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WestJet says efforts to attract business customers, Encore exceeding forecasts

11/05/2013 07:32 EST | Updated 01/23/2014 06:58 EST
New fare options, efforts to attract business customers and the launch of a regional service are exceeding expectations and beginning to deliver millions of dollars in additional revenue, WestJet Airlines (TSX:WJA) said Tuesday.

The Calgary-based airline hopes to generate about $80 million in annualized ancillary revenues next year, partially from last-minute upgrades and premium economy seating.

Up to $30 million is expected in 2013, including $10 million realized in the third quarter, half of which came from customers seeking upgrades.

WestJet is trying to lure business travellers from rival Air Canada. Instead of offering a business class section, it has allocated about 18 seats on flights to business class and increased flexibility to change travel plans through its premium economy Plus product.

The carrier expects to end the year on a high note after slightly beating analyst forecasts in the third quarter, despite a drop in net income.

It anticipates that capacity will increase by seven to 7.5 per cent in the quarter on flat revenue per available seat mile and lower unit costs. Its new WestJet Encore regional service is expected to account for about half next year's four to six per cent forecasted growth in capacity.

WestJet reported its 34th consecutive profitable quarter in the period ended Sept. 30, earning $65.1 million or 50 cents per diluted share. That was down 7.8 per cent from $70.6 million or 52 cents per share a year earlier.

Analysts had looked for 48 cents per share on an adjusted basis and 49 cents per share under standard accounting, according to estimates from Thomson Reuters.

Total revenue grew to $924.8 million from $866.5 million a year earlier, an increase of 6.7 per cent.

"We're not apologetic at all about the results," president and CEO Gregg Saretsky said during a conference call when asked about the lower profits.

"It's the third best quarter in our 17 years (in operation). We grew capacity significantly (and) it improved our market position. We're gaining traction in the business travel market...and it has positioned us nicely on a go-forward basis."

WestJet announced a three-year plan last January to reduce $100 million in annual costs by the end of 2015. It expects to achieve that goal a year early, in part due to $30 million realized from reducing the ratio of flight attendants to passengers.

The airline rolled out its new Encore regional service in June and now flies 42 flights a day to 12 destinations using five Bombardier Q400 turboprops. It added Brandon, Man., to its destinations on Sept. 3 and Terrace, B.C., will join the list on Nov. 25 as it expects to fly 60 flights a day by year-end.

The airline has 20 firm orders and 25 options that will likely be exercised next year as it prepares to open a hub in Toronto next summer and begins to service Eastern Canada.

WestJet's operating expenses increased 8.9 per cent in the quarter to $825.8 million but its costs per available seat mile (CASM), excluding fuel and employee profit sharing, decreased 1.5 per cent.

Analysts welcomed the improved outlook and said the results were largely in line with expectations.

"It was another solid quarter for WestJet with demand trends appearing to remain intact. Expectations heading into the quarter were likely high and we believe were largely met," Walter Spracklin of RBC Capital Markets wrote in a report.

Cameron Doerksen of National Bank Financial raised his target price for WestJet shares seven per cent to $29, adding that he anticipates that WestJet may also increase its 10 cent per share dividend next year.

"We remain positive on WestJet's prospects and expect the company to perform well in 2014," he said, pointing to the high-margin Plus product and growth of Encore.

Meanwhile, WestJet reported Tuesday its October load factor was 79.2 per cent, the second highest level after last year's record 81.2 per cent. Traffic increased 5.4 per cent while capacity grew 8.1 per cent. The airline flew a record 1.5 million passengers in the month, up 4.3 per cent from the prior year.

On the Toronto Stock Exchange, WestJet's shares closed up 20 cents at $27.50.

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