Following the failed launch of services in January, Canada Jetlines Ltd. now plans to list on the Canadian TSX Venture Exchange in a reverse takeover of Jet Metal Corp., a junior uranium explorer, with the IPO expected to complete in May 2016. Under the deal each 1.5 share of Jet Metal will convert to one share of the new company, which will list under the same symbol, JET. Each Jetlines share will be treated as 1.5 shares of the new entity. Jetlines’ chief executive Jim Scott confirmed that there were several options for a shell company but the board opted for Jet Metal, which owns uranium properties in Newfoundland and Wyoming. Jet Metal shares were suspended on January 15 when talks began with Jetlines. Jet Metal will assume two seats on the new company’s board. But Jetlines president David Solloway will now be leaving the company.
So why Jet Metal? Well the company does have $2m of unencumbered cash reserves and $5m in listed assets that will be converted into cash, but Scott is quick to point out that Jet Metal also comes with a management team that has a vision of how to finance the remaining market portion of the airline. The Jet Metal team will aim to raise $6m through a private placement while Jetlines is now free to focus on securing funding and regulatory approvals. The latter though will require Jetlines to reach and pass the $40m of funding level, which is the minimum bar set by The Canadian Transport Agency. Jetlines will also have to prove that it can operate for 90 days without any income.
Jetlines still intends to launch ultra-low-cost services out of Vancouver, Hamilton and Winnipeg to destinations across North America, with a promise to offer fares 40% lower than current competitors.
This brings us back to what is going on at WestJet right now and also at Air Canada (see below for that one). The market is not strong in Canada at this time and it is weakening quite rapidly in British Columbia if one takes a look at the load factors – so can Jetlines make this work? There is logic to suggest that as times get hard, people are drawn to low-cost airlines, but WestJet and Air Canada are anything but expensive that is for sure and Jetlines, in order to undercut its established competition, is going to have to have an estimated cost base of slightly lower than that of Spirit and that means cost of funding is going to have to be on the floor and the aircraft are going to have to be purchased or leased at very keen rates indeed. Keep an eye on Jetlines as if they can make all this work then it will be very impressive indeed, and I hope it does work, but the gap in the market is so slight that margins are going to be wafer thin and by Summer 2016 they may have narrowed further.
Meanwhile, it comes as a great fillip for the US majors that the U.S. government has secured a new agreement with Japan resulting in greater access for U.S. airlines to Tokyo’s downtown Haneda Airport. U.S. airlines will for the first time have five daytime flights into Haneda and one additional nighttime flight. This agreement is an addenda to the 2010 U.S.-Japan Open Skies agreement and should give US majors a significant boost in the Key US/Japan market going forward. All are hoping that Delta are able to secure the slots they have been coveting for so long now.
Meanwhile, it was refreshing and most welcome today to see Avolon sending a shot across the collective bow of the aircraft appraisal industry. There is no doubt that the aircraft appraisal industry is a bit of a joke right now with no one agreeing on prices for most major types giving a company the ability to get several different prices for the same aircraft at any one time. Some lessors will of course prefer to keep rolling with this rather opaque status quo as they can more or less get an aircraft valued at the right price at any given time, but as we have been saying here for five years now, it will come back to bite at some point as capital market influence increases. In fairness to the appraisers, it is the case, and they will agree, that the only way to really value an aircraft accurately is to do a proper inspection and if appraisers were to carry out inspections on any given aircraft it is highly likely that they would all come out very close to each other on price. As things stand, the industry does not want this service 9 times out of 10 so we are left with the only real appraisal method in town right now, which is to take all the values from the various major appraisers, strip out the two at the top end and the two at the bottom end and go somewhere in the middle of what is remaining, which will be sitting somewhere around the real value. One trader recently told me that appraised values on one of his mid-life aircraft were close to a 90% difference – Can we carry on like that?