Decline In Westjet Load Factor

[Guest]

WestJet reports May load factor of 77.2 per cent

Airline increases traffic by 6.6 per cent year over year and improves on-time performance to 93.2 per cent

CALGARY, June 3, 2015 /CNW/ - WestJet today announced May 2015 traffic results with a load factor of 77.2 per cent. Revenue passenger miles (RPMs), or traffic, increased 6.6 per cent year-over-year, and capacity, measured in available seat miles (ASMs), grew 9.1 per cent over the same period. The airline flew a record 1.6 million guests in May, a year-over-year increase of 3.9 per cent or more than 63,000 additional guests, and achieved an on-time performance rate of 93.2 per cent, a year-over-year improvement of 8.3 percentage points.

"We are pleased with our strong year over year traffic growth as we flew a record 1.6 million guests for the month of May while continuing to improve our on-time performance," said WestJet President and CEO Gregg Saretsky. "I want to thank our more than 10,000 WestJetters for continuing to deliver our brand of friendly caring service each and every day."

May 2015 traffic results

May 2015 May 2014

Change Load factor 77.2% 79.0% (1.8 pts)

ASMs (billions) 2.187 2.005 9.1%

RPMs (billions) 1.688 1.584 6.6%

Year-to-date 2015 Year-to-date 2014

Change Load factor 80.5% 82.2% (1.7 pts)

ASMs (billions) 11.286 10.675 5.7%

RPMs (billions) 9.083 8.774 3.5%

In May, WestJet announced improvements to its Plus product, enhancing the airline's offering for value-oriented business travellers and comfort-seeking vacationers. Middle seats in Plus on WestJet's Boeing Next Generation 737s will be outfitted with a new tray table between the aisle and window seat, giving guests a guaranteed empty middle seat. Seats in Plus on WestJet's Boeing 767 aircraft will be wider than the airline's current seats, with an aisle separating each set of two seats. The airline is upgrading meal options for guests in Plus to include a premium boxed meal on longer 737 flights and premium hot meals served on 767 flights, both with complimentary beverages. This option is available for booking now, for travel beginning September 14, 2015.

http://www.newswire.ca/en/story/1548721/westjet-reports-may-load-factor-of-77-2-per-cent

[Thebean]

WJ's May l/f slide occurs every year as WJ transitions from its north/south winter sched to the east/west summer sched whilst simultaneously adding new capacity.

Next year, I'm gonna take a couple of screen shots in mid April from Flighttracker24 of where WJ's fleet is at 9am and 4 pm on a Weds and do the same on a Weds in mid May and then post them. It is a completely different picture, and one that surprises even me.

In simple terms, April's screenshot is more "u" shaped and May's is more "n" shaped. May is when the shift of horizontal part of those letters moves north. The reverse happens in late Oct/early Nov.

Lest anyone forget or is bamboozled by various claims made elsewhere. WJ's strategy results in WJ producing an operating margin over the 6 winter months of 2014/2015 of 14.85% and a BELF of just 68.7%, compared to it's main domestic competitors margin of 2.09% and a BELF of 79.5% over the same period.

It's just math, folks. Skip the spin being pumped out and look up the numbers for yourselves. They are readily available at both airlines Investor Relations web sites.

The phenomena is as regular and predictable as clockwork. It has occurred every May for over 10 years. It amazes me that there are people who follow the industry who seem pathologically unable to grasp these sorts of annual occurrences.

In 2014, WJ had a 1Q BELF of 73.6% and a May L/F of 79.2%, a spread of 5.6% points. Year over Year May capacity growth was 4.1%.

In 2015, WJ had a 1Q BELF of 67.8% and a May L/F of 77.2%, a spread of 9.4% points, up 3.8% pts yoy. Year over Year May capacity growth was 9.1%, more than double the previous years growth with a 2% point decline in l/f.

In 2014, AC had a 1Q BELF of 83.9% and a May L/F of 83.3%, a spread of .6% points. Year over Year May capacity growth was 8.1%.

In 2015, AC had a 1Q BELF of 78.7% and a May L/F of 82.3%, a spread of 3.6% points, up 3.0% pts yoy. Year over Year May capacity growth was 9.8%.

WJ's spread between L/F and BELF appears to have increased by 3.8% points in May, Air Canada's appeared to increase by 3% points. Both are good, but one is about 25% better than the other.

Remember how I've been preaching the tide rises and falls pretty much equally for all?

This all suggests a couple of conclusions.

1. WJ, like everyone else, is on pace to have a YOY improved 2Q. WJ's May loads operated somewhere in the vicinity of 9.4% points above their last confirmed break-even levels, suggesting a 3.8% point improvement over May 2014. Again, lest anyone forget, WJ's margins were almost double those of their main domestic competitor in 2Q 2014.

2. AC is on pace for an improved 2nd quarter, operating in the vicinity of 3.6% points above their last reported and confirmed break-even levels, suggesting a 3.0% point improvement over May 2014.

3. With margins in the top tier of North American airlines, WJ is not about to concede any ground to anyone, even to those with margins and metrics at or near the bottom of the pack. WJ's growth is currently concentrated in far higher cost regional markets which are a necessary building block to developing longer term strategies which relates to the point below.

4. I would imagine WJ is very intrigued by the seasonal dynamics of some of the new long haul markets they are dabbling in and their impact on 2Q loads and, far more importantly, margins.

Naturally, this all gets confirmed when 2Q numbers come out, but it is a very interesting indicator.

[Lakelad]

.

Air Canada Reports May Traffic Results

82.3% load factor with traffic increase of 8.5 per cent for the month

MONTREAL, June 3, 2015 /CNW Telbec/ - For the month of May, Air Canada reported a system load factor of 82.3 per cent, versus 83.3 per cent in May 2014, on a system-wide capacity increase of 9.8 per cent. On this additional capacity, system wide traffic for May increased 8.5 per cent. Air Canada reports traffic results on a system-wide basis, including regional airlines from which Air Canada purchases capacity and Air Canada Rouge.

"I am pleased to report a load factor of 82.3 per cent and an increase in traffic of 8.5 per cent for the month of May – a month during which all markets performed consistent with our expectations," said Calin Rovinescu, President and Chief Executive Officer. "Air Canada generated greater traffic in all markets led by significant growth in the U.S. transborder, Atlantic, and Pacific markets. These strong results underscore the effectiveness of our commercial strategy focusing on international growth. During the month of May we launched new services to Osaka, Venice, Austin and Atlantic City, as well as expand our regional network in Western Canada. We also re-introduced seasonal Toronto-Tokyo Narita flights complementing new Toronto-Tokyo Haneda year-round service. I would like to thank our employees for taking care of our customers while transporting them safely to their destinations."

.

[moeman]

3. With margins in the top tier of North American airlines, WJ is not about to concede any ground to anyone, even to those with margins and metrics at or near the bottom of the pack. WJ's growth is currently concentrated in far higher cost regional markets which are a necessary building block to developing longer term strategies which relates to the point below.

4. I would imagine WJ is very intrigued by the seasonal dynamics of some of the new long haul markets they are dabbling in and their impact on 2Q loads and, far more importantly, margins.

What do you think this will do to Westjet's numbers going forward? You suggest that they are ready for and/or fighting a turf war. You also suggest that their future lies in higher cost markets. If the numbers aren't there, do you think they will continue down this path or retrench?

[internet]

Bean's reference to higher cost markets is with the short stage lengths markets that Encore flies, and will continue to expand into, no?

[moeman]

Bean's reference to higher cost markets is with the short stage lengths markets that Encore flies, and will continue to expand into, no?

He said:

WJ's growth is currently concentrated in far higher cost regional markets which are a necessary building block to developing longer term strategies which relates to the point below.

4. I would imagine WJ is very intrigued by the seasonal dynamics of some of the new long haul markets they are dabbling in and their impact on 2Q loads and, far more importantly, margins.

So I'm curious what was meant by that.

[Thebean]

What do you think this will do to Westjet's numbers going forward? You suggest that they are ready for and/or fighting a turf war. You also suggest that their future lies in higher cost markets. If the numbers aren't there, do you think they will continue down this path or retrench?

Retrench with 16%+ margins? That's an "E" margin, not an "EBITDAR" margin, by the way.

Nah.....I doubt it.

[AvWatcher]

I think the point being made is not that WJ's May's L/F is down, but that it's down as compared to last May, almost 2%. AC on the other hand is down only 1%, after starting a number of new very long haul routes in the month. Not the end of the world, but interesting.

[Thebean]

No.

The point being made is that even with loads 5% points below Air Canada's during their annual sched cutover month, WJ likely generated significantly higher margins than Air Canada, and even with both airlines equally enjoying the fruits of 70 cent per liter fuel, the monthly margin gap between the two likely grew year over year.

How's that? Because the mathematical relationship between their significantly lower unit cost base combined with their lower unit revenue base allows WJ to operate with a dramatically lower break even load factor.

As you may recall, WJ's margin in 2Q 2014, their seasonally weakest quarter, when interest payments are included as an expense, (and let me know how your conversation works out with your banker when you tell him the interest on your auto or home loan isn't an expense), was 7.2% compared to AC's identically calculated 3.7%.

WJ broke-even with a 73.8% l/f in 2Q 2014 whilst AC needed to fill 81% of it's seats to accomplish the same outcome, a gap of 7.1% points. Will that gap shrink, remain the same or grow in the quarter. Last quarter, it grew. Ask 10 analysts or media experts whether or not the gap between the two airline BELF is shrinking or growing and I'll bet 90% of them would tell you its shrinking. Therein is the power of "conventional wisdom".

In an industry where no scheduled operator has ever reported system loads higher than 90% over any generally accepted reporting window, (monthly, quarterly or annually), who has greater upside?

The airline that breaks even on a fully allocated basis when 68% of its seats are filled, or an airline that breaks even when 79% of its seats are filled?

And under the same circumstances, who has greater downside risk?

[dagger]

I find this argument increasingly sterile and meaningless, because the underlying premise is AC vs WS. The question of relevance really boils down to "What am I trying to prove". Well, WS has a more profitable platform, a clearer sheet, so to speak, than AC, and should always be more profitable. Haver we got that out of the way?

What is relevant, to each airline's investors (and staff), is where each is going qualitatively. Comparing the two airlines on that score doesn't add any value to each. What matters to investors and the investment community is "upside" and what each is doing to capture its upside, because right now, both are profitable, both are continuing to expand, and both (not just WS) have begun to reward shareholders, only in different ways. With WS, it's mainly via a dividend, with AC its a combination of accelerated share price recovery now enhanced by a Normal Course Issuer bid.

With current fuel prices, AC may well become - for the first time in its history - profitable through all four calendar quarters. In its Q1, its rate of improvement in operating profitability exceeded the dollar reduction in fuel cost, suggesting AC is realizing benefits from more than just fuel, but from its other cost cutting measures. There isn't a broker out there now that hasn't got some sort of buy on the stock with a 12 month target of at least $17, and as high as $22. And many analysts have talked about even greater upside for the stock price, but acknowledge that AC's past track record makes a lot of investors hesitant to buy into scenarios that see AC achieve the kind of multiples some US airlines get.

Both AC and WS are following their own paths to success, with different products, both are enjoying quite a bit of it, both should continue to prosper and reward investors, both are renewing and expanding their fleets on a sane, sustainable basis, both have access to competitive rates on capital and so should be well-positiioned in the events interest rates start tracking higher.

A better question for me is, "When does the increasing profitability of AC and WS cause someone to actually pony up folding money to start one of these phantom, ultra-low-cost-and-no-service carriers we keep reading about." That's when the fun begins. Ultimately, someone with more credibility than the people trying to create new competition is going to be tempted to take a slice out of the pie, even if they ultimately blow it.

[j.k.]

Well put, Dagger.

[dagger]

I think it's also true that both AC and WS are profitable to the point that while they compete against each other, there is no point it trying to use financial might to put the other's back to the wall, so to speak. WS is moving into some AC territory - Encore in the regional area, wide bodies for international - but that isn't enough, and won't be enough, to force AC off its strategy. Conversely, AC is expanding internationally at a far faster clip than WS, and has the ability with its larger network and international joint ventures to capture more secondary traffic flows from US and European carriers, even use non-stops on 787s to score some gains against the mid-East carriers in flows like North America-South Asia. With a weak dollar, AC can throw cut-rate intercontinental fares priced in US dollars into US markets and still achieve a healthy yield.

So the real measuring sticks for AC and WS are 1) What is each doing to enhance its own profitability. in other words, what is each doing to increase its upside; 2) How successful is each in capturing some of that upside; 3) How is each positioned to deal with either domestic or international operators seeking to enter their markets with even lower fares and fewer amenities; 4) How adaptable is each to adopting new trends in the industry. To me, pretty much everything else is just chest-beating.

This is a rare time when the economic environment is lifting all boats at the same time both AC and WS seem ready for it. Of course, history tells us that something is going to happen to disturb that, maybe someone living in a cave in Yemen or a volcano in Iceland or another pandemic scare...

[AvWatcher]

No.

The point being made is that even with loads 5% points below Air Canada's during their annual sched cutover month, WJ likely generated significantly higher margins than Air Canada, and even with both airlines equally enjoying the fruits of 70 cent per liter fuel, the monthly margin gap between the two likely grew year over year.

How's that? Because the mathematical relationship between their significantly lower unit cost base combined with their lower unit revenue base allows WJ to operate with a dramatically lower break even load factor.

As you may recall, WJ's margin in 2Q 2014, their seasonally weakest quarter, when interest payments are included as an expense, (and let me know how your conversation works out with your banker when you tell him the interest on your auto or home loan isn't an expense), was 7.2% compared to AC's identically calculated 3.7%.

WJ broke-even with a 73.8% l/f in 2Q 2014 whilst AC needed to fill 81% of it's seats to accomplish the same outcome, a gap of 7.1% points. Will that gap shrink, remain the same or grow in the quarter. Last quarter, it grew. Ask 10 analysts or media experts whether or not the gap between the two airline BELF is shrinking or growing and I'll bet 90% of them would tell you its shrinking. Therein is the power of "conventional wisdom".

In an industry where no scheduled operator has ever reported system loads higher than 90% over any generally accepted reporting window, (monthly, quarterly or annually), who has greater upside?

The airline that breaks even on a fully allocated basis when 68% of its seats are filled, or an airline that breaks even when 79% of its seats are filled?

And under the same circumstances, who has greater downside risk?

It's funny - I would have sworn the topic of this thread was "Decline in WestJet Load Factor" ...

[Thebean]

Or, to bring the discussion full circle, $85+ oil.