6. UNIVERSITY
OF LETHBRIDGE
Canadian Market
Business Travel
International Market
Employee Efficiency / Profit Sharing
Codesharing / Interline Agreements
INDUSTRY OVERVIEW
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
7. UNIVERSITY
OF LETHBRIDGE
INDUSTRY BREAKEVEN LOAD FACTORS
49%
71% 74% 73% 74%
83% 83%
Porter WestJet Southwest JetBlue AirTran Air
Canada
Delta
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
8. UNIVERSITY
OF LETHBRIDGE
Canadian Market
Business Travel
International Market
Employee Efficiency / Profit Sharing
Codesharing / Interline Agreements
INDUSTRY OVERVIEW
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
9. UNIVERSITY
OF LETHBRIDGE
D/E OF SELECT FIRMS
1.36 1.48 3.06 3.04 5.06
59.35
92.08
-7.96
WestJet Southwest JetBlue AirTran Air
Canada
Delta
Airlines
US
Airways
AMR
Corp.
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
11. UNIVERSITY
OF LETHBRIDGE
Low Cost Carrier
Customer Service
Fleet
• New
• Efficient
• Flexibility in delivery
• Maintenance
Lack of Business Class
• Flight Availability
• Business Perks
Strengths
INTERNAL ANALYSIS
Weaknesses
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
12. UNIVERSITY
OF LETHBRIDGE
Recovering Economy
Leisure demand follows
Competition Grounded
Planes
WestJet New Planes
Dependence on
Economic Activity
Competition
Going Green Trend
Oil prices and hedging
Opportunities
EXTERNAL ANALYSIS
Threats
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
14. UNIVERSITY
OF LETHBRIDGE
WJA REVENUE FORECAST
0.0000
0.0004
0.0008
0.0012
0.0016
0.0020
WJARevenue/CanadianGDP
Revenues to GDP Ratio Growth
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
23. UNIVERSITY
OF LETHBRIDGE
Substantial free cash flow generation
Effectively managing capital spending with timing of new
aircraft deliveries
Returning cash to shareholders via higher dividend and/or
share buybacks should sustain valuation multiple
Room for rising dividend stream over medium term
FREE CASH FLOW ENGINE
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
24. UNIVERSITY
OF LETHBRIDGE
SOURCES & USES OF FUNDS
0
100,000
200,000
300,000
400,000
500,000
600,000
2007 2008 2009 2010 2011E 2012E
ThousandsofCanadianDollars
Cash Flow CAPEX Dividend
Room for
further
dividend
increases
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
26. UNIVERSITY
OF LETHBRIDGE
P/EBITDAR per Share P/EARNINGS per Share
EBITDAR/EARNINGS 629,739,252 192,793,258
Price Multiple 3.8x 16.0x
Enterprise Value 2,393,009,159 3,084,692,127
Net Adjustments (61,865,400) (61,865,400)
Adjusted Enterprise
Value
2,331,143,759 3,022,826,727
Shares Outstanding 144,958,414 144,958,414
EV per Share $16.08 $20.85
Factor Weight 70% 30%
Target Price $17.51
2011 PRICE TARGET DERIVATION
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
27. UNIVERSITY
OF LETHBRIDGE
Price Target $17.51
Price at Close Mar 3, 2011 $15.48
Price Appreciation 13.12%
Dividend Yield 1.29%
Total Upside 14.41%
RECOMMENDATION BUY
UPSIDE POTENTIAL
INDUSTRY OVERVIEW SWOT GROWTH TO GARP DIVIDEND YIELD VALUATIONFINANCIAL FORECAST
WestJet has solidified itself as a low cost provider status in the market.
CANADIAN. Without a change in business strategy the growth of WestJet in Canada market growth is limited. WestJet operates with around 50% market share for Western Canadian markets, but Air Canada is the leader in Eastern Canada. WestJet can increase Canadian market share by introducing new destinations, increasing frequencies of flights, as well as gaining better presentation in their business class. West Jet should experience average market growth in Canada but unlikely to achieve continued above average Canadian market place growth.
BUSINESS. The lack of business class on WestJet planes is a barrier to higher yield growth. Although the new WestJet loyalty program has created incentive for repeat customers, rivals Air Canada and Porter are preferred for business travel. WestJet has had difficulty competing in business class, because they do not cater to the higher margin business traveler and typically companies that cater to the business traveler are able to earn sizable yields from these customers. WestJet must have favourable flight times, efficient and speedy loading and unloading, as well as a business class to effectively compete for business market share.
INTERNATIONAL. Air Canada’s strongest revenue growth is currently being realized in the Pacific and Atlantic markets. In order to grow, WestJet must continue expand into new international markets. As WestJet begins to establish themselves in these new markets, we expect their revenue per available seat mile to drop slightly initially, but with time to return to historical levels. If WestJet has manageable growth internationally the reduced initial margins from these flights will have minimal effect on financial strength. THE COMPANY ALSO HAS THE FLEXIBILITY IN AIRCRAFT DELIVERIES TO EVALUATE NEW ROUTES AND HIGH GRADE WHERE RETURNS SUPPORT NEW CAPACITY.
FINANCIAL STRENGTH. WestJet boasts one of the strongest balance sheet in airline industry. Many competitors do not have the amount of financial flexibility WestJet enjoys. WestJet has significant cash on hand and continually generates strong free cash flow. As the airline industry is a cyclical industry, sizable loses do frequently occur only two companies, WestJet and Southwest have operated with consistent profitability.
CODESHARING. WestJet has formed strategic alliances with several airlines. Recent notable agreements have been signed with British Airlines and Cathay Pacific with a few more deals in the works. Strategically this allows WestJet to offer more destinations to customers, while increasing the load factor on WestJet flights.
NO UNION. A major advantage for WestJet is the employee profit sharing while many competitors are unionized. During weak economic conditions WestJet benefits due to employee profit sharing and the lower expenses. This allows WestJet to have labour costs below industry average and operate with fewer employees. The unique culture of employees being owners has enabled a reputation for superior customer service, which has supported WestJet’s growth.
FINANCIAL STRENGTH. WestJet boasts one of the strongest balance sheet in airline industry. Many competitors do not have the amount of financial flexibility WestJet enjoys. WestJet has significant cash on hand and continually generates strong free cash flow. As the airline industry is a cyclical industry, sizable loses do frequently occur only two companies, WestJet and Southwest have operated with consistent profitability.
CODESHARING. WestJet has formed strategic alliances with several airlines. Recent notable agreements have been signed with British Airlines and Cathay Pacific with a few more deals in the works. Strategically this allows WestJet to offer more destinations to customers, while increasing the load factor on WestJet flights.
NO UNION. A major advantage for WestJet is the employee profit sharing while many competitors are unionized. During weak economic conditions WestJet benefits due to employee profit sharing and the lower expenses. This allows WestJet to have labour costs below industry average and operate with fewer employees. The unique culture of employees being owners has enabled a reputation for superior customer service, which has supported WestJet’s growth.
Thomas
Hi, I’d just like to give you a quick internal and external Analysis of West jet Airlines, simply some key
strengths and weaknesses we’ve identified for you which were very instrumental to us in our valuation
of West Jet.
A few Strengths that provide West Jet with an excellent competitive advantage are Low Cost Carrier.
West Jet entered the airline industry as a no frills airline, intent on offering the lowest price and keeping
costs down. The next strength we’d like to take not of is the customer service that West Jet employs.
Part of their hiring process is to pick energetic out going people that will enhance the experience
customers have on their flights. They’ve done an excellent job over the past 15 years in both these
area, and both have helped to make West Jet a well known and appreciated brand.
Almost because of their goal to provide customers with a low cost alternative, West Jet has found
it difficult to provide a good Business Class. Business individuals are looking for things such as flight
availability, spacious and comfortable seats, better meals, and even lounges to relax in at the airport.
We found that despite the new loyalty rewards program West Jet has recently initiated the business
class is still an area they have difficulty competing in.
As for opportunities we found that air travel is very closely correlated with economic activity. As we
have seen economic growth recently we know that money will be making its way into the hands of leisure travelers
in the near future and we’ll see more demand for flights. Also a quick point to note is that during the
recession many airlines grounded planes which provide additional room in airports for increased traffic.
West Jet can capitalize on this area by continuing with their purchasing schedule and getting more
planes in the air in anticipation for the increased demand I just mentioned.
Finally an external area of concern we have seen is the dependence on economic activity. We did just
mention this as an opportunity, but likewise if the economy decides to take a turn for the worst, air
travel will move with it. Next in this industry there is high competition, so it is always something to be
aware of. Finally another aspect to be considered is the growing trend to be green, as an industry which
that does produce high levels of carbon emissions it will be targeted as a polluter. This may lead to
higher costs in either taxes, or new technology, the good news is that everyone in the industry is in the
same boat.
Thomas
To forecast our figures for WestJet’s revenues, we looked at a few different ways. The method we finally settled on looks at the ratio of Total Revenue to Canadian GDP. When we plot that time series we get this chart. As you can see, the proportion of Canadian GDP that WestJet collects in revenues has had a steady, nearly linear, growth from the year they went public right up until the recent recession.
Now that WestJet has entered a period of transition, which we will discuss in a moment, we don’t see this ratio growing as quickly going forward. We have, however increased the growth we expect within the past month in response WestJet’s aggressive actions to gain a greater share of business travel in the Eastern Triangle.
Our forecast expenses are simply an average of 2009 and 2010 expenses on a common-size basis, for all non-fuel items.
Because aircraft fuel expenses depend more on the market price of jet fuel and WestJet’s ASM capacity, we forecast these expenses using regression analysis. For the regression, we used the price of oil as a proxy for the price of jet fuel and entered it as the independent variable in our regression. We compared it to the actual aircraft fuel expense per ASM.
We can then use the resulting regression equation to forecast aircraft fuel expenses using the forecast price of oil and our forecasts for WestJet ASMs.
Bradley
WestJet is in a transition period between business life cycle stages. From their launch in the mid-’90s to the turn of the century was their introduction phase. The majority of the past decade has been a period of significant growth. We see WestJet entering a period of LOWER THAN HISTORICAL GROWTH AND IN LINE WITH BROADER MARKET AVERAGES. GIVEN THE INDSUTRY GROWTH IS HIGHLY CORRELATED WITH GDP GROWTH AND ALSO REFLECTING WESTJET’S 50% DOMESTIC MARKET PENETRATION, WE FEEL THAT WESTJET IS ENTERING THE MATURE PHASE OF ITS BUSINESS LIFE CYCLE, WHICH REQUIRES ADAPTATION IN BUSINESS STRATEGY, PACE OF SPENDING AND EFFECTIVE DEPLOYMENT OF CASH AS A MEANS TO MAINTAIN AND ATTRACT DIFFERENT STYLES OF INVESTORS.
SO, WE SEE WESTJET TRANSITIONING FROM A GROWTH STOCK TO BEING INCREASINGLY APPEALING TO GARP INVESTORS; WHEREIN, INVESTORS PAY LESS FOR LOWER GROWTH GOING FORWARD. THE ADDITION OF A DIVIDEND AND, IN OUR VIEW, THE ABILITY TO INCREASE THE DIVIDEND OVER TIME, SHOULD ATTRACT A GROWING UNIVERSE OF YIELD INVESTORS.
The graph shown here details the P/E multiples over the last five years. It is based on daily closing prices and 12 month trailing Earnings per Share figures. Sudden changes in EPS have resulted in a fairly volatile P/E ratio. Ignoring the recession abnormalities, the P/E has ranged from about 15x to 25x in 2010 alone. The data from the last couple quarters shows the multiple stabilizing between 15x and 18x. For our valuation, we’ve used a multiple of 17x.
WE BELIEVE THE MULTIPLE IS CONSISTENT WITH MARKET VALUATION AND INCREASING UNIVERSE OF INVESTORS IN THE YIELD SPACE.
The graph shown here details the Price to EBITDAR multiples over the last five years. It is based on daily closing prices and quarterly EBITDAR figures. The multiple has been fairly stable through 2010, since the economic recovery started. Notice however, that the 2010 average is lower than the pre-recession average for this multiple. We’ve used the 2010 average of 3.8x in our valuation. We will show more detail on that later in the presentation.
Matthew
DIVIDENDS. BASED ON OUR FORECAST, we SEE THE Debt/EBITDAR ratio declining OVER THE FORECAST PERIOD, WHICH GIVES US CONVICTION ON THE DIVIDEND BEING MANAGEMABLE AND DEFENSIBLE TO ECONOMIC DOWNTURNS.
WE expect continued financial strength and free cash flows that should help redistribute cash to shareholders IN THE FORM OF RISING DIVIDENDS OR SHARE REPURCHASES.
Bradley
Thank you for your time. We will now take questions from the judging panel.
