WestJet continues transition from regional airline to international player

WestJet

WestJet Airlines Ltd. says strong demand, higher-paying passengers and its new ultra-low-cost subsidiary will bolster revenue in 2019 as the company continues its transition from regional airline to international player.

"We're not seeing any potential slowdown in our booking curve," said John Weatherill, vice-president in charge of pricing and revenue.

Despite tight domestic competition and volatile fuel prices, the Calgary-based company aims to boost revenue per available seat mile – an industry metric of how much cash each seat on the plane brings in – by between two per cent and four per cent in 2019.

Revenue from premium economy passengers shot up 70 per cent last year, chief executive Ed Sims said.

"It's the first time I've seen analyst reports use the word ahead in the 12 months that I've been in the role," Sims said. "But we are incredibly conscious of the heavy lifting that we have ahead of us."

The airline is starting to reap the benefits of more branded fares, which bundle various perks such as extra leg room and on-demand dining, and ancillary fees for meals and baggage. The proportion of WestJet passengers who opted to buy up to a fare higher than the lowest one available increased to 36 per cent in the fourth quarter, up from six per cent at the start of the year, Sims said.

The 23-year-old airline plans to grow passenger capacity by between six per cent and eight per cent – down half a percentage point from its previous guidance – largely through three Boeing 787 Dreamliner aircraft embarking on non-stop service from Calgary to Dublin, Paris and London's Gatwick Airport this spring.

The intercontinental flights will furnish the first of an expected 10 Dreamliners in a bid for business passengers that challenges Air Canada's transatlantic dominance.

Intense competition remains a concern. A freshly expanded Flair Airlines, soon-to-launch Canada Jetlines Ltd., and Air Canada's low-cost Rouge are all crowding the budget airspace that WestJet has flown into with its eight-month-old, ultra-low-cost Swoop.

"We still see risks related to increased ultra-low-cost carrier competition, labour and execution around the company's international growth strategy," said analyst Cameron Doerksen of National Bank Financial.

Sims said Swoop will expand its fleet to 10 planes from six in 2019.

After a turbulent year, labour relations still pose a potential hurdle. WestJet is now in negotiations with two unions that represent dispatchers and its regional airline pilots, while talks with flight attendants are set to begin this year as well. The company is also holding internal negotiations with its mechanics.

Canada's second-largest airline saw the repercussions of labour strife last May, when WestJet pilots voted in favour of strike action before the Air Line Pilots Association and the company agreed to a settlement process two weeks later. The initial threat scared off potential passengers and prompted discounted fare offers that cost the carrier "tens of millions of dollars" throughout the second and third quarters, Sims said last year.

"Throughout 2018, we faced compounding headwinds that resulted in our business delivering results well below where we could and should perform," he said Tuesday.

In the fourth quarter WestJet saw surging jet fuel prices – also a problem last spring – dent its profits, with net earnings falling 39 per cent year over year.

Passenger revenue grew seven per cent last quarter compared to the same period a year earlier, but fuel costs rose 21 per cent to $304.9 million, WestJet said, cancelling out some of the gains.

The expense pushed cost per available seat mile up 3.8 per cent.

WestJet earned $29.2 million in the fourth quarter, down from $47.8 million in the same period a year earlier.

Profits amounted to 26 cents per diluted share for the three months ended Dec. 31, compared with 41 cents per diluted share in the fourth quarter of 2017.

Revenue totalled $1.19 billion in the last three months of 2018, up from $1.12 billion a year earlier.

Analysts on average had expected a profit of 13 cents per share for the quarter and revenue of $1.19 billion, according to Thomson Reuters Eikon.

Kevin Chiang, an analyst with CIBC World Markets, cited a "healthy demand environment and strong revenue growth."

"While fuel has become a lot more volatile, we have greater comfort in our view of expanding profitability from Canada's two largest airlines," he said in an investor note.

For the full year, WestJet said it earned $91.5 million or 80 cents per diluted share, down from $279.1 million or $2.38 per diluted share in 2017.

Revenue totalled $4.73 billion for 2018, up from $4.51 billion.