WestJet Plunges as Capacity Gains Seen Hurting Profit

WestJet Airlines Ltd. fell the most in almost four years amid concern that additional flights will crimp profit as competition with larger rival Air Canada escalates.

Canada’s largest discount carrier said today it expects a “moderate decline” in second-quarter revenue per available seat mile as system capacity climbs 9 percent to 10 percent in the period. Capacity will climb 7.5 percent to 8.5 percent for all of 2013 after a 6 percent first-quarter increase, Calgary-based WestJet said in a statement.

Less than a week ago, Air Canada predicted further pressure on 2013 fares as its first-quarter yield dropped with competitors adding seating and offering lower prices on some routes in North and South America.

“There’s a high degree of anxiety about capacity growth,” David Tyerman, an analyst at Canaccord Genuity, said in a telephone interview from Toronto. “This industry has a long bad history of airlines pursuing their own growth agenda which ends up destroying profitability for everybody. And of course WestJet and Air Canada both have growth agendas.”

WestJet dropped 7.5 percent to C$22.87 at the close of trading in Toronto, the largest single-day drop since June 2009. Air Canada tumbled 7.6 percent to C$2.32, its lowest level since Feb. 21.

Yield, or average fare per mile, has declined since the start of the second quarter after climbing just 0.7 percent in the first three months of 2013, WestJet Executive Vice President Robert Cummings said today.

Lower Yield

“In deploying more capacity, we’ve done so with a bit of a reduction on the yield side,” Cummings told analysts on a conference call. “Yields aren’t significantly down, but with more capacity deployed, and a trend toward slightly less bookings close in, we have the yield backing off a little bit.”

First-quarter yield showed “the weakest year-over-year growth WestJet has reported since the second quarter of 2010,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said in a note to clients. “Increasing domestic capacity is starting to weigh on the significant pricing strength the Canada airlines have enjoyed over the last couple of years.”

WestJet is working toward the start of its Encore regional unit, which will compete with Air Canada and seek part of a C$2 billion market for short-haul Canadian and trans-border flights. Encore will begin daily service on June 24 from Calgary and Vancouver, WestJet said today.

Air Canada

Air Canada responded Feb. 1 by introducing turboprop service in Western Canada, WestJet’s backyard, and boosting available seats to meet demand.

“Encore will add capacity into the regional market, which Air Canada is trying to defend,” Tyerman said. “The worry is that profits will start dropping because too much capacity being put in negatively impacts pricing.”

WestJet’s profit of 68 cents a share in the first quarter compared with the 64-cent average of projections from analysts in a Bloomberg survey. Net income climbed to C$91.1 million ($90.7 million) from C$68.3 million, or 49 cents, Calgary-based WestJet said today.

Traffic results for April, which WestJet released separately today, showed planes were 82.7 percent full on average, a drop of 3.5 percentage points from the same month a year earlier. WestJet is seeing “stronger bookings” so far in May and June, Chief Executive Officer Gregg Saretsky said without being more specific.