WESTJET BRACES FOR POSSIBLE PILOT STRIKE.

Shares slip on profit, Swoop, widebody plans

WestJet Airlines Ltd.’s streak of 52 consecutive profitable quarters is at risk of coming to an end as the airline grapples with rising startup expenses for its ultra low-cost carrier and surging fuel costs, as well as the uncertainty ahead of a potential labour strike.

After what it called a “challenging” first quarter, WestJet said its second-quarter revenues per available seat mile (RASM) could potentially decrease by as much as two per cent because of potential strike by its pilot union.

WestJet is negotiating its first agreement with the Air Line Pilots Association International (ALPA), the union that represents 1,500 of its pilots. A vote to authorize potential strike action closes on Thursday. If the pilots authorize a strike, they could walk off the job as early as May 19 — a move that has prompted some customers to postpone travel plans or book with other airlines, WestJet’s new chief executive Ed Sims said Tuesday.

“What we’ve seen over the last two weeks is a significant deferral in bookings,” Sims told analysts on a conference call ahead of the company’s annual shareholder meeting.

“What we are committed to is reaching a settlement as quickly as possible ... But clearly, while we are still in those negotiations, the potential call for industrial action creates an element of uncertainty.”

When asked about the possibility of the company’s streak of 52 consecutive profitable quarters coming to an end, Sims said the firm is “evaluating the situation very carefully.” He also said that airline is working on a contingency plan that would allow WestJet’s operations to continue in the event of a strike, whether it’s a gradual or full-work stoppage.

“We need to plan for all those eventualities and make sure we can continue to operate and continue to do everything we can to minimize potential distress for the 17,000 guests who fly with us every day,” Sims said.

“We will look to find a way of operating whatever capacity we can if there is a full strike.”

WestJet’s shares plummeted more than 10 per cent on Tuesday, the most in more than two years.

The airline’s net earnings for the three-month period ending March 31 came in at $37.2 million, or 32 cents per fully diluted share, a decrease of 20.4 per cent from the same time last year, when profits hit $46.7 million, or 40 cents.

Cost per available seat mile increased 5.2 per cent to 14.15 cents, and is expected to rise next quarter by between 7.5 and 8.5 per cent as the company continues to invest in the launch of its ultra low-cost carrier Swoop, the delivery of the Boeing 787 Dreamliner, and increased maintenance on leased aircraft. WestJet’s chief financial officer Harry Taylor said that the company is actively looking for cost savings.

“In addition to accelerating the medium-term costreduction programs, we have been looking under every rock to see what else we can do in the short term to improve margins, reduce costs and look for ways to mitigate the downward pressure we’re seeing on the top line,” Taylor said.

RBC Capital Markets analyst Walter Spracklin reduced full-year guidance as the airline’s costs ramped up unexpectedly.

“The costs of the company’s multitude of initiatives are causing overruns in many areas,” Spracklin wrote in a note. “We are hardpressed to see an easy solution to the cost problem and the risk is that it gets worse before it gets better.”

Analysts have largely remained skeptical of WestJet’s strategy to seek growth through the launch of Swoop, while at the same time undergoing a widebody plan and pursuing premium passengers.

On Tuesday’s conference call, Raymond James analyst Ben Cherniavsky questioned WestJet’s strategy and said “a credibility gap” was building over the company doubling down on the plan while missing targets, calling it the “elephant in the room that someone needs to address.”

“What we are doing is closing the gap between the development of the strategy and its execution,” Sims said in response.

“I fundamentally believe that the benefits of both of those parallel streams have yet to be delivered which is why we are confident that the second half of this year will look very different from a yield and RASM perspective to the first half.”

While investors gathered at the company’s Calgary headquarters on Tuesday for an annual shareholder meeting, members representing the WestJet pilots were outside picketing, holding signs saying “Wanted: Our first contract” and “Stop outsourcing WestJet pilot jobs.”

Capt. David Colquhoun, chairman for the ALPA group representing Calgary pilots, said negotiations between the union and WestJet management have been ramping up in recent weeks. Of the 50 days of bargaining talks held this year, 14 have come in the past two weeks, he said.

However, Colquhoun added that the hiring practices surrounding Swoop, which is scheduled to launch in June, remain a sticking point in the negotiations.

“Until we have language in the contract that ensures our work is not being outsourced, there is potential to seek pilots from outside the company,” he said.

“The goal here is not to go on strike, but to motivate the company to deal with this at the bargaining table.”