WestJet Airlines Ltd. took a one-two punch from Alberta’s economy in the fourth quarter, forcing the airline to discount fares and redeploy capacity in anticipation of more blows this year.
Shares fell 11.07 per cent to $16.63 Tuesday to close in their minimum since 2012 after the Calgary-based company said unit revenues will plunge in the first quarter because it cuts ticket prices in Alberta to win over frugal customers.
“It’s not clear that we’ve found the underside yet of the current downturn,” WestJet CEO Gregg Saretsky said on the business call with analysts.
Saretsky said the impact of Alberta’s oil-price-fuelled slowdown “was sudden and it is gotten very deep,” adding the provincial economy is a lot softer now than it was even throughout the financial crisis.
For WestJet, the numbers are stark: fourth-quarter profit fell 30 percent to $63.4 million or $0.51 per share, well below the consensus estimate of $0.63 per share. On the per-seat basis, revenue fell 5.8 percent while adjusted costs rose nine per cent partly due to the weaker loonie.
For the very first quarter of the year, WestJet expects unit revenue to fall a further 10 to 12 percent with adjusted unit costs rising seven to 10 %.
The airline continues to be shuffling its number of planes, moving capacity out of Alberta and into other areas of Canada in which the economy is stronger. However, still it expects capacity to increase seven to 10 % in 2016, merely a slight reduction from its previous forecast of eight to 11 per cent.
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This makes investors and analysts nervous that the company isn’t being disciplined enough in its response to the downturn, and may even be repeating exactly the same mistakes that airlines produced in yesteryear once they were not fast enough to adjust to economic weakness.
Cormark Securities analyst Hilda Maraachlian said the slight decline in capacity “may ‘t be enough to ease investor concern” that the growing number of available seats will put pressure on yields – a stride from the average fare paid per mile, per passenger – as well as revenue per available seat mile, also known in the industry as RASM.
“We believe investor concern is that capacity addition will not be matched with demand, particularly in this uncertain demand environment, putting pressure on yields and RASM, which might continue to impact sentiment negatively,” Maraachlian wrote inside a note to clients.
But Saretsky insisted that WestJet is responding inside a sensible way, and will have five per cent less capacity in Alberta through the third quarter of computer did a year earlier.
“That’s an enormous capacity shift,” he explained, adding the airline will be able to raise fares again once the shift is finished.
“We expect the very first quarter will be the low point for RASM and expect sequential improvement all year round.”
Most of WestJet’s expected capacity growth is originating in the inclusion of four new Boeing 767s, the company’s first widebody aircraft, which is used on longer-haul routes to Hawaii and London.
Those routes is going to be profitable this season, they also fit into WestJet’s longer-term expansion strategy.
“We want to make certain we’re building the company and developing it for that medium and long term,” said chief financial officer Harry Taylor, adding the company’s credit metrics and earnings will continue to be strong despite the weakness in Alberta.
“The wolf is not in the door.”
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