November 15, 2011 Company Overview Westjet, established in1996, is a low-cost Canadian airline company specializing in flights to various destinations in Canada, the United States, the Caribbean and Mexico. It is a non-union, self-run employee organization that focuses on world-class guest experience at an affordable rate.
Westjet prides itself on a corporate culture that blends devoted employees with efficient service. Westjet’s business plan, since day one, has been focused on a distinct advantage over other airlines: lower costs and increased customer satisfaction.It executes this plan by investing in one type of aircraft to serve main cities in North America instead of investing in different aircrafts needed to reach all cities and communities. Industry Westjet operates in a very afflicted, declining industry. Because the airline industry is one closely tied with economic growth and trade it is continuously changing. In fact, twenty-eight domestic airlines have disappeared in the past twenty years due to reduced numbers.
Fortunately, Westjet has found its niche in the industry.Through extensive research, Westjet determined a market segment that was seemingly unaccounted for in the airline industry: families with small children who often travel by vehicle. Westjet offered lower prices on air travel in order to present an alternative to these families. This plan took off. Today, Westjet is the second largest Canadian airline, only behind Air Canada.
It is however, the most successful domestic airline and continuously growing. Westjet’s most direct competition includes Air Canada, Air Transat, Sunwing Airlines and Porter Airlines. Despite the current struggle in the airline industry, Westjet continues to grow.Analysis Summary In order to recognize the success, growth and direction of Westjet, many aspects must be considered. A financial analysis had been conducted in order to understand the numerical progress and profit of the company. This includes overviews of both interim and annual financial statements including the Statement of Earnings, Balance sheet and Statement of Retained Earnings.
The Statement of Earnings has been used to evaluate profitability over a 5 year period with a particular focus on Sales, Operating expenses and Net Earnings. This includes the calculation of earnings per share and price-earnings ratio.The Balance Sheet has been used to better recognize the assets and foundation of the company compared to its debts and commitments. The calculation of working capital, current ratio and debt-to-assets has been done. These numbers will not only show the growth over time of the company but also how the numbers have compared to its close competitors. However, numbers do not always tell the whole story.
As a result, I have analyzed the company policies and goals in order to truly see the successes of the company. This includes its consideration of all GAAP policies and concern for investor information.Also, I considered outside economic factors that have affected the profits of the company in the past and also how they may affect the operations in the future. I analyzed economic growth and decline, airline use compared to other transportation and finally, customer experiences. Accounting Policies In order to fully recognize the credibility and faithful representation of Westjet financial statements, the use of accounting policies and procedures must be considered.
Although one can confidently say Westjet financial statements are continuously prepared in accordance with GAAP principles, we may look into further detail.First, it is useful to consider the application of preparing the financial statements. Westjet has a distinct management team separate from other managing authorities that prepare the statements. This segregation of duties allow for a faithful representation. This shows strong internal control.
To assist, Westjet’s statements are audited by independent directors from the KPMG LLP group. All statements are presented in Canadian Dollars, displaying an easily comparable figure to our own economy. Westjet’s financial statements are prepared on both an interim and annual basis.That is, statements are prepared and presented to the public quarterly and annually and follow a standard calendar year. This, in accordance with the time-period assumption, has been the process since the establishment of Westjet in 1996.
This shows consistency with their statements and allows the information to be comparable because of the standard calendar dates. In agreement with the cost principle Westjet records all assets at cost and are then amortized, using various methods, to determine the net realizable value. For loans and receivables, Westjet uses the effective interest method to depreciate these assets.All property, plant and equipment and recorded at cost and amortized in individual accounts to the estimated residual value. Finally, intangible assets are depreciated using the straight-line method and have a lifetime of 5 years.
All further information that may affect the values of assets is presented in the financial notes, illustrating the depreciation over time for each asset. This proves the consideration for the full-disclosure principle as all useful information can be obtained within the notes. Westjet uses multiple amortization methods because different methods prove more effective for different assets.However, once a method is used it will continue to be depreciated with that method. In general, Westjet uses the method that provides the most appropriate, conservative information.
In regards to the Statement of Earnings, all revenues and expenses follow the revenue recognition and matching principles. In specific, all guest revenues are recorded once the air transportation is provided. All other sales or guest credits are recorded in the Advance Ticket Sales account. Also, all expenses and maintenances costs for the operation of an aircraft are recorded once they are incurred and are charged to the Maintenance Expense category.For inventory, Westjet uses the FIFO method when determining cost. This method allows Westjet to keep an up-to-date inventory system and effectively sells the oldest units first.
Because Westjet is primarily a service company, the use of FIFO allows an appropriate account of assets without skewing any statements. Finally, it is important to consider the Receivables. In order to minimize the Bad Debt account, Westjet practices a strong collection system. That is, the majority of receivables and cash equivalents have a term of less than 91 days.Although the receivables turnover and average collection period cannot be calculated, it is said that majority of receivables are collected within the first 30 days.
In order to develop global accuracy and comparability, Westjet is transitioning into the practice of IFRS standards. As many organizations are moving in this direction, this allows the financial statements to be compared to other domestic airlines across the world. However, Westjet still recognizes GAAP principles in their current statement. Financial Analysis Looking at the current financial statements, it is evident that Westjet shows strong numbers.In particular, it shows revenues in 2011 already at $2. 2billion, $1.
3billion in cash and cash equivalents and $6million in share capital. However, we must look further and decipher information from these numbers to truly recognize their value. Profitability It is always important to measure the earnings or operating success for a company. Being a fairly new company, Westjet earned profits very quickly, but is it necessary to understand the progress and growth. First, let’s consider the Earnings per Share. This will show the shareholder’s benefit of the company.
In order to calculate these figures, I used information from within the Statement of Earnings and the notes to the financial statements. In particular the net earnings and average number of shares were determined. Westjet’s 2011 statement below shows this information. *All numbers are stated in thousands Here shows the Net Earnings as at the three quarters ending September 30, 2011. I will divide this figure by the Average Number of Common Shares (shown below) to find the earnings per share for 2011. With these two figures I can calculate earnings per share for 2011: EPS = 113,118,000/140,456,384 = 0.
81Unfortunately, this information only tells us the current situation and does not track growth. As a result, I have obtained the information required for this calculation over the past 5 years and found these results. EARNINGS PER SHARE 2006| 2007| 2008| 2009| 2010| 2011(Q1)| 2011(Q2)| 2011(Q3)| 0. 88| 1. 49| 1. 38| 0.
74| 0. 94| 0. 34| 0. 18| 0. 28| As seen, Westjet had a very profitable year in 2007 before falling for two years until 2009. However, so did all of the airline industry, as it was a time of recession across the world.
It is more important to consider the growth that has occurred since that time, indicating a sense of recovery.Since 2009, profitability has steadily increased. Furthermore, with a full quarter still remaining in Westjet’s financial period they already have an earnings per share of 0. 8. This number will only increase as we enter into a holiday season and profits for Westjet are expected to rise during this time of travel.
It is also important to recognize how the competition is performing. A look at Westjet’s two strongest competitors, Air Canada and Air Transat, indicates that these companies are actually at a decline in their profits. Earnings per Share for Air Canada 2009 2010 2011(Q1)2011(Q2)2011(Q3) (0. 8) 0. 38 (0.
07) (0. 17) (0. 45) Earnings per Share for Air Transat 2009 20102011(Q1)2011(Q2) 2011(Q3) 1. 85 1. 73 (0. 51) (0.
02) (0. 20) These figures show a loss in all three quarters of 2011 for both Air Canada and Air Transat. This means that of the top 3 airlines in Canada Westjet is the only one showing a positive earnings per share. The next value to consider is the price-earnings ratio. This will allow us a better comparison across companies. Also, this will allow us better predictability for future profitability.
Finding the market price per share (Westjet trades on the Toronto Stock Exchange), we can find that Westjet has the strongest looking profitability in the industry. Current Market Price = 12. 12 Earnings per Share (2011) = 0. 8 Price-Earnings Ratio = 12. 12/0.
8 = 15. 2 By using average market prices, we can also determine this figure for past years. 2008 2009 2010 13. 5 16. 1 16.
6 This indicates continuously high expectations for Westjet, a strong sign of development.This proves enticing as Air Transat had a price-earnings ratio for 2011 of 9. 2 and Air Canada had a minimal 1. 9. This helps indicates who is really taking charge of the airline industry. Liquidity It is important to realize not only the profits a company is earning, but also their ability to pay obligations and to meet unexpected needs for cash.
Fortunately, Westjet has a high current asset value while minimizing their liabilities (as shown below). *All numbers are stated in thousands Before even calculating any ratios it is evident that Westjet has a strong asset section as over 42% of all assets are current.This means in a time of immediate crisis, Westjet would more than likely be able to recover because of the liquidity their assets have. We can also look at the liabilities section to compare with assets. *All numbers are stated in thousands. Because Westjet has many liabilities, it is appropriate to measure their ability to actually pay off these debts.
Furthermore, is it worth investing into the company or will they be stuck in a debt crisis in the near future? To measure this we can calculate working capital. Using the values for 2011, we can concur that Westjet has a working capital of 473, 748 thousand. 1,449,415 – 975,677) This illustrates that even in a difficult time for airline companies, Westjet has a great capability of paying off their liabilities. Looking at the 5 year trend this proves more believable. *All numbers are stated in thousands 2006| 2007| 2008| 2009| 2010| -8418| 127128| 176003| 363447| 436538| This indicates that Westjet has had consecutively increasing working capital, in other words a stronger ability to pay debt, over the past 5 years.
In comparison, Air Canada and Air Transat have weaker trends, which proves worrisome for an potential investor. Air Canada (All numbers are stated in millions) 00920102011 -351 383 298 Although these 2010 and 2011 figures are strong numbers considering they are stated in millions, they also show inconsistency. Furthermore, investors cannot be sure of the amount of liabilities the company will have. Air Transat (All numbers are stated in thousands) 200920102011 34,958 64,269 117,963 Air Transat, on the other hand, shows consistent growth in their working capital. This may result as either an increase in current assets or a more intense budgeting of liabilities (most likely).As a result, it is necessary to find further information.
Using these same figures for current assets and liabilities, we can calculate the current ratio. This may prove a more reasonable liquidity ratio as it can compare directly a company’s liabilities and assets. For Westjet, we can break down the ratio over time. CURRENT RATIO 2006| 2007| 2008| 2009| 2010| 2011(Q1)| 2011(Q2)| 2011(Q3)| 0. 98:1| 1. 22:1| 1.
25:1| 1. 48:1| 1. 52:1| 1. 47:1| 1. 48:1| 1. 49:1| As illustrated, Westjet has posted strong numbers over many years.
For a company that works to maintain a ratio of 1:1, they are clearly exceeding.Here are the competitor’s numbers: Air Canada 200920102011 0. 88:1 1. 13:1 1. 10:1 Air Transat 200920102011 1. 06:1 1:10:1 1.
07:1 Even though these companies still currently hold positive ratios, they are clearly less efficient. This is more than likely due to Westjet’s ability to maintain low-costs while producing large profits. Once again, it seems as though Westjet is the leader in the industry. Solvency For potential long-term creditors or prospective shareholders a company’s long-run solvency proves very important.Especially in such a tough industry, it is necessary to see who has the ability to survive over a long period of time. Furthermore, it shows who has the ability to pay debts effectively.
For this we consider the Debt to Total Assets Ratio. For this figure we will consider the totals of both assets and liabilities, as opposed to just current. This will provide is with a strong analysis because it shows complete debts including long-term liabilities. This means not only will the company be able to pay interest as it comes due, but also to the repay the face value. For 2011, Westjet’s Debt to Total Assets = ,147,108 / 3,494,560 = 0.
61 = 61% Now, 61% does seem high as that means creditors provided most of Westjet’s assets. However, a look at the 5 year trend and competitors may show otherwise. 2006| 2007| 2008| 2009| 2010| 2011| 70%| 68%| 67%| 60%| 58%| 61%| Despite a small increase over the past year, the general trend shows a gradual increase in the amount of assets financed by shareholders rather than creditors. Let’s look at the competitors. Air Canada 200920102011 84% 82% 122% Air Transat 200920102011 67% 63% 61%Once again, this indicates a financial crisis for Air Canada, a company currently reddened by debt.
Air Transat, alternatively, shows an improvement in financing, one that is currently equal to that of Westjet. Once again, Westjet is leading the industry. Overall Evaluation Investment After much research, it is evident that Westjet is definitely a company that one may consider investing in. After recently surpassing 26 consecutive profitable quarters, it is obvious that shareholders of Westjet will be rewarded. With earnings per share currently on the rise, it is definitely a great time to invest.Also, as of 2010, Westjet created stock-option, share-purchase and profit-sharing plans, all benefitting its current shareholders.
While competitors such as Air Canada are trying to restructure itself and emerge from bankruptcy, Westjet is on the rise. Credit As the numbers show, Westjet is in a comfortable position in regards to pay debt. As an outside company it would be highly unlikely for Westjet to not be able to pay them on a timely basis. Compared throughout the industry, Westjet seems to be in the strongest financial position. Other Factors There are other factors that can also be considered for the investment of Westjet.
Firstly, it is a Canadian company and therefore provides support to a domestic organization. Secondly, with a current rise in gas prices travelling by vehicle has become more expensive. Consequently, drivers may think twice about travelling greater distances on land and therefore choose to fly. As Westjet has some of the lowest prices on the market, it is definitely a possibility for consumers to choose them. As a result, profitability should continue to increase. Another consideration is Westjet’s other competitive advantage: excellent customer service.
Rated one of the more friendly staff in the world, shareholders can expect not only cheaper flights but efficient, comfortable environments too. Personally, I can agree with this as I have flown with Westjet multiple times and received great service on each occasion. Overall, Westjet is a growing, progressing company that is definitely worth consideration. Works Cited 1. Westjet Corporate Website http://www. westjet.
com/guest/en/media-investors/index. shtml 2. SEDAR http://www. sedar. com/FindCompanyDocuments.
do 3. Grescoe, Paul. Flight Path – How Westjet is Flying High in Canada’s Most Turbulent Industry. Wiley