A Tale of Two Airlines: WestJet and Canada 3000.(instructor's Note)

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CASE DESCRIPTION

The primary subject matter of this case is concerned with the financial risks in the Canadian Airline Industry. Secondary issues examined include financial structures and utilization of capital within airline companies. The case has a difficulty level of three and should be appropriate for undergraduate and graduate courses in financial and strategic management. The case is designed to be taught in one to two class hours, with three hours of outside preparation by students.

CASE SYNOPSIS

Over the last twenty years, shareholders, financial institutions, and the general public who associate with the airline industry have seen a battlefield littered with airline casualties. All airlines, from large international carriers such as United Airlines, Swiss Air, and Air Canada to small short haul carriers such as WestJet have faced enormous risks in their operations. The Gulf War and the War in Iraq, high oil price volatility, the threat of terrorism, and lately SARS all have had a negative impact on airlines around the globe. Many airlines have seen losses, reduced capacity, and large layoff. However, a few exceptional airlines have been able to stay profitable even in such a demanding business environment. In this case study we explore two Canadian airlines: WestJet and Canada 3000. The former is an example of an airline that is thriving despite the hostile business environment while the later is an example of an airline that failed shortly after September 11, 2001. Why did this happen? Both airlines were of similar size and initially followed a similar strategy. However, one succeeded, one did not. The major factors that explain WestJet's success and Canada 3000's failure are examined. While we use two Canadian airlines for the analysis, the lessons learned are applicable to airlines in other countries as well.

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case presents numerous opportunities for analysis and discussion. Students can initially work on the case individually but it is a nice case for discussion among small groups or as a class led by the instructor.

The teaching objectives for this case are:

1. Introduce students to the business model of the airline industry.

2. Illustrate the difficulties of being a consistently profitable airline.

3. Determine the key characteristics to being a successful and profitable airline.

4. Determine the risk involved in leasing vs. purchasing.

5. Use financial ratios to determine leverage and profitability.

6. Examine the pitfalls of rapid expansion and mergers.

SUGGESTED QUESTIONS

1. Both Canada 3000 and WestJet were profitable airlines in 2000. Examine their strengths and weaknesses and what factors led to Canada 3000's demise and WestJet's prosperity.

WestJet is an innovative airline modeled after the highly successful, no frills, Dallas-based Southwest Airlines and other low cost carriers with similar structures including Ryan Air and Air Tran. Their flights are considered inexpensive and their staff is known to be young and upbeat. This has allowed the airline to woo, from cars and busses, a new type of air passenger. Although the frequency of flights is less than the traditional airline and the airports used are often smaller than those used by most airlines, the nonbusiness, value-seeking flyer is willing to trade convenience for savings. WestJet educates their current and future passengers on economical air travel and stimulates demand by providing the service at the lowest possible price. In terms of operations, the company only expanded when the company was profitable. Therefore, the majority of their aircrafts were purchased through raised share capital and some long-term debt. The company's use of debt was limited and capital leases regarding aircrafts were very few in number.

Canada 3000 began as a holiday charter airline for vacationers, transforming itself into a major and profitable low-cost airline in early 2000. …