TORONTO (Reuters) - WestJet Airlines Ltd (WJA.TO) will launch a new regional operation to serve smaller Canadian destinations after winning the endorsement of its workforce for a plan that will ratchet up the pressure on Air Canada ACa.TO, its larger rival.
Shares of non-unionized WestJet rose more than 4 percent on Wednesday after the company said it expected to launch the division before the end of 2013. It is talking with two aircraft makers about buying a single fleet of turboprop planes to serve the new routes.
The country's No. 2 airline, which also reported lower quarterly earnings that still topped analyst expectations, said the new regional operation would boost its bottom line.
The smooth implementation of WestJet's plan, first announced last month, highlights its advantages over Air Canada. Labor strife has stymied the No. 1 Canadian airline's own plan to start a lower-cost carrier, which its CEO has said is critical to sustained profitability.
"The regional carrier is the single most important aviation development in Canada since WestJet was launched," said independent airline consultant Robert Kokonis.
"The opportunity is so significant - there are so many communities across Canada where Jazz or another Tier 3 carrier has monopoly service and WestJet's perfectly poised to exploit that," he said, referring to Chorus Aviation's CHRb.TO Jazz, which operates short-haul Air Canada Express-branded flights under contract.
Calgary, Alberta-based WestJet said 91 percent of its 8,500 employees voted in favor of launching the short-haul airline as a wholly owned subsidiary. The company is known for a corporate culture that values consultation between employees and management, in contrast to a confrontational tone that prevails between Air Canada and its unionized workforce.
Air Canada, which reports fourth-quarter results on Thursday, last spring proposed a low-cost carrier but has not announced progress in launch plans. The airline, which is in contract negotiation with its unions, would operate its low-cost carrier in low-yield, high volume international destinations and southern vacation spots.
WestJet, which ended 2011 with C$1.2 billion ($1.2 billion) in cash, did not say how it will pay for new carrier, estimated to cost up to C$1 billion. It also said on Wednesday it could not yet provide detailed plans on its launch.
"The devil will be in the details," said PI Financial analyst Chris Murray. "I'm more interested in the financial backdrop and the rate of implementation ... what's the roll out going to look like, how are they going to pay for them."
The company said it is asking for proposals from Bombardier Inc (BBDb.TO), for its Q400 NextGen plane, and from ATR, a joint venture of aerospace group EADS EAD.PA and Italian defense group Finmeccanica SIFI.MI, for its ATR 72-600 aircraft. It expects to place an order by mid-year.
Operating a single fleet of Boeing 737 aircraft has been central to WestJet's strategy as a low-cost airline, as maintenance and training costs don't have to be duplicated. The airline expects to extend that formula with a single fleet of turboprops for its new airline.
The fast-growing carrier, which flies within Canada and to mostly sun destinations in the United States, Mexico and the Caribbean, has considered adding a second fleet for some time as it searches for new revenue sources.
National Bank Financial analyst Cameron Doerksen said WestJet could win market share on higher-yielding regional routes. Using smaller planes will allow the airline to connect more cities in its existing network and manage capacity better.
WestJet's earnings topped analyst expectations, owing to slightly better-than-anticipated revenue growth and lower costs.
Profit dipped to C$35.6 million, or 26 Canadian cents a share, from C$37.2 million, or 26 Canadian cents, in the same period last year. Analysts, on average, had forecast earnings of 20 Canadian cents a share, according to Thomson Reuters I/B/E/S.
Revenue increased nearly 13 percent to C$781.5 million.
Fourth-quarter costs per available seat mile rose 8.3 percent, but those costs increased just 2.7 percent once fuel and profit share expenses were stripped out.
WestJet forecast 2012 costs per available seat mile, excluding fuel and employee profit sharing, to be unchanged to up to 1 percent higher year-over year.
Fourth-quarter RASM, an industry measure that compares revenue performance among airlines grew 6.4 percent, reflecting higher ticket prices and a slightly higher load factor, Doerksen said in a note.
The company said persistent economic uncertainty had not hurt its forward bookings. In the first quarter of 2012 it expects modest RASM growth, with a further 8 to 9 percent expansion in capacity.
WestJet increased its quarterly dividend by a penny to 6 Canadian cents, and approved a share buy back plan for up to 5 percent of its outstanding shares.
WestJet shares added 57 Canadian cents to C$13.67 on the Toronto Stock Exchange early Wednesday afternoon, a gain of 4.3 percent.
($1 = $0.99 Canadian)
Reporting By Susan Taylor