Canada Jetlines Ltd. (TSXV: JET / OTCQB: JETMF) – Secures Airport Agreements / Further Advances Operations

Siddharth Rajeev, B.Tech, MBA, CFA

Anthony de Ruijter, BA

December 11, 2017

Industry: Airlines www.jetlines.ca

Market Data (as of December 11, 2017) Investment Highlights Current Price C$0.33  Canada Jetlines (“company”, “Jetlines”) has secured multiple Fair Value C$3.03 agreements with secondary airports across Canada to offer ultra- Rating* BUY low-cost air service in the summer of 2018. Airports include Risk* 4 John C. Munro Hamilton International Airport, Abbotsford 52 Week Range C$0 .17 – C$ 0.3 4 International Airport, and Halifax Stanfield International Shares O/S 57, 911,409 Airport. Market Cap C$ 18.82 mm  The company has made a significant addition to its advisory board Current Yield N/A in the form of a former executive member of the John C. Munro P/E (forward) N/A Hamilton International Airport. The addition adds significant P/B 5.18 x YoY Return n/a airline industry experience and expertise to the company’s YoY TSXV 5.83% leadership team.  The company’s shares began trading on the OTCQB exchange, *see back of report for rating and risk definitions under the ticker JETMF, on October 3, 2017.  Jetlines has signed a letter of intent (“LOI”) for the delivery of two Boeing (NYSE: BA) 737-800 NG aircraft by April 2018, beginning the build out of their fleet.  The company maintains a strong cash position and working capital position of $3.74 million and $3.15 million, respectively.  We are maintaining our BUY rating with fair value estimate of $3.03 per share.

Key Financial Data (FYE - Dec 31) (C$) Q3-2017 Cash $ 3,736,336 Working Capital$ 3,153,034 Debt $ - Total Assets $ 4,530,815 Net Income (9M ended Q3-2017) $ -8,232,388 Shareholders' Equity $ 3,635,276

  2017 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Page 2

Corporate Jetlines has advanced significantly, reporting the following, since our initial report published Update on September 6, 2017:

 On December 5, 2017 - announced its intent to offer flights out of Halifax Stanfield International Airport (“YHZ Airport”), come summer 2018.  On November 2, 2017 - addition of the former CEO and president of John C. Munro Hamilton International Airport, to the company’s advisory board.  On October 30, 2017 - intent to offer flights out of the Abbotsford International Airport (“YXX Airport”), come summer 2018.  On September 11, 2017 - reached an agreement to provide ultra-low-cost air service out of both John C. Munro Hamilton International Airport (“YHM Airport”) and entered active discussions with the Region of Waterloo International Airport (“YKF”).  On September 7, 2017 - signed an LOI with a major US aircraft leasing firm for two Boeing 737-800NG aircraft. The agreement stipulated the delivery of the aircraft for April 2018. This is inline with the company’s expectation that they will be able to grow the fleet by four aircraft per year.

The agreements with airports listed above allow the company to establish an east coast base of operations in Hamilton, and a west coast base of operations in Abbotsford. We view this as a favourable sign of the company’s progress. Furthermore, it is inline with the company’s strategy of establishing operations at lower-cost airports, whilst still maintaining access to well-populated regions and catchment areas.

Expanding Halifax Stanfield International Airport: Planned The YHZ Airport ranks as Canada’s eighth busiest airport, and is considered the primary Routes, airport in the province of Nova Scotia. Furthermore, the airport contributes $2.8 billion to Securing Nova Scotia’s economy on an annual basis. The following chart outlines the airport’s historic Agreements passenger traffic until 2016.

Source: Halifax Stanfield International Airport, FRC

In 2016, the YHZ Airport reported enplanements and deplanements of 3.91 million, growing at a CAGR of 1.82 % since 2010.

 2017 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Page 3

Abbotsford International Airport: The YXX Airport in Abbotsford also exhibits similarly low passenger traffic in comparison to the primary Vancouver International Airport. Statistics Canada reported that, in 2016, the Vancouver International Airport had enplanements and deplanements totalling over 21.3 million. By comparison, YXX reported 2016 air passenger traffic of 530,643. Though the difference in passenger traffic is pronounced, YXX represents the primary air infrastructure in the Fraser Valley region , the population of which has more than doubled since 1981. Furthermore, as Abbotsford is only about 50 kilometres from the Bellingham International Airport, we believe that the region is experiencing passenger loss to cheaper airlines in the US. Jetlines entry into the Canadian airlines market may repatriate some of this catchment passenger loss, as ultra-low-cost airlines may incentivize these passengers and reduce their opportunity cost.

Source: Abbotsford International Airport, FRC

John C. Munro Hamilton International Airport: YHM gives the company exposure to a significant portion of Southern Ontario, despite not running operations out of the major airport in the area, the Toronto Pearson International Airport. Jetlines views Southern Ontario as a major opportunity, as management believes less than 5% of the region’s flights pass through the five secondary airports (excluding Billy Bishop Toronto City Airport). We believe that the significant difference in passenger traffic reflects a large opportunity for Jetlines, to both generate new traffic and capture existing passenger traffic via price stimulation. As the map below shows, YHM’s catchment area radius (defined as a 90-kilometre drive from each airport) contains over four million people, and overlaps the London and Waterloo regions.

Southern Ontario Secondary Airport Catchment Areas

Source: C4SE Economic Model, McKinsey, Company

In 2016, YHM reported that 333,368 passengers had flown to and from YHM, against total enplanements and deplanements at Toronto’s Pearson International Airport of 42.8 million.

Management have also released updated plans for routes that they intend to offer once they commence operations. The following map depicts initial routes to be offered in the summer of 2018:

Jetlines Planned Routes: 2018 Summer

Source: Company

The company plans to offer the following routes by the winter of 2020. As we noted in our

initial report, the company intends to expand operations south to the U.S., Mexico, and the

Caribbean.

Jetlines Planned Routes: Winter 2019-2020

Source: Company

In addition to announcing operational centres, the company also announced the addition of Vijay Bathija to the company’s advisory board. A brief biography, as provided by the company, is presented below:

Mr. Bathija has over 20 years of aviation industry experience with low cost start-ups, network carriers, and Canadian airport management. Mr. Bathija was most recently President and CEO of John C. Munro Hamilton International Airport. During his tenure, the airport realized over 70% growth in passengers and secured significant new air services. Under Vijay’s leadership, the airport repositioned itself as a low-cost airport and subsequently became one of the fastest growing Canadian airports in 2017.

Prior to his time with the John C. Munro Hamilton International Airport, Mr. Bathija spent nine years with Air Canada in progressively senior roles from Senior Director of Network Planning to Vice President, Commercial for Air Canada Leisure Group, which includes Air Canada Vacations and Air Canada Rouge. In this position, Vijay successfully led the commercial activities for the launch of Rouge and oversaw the ramp up of an initial fleet of 4 aircraft to 27 aircraft within the first year of operations. Vijay also consulted as the Senior Principal/Director of Airline Planning for Sabre Airline Solutions, advising the client airlines on network, fleet, and alliance strategies.

Industry WestJet Airlines Ltd. (TSX: WJA) revealed in late September that their planned ULCC Developments airline would be offered through the “Swoop” brand.

Source: WestJet

The ULCC airline poses a potential threat to Jetlines, as WestJet boasts a long track record and has established infrastructure in place. Jetlines, by comparison, is pre-revenue, and has yet to raise the required capital to facilitate the planned operational launch. As investors may recall from our previous report, the Canada Transport Agency (“CTA”) requires airline startups to provide sufficient funding for the operation of services for a 90-day period, assuming zero revenue.

WestJet’s proposed airline is aiming to begin operations June 2018, with a fleet of six Boeing 737-800 series aircraft, scaling up to 10 by spring 2019. This puts Swoop ahead of Jetlines in terms of fleet buildout and scale. Another issue is that WestJet have confirmed that Swoop will include YXX as an initial destination - directly competing with Jetlines on the west coast.

However, there is still confusion as to how Swoop will be able to maintain low costs despite regulations that stipulate the maintenance of compensation standards between parent companies and subsidiaries. With WestJet’s pilots unionizing, pilots of their regional carrier voting in favor of unionization, and concern that flight attendants may also soon move towards unionization, we remain unconvinced that Swoop can operate as a true ULCC. Until WestJet is able to address their ability to maintain low labor costs, we believe that Swoop’s labor costs will reflect WestJet’s in the long-term. We will be closely monitoring Swoop’s developments.

Financials At the end of Q3-2017 (ended September 30, 2017), the company had cash and working capital of $3.74 million and $3.15 million, respectively. The following table summarizes the company’s liquidity position:

Liquidity & Capital Structure 2017(Q3) Cash 3,736,336 Working Capital 3,153,034 Current Ratio 4.60 Total Debt / Capital 0%

The following table summarizes the company’s cashflows:

Summary of Cash Flows ($, mm) 2016 (9M) 2017 (9M) Operating -$0.04 -$0.30 Investing $0.01 $0.01 Financing $0.03 $0.65 Effects of Exchange Rate $0.00 $0.00 Net -$0.00 $0.36

Free Cash Flows to Firm (FCF) -$0.03 -$0.29

The company currently has 6.8 million options outstanding (weighted average exercise price

of $0.28 per share) and 30 million warrants outstanding (weighted average exercise price of

$0.43). Currently, we estimate that 1.5 million options and nil warrants are in-the-money. If

all options were exercised, the company could raise an additional $0.32 million.

Valuation We are maintaining our long-term revenue forecasts and cash flow projections; details are

presented in our initiating report. Our projections are based on the following assumptions:

 Passenger count reaching 6.61 million by the end of 2025. We believe this is

reasonable based on an 8% market share of the total domestic market that we have

forecasted for the end of 2025. As their initial operations will be mainly in Canada,

our forecasts are only based on the domestic market.

 Costs and revenue estimates are based on a selected basket of ULCC airline

comparables.

Note that management estimates that ULCC airlines could achieve market penetration of up

to 12.5% of the total projected domestic and trans-border Canadian passengers.

Source: Company

The following table shows our comparables valuation based on expected revenue and EBITDA projections for 2025. The average valuation multiples were based on a peer group of established ULCCs.

Comparables Valuation 2025 Forecast (Revenues) $985,474,599 2025 Forecast (EBITDA) $179,956,928

Average EV / Revenue 1.30 Average EV / EBITDA 7.22

Expected EV at 2025 ($) $1,281,116,979 Expected EV at 2025 ($) $1,299,289,023 Present Value of EV ($) $271,987,031 Present Value of EV ($) $275,845,039 Avg. Present Value of EV ($) $273,916,035

Value per Share (C$) $4.72 Value per Share (C$) $4.78

The average of our discounted cash flow valuation ($326.67 million) and our comparables valuation ($273.92 million) is $300.29 million. The comparables valuation rose from our previous estimate of $260.03 million, due to an increase in the average EV/ Revenue and EV/ EBITDA multiples of comparables.

As mentioned in our initial report, our value per share estimate is dependent on the then current share price that the company will use to raise the CTA initial capital requirements mentioned earlier. The following table shows the various potential scenarios and our expected fair value per share for each scenario.

Valuation Summary New Shares Issued Total Shares Fair Value

100% equity at $0.33 per share 137,161,085 195,072,494 $1.76

50% equity at $0.33 per share 68,580,542 126,491,951 $2.54 100% equity at $0.50 per share 90,526,316 148,437,725 $2.31

50% equity at $0.50 per share 45,263,158 103,174,567 $3.12

100% equity at $1 per share 45,263,158 103,174,567 $3.33

50% equity at $1 per share 22,631,579 80,542,988 $4.00

100% debt - 57,911,409 $5.93

Source: FRC

We are maintaining our fair value estimate at $3.03.

Risks We believe the company is exposed to the following risks (list is non-exhaustive):

 Our valuation is dependent on a 2018 launch. Delays or other changes to the operational timeline could significantly impact our valuation.  High barriers to entry due to existing duopoly, as well as large initial operating cash requirement.  External surcharges that are beyond the company’s control could affect their ability to

charge sufficiently low prices and stimulate new demand. These charges include taxes, airport fees, etc.  The company is in early stages and has yet to commence operations.  The existing Air Canada (TSX: AC)/ WestJet duopoly dominates the Canadian aviation market.  WestJet is planning to release their own ULCC fleet, Swoop.  Access to capital and share dilution.

We are maintaining our risk rating of 4 (speculative).

Fundamental Research Corp. Equity Rating Scale: Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.

Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt.

2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt.

3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient.

4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative.

5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

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