Westjet Analysis
... up from 1-2 millions to almost 10 millions. This was because of the 72.9% increase in the load with Jetsgo going bankrupt. Jetsgo filed a lawsuit against WestJet, but since Jetsgo went bankrupt, the lawsuit had no creditability. In addition, WestJet helped Jetsgo’s customers which in turn helped WestJet attract more customers. Hence, it increased its market share and revenue. So its stock price finally went over 15 since April last year. On April 27 2005, due to the announcement of first quarter loss in 2005, the stock price went down a bit. So the price now is fluctuating between 14 and 15. 9.11 T he terrorist attacks of September 11 2001 and their aftermath have negatively impacted the airline industry including WestJet. Additional terrorist attacks, the fear of such attacks or increased hostilities could further negatively impact the airline industry and WestJet and could result in a decrease in travel and an increase in costs to airlines and air travelers. In the aftermath of the September 11 2001 terrorist attacks, the availability of insurance for airlines has decreased and the costs such insurance have increased. As a result of 9-11, all commercial airline flights in North America were suspended for at least three days. Westjet cancelled approximately 343 flights from September 11 2001 until September 13 2001. Although flight operations were suspended, WestJet continued to incur nearly all of its normal operating expenses (with the exception of certain direct trip-related expenditures such as fuel and landing fees). Once WestJet resumed operations, revenues were severely impacted as advance booking were reduced and non-refundable confirmed travel was cancelled. Advance bookings returned to normal levels by mid-October 2001. WestJet’s passenger load factor decreased from September 2001 to November 2001 but increased in December 2001. Although 9-11 had a huge damage on airline industry, WestJet still reported earnings for last quarter of 2001. SARS W ith the outbreak of SARS in Toronto, the year 2003 proved to be challenging for air traffic. At the height of the outbreak in May, overall air traffic had decreased by 11 per cent from levels the previous May. The impact was most severe in the transborder and international sectors, where traffic decreased by 17 and 19 per cent, respectively. Although all the major airports in Canada reported reduced traffic levels, Toronto and Vancouver were most affected by the crisis. Traffic had gradually recovered during the summer and fall, with most airports reporting modest year-over-year growth by year-end. The impact of SARS was that traffic in 2003 decreased by two per cent from 2002 to 54 million passengers. Air traffic in the transborder sector was the most affected, with a four per cent decrease from 2002 while the international sector experienced a two per cent decrease. Air traffic in the domestic sector remained almost the same in 2003. However, traffic in all three sectors was significantly below its peak in 2000, when the traffic was 60 million passengers. Demographics We believe that WestJet will not have a significant impact by changes in demographics. People will always continue to choose WestJet because of its competitive prices and excellent service. Our main concern was about the baby boomers. These retiring baby boomers will be ready to spend their life savings and most of them would not care about the “best price” or the “best deal”. But wouldn’t you prefer to take two trips instead of one? Furthermore, no matter how much money you have, eventually it will run out. So if these baby boomers have all spent their money on a couple of expensive vacations, they will eventually look towards WestJet to provide them with exceptional prices and they shall not be disappointed because the service is as exceptional as the prices. Regardless of demographic differences, people will choose this airline because its purpose is to provide customers with the lowest airfare without sacrificing service. Therefore, it is sufficient to conclude that no matter where WestJet plans to expand, it will hold a strong market share. Revenue Profile W estJet is rated as one of the most successful companies in Canada because of its excellent performance in finance. In 1996, WestJet had only three Boeing 737-200 planes and 220 employees. Now, it has 57 aircrafts and 4500 employees. From 2001, WestJet has increased its total revenue every year by more than 50%. WestJet incurred profit in 2001 regardless of the terrorist attacks. WestJet took over the market share of Canada 3000 in November 2001 which caused WestJet’s load factor to rise back to normal by the end of 2001. One October 27, 2004, WestJet announced its third quarter 2004 result. It had a loss in the fourth quarter 2004 because of early replacement of the 737-200 planes, computer data base problem, high fuel prices, high operating cost and competition with Jetsgo. WestJet Revenue 2001-2004 ($million) 2004 2003 2002 2001 Total Revenue 1,057,990 863,599 683,420 478,393 Profit / Loss -17,168 60,539 51,780 36,710 Total Assets 1,877,354 1,476,858 784,205 393,413 In 2003, WestJet’s Revenue Passenger Miles was 4,852.5 million dollars, and its available seat miles were 6,871.7 million dollars. The load factor during the same period in 2003 was 70.6%. Whereas, in 2004, WestJet’s RPM had increased 29.4% to 6,277.3 million dollars. The available seat miles increased 30.4% to 8,963.1 million dollars and the load factor was 70.0% in the same year. “During 2003 economic activity in Canada slowed because of a series of unforeseen shocks. As a result, real gross domestic product (GDP) expanded only 1.7 per cent for the year, well below the 3.2 per cent expected by private sector economists at the time of the 2003 budget.”(http://finance.yahoo.com) However, WestJet had increased sales and revenue during the Canadian GDP recession period and high inflation period in 2003 because of its business strategy. WestJet airlines strategy is to offer high-quality and low-fare operations for customers. WestJet strategies include the following: 1. Use of one aircraft type (737) to reduce maintenance & training costs; realize bulk purchasing benefits 2. Use of technology to lower costs 3. maximize aircraft utilization 4. Recruit, train, and reward service oriented people 5. Simplified route structure & operations 6. Use of secondary airports where available WestJet is one of the successful businesses in Canada. Because of this, they can no longer say that they are one of the small guys in the airline industry. Their success has challenged them to continually reshape their strategy in order to maintain profiles and revenue growth. Financial Instruments Foreign Exchange Rate Since Westjet leases its planes and purchases oil from the US. The exchange rates are a critical part in WestJet’s business. The corporation had not entered in contracts to lock the exchange rates prior to last year and as a result of this, on June 2004, the At June 30, 2004, the Corporation had U.S. dollar crash with the cash equivalents totaling to US $35,472,000. During the quarter the Corporation has entered into contracts to fix the exchange rates on eliminate future US dollar losses, especially for the purchase of four aircrafts. Interest Rates This is another major concern for Westjet. The Corporation had entered into forward starting interest rate agreements at rates between 5.59% and 5.93%, effective for the period between September 2004 and February 2005, to fix the interest rate on four future aircraft deliveries. Since the purchase of the aircraft has been delays to the following year the contract has been extended till next year. Financing Agreement WestJet had an agreement with the Ontario Teacher’s Pension Plan Board (“Ontario Teachers”) for the right to require Ontario teachers to purchase up to $100,000,000 of common shares. The Financing Agreement expired August 29, 2004, and gave the corporation the one-time right to require Ontario Teachers to purchase common shares at 94% of the weighted average trading price for the corporation's shares for the ten trading days prior to the Corporation's notice of exercise to Ontario Teachers. The Financing Agreement was subject to several conditions, including that Ontario Teachers were not required to purchase common shares under the Financing Agreement which would cause their ownership to exceed 29.99% of the then outstanding common shares and a requirement that the corporation obtain all necessary regulatory approvals. The corporation would pay Ontario Teachers a standby fee of 1% per annum, payable quarterly, in advance, so long as the Corporation has not exercised or cancelled its rights under the Financing Agr...