WestJet Airlines Ltd. took a one-two punch from Alberta’s economy in the fourth quarter, forcing the airline to discount fares and redeploy capacity in anticipation of more blows this year.
Shares fell 11.07 per cent to $16.63 Tuesday to close at their lowest level since 2012 after the Calgary-based company said unit revenues will plunge in the first quarter as it cuts ticket prices in Alberta to win over frugal customers.
“It’s not clear that we’ve found the bottom yet of the current downturn,” WestJet CEO Gregg Saretsky said on a conference call with analysts.
Saretsky said the impact of Alberta’s oil-price-fuelled slowdown “was sudden and it’s gotten very deep,” adding that the provincial economy is much softer now than it was even during the financial crisis.
For WestJet, the numbers are stark: fourth-quarter profit fell 30 per cent to $63.4 million or $0.51 per share, well below the consensus estimate of $0.63 per share. On a per-seat basis, revenue fell 5.8 per cent while adjusted costs rose nine per cent partly due to the weaker loonie.
For the first quarter of this year, WestJet expects unit revenue to fall a further 10 to 12 per cent with adjusted unit costs rising seven to 10 per cent.
The airline has been shuffling its fleet of planes, moving capacity out of Alberta and into other parts of Canada where the economy is stronger. However, it still expects capacity to increase seven to 10 per cent in 2016, only a slight reduction from its previous forecast of eight to 11 per cent.
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This has made investors and analysts nervous that the company isn’t being disciplined enough in its response to the downturn, and may even be repeating the same mistakes that airlines made in the past when they were too slow to adjust to economic weakness.
Cormark Securities analyst Hilda Maraachlian said the slight cut in capacity “may not be enough to ease investor concern” that the growing number of available seats will put pressure on yields — a measure of the average fare paid per mile, per passenger — as well as revenue per available seat mile, better known in the industry as RASM.
“We believe investor concern is that capacity addition will not be matched with demand, especially in this uncertain demand environment, putting pressure on yields and RASM, which may continue to impact sentiment negatively,” Maraachlian wrote in a note to clients.
But Saretsky insisted that WestJet is responding in a sensible way, and will have five per cent less capacity in Alberta by the third quarter than it did a year earlier.
“That’s a massive capacity shift,” he said, adding that the airline will be able to raise fares again once the shift is complete.
“We expect the first quarter will be the low point for RASM and expect sequential improvement throughout the year.”
Most of WestJet’s expected capacity growth is coming from the addition of four new Boeing 767s, the company’s first widebody aircraft, which will be used on longer-haul routes to Hawaii and London.
Those routes will be profitable this year, but they also fit into WestJet’s longer-term expansion strategy.
“We want to make sure that we’re building the business and developing it for the medium and long term,” said chief financial officer Harry Taylor, adding that the company’s credit metrics and earnings will continue to be strong despite the weakness in Alberta.
“The wolf is not at the door.”