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WestJet 1Q earnings rise for 10.3% operating margin, beats US LCCs but not Alaska

4-May-2011
Westjet CEO, Gregg Saretsky
Westjet CEO, Gregg Saretsky

Following its US low-cost carrier counterparts, WestJet posted rising first quarter net income of CAD48.2 million, a CAD46 million jump from the CAD2.4 million posted in the first 2010 quarter and a 6.4-point jump in operating margin to 10.3%.

Foreign exchange aside, the carrier’s year-on-year growth bettered Southwest which experienced a 54.5% drop in net income and JetBlue which posted a comparatively anemic USD4 million rise in net income. However, its results was not enough to beat the rise in Alaska Air Group net income from USD5.3 million to USD74.2 million.

The increases came on a 24.7% increase in total revenue to CAD772.4 million and an 11.3% increase in ASMs to 5.2 billion. As with other Canadian companies, the results conform with IFRS standards as do its year on year comparables.

The company reported an 11.6% increase in yield to 18 cents along with a 12.1% jump in RASM to 14.77 cents. WestJet attributed the jump in RASM to a its yield and load factor growth. CFO Vito Culmone reported that trailing 12 months margin was 9.8%, adding the company hopes to achieve its 12% target in the next few years.

"We are pleased that the market has absorbed the fare increases put in place to offset rising fuel costs,” said CEO Gregg Saretsky. “These strong first quarter results represent net earnings per guest of roughly CAD12 which highlights the competitive nature of the airline industry. For the second quarter of 2011, WestJet is projecting fuel costs, excluding hedging, to range between USD0.95 and USD0.98 per litre, and is anticipating continued strong year-over-year RASM growth.”

Mr Saretsky reported rising ancillary revenues during the quarter when it reached CAD7.63 per passenger, up 34.3%. He also indicated that ,with the Sabre cutover complete and new initiatives, that number is expected to rise. He cited pre-reserved seating and the imposition of a second bag fee for the increase. Other revenues rose from CAD59.5 million in the 2010 first quarter to CAD83.8 million in 1Q2011. Executives thought the per-guest rate was not the highest in history. Its second-bag fee accounting for 50% of the year-on-year increase with pre-reserved seats and credit-card items accounting for the rest of the increase.

RASM is expected to show similar strength in the second quarter but not on the double-digit magnitude seen in the first quarter, largely owing to last year’s second quarter launch of Everyday Low Fares.

The strong results came with a 3.3% drop in CASM ex fuel and profit sharing which came in at 8.91 cents while CASM rose 4.5% to 13.24 cents, largely on fuel. The company is expecting CASM ex fuel and profit share in the first half of 2011 to be flat compared with the first half of 2010. CASM ex fuel is expected to rise in the second quarter, according to Mr Culmone, on marketing increases to support its business traveller focus. Total CASM this year will rise in the double digits.

Utilisation is up to 12 hours daily and would rise only if that incremental flying were profitable. WestJet has already increase red-eye flights for the summer schedule. Interestingly, the carrier is not making contingency plans against the threat of a labor action against Air Canada and would only say it has a lot of utilisation opportunity if that happens. Saying there have been few details released about the launch of an Air Canada low-cost carrier, Mr Saretsky refused to comment, saying it would only be speculative.

When asked if WestJet might retain higher fares if fuel declines, it is clear CEOs would love to do just that. However, Mr Saretsky imposed a little economics 101 in his answer. “We would like to get closer to our targeted ROIC which has underperformed but that is all a function of supply and demand,” said Mr Saretsky.

The company cited several initiatives to deal with rising fuel which, so far, has offset the 30% increase in fuel costs. It has imposed five fare increases with no demand decline. In addition to growth in WestJet Vacations, Mr Saretsky also cited its work in boosting business travel, having just passed the first anniversary of its frequent flyer programme and launched expanded Eastern Triangle service. It also launched new service in the trans-con market between Toronto and Ottawa to Vancouver and Calgary.

Analysts were clearly worried about the increase in capacity in the Eastern Triangle, the company is flying largely at peak times and carrying connecting traffic to the west and south. Mr Saretsky also noted the company offers 10 flights daily between Toronto and Montreal and 12 daily in the smaller Toronto-Vancouver market.

Its Eastern Triangle service, launched 2-May with 10 flights each weekday between Toronto and Montreal and nine between Toronto and Ottawa, Mr Saretsky said, while the airline may eventually acquire another fleet type which is always being studied by its strategic planning team, it remains focused on a single fleet type no plans for a new type this year. This, in response to a question whether it would consider the Q400 in competition with Air Canada Express and Porter service at Billy Bishop Airport near downtown Toronto. He added that whether a person used Pearson or Billy Bishop largely depended on their propinquity as they  were departing for the airport.

WestJet offers an on-time guarantee that takes 50% off a passenger's next flight if a flight in the Triangle is delayed more than 30 minutes and full credit if the flight is cancelled or the cost of their ticket plus 50% off their next Toronto-Montreal or Toronto-Ottawa flight.

Helping WestJet is leveraging its scheduled service for its WestJet Vacations which Executive Vice President Marketing and Sales Bob Cummings indicated allowed a fare premium as a result of not forcing WestJet Vacations traffic to adhere to traditional vacation package stays. Adding to that is the ability to connect its entire network to Westjet Vacations instead of being limited to a single departure point as it feeds vacation traffic over Toronto.

Mr Culmone added that results benefited from a 6% increase in stage lengths which would not continue in the second quarter which is expected to be up 1-2%.  It projected 2Q-2011 capacity to rise 8-10% for a full-year capacity increase of 6-8%. Domestic capacity will rise 3-4%, mostly with its Eastern Triangle initiative while full year will be up 1-2% on the increase on its trans-con service. The integrated model also enables the carrier to take more margin the further out the booking for vacation packages with no dramatic discounting closer in.

Other initiatives include its new codeshare with American and interline partnership with Delta. Westjet wants to forge partnerships with at least one carrier in all major geographical regions and expressed great interest in China Southern which is set to start Vancouver service. Mr Saretsky reported being pleased with its Cathay Pacific deal which does not preclude a similar deal with China Southern. He also said he has been pleased with the traffic flow to WestJet from Cathay across the Pacific and Air France/KLM across the Atlantic.

A deal with British Airways is not in the offing this year and WestJet is awaiting when BA can devote extra resources to ensure a smooth transition to an interline or codeshare relationship.

WestJet's board of directors declared a cash dividend of USD0.05 per common voting share and variable voting share for the second quarter of 2011, to be paid on June 30, 2011, to shareholders of record on June 15, 2011.


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