AIR CANADA & WEST JET GROUP ASSIGNMENT Case Solution
1). Fundamental Differences between Air Canada and WestJet Airlines Limited
Although both the airline companies are international airline companies and their operations are spread across the world however, the list of the differences between the two companies is huge. First, we determine the differences in the operations of both the companies.
There are two fundamental differences between the operations of both the airline companies. The first is in terms of scope. While both the airline companies do most of their flights in Canada, however, Air Canada is a true worldwide airline, which travels to South America, Asia, Europe and Australia. On the other hand, WestJet has just started to fly in Ireland and United Kingdom(Smith, 2016).
The worldwide operations of Air Canada can be seen as negative or positive depending on one’s perspective If we look at the positive side then we can say that it is good to diversify the operations from the domestic routes. On the negative side, the company faces stiff competition, as many of the routes are highly competitive especially to the Europe.
The second big difference is in terms of the business model of both the companies. WestJet is a low cost model airline whereas the focus of Air Canada is not much on lowering the costs of the company(Smith, 2016). For instance, WestJet makes use of few different plane models and it puts a large amount of effort to encourage and motivate its staff to not engage in unionization. It is because of its expertise and business model that the cost per mile flown for WestJet is 25% lower than that of Air Canada.
The balance of Air Canada is financially reasonable the debt to assets ratio of the company is around 50%, which is where the management wants to be. The company has $ 3.1 billion in cash and $ 7 billion in debt. Similarly, WestJet also sits on a mountain of cash balance of $ 1.7 billion with short-term investments but its debt level is just $ 2 billion, which shows that it is more secure airline than Air Canada in financial terms(Smith, 2016).
Air Canada is one of the cheapest stocks in the world, which is trading four times earnings. Analysts think that this share price would also continue for the years 2016 and 2017 based on projected 2016 earnings of $ 3.61 per share. This is the reason that market does not have much confidence in Air Canada because of such low numbers. WestJet valuation is not as cheap as Air Canada but it is also not much expensive. The shares currently trade at 10 times of trailing earnings of the company(Smith, 2016). A dividend of 2.4% is also paid by the company to its shareholders unlike Air Canada, which does not pay any dividends.
Apart from the above fundamental differences, other differences include higher seat space and seat width in WestJet Airlines. Air Canada has alliance with Star Alliance whereas WestJet has no alliance. The number of destinations served by Air Canada and WestJet are 131+ and 167+ respectively. The average age of fleet for Air Canada and WestJet is 6.3 years and 6.9 years respectively. Air Canada has 172 planes while WestJet has 123 planes(Wanderbat, 2017).
2). Limitations of Financial Ratio Analysis
Financial Ratio Analysis is the most common tool, which is used by companies especially the smaller companies to evaluate their performance. However, there are certain general limitations of using financial ratio analysis. Financial ratio analysis is not useful without comparison. Companies use benchmark companies to analyze their own performance however, the operations, environment and the business models of both the companies differs most of the times(Peavler, 2017). Secondly, the ratios make use of balance sheet data, which is historical data.
The actual figures might have been distorted by the inflation therefore; depending on historical data for performance, analysis might not be a good idea. Another limitation of ratio analysis is that it just provides us with the numbers but does not states the causation of a declining ratio or an increasing sales growth. Large companies face other problems since they are comprised of different divisions and each division might require different benchmark industries. However, most of the time this is not taken into accounts(Accounting, 2016).
Ratio analysis is also affected by the policies of the companies. For instance, companies use different account policies such as to value their inventory. Depreciation is another issue. This can distort the results and the comparisons between the companies might not be useful.......................................................
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