MGCR 211 FINAL PROJECT: FINANCIAL STATEMENT ANALYSIS
The project can be done in a group of 2. It’s due on 11:59pm, June 24th. The report
must be typed, including a clear cover page indicating the student names and student
numbers. Please use a font equivalent to Arial 11 or Times New Roman 12, with line
spacing 1.5, and a normal margin and please keep the report below 10 pages (forms
included).
Please find the annual reports of WestJet and Air Canada in 2017 posted in the “Final
Project” folder under “Content” section on MyCourses and analyze these two
eports to answer the following questions to develop your final report.
1) Briefly evaluate these two companies in terms of EPS (earnings per share),
price-to-earnings (P/E) ratio, total revenues, total expenses, total assets, total debt,
and total equity for the fiscal year 2017. For P/E ratio, use the stock price on the
last day of the fiscal year for both companies (usually stock price is not reported
in the annual reports; find the stock price from online resources, e,g., Yahoo
Finance).
2) Compute return on assets (ROA), return on equity (ROE), profit margins, and
operating profit margins for both companies for the fiscal year ended in 2017.
Remember to use average total assets and average stockholders’ equity in your
atio calculations. Consider profitability in terms of overall ROA, ROE, net profit
margins, and operating profit margins. Show all your calculations.
3) Assess and explain the companies’ liquidity and solvency for both companies for
the fiscal year 2017. Are the companies likely to meet their debts as they come
due? Consider cu
ent ratio, accounts receivable turnover, average collection
period for accounts receivable, times interest earned, and debt to total assets.
Show your calculations.
4) Compute the asset turnover for both companies for the fiscal year 2017. Assess
and explain the companies’ asset efficiency. Which firm is more efficient in its use
of assets? Show your calculations.
5) Comment on any differences between two companies’ dividend policies. If the
firm is not paying dividends, provide potential reasons as to why they do not
decide to give dividends to their shareholders. If the firm is paying dividends,
provide possible reasons as to why they issue dividends to their shareholders.
6) Assess the cash flow of each company after looking into statements of cash flows
in 2017. Are cash flows from operating activities positive or negative? Comment
on whether cash flows from operations are better or worse indicators of
underlying firm performance, relative to earnings (or profits) on the income
statement?
7) Based on the above analyses, do you expect that each company achieve higher or
lower accounting performance in 2018, relative to 2017? Explain your reasoning
for each company.
8) If you are hired as a consultant for Air Canada, what would be your
ecommendations for the company based on your analyses above? By the same
token, if you are hired as a consultant for WestJet, what would be your
ecommendations?
Annual Report_en_draft 1d.indd
2017 Annual Report
XXXXXXXXXX
2017 Annual Report Management’s Discussion and Analysis of Results of Operations and Financial Condition
1. Highlights
The financial and operating highlights for Air Canada for the periods indicated are as follows:
(Canadian dollars in millions,
except where indicated)
Fourth Quarter Full Yea
XXXXXXXXXX $ Change XXXXXXXXXX $ Change
Financial Performance Metrics
Operating revenues 3,820 3, XXXXXXXXXX,252 14,677 1,575
Operating income XXXXXXXXXX,364 1,345 19
Income (loss) before income taxes XXXXXXXXXX, XXXXXXXXXX
Net income (loss XXXXXXXXXX, XXXXXXXXXX,162
Adjusted pre-tax income XXXXXXXXXX,158 1,148 10
Adjusted net income XXXXXXXXXX,142 1,147 (5)
Operating margin % 3.5% 0.5% 3.0 pp 8.4% 9.2% (0.8) pp
EBITDAR (excluding special items XXXXXXXXXX,921 2,768 153
EBITDAR margin (excluding special items) % XXXXXXXXXX% 13.3% 0.3 pp 18.0% 18.9% (0.9) pp
Unrestricted liquidity (3) 4,181 3, XXXXXXXXXX,181 3,388 793
Net cash flows from operating activities XXXXXXXXXX,738 2,421 317
Free cash flow XXXXXXXXXX1, XXXXXXXXXX,205
Adjusted net debt (1) 6,116 7, XXXXXXXXXX,116 7, XXXXXXXXXX)
Return on invested capital (“ROIC”) % XXXXXXXXXX% 16.7% (2.8) pp 13.9% 16.7% (2.8) pp
Leverage ratio XXXXXXXXXX XXXXXXXXXX)
Diluted earnings (loss) per share $ 0.02 $ (0.66) $ 0.68 $ 7.34 $ 3.10 $ 4.24
Adjusted earnings per share – diluted (1) $ 0.22 $ 0.14 $ 0.08 $ 4.11 $ 4.06 $ 0.05
Operating Statistics (4) % Change % Change
Revenue passenger miles (“RPM”) (millions) 19,396 17, XXXXXXXXXX,137 76, XXXXXXXXXX
Available seat miles (“ASM”) (millions) 24,191 22, XXXXXXXXXX,492 92, XXXXXXXXXX
Passenger load factor % 80.2% 79.9% 0.3 pp 82.3% 82.5% (0.2) pp
Passenger revenue per RPM (“Yield”) (cents XXXXXXXXXX XXXXXXXXXX)
Passenger revenue per ASM (“PRASM”) (cents XXXXXXXXXX XXXXXXXXXX)
Operating revenue per ASM (cents XXXXXXXXXX XXXXXXXXXX)
Operating expense per ASM (“CASM”) (cents XXXXXXXXXX XXXXXXXXXX
Adjusted CASM (cents XXXXXXXXXX XXXXXXXXXX)
Average number of full-time equivalent (“FTE”)
employees (thousands) (5)
XXXXXXXXXX XXXXXXXXXX
Aircraft in operating fleet at period-end XXXXXXXXXX 3.7
Average fleet utilization (hours per day XXXXXXXXXX XXXXXXXXXX
Seats dispatched (thousands) 14,522 13, XXXXXXXXXX,820 57,135 6.4
Aircraft frequencies (thousands XXXXXXXXXX XXXXXXXXXX
Average stage length (miles) (6) 1,666 1, XXXXXXXXXX,702 1,623 4.8
Fuel cost per litre (cents XXXXXXXXXX XXXXXXXXXX
Fuel litres (thousands) 1,254,111 1,160, XXXXXXXXXX,331,888 4,837, XXXXXXXXXX
Revenue passengers ca
ied (thousands XXXXXXXXXX,314 10, XXXXXXXXXX,126 44,849 7.3
(1) Adjusted pre-tax income, adjusted net income,
adjusted earnings per share – diluted, EBITDAR
(earnings before interest, taxes, depreciation,
amortization, impairment and aircraft rent),
EBITDAR margin, leverage ratio, free cash flow, ROIC
and adjusted CASM are each non-GAAP financial
measures and adjusted net debt is an additional GAAP
measure. Refer to sections 9 and 20 of Air Canada’s
MD&A for descriptions of Air Canada’s non-GAAP
financial measures and additional GAAP measures.
As referenced in the table above, special items
are excluded from Air Canada’s reported EBITDAR
calculations. Refer to sections 6 and 7 of Air Canada’s
MD&A for information on special items.
(2) Starting as of and including the fourth quarter of
2017, adjusted net income is determined net of tax
and includes the income tax effect of adjustments
included in the measurement of adjusted net income.
Prior to the fourth quarter of 2017, there was no
defe
ed income tax expense recorded because of
significant unrecognized defe
ed tax assets. A tax
expense of $16 million affected fourth quarter and
full year 2017 adjusted net income results.
(3) Unrestricted liquidity refers to the sum of cash, cash
equivalents, short-term investments and the amount
of available credit under Air Canada’s revolving credit
facilities. At December 31, 2017, unrestricted liquidity
was comprised of cash and short-term investments
of $3,804 million and undrawn lines of credit of $377
million. At December 31, 2016, unrestricted liquidity
was comprised of cash and short-term investments
of $2,979 million and undrawn lines of credit of
$409 million.
(4) Except for the reference to average number of
FTE employees, operating statistics in this table
include third party ca
iers (such as Jazz Aviation LP
(“Jazz”), Sky Regional Airlines Inc. (“Sky Regional”),
Air Georgian Limited (“Air Georgian”) and Exploits
Valley Air Services Limited (“EVAS”)) operating under
capacity purchase agreements with Air Canada.
(5) Reflects FTE employees at Air Canada. Excludes FTE
employees at third party ca
iers (such as Jazz, Sky
Regional, Air Georgian and EVAS) operating under
capacity purchase agreements with Air Canada.
(6) Average stage length is calculated by dividing the total
number of available seat miles by the total number of
seats dispatched.
(7) Revenue passengers ca
ied are counted on a flight
number basis (rather than by journey/itinerary or by
leg) which is consistent with the IATA definition of
evenue passengers ca
ied.
2017 Annual Report
3
Contents
MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER 4
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES
1. Highlights 2
2. Introduction and Key Assumptions 10
3. About Air Canada 12
4. Strategy 13
5. Overview 21
6. Results of Operations – Full Year 2017
versus Full Year 2016 23
7. Results of Operations – Fourth Quarter 2017
versus Fourth Quarter 2016 31
8. Fleet 40
9. Financial and Capital Management 43
9.1. Liquidity 43
9.2. Financial position 43
9.3. Adjusted net debt 44
9.4. Working capital 45
9.5. Consolidated cash flow movements 45
9.6. Capital expenditures and related financing
a
angements 46
9.7. Pension funding obligations 47
9.8. Contractual obligations 48
9.9. Share information 49
10. Quarterly Financial Data 51
11. Selected Annual Information 53
12. Financial Instruments and Risk Management 54
13. Critical Accounting Estimates and Judgments 56
14. Accounting Policies 59
15. Off-Balance Sheet A
angements 60
16. Related Party Transactions 60
17. Sensitivity of Results 61
18. Risk Factors 63
19. Controls and Procedures 72
20. Non-GAAP Financial Measures 73
21. Glossary 78
Statement of Management’s Responsibility
for Financial Reporting 82
Independent Auditor’s Report 83
Consolidated Statement of Financial Position 84
Consolidated Statement of Operations 85
Consolidated Statement of Comprehensive Income 86
Consolidated Statement of Changes in Equity 86
Consolidated Statement of Cash Flow 87
1. General Information 88
2. Basis of Presentation and Summary of Significant
Accounting Policies 88
3. Critical Accounting Estimates and Judgments 97
4. Property and Equipment 98
5. Intangible Assets 99
6. Goodwill 100
7. Long-Term Debt and Finance Leases 101
8. Pensions and Other Benefit Liabilities 104
9. Provisions for Other Liabilities 112
10. Income Taxes 113
11. Share Capital 116
12. Share-Based Compensation 118
13. Earnings per Share 121
14. Commitments 121
15. Financial Instruments and Risk Management 123
16. Contingencies, Guarantees and Indemnities 129
17. Capital Disclosures 130
18. Geographic Information 131
19. Regional Airlines Expense 132
20. Special Items 132
21. Sale-Leaseback 132
22. Related Party Transactions 133
OFFICERS AND DIRECTORS 134
HIGHLIGHTS OF THE CORPORATE SUSTAINABILITY REPORT 136
4
2017 Annual Report
I am delighted to report that 2017 was a record year for Air Canada,
underscoring the effectiveness of our transformation strategy, our global
expansion and the power of our comprehensive network. We reported