WestJet says fuel savings will not lead to lower fares
Good Morning All:
A very interesting comment made by Mr Gregg Saretsky the C.E.O. of WestJet regrding fuel costs.
That being said with the drop in the Canadian dollar (oil is priced in U.S. dollars) there can be issues airlines face with fuel being purchased on the futures market (pick wrong it hurts pick right you are a hero).
As an aside regular gas in southern California last week was roughly $:50 U.S. a liter for cash purchases.
From the Globe and Mail
GREG KEENAN - AIRLINE INDUSTRY REPORTER
The Globe and Mail
Published Tuesday, Feb. 03 2015, 6:51 AM EST
Last updated Tuesday, Feb. 03 2015, 5:16 PM EST
The benefits of falling prices for airline fuel will not lead to cuts in fares at WestJet Airlines Ltd., senior executives of the airline say.
“Our plan is not to pass any of it on,” WestJet chief executive Gregg Saretsky said Tuesday on a conference call with analysts and reporters.
“This is a supply and demand business and we price according to supply and demand. If demand stays robust we continue the pricing strategy we’ve had in effect and we will take the opportunity to improve our bottom line.”
Mr. Saretsky made his comments after WestJet reported a 6-per-cent jump in final profit last year – to $284-million or 70 cents a share, from $268.7-million or 52 cents a year earlier.
He added that the fuel price is volatile so the airline is not planning massive price reductions.
“I love that answer,” RBC Dominion Securities Inc. analyst Walter Spracklin said on the call in response to Mr. Saretsky’s comment.
WestJet returned some of the largesse to its shareholders, raising its quarterly dividend to 14 cents a share from 12 cents.
The full impact of lower fuel prices is not evident in WestJet’s fourth-quarter or year-end financial results and the reduction is offset by the drop in the value of the Canadian dollar that is caused by that same drop in the price of oil.
The drop in the Canadian dollar offsets about one-third of the drop in the cost of aviation fuel, WestJet officials said.
Fuel costs fell to 81 cents a litre in the fourth quarter from 92 cents a year earlier. But fuel will drop even more dramatically in the first quarter, WestJet forecast, hitting between 63 and 65 cents a litre.
“Given that fuel has been the airline’s largest cost item [approximately 30 per cent], the year-over-year impact of the fuel price drop on profitability is substantial,” analyst Cameron Doerksen, who follows the company for National Bank, said in a note to clients Tuesday.
The drop in oil prices that is now roiling the Alberta economy has had little impact on demand among travellers, Mr. Saretsky said.
The airline’s expansion eastward and to transborder destinations as well as two transatlantic routes means WestJet is much less dependent on business out of its Calgary hub than it was a decade ago, he said.
“Western Canada is bigger than just the province of Alberta,” he said.
WestJet does plan to offer periodic fare reductions to attempt to fill the 20 per cent of seats on average that are sitting empty on its planes, he said.
The uncertainty about where the price of oil is going – demonstrated by its sudden rise in recent days – and similar volatility in the value of the Canadian dollar are good reasons for WestJet to hold the line on overall fares, said Robert Kokonis, president of consulting firm AirTrav Inc.
“They have to fill those airplanes,” Mr. Kokonis said. “If they can help to stimulate the market keeping fares low that will keep the capacity filled and keep it filled at a reasonable degree of profitability,” he said.
Ancillary revenues, such as those from charging travellers fees for their first checked bags, are rising.
They amounted to $13.89 a passenger in the fourth quarter, up 38 per cent from $10.09 a year earlier.