with a -6% return in the starting year. For the rest of the periods return on assets was 6%, 7% and 3% (till June 2003). The returns on investment (ROI) were much higher than the returns on assets, being 24%, 23% and 10% in 2001, 2002 and half year ended June 2003 while negative returns were posted in the initial year of