TORONTO (Reuters) - WestJet Airlines Ltd (WJA.TO) will introduce new "premium economy" seating across its fleet in a bid to boost revenue and lure more business travelers, a departure from the Canadian carrier's roots as a low-cost challenger to Air Canada ACb.TO.
Shares of Calgary, Alberta-based WestJet fell 3.2 percent on Wednesday despite a dividend hike and record second-quarter profit, which slightly lagged estimates and disappointed investors hoping for market-beating results.
"The more important point for me is the outlook is really strong," said PI Financial analyst Chris Murray.
"The dividend increase is important. That, if anything, is a vote of confidence in where they're going and what they're doing."
Canada's No. 2 airline said third-quarter revenue per available seat mile, a key industry measure, should outpace gains of 6.1 percent in the first half of the year and margin expansion should continue for the remainder of 2012.
It bumped its dividend up to 8 Canadian cents from 6 Canadian cents a share, building on a 1 Canadian cent increase announced in the fourth quarter.
The gains will come despite higher expenses. WestJet increased its full-year cost forecast, citing higher recruitment and training expenses for its busier winter flight schedule and higher maintenance.
The carrier did not forecast the cost or benefits from its "premium economy" plan, available early next year, but said it is expected to boost revenue.
The carrier will add several inches of leg room in the first four rows of its planes, or 24 seats. But that additional space will come at the expense of other passengers in the aircraft.
New planes have thinner seats which will minimize passenger impact, WestJet said.
On its biggest plane, the 737-800, WestJet will also add eight extra seats, but the seat count will remain the same on its smaller 737-600 and 737-700 planes.
WestJet will begin reconfiguring its fleet in August and expects to complete the work by December.
It says the costlier seats, which offer priority boarding and free on-board amenities, will have equivalent space to Air Canada's business cabin, but could cost half as much.
"We expect this to be positive for yields as passengers pay up for more leg room and amenities," said National Bank Financial analyst Cameron Doerksen.
"Importantly, seating configuration changes, across WestJet's fleet, will increase average seat density with positive implications for unit costs."
WestJet said its plans to launch a low-cost regional carrier in the second half of 2013 are on schedule.
It has begun hiring employees, met with 30 Canadian airports and set a delivery schedule for new planes.
WestJet will take delivery of seven turboprops from Bombardier Inc (BBDb.TO) in 2013 for the new carrier, followed by seven more planes in 2014, four in 2015 and two in 2016. It has options on 25 aircraft for between 2014 and 2018.
For the quarter ended June 30, WestJet said net income rose to C$42.5 million ($42.5 million), or 31 Canadian cents a share, from C$25.6 million, or 18 Canadian cents, a year earlier.
The result lagged the average analyst forecast for profit of 33 Canadian cents, according to Thomson Reuters I/B/E/S.
Revenue rose 9 percent to C$809 million from C$742.3 million.
Operating margin rose to 8.7 percent from 6.9 percent as second-quarter load factor, or the percentage of seats filled with paying customers, rose to 81.6 percent from 78.1 percent in the same period last year.
Second-quarter costs per available seat mile, or CASM, excluding fuel and employee profit sharing, rose 4.8 percent, as WestJet flew more to high-cost markets like Toronto and New York.
For 2012, WestJet expects CASM, excluding fuel and employee profit share, to increase by 3 to 3.5 percent. That is up from its previous forecast of a 1.5 to 2.5 percent rise.
WestJet shares dropped 49 Canadian cents, or 3 percent, to C$16.09 on the Toronto Stock Exchange on Wednesday.
Reporting By Susan Taylor, additiona reporting by Ankur Banerjee in Bangalore; Editing by Don Sebastian