07/04/2013 09:17 EDT | Updated 09/03/2013 05:12 EDT

Air Canada, WestJet traffic grew in June but load factor fell on higher capacity

Canada's two largest airlines reported increased passenger traffic in June, but their planes flew slightly less full as they both added capacity.

Air Canada said its traffic grew 2.1 per cent on a system-wide capacity increase of 2.8 per cent. Its load factor was 85 per cent, compared to 85.6 per cent a year earlier.

CEO Calin Rovinescu said the load factor, which slipped slightly from last June's record level, underscored the effectively of its capacity management strategy.

"Traffic grew 2.1 per cent system wide for the month, led by the Pacific and domestic Canada markets, he said in a statement.

During the second quarter, Air Canada's load factor was 83 per cent, down from 83.5 per cent a year ago, on a 1.6 per cent increase in traffic and 2.2 per cent growth in capacity.

Traffic grew on routes in Canada, to the U.S., Atlantic and Pacific regions. Only Latin America and the Caribbean were down. The load factor in Canada was unchanged at 81.7 per cent.

WestJet said its passenger traffic increased more than eight per cent in June, despite some cancellations and weakness following severe floods in southern Alberta.

The Calgary-based airline said its load factor decreased for the fifth consecutive month, falling 2.2 percentage points to 76.8 per cent as capacity increased 11.3 per cent, outpacing traffic gains.

WestJet (TSX:WJA) said it flew nearly nine million passengers in the first half of the year, a 5.7 per cent increase from the prior year and achieved a load factor of 81.9 per cent.

"We continue to be pleased with our strong year-over-year traffic growth, notwithstanding reservation cancellations and weakness in advance bookings in southern Alberta since the June 21 flood," stated CEO Gregg Saretsky.

The airline launched its WestJet Encore regional service in the month following the delivery of its first two new Bombardier Q400 turboprop aircraft.

Walter Spracklin of RBC Capital Markets said Air Canada's (TSX:AC.B) load factor remains seasonally healthy despite slipping slightly.

"Air Canada continues to do a nice job in matching supply with regional demand. However, we do expect continued competitive pressure as industry capacity ramps," he wrote in a report.

Spracklin said WestJet's increased traffic in the month was below his estimate for 10 per cent growth while capacity additions were higher than expected.

"While traffic growth still remains resilient on a relative basis, we note that we are seeing the largest capacity uptick from WestJet since the first quarter of 2011, leading to what we believe will be continued pressure on yields and RASM (revenues per available seat mile)," he wrote in a separate report.

In the second quarter, WestJet's load factor decreased to 79.4 per cent from 81.6 per cent in the prior year as a 9.3 per cent increase in capacity outpaced the 6.4 per cent growth in traffic.

Spracklin said the traffic growth in the quarter lagged the 7.8 per cent growth in the first quarter and 8.1 per cent increase achieved in fiscal 2012.

"Coupled with the recent ramp in WTI (fuel) prices and a stronger U.S. dollar, we continue to believe that a valuation pause in the airline sector is warranted," he added.

Meanwhile, Spracklin said Air Canada's growth will be bolstered with an expanded bilateral agreement with China was announced Thursday by the Canadian government. The accord, which takes effect immediately, will increase the number of flights between China and Canada.

It also gives Chinese airlines the ability to offer passenger and all-cargo services to third countries in connection with Canada and improves code-sharing agreements with partner airlines from third countries.

Air Canada plans to deploy five new Boeing 777 aircraft on routes to China. Spracklin said the Pacific segment will provide longer-term benefit but should remain challenging in the near-term on increased competition and slowing demand.

On the Toronto Stock Exchange, WestJet's shares closed down 11 cents to $22.39 in Thursday trading. Air Canada's shares gained one cent to $2.45.