WestJet Flying to Dublin Heightens Air Canada Showdown

WestJet Airlines Ltd. (WJA)’s first foray into Europe positions the Calgary-based low-fare carrier to compete head-on with Air Canada (AC/A) in the trans-Atlantic market by the end of the decade.

After starting seasonal daily service in June to Dublin from St. John’s, Newfoundland, the country’s second-biggest carrier will decide by November whether to add other European destinations beginning in 2015, Executive Vice President Bob Cummings said. He wouldn’t identify those prospective cities.

“Dublin is the first toe in the water to perhaps another frontier or horizon for us -- flying trans-Atlantic,” Cummings said in a telephone interview from Calgary. “There is the potential for us to fly to four or five cities out of Atlantic Canada.”

Serving multiple European venues would cement a shift into long-haul operations from WestJet’s roots as a discounter in western Canada. Possible future destinations include London’s Stansted airport, Edinburgh and Manchester, England, spurring orders for wide-body planes, said Ben Cherniavsky, a Raymond James Ltd. analyst in Vancouver.

WestJet began operations in 1996 with three single-aisle Boeing Co. 737s serving five cities. Its network now spans more than 80 cities, mostly in Canada and the U.S. along with Central America and the Caribbean. Fadi Chamoun, a BMO Capital Markets analyst in Toronto, predicts regular European service within five years.

Fully Fledged

“I’d be very surprised if WestJet isn’t flying trans-Atlantic by the end of the decade,” Chamoun said in a telephone interview. “I think of this as a five-year proposition. By 2018, they would become a fully fledged mainline carrier.”

WestJet rose 0.2 percent to C$28.12 at the close in Toronto, boosting its gain this year to 42 percent. That compares with a 7.1 percent advance in 2013 for Canada’s benchmark Standard & Poor’s/TSX Composite Index.

The widely traded Class B shares of Air Canada (AC/B), the country’s largest airline, have more than quadrupled in 2013. Today they fell 2.8 percent to C$7.71 after Cameron Doerksen, an analyst at National Bank Financial in Montreal, cut his rating to sector perform from outperform. In a note dated yesterday, he cited an “ultra-competitive” market for trans-Atlantic flights in 2014.

Stock Ratings

Chamoun and Cherniavsky both rate WestJet as market perform, and Doerksen lists it as sector perform. They’re among four analysts who recommend a hold on the stock, compared with 12 who say buy, according to data compiled by Bloomberg.

Chief Executive Officer Gregg Saretsky led WestJet to net income of C$65.1 million ($61.1 million) in the third quarter on sales of C$924.8 million. Air Canada, led by CEO Calin Rovinescu, had net income of C$299 million on revenue of C$3.48 billion in the period.

WestJet plans to fly to Dublin with a jet seldom used for trans-Atlantic travel: a Boeing 737-700, which can seat 136 people and fly a maximum of 6,115 kilometers (3,800 miles). International carriers such as Air Canada typically use wide-bodies such as Boeing’s 777 or Airbus SAS’s A330, with double the passenger capacity and almost twice as much range.

Dublin is about 3,300 kilometers from St. John’s. Passengers from Toronto, Canada’s largest city, will need to make a stop for a brief aircraft inspection in Newfoundland before the plane continues on to Dublin. The stop is mandated as part of WestJet’s certification for over-ocean flying.

‘Getting Experience’

“Going to Dublin with a 737 is more about learning than anything else,” said BMO’s Chamoun. “It’s not a product that is going to give them the runway to grow share in the Atlantic. You can’t really compete on the Atlantic with a narrow-body. This is about getting experience and a knowledge of the market.”

WestJet will need to order or lease larger jets in the next few years if it’s serious about capturing a meaningful share of trans-Atlantic flying, said Jennifer Radman, a fund manager at Caldwell Investment Management in Toronto, which oversees about C$1 billion and holds WestJet stock.

Royal Bank of Canada funds are WestJet’s biggest shareholder, with a stake of about 3.3 percent, according to data compiled by Bloomberg. Montreal-based asset management firm Letko Brosseau & Associates Inc. is the largest holder for Air Canada, with about 18 percent of the Class B stock, the data show.

International Leader

Air Canada estimates it controls 37 percent of the nation’s market for international flights compared with WestJet’s 4 percent. Robert Palmer, a WestJet spokesman, said the estimates are accurate.

For Air Canada, WestJet’s Dublin route is “immaterial,” Rovinescu said Nov. 19 at an investor conference.

“In our context it’s a very small amount of capacity,” Rovinescu said. “While they may have plans and ambitions in the future, at this stage it’s a non-event as far as we are concerned.”

Air Canada isn’t standing pat in some markets that may be on its rival’s radar. Dublin, Manchester and Edinburgh will be added by June to the network of Air Canada’s low-cost Rouge unit, which began operations in July.

Customer response to WestJet’s Nov. 15 Dublin announcement has been positive, according to the company. The introductory fare from Toronto via St. John’s was C$597. That’s about half of the C$1,096 that Air Canada is now charging for a July flight to Dublin on Rouge.

‘Bigger Opportunity’

“We’re not just another carrier that’s flying over the Atlantic Ocean,” Cummings said. “The fares are low fares, and they are liberating that market. When you look at the Atlantic Canada market into Europe, it can lead to a bigger opportunity.”

That break could come as soon as 2015, with direct flights to “four or five” European cities from Newfoundland and Halifax, Nova Scotia, if demand is sufficient, Cummings said.

“If you drew the circle around St. John’s or Halifax, that does take you to some pretty substantive cities in Europe besides Dublin,” Cummings said. “We’re not tipping our hand by naming the cities, but you are into multiple countries.”

While Chief Financial Officer Vito Culmone said at an investor conference last month that exploratory talks about wide-body planes were under way, Cummings said any such order would likely be at least a few years away.

Instead, WestJet is focusing on the expansion of its Encore regional unit, which will have a fleet of seven Bombardier Inc (BBD/B).- made turboprops by month’s end and 16 more by the end of 2014. Encore seeks to capture part of a C$2 billion market for short-haul Canadian and trans-border flights.

“We do have our hands full with Encore,” Cummings said. “There’s no hurry here in ordering wide-bodies. There’s no imminent announcement here, but we are looking out a long way, and that’s always how we’ve done things.”

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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