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May 2, 2017

'It's not for everybody': WestJet CEO on ultra-low-cost service plans

WestJet CEO on Boeing Dreamliner purchase and ultra low-cost carrier plan

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WestJet Airlines Ltd (WJA.TO) reported a 45 per cent fall in quarterly profit on Tuesday, and said it agreed to buy up to 20 Dreamliner planes from Boeing Co (BA.N) as it seeks to add fuel-efficient aircraft to its fleet.

Shares of the Calgary-based carrier fell as much as 5.7 per cent to $21.54 on the Toronto Stock Exchange, but rebounded to the $22.00 range by 3 p.m. ET.

The company believes the investment in the new wide-body aircraft is critical to its plans to move into an ‘ultra-low-cost’ market.

“There is competition now at the very low end with one carrier and rumoured others to follow, and we’re going to defend that franchise,” WestJet CEO Gregg Saretsky told BNN on Tuesday. “To do the best job of it, we need to lower our costs even more and the best way to do that is to move into this space with a different model with a more densely configured aircraft with absolutely no frills on-board.”

However, Saretsky says that customers expecting to save on air fares should be prepared to sacrifice some creature comforts as part of the deal.

“If people have any experience flying around on EasyJet or Ryanair, that’s the type of experience they should expect from our new ultra-low-cost carrier. It’s not for everybody and for those who prefer the classic WestJet service, we’ll continue to keep all those planes flying, as well,” he said.

WestJet said the deal with Boeing includes commitments for 10 787-9 Dreamliner aircraft to be delivered between the first quarter of 2019 and December 2021. The deal also includes options to buy 10 more aircraft.

The 787-9 planes — about 20 per cent more fuel-efficient than the 767s WestJet owns — will allow the airline to offer new routes in Asia, South America and Europe amid stiff competition from larger rival Air Canada (AC.TO).

Saretsky is confident in the company’s strategy to move further afield with their flights, citing a successful move into the European market in 2016.

“When we entered the UK market from Canada last summer with our wide-body 767s, there were many analysts that said, ‘Look, these markets are mature. It’s going to be very difficult for WestJet.’ What we found is [we] had an exceptional year on the North Atlantic, and it’s met every one of our expectations.”

He also cited the company’s mission to stay ‘organic’ as the reason behind purchasing planes instead of taking over established airlines with existing routes.

“A home-grown organic growth strategy is one that we’ve been pursuing since our foundation in 1996,” he said. “Twenty-two years later we feel that the best opportunity for us is to exploit organic growth in the international wide-body space, and that’s why we’re placing orders today.”

WestJet now expects 2017 capital expenditure of $1 billion, up from a prior forecast of $900 million-$920 million, the company said on a call with analysts, attributing the increase partly to the Boeing order.

The company's aircraft fuel costs jumped 41.5 per cent to $235.5 million in the first quarter ended March 31, contributing to the sharp drop in profit.

McCreath: WestJet's management has its hands full with strategy

Morning Call: BNN Commentator Andrew McCreath gives his take on WesJet placing an order for up to 20 Boeing Dreamliners, Encana's earnings and Donald Trump's comments on breaking up the big U.S. banks.

Oil prices have nearly doubled from multi-year lows a year ago, weighing on profit margins at several airlines.

WestJet's net earnings fell to $48.3 million, or 41 cents per share in the first quarter, from $87.6 million, or 71 cents per share, a year earlier.

Excluding items, WestJet earned 56 cents per share, according to Thomson Reuters I/B/E/S, beating analysts' average estimate of 50 cents.

Revenue rose eight per cent to $1.11 billion.

The better-than-expected profit came as the airline flew 5.7 million passengers in the quarter, up nearly seven per cent from a year earlier.

- with files from BNN