BUSINESS

WestJet Profit Soars, Helped By Lower Fuel Prices

05/05/2015 06:56 EDT | Updated 05/05/2016 05:59 EDT
After enduring years of weak results and bankruptcies, airlines are making big profits as they pile on more fees and pocket most of the benefit from lower fuel prices.

WestJet Airlines is just the latest North American carrier to post a quarterly record.

The Calgary-based airline's net income surged 58 per cent to $140.7 million in the first three months of the year as fuel prices plummeted and it collected higher fees from checked luggage and other charges.

Still, WestJet CEO Gregg Saretsky insisted that the cost of travel has decreased as some of the fuel savings were passed along to the airline's customers.

"There are bargains today that are better than they were a year ago and that's a function of the lower fuel environment, so we are effectively passing that along to our guests," he said during a conference call Tuesday.

WestJet (TSX:WJA) is following a global trend that has seen airlines boost profits by charging passengers for services. In the United States, airline industry bag fees rose five per cent to US$3.5 billion last year while the fees for changing reservations were up six per cent to US$3 billion.

The charges have left some passengers angry, accusing carriers of nickel-and-diming them relentlessly while at the same time removing the comfort of extra legroom and free onboard food.

Industry observers said airlines needed to change a broken economic model that saw too many carriers go out of business.

In exchange for keeping base fares as low as possible, airlines are charging passengers for the things they value. That includes checking luggage, preferred seating and, soon, Wi-Fi.

"The messaging that they're getting from customers over and over is: 'We want the lowest fares and we're ready to put up with a lot to get them,'" said David Tyerman of Canaccord Genuity.

He said so-called unbundling is a philosophical change from the all-inclusive flights of the past.

Tyerman added the industry has done a poor job of showing that base airfares, adjusted for inflation, are much lower than they were 20 or 30 years ago. However, they haven't dropped as fast as the latest sharp decrease in fuel prices.

Even though airlines are making stronger profits, the money being made by carriers still pales in comparison to car-makers and rail companies that post much higher returns on invested capital.

"In the past, we were very lucky because the industry was badly run and they didn't charge nearly enough for their product," he said, referring to the free extras like meals and checked baggage. "Now they're charging a more representative price and we don't like that."

Robert Kokonis, president of airline consulting firm AirTrav Inc., said airlines are making more money now but adds their financial outlook is uncertain, dependent upon fuel prices and the strength of the global economy.

While fees may have swung too far in one direction, they could easily swing back the other way to attract customers in the years to come.

WestJet said it resisted pressure to raise fares in the first quarter, but added higher ticket prices could loom on the horizon if fuel prices increase.

The airline said Tuesday its new Plus seating section will offer a window or aisle seat with no middle seating on narrow-body planes, or wider seats on the new Boeing 767s. The new configuration, aimed mainly at business travellers, will be priced as much as 75 per cent lower than business class fares operated by Air Canada.

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