Canada Jetlines: It's Turn to Fly

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dialdriver
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Canada Jetlines: It's Turn to Fly

Post by dialdriver » Fri Jul 19, 2019 11:56 am

https://seekingalpha.com/article/427581 ... s-turn-fly



Summary

Canada Jetlines has secured new financing partners: InHarv and Smartlynx.

Its technology (its key piece to keep costs low) appears ready for implementation.

December 2019 launch date is likely a go.

It could be a potential disruptor in the industry.


Since my last article on Canada Jetlines (OTCQB:JETMF) back in Nov. 2018, the Canadian airline industry has changed quite a bit. From the privatization of WestJet (OTC:WJAFF) by Onex (OTCPK:ONEXF) to the acquisition of Air Transat by Air Canada (OTCQX:ACDVF), the Canadian airline industry continues to evolve. Regardless of how things shake out for the airline industry, I believe Jetlines has the potential to disrupt the industry.

Although Jetlines continues to burn cash and has yet to fly its first plane, I believe the airline's pivot towards technology will make it a formidable player in the industry, and this will help drive profitability when Jetlines launches in late 2019.

Jetlines Advantage: Technology to Drive Costs Down

Two major expenses in any airline are its fuel costs and salaries/benefits. Aircraft fuel is a necessary expense and one way to mitigate this is to fly fuel-efficient airplanes. With salaries and benefits, too high of a salary for its employees can erode an airline's profit margins. This is one major reason why Westjet was very much against its employees unionizing.

For Jetlines, in a bid to lower its cost structure, it is leaning heavily on the latest technology to help drive costs down.

It's investing heavily in its e-commerce platform and already it has confirmed the following systems are ready for launch:

Jetlines has integrated several commercial systems including its booking engine, payment processing, revenue management system
Its reservation platform will allow it to book car rentals and hotels
The airline has successfully integrated its website with the reservation system platform, Radixx
In partnership with Elavon, Jetlines booking platform can now handle CDN and USD
In working with Adyen, payments can now be made through mobile, Jetlines website, and through e-commerce
The integration with airRM systems is now complete where ticket inventories can now be optimized for maximum pricing
If all these systems can work as Jetlines claims, this is a very powerful piece of technology that can potentially disrupt the industry. Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) disrupted its respective industries and indirectly took down some heavyweight giants (remember Blockbuster).

Jetlines has already claimed it wants to lower the price of airfares enough that it can attract travelers that would typically not fly. By comparing itself to Amazon, its pricing strategy will be to offer its fares at steep discounts and to make up the loss through volume sales.

To maintain its ultra-low cost structure, Jetlines will be using its newly developed technology in place of traditional workers that would typically be employed for booking tickets or for administration.

Jetlines and its New Owners: Smartlynx/InHarv

Jetlines is the first airline to be allowed up to 49% of foreign voting interest. In the several months, this upstart airline has already attracted investments from a Korean private equity firm, InHarv and an European airline operator, Smartlynx.

InHarv, a Korean private equity firm is providing up to $14 million in financing for the company:

$7 million in warrants, each warrant is exercisable for a price of $0.56 per share for a period of 36 months
$7 million in debentures, each bearing an interest of 10% and matures in 36 months from its issuance date. The debentures are subject to a number of conditions before it can close
From Smartlynx, a new financing agreement (similar to the debenture agreement with InHarv) was signed with Jetlines, allowing up to $7.5 million in new financing proceeds. In total, this is over $21 million in potential financing for Jetlines.

Besides a financing agreement with Smartlynx, Jetlines also inked a new leasing agreement for 2 Airbus aircraft. The leasing will start for a period of 5 months starting on November 1, 2019.

A quick background of Smartlynx, this airline operator is based out of Riga, Latvia, and is primarily in the full-service ACMI business (Aircraft - Crew - Maintenance - Insurance). Its business deal with Jetlines is its first foray into North America. Smartlynx has been in the airline business in Europe since 1992, so it knows a thing or two about operating an airline business. With the knowledge that Smartlynx has in the airline industry, it will not invest in a money losing venture, so, in my opinion, an investment in Jetlines is a sign that Smartlynx at least approves of Jetlines strategy.

Jetlines is Committed to its Timeline of Flying in Dec. 2019

Jetlines has been around for a while now and has drawn some criticism for being around so long but has yet to fly one plane. Back in 2014, there were plans to launch that year but 2014 came and went. 2019 seems a lot different.

With financing secure, Jetlines is going fast to get its operations up and running before the end of this year:

It appointed Jyri Strandman as its COO. Jyri Strandman worked in another ultra-low cost carrier (ULCC) Spirit Airlines. So, he comes with a wealth of experience in the ULCC niche
For risk management, Jetlines has partnered with Kenyon International Emergency Services and MedAire (Kenyon)
For passenger safety, it partnered up with MedAire, where it provides safety for its passengers and crew
Airlines would not generally sign these agreements if there was no plan to launch its first flight. So, the likelihood is high that Jetlines will be launching its first flight in Dec. 2019.

Risk: No Guarantees of Profit


There has not been a strong record of success for airline operators in Canada. The most recent casualty was WOW Air when it ceased operations in March 2019. Running an airline is a narrow margin business especially for carriers flying in the ULCC niche. High fuel costs and a unionized work force can quickly turn profits into losses.

Most ULCC airlines will try to keep costs down and that includes flying out of secondary airports because the fees there are generally lower than main airport hubs. Jetlines has chosen to initially fly out of Vancouver International Airport and its justification is the Vancouver market is large enough for Jetlines to be profitable. Whether that demand is there remains to be seen.

Smartlynx also appears to be playing it safe with its investment in Jetlines. The leasing agreement with Jetlines is only for 5 months, so it appears Smartlynx is taking a wait and see approach. Also, Smartlynx and InHarv's investment is contingent on Jetlines satisfying a number of conditions such as gaining approval from Transport Canada. Even before Jetlines can start its operations, there are a number of hurdles the airline needs to jump through first.

Its Monthly Cash Burn Rate has Increased

In anticipation for its first flight in Dec. 2019, Jetlines has been increasing its spending:

In looking at the operational activities alone, the monthly cash burn has been steadily increasing. That means from now (mid July 2019) to the end of the year, the airline is going to burn through at least another $3 million before it can see any revenue come in.

Strong Management Team

Despite the monthly cash burn and the poor track history of successful airlines operating in Canada, I still believe Jetlines can make money. The main reason for my optimism is because of its management team. The management team has had experiences working in different airlines before, and its CEO, Javier Suarez and newly appointed COO, Jyri Strandman has experiences in the ULCC segment.

Also, building a technological platform and integrating it into an airlines operations (or into any company) is not easy. I believe one of the reasons why it has taken them so long to get Jetlines ready is because it was taking its time to get everything ready, and it was not cutting corners.

I believe what the market will soon realize is the company is being run by a very experienced group of executives, with airline experiences that span the globe. Some of these people have been through the highs and lows of the industry. If anyone can guide this airline to profitability, it would be this team.

Conclusion: Bullish on Jetlines

Jetlines do face some headwinds and it will be a while before this company is profitable. But what investors are investing in is a technological platform that can potentially disrupt the industry, managed by a group of executives who knows what they are doing, and is backed by sophisticated investors.

I'm bullish on Jetlines.

Disclosure: I am/we are long JETMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Re: Canada Jetlines: It's Turn to Fly

Post by RRJetPilot » Fri Jul 19, 2019 12:54 pm

For Jetlines, in a bid to lower its cost structure, it is leaning heavily on the latest technology to help drive costs down.
Haha so WJ and AC and Flair etc arnt using the "latest technology"? Please explain SPECIFICALLY and EXACTLY what technology will give then a competitive advantage?

Jetlines has already claimed it wants to lower the price of airfares enough that it can attract travelers that would typically not fly. By comparing itself to Amazon, its pricing strategy will be to offer its fares at steep discounts and to make up the loss through volume sales.
LOL AMAZON?? There are a specific number of seats in a plane, you cannot "make up losses" through volume sales. This is the by far the stupidest comment in the article so far.

To maintain its ultra-low cost structure, Jetlines will be using its newly developed technology in place of traditional workers that would typically be employed for booking tickets or for administration.
The internet? i guess the competition isn't using the internet. I go to my local AC or WJ corner store to book a flight :rolleyes:
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Re: Canada Jetlines: It's Turn to Fly

Post by valleyboy » Fri Jul 19, 2019 4:44 pm

low fare airlines try to make profits on the backs of their employees - works for a little while but not in long run - even Ryan Air is feeling the backlash and facing a pilot strike -
Having said all that, the time is right to pick apart the routes the majors are trying to service with the dash 8 where jet service would clearly attract passengers.
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Re: Canada Jetlines: It's Turn to Fly

Post by CitationNation » Fri Jul 19, 2019 9:44 pm

Then there’s the fact that the “secured A320 frames” were sold to someone else.

Jetlines is nothing but smoke and mirrors
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Re: Canada Jetlines: It's Turn to Fly

Post by confusedalot » Sun Jul 21, 2019 9:41 pm

Hate to be a party pooper but many have tried, made a go of it measured in years and decades, only to ultimately fail. The list is very long.

And Jetlines is only years of talk. No real substance.

I wish them luck, but history is not on their side, let alone that nothing material is present.

This is canadastan, where only the big 2 write the rules. Sadly. That's the way it is comrades.
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Re: Canada Jetlines: It's Turn to Fly

Post by boeingboy » Sun Jul 21, 2019 10:09 pm

This is canadastan, where only the big 2 write the rules. Sadly. That's the way it is comrades.
That is just not true.

The ULCC model will never work in this country - I've said that forever. Why.....It has nothing to do with the big 2 ruling the skies - and everything to do with demographics.

Canada is the second largest country in the world - and yet has only 35 million people. The nearest city centers are at least an hour apart - and not all are heavily populated or traveled to. The US has 350 million people and the EU - which is less than half the size of Canada has 510 million people. Both the US and the EU have multiple major city centers less than an hour from each other.

This country cannot supply more than 2 major carriers and a couple of second tier companies (like the Sunwings and Air Transats) A ULCC will quickly wither and die as you cant operate an aircraft that cheap without frequency. And that's the key....frequency. You could easily rack up 10 or so hours flying in this country and only have 3 or 4 legs. You'll never make money like that when you sell seats for 99 bucks. Even if your pilots and mechanics are paying you to work. As many have said - look at the history.


It still amazes me that some dimbo comes along every few years claiming to have the magic Canadian ULCC bullet. Will never happen.
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Re: Canada Jetlines: It's Turn to Fly

Post by plhought » Tue Jul 23, 2019 9:14 am

SmartLynx is notorious for outrageous Pay-2-Fly schemes in Europe as well. Through it's Baltic Aviation Academy it's basically a rotating door of Pay-2-Fly cadets that pins all the costs on the pilots.

Lots of horror stories on pprune.

Basically 2+ years of indentured servitude to a cruddy ACMI operator. They can't keep operations afloat in places like Germany or Poland, folds up shop, lay everyone off, then restart the operation in the next EU country over.

This isn't an operation I'd suspect has much cash to invest in a Canadian ULCC - so I suppose they were given a stake in exchange for aircraft/crews.
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Re: Canada Jetlines: It's Turn to Fly

Post by confusedalot » Sat Jul 27, 2019 7:04 pm

boeingboy wrote:
Sun Jul 21, 2019 10:09 pm
This is canadastan, where only the big 2 write the rules. Sadly. That's the way it is comrades.
That is just not true.

The ULCC model will never work in this country - I've said that forever. Why.....It has nothing to do with the big 2 ruling the skies - and everything to do with demographics.

Canada is the second largest country in the world - and yet has only 35 million people. The nearest city centers are at least an hour apart - and not all are heavily populated or traveled to. The US has 350 million people and the EU - which is less than half the size of Canada has 510 million people. Both the US and the EU have multiple major city centers less than an hour from each other.

This country cannot supply more than 2 major carriers and a couple of second tier companies (like the Sunwings and Air Transats) A ULCC will quickly wither and die as you cant operate an aircraft that cheap without frequency. And that's the key....frequency. You could easily rack up 10 or so hours flying in this country and only have 3 or 4 legs. You'll never make money like that when you sell seats for 99 bucks. Even if your pilots and mechanics are paying you to work. As many have said - look at the history.


It still amazes me that some dimbo comes along every few years claiming to have the magic Canadian ULCC bullet. Will never happen.
Yer gonna need to brush up on canadian airline history.........

Any new entrant was met with a killer price war. For the sole purpose of putting them out of business.

They suceeded. Strategy worked.

And then the big guy goes into bankruptcy protection, gets facilitation to reorganize, and poof, once again, they are the darlings of the business.

So.....yes......

The big two actually do write the rules.
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Re: Canada Jetlines: It's Turn to Fly

Post by Capt. Underpants » Mon Jul 29, 2019 7:28 am

Which new entrant was that?
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Re: Canada Jetlines: It's Turn to Fly

Post by dialdriver » Mon Jul 29, 2019 11:54 am

confusedalot wrote:
Sat Jul 27, 2019 7:04 pm
boeingboy wrote:
Sun Jul 21, 2019 10:09 pm
This is canadastan, where only the big 2 write the rules. Sadly. That's the way it is comrades.
That is just not true.

The ULCC model will never work in this country - I've said that forever. Why.....It has nothing to do with the big 2 ruling the skies - and everything to do with demographics.

Canada is the second largest country in the world - and yet has only 35 million people. The nearest city centers are at least an hour apart - and not all are heavily populated or traveled to. The US has 350 million people and the EU - which is less than half the size of Canada has 510 million people. Both the US and the EU have multiple major city centers less than an hour from each other.

This country cannot supply more than 2 major carriers and a couple of second tier companies (like the Sunwings and Air Transats) A ULCC will quickly wither and die as you cant operate an aircraft that cheap without frequency. And that's the key....frequency. You could easily rack up 10 or so hours flying in this country and only have 3 or 4 legs. You'll never make money like that when you sell seats for 99 bucks. Even if your pilots and mechanics are paying you to work. As many have said - look at the history.


It still amazes me that some dimbo comes along every few years claiming to have the magic Canadian ULCC bullet. Will never happen.
Yer gonna need to brush up on canadian airline history.........

Any new entrant was met with a killer price war. For the sole purpose of putting them out of business.

They suceeded. Strategy worked.

And then the big guy goes into bankruptcy protection, gets facilitation to reorganize, and poof, once again, they are the darlings of the business.

So.....yes......

The big two actually do write the rules.
Pricing below cost is a violation of the Competition Act. Swoop is under investigation for this right now, due to a complaint by Flair.
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Re: Canada Jetlines: It's Turn to Fly

Post by Panama Jack » Fri Aug 02, 2019 10:27 am

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Re: Canada Jetlines: It's Turn to Fly

Post by mixturerich » Fri Aug 02, 2019 12:31 pm

I feel like the people that start these ULCC’s might be the same kinds of people you see on Dragon’s Den or Shark Tank, who’s ideas are stupid and worthless but they keep devoting their lives to it despite ridicule and heavy skepticism from the dragons/sharks and desperate pleas from their family and friends.

Reminds me of that quote:

"If you want to be a millionaire, start with a billion dollars and launch a new airline."

-Sir Richard Branson
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