Grab a seat & buckle up! - article from plane business

[Flightlevels]

Ah, WestJet. Our favorite airline stock.

While we had assumed the airline was going to do well for the quarter, even we were not prepared for the way WestJet simply blew apart analysts' forecasts for its first quarter performance.

The airline posted net income of C$52.5 million for the quarter, or $0.40. This was up substantially from last year when the airline posted a profit of C$29.8 million or $0.23.

Analysts' forecast here had been for a profit of C$0.27, so the airline blew that forecast number away, handily.

WestJet saw operating revenue rise 27.3%, while operating expenses were up 26%. Operating income rose a whopping 36.4% to C$82.5 million.

Revenue passenger miles were up 19.1% while available seat miles were up 17.9%, resulting in a 0.8% increase in load factor to 81.9%.

Yield was up 6.9% to 17.99 cents/mile, while passenger revenue per available seat mile increased 14.1% to 12.93 cents/mile. Cost per available seat mile was up 6.9% to 12.71 cents/mile, while cost per ASM excluding fuel was down 1.3% to 8.58 cents/mile.

WestJet generated C$102.3 million in free cash flow in the March quarter,
consisting of C$189.8 million in cash flow from operations offset by capital
expenditures of C$87.5 million.

The company ended the quarter with C$784.4 million in cash, about C$131 million higher than at the end of the December quarter. Pretax margin was12% -- the highest of the North American carriers who have reported, and well, we don't see anyone beating them.

(For those with enquiring minds, Allegiant took second place this quarter with an 11% pretax margin, Republic came in third with a 10% margin, and Southwest posted a 3% pretax figure for the quarter. Everyone else? In the negative numbers. We'll have a more complete wrap-up of all the numbers in a forthcoming issue).

On the airline's call this week were Sean Durfy, President and CEO; Vito Culmone, EVP of Finance and CFO; and Bob Cummings, EVP of Guest Experience and Marketing.

Sean knows how to open a call, as he first thanked his fellow 7000 WestJetters, by bragging about them. "We increased our capacity by almost 18%, reported record load factors of nearly 82%, improved our yield by 6.9%, achieved RASM growth of 8%, received three new aircraft, and we announced service to Quebec City as well as New York, through Newark. And we did it while delivering a guest experience unrivaled in the airline industry."

Not a bad first quarter. Oh, and did I mention? They made a profit. And the airline will distribute some $22 million to its employees this month at the airline's annual profit-sharing soiree.

One of the reasons the airline did so well was because it has really fine-tuned its seasonal deployment strategy during the winter months. The airline began to do this a couple of years ago, and now the benefits of shifting capacity in this manner are well-established. In the winter months, WestJet now moves a good amount of its capacity out of domestic intra-Canada flying into more "destination" international flying. I mean, what would you rather do in January -- fly between Montreal and Calgary or between Calgary and Cabo San Lucas. Or Montego Bay, or Puerto Plata?

You see the point.

Vito Culmone, WestJet's CFO then came on the call, and talked in more detail about the airline's financial results.

He had good news as well as he told analysts that this first quarter was the most successful first quarter in the airline's history.

Just a reminder to those of you who might be new to the WestJet story. The airline does not hedge its fuel.

Vito noted that the airline moved about 40% of its capacity around during the quarter. He also noted that even while doing this the airline still managed to post a gain in RASM of 8% while growing the airline by almost 18% during the quarter. Stage length also increased during the quarter, by 6.9%. The airline also increased aircraft utilization by 24 minutes or 3% to 12.4 block hours.

On the fuel side, the airline saw 32% of its operating expenses allocated to fuel expense. This was up from 27% in the first quarter of 2007. Fuel cost per ASM was up 29% when compared to first quarter 2007.

In terms of fleet management, the airline took delivery of three aircraft in Q1, two 700s and one 800, bringing the total fleet at the end of the quarter to 73 aircraft. On February 29, 2008, the airline signed a letter of intent to lease an additional 800 series aircraft, scheduled for delivery in 2011. Including this aircraft, WestJet's future deliveries total 44 aircraft, which brings the total committed fleet to 117 by 2013. "We expect to take delivery of four more aircraft in 2008, two in Q2, and one in each of the last two quarters of 2008," Culmone said.

Looking forward, Culmone said the airline remains "cautiously optimistic." The focus remains on continued revenue growth and cost containment. "Unprecedented fuel prices will continue to put pressure on margins during 2008. Based on current fuel pricing and the current value of the Canadian dollar, our estimated second quarter 2008 fuel costs per liter would be approximately CAN $1.01. This would result in our fuel costs being approximately 45% higher than they were in Q2 2007, on a per liter basis. As such, our low-cost strategy has never been more critical to our financial growth. In Q2, we expect our CASM, excluding fuel and profit share, to continue to decline," Culmone told analysts.

While the airline will see quite a lot of capacity going back into the Canadian domestic market this quarter as a result, Culmone said the airline still sees Q2 bookings as remaining strong so far and "demand for summer travel seems to be holding." The airline now expects its 2008 Q2 RASM to be comparable to 2007 Q2.

At that point it was time for questions.

David Newman with National Bank Financial came on and asked how far the airline thinks it can push RASM growth as the airline heads into the summer. "How far do you think you can push it as you head into the summer on ticket prices, fuel surcharges, ancillary revenues--like, what are your plans, and what should we sort of think about as far as RASM growth for the entire year, including Q1 and Q2?"

Sean responded that the true test of RASM growth would be rising fuel prices, as he said, "It's really the velocity and the speed at which these fuel prices are rising which hampers some of our ability to catch up with fare increases."

He continued, "So for example, when we see--when we're selling a ticket today for someone traveling four weeks in the future, if we're selling at $120.00 combined barrel plus crack spreads, and they're flying at $140.00, and we look at the revenue when they fly, that has a huge impact on us. So one of the strategies that we are looking at very seriously is a fuel surcharge going forward, and we believe that given what's happening with fuel, if we address the fuel problem, then we believe our guests will look at that and understand the predicament we're in."

David came back and he and Sean then got into a discussion of just how far they both thought fares could be pushed higher.

Sean concluded the back and forth by saying, "So I think at the end of the day--boy, people are going to want to fly. I think other forms of transportation have the same impact, and as long as we can continue to stimulate, and we do that on a lot of our route pairings still, we'll be okay. And I think the other side of this is, we understand our customer segments, and we understand who has to fly. And we also understand the demographics today of who is flying. And [former WestJet CEO] Clive Beddoe has said it in the past, a couple of years ago, there's a huge sector of baby boomers who are flying today who are resilient, really, to a recession, and they have a lot of disposable income that's not impacted by it. And we see a lot of that in our traveling population. So you know, David, it is a crystal ball, but we're still very bullish on the entire year."

Cameron Doerksen from Versant Partners came on the call and asked if there were other revenue enhancement items the airline was currently considering.

Bob Cummings replied,

"As fuel has increased so steeply over the last three or four months, we have looked within our business and our business model, and we have looked at what's happening across North America. Sean has mentioned one potential approach that helps us with respect to our shareholder value, as well as covering the increased costs, and doing it in a way that we believe would be transparent, or potentially transparent to the guests in the market. Looking across other services, and what's occurred across North America, we look at those type of changes. We look at it from four perspectives. We looked at--we look at it from the value to the guests, we look at it from our brand and our culture, and would our folks feel good about us taking the approach of charging for this service or that service, or increasing these fees. We also look at our business model, and keeping it simple. And finally, we do look at the competition. So we are assessing a variety of options to help us with the environment at this particular point, and so we have a lot of stuff on the table. And, I guess, stay tuned."

Mike Linenberg with Merrill Lynch then came on the call and asked how many fare increases or surcharges the airline took in the March quarter, and what the airline has done since then.

Sean replied that the airline had put no surcharges into its system...yet. What the airline has tried to do is raise fares. He estimated that the airline raised fares three times in the first quarter.

He then explained, however, that just because the airline puts into effect a $10 fare increase, you really don't get $10 per ticket. "There's also a dilutionary effect on those fare increases. So you really--for example, if you increased your fares on a P fare, we'll say, $10.00, over the entire system, that $10.00 really is about $2.00 to $4.00 in terms of the actual increase, and that's because you still have seat sales, you have different capacity in the different buckets, you have different fares like air miles and what not. And you're also discounting regions that are not as strong as other regions. So the true impact of fare increases are not offsetting the rising fuel costs, and that's the issue. So a fuel surcharge would go, potentially, on all tickets sold, and that--in that case, you can capture the true increase of fuel."

On the capacity front, Mike then asked about the airline's projected increase in capacity. Vito said that between 16% and 17% for 2008 sounded about right. For 2009, 8% full year.

There was then a little interesting exchange between Sean and Nick Morton, analyst with RBC Capital.

Nick: Assuming load factors--load factor, do you think that will be down this quarter compared to last year, or how's that strike you?
Sean: No, we don't. No, we don't.
Nick: So yields should be up, I would think.
Sean:Well, we--as we said, again, and we--as I have said in the past, Nick, we manage our business to RASM/CASM, because we look at capacity, load factor and yield, and it's different all over the place within our systems. And when we look at it, we said, comparable, and our commentary on--
Nick: Comparable means, roughly the same?
Sean: Nick, we've been talking about this for a while. Comparable--you should know what comparable means.
Nick: Okay, I'll change the point.

Vito then said, "Nick, 2007 Q2 over 2006 Q2, I believe--I'm going by memory here, I don't--we can look it up. But the RASM improvement was about 2.5. So you see that Q2 piece year-over-year being sort of comparable to slightly positive territory."

This was followed by Bob, who added, "And I'll go back to the earlier mention of the 8.8% increase in stage length, and that being material. And if you look at Easter,
and if you look at the winter we had, with the exchange rate down into trans-border, and the strength we had with our brand and network connectivity down into trans-border, and if you look at the number of new routes--into Quebec City, into New
York, and the number of new nonstops, and frequencies back into Canada in Q2--as I said, or as we said, we're quite happy with how Q2 is shaping up to date."

To which Nick responded, "Great, thank you very much for the complete answer."

At which point Sean shot back, "Is that a jab, Nick?

Nick: No, it's a good answer.

Sean: Any other questions?

Nick was gone.

Kim James from TD Newcrest came on the call and asked if they had seen any particular areas of weakness or strength during the quarter, in terms of demand.

Sean responded,

"You know, here's what I will say, and we don't really segment out that type of information. But I will say--and it's pretty evident. Eastern Canada is starting to show some weakness--that's in the manufacturing sectors. Atlantic Canada may be showing a little bit of weakness. And when I say weakness, I have to be careful there, because there is some more capacity in Atlantic Canada. So not necessarily weakness as opposed to, there's more supply in that--and we've done that ourselves. If you look at British Columbia, Alberta--boy, Saskatchewan, it--very, very strong, continues to be strong. You know it's running our national economy right now. So trans-border Canadian dollar, you know, at par, and what's happening in the housing market, very interesting, because you're getting a lot of demand going down south for Canadians want -- either visiting or buying property down there. So that's working very well. Toronto, we have 68, 70 flights a day out of Toronto, and Toronto is still very strong for us, and all the connectivity around Toronto out from east to western Canada is very strong for us. "

There were a couple of other folks who came on the call. Steven Henson was on the call from Raymond James, pinch-hitting for Ben Cherniavsky. Steve explained, "He's actually expecting today, er, his wife is expecting." There was then a discussion of what happens when oil goes to $200/barrel, and a few other things.

But generally, that was it for the call.

Analysts' Take

Ben Cherniavsky, Raymond James


"Despite the exceptional operating performance achieved this quarter, our near-term outlook remains more tempered. In particular, the velocity at which fuel prices have soared in recent months presents a demonstrable headwind to overcome, particularly given the company’s unhedged fuel position."

Cherniavsky increased his earnings estimate for 2008 to $1.51, up from $1.47 a share, but kept his forecast for next year intact at $1.49 a share. He has a price target of $19 on the stock.

Mike Linenberg, Merrill Lynch

June quarter outlook
For the June quarter, we expect WestJet to post diluted EPS of C$0.20 (vs. the
consensus estimate of C$0.32). Our forecast assumes a 1.0% increase in yield and
a 0.1 point increase in loads to 81%, which results in a total unit revenue increase of
1.1%. We expect CASM ex-fuel to decrease 6%. Our fuel price assumption for the
quarter is 101 cents/liter. As for foreign exchange, we are assuming a C$1.00/US$1.00. Finally, our forecast calls for an operating margin of 7.6%.

Trimming 2008 EPS on a higher fuel assumption
Despite the better-than-expected results, we are trimming our 2008 diluted EPS
estimate from C$1.55 to C$1.45 (vs. the consensus estimate of C$1.47) due to a
higher fuel price assumption for the remainder of the year. Our forecast is based
on a 16.9% increase in capacity and a 3.7% increase in RASM. Our +3.7% RASM
forecast is driven by a 3.0% increase in yield and a 0.5 point increase in loads.
We expect CASM ex-fuel to decline 3.3%. Our fuel price assumption for the full
year is 95.7 cents per litre; our foreign exchange rate forecast is C$1.02/US$1.00.
We are maintaining our 2009 EPS estimate of C$1.60 (vs. the consensus
estimate of C$1.76).

Our Take

Nice quarter, but it's clear the airline is concerned about the coming months. In addition, the strong Canadian dollar also helped the airline beat rising fuel costs to a certain extent, as it spurred travel to the Caribbean and Mexico.

As for the bigger picture, the airline remains at the top of our "most favored" list. Both in terms of its operations and its stock. Nothing I heard in the airline's call this week changes that.

Not a whole lot else to say -- excellent quarter.

[Norfolk]

Great article FL. Thanks for posting it.

[Realitychex]

Great article FL. Thanks for posting it.

[Norfolk]

Great article FL. Thanks for posting it.

[airliner]

Koolaid

[Flightlevels]

.

[rightseatwonder]

Its disheartening to see that whenever anyone for any company expresses any sort of excitement or pride in their job and place of work... they get dumped on.

chill out and enjoy your own ride.

[Norfolk]

Koolaid

Don't be jealous Dale.

[Squid]

the dude from Pasco???