Soaring fuel prices to result in fare increases: WestJet CEO

Ross Marowits, The Canadian Press</span>
Published Tuesday, July 31, 2018 1:23PM EDT
Last Updated Tuesday, July 31, 2018 6:12PM EDT

Airline passengers should expect to face higher fares later this year to compensate for rising fuel costs that contributed to WestJet Airlines posting its first quarterly loss in 13 years, its chief executive said Tuesday.

"I think this is the way guests now need to think is that airfares will be rising just as they did back in 2010, 2011 when we had the last major fare spike," Ed Sims said in an interview.

The increases will likely be felt this fall after the negative effects on demand from a threatened pilots strike dissipate.

"We firmly believe that by the time we get to late September, October we'll start to see more of those fare increases sticking and more guests understanding that we are passing on the cost of the fuel increase."

Even though the second-quarter results beat analyst expectations, Sims conceded they were "disappointing" and that its 2018 results are "off track."

"We are now operating in a very different fuel and competitive environment," he said during a conference call.

The Calgary-based airline said it was forced to offer discounts that partially offset five fare increases this year to stimulate travel and restore passenger confidence.

"To build flow-on benefits like ancillary revenues, we had to be aggressive both to recover those guests who would otherwise have booked away or booked with a competitor but also to compete with this almost unprecedented level of peak season capacity," Sims added.

The threat of the strike wiped out tens of millions of dollars in profit in the second quarter that pushed the airline to break a 52-quarter streak of profitability, chief financial officer Harry Taylor said in a conference call.

"We start rebuilding from today," Sims said in an interview. "I think when any sports team breaks their winning streak their first focus is how do you rebuild that streak."

Overall demand for air travel remains strong with WestJet traffic up 6.2 per cent in the second quarter.

Industry analyst Walter Spracklin of RBC Capital Markets says the result will be higher fares.

"At the end of the day, we see emerging in the fourth quarter a period of dramatically slowing capacity growth and rising fares -- both of which are expected to carry into 2019," he wrote in a report.

WestJet will be ramping up the service of its ultra low cost Swoop airline by launching transborder service as it faces growing competition from increased capacity at Flair Airlines.

Details about routes and the official start date will be announced on Thursday.

Reports suggest the airline will fly to Las Vegas, Nev., Phoenix, Ariz., and Florida destinations including Orlando, Tampa, and Fort Lauderdale from low-cost airports in Canada like Hamilton, Ont., and Abbotsford, B.C.

"We'll be following routes where we know there's high demand for low fares," Sims said.

WestJet is using Swoop to attract five million Canadians who would otherwise cross the U.S. border to catch flights.

The airline recently received its third of six Boeing 737-800s to be delivered this year and is looking at speeding up plans to expand to 10 planes by the fall of 2019.

WestJet's stock fell more than eight per cent in Tuesday trading after the company reported a rare loss of $20.8 million in the second quarter and adjusted some of its 2018 expectations to reflect the impact of higher fuel costs.

The closed down $1.63 to $18.32 on the Toronto Stock Exchange.

WestJet said its second quarter fuel cost was up nearly 31 per cent from a year ago, at 81 cents per litre, and that it expects the current quarter's cost will be even higher at between 83 and 85 cents per litre.

Its net loss amounted to 18 cents per share, which was better than analyst estimates, but down from a year-earlier profit of $48.6 million or 41 cents per share.

WestJet's revenue grew less than expected to $1.09 billion, compared with the consensus estimate of $1.1 billion.

The company has also reduced its plan for full-year capacity growth to between 5.5 per cent and 6.5 per cent, compared with the previous estimate of between 6.5 per cent and 8.5 per cent.

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