WestJet profit hit by energy downturn and stumbles on new London flights

Canada's second-largest airline saw its profit take a hit in the second quarter as it continued to feel the pinch from the energy downturn and had a rocky start to its new U.K. route.

WestJet Airlines (TSX:WJA) reported earnings of $36.7 million for the months of April through June, a 40 per cent drop from the $61.6 million it had in net income for the same stretch last year.

The Calgary-based airline said there was continued downward pressure on its fares as a result of the severe economic downturn in the energy sector in Alberta and Saskatchewan, contributing to a decline in its operating margin to 6.5 per cent from 10.7 per cent last year.

Costs were also up because of early stumbles on its new destination to London's Gatwick airport as the company dealt with flight delays and cancellations due to issues with the used Boeing 767 aircraft it added to its fleet for the route.

CEO Gregg Saretsky said on a conference call Tuesday that the problems were heightened because the aircraft were delivered 55 days late.

But he said the "early teething pains" are being worked out and the route has operated at a 100 per cent completion rate so far this month.

"It was a blip and the blip is behind us, knock on wood," said Saretsky.

Revenue for the company edged up slightly to $949.3 million from $942.0 million last year, despite continued weakness in Alberta and Saskatchewan, as the company continued to diversify its route offerings away from the two markets.

On Monday, WestJet announced its winter schedule that included more flights to tropical destinations, while in June the company added non-stop flights between Kelowna, B.C., and Winnipeg and between Hamilton and Edmonton.

Those cities are the same main flight hubs of NewLeaf, the low-cost air travel company that launched its maiden flight on Monday after months of delays.

WestJet executive vice-president Bob Cummings said on the call Tuesday that they aren't threatened by NewLeaf since it's operating so few aircraft and WestJet has competitive advantages. But he said they're keeping an eye on it.

Saretsky said the new entrant was entering a tough market.

"Canada is a very sparsely populated country, and this space that NewLeaf is competing in is a boneyard," said Saretsky.

"Just go back and think about JetsGo and Greyhound Air and Roots Air. None of them made it. It's a difficult space, and we're going to continue to protect our franchise."

NewLeaf chief operating officer Dean Dacko said in an interview that the company expected a very competitive environment, but is prepared for it.

"In our business model, our costs are significantly lower than WestJet's costs, and that's why we're able to offer the low fares that we have," said Dacko.

"Every time that WestJet looks to compete with us and come down to our level, they're losing money, so it's going to show up in their results, not ours."