National Post (National Edition)
Westjet downgraded on strategy execution
Labour woes also add to turbulence
Despite management’s attempts to alleviate concerns about execution risk, many analysts remain skeptical of Westjet Airlines Ltd.’s growth strategy to launch an ultra low-cost carrier while pursuing international expansion amid a labour strife.
Following the airline’s underwhelming first-quarter results and a decrease of revenue targets for the upcoming second quarter, two analysts downgraded Westjet’s stock on Wednesday. CIBC analyst Kevin Chiang lowered the airline’s rating from neutral to underperformer, while Altacorp Capital analyst Chris Murray decreased it from sector perform to underperform.
Analysts across the board slashed the company’s yearend stock price targets by several dollars as shares hovered below $20 on Wednesday, a year-to-date drop of more than 25 per cent.
“Given how 2018 is shaping up for the airline, the Westjet story now requires near flawless execution, which we view as a high hurdle for any company,” Chiang wrote in a note to clients, listing several reasons behind the downgrade, including worrying cost trends, a narrowing cost advantage over Air Canada, and labour uncertainty.
While Chiang was more optimistic about Westjet’s strategy, writing that he believes it is sound and that expansion of its network is necessary, he said the airline is now “in a period of heightened execution risk.”
“We have concerns over Westjet’s ability to quickly rein in costs or that it has fully accounted for all the necessary investments related to its growth plans,” he wrote.
Some analysts first raised concerns a year ago about Westjet’s ambitious strategy to pursue growth in both the ultra low-cost and long-haul segments, when the airline announced it would purchase at least 10 Boeing 7879 Dreamliners to expand its international reach.
At the time, Murray said he struggled to see the economic rationale of the widebody strategy and entering a market where they cannot provide a more competitive offering. A year later, his concerns remain.
“I’m still challenged to understand how they are going to differentiate that product from any number that are already in the marketplace,” Murray said.
“They’ve put a lot of money into this, and already alluded that costs are running ahead of where they thought they would be. They don’t have a fuel-cost advantage, they are not going to be buying planes cheaper than anybody else, and then you add labour complications, so you’re left struggling on what’s the rationale for wanting to do this.”
Murray also believes that Westjet’s labour issues will not be restricted to the nearterm challenges with the pilots union. The airline is currently in the midst of negotiating its first agreement with the Air Line Pilots Association International (ALPA), the union which represents 1,500 of its pilots. A vote to authorize strike action is largely expected to pass with support this week, and pilots could strike as early as May 19.
“We see the pilots as only the first of these types of events we see unfolding over the next several years,” he wrote in a note to clients Wednesday.
“We are coming to the opinion that management may be outclassed in dealing with one of the most sophisticated unions in the industry, which also opens up concerns about how an agreement translates to other employees and what this does to an increasingly thinner cost advantage.”
Westjet’s chief executive Ed Sims had to apologize this week after it was revealed that the airline asked some of its frequent flyers to videotape the service provided by its own flight attendants — a practice that has angered many Westjet flight attendants who complain it is an invasion of their privacy, against airline rules and not the practice of a caring employer.
Sims reiterated on a conference call with analysts on Tuesday that Westjet will continue to pursue its ambitious growth strategy. Some analysts had questioned him as to why the company seemingly abruptly replaced its former chief executive Gregg Saretsky in March, and then continued to pursue the same strategy that has left some concerned.
“I was fundamentally involved in the strategy, as were all of the senior leadership team right across the organization,” Sims told analysts. “From our perspective, the strategy doesn’t change. What has changed is the speed of execution.”
Still, Raymond James analyst Ben Cherniavsky said to expect turbulence ahead.
“We believe near-term caution is still warranted as management navigates a looming pilot strike, persistent margin pressure, and a mounting credibility gap,” he wrote.
“We are also mindful that prior margin expansion goals have failed to transpire over the past couple years, creating the credibility gap ... 2019 has the potential for management to close this gap and validate their strategy, but the flight path there could still be turbulent.”