Canada’s No 2 airline drops most since 2015 on expansion costs

Bloomberg

WestJet Airlines Ltd. dropped the most in more than two and a half years after it said increased spending to create a new low-cost unit and expand overseas will vastly exceed revenue growth.
Costs for each seat flown a mile, excluding fuel and employee profit sharing, will climb as much as 8.5 percent this quarter, Canada’s second-biggest carrier said. WestJet forecast that revenue on the same basis would drop as much as 2 percent.
The outlook signals the challenges for new Chief Executive Officer Ed Sims as WestJet starts its Swoop ultra-low-cost unit next month and increases international flying with new Boeing Co. Dreamliner wide-body jets in 2019. WestJet, which reported first-quarter profit that missed analysts’ expectations, said it also faces the threat of a pilot strike or lockout as soon as May 19.
“The costs of the company’s multitude of initiatives are causing overruns in many areas,” Walter Spracklin, an RBC Capital Markets analyst, said in a note to clients. “We are hard-pressed to see an easy solution to the cost problem, and the risk is that it gets worse before it gets better.”
Fleet expansion, improved on-board service, increased maintenance costs for leased jets and continued Swoop investment are boosting costs, he said. The shares fell 11 percent to C$19.72 in Toronto after sinking as much as 13 percent, the most intraday since August 2015. WestJet had tumbled 16 percent this year through Monday, while Canada’s benchmark S&P/TSX index declined 2.5 percent.
WestJet’s string of 52 consecutive profitable quarters is in jeopardy, Fadi Chamoun, a BMO Capital Markets analyst, said. Its second-quarter outlook indicates a potential loss of 25 cents to 30 cents a share, he said.