02/04/2014 07:10 EST | Updated 04/06/2014 05:59 EDT

WestJet could raise fares again if pressure from falling loonie persists

WestJet Airlines raised fares by two per cent last week in response to the falling Canadian dollar and may consider additional hikes and other revenue generating efforts to offset any future cost pressures, the carrier's chief executive said Tuesday.

"If we continue to face additional headwinds over and above what we see and are talking about today, clearly another fare increase in a strong demand environment would be possible," CEO Gregg Saretsky said during a conference call after reporting record earnings last year.

The airline's across-the-board fare increase was quickly matched by other carriers, with no apparent hit on demand.

Unlike rivals operating package tours, WestJet has refused to implement currency surcharges in order to be transparent about the total cost of flying, Saretsky said.

Sales vice-president Bob Cummings said the airline is reluctant to increase fares and has avoided matching such moves by rival carriers over the last couple of years.

"We held off as long as we could with the (foreign exchange) situation and really felt the need with respect to our shareholder and all things considered to have the price increase at this time."

Cameron Doerksen of National Bank Financial said capacity growth to sun destinations by other airlines may limit future fare increases.

"This is easier said than done," he wrote in a report. While the domestic Canadian market appears to be "fairly rational for 2014" with only WestJet adding capacity, it and Air Canada Rouge are adding seats to Las Vegas and the Caribbean.

Calgary-based WestJet has increased the cost of travel in other ways through ancillary charges for passenger choice like changing reservations, cancelling flights, reserving seats and purchasing food. Such revenues increased by 33 per cent in the past year to $46 million or $10.09 per passenger in the fourth quarter.

The airline plans to announce later this month a new in-flight entertainment and Wi-Fi system to be implemented starting by year-end that should generate additional revenues as of 2015.

A decision on whether to charge for first checked bags on flights to the U.S. or in Canada is being put off until technological challenges are ironed out that would allow the airline to exempt frequent flyer and loyalty credit card customers. It currently charges all customers for a second checked bag.

Saretsky said charging for first bags as is done by Air Canada (TSX:AC.B) for service to the U.S., or introducing it to Canada, is not inevitable.

"If the IT team and our outside suppliers come back and can't deliver a solution that is commercially reasonable, feasible and competitive, we wouldn't go forward with implementing a first-bag fee."

Each cent decrease in the loonie causes a $13 million reduction in annual unhedged operating costs, of which $11 million relates to fuel expenses.

WestJet said Tuesday that it will boost its quarterly dividend by 20 per cent to 12 cents per share amid confidence about prospects for higher profits in the coming year. It's the fourth dividend increase since WestJet began the payouts to shareholders in 2011 and is on top of $165 million returned to shareholders through stock buy-backs in 2013.

WestJet (TSX:WJA) also reported $67.8 million of net income in the fourth quarter, or 52 cents per diluted share. That's in-line with analyst estimates and higher than the $60.9 million or 46 cents per share earned a year earlier. Revenues increase to $926.4 million from $860.6 million last year.

Costs excluding fuel and profit sharing decreased 0.3 per cent. Profit sharing from 2013 will provide employees with the equivalent of six weeks pay.

The airline said winter weather cost it between $6 million and $7 million in the quarter as a result of additional costs and lost revenues.

For the full year, profits increased nearly 11 per cent to $268.7 million, or $2.03 per diluted share. That compared to $242.4 million or $1.78 per share in 2012.

Capacity is slated to grow by 7.5 to 8.5 per cent in the first quarter, while revenues per available seat mile will be flat and costs, excluding fuel and profit sharing, will be up 3.5 to 4.5 per cent on harsher winter weather, a weaker dollar and the timing of engine overhauls.

For 2014, it says capacity should be up four to six per cent, while costs will be 1.5 to 2.5 per cent higher, above its prior guidance of zero to one cent.

Saretsky said half the anticipated growth this year will come from the Encore regional service, which has seen 50 to 60 per cent of passengers connect to the mainline carrier. WestJet expects to take delivery of eight Q400s this year, doubling its fleet to 16 as it expands service from Toronto.

Bookings for WestJet's summer service to Dublin, Ireland, are strong and additional destinations could be added in 2015, he said.

On the Toronto Stock Exchange, WestJet's shares were up 85 cents, or 3.4 per cent, at $25.70 in Tuesday afternoon trading.