Strong Foundations: WS Optimistic As Alberta Crawls Out Of Crisis

By Bruce Parkinson

Gregg Saretsky

They may not be exactly where they want to be in terms of metrics like return on invested capital, but WestJet executives on yesterday’s fourth-quarter and full-year earnings call had reasons for optimism.

“Clearly, our foundations are strong,” CEO Gregg Saretsky told financial analysts after reporting full-year net earnings of $295.5 million, down from a record $367.5 million the year before, but still among the airline’s best-ever results.

“I'm very pleased with how our resilient business model has performed even during an economic downturn in Alberta of unprecedented proportion. In 2016, we delivered top line revenue growth, double-digit traffic growth through a record number of guests and achieved our second highest annual load factor in our history at 81.8%.”

Analysts were eager to learn more about WestJet’s plans for international expansion using wide-body planes, but execs were tight-lipped, saying only that no new wide-bodies will enter revenue service in 2017, and that aircraft types and potential destinations for expansion are still under review.

WestJet’s leaders offered a long list of positives: managed corporate business revenue is up significantly as is revenue from its premium Plus product; ancillary revenues jumped 19% in Q4 year-over-year; the WestJet Rewards program is growing; the balance sheet remains strong and the airline now has 46 unencumbered aircraft (no money owing), representing nearly 1/3 of its fleet. 

Perhaps the biggest positive, however, is Alberta’s slow emergence from recession. While WestJet has expanded east, south and across the Atlantic in recent years, 40% of flights still fly to, from or within the province.

The rising price of oil is helping to revive Alberta’s economy, but it will also impact WS costs. The airline is predicting increases of as much as 35-40%. Still, that’s a burden shared with all competitors and the negative impact will only come if demand dampens due to higher fares.

Speaking of competition, Saretsky does not appear to feel too threatened by a potential increase in low-cost competition, either from NewLeaf or other would-be entrants. He’s more concerned about what he sees as too much capacity in the domestic long-haul market, driven by Air Canada increases.

Mentioning an Open Jaw headline yesterday that read “Caveat Emptor” in relation to a Consumers Association of Canada warning about NewLeaf Travel’s “arbitrary” route cancellations and changes, Saretsky maintained that Canada is “adequately served with a low-cost incumbent” – namely, WestJet.

“There are others waiting in the wings. The federal government created a special exemption to increase foreign ownership to 49% against legislation which currently stands limiting foreign ownership to 25%. These two other ULCCs are working hard to try and find investors but they have been doing that for more than a year and a half or two years and I think it’s all indicative of a very difficult marketplace that is adequately served with an incumbent low cost carrier and investors have to look carefully at where they’re going to place their bets.”

The chaos created south of the border by President Trump’s temporary ban on travel and aggressive attacks on Mexico have not had a major impact on WestJet to date, Saretsky told analysts.

“We haven’t seen any big movement yet, but there is perhaps an opportunity for Canada to benefit from increased foreign arrivals.”

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