With higher demand and fuller flights, WestJet Airlines Ltd. reported a soaring, 80-per-cent rise in quarterly profit.
A number of positive factors have helped the Canadian airline industry recently, from growing demand by travellers to rising airfares.
WestJet noted its record-high load factors – financial shorthand for calculating the fullness of flights over distances travelled – when announcing Wednesday that it posted a third-quarter profit of $70.6-million, or 52 cents a share, up from $39.3-million, or 28 cents, in the same period a year ago.
Fuel costs have had a lot to do with the industry’s increased emphasis on filling planes rather than offering more flights.
“It’s mainly more a function of fuel prices. Fuel is a third of our expenses, and it has risen up dramatically over the last five years,” said WestJet’s president and chief executive officer, Gregg Saretsky. “So, I think airlines have to run higher load factors, and certainly that is our plan.”
Given its strong quarter, WestJet executives were confident they are introducing the airline’s new regional carrier, WestJet Encore, at an opportune time.
“Everything remains on track for the planned launch in the second half of 2013,” Mr. Saretsky said.
Analysts also see few signs of demand slipping for WestJet’s services.
“Management noted that forward bookings continue to point to strong demand for air travel and, as such, they expect operating margins to expand once again,” said RBC Dominion Securities analyst Walter Spracklin. He sees strong demand and healthy financial performance to continue unabated. “We have no indications to assume otherwise,” he added.
Robert Kokonis of airline and travel consulting firm AirTrav also foresees a positive scenario for the carrier. “Absent any significant shocks to the Canadian economy or resurgent fuel prices, WestJet should also post healthy gains in the [fourth quarter].”
WestJet still would not say whether Encore will begin first in Western or Eastern Canada. However, the company announced that Ferio Pugliese, currently WestJet’s executive vice-president of people, culture and inflight services, is now president of the regional carrier. Encore’s full unveiling is now scheduled for Jan. 21.
The question is how much the cost of starting Encore will eat into WestJet’s currently strong financials. “With respect to Encore, we have a lot of expenses that we will be incurring before the first aircraft flies in the [second] half of next year. So that will be quite a drag on earnings,” Mr. Saretsky said.
On the other hand, he noted that the new “premium economy” class coming early next year, offering roomier seats and geared toward business travellers, is expected to bring an immediate earnings boost.
As a result, WestJet executives told analysts that they expect to absorb Encore’s startup costs without much undue impact on earnings and to maintain the company’s target of a return on invested capital of 12 per cent.
Competition is widely expected to heat up when Encore begins flying to smaller communities, making in-roads into markets served by Air Canada Express and others.
However, WestJet told analysts it will likely be driving that competition, notably by offering lower airfares – rather than being forced by other carriers to heavily discount its ticket prices.
“These small communities are victims of monopoly airfares that are very, very high,” Mr. Saretsky added.