WestJet confirmed Wednesday it will launch a low-fare, no frills regional airline, intensifying competition in smaller domestic markets with rival Air Canada (TSX:AC.B) for business and leisure class travellers.
"It's the next logical step in WestJet's evolution," president and CEO Gregg Saretsky said on a conference call Wednesday.
WestJet is considering either Bombardier's Q400 NextGen 70 to 80-seat aircraft designed for short hauls or Italian-French company ATR's 72-600 series, Saretsky said after the airline reported profits fell 4.3 per cent in its fourth quarter.
Saretsky said he expects that WestJet's regional airline will be up and running before the end of 2013 and the Calgary-based airline will place an order with either Bombardier (TSX:BBD.B) or ATR later this year.
"Both are excellent aircraft that would fit seamlessly into our current fleet. I want to emphasize that the regional fleet will consist of just one type of aircraft to maintain operational efficiencies and flexibility similar to the successful single-fleet approach we use in our current operations."
Saretsky said he couldn't yet say when the fleet will be delivered, nor announce market destinations or an exact launch date.
"We believe the short-haul turbo prop aircraft combined with WestJet's brand, strong balance sheet and low-cost structure will allow us to strengthen our domestic network for both leisure and business guests."
Saretsky said employees of WestJet (TSX:WJA) voted 91 per cent in favour of launching the regional carrier.
"We're trying to the degree possible to replicate exactly the way WestJet was started in 1996 — single fleet, low cost, highly productive, good utilization... a seating configuration that provides us a cost advantage over other operators of similar aircraft."
Air Canada has said it wanted to introduce a low-cost carrier to help trim costs but hasn't been able to get it in the air yet.
Chorus Aviation's Jazz (TSX:CHR.B) operates regional flights for Air Canada under contract.
"This is the biggest game-changer in Canadian aviation since WestJet was founded in 1996, which is ironic," said Robert Kokonis, president of airline consulting firm AirTrav Inc.
But it's also good for travellers who will have more choice, he said.
"The biggest winner clearly, upfront, is the consumer," he said.
There are communities across the country where they're only being served on by Jazz or by other carriers and could benefit from some competition, Kokonis said.
Communities that WestJet currently doesn't serve include Medicine Hat, Alta.; Brandon, Man.; and Fredericton and Saint John, N.B., he said.
Kokonis said Air Canada is a "very robust" competitor and will take on WestJet.
"If any airline can make a separate airline division work, I think it's WestJet because their corporate culture, their employee culture is so strong, so focused in an unrelenting way, I believe they can make a go of it."
WestJet also announced Wednesday that it's raising its dividend by 20 per cent. The Calgary-based company said the quarterly dividend will climb a penny to six cents per share, to be paid on March 30.
In it financial results, WestJet posted lower profits of $35.6 million, or 26 cents per share, compared to $37.2 million, or 26 cents per share in the comparable period of 2010.
The results beat average analyst expectations of 20 cents per share, according to a poll by Thomson Reuters.
Revenue grew 12.9 per cent to $721.5 million from $692.2 million.
"We managed to cover the elevated fuel costs with our revenue growth and improve our profit margin on a full-year basis," Saretsky said.
WestJet's 737s can't make long-haul journeys to Asia or Europe. So the company has been seeking partnerships with other carriers to expand its global reach and Saretsky said the Calgary airline will continue on with that strategy this year.
In the United States, WestJet is working with American Airlines and Delta. On the international front, WestJet has announced partnerships with British Airways, Cathay Pacific, China Airlines, Air France and KLM.
National Bank Financial analyst Cameron Doerksen said WestJet's earnings were better than forecasted and revenue of $782 million was essentially in line with his estimate of $776 million. Earnings per share of 26 cents was beat his forecast of 21 cents, he said in a research note.
Shares in WestJet were up 53 cents, or four per cent, to $13.63 in afternoon trading on the Toronto Stock Exchange.