WestJet Sinks as Rivals, Fuel Force First Loss in 13 Years
(Bloomberg) -- WestJet Airlines Ltd. tumbled after stepped-up competition and pricier oil snapped the carrier’s 52-quarter profit streak.
New discount airlines pressured fares in the second quarter while the cost of each liter of jet fuel rose 31 percent, WestJet said in a statement Tuesday as it reported results. Canada’s No. 2 carrier also lost some bookings because of a threatened pilot strike.
The company’s first loss in 13 years highlights the hurdles facing new Chief Executive Officer Ed Sims, who took over in March from Gregg Saretsky. With profits under pressure, WestJet said it would end some flights and curb the expected growth rate in seating capacity to no more than 6.5 percent. That’s down from a previous forecast of as much as 8.5 percent.
“We are, of course, disappointed with these results and very focused on course correction,” Sims said on a conference call with analysts.
The shares plunged 9.9 percent to C$17.98 at 12:10 p.m. in Toronto after sinking as much as 12 percent for the biggest intraday decline since May 8. WestJet fell 24 percent this year through Monday, the second-worst performance among Canadian industrial companies.
WestJet swung to a loss of 18 Canadian cents a share in the second quarter, compared with the average analyst estimate of a loss of 27 cents. Revenue climbed 2.9 percent to C$1.09 billion.
WestJet lost “tens of millions of dollars” in revenue in May, June and July as customers canceled bookings because of concerns about a potential strike, Chief Financial Officer Harry Taylor said on the conference call. The carrier subsequently discounted fares to “bring people back,” he said, without being more specific.
With the airline and its pilot union now engaged in a settlement process, “it’s our intention to reduce both the frequency and the scope of discounting,” John Weatherill, vice president of pricing and revenue management, said on the call.
Revenue for each seat flown a mile, a measure of pricing power known as unit revenue, will decline 4 percent to 6 percent in the third quarter, WestJet said, citing industry capacity increases and “aggressive competitive pricing action.” Costs for each seat flown a mile, excluding fuel and employee profit share, will rise 3 percent to 4 percent in the period.
Fuel prices that will be as much as 38 percent higher than a year earlier will only add to the pressure.
“The near-term outlook for the company remains difficult as unit revenue remains under pressure and both jet fuel and non-fuel costs continue to rise,” Helane Becker, an analyst at Cowen & Co., said in a note to clients. “WestJet is adjusting 2018 capacity growth, but margin deterioration should continue through the rest of the year.”
With jet fuel getting more expensive, the Calgary-based airline has embarked on a cost-cutting plan aimed at saving C$200 million annually by 2020. For the year, costs for each seat flown a mile will rise 2 percent to 3 percent excluding fuel and profit sharing, WestJet said Tuesday. That’s down from a previous forecast calling for an increase of 2.5 percent to 3.5 percent.
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