Less fun in the sun sees WestJet fly lighter

Sun-seeking travellers have more choice in air travel than ever before, but the crowded market is taking its toll on WestJet Airlines Ltd., which saw its shares battered Monday after reporting that its planes flew with more empty seats in the first quarter.

WestJet said Monday that its load factor — the average percentage of seats filled — fell to 81.6% in the first quarter, down 1.5 points from a year earlier. The decline was more dramatic in March, when load factor fell 2.7 points to 81.3%, marking the fourth consecutive month where capacity has outpaced traffic growth.

The airline’s shares tumbled 4.33% Monday to close at $28.50, the stock’s biggest oneday decline since last November. Including Monday’s drop, WestJet’s shares have lost 14.57% of their value this year amid concerns about overcapacity in southern markets and economic weakness in its home province of Alberta.

CEO Gregg Saretsky warned in February that airline capacity in southern markets was growing faster than demand. Air Canada’s discount airline, Rouge, has been rapidly expanding with new flights to the Caribbean and Mexico, and charter airline CanJet began offering flights from Toronto to southern destinations this past winter. Demand growth has also been slowing because of the weaker loonie.

“As expected, we have seen industry supply increases in certain southern markets running ahead of demand, resulting in depressed load factors,” Mr. Saretsky said in a statement Monday.

However, he added that “the overall demand environment remains strong” and first-quarter revenue per available seat mile — a gauge of efficiency that measures revenue per seat per mile flown — is expected to be in line with a prior forecast of flat to slightly negative yearover-year.

Fadi Chamoun, who follows the company for Bank of Montreal, said WestJet’s first-quarter earnings per share could come in 2¢ to 3¢ below his estimate of 98¢ because of the weaker traffic results, and things are likely to get worse before they get better.

“In our view, the larger issue is that capacity growth is expected to accelerate over the coming two quarters, particularly in the domestic Canadian market, while the demand backdrop appears uncertain given the potential for more moderate economic growth in Canada and a weaker Canadian dollar,” Mr. Chamoun wrote in a note to clients.

Despite concerns about overcapacity, Mr. Chamoun pointed out that WestJet’s earnings estimates have risen 25% since late fall due to lower energy prices, while the stock is down about 10% over the same period, creating a buying opportunity.

“We believe the downward pressure on the stock reflects the previously noted headwinds, which have brought the valuation to a very attractive level, particularly in the context of the company’s solid growth outlook, robust execution and strong balance sheet,” Mr. Chamoun wrote.