Canada's WestJet flies high
Wednesday, January 24, 2007
By Susan Carey, The Wall Street Journal
WestJet Airlines Ltd. may be the best airline stock you've never heard of.
The fast-growing Canadian carrier has borrowed tricks from U.S. discounters like Southwest Airlines Co. and JetBlue Airways Corp. to deliver the best operating margins in North America in the first nine months of 2006.
WestJet Airlines, based in Calgary, Alberta, has traded on the Toronto Stock Exchange since 1999. Its shares have risen 60 percent since last summer and many analysts expect strong fourth-quarter results. The company plans to report results next month. Cheaper fuel and growth opportunities to destinations in the U.S. and beyond might also make the shares attractive to some investors.
In trading Tuesday, WestJet's shares closed at C$14.48, down 12 Canadian cents.
For investors who have been burned by volatility in the U.S. airline industry in the past few years, WestJet may offer a more straightforward choice. The small Canadian air market -- fewer than 64 million total passengers in 2005, compared with 656 million in the U.S. -- has two main players, with ACE Aviation Holdings Inc.'s Air Canada controlling 60 percent of the domestic capacity compared with WestJet's 30 percent. The rest is split among smaller players.
For U.S. investors thinking of hopping on board, WestJet says about 7 percent of its 129 million shares outstanding are held by foreigners, primarily U.S. mutual funds and investment banks.
"There's a lot of excitement in the U.S. about consolidation," says Ben Cherniavsky, a Raymond James Ltd. analyst in Vancouver. "In Canada, we're miles ahead. Eight airlines have failed and we're down to two, a virtual duopoly."
Mr. Cherniavsky, who doesn't own any WestJet shares, last month raised his earnings estimates and rating on the stock to "strong buy" from "outperform," citing robust traffic, encouraging yield trends and the buoyant economy in Western Canada.
WestJet, with a current market capitalization of C$1.87 billion ($1.58 billion), has been consistently profitable and its revenue has soared from C$332.5 million in 2000 to nearly C$1.4 billion in 2005. Its rare 2004 loss was due to a writedown related to its retirement of older aircraft.
WestJet currently trades at 13 times estimated per-share earnings for 2007. That is cheaper than Southwest's price/earnings ratio of 16.2 and JetBlue's 33, but richer than ACE's 11.5, according to CIBC World Markets.
The failure of two smaller Canadian airlines and problems that led to Air Canada's bankruptcy filing in 2003 helped clear WestJet's route. Its earnings peaked that year at C$60.5 million. Air Canada, however, emerged the following year with less debt, lower costs and a new pricing and service strategy, and is now giving WestJet more of a run for its money.
While WestJet's unit costs still are significantly lower than Air Canada's, the bigger flag carrier can charge more per seat because of its more extensive schedule, destinations and premium service.
Michael Linenberg, a Merrill Lynch analyst in New York who has WestJet at a "buy," notes that the company's third-quarter operating margin of 19 percent, up from 15.5 percent in the prior-year quarter, handily beat the margins of 10 other mostly U.S. carriers that he follows.
He expects WestJet to earn C$0.65 to C$0.80 per share for 2006 and C$0.90 for 2007 on double-digit capacity increases and only minimal unit cost growth, excluding fuel. Mr. Linenberg doesn't own the stock and Merrill doesn't do business with WestJet.
The company was founded in 1994 by four Calgary businessmen who wondered why in a deregulated Canada there were no start-ups like Southwest. They decided to "replicate the Southwest model and Canadian-ize it," says Clive Beddoe, a real-estate investor and owner of a plastics company who now is the carrier's chairman and chief executive.
The founders got help from David Neeleman, a U.S. airline entrepreneur who co-founded discounter Morris Air, sold it to Southwest and later went on to launch JetBlue. Mr. Neelemen, a WestJet investor and director for five years, says he helped the Canadians raise money, buy aircraft and copy Southwest's efficiencies.
The low-cost airline took off from Calgary in 1996 using a single type of aircraft. Unlike Southwest, WestJet offers assigned seating, sells meals on board and, for a fee, offers passengers -- who are called "guests" -- access to airport lounges at three domestic airports. Its employees aren't unionized and receive profit-sharing awards based on the company's pretax profit margin.
After WestJet saw JetBlue's success with its seatback television service, it secured the Canadian license for the service from JetBlue. WestJet has installed the TVs on all of its new Boeing Co. 737-700s and -800s, and the remaining 13 smaller 737-600s in the fleet should be outfitted by fall, Mr. Beddoe says.
Starting from its base in Western Canada, WestJet now serves 23 domestic airports, including the largest cities coast to coast. Last week, the company said it plans to add three more Eastern Canada cities in May for the summer season.
In 2005, the carrier began scheduled flights from Toronto to Fort Myers, Fla., and Vancouver to Honolulu and Maui. This winter, 17 percent of its capacity is deployed to the U.S. Sunbelt and Nassau, the Bahamas. The trans-border market, currently 4 percent of its annual business, is the carrier's biggest growth opportunity, Mr. Beddoe says. He says he wants to increase that to 20 percent to 25 percent of its traffic.
A belated upgrade to its reservation system -- the carrier recently bailed out of a problem-plagued plan to switch to a different system altogether -- should allow WestJet by May to distribute its tickets on U.S. Internet travel sites, increasing its exposure south of the border.
Later, it should have the ability to sell connections to overseas airlines. That could pave the way for WestJet to join a global airline marketing alliance.
