WestJet posts Q4 loss; Beddoe cuts salary to $1
First losing quarter since 1996
Wednesday, February 16, 2005
WestJet Airlines Ltd. snapped its string of profitable quarters Tuesday, spurring its chief executive to slash his salary to $1 as the discount carrier posted its first loss since it began in 1996.
Soaring fuel costs, reservation system problems and losses on new U.S. routes pushed WestJet into the red -- even before a $47.6-million writedown to replace older, fuel-guzzling jets faster than planned.
The dismal results capped a tumultuous year for WestJet, which faced tough competition from a renewed Air Canada and discount rivals Jetsgo and Canjet that has lowered air fares for consumers. The carrier also remains locked in a legal battle with Air Canada and Jetsgo over corporate espionage allegations.
"This was an extremely challenging year for our airline and for our industry as a whole as we had to deal with record fuel prices, rising operating costs and fierce competition," Beddoe said.
The $46.3 million loss amounted to 37 cents a share in the fourth quarter, compared with $12.8 million profit, or 10 cents a share, in the corresponding period in 2003.
After trumpeting 31 consecutive quarters of profitability, Beddoe called the loss disappointing and said he would chop his salary to $1 for the coming year, following precedents set by chief executives at some struggling companies.
"It's usually a signal of pain to come," said Doug Reid, a business professor at Queen's University in Kingston.
Still, Beddoe's stake in WestJet -- about 4 million shares as of April 2004 -- is worth roughly $50 million. In 2003, Beddoe's salary was $220,000, plus a $105,000 bonus and $285,000 in other compensation. He also had $2.3 million in stock options yet to be exercised.
Reid noted Beddoe's move was a stark contrast from Air Canada, when chief executive Robert Milton stood to gain a $20-million bonus while the airline conducted massive layoffs as part of its restructuring last year.
WestJet will also have to watch employee morale, now dealt two big blows with Air Canada's lawsuit and the airline's loss, which means no profit-sharing cheques this year, Reid added.
"It's not a magic formula anymore . . . There really is a lot of hard work involved in this and it's not just simply of showing up and saying we're better than Air Canada," he said.
For the year, the airline lost $17.2 million, down from earnings of $60.5 million in 2003. Revenues rose 26 per cent to $1.06 billion.
Without the charge for the older planes, announced last Friday, the company had expected a $14.9-million loss during quarter and an $18.4-million profit for the year.
The results surprised some analysts, who had expected a break-even quarter. On Tuesday, shares of the stock fell 45 cents to $12.20 on the Toronto stock exchange. The shares are down about 30 per cent over the past 12 months.
WestJet could be in for a tough year, said one analyst who lowered his rating to neutral from buy after the airline's dismal results.
"We think it could be at least several quarters before WestJet regains its lustre," Merrill Lynch's Michael Linenburg said in a research note.
WestJet said the pace of growth will slow to about 17 per cent this year, compared to 30 per cent in 2004. But the airline will become more aggressive on pricing, adding more low-end fares in markets to fill more seats on its planes.
"We've already started it and you'll see it stepped up," Beddoe said, noting the airline sold more discount seats in the fourth quarter -- 59 per cent compared to 54 per cent a year ago.
However, the extremely competitive environment raises questions about the viability of carriers such as Jetsgo and CanJet, which are private companies and do not release financial results.
"If WestJet is losing money and given their cost structure, one has to assume that the other competitors in the domestic market are also losing money," said Cameron Doerksen, an analyst with Dlouhy Merchant Group in Montreal.
"And how sustainable that is for them is open to debate."
During the fourth quarter, WestJet's fuel costs rose 20 per cent as oil prices remained at record levels. The airline also faced higher airport and navigation fees.
Retirement of the older jets is expected to save about $30 million annually on fuel and maintenance costs, WestJet said.
A problem with the airline's booking system cut ticket sales in October and November, costing WestJet as much as $20 million during the quarter.
WestJet's new U.S. destinations lost $5 million during the quarter as the launch of Florida routes was marred by hurricanes and the lack of an American distribution system hurt ticket sales. However, Beddoe said 80 per cent of routes were now showing a profit.