WestJet Quarterly Profit Rises 16% as Sales Beat Costs

WestJet Airlines Ltd. rose the most in 10 months after second-quarter profit rose 16 percent and the Canadian carrier said it expects to keep a lid on costs in 2014 amid continued revenue growth.

The shares climbed 3.9 percent to C$28.49 in Toronto, the biggest single-day gain since Sept. 18 and the highest closing price since Dec. 12.

WestJet’s earnings increased as revenue for each seat flown a mile was up 4.8 percent, outpacing the 4.2 percent rise in costs on that basis. The Calgary-based airline also said today that excluding fuel and employee profit sharing, those expenses will climb 1.5 percent to 2 percent this year, down from an earlier outlook of as much as 2.5 percent.

“Second-quarter results were strong across the board,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said in a note to clients. “While costs and capacity are moving higher, the strong demand environment is more than offsetting.”

Second-quarter net income rose to C$51.8 million ($47.9 million), or 40 cents a share, from C$44.7 million, or 34 cents, a year earlier, WestJet said in a statement. Sales gained 10 percent to C$930.3 million, beating the C$913.8 million average of nine analyst estimates compiled by Bloomberg.

After starting service to Ireland last month, WestJet is stepping up its challenge to Air Canada, the country’s dominant carrier. WestJet, Canada’s second-biggest airline, said it will expand overseas in 2016 with the addition of used wide-body aircraft, thanks to a July 28 agreement with Boeing Co. that provides an option to lease or buy 767-300ERW aircraft.

Options Open

WestJet will start flying the refurbished 767s next year within Canada for 90 days to obtain certification before they can be deployed on overseas routes, Chief Executive Officer Gregg Saretsky said today on a conference call.

The company is “keeping all options open” to deploy the 767s, and is considering various routes to Europe and Asia, Saretsky said without being more specific. WestJet has a “pipeline” of wide-body aircraft it could obtain from Boeing if need be, he said.

“We’ll exploit opportunities to bring in additional units if that makes sense and contributes” to profit targets, Saretsky said.

The 767s will seat 262 passengers, compared with 211 for the leased 757s that serve Hawaii, the CEO said. WestJet will have a premium economy section on the 767s, but no business class, Saretsky said. WestJet doesn’t offer business class on any of its planes.

Passenger Growth

Demand for WestJet’s premium economy cabin is such that 2014 revenue from those seats will probably exceed the company’s target of C$50 million to C$80 million, Saretsky said.

Growth in passenger numbers of 6.2 percent helped WestJet fill 79.6 percent of its seats in the second quarter, up from 79.4 percent a year earlier. The airline is expanding its short-haul Encore unit and its premium economy service to lure business-class travelers.

Yield, or the average fare per mile, climbed 4.5 percent to 18.9 cents, WestJet said.

For the third quarter, WestJet today forecast “continued strong traffic and revenue growth.” Revenue for each seat flown a mile will increase at a slower rate than the second quarter’s 4.8 percent, the company said.

Systemwide capacity for all of 2014 will rise 6 percent to 7 percent, WestJet said today. The previous forecast was 5 percent to 6 percent.

“While WestJet is rolling out new capacity, the current demand environment remains well supportive and we currently do not see any market disruptions,” Spracklin said.

Bombardier Options

He rates WestJet shares the equivalent of a hold. The stock had gained 2.3 percent this year, as Canada’s benchmark Standard & Poor’s/TSX Composite Index rose 13 percent.

WestJet exercised options to buy five more Bombardier Inc. Q400 turboprops, which are operated by the Encore short-haul unit, the Montreal-based planemaker said today in a statement. At list prices, the new aircraft are valued at about $167 million, Bombardier said.

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