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WestJet pushes ahead with its widebody evolution as its stock valuation has fallen by half

Analysis

Canada's second largest airline WestJet faces formidable challenges in early 2016 driven by weak demand in the Canadian province of Alberta, home province of its largest hub and headquarters, Calgary. Softening conditions that lingered over the region throughout most of 2015 began to worsen quickly in 4Q2015, forcing WestJet to adjust its capacity projections slightly for 2016.

The sharp decline in demand in Alberta is pushing WestJet's 1Q2016 unit revenues down by 7% to 10%, and is also pressuring the airline's margins in the short term. Although visibility for the latter half of 2016 remains somewhat murky, for now WestJet believes that its unit revenues will progressively improve after 1Q2016.

Weakening unit revenue, compressed margins and still high capacity growth have combined to dull confidence in WestJet among some of the airline's investors. The airline's stock price has halved during the last year, and questions are arising whether the airline is taking on too much risk with its growth plans, at a time when Canada's projected economic growth for 2016 is below 2%. WestJet maintains that it is managing its business for the long term; but for now the market is not welcoming that message, and is looking for more short term assurance that WestJet can manage its current challenges.

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