WestJet Airlines Ltd. reported its first quarterly profit loss in 13 years on Tuesday following a turbulent second quarter that saw the airline narrowly avoid a pilots’ strike, but absorbed soaring jet fuel prices.
“Our 2018 results are off track from the path to our 2020 targets and we are now operating in a very different fuel and competitive environment against earlier assumptions,” WestJet’s chief executive Ed Sims told analysts on a conference call on Tuesday.
“To maximize our returns for this challenging period, we are taking action to improve interim results while also re-evaluating the pace and implementation of our strategic initiatives.”
The Calgary-based airline reported a loss of $20.8 million, or 18 cents per diluted share, in the three-month period ending June 30, down from a $48.6 million profit, or 41 cent per diluted share, during the same time in 2017. Although the results were slightly better than analysts had anticipated, the loss drove WestJet’s stock down as much as 10 per cent on Tuesday. The share price closed at $18.32, down 8.17 per cent.
The threat of WestJet’s pilots going on strike in late May led to the company losing “tens of millions of dollars” in revenue due to cancellations and passengers turning elsewhere to book flights, Sims told analysts. The pain of the labour issues is also expected to have some impact on bookings in the third quarter, he said.
At the same time, jet fuel prices in the second quarter surged nearly 31 per cent from a year earlier, putting pressure on WestJet’s operating expenses. The airline said it expects fuel costs to increase by 35 and 38 per cent in the third quarter, compared to the same time last year.
Meanwhile, oversupply in the domestic market has offset strong passenger demand. Sims pointed to the widespread introduction of basic fares, collapsing of advanced purchase requirements and removal of peak-season fare premiums being used to deal with the overcapacity.
“We are reviewing all opportunities to remove underperforming capacity and will reduce planned fourth quarter WestJet and Encore available seat miles by almost six percentage points, the most significant capacity adjustment of any of our peers,” Sims said.
WestJet’s rival Air Canada last week said it will hike fares and also consider adjusting capacity to offset rising energy prices.
The rising cost of jet fuel and non-fuel costs would make WestJet’s path forward difficult, Cowen analyst Helane Becker wrote in a note to clients Tuesday.
“WestJet is adjusting 2018 capacity growth, but margin deterioration should continue through the rest of the year,” Becker said. “This was a challenging quarter for the company, and management is likely happy to move on from (the second quarter).”
The rising cost of fuel and increased supply in the domestic market comes as WestJet pursues an ambitious growth strategy of launching its ultra low-cost carrier Swoop while also preparing for international expansion. It’s a strategy that many analysts have expressed skepticism over.
While the labour strife with the pilots union may have been resolved, National Bank of Canada analyst Cameron Doerksen warned in a note to clients that labour uncertainty may not be going away anytime soon.
“Although the threat of a strike by WestJet’s pilots is over, the final terms of the new contract remain unknown with our expectation that pilot costs could move higher,” Doerksen wrote.
“WestJet’s flight attendants group also recently moved forward with its unionization efforts creating further uncertainty surrounding labour. We believe further unionization within WestJet’s other employee groups is inevitable with the likely outcome being labour cost inflation.”
Doerksen also noted there is still “elevated execution risk” in the company’s strategy.
“Recent turnover in WestJet’s senior management further exacerbates the execution risk, in our opinion,” he wrote.