WestJet Seeks Cost Savings Amid Air Canada Challenge

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WestJet Airlines Ltd., the discount carrier stepping up its challenge to Air Canada, said it plans to cut costs by C$100 million ($100 million) over three years with steps such as boosting the flying done by each plane.

The program won’t result in any layoffs, and any changes to WestJet’s employment levels would be voluntary, Chief Executive Officer Gregg Saretsky said today on a conference call. Managers recently met with employees of the Calgary-based airline to brief them on the plan, he said.

WestJet estimates its costs are 10 percent to 15 percent lower than those of Air Canada, and it wants to widen the gap, Saretsky said. The airline’s Encore regional unit will debut in mid-2013 to compete with Air Canada and seek part of a C$2 billion market for short-haul Canadian and trans-border flights.

“As an airline ages, there are a lot of legacy costs that start to creep into the business model,” Saretsky said. “We’re just taking a bit of a pause and saying: ’Let’s take a long look at all the costs that have come into the model and see how much of that we can actually work in the opposite direction.’”

Potential changes may include increases in so-called fleet utilization, or the amount of time each plane flies. Other shifts may be to replace contractors with full-time employees at lower rates of pay, and increased automation to replace manual processes, Saretsky said.

Call-center employees are now being assigned to work from home, which will free up square footage and eliminate the need to construct an office building, he said.

‘Ripping Out’

WestJet wants to be “smart and pensive about where this money comes from, as opposed to ripping things out for the sake of getting that benefit in 2013,” Saretsky said. He said he doesn’t expect much savings this year. Capital expenditures will probably be C$430 million to C$450 million, WestJet said.

WestJet fell 0.9 percent to C$22.34 at the close of trading in Toronto. The shares have gained 67 percent in the past 12 months, outpacing a 1.6 percent advance by the benchmark S&P Toronto Stock Exchange Composite Index.

Saretsky commented today after WestJet posted higher fourth-quarter earnings than analysts estimated and boosted its dividend 25 percent after operating fuller flights.

Profit of 46 cents a share compared with an average projection of 43 cents from analysts in a Bloomberg survey. Net income at Canada’s second-largest carrier rose 71 percent to C$60.9 million ($61 million), from C$35.6 million, or 26 cents a share, a year earlier, the company said.

‘Good Indications’

WestJet declared a dividend of 10 cents a share, up from 8 cents, payable on March 28 to shareholders of record as of March 13. The company said it plans to buy back as much as 5 percent of its outstanding shares.

The dividend increase and announcement that WestJet will continue a share-buyback program “are good indications that management is confident in their ability to generate strong free cash flow growth,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said in a note to clients. He rates the shares outperform.

WestJet agreed last year to purchase 20 Bombardier Inc. Q400 aircraft for its regional unit through 2016, with options for 25 more. Encore plans to take delivery of seven turboprops each this year and next, Chief Financial Officer Vito Culmone said.

Full Flights

The airline said today it signed an C$820 million commitment with Export Development Canada, which will provide financing support for the Bombardier planes. The company plans to announce an initial schedule for Encore on Feb. 11.

WestJet is in discussions with Boeing Co. about the 737 Max and “how it might fit in our fleet, and whether or not we want to go forward with an order for Max, but there’s nothing definitive to report right now,” Saretsky said.

In the fourth quarter, WestJet filled 81.9 percent of its seats, an improvement of 3.2 percentage points from a year earlier. Through January, the carrier had posted occupancy records for each of the past seven months.

To boost revenue, WestJet is preparing to introduce so-called premium economy seating aimed at business travelers who want extra legroom. The reconfiguration, which involves the installation of four rows of seats with 36 inches of legroom, will be fully completed by the end of the first quarter, WestJet said in a regulatory filing today.

The airline plans to introduce three bundles with varying fares and additional services, starting in the first half of this year, to take advantage of the new seating. The bundles will generate additional revenue of C$50 million to C$80 million annually, the company said today.

(Updates share prices in eighth paragraph.)
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