The MD&A clearly described the company’s liquidity condition and its ability to fund prospective strategies. In order to fully exhibit WestJet’s liquidity and capital resources, the MD&A included detailed information concerning cash flow, financing, interest, credit ratings, contractual obligations and commitments and contingencies. The MD&A also had a complete summary of WestJet’s cash needs and sources of cash.
Need of cash
Current obligations, budgets and plans in the short and long term
In MD&A, WestJet estimated its budget to be between $900 million and $920 million. Targeting at network expansion, especially fleet expansion and guest experience enhancement, the major expenditure would be related to aircraft deliveries, deposits on future aircraft, overhauls on owned engines and the installation of a new inflight entertainment system. WestJet also reported its cash and cash equivalents at $1,520.8 million in 2016, compared with $1,183.8 million in 2015, and claimed to have sufficient liquidity to meet obligations.
The airline industry is highly sensitive to unpredictable circumstances. Therefore, WestJet recognized maintaining a strong financial position as an imperative aspect to success. Based on the MD&A, WestJet’s strong financial position would allow it to fulfill long-term obligations even under economic fluctuation.
The short-term duties are mainly two parts. First one is using cash and cash equivalents on hand to have sufficient liquidity to meet liabilities, when due, under both normal and stressed conditions. The company has alleviated the problem through collecting cash with respect to advance ticket sales. Another is maintaining the stable of credit ratings of the company. Keeping cash and cash equivalents on hand could help the corporation maintain stable credit rating, being considered as “investment grade”.
Regarding current obligations, in MD&A liquidity section, as of December 31, 2016, WestJet’s cash to TTM revenue ratio was 36.9 percent, compared to 29.4 percent in 2015, indicating a 7.5 percent increase. With the internal guideline stating 30 percent, the excess could be due to significant future aircraft commitments in 2017 that require funding. In addition, at the end of contractual obligations and commitments section, the company’s plan, related to future US-denominated purchase commitments, is referred. The company plans to match its contractual obligations and commitments through current cash and cash equivalents balance combined with cash flows from operations and future sources of financing. However, someone could contradict the plan because the MD&A did not offer a reasonable plan for adverse changes to their future ability to access similar or other generally available sources of liquidity.
Cash requirements to maintain the company’s operating capacity, meet planned growth and fund development activities
In general, MD&A has given a detailed picture of future and current cash requirements. Operating cash flow could show the cash requirements to maintain the operating capacity, including restricted cash consisted of $70.1 million of cash held in trust by WestJet Vacations; $31.0 million of security on letters of guarantee; and, in accordance with U.S. regulatory requirements, $1.6 million of cash not yet remitted for passenger facility charges. Besides, the operating costs should also contain fuel services and de-icing services costs which are not consolidated within the company’s accounts. In order to obtain fuel services and de-icing services at major Canadian and U.S. airports, WestJet entered into agreements with 17 fuel facilities and three de-icing facilities to participate under contract in Fuel Facility Corporations (FFCs) and De-icing Facility Corporations (DFCs). In the remote event where all other contracting airlines withdraw from the arrangements and WestJet remained as sole member, WestJet would be responsible for the costs of the FFCs and DFCs, including debt service requirements. About planned growth and development activities, the report just discloses that the company’s plans and what they want to do in the future to develop business expansion. However, just like budget, they did not announce any detailed number of cash they need.
Impact of non-operating items
In the meantime, MD&A presented tabulated data summarizing cash provided by operating as well as non-operating activities, with a year-to-year comparison.QQ截图20170706025802.png
Cash used by investing activities totaled $942.3 million in 2016, compared to $822.9 million in the prior year. The investing activities during 2016 related primarily to the delivery of four Boeing 737 NG aircraft, ten Q400 aircraft, two Boeing 767 aircraft, additional deposits for future Boeing 737 NG and Q400 aircraft, overhauls of owned engines, and installation of new inflight entertainment system and slim-line seats with power.
Aside from investing activities, large amount of share buy-back and debt repayments of principal and interest also required cash. In its MD&A, WestJet reported debt repayments of principal and interest of $ 213.2 million, share repurchases pursuant to normal course issuer bid of $ 126.2 million and dividends paid of $67.0 million. Throughout 2016, the company repurchased and canceled approximately 3.8 million shares, for total consideration of $ 84.2 million; adding the repurchasing and canceling of approximately 2.1 million shares under the 2015 bid (expired in May 2016), for total consideration of $ 42.0 million.
On the other hand, on February 6, 2017, the Board of Directors declared 2017 first quarter dividend as $0.14 per common voting share and variable voting share payable on March 31, 2017 to shareholders of record on March 15, 2017, which remained consistent with the $0.14 per common voting share declared and paid quarterly throughout 2016. Similarly, as the company successfully completed the US-Dollar Notes, the company bears 3.5 per cent per year with semi-annual interest payments.
For the full-year 2017, the capital expenditure is expected to be around $900 million compared to $800 million in 2016, and the increase is primarily due to a weaker Canadian dollar to one US dollar exchange rate forecast. Technical maintenance expense in 2016 was 128.8 million representing an increase of 26.6 percent from 2015 due to the majority maintenance costs are denominated in US dollars. In order to reduce the foreign currency exposure risk, WestJet holds US-dollar-denominated cash and short-term investments and several US dollar foreign exchange forward contracts. In 2016, US-dollar-denominated net monetary liabilities experienced a decrease of $4.6 million from 2015 due to an increase in US dollar cash and accounts receivables. Under periodic usage of financial derivatives, WestJet fixed the exchange rate on a part of US-dollar-denominated hotel costs and aircraft lease payments at a contract price of 1.3414 Canadian dollars to one US dollar. Additionally, the company entered into fixed US dollar to fixed Canadian dollar uncollateralized cross-currency interest rate swap agreements to reduce the exposure to fluctuations in the Canadian to US dollar exchange rate on interest payments on the US-dollar-denominated notes. The net effect of foreign exchange on cash and cash equivalents decreased from $31,247 thousand to negative $3,551 thousand.
Ability to continue to pay dividends at current payout ratios
Current payout ratios indicate a corporation’s ability to to pay future dividends at a certain rate. WestJet’s MD&A offered few basic ratios, including adjusted debt-to-equity ratio, adjusted net debt to EBITDAR ratio and current ratio. Effective as they are, these ratios alone might not be sufficient.
As a result of increased borrowings, as of December 31, 2016, both of WestJet’s adjusted debt-to-equity ratio and adjusted net debt to EBITDAR ratio increased over the year, from 1.27 to 1.63 and 1.29 to 1.93, respectively. The ratios were well below WestJet’s internal guideline (2.5) and yet to touch boundary. Justifying using these ratios, WestJet was confident in delivering future profitable results, and stated that they have enough cash for both normal and stressed conditions, which can be segmented using the internal guideline (2.5).
Impact of commitments
As of December 31, 2016, WestJet has not made any future aircraft financing commitment, except their $820 million guaranteed loan agreement with EDC. Per the agreement, EDC would make available to WestJet Encore financing support for the purchase of Q400s, while WestJet is charged for a non-refundable commitment fee of 0.2 per cent per annum on the undisbursed portion of the commitment.
During 2016, WestJet took delivery of ten Bombardier Q400 aircraft, four Boeing 737 NG 800 series aircraft and two Boeing 767 aircraft. In the same year, they also returned three leased Boeing 737 700 series aircraft and executed extensions for two aircraft leases scheduled to expire in 2017: one Boeing 737NG 700 series for an additional four years and one Boeing 737 NG 800 series aircraft for two appended years. In addition, they converted the remaining nine original 25 purchase options with Bombardier into firm orders for Q400 aircraft, expecting deliveries in 2017 and 2018. The combination of their firm commitments and lease renewal options would help to optimize the size and age of the fleet, providing WestJet with the flexibility to end 2027 with a fleet size between 190 and 231 aircraft. As of December 31, 2016, WestJet had 41 Boeing 737 NG aircraft under operating leases. Future cash flow commitments in connection with these aircrafts totaled US $ 337.1 million (December 31, 2015 – US $466.6 million) and would be funded through CFO.
Short- and long-term debt and equity instruments and associated servicing costs
The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities included in the statement of financial position approximate their fair values because of the short-term nature of the instruments, and hence interest rate fluctuations would not have a huge impact on such instruments. Therefore, the MD&A report spent more time describing long-term debt instruments, and their sensitivity to interest rate fluctuations,.
As of December 31, 2016, the fair value of long-term debt was approximately $1,972.0 million (2015 – $1,124.8 million). The increase in the fair value of long-term debt was mostly due to the decrease in the discount rate used for debt. The fair value of variable-rate long-term debt approximated its carrying value, due to the floating-rate nature of interest. However, the fair value of fixed-rate long-term debt was determined by discounting the future contractual cash flows under the current financing arrangements at discount rates presently available for loans with similar terms and remaining maturities. Therefore, the fixed-rate nature of the majority of long-term debt mitigates the impact of interest rate fluctuations on their cash flows over the term of the outstanding debt. As disclosed, WestJet used amortized cost to consolidate their accounting for long-term fixed-rate debt, and therefore, the net earnings would not be influenced by a change in interest rates on December 31, 2016. Moreover, in order to manage exposure to interest rate fluctuations on their variable-rate long-term debt, WestJet entered into interest rate swap agreements to fix the interest rates over the term of all such debt. The analysis was based on foreign exchange and interest rates in effect at the date of consolidated financial statement, and included both principal and interest cash flows for long-term debt.
Sources of Cash
WestJet’s MD&A has addressed strong financial position including the source of cash and cash and cash equivalents positions changes. WestJet completed the fourth quarter of 2016 with cash and cash equivalents balance of $1,520.8 million, compared to $1,183.8 million as of December 31, 2015.
Resources available to satisfy cash needs in the short- and long-term
One available source to satisfy cash needs would be guest revenue, including advance ticket sales, which increased from $620.2 million to $626.6 million over the year. The company expected to keep the trend of advance ticket sales and intended to keep enough cash and equivalents to cover such advances.
Part of the cash inflow is offset by debt repayments of principal and interest of $213.2 million, share repurchases pursuant to our normal course issuer bid of $126.2 million and dividends paid of $67.0 million. The unsecured, non-revolving credit facility is related to $300 million 4-year term credit facility with a syndicate of banks. On January 7, 2016, the company drew the full $300 million available under the credit facility for aircraft purchases. The fund, $400 million, comes from the issuance of the US-Dollar Notes. Last but not least, borrowings from the corporate’s non-revolving and unsecured credit facility could be a source of cash for WestJet. The corporation has an $820 million guaranteed loan agreement with EDC pursuant to which EDC will make available to WestJet financing support for the purchase of Q400s.
Impact of non-operating items and Flexibility in cash management
WestJet’s 2016 MD&A differed slightly from 2015 MD&A: there was no sale of oldest aircraft. Therefore, the impact of non-operating activities was minimum. The company indeed made some investments, but the primary objective was to expand the scale of the WestJet fleet, so the source of cash would still belong to operating results.
Concerning the flexibility in cash management, WestJet adopted guidelines regarding ratios. For example, as of December 31, 2016, the company’s adjusted debt-to-equity ratio of 1.63 and adjusted net debt to EBITDAR ratio of 1.93 both increased from 1.27 and 1.29, respectively. Both were under the internal guideline which was 2.5 and therefore indicating good cash management.
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