Financial distress, placing in a very broad perspective, is a situation when a company is under financial pressure and incurs costs, generally known as the financial distress costs, just because of the threat of an impending bankruptcy. A firm that is in a condition of financial distress faces issues such as investment distortion, decreased revenues, shortsightedness, etc, and is at times also reluctant to liquidate. In order to ride the distress, a company must work on its weak areas and try to keep away from costs and investments that would do nothing but add to its debt. Also a company must always be cautious that its investors and shareholders do not lose faith in its credibility.
WestJet Airlines Ltd, is one such firm that is in financial distress. It is a low cost Canadian air carrier, founded in 1996 by Clive Beddoe, Mark Hill, Tim Morgan and Donald Bell. The carrier was modelled after the Southwest Airlines. [WestJet’s founder stepping down as CEO. July 25, 2007. p.1. Retrieved March 16, 2009]
The current economic crisis and the difficult pricing environment has brought about a significant drop in air traffic. The Calgary-based airline logged a 34% dip in Q4 earnings in February this year, to $41-million.
Besides the thinning of the air traffic, another major reason for the dip is Petro-Canada’s cutting of its refinement of jet fuel in Alberta. This forced WestJet to import fuel from B.C. and consequently it shot up by $7 million and the management said that this would extend to May. Also, the carrier has been cutting fares so as to enhance demand and fill
its planes. [WestJet unit revenue to fall as ticket prices go lower. March 04, 2009. p.1. Retrieved March 16, 2009.]
Despite these difficulties and financial distress, the carrier has plans of growing its capacity by five per cent in the current year. It also insists on adding 9 more leased aircraft to its 76-plane fleet.
However, the management is cautious on the company’s 2009 outlook. [WestJet plans growth despite turbulence. Feb 12, 2009. P.1. Retrieved March 16, 2009.]
Apart from these expansion plans, the carrier is also ready to spread its wings with a new reservation system, which has cost it 2 years and $38 million.
Unfortunately, the upgraded version of the Open Skies system that it has been using, anticipating some strategic partnerships, never turned true.
Now, with the new Sabre system in place, it hopes to actually see its growth strategy going forward. [WestJet eyes global expansion. February 06, 2009. P.1. Retrieved March 16, 2009.]
WestJet unit revenue to fall as ticket prices go lower. March 04, 2009. p.1. Retrieved March 16, 2009 from http://www.financialpost.com/story.html?id=1352568
WestJet plans growth despite turbulence. Feb 12, 2009. P.1. Retrieved March 16, 2009 from http://www.financialpost.com/related/links/story.html?id=1279705
WestJet eyes global expansion. February 06, 2009. P.1. Retrieved March 16, 2009 from http://www.financialpost.com/related/links/story.html?id=1258628