WestJet in 22nd consecutive quarterly profits, earnings rising
Westjet posted CAD54 million in net earnings for 3Q2010, marking a large swing that showed the carrier’s earnings up 72% from 3Q2009. Its operating margin rose to 13.2% for the quarter compared with 12.8% in the third quarter of 2009. Meanwhile, its pre-tax margin was up from the 8.3% in the 2009 quarter to 11.1%.
However, CEO Gregg Saretsky reported that the trailing 12-month margin at the end of the third quarter was 8.1%, up from the 7.6% in the June quarter. “We think our 12% target is achievable,” he told analysts during the third quarter conference call.
Saretsky reported that total revenues reached CAD684.6 million, interestingly about the size of SkyWest Airlines which also reported its third quarter results yesterday.
Its cash balance continues to grow, a nice position to be in, but signalling a need to provide investors with a return. To that end, the company is paying a dividend of 5.0 cents per common voting share and variable voting share to be paid on 21-Jan-2011 to shareholders of record on 15-Dec-2010. Saretsky noted its long-term cash position goal is between 30-35%. However, in the third quarter it was 49%.
"Our business model and our ability to consistently generate significant positive cash flow give us the confidence that we can maintain a healthy balance sheet while providing the necessary flexibility to fund our strategic objectives and growth plans," said Saretsky. “We are generating cash flow in excess of our needs. At 20 cents per share that translates into a payout ratio of 24%. And as our cash position grows we will continue to reconsider the rates as we go forward. We want to get to a position where a certain percentage of cash flow is devoted to our investors whether it be a dividend or buy back.”
In addition, the Toronto Stock Exchange (TSX) also approved the purchase of up to 7.2 million common voting shares and variable voting shares representing approximately 5% of WestJet's currently issued and outstanding shares under the normal course issuer bid. On any trading day, WestJet will not purchase more than 117,583 shares. As of 3-Nov-2010, there are 139,727,125 common voting shares and 5,569,285 variable voting shares issued and outstanding.
The airline continues to increase capacity, especially in the trans-border and international markets but that capacity continues to pay off with higher RASM and yield. Total ASMs for the third quarter of 5.0 billion, up 11.7%. RPMs also rose 11.7% to 4.0 billion as load factor declined slightly (0.1 points) to 79.5%. Yield rose slightly by 2.1% to 17.09 cents while RASM increase 2.0% to 13.61 cents.
This was the first full quarter of everyday low pricing which has forced a change in passenger behaviour who, through most of the quarter, continued to expect fare sales from the carrier. However, Saretsky said it is having a positive impact on the fare mix and yields, although that will show itself more effectively in the fourth and future quarters.
He noted that load factors in August and September took a hit, as passengers waited for fare sales which didn’t happen. In addition, WestJet didn’t get a boost from international flow feed that Air Canada did. However, its codeshare with Cathay Pacific will probably change that in the future. In addition, the market is now responding to the everyday low pricing, with load factors picking up which, said Saretsky with expected contributions to overall volume and yield strengthening.
On the cost side, WestJet reported that CASM was basically flat, rising only 1.5% to 11.81 cents but ex-fuel and profit sharing rose only 1.1% to 8.25 cents. However, the airline reported a 36.7% or 1.29 cent per ASM increase in sales and distribution costs now that passengers are able to book though non-WestJet distribution systems. Such costs were 93 cents in the 2009 quarter.
WestJet boosted its ancillary revenue offerings for travel beginning in the new year by instituting a CAD20 charge for the second bag. It does not charge for the second bag but in an effort to offset the new second-bag fee, it dropped its third and fourth bag fees from CAD75 to CAD50. Saretesky noted that the new fee is less than its North American counterparts are charging and offers the right balance for WestJet and its stakeholders.
CFO Vito Culmone reported that ancillary revenues were actually down in the quarter by 10% drop with less activity on pre-reserved seating and lower change and cancel fees.
The carrier is currently at CAD5.80 per passenger and Saretsky indicated that it will likely be CAD7 per passenger next year before rising in the back as full-year run rates for several programmes kick in. Those programmes include the second-bag fee, fare bundling increasing refundability and changes that attract business travellers and cashless cabins which is tracking upwards. He noted that pre-reserved seats sales have been depressed but expects fixes in the GDS systems will facilitate increasing sales both by travel agents and online. The airline just launched its co-branded credit card in the second quarter which is just ramping up in addition to airline partnerships and its frequent guest programme, all of which contribute significantly to increases in revenue.
“We felt emboldened by comments from our US counterparts that 93% of their third quarter profits resulted from ancillary revenues,” said Saretsky. “In our business, we have built our profits on the business so all of that represents upside for WestJet earnings.”
As part of its cost-cutting efforts it has implemented self service bag check at both Vancouver and Calgary and plans to expand that to Toronto and Edmonton before the end of the year. The rest of the system will come on line in 2011.
The airline plans fourth quarter capacity to increase 13-14% year on year which it expects to absorb while improving year-over-year RASM. Saretsky predicted the company would still see a year-on-year RASM improvement in the fourth quarter despite the downward press on RASM from increasing capacity.
Culmone said there has been sequential monthly improvements in yield since the second quarter increasing confidence that pricing strength is not only improved but will be sustained.
He noted the delivery of an additional aircraft during the fourth quarter for a year-end fleet total of 91 aircraft and a full year capacity increase of between 10-11% over 2009. He also said that was up 1% from its previous guidance. Fourth quarter RASM ex fuel and profit sharing will be flat from 4Q2009 when it was 12.92 cents while CASM ex fuel and profit sharing will also expected to be flat from 4Q2009 at about 8.67 cents.
In 2011, the carrier is taking six new aircraft for a full-year capacity increase of between 6-8% and a first quarter capacity increase between 9-10% from 1Q2010.