Case Analysis: West Jet Airlines

What investment strategy should Lau follow after the analysis? Support your answer with
at least three reasons.
Steven Lau is a portfolio manager at resolute fund. One of the major holdings of the fund is the
stock of West Jet Airlines. During the last five years, West Jet Airlines stock price experiences a
continuous decline in stock price, in addition to declining stock return. Now, Lau has three
investment alternatives:
1. Bail out West Jet Airlines holdings and shift the investment in other airlines.
2. Continue to hold the stocks of West Jet Airlines
3. Buy more shares of the West Jet Airlines at the lower price.
Therefore, Lau gathers the team of expert to perform comparative analysis of all the top
performers in the aviation industry: Southwest Airlines, Continental Airlines, Lufthansa Airlines,
and Air Canada to select the best investment strategy for the resolute fund.
After the comparative analysis of financial statements of all the six airlines company, I believe
Lau should follow the investment strategy third i.e. add additional shares of West Jet Airlines
at the reduced price because of the following reasons:
1. As far as, share price at the end of 2007 and 2008 is concerned, it is $22.51 and $13.12
respectively which shows a decrease of $9.39 over a year. In addition, the earnings per
share are $1.48 and $1.39 for the year end 2007 and 2008 respectively which shows a
decrease of $0.09. Since the decrease in share price of $9.39 is more than the decrease in
earnings per share of $0.09, the share of West Jet Airlines is underpriced suggesting Lau
to buy more shares of West Jet Airlines.

2. The key financial indicators like ROA and ROE of the company for the year 2008 are
5.4% and 16.4% respectively highest of all the airlines companies. Also, the
EBIT/interest ratio of 5.7 times justifies the debt ratio of 41.3% suggesting that company
is able to meet the interest expenses on debt easily. Besides, the current ratio and acid test
ratio of 1.3 times and 1.2 times shows enough liquidity of the company to meet operating
expenses.

3. Most importantly, West Jet Airlines is the youngest company on the list. So, it is quite
obvious for the company to have highest financial leverage and cost per available seat
mile. However, when the sales and revenue per available seat mile are considered, the
company is out casting its competitors. Net earnings of the company shows greater
consistency in growth even during the time of economic down turn. Also, the share price
as of August 14, 2009 of Wes Jet Airlines is $11.62, highest of all.

All the three reasons provide sufficient backup to the resolute fund to add additional shares of the
West Jet Airlines at the reduced price. Undoubtedly, the fund will benefit from buying more
shares of the company.




Submitted By: Prabin K.C
Roll no: 18