Financial Management – Westjet Financial Analysis

Financial Management – WestJet Financial Analysis

University of Winnipeg PACE

Friday May 6, 2016

Ariel Webster

Introduction

WestJet is a Canadian airline, its head office is located in Calgary, Alberta. Their principle markets are the domestic (Canadian), trans-border (US), and international markets (Mexico, Central America, The Caribbean and Europe) (WestJet, 2016, p. 13). The company offers service to approximately 93 destinations, serving over 17 million passengers annually. The company’s subsidiaries include WestJet Investment Corp., WestJet Operations Corp., WestJet Vacations Inc., and WestJet Encore Ltd. . (Globe and Mail , 2016) WestJet had revenues of $4.029 billion dollars in 2015, which is an increase of 52 billion or 1.33% from 2014.

Situational Analysis

As of May 5, 2016, WestJet stocks are currently valued at $19.85, this is a significant decrease from its price of $26.80 on May 5, 2015 (MSN Money , 2016). For the horizontal and vertical analysis, the statements from the first-quarter of 2015 and 2016 as well as the annual statements for 2014 and 2015 will be compared. Primary stakeholders at WestJet are the employees, the customers, the suppliers (Bombardier, Boeing), the government, and the Canadian population as a whole. (WestJet, 2016)

As you will see in Appendix A: Horizontal and Vertical Analysis the quarterly statement for 2016 recorded a decrease in profit, dropping their stock price to an all-time low of $14.99. For the 2016/2015 quarterly horizontal variance analysis, it reported a -4.80% decrease of revenues when compared to the first quarter of 2015, with a -57.36% decrease of their cost-of-goods sold.   The net profit for 2016 was $87 million, in comparison to $140 million in 2015 which equates to a -37.73% decrease. For the 2015/2014 horizontal variance analysis, it reported a 1.33% increase of revenues when compared to 2014, with a -17.62% decrease in the cost-of-goods sold. The annual net profit for 2015 was $367 million, in comparison to $268 million in 2014 which equates to a 36.78% increase. For a more in-depth overview of the variance analysis please refer to Appendix A. Below you will find graphs taken from The Wall Street Journal further proving the financial situation of WestJet.

[pic 1] (Wall Street Journal, 2016)

[pic 2] (Wall Street Journal, 2016)

The main reason for the major decrease in share price and profits is directly related to the economy weakening in Alberta as well as the decrease in the Canadian dollar. According to (Smith, 2016) 25% of WestJet flight’s either originate or are destined for airports in a region that is  “oil-rich”. Because of the large amount of fuel used by WestJet one would assume that lower fuel prices would result in WestJet making a higher profit, but in reality fuel price is calculated in U.S. dollars and most revenues come from the local currency, therefore the fuel costs have not decreased to the extent people would assume (Smith, 2016). WestJet has formulated a new strategy to combat the economic crisis and fall of Canadian dollar, such as moving routes out of the west and Newfoundland, into places like Toronto. Fares in areas with decreased traffic will be lowered to entice people to fly. Lastly, emphasis will be placed on international routes and code sharing partnerships. (Lu, 2016)

Competitive Analysis

         Air Canada is considered to be WestJet’s biggest domestic competitor. Air Canada is well-known for for its presence in the domestic Canadian, U.S. transborder, and the international markets. They transport 38 million passengers annually to more than 190 destinations on five continents. (Air Canada, n.d.) Air Canada had revenues of $13.86 billion for 2015, which is $9.8 billion or 2.44% more than WestJet’s revenues for 2015. Although, Air Canada generally earns a higher profit each year when compared to WestJet, this mainly has to do with the size of jets they operate and the locations to which they fly. A major advantage that WestJet has over its competitor is their mission and vision. WestJet’s business strategy is very customer focused, something that many of its competitors such as Air Canada, lack. Air Canada has expanded their services to places that WestJet has yet to explore, such as Asia seeing as though the Canadian demographic is so multi-cultural having a wider range of destinations is a competitive advantage that Air Canada currently exploits. Implementing the first-checked baggage fee has given WestJet some added revenue, helping them continue to vie for the number-one airline in Canada.  

Strengths

WestJet Loyalty and Corporate Culture

        Since 1996, WestJet has been a major player in the Canadian airline industry. Their customer focused nature is what keeps customers coming back. The company’s down-to-earth, fun, playful image, coupled with their friendly, pro-active social-media presence helps to attract and personalize the company for the customers who fly with them. WestJet is known for going above and beyond for their customer, the managerial strategy at WestJet allows employees the autonomy to make decisions regarding their customers, as they have an “ethics-driven culture, that puts a premium on do-the-right-thing customer service” (Barmak, 2013).In addition to having amazing customer service, WestJet has been the recipient of many different awards in recognition of their admired corporate culture. WestJet values their employees so much they offer an attractive profit-sharing plan that allows employees to buy WestJet stock with up to 20% of their pay-cheques, which the company matches one-to-one. (Barmak, 2013)