Possible strike, higher costs weigh on WestJet shares

CALGARY — WestJet Airlines Ltd.’s 13-year streak of quarterly profitability appears to be in danger as it struggles with rising fuel costs and the spectre of impending labour strife.

The Calgary-based airline’s shares plummeted to a two-year low after issuing first-quarter results Tuesday that included a warning that its revenue per available seat mile will be flat to negative two per cent due in part to a possible pilot strike.

Shares finished the day down 9.77 per cent, at $19.94, on the Toronto Stock Exchange.

“What we have seen over the last two weeks is a significant deferral of bookings while some guests will either postpone travel plans or make other decisions,” CEO Ed Sims said Tuesday during a conference call.

Sims said the airline is committed to remaining at the negotiating table until a sustainable agreement is reached, noting there has been some progress.

“Clearly while we are still in those negotiations with a potential call for industrial action, it creates an element of uncertainty,” he told analysts ahead of the annual meeting.

WestJet earned $37.2 million, or 32 cents per diluted share, in its latest quarter, down from a profit of $46.7 million, or 40 cents per diluted share, a year ago.

The airline attributed the drop to a series of factors including heightened spending to prepare for the introduction of its ultra low-cost airline Swoop, introduction of Boeing 787s for international routes, increased domestic competition, winter weather disruptions and an increase in fuel costs.

Its charter business also slowed as construction on Suncor Energy’s Fort Hills project came to a close and partnership revenue has fallen due to the loss of its code-share relationship with American Airlines.

WestJet is expanding its relationship with Delta Air Lines and exploring partnerships for new regions, including the transAtlantic.

It has also moved up its goal of finding $200 million in annual savings by two years, to 2020 from 2022.

The results fell short of analysts’ expectations for earnings of 36 cents per share, according to data from Thomson Reuters Eikon.

Revenue for the three-month period totalled $1.19 billion, up from $1.11 billion in the same quarter last year.

The increase in revenue came as capacity increased 4.3 per cent and revenue passenger miles — a measure of traffic — increased 6.5 per cent.

Revenue for non-fare ancillary services like checked baggage and upgrades increased 7.4 per cent to $109.5 million in the quarter, or $18.58 per passenger.

WestJet said it has raised prices three times this quarter and five times since November to partially adjust to rising fuel costs, which rose 14.1 per cent in the quarter compared with the same period last year.

However, it is cautious about raising fares too much and causing demand to falter.

Still, Sims said the fundamentals of the airline’s business remain strong with underlining strength of the overall demand environment.

Sims was challenged by analysts on the call for maintaining the same strategy despite an abrupt change in CEO from Gregg Saretsky.

“You guys keep moving forward with these targets that you miss and telling us you’re just going to double-down on them,” said Ben Cherniavsky of Raymond James.

“I think there’s a credibility gap here that’s building, and I think that’s the elephant in the room that someone needs to address.”

Sims defended the strategy, saying it was developed by a team and not one person.

Analyst Walter Spracklin of RBC Capital Markets said the airline’s cut to its cost guidance is negative.

“We are hard-pressed to see an easy solution to the cost problem, and the risk is that it gets worse before it gets better,” he wrote in a report.