WestJet-CanJet merger need to fend off Air Canada, report says
Merger may be needed to fend off Air Canada, report says
Chris Sorensen Financial Post
August 26, 2005
WestJet Airlines Ltd. may need a more aggressive approach in Eastern Canada, including the potential takeover of CanJet Airlines, in order to fend off recent advances by rival Air Canada, a Bay Street analyst says.
Fadi Chamoun, an analyst at UBS Investment Research, made the comments yesterday in a research report that argued the high cost of fuel is eating up the profit windfall expected by both Air Canada and Calgary-based WestJet following the collapse of discount airline Jetsgo in March.
He called WestJet's market and service coverage in Eastern Canada "sub-par" and noted that Air Canada, in addition to matching WestJet's air fares, has recently stepped up efforts to build market share in Western Canada by deploying smaller regional jets in WestJet's backyard.
The circumstances, Mr. Chamoun argued, could result in a bold retaliatory move from WestJet.
"While the company favours applying its long-standing and successful approach of steady internal growth, we would not rule out a more aggressive approach in Quebec [and] Ontario and Atlantic Canada, including a potential takeover of CanJet," Mr. Chamoun wrote.
There had been rumours circulating earlier this year about the possibility of a tie-up between WestJet and CanJet, which have similar low-cost business models and fleets of Boeing 737 aircraft.
One source said yesterday it was an option that both companies had looked at. "It's not a new thought," he said.
WestJet executives could not be reached for comment yesterday.
Analysts are divided on whether a takeover would be a wise move for WestJet, which has been struggling this year because of the lingering effects of a fare war fought with the former Jetsgo.
Ben Cherniavsky, an analyst with Raymond James, said a takeover of CanJet, which currently operates nine Boeing 737 aircraft, would be tantamount to WestJet paying to have its much smaller rival in Eastern Canada removed.
"The big problem with WestJet is that they have all these planes coming so they need somewhere to put them. And the best place to put them is Eastern Canada," Mr. Cherniavsky said. "But with CanJet there it makes it more problematic. So, why not buy them, their routes, their [airport] gates and then replace their old planes with your new ones?"
But others argue a takeover doesn't make sense since WestJet is already in the midst of increasing its presence in Central and Eastern Canada through marketing campaigns and a focus on improving flight frequencies between key cities for business travellers.
Steve Garmaise, an analyst at Genuity Capital Markets, said he too is worried about the impact of Air Canada's regional jet strategy on WestJet's profitability, but doesn't think a takeover of Canjet is the magic bullet.
"I think it's unlikely," said Mr. Garmaise. "CanJet is a different animal altogether and I don't think Eastern Canada really offers [WestJet] that many opportunities to make an acquisition have a huge appeal."
Ken Rowe, CanJet's controlling shareholder, has said Canjet's business plan calls for slow, steady growth across the country -- it recently began flights between Toronto, Calgary and Vancouver -- and into the United States. He has also said CanJet may take itself public as early as next year.
WestJet Airlines WJA-T Last Trade:Aug 26, 2005 14:36 EST
Last: C$ 11.530 Net Change: C$ -0.010 % Change: -0.09%
Air Canada ACE.B-T Last Trade:Aug 26, 2005 14:35 EST
Last: C$ 36.860 Net Change: C$ -0.240 % Change: -0.65%
