Gordon C

WestJet's new baggage
No longer an upstart, carrier feels growing pains

Chris Sorensen
Financial Post

Saturday, February 19, 2005

WestJet Airlines Ltd.'s decision to battle rivals with more aggressive pricing is worrying analysts -- not because it is an abrupt shift in strategy, but because it suggests deeper problems for the company and the industry as a whole.

After posting its first-ever quarterly loss of $46-million, WestJet chief executive Clive Beddoe said this week the airline plans to offer more lower-fare seats to maintain market share and protect key routes from advancing competitors.

With this move, WestJet is shifting from its strategy of improving profit margins by adding such extras as leather seats and live television to its planes, allowing it to charge more for tickets.

Among the fears is that WestJet's decision to offer more low fares, although good news for consumers, will further depress industry yields, or the amount of money airlines earn on each seat sold.

"When the one player who has been, more or less, the most disciplined operator decides to chase price, it's not very good for the industry in general," said Nadi Tadros, an analyst at Desjardins Securities.

"That means lower pricing for everybody. And in that case, nobody really wins."

WestJet, however, is gambling that its lower cost-structure -- which should be reduced further with management's decision to speed up the replacement of its ageing Boeing 737's with more fuel-efficient models -- will allow it to run its smaller rivals into the ground.

In addition to a rejuvenated Air Canada, Calgary-based WestJet now faces stiff competition from Jetsgo Corp. and CanJet Airlines on several key routes. "We cannot let any carrier gain a foothold in any sector of our market," Mr. Beddoe said during a conference call.

But heightened competition is only one of many problems faced by WestJet -- and it's far from clear whether a strategy of filling more planes with cheaper fares will help matters.

Like other carriers, the airline is grappling with dramatically higher fuel costs, airport fees and navigational charges. In addition, the company has been forced to absorb legal costs associated with a $220-million Air Canada lawsuit that alleges WestJet stole confidential route information.

Mr. Tadros, who this week downgraded WestJet's shares to "sell," calculated a 16% year-over-year increase in costs for WestJet flights of comparable lengths.

Meantime, WestJet's load factor, or percentage of seats filled on its planes, dropped to 67.5% in the most recent quarter, compared with 70.3% during the same period the previous year.

The company blamed part of the decrease in loads on problems with its computerized booking system, which has since been fixed.

However, at least one analyst suggested WestJet's weakened third- and fourth-quarter results may also be attributed in part to WestJet's lack of access to Air Canada's booking information -- currently the subject of the carrier's lawsuit against WestJet.

"We believe the information ... was potentially very valuable and could have allowed the company to better manage its seat inventory," wrote Claude Proulx, an analyst at BMO Nesbitt Burns, in a research note.