February 6, 2018 / 11:45 AM / 18 days ago

WestJet targets higher margins, but faces rising fuel costs

(Reuters) - WestJet Airlines Ltd’s efforts to boost profit margin while adding more passengers in 2018 is seen countered by rising fuel costs, the airline company said on Tuesday after reporting quarterly earnings per share in line with estimates.

Canada’s second-largest commercial carrier expects to add capacity in 2018 by targeting both price-conscious and more affluent customers in an effort to win turf from rival Air Canada while eventually targeting Canadian travelers who cross the border to fly on U.S. ultra low-cost carriers (ULCCs).

During the first quarter of 2018, WestJet expects fuel costs to grow between 13 percent to 16 percent. Costs per available seat mile (CASM) - a measure of how much an airline spends to fly a passenger excluding fuel and employee profit sharing - should rise by 2 percent to 3 percent on an annual basis.

WestJet expects revenue per available seat mile (RASM) to rise 4.5 percent-5.5 percent on an annual basis during the quarter.

“We are still targeting margin expansion, (but) there’s no question that the higher cost of fuel is making that challenging,” WestJet Chief Financial Officer Harry Taylor told analysts.

Calgary-based WestJet expects total capacity for its fleet to rise between 6.5 percent and 8.5 percent for 2018. It plans to introduce new domestic flights on Swoop, its own ULCC which started sales last week ahead of its June launch.

Analysts believe Swoop was created by WestJet as a separate carrier to defend against ULCC start-ups in Canada.

Swoop, which would eventually grow to 30 to 40 planes, expects to attract Canadians hunting for lower fares in U.S. airports.

But Swoop will “have a cost disadvantage” against U.S. ULCCs like Allegiant Airlines because of higher Canadian airport costs and taxes, Raymond James airline analyst Savanthi Syth said in an email.

“We don’t anticipate any major impact on demand in our Canadian-centric markets in the northern United States,” Allegiant spokeswoman Krysta Levy said by email.

WestJet said its passenger traffic rose 8.8 percent in the fourth quarter ended Dec. 31, while passenger carrying capacity ticked up 5.6 percent. But WestJet’s fuel prices jumped 19.5 percent year-over-year in the quarter, sending operating expenses up 11.5 percent to C$1.04 billion.

WestJet shares fell 0.8 percent in early afternoon trading on the Toronto Stock Exchange amid a selloff in the broader market.

Reporting by Anirban Paul in Bengaluru, additional reporting by Allison Lampert; editing by Savio D'Souza and G Crosse

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