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Here’s why WestJet is dropping airfares and ‘filling planes’

Sharply lower fuel costs – thanks to oil’s slide – are creating the opportunity WestJet has been waiting for.
Sharply lower fuel costs – thanks to oil’s slide – are creating the opportunity WestJet has been waiting for. THE CANADIAN PRESS/Darryl Dyck

It’s a good time, or at least a better one, for WestJet customers than for shareholders, experts say. That’s because one group is saving money while the other is losing it (at least on paper) as the Calgary airline’s stock price skids lower.

Analysts whose job is to steer clients into the best money-making opportunities on the stock market seem annoyed with WestJet, mainly because it’s adding a lot of capacity and new routes that need to be filled by customers.

That’s putting pressure on the carrier’s bottom line and the bottom lines of other airlines who compete with it, like Air Canada.

“How are you going to fill those seats if it’s not through a strategy of bringing lower fares to travellers,” Walter Spracklin, an analyst at RBC Capital Markets said. “Where is that traffic going to come from unless you make a meaningful … reduction in your fares.”

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WestJet’s answer is that it’s unapologetically offering attractive airfares in a concerted attempt to stir demand for its regional service, Encore, as well as its main network of routes across the country. That’s directly feeding into the carrier’s ambitions to grow into a bigger international player.

MORE: Lower airfares to Europe? WestJet moves signals discounts on horizon

“We’re not apologizing for the capacity growth. We’re making a lot of Canadians happy and we’re filling up a lot of planes,” Gregg Saretsky, chief executive of the Calgary-based carrier, said.

“When you bring in fares that are [sometimes] reduced 30 to 40 per cent … like we’ve done all over Atlantic Canada and Western Canada, we’re seeing growth.”

Pedal down

Sharply lower fuel costs – thanks to oil’s slide – are creating the opportunity WestJet has been waiting for. The carrier is earning lots of money from what it’s saving on fuel, booking record earnings even as it spends on new planes, routes and lower airfares.

‘We’re making a lot of Canadians happy and we’re filling up a lot of planes’

“We think the company will step on the growth pedal when external conditions permit,” David Tyerman, analyst at Canaccord Genuity, said. “The current period is such a period.”

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“Low fuel prices have provided a windfall profit that WestJet has translated into balanced growth,” Tyerman said in a research note on Wednesday. “No doubt many analysts and investors would prefer WestJet pursue the American airline approach of focusing only on [return on invested capital] through controlled capacity. This does not seem to be the WestJet way.”

Or at least it’s not the current WestJet way, which is to invest in getting bigger, including cash put toward new widebody jets destined for new routes further afield such as London’s Gatwick airport.

“The sharp decline in fuel prices in such a short period has presented management with an interesting opportunity to move ahead with investments and strategic evolution into the international market,” RBC’s Spracklin said in a research note.

Shares have been punished though, with investors hammering the stock price lower by 30 per cent in the last six months.

Mainline airline

In addition to newly announced plans to fly to London, WestJet has announced beefed up regional service in Alberta this summer, as well as new planned routes to destinations like Florida, Mexico and Costa Rica.

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The rush to add capacity will slow substantially toward the end of the year and throughout 2016, experts suggest. Fares will rise when oil prices recover, too.

At that point, WestJet will have laid the groundwork to complete its evolution from scrappy lower-cost rival to Air Canada into one who has the scale and heft of a “mainline airline.”

“Rather than being undisciplined, we see management’s capacity expansion as a function of its longer-term growth strategy as it ‘grows into’ becoming a mainline airline,” RBC’s Spracklin said.

WATCH: WestJet is expanding flights from the Edmonton International and increasing service to some destinations. Michel Boyer reports.

jamie.sturgeon@globalnews.ca
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