Question

You are using EDITBA multiple approach to estimate the terminal value for JetBlue Airways. Which of the following statements are correct? Select all that apply.

Select one or more:

a. We can use airlines industry average as it will give a representative measure of the entire industry.

b. We should not use industry average multiples as they suffer from outlier effects and lack of comparability.

c. We can use mean EBITDA multiple for low-fare airlines, as these are more comparable to JetBlue.

d. The use of EBITDA multiples for estimating terminal value is not appropriate. PE ratios should be used instead as they capture growth opportunities more accurately.

e. All of the above

Answer 1

For this question, lets rule out the incorrect statements first.

Option d. Since we are estimating the terminal value of the overall company (JetBlue Airways), in such cases the EBITDA multiples are more useful rather than PE ratios, as PE ratios are mainly used to estimate the Equity value rather than the overall company value.

Option e. Since Option d has been ruled out as explained above, Option e will also be naturally ruled out.

Option a. Since JetBlue is a Low Cost Carrier (low-fare airline), its operating cost structure is different compared to that of Full service carriers. So, for a more representative measure, we need to focus on Low Cost Carriers and not the entire Airlines Industry average.

This brings us to the two correct options i.e. Option b and Option c.

Option c is correct as low-fare airlines will be more representative of and comparable to JetBlue and so, mean EBITDA multiple of low-fare airlines will lead to a more accurate valuation

Option b is also correct as the industry is comprised of Full service, low cost and ultra-low cost carriers and thus, an average multiple of the overall industry will also include outliers and other uncomparable peers which might not need to correct valuation estimate.

So, correct options are Option b and Option c.