TORONTO (Reuters) - WestJet Airlines Ltd’s (WJA.TO) chief executive said on Tuesday that the low-cost carrier recently raised ticket prices to compensate for climbing expenses caused by a weaker Canadian dollar, and may do so again if the currency falls further.
Chief Executive Officer Gregg Saretsky made the comments after Canada’s second-largest carrier reported fourth-quarter results on Tuesday that largely met expectations, though WestJet warned it sees the currency and an accelerated maintenance schedule swelling costs in 2014.
“If it makes sense that we need to offset some of the input cost increases, as a result of the change in foreign exchange, we’ll make whatever changes are smart for the business, respecting of course the impact on demand,” Saretsky said on a conference call.
“We’re watching this very closely.”
The airline also hiked its dividend by 20 percent and said it expected earnings growth in full-year 2014. Its stock rose 3 percent as healthy yield growth allayed concerns that WestJet’s expansion would dent profits, said independent airline consultant Robert Kokonis.
WestJet, which is working to grow beyond its low-fare origins to lure business customers and add more fees to plump up revenue, said it introduced a system-wide 2 percent fare increase last week, which was matched by competitors.
The Calgary, Alberta-based carrier repeated that it does not plan to add a currency surcharge to offset the weaker dollar, despite such a move by rivals including Air Canada’s ACb.TO vacation packages arm and Transat AT TRZb.TO.
“The primary method by which the airlines can offset both a weaker Canadian dollar and higher fuel prices is by increasing air fares. This is easier said than done, especially in an environment where overall market capacity is increasing,” National Bank Financial analyst Cameron Doerksen wrote in a note to clients.
A falling dollar hurts airlines because they make major purchases in U.S. dollars, including fuel and planes. Every 1 cent change in the value of Canada’s dollar has an approximate C$13 million ($11.7 million) impact on WestJet’s annual unhedged operating costs, the company estimates, with about C$11 million of that from fuel expenses.
WestJet shares fell 5 percent last week, while bigger rival Air Canada’s stock dropped 17.5 percent, on mounting worries that currency issues would hurt the airlines’ profits. Air Canada reports its fourth-quarter results on February 12.
A weaker dollar may also factor into WestJet’s decision on whether to introduce new baggage fees.
In the fourth quarter, so-called ancillary revenue for such non-ticket items as seat selection, jumped by nearly 33 percent to C$46 million, or C$10.09 per passenger.
WestJet said it expects to announce by month’s end which company will provide in-flight entertainment and Internet connectivity for its flights. It will start rolling out the for-fee services later in 2014, but will not collect revenues this year.
Currency and an accelerated schedule for engine overhaul and repair will lift costs in 2014, WestJet warned. It now sees costs, excluding fuel, increasing by 1.5 percent to 2.5 percent, versus a previous estimate of flat to 1 percent.
For the first quarter, costs excluding fuel will jump 3.5 percent to 4.5 percent, as the company accounts for much of the maintenance work and the impact of tough winter weather.
Capital expenditures will also rise, to between C$610 million and C$630 million, from an earlier estimate of C$580 million to C$600 million.
Doerksen wrote that he expects first-quarter earnings per share to decline due to higher costs, challenging winter weather and tepid revenue growth. WestJet did not issue an earnings forecast.
First-quarter revenue per available seat mile is expected to be flat to up slightly from the same period last year, as system-wide capacity climbs 7.5 percent to 8.5 percent and domestic capacity grows 9 to 10 percent.
For the full-year, WestJet see system-wide capacity growth of 4 to 6 percent, with a domestic increase of 5 to 6 percent.
For the fourth-quarter ended December 31, WestJet said net earnings rose to C$67.8 million, or 52 Canadian cents per share, from C$60.9 million, or 46 Canadian cents per share, a year earlier. Revenue rose 8 percent to C$926.4 million.
Analysts expected earnings of 52 Canadian cents a share and revenue of C$931 million, on average, according to Thomson Reuters I/B/E/S.
Shares of WestJet, which launched a new regional airline last summer and will start trans-Atlantic service in June, added 80 Canadian cents to C$25.65 on the Toronto Stock Exchange.
($1 = 1.1082 Canadian dollars)
With additional reporting by Solarina Ho in Toronto and Ashutosh Pandey in Bangalore; Editing by Maju Samuel, Saumyadeb Chakrabarty, Sofina Mirza-Reid and Meredith Mazzilli