WestJet Says ‘Low-Cost DNA’ Will See It Through Tough Times

Open Jaw
by Bruce Parkinson

For most airlines, the low price of oil has been a gift from the gods. For WS, headquartered in the heart of what was a booming Alberta oil scene for most of its 20 yr. history, it has been both a blessing and a curse.

A blessing, because WS, like other airlines, has saved hundreds of millions in fuel costs over the past couple of years. A curse because the carrier had a lot of capacity committed to Alberta and neighbouring Saskatchewan when demand took a deep dive.

Despite the less than ideal situation it finds itself in, WS still managed to post its 2nd best ever Q1 net earnings. (There’s that blessing again.) However, Q1 2016’s $86.7 million in net earnings is nearly 38% lower than last year’s record for the quarter of $140.7 million.

The earnings call and WestJet’s Annual General Meeting yesterday came just days in advance of a major milestone for the airline. Friday sees the launch of wide-body 767-300ERW service from 6 Canadian cities to LGW. This bold move – on a very competitive route – makes up the lion’s share of the carrier’s capacity growth for the year.

“We’re very happy with advance bookings,” Saretsky told the earnings call, saying that bookings from the U.K. to Canada have been especially strong. “As long as we continue this current momentum it will be accretive.”

WS executives say an announcement will be made over the next couple of weeks about a charter program they described as “a new line of business” that will help mitigate Alberta weakness. No other details were released.

CFO Harry Taylor pointed to recent reports that domestic airfares are at a 6 yr. low. “Consumers are clearly benefitting from the lowest fares in years. Our whole DNA is that of a low-cost airline and we will leave no stone unturned to reduce and minimize costs.”

But, WS is clearly feeling some turbulence. Revenue for the quarter was down 4.8% year over year. Operating margin dipped to 12% from 18.2%. Revenue per available seat mile (yield) was down 11% while cost per available seat mile dropped just 4.2%, thanks in large part to fuel. When fuel and employee profit share are taken out of the mix, cost per available seat mile rose 7.4%.

Bright spots for the quarter included an impressive load factor of 82.1% and an 8.4% increase in pax to 5.3 million. Capacity growth of more than 7% was fully absorbed. Flights arrived on schedule 83% of the time during the quarter.

“It was a good start to 2016,” said CEO Gregg Saretsky during an earnings call with investment analysts and media. “The fundamentals of our business remain strong.”

WS responded to the troubles in Alberta through schedule adjustments and capacity shifts. It has deferred the arrival of 3 new 737s and returned a leased aircraft for the 1st time in its history. It will return 2 more by the end of the year.

Despite the headwinds, WS execs pointed to several factors that give them optimism:

  • Managed corporate pax were up 10% during the quarter.
  • Plus product revenues were up 5.2%
  • Ancillary revenues were up 14.8% year-over-year, with the figure of $18.05 per pax at its highest level ever.
  • The balance sheet remains strong, with $1.4 billion in unrestricted liquidity – a similar amount to the airline’s net debt.
  • WestJet now owns 33 unencumbered aircraft, up from 12 in 2015.
  • The airline has enjoyed strong membership growth in WestJet Rewards, up 24% year over year.
  • Moody’s became the 2nd credit rating company to award WS with ‘investment grade’ ratings. “That makes us one of very few airlines in the world – and the only one in Canada,” Saretsky said.

With oil prices up somewhat of late and the CAD performing better than expected, WS’s leaders “feel better than we did 3 months ago,” said E.V.P. Commercial Bob Cummings.

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