WestJet profit more than doubles. Ancillaries hurt by Sabre cutover

Its earnings were affected by revised estimates for provincial income tax allocation amounting to CAD2.4 million, without which earnings would have been CAD23.5 million. Its other revenues rose slightly from CAD45.9 million to CAD49.3 million. WestJet finished the quarter with CAD1.1 billion in cash and cash equivalents, up significantly from the CAD739.6 million in the year-ago quarter or 46% of 12 months trailing revenue.

"We are pleased to deliver our 21st consecutive quarter of profitability," said WestJet President and CEO Gregg Saretsky, explaining its new everyday, low-pricing initiative designed to give passengers more confidence in booking early. "In June, we introduced our everyday, low-pricing structure to provide great fares year-round across our entire schedule and reduce the volatility in pricing. We are encouraged by the early booking trends and the improved mix of fares we are selling."

Mr Saretsky said the reaction to its new fare structure has been good. "In the past we have been on sale 42 or more weeks during the year," he explained. "The consumer was trained to wait for fare sales before they booked. The everyday fares puts fares-sale type levels in the market 330 days in advance at fares that are higher than our previous fare sales but lower than fares when we weren't on sale. This induces consumers to book with confidence in advance and gives us greater visibility on how demand is building. We also have a very flexible guest policy that allows guests to downgrade if a cheaper fare becomes available. So we've eliminated the risk of booking early. From time to time, we'll continue to have sales but they will be far fewer than in the past. We are already seeing an improvement in the mix which will drive improved unit revenue performance. The second goal was to take our high-end fares - those for guests who buy today for travel tomorrow - and reduce them by 25% in keeping with our brand philosophy of driving good value for all our guests."

Still weak in the east, so targeting cross border and international

Still struggling with a weak presence in the Canadian east, WestJet outlined plans for increasing capacity in the cross-border and international markets where demand is high while awaiting a more robust turnaround in the east. WestJet believes the Canadian economy needs to rebound further before it can support more new domestic capacity growth. During an investor conference, Mr Saretsky indicated his disappointment in the carrier's eastern penetration.

"Qualifying those comments, I would say that my disappointment is more a function of the fact that, after 14 years, the growth in southern Ontario has not been as rapid as the growth in Western Canada," he said, reiterating the carrier's strong presence in Toronto and noting plans to accelerate growth there because that is where most of its corporate accounts are.

"Part of that is a function of where our capacity has been deployed and the fact we haven't made a sizeable enough investment in building market awareness. So it is an under-developed opportunity for us. You are going to start seeing a stronger presence by WestJet and if you look at the way we have been deploying our capacity you see more and more of our new capacity sent to Toronto where we have a lot of our southern flying to the Caribbean and southern US."

Focus on operating margins - and codeshare by end 2010

Following its US counterparts with a new focus on operating margins, WestJet reported a 2Q-2010 operating margin of 7.6%. Pre-tax, its second quarter margins were 5.4%, up from the 2.6% experienced in the year-ago period. The company's goal is to have over-the-cycle margin of 12%.

"If you look at our three-year average, the margin is around 11% and peaked at 14% in the second quarter of 2008," Mr Saretsky said. "So we are looking at 12% as a normative cycle period number. To get there will take unit revenue improvements, driving costs out of the network as well as better utilization of all our assets and cash deployment. The concept of ROIC is not a new one here but we are putting more focus on that which is one of the reasons we drove the capacity reduction. We continue to look at where we are in the cycle.

"You have to remember we are only a 14-year-old airline and we have a lot of opportunity ahead of us," he continued. We have some new tools, the frequent flier program, a new affinity card program. Our level of participation in key segments of the domestic market including airline alliance partnership and international flow - all of that will auger very well for improved financial results going forward. We are still building so are in a different part of the cycle versus the legacies."

The company still hopes to announce its first codeshare by the end of the year but it is going more slowly than anticipated when Mr Saretsky spoke at the investor conference. Reports indicate it will be Delta.

Total revenues up 15.2% against 2Q2009, but longer stage lengths hurt RASM

The Calgary-based company reported total revenues of CAD612.1 million, up 15.2% from 2Q-2009 on a 10.9% increase in available seat miles to 4.7 billion. Load factor rose 3.9 points to 80%, while yield dropped slighted - 1.1% - to CAD 16 cents. Revenue per available seat mile rose, however, 4% to CAD 12.80 cents. WestJet cited better management of bookings into higher fare classes as contributing to improving RASM. However, echoing Air Canada, the executives noted that the double-digit RASM growth experienced in the US, was not mirrored in Canada. Cash flow from operating activities was CAD84.8 million, more than triple the year-ago period.

Despite improvement in the revenue environment from 2009, lower yields and increasing stage length in the international and trans-border markets continue to pressure system RASM. WestJet reported that the 5.9% increase in average stage length was hampering the scale of the positive return on RASM growth this quarter which has been offset by strong revenue growth from WestJet vacations. The unit does not drive capacity planning, it said, but rather bolsters earnings during weaker periods.

It reported that capacity in the international market was up 237% in the second quarter, with domestic flat and trans-border up 34%. The company is seeing yield strength improvement this summer across the regions but the mix is continuing the downward pressure on system unit revenue performance. That is expected to remain for the rest of the year. The actual number of additional seats available this quarter was up only 6%, said Saretsky, compared to a 10.9% growth in ASMs. "That is important because we sell seats, not ASMs," he said.

Improvements offset by cost increases

While CASM experienced a similar increase - 4.4% - to CAD 11.96 cents largely on a 14.5% increase in fuel. CASM ex fuel was better than expected owing to lower advertising spending and an engine insurance recovery. CASM ex fuel and profit sharing declined 0.1% to CAD 8.44 cents. The company cited a stronger Canadian dollar for the cost reductions coupled with increasing average stage length. However, this was offset by higher commissions paid on WestJet Vacations' significant revenue growth, quarter over quarter.

Sales and distribution costs increased during the second quarter at CAD 1.2 cents per ASM, up 31.9% from the year-ago period. The company cited the growth of WestJet vacations in the generation of higher sales and distribution expense as well as its new Sabre reservations system including transaction fees for the new system and higher GDS fees.

Sabre shift has hurt ancillary revenues; improving these "a focus for 2011"

Ancillary revenues are suffering with the transition to Sabre, said Executive Vice President Marketing and Sales Bob Cummings, who reported a 10.4% drop in per-guest ancillary revenues. "We've had a shift in the percentage of bookings through GDSs and the travel agents using the GDS don't have the tools to offer guests such services as pre-reserved seating so there is a limitation there. That is why you see a dampening of that line item but we are looking to regain some of this. With respect to change and cancellations, we've taken a bit of a step back but we have initiatives in place to bring that back over the next couple of quarters. We also have a fair bit in the pipeline such as the affinity credit card. We've stepped back to take a look at the road map on the ancillary revenue side and you won't see an immediate recovery but in the next year we are increasing that line item quarter by quarter. It is certainly a focus for us."

Mr Saretsky added, "We are actually very bullish our on ancillary revenue opportunities. It is a big focus for 2011 so expect to see that take off. It will absolutely surpass the 2009 performance by a wide margin."

Domestic capacity down, deliveries deferred, as international is expanded

Domestic capacity was reduced during the second quarter and new capacity directed into the airline's southern markets. Most of the new capacity will continue to be deployed outside of Canada in the third and fourth quarters as well, it said, adding third quarter capacity will increase 11-12% while full year will be up 9-10%. However, WestJet is deferring an aircraft in 2011 and two in 2012 until 2017. Even so it is set to add six aircraft next year and another five in 2012.

The company cited the recent downward revision to the Canadian GDP growth estimates. "Economic uncertainty has caused us to rethink our short-term capacity plan," said Mr Saretsky. "We have worked closely with our Boeing to further enhance our fleet plan flexibility."

Mr Saretsky reported that demand is also keeping up with capacity. "During the quarter our ASMs were up 12% while demand was up 17%," he said. "We are seeing unbelievable demand and strength in southern flying which has more than kept pace with the 200-300% capacity increases in those markets."

Outlook improved, further RASM increases expected

Third quarter RASM estimates are anticipated to be positive again on a year-on-year basis, although the company would provide no further guidance. In addition, it expects a 1-3% increase in CASM ex fuel in the third quarter, year on year. Its stage length rate was 5.9% in the second quarter and is assumed to expand in the 4-4.5% range for the balance of the year.

WestJet operating highlights (Unaudited): 2Q-2010 vs 2Q2009

	Three months ended June 30
	2010	2009	Change
ASMs	4,783,649,533	4,314,869,886	10.9%
RPMs	3,824,847,258	3,284,898,568	16.4%
Load factor	80.0%	76.1%	3.9 pts.
Yield (cents)	16.00	16.17	(1.1%)
RASM (cents)	12.80	12.31	4.0%
CASM (cents)	11.96	11.46	4.4%
CASM excluding fuel and employee profit share (cents)	8.44	8.45	(0.1%)
Average stage length (miles)	962	908	5.9%
Utilisation (hours)	11.5	11.5	-