Shares in Canada’s most profitable, low-fare air carrier have been in slow descent since the beginning of the year as WestJet Airlines continues to absorb the effects of rapid expansion, stubbornly high fuel prices and stiff competition.
Calgary-based WestJet was the darling of the industry last year as bad news hammered main rival Air Canada during the latter’s ongoing efforts to restructure. With its low costs and consecutive years of profits, WestJet’s shares nearly doubled in value as its planes finally stretched from Pacific to Atlantic, landing in Newfoundland as well as reaching the big markets of Montreal and Toronto.
But things are different this year. Despite the company’s three-for-two stock split in early May, the shares have lost more than 37 per cent of their value from their January highs. Analysts who had been expecting WestJet to report much higher load factors – the proportion of seats filled – scrambled to lower their estimates for the company.
“The little airline that could, did; and it is no longer a little airline – it’s a big airline,” says independent analyst Rick Erickson.
“It’s the second-largest airline in the country by far and it’s starting to face some of the larger airline challenges.”
Many of those challenges, says Erickson, emanate from a fundamental change in strategy.
WestJet began operating more than eight years ago with three aircraft and 220 employees, flying routes between Vancouver, Kelowna, B.C., Edmonton, Calgary and Winnipeg.
Expansion focused on niche markets that were under-served by the competition, such as Abbotsford in British Columbia’s Fraser Valley and Thunder Bay in northern Ontario.
“They’re not getting quite the same returns as they would in other marketplaces where they were the dominant player,” says Erickson. “And you may well argue that it was a pretty quick transition to leave Hamilton and go into Toronto – brand recognition may not have been as strong in Eastern Canada as the WestJet folks would have liked.”
Clive Beddoe, WestJet’s chairman, president and chief executive, says it was inevitable that his airline would go head-to-head with not only Air Canada, but other new discount carriers such as Jetsgo and CanJet Airlines.
And he says it will take a little time for the expansion to produce tangible results.
“Our load factors are down because we’ve launched such a huge initiative into the Toronto area and it’s unrealistic to imagine that we were going to be able to take Toronto from 66 flights a week to 210 flights a week in the course of two months and not have an impact,” Beddoe told The Canadian Press.
“So that’s short-lived and that’s to be expected.”
Beddoe says the drop in WestJet’s stock value is due to the market’s fixation on quarterly results and the correct assumption that there will be a short-term drop.
“In order to grow the company the way we’re going, we’ve got to invest in the future,” he says. “And that takes energy, time and capital – so it’s part of the cost of growing the airline.
“The fundamentals haven’t changed. Not one little bit.”
And WestJet continues to expand. This fall, it will begin regularly scheduled flights to Los Angeles, San Francisco, Phoenix and the two Florida cities of Fort Lauderdale and Orlando.
But analysts are still curtailing their expectations, and WestJet’s stock continues to drift downward.
After the company revealed that its May load factors were down seven per cent from last year to 65 per cent, the research report from Raymond James read: “May traffic stinks.”
Analyst Ben Cherniavsky wrote: “We are walking away from all of this analysis with increased uncertainty about and reduced confidence in our numbers, which in turn compels us to drop our target multiple for this stock.”
Another disappointment for WestJet has been the delays in getting its fleet of new Boeing 737-700 planes fitted with LiveTV by the end of June.
The unexpected length of time involved in getting approval for the in-seat television screens has not only been an embarrassment, but costly as well, with three airplanes out of service waiting for the installation. Beddoe said even if the approvals came tomorrow, WestJet would not disrupt its summer schedule and no work will be done until autumn.
Another diversion for WestJet is its defence of a lawsuit filed by Air Canada, alleging that one of its employees – who used to work at Canadian Airlines International – used old passcodes to access a private Air Canada website that shows where space is available on planes and whether that space is likely to remain available.
Though the case has not yet been heard in court, the suit seeks punitive damages of $5 million, and could involve millions more in revenue and profits Air Canada says it lost because of the alleged snooping.
With all of this on the company’s plate, WestJet investors will have to be patient and wait for a recovery, says Sara Elford, an analyst with Canaccord Capital. “WestJet has the lowest costs in the industry and so, longer term, should grow and prosper,” says Elford.
“That said, there are certainly many challenges in the short term, including the cheapest fares Canadians have ever seen, incredibly high fuel prices, and rising surcharges and fees.”
