* WestJet signs letter of intent to buy 20 Bombardier Q400s
* Airline takes option on 25 more Q400s
* WestJet had eyed planes from Europe's ATR
* WestJet profit up 42 pct, beats market expectations
By Nicole Mordant
May 1 (Reuters) - WestJet Airlines Ltd, Canada's No. 2 airline, has selected Bombardier Inc to supply up to 45 aircraft for a regional carrier it is setting up to chip away at its struggling competitor Air Canada.
WestJet, which also reported a steeper-than-expected 42 percent rise in quarterly profit on Tuesday, chose Bombardier's Q400 turboprop over a model made by ATR, a joint venture of France's EADS and Italy's Finmeccanica.
The low-cost airline, which flies across Canada, into the United States and to the Caribbean, said it signed a letter of intent to buy 20 Q400 Bombardier NextGen aircraft, with the option of purchasing another 25 over the next six years.
"I think it was the right choice. Range, speed and flexibility were key drivers," said Addison Schonland, a partner at airline consulting firm AirInsight, referring to WestJet's decision to choose the Q400 over the ATR 72-600.
Shares of both WestJet and Bombardier rose after the deal was announced. WestJet's stock also benefited from the stronger-than-expected earnings and an improved outlook.
WestJet declined to reveal a price for the planes but Stonecap Securities analyst Scott Rattee estimated the 20-plane commitment at around $620 million. If the 25 options are exercised, the deal is worth $1.395 billion at current list prices, he said in a note to clients.
The airline, which until now has only flown one type of aircraft, Boeing 737s, said in February that it will launch a regional operation to serve smaller Canadian communities as it searches for ways to expand.
It said then it was talking to Bombardier and ATR about buying about 40 turboprops - smaller, more fuel-efficient planes that can operate on shorter runways.
WestJet's planned regional airline spells new competition for Air Canada, which is the sole carrier, through its partner Chorus Aviation, on several routes to small towns in Canada.
The new WestJet carrier is expected to launch in the second half of 2013 after announcing an initial schedule later this year.
Air Canada has wrestled with labor disruptions and high pension costs during the past year, while non-unionized WestJet, with about a third of Air Canada's costs, has thrived and expanded.
Most analysts expected WestJet to opt for the Q400 over the ATR 72-600, highlighting the faster speed, slightly bigger size and superior climbing capability of the Bombardier plane even though it is less fuel efficient.
The order is a boost for Bombardier, which last year announced cuts in Q400 production as its order book shrunk due to weaker economic conditions and heightened competition.
Rattee said the WestJet order may push Bombardier to increase production and help support heavy spending on new aerospace programs such as the Learjet 85 and the C-Series jet.
WestJet reported a 42 percent rise in first-quarter earnings as it flew more passengers while increasing fares and squeezing out extra fees for baggage and early seat reservations.
Earnings rose to C$68.3 million ($69.1 million), or 49 Canadian cents a share, well ahead of the 39 Canadian cents that analysts had expected. In the same period a year earlier, WestJet earned C$48 million, or 34 Canadian cents.
Revenue increased 15.4 percent to C$891 million.
First-quarter costs per available seat mile (CASM) rose 4.2 percent, outflanked by revenue per available seat mile, which rose 6 percent.
WestJet slightly raised its outlook for full-year CASM, excluding fuel and employee profit share, saying it expected it to rise by between 1.5 percent and 2.5 per cent. Its previous guidance was for a zero to 1 percent increase in CASM.
"The good news is that this increase is being driven primarily by increased expenses related to a better than expected revenue outlook," National Bank Financial analyst Cameron Doerksen said.
Shares in WestJet were up 1.6 percent at C$14.46 on the Toronto Stock Exchange on Tuesday afternoon. Bombardier's stock rose 1.2 percent to C$4.23.