Canada's No. 2 Airline Drops Most Since 2015 on Expansion Costs

(Bloomberg) -- WestJet Airlines Ltd. dropped the most in more than two and a half years after it said increased spending to create a new low-cost unit and expand overseas will vastly exceed revenue growth.

Costs for each seat flown a mile, excluding fuel and employee profit sharing, will climb as much as 8.5 percent this quarter, Canada’s second-biggest carrier said Tuesday. WestJet forecast that revenue on the same basis would drop as much as 2 percent.

The outlook signals the challenges for new Chief Executive Officer Ed Sims as WestJet starts its Swoop ultra-low-cost unit next month and increases international flying with new Boeing Co. Dreamliner wide-body jets in 2019. WestJet, which reported first-quarter profit that missed analysts’ expectations, said it also faces the threat of a pilot strike or lockout as soon as May 19.

“The costs of the company’s multitude of initiatives are causing overruns in many areas,” Walter Spracklin, an RBC Capital Markets analyst, said in a note to clients. “We are hard-pressed to see an easy solution to the cost problem, and the risk is that it gets worse before it gets better.”

Fleet expansion, improved on-board service, increased maintenance costs for leased jets and continued Swoop investment are boosting costs, he said.

Profit Streak

The shares fell 11 percent to C$19.72 at 12:04 p.m. in Toronto after sinking as much as 13 percent, the most intraday since August 2015. WestJet had tumbled 16 percent this year through Monday, while Canada’s benchmark S&P/TSX index declined 2.5 percent.

WestJet’s string of 52 consecutive profitable quarters is in jeopardy, Fadi Chamoun, a BMO Capital Markets analyst, said in a note. The company’s second-quarter outlook indicates a potential loss of 25 cents to 30 cents a share, he said. Analysts had been expecting earnings of 30 cents, according to the average of estimates compiled by Bloomberg.

With expansion expenses mounting, Calgary-based WestJet accelerated its plan to cut costs, targeting C$200 million ($155 million) by the end of 2020, according to a filing Tuesday. The company previously said it saw “opportunities” to save between C$140 million and C$200 million by 2022.

‘Significant Deferral’

Uncertainty over a possible labor dispute has led to a “significant deferral” in bookings in the last two weeks, Sims said Tuesday on a conference call with analysts. WestJet is making progress in discussions with the Air Line Pilots Association, and it plans to stay at the negotiating table until a settlement is reached, he said.

The company’s 2018 financial outlook assumes no interruption in service stemming from “industrial action,” Chief Financial Officer Harry Taylor added.

WestJet’s first-quarter profit of 32 Canadian cents a share fell short of the 36 cents that analysts anticipated.

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