Canada's WestJet Airlines Ltd (WJA.TO) offered a disappointing revenue outlook for the current quarter on Wednesday, sending its shares lower, even as it posted a stronger-than-expected jump in profit for the final three months of 2012 and boosted its dividend.
The outlook raised concerns that Canada's No. 2 air carrier could find it hard to maintain its record of strong growth against the backdrop of a tempered economic outlook for Canada and heightened competition.
"Revenue growth is clearly decelerating. They are talking about modest growth in Q1. By the time you get to the fourth quarter they will be lucky to be flat," said Raymond James analyst Ben Cherniavsky.
After a strong 2012, Cherniavsky is forecasting a tougher, more competitive 2013 for Canada's airlines as both WestJet and bigger rival Air Canada ACb.TO launch lower-cost subsidiaries. At the same time, the Bank of Canada has lowered its 2013 GDP forecast and Canadian household debt is at record levels.
National Bank Financial analyst Cameron Doerksen was more sanguine about WestJet's prospects, saying a 71 percent rise in fourth-quarter profit and expectations of a moderate increase in revenue for the first quarter were enough for him to re-affirm his positive view on the stock. He increased his target price to C$27 from C$26.
After starting the session firmer, the shares later fell 21 Canadian cents to close at C$22.34 on the Toronto Stock Exchange. The stock has risen 66 percent in the past year.
In a note to clients, Doerksen forecast a 21 percent rise in WestJet's earnings in 2013, driven by strong demand for air travel and WestJet's introduction of several revenue-generating initiatives this year, including premium economy seating in the second quarter.
WestJet, which started life as a low-cost airline 16 years ago, but is adding premium services as it searches for ways to increase revenue, said it was working to slash C$100 million ($100.33 million) off its cost base in the next three years.
The main reason is to get "back to our fundamentals of being Canada's low-fare airline and needing to have a cost structure that can continue to support that," WestJet Chief Executive Gregg Saretsky said on a conference call.
The cost cutting will start slowly with little impact in 2013, Saretsky said. It will not include job reductions, he said, but will target items such as back-office costs and replacing contractors with lower paid full-time employees.
As part of its new revenue-generating initiatives, WestJet is launching lower-fare regional airline Encore in the second half of the year. It will compete head-on with Air Canada on some routes to smaller cities and towns where Canada's biggest airline has enjoyed a monopoly.
Saretsky said WestJet will release on February 11 the schedule for Encore's initial two aircraft, which will be delivered in June. From August on, Encore will take delivery of one aircraft a month until the end of the year and schedules for those planes will be announced as they arrive.
WestJet's fourth-quarter earnings rose 71 percent to C$60.9 million, or 46 Canadian cents a share. That was ahead of analysts' average expectations of earnings of 42 Canadian cents a share, according to Thomson Reuters I/B/E/S.
Revenue increased 10 percent to C$860.6 million, while its load factor, the percentage of available seats filled with paying customers, rose to 81.9 percent for the quarter from 78.7 percent a year earlier.
The Calgary-based company raised its quarterly dividend by 25 percent to 10 Canadian cents a share. It also announced a plan to buy back up to 5 percent of its outstanding shares.
WestJet expects a moderate rise in revenue per available seat mile, a measure of an airline's profitability based on its per seat earnings, and margin expansion in the current quarter.
It also expects its 2013 costs per available seat mile to rise by 2 percent to 3 percent year over year, excluding fuel and employee profit-sharing costs.
(Additional reporting By Maneesha Tiwari in Bangalore and Solarina Ho in Toronto; Editing by Frank McGurty and Andre Grenon)