WESTJET’S GROWTH GAMBLE

Deal with pilots key to expansion

Demand for WestJet’s new London-Gatwick flight is strong, CEO Gregg Saretsky said Tuesday, but the Calgary-based carrier will need to strike a deal with its pilots before it can realize any new international ambitions and expand its widebody fleet.

On a conference call with analysts, Saretsky said traffic on the London route has exceeded expectations since its launch in May, something that “bodes well” for future expansion of the company’s wide-body plans.

“We like the early day returns that we’re seeing. It gives us a lot of encouragement about doing more of that,” he said.

But Saretsky acknowledged the existing contract between WestJet and its pilots limits the carrier to the four wide-body Boeing 767s it currently operates, and that if it were to expand, it would require a new round of salary negotiations. He added the current deal was reached when the wide-body service was being pitched as an “experiment,” and if it became more than that, pilots would likely have a different set of demands.

“So we’re in this waltz now around, ‘What might this look like?’ ... It has to continue to provide economics that would make it in our best interest to expand that fleet. If we can’t come to terms on what those economics look like, then there will be no expansion of that fleet — it’s as simple as that,” Saretsky said.

Saretsky’s comments came the same day the company reported second-quarter earnings of $36.7 million, down 40 per cent yearover-year. Though the airline flew a record number of guests and saw its revenues tick upward by 0.8 per cent, its costs per available seat mile also increased by seven per cent.

Saretsky acknowledged that the “hiccups” encountered in the early days of the London-Gatwick route were costly for the airline. Mechanical difficulties with the 767s — which previously belonged to Australia’s Qantas Airways Ltd. and are between 23 and 25 years old — contributed to a 36 per cent increase in maintenance costs in the second quarter, and forced flight cancellations and several delays in the month of June.

Due to EU rules, WestJet was forced to pay 600 euros per person for every cancelled flight or delay over three hours.

“These planes are very full, so every time there’s a hiccup there’s 260 people we’re having to pay 600 euros to, and it doesn’t take long in a quarter to rack up a significant bill,” Saretsky said.

Saretsky said the early troubles encountered on the route were a “blip,” and added the London-Gatwick service is already profitable after just three months of operation.

But Chris Murray of AltaCorp Capital Inc. said many analysts still have concerns.

He said long-haul international flying is a “different animal” that will require WestJet to tackle all kinds of issues, including labour relations with its pilots. He suggested that WestJet may have bitten off more than it can chew, adding that many airlines have suffered financially because of an over-aggressive growth strategy.

“When you get right down to it, is this (the wide-body plan) a good idea?” Murray said. “Has it gone from a small experiment to an overwhelming distraction for management? And, frankly, a bit of a cost drag just when you didn’t need one?”

Robert Kokonis, president and managing director of AirTrav Inc., took a different view. He said Rouge, Air Canada’s low-cost leisure carrier, has expanded significantly since its launch in 2013 — proving there is a market for additional air capacity to Europe and beyond.

“Any new route, along with the introduction of a new aircraft type, will bring challenges,” Kokonis said. “There’s tremendous growth opportunities globally, and instead of just letting Air Canada have control of that market, I think there’s great opportunity for WestJet to put their feet in the water.”

WestJet’s share price closed at $22.81 on Tuesday, down 0.52 per cent.