UPDATE 3-WestJet eyes higher fees, cost cuts to offset weak Canadian dollar

Tue May 6, 2014 12:07pm EDT

(Recasts with focus on costs and higher fares)

By Susan Taylor

TORONTO May 6 (Reuters) - WestJet Airlines Ltd will try to cut more costs and notch fees and fares higher, the country's second-largest airline said on Tuesday, as it grapples with a weaker Canadian dollar that is driving up expenses.

The carrier, which is expanding its regional subsidiary into eastern Canada and launching trans-Atlantic service this summer, said its first-quarter results took a C$33 million ($30.10 million) hit from foreign exchange.

The Calgary, Alberta-based airline has no plans to add a currency surcharge, Chief Executive Gregg Saretsky said on a conference call, but it will fight the "FX problem."

"Airlines get into trouble when all they do is just keep raising their airfares," he said. "You'll see us continue to work through the balance of the year both on cost reduction and on revenue initiatives."

A falling Canadian dollar hurts airlines because they make major purchases in U.S. dollars, including fuel and planes.

The low-cost carrier, which has cut some C$125 million from annual expenses, will mull higher ancillary fees for services like seat reservations, and fare increases that do not hurt demand.

Ancillary revenue jumped 37 percent in the first quarter to C$50.7 million, WestJet said, as it made gains with tiered ticket pricing and premium economy seating.

Since WestJet introduced a system-wide 2 percent fare increase in February, it has twice lifted fares in specific geographic markets.

WestJet said it expects second-quarter costs, excluding fuel and profit sharing, to increase 3-4 percent. That pace will moderate in the second half of the year, management said, resulting in a full-year increase of 2-2.5 percent.

"We were very encouraged to hear the CEO speak to a much improved traffic and yield environment," RBC Capital Markets analyst Walter Spracklin said in a note to clients. "The company is now pointing to a ramping demand environment."

Yield, or revenue per revenue passenger miles, rose 1.2 percent in the first quarter, a positive trend that would continue into the second quarter, WestJet said.

The carrier, which will boost system-wide capacity by 4.5 percent in the second quarter, said it continues to consider an expansion with wide-body planes, but a decision remains at least a year away.

WestJet will test the trans-Atlantic market with daily non-stop flights to Dublin, Ireland from St. John's, Newfoundland starting in June. It will use narrow-body Boeing 737 aircraft for the route, but is talking to its pilots, plane makers and lessors about using wide-body planes on such routes.

"We're looking for markets that are burdened by very high fares and there are lots of those in the international space," Saretsky said.

Such a move would heighten competition with Air Canada and its discount vacation carrier Rouge.

WestJet's reported a net first-quarter profit of C$89.3 million, or 69 Canadian cents per share, up from C$91.1 million, or 68 Canadian cents per share, a year earlier.

Excluding the impact of a C$20.1 million tax recovery, earnings were about 58 Canadian cents a share, the company said.

Revenue rose 7.7 percent to C$1.04 billion.

WestJet also announced a buyback program under which it could repurchase up to 2 million shares.

During the quarter, costs per available seat mile rose 3.8 percent, excluding higher fuel and lower profit sharing expenses. Capacity was 8 percent higher, but the load factor, or percentage of available seats filled with paying customers, fell to 83.1 percent from 84.3 percent.

WestJet shares were down 1.7 percent, or 43 Canadian cents, at C$24.54 on the Toronto Stock exchange at midday Tuesday. ($1 = 1.10 Canadian dollars) (Additional reporting By Shubhankar Chakravorty in Bangalore; Editing by Savio D'Souza, Sofina Mirza-Reid and Meredith Mazzilli)

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