A couple months ago, I was pretty optimistic in the growth prospects at Jetlines (OTCQB:JETMF). The company had hired a strong management team to run its operations and it signed up a number of vendors/suppliers in preparation for a December launch. All of these initiatives hit a wall last week when SmartLynx and InHarv ULCC Growth Fund had exercised their option to terminate their partnership with Jetlines.
In response, Jetlines decided to conserve its cash by canceling its December launch to an indefinite time:
- Jetlines had decided not to put down additional deposits for the two Airbus 320s
- It has laid off most of its employees
- CEO Javier Suarez/board member Zygimantas Surintas has resigned
Why did SmartLynx and InHarv get cold feet? SmartLynx's investment into Jetlines is contingent on the airline securing further financing from new investors, and no one came forward to put up capital in the company. Without a new partner, SmartLynx and InHarv didn't feel comfortable to invest further in the airline and so they bailed.
The reason for a lack of interest in Jetlines is because of alleged predatory pricing by WestJet's (OTC:WJAFF) discount airline: Swoop. In October 2019, Swoop had advertised discounted air fares from Abbotsford. This was less than two months before Jetlines was to commence operations in Vancouver. Abbotsford is a city that is under an hour drive away from Vancouver, so the close proximity is sure to affect Jetlines' bottom line.
The Damage is Done
It is now a waiting game for Jetlines as it patiently waits for the Competition Bureau to finalize its investigation into Swoop/WestJet. But the damage is already done. Whether or not Swoop was deliberately lowering its ticket prices to undercut the competition no longer matters, because Jetlines has fallen a few steps back.
Even with a positive ruling in Jetlines' favor from the Competition Bureau, there are a number of reasons why Jetlines is going to be grounded for a while:
- It will take months to rebuild Jetlines again since it has just laid off its employees and its CEO
- The Competition Bureau can only slap fines of up to $25 million (which Swoop can easily afford), so what stops Swoop from doing so again?
- Even if Swoop is found guilty, Jetlines can claim damages and take legal action, but this will take more time and drain even more resources.
- It is going to take time to Jetlines to secure new financing especially without a CEO.
Ruling from Competition Bureau Still Vital for Jetlines
This is a huge setback for Jetlines, but the ruling from the Competition Bureau is still very important. For one, this ruling sets the tone for other upstart airlines thinking of competing in Canada's airline market.
For now, Jetlines claims it has a strong position as it has the market research to back up the evidence against Swoop. Also, the Competition Bureau has penalized airlines in the past for predatory pricing such as the verdict against Air Canada back in 2003, so there is evidence that the Competition Bureau can get tough on airline predators when it needs to
Too Much Uncertainty
Investors invest on certainty and whether its business plans are sound. To me, Jetlines' business plans and operational strategy make sense. It had hired a strong management team and laid out a cost structure that I believe could make it a compelling contender in the airline market. But at this point, there are too much hurdles for the airline to jump through.
In order for the airline to start flying, it needs capital. To get capital, it needs to attract new investors. To attract new investors, the company has to wait for the Competition Bureau's ruling and also it needs to find a CEO to help sell the company to new investors. These are a lot of roadblocks.
Ultimately, I believe the Competition Bureau will rule against Swoop and hopefully this will make Jetlines an attractive investment. A favorable ruling for Jetlines should give it some lift in the stock price - at least in the short term. But after that, there is just too much uncertainty in the business. Investors considering this stock should take a wait and see approach.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.