WestJet's fare strategy unnerves analysts
By Brent Jang
Thursday, February 17, 2005 - Page B17
WestJet Airlines Ltd.'s decision to play hardball on air fares is being viewed with much nervousness by industry analysts.
Yesterday, at least six analysts cut their one-year price targets following comments Tuesday by WestJet chairman Clive Beddoe that the discount carrier intends to sell thousands of more seats in the lower-end fare category.
Air Canada, Jetsgo Corp. and CanJet Airlines are battling Calgary-based WestJet for passengers, but it's Jetsgo that has been the front-runner in lowering fares recently. Desjardins Securities analyst Nadi Tadros cut his one-year target on WestJet to $10.80 from $13.50, citing concerns about cheap fares and higher operating costs. On Tuesday, WestJet announced a $46.3-million loss in its fourth quarter, and also revealed that its cost per available seat mile -- a key measure of costs -- climbed to 11.7 cents from 10.7 cents. Mr. Beddoe stressed that WestJet is undergoing growing pains, including its transborder expansion into the United States, and he estimated that seat capacity could still rise 17 per cent this year.
Research Capital Corp. analyst Jacques Kavafian has been among the most bullish observers, but he reduced his one-year target to $16.50 from $20.50. He bases his new valuation on about 15.5 times his forecast WestJet earnings next year of $1.07 a share. TD Newcrest analyst Brian Morrison reduced his one-year price target to $13.50 from $14.50, saying WestJet's unit costs could fall this year, but yields may be weak.
Yield in the airline industry measures revenue per passenger mile. Still, Mr. Morrison said investors seeking to buy WestJet shares may find the $11 range to be an attractive entry point.
WestJet's much-ballyhooed, laid-back corporate culture shouldn't be taken for granted. The risk of unionization is rising, added RBC Dominion Securities Inc. analyst Nick Morton, who noted that employee profit sharing fell to $2.9-million last year from $15.9-million in 2003. WestJet (WJA-TSX) fell 26 cents to $11.90 yesterday. |
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