Westjet profits down 10.4% but revenue up 13.3%
Following the rest of the industry and bringing the third quarter, North American airline earnings season to a close, WestJet posted CAD39.2 million profit, down 10.4% on a 13.3% uptick in revenues to CAD 775.3 million. However, it missed its consensus target.
The company attributed its results to growth in both yield, up 5.3% to CAD 17.97 cents and revenue per available seat mile (RASM), up 5.9% to CAD 14.39 cents and boasted 3Q2011 was its 26th consecutively profitable quarter. Echoing peers in the US and Canada, the company sees continued strong bookings, adding corporate travellers were growing as companies seek to stretch their dollars.
CEO Greg Saretsky indicated corporations are able to travel more with the same travel spend as last year by booking WestJet. Third quarter corporate revenues grew at a much faster pace on increased RASM and volume.
Growth will slow next year, the company said, adding full-year capacity will be between 4-5% compared to the 8% in 2011. Most of the growth will come in 1Q2012 and then taper as the year progresses. Fourth quarter capacity will be up 5-6% year-on-year while domestic capacity will grow only 2-3%, mostly in the east where it is trying to make inroads on Air Canada's power position there.
Westjet posted a highly respectable operating margin of 8.5% despite the fact that it was down 2.8 points year-on-year and the cost of fuel had skyrocketed in the interim adding CAD49 million to the carrier's fuel bill in the quarter. Fuel was up 26% on a per-unit basis. Had it not been for that, its operating margin would have been 14%, according to Mr Saretsky, who briefed analysts yesterday. The margin pressure is coming from a 16.8% growth in operating expenses.
Its return on invested capital (ROIC) came in it at 10.2%, down from the 10.5% in the second quarter but up 8.2% year-on-year. It remains focussed on its 12% target, executives reported. CFO Vito Culmone reported the company generated CAD187 million in operating cash flow and CAD170 million in free cash flow, up 16% and 13%, respectively.
Mr Saretsky reported that KLM is joining Cathay Pacific and American Airlines as codesharing partners with Delta Air Lines expected to join the group in December. During the quarter, it inked interline agreements with Emirates and Korean Air and will add Air India as well. KLM partner Air France is expected to join the codesharing programme but WestJet focussed first on KLM with its larger number of Canadian gateways.
He noted interline revenues were up 300% year-on-year and expects continued strong growth in 2012. The average ticket price for such traffic was up more than double digits year-on-year. Finally, Mr Saretsky said that its codesharing and interline operations should yield an additional CAD100 million in revenue at maturity, expected mid-decade.
Capacity rose 7.1% in the quarter to 5.3 billion available seat miles (ASMs) as load factor inched up 0.5 points to 80.1%. In addition, Mr Saretsky said the number of passengers represented a new quarterly record.
Cost per available seat mile (CASM), however, also rose, 9.1% to CAD 13.16 cents as CASM, ex fuel and profit sharing rose only 3.2% to CAD 8.77 cents. It anticipates full-year controllable cost CASM to rise about 1% on higher maintenance expense, which is expected to continue through 2012.
Mr Saretsky noted that while it was unable to recapture all the costs of rising fuel, it only needed CAD2 more per passenger to do so. In the fourth quarter, he said, RASM would have to improve 8% to cover all rising costs. He added that with demand expected to remain strong, the company expects to shrink the cost/revenue gap.
RASM is expected to continue growing in the fourth quarter similar to the 5.9% posted in the third quarter, the airline told analysts in yesterday's earnings call, despite the continuing economic volatility and consumer confidence metrics. Even so, it reported no impact on forward bookings.
WestJet Vacations has a new web site which is driving more traffic. The airline, which is working on a new WestJet website as well, expects that with the granting of its Quebec WestJet Vacations licence business will increase in that market.
WestJet is bidding on the LaGuardia and Washington National slots made available by the government-imposed slot divestiture that is part of the Delta/US Airways slot swap.
Passengers revenues rose from CAD632.5 million in 3Q2010 to CAD714.6 million in the current quarter. Other revenues increased just over CAD9 million to CAD60.6 million. Expenses rose from CAD606.9 million to CAD709.1 million in the period.
It ended the quarter with cash and cash equivalents of CAD1.3 billion, up 11.1% from 31-Dec-2010.