WestJet plunges the most in two years as costs of Swoop and overseas expansion mount
WestJet Airlines Ltd. dropped the most in more than two 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 per cent this quarter, Canada’s second-biggest carrier carrier said Tuesday. WestJet forecast that revenue on the same basis could drop as much as 2 per cent.
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. Calgary-based 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 10 per cent to $19.94 at 9:43 a.m. in Toronto after tumbling as much as 13 per cent, the most intraday since August 2015. WestJet had tumbled 16 per cent this year through Monday, while Canada’s benchmark S&P/TSX index declined 2.5 per cent.
Profit Run
WestJet’s string of 52 consecutive profitable quarters is in jeopardy, Fadi Chamoun, a BMO Capital Markets analyst, said in a note. The company’s second-quarter outlook indicates a potential loss of 25 cents to 30 cents a share, he said. Analysts had been expecting 30 cents, according to the average of estimates compiled by Bloomberg.
With expansion expenses mounting, WestJet accelerated its plan to cut costs, targeting $200 million by the end of 2020, according to a filing Tuesday. The company previously said it saw “opportunities” to save between $140 million and $200 million by 2022.
WestJet’s first-quarter profit of 32 cents a share fell well short of the 36 cents that analysts anticipated.