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JetBlue Airways (JBLU)
JetBlue Airways Flying High on Cash-Boosting Offer
JetBlue Airways received a much needed ego and financial boost yesterday after well-established German carrier Lufthansa agreed to purchase a partial stake in the company. JetBlue officials, shareholders, and potential investors alike are all cheering the deal as a vote of confidence in the little U.S. carrier that could, sending shares up after trading was halted pending the announcement. JetBlue shares have suffered significantly this year and the company has a lot to gain with the influx of funds. Is this move by Lufthansa a sign of a new found credibility and respect from the airline industry for JetBlue, or is the purchase simply a smart business decision in light of the powerful euro?
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Regardless of Lufthansa's motivation, the agreement is great news for JetBlue. After suffering from an operational crisis on Valentine's Day of this year, JetBlue stock has lost about two-thirds of its value. The news yesterday was enough to boost shares as much as 41 percent before closing 14 percent higher at $7.15. From an operational standpoint, the agreement will be a huge factor in allowing JetBlue to overcome issues that are plaguing the airline industry as a whole, such as rising fuel costs, decreased consumer demand, and new competition. These problems have hit JetBlue particularly hard given its focus on low-cost, high-comfort air travel.
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The terms of the agreement call for Lufthansa to purchase 42 million shares of JetBlue at $7.27 each, which will cost Lufthansa about $300 million. This will give Lufthansa a 19 percent stake in JetBlue, just under the amount in U.S. law for domestic airlines that prohibits more than a 25 percent ownership of a company's voting stock by non-U.S. citizens. Though the deal is certainly in JetBlue's favor, the German carrier can expect some benefits as well. One of the more beneficial aspects of the deal is the opportunity for Lufthansa to gain greater access to New York's JFK airport, JetBlue's primary hub. If U.S. laws are changed, the German company is further poised to make a larger investment, or purchase JetBlue outright, leading to greater returns down the road. The relatively cheap U.S. dollar makes getting in now a bargain.
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This cost-benefit discrepancy has left many analysts and industry experts bewildered. While Lufthansa's perks are limited (until they are allowed to fully purchase JetBlue, that is), JetBlue has much to gain. Dave Barger, Chief Executive of JetBlue, said, "Now with a stronger balance sheet and financial flexibility we are well positioned to successfully meet our industry's challenges, shareholder expectations and continue to be a leader in the markets that we serve." JetBlue will now have some additional cash to face the issues of rising operational prices and hope to increase their margins from their lower-priced tickets.
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This deal is just one more in a string of recent rumors and announcements of overseas interest in U.S. businesses. As the dollar continues to struggle against its major foreign counterparts, buying into U.S. companies will become a bigger bargain. It remains to be seen if laws will loosen or tighten in allowing for full takeovers by non-U.S. investors.
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