WestJet expects strong 2013 on internal changes, passenger demand

WestJet Airlines says it’s poised for another strong year in 2013 as it launches a new regional service, introduces new fare options designed to lure business travellers and seeks to cut $100 million in costs to reinforce its cost advantage over Air Canada.

On Monday, the Calgary-based airline will disclose whether its regional carrier, WestJet Encore, will initially serve the East or the West after it receives its first two Bombardier Q400s in June, the first time the company has used turboprops.

Over time, WestJet plans to grow the Encore fleet to serve more of the country and will fund the aircraft purchase with the assistance of $820 million in funding from Export Development Canada.

Next week’s announcement, expected to reveal whether Encore will be based in Calgary or Toronto, follows a 2012 profit of $242.4 million for the airline, up 63 per cent from the previous year.

“What a great year,” president and CEO Gregg Saretsky said Wednesday during a conference call with analysts.

The year ended on a high note with $60.9 million or 46 per diluted share of net income in the fourth quarter ended Dec. 31, the best quarter in the company’s history excluding one-time gains in 2007 from lower federal taxes. The results were up more than 70 per cent from net earnings of $35.6 million or 26 cents per share a year earlier.

Revenue rose to $860.6 million from $781.5 million in the fourth quarter of 2011.

WestJet’s (TSX:WJA) 2012 full-year profit amounted to $1.78 per share with almost $3.43 billion in revenue.

The addition of Encore and a new fare structure that will be accompanied by a reconfiguration of its Boeing 737s to include “premium economy” seating are meant to further attract corporate and well-heeled travellers. The company said revenue from corporate customers grew by more than 20 per cent last year.

The new fare structure and premium seat offering are expected to add $50 million to $80 million in annual revenues, which analysts expect will drive a 25 to 40 cents per share boost to its bottom line.

“This will enable us to go to another level yet,” added Bob Cummings, executive vice-president, sales, marketing and guest experience.

The airline announced that it plans to renew its share buyback program and will raise its quarterly dividend by 25 per cent. The payout will increase 10 cents from eight cents effective March 28 to shareholders of record on March 13.

It also unveiled a plan to cut $100 million of costs over 36 months to regain some of the cost advantage lost to Air Canada (TSX:AC.B) when its rival trimmed $530 million of costs.

“Even with Air Canada’s transformation, we believe our costs are still somewhere between 10 and 15 per cent lower than Air Canada’s,” said Saretsky. “This business transform is meant to create even a wider gap again.”

WestJet will also examine other ways to cut costs, including reducing the number of back office employees without resorting to layoffs, IT changes and using higher capacity aircraft on some routes.

WestJet was expected to earn 41 cents per share on $856 million of revenues in the quarter, and $1.72 per share on $3.42 billion of revenues for the year, according to analysts polled by Thomson Reuters.

The airline flew 17.4 million passengers last year, up 8.6 per cent from 2011, including 4.3 million in the fourth quarter.

Saretsky said the decision to repurchase up to five per cent of WestJet’s outstanding shares and raise its dividend signals its confidence in the business and commitment to return value to shareholders.

The airline expects moderate revenue per seat mile growth in the first quarter on top of a six per cent increase last year. System capacity is expected to increase 7.5 to 8.5 per cent for the year. Domestic capacity will increase five to six per cent, after declining 0.9 per cent in 2012.

And the company foresees no deceleration in demand from customers.

“We’re not seeing any guest resistance to higher fares which is coming both through the mix and higher ticket prices,” Saretsky said.

WestJet ended the year with $1.4 billion in cash or 41 per cent of trailing twelve month revenue.

Analysts described WestJet’s results as positive and further demonstrating the likelihood of strong results to come in 2013.

“We forecast 21 per cent earnings growth in 2013 driven by continued strong demand for air travel, the introduction of bundled fares and premium economy… and the start-up of WestJet’s regional operation,” wrote Cameron Doerksen of National Bank Financial.

On the Toronto Stock Exchange, WestJet’s shares lost 17 cents at $22.38 in afternoon trading.