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WestJet Airlines Ltd faces challenging 2016 thanks to high exposure to weak Alberta

Calgary-headquartered WestJet appears to be at great risk in 2016 because of its high level of exposure to Alberta, where the economy is thought to have contracted in 2015 due to the oil price rout.

The bloom came off the rose for Canadian airline stocks in 2015 despite plunging fuel costs, and 2016 could prove to be even more challenging as capacity additions continue to eclipse economic growth.

The quotable Gregg Saretsky: WestJet CEO on Air Canada competition, unionization and more

Chris Bolin for National Post

On Air Canada’s decision to offer Rouge flights to London’s Gatwick airport, a few days after WestJet did the same:

“I was not surprised, not surprised at all. … Wherever we’ve gone, they’ve come into the market behind us and then often exit, so they’ve been in and out of markets all across Canada. I think my favourite market is Abbotsford where they’ve been in and out four or five times.”

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After impressive gains in 2013 and 2014, shares of both Air Canada and WestJet Airlines Ltd. ended the year with double-digit declines amid investor fears “that the Canadian market is plagued by carriers that are adding too much capacity into a weak economic environment,” according to a recent analysis by Ben Cherniavsky, who follows the airlines for Raymond James.

In the first 11 months of the year, Canada’s two biggest airlines added seven per cent more capacity to the market between them in an economy that’s eking out growth of about one per cent, according to Cherniavsky.

And Calgary-headquartered WestJet appears to be more at risk because of its high level of exposure to Alberta, where the economy is thought to have contracted in 2015 due to the oil price rout.

“Who knows exactly where we are in that cycle, but it doesn’t feel like we’re at the bottom yet,” WestJet CEO Gregg Saretsky said in a recent interview.

“I think things are going to get a lot worse in Alberta before they get better, and we’re sort of sitting here in the epicentre of a storm … 25 per cent of our capacity originates in Alberta.”

Saretsky said the Alberta economy is the greatest challenge facing WestJet in 2016, but he’s prepared to redeploy the airline’s fleet as needed.

“It’s not like we’ve built a hotel in a destination nobody wants to travel to anymore; we can actually pick up our planes and say we’re going to fly them in different places,” he said.

“As we think about 2016 and what we’re going to need to do, you’re going to see a fair amount of redistribution of our capacity away from some of these softer markets into markets that are a little more robust,” like Central Canada and other parts of Western Canada, he added.

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