WestJet’s London glitches weigh on costs as airline reports 40% drop in profit

WestJet Airlines Ltd.’s costs will be higher this year than previously forecast because of glitches on its new London flights that resulted in a “significant bill” for passenger compensation, the company said Tuesday.

WestJet was forced to cancel 10 London flights out of 426 in the first two months of operations due to maintenance problems with its recently acquired fleet of Boeing 767s, which are between 23 and 25 years old.

European law requires airlines to compensate passengers whose flights are cancelled based on the distance of the flight. For overseas flights like WestJet’s, that compensation works out to 600 euros (about $870) per passenger.

“These planes are very full so every time there’s a hiccup there’s 260 people we’re having to pay 600 euros to and it doesn’t take long in a quarter to rack up a significant bill,” CEO Gregg Saretsky said on a conference call with analysts.

WestJet said it now expects full-year cost per available seat mile, excluding fuel and employee profit share, to rise 2.5 to 3.5 per cent. This is above the previous forecast of 0.5 to 2.5 per cent due to “guest experience costs” and maintenance expenses associated with the London routes, said chief financial officer Harry Taylor.

WestJet blamed the problems on delays in getting the aircraft from the maintenance facility where they were being overhauled. This gave the airline less time than usual for the shakedown process, testing that’s done to make sure there are no problems or defects before the aircraft enter service.

However, Saretsky stressed that the problems, which he characterized as “teething pains,” seem to be behind WestJet. The airline completed all of its transatlantic flights in the first 25 days of July.

“The guidance we gave when we announced service with wide-body aircraft to London was that we expected the operation to be accretive to earnings. That continues to be our expectation,” he said. “We’ve been very pleasantly surprised by the very robust demand that we’ve seen.”

He added that the London flights have been operating with above-average load factors, which “bodes well for future potential expansion of this new line of business.”

WestJet’s profit plunged 40.5 per cent to $36.7 million in the second quarter as lower fares and higher costs weighed on the airline’s bottom line. Earnings per share came in at 30 cents, one penny above analyst expectations, while revenue rose 0.8 per cent to $949.3 million.

We’ve been very pleasantly surprised by the very robust demand that we’ve seen

Saretsky blamed economic weakness in Alberta and Saskatchewan for the lower profit but said the airline’s “fundamentals remain strong.”

Load factor — the percentage of seats filled across the network — rose 2.7 points to 80.8 per cent, but yield — the average fare paid per mile, per passenger — fell 8.9 per cent. This led to an overall decline in revenue per available seat mile of 5.8 per cent, while cost per available seat mile excluding fuel and employee profit share rose seven per cent.

WestJet announced Monday that it will add dozens of new flights to its network this winter. The airline is facing new competition from NewLeaf Travel Co. Inc., a discount travel company that launched its first flights this week, although Saretsky dismissed the threat.

“Canada is a very sparsely populated country and this space that NewLeaf is competing in is a boneyard,” he said. “Just go back and think about Jetsgo and Greyhound Air and Roots Air (all failed airlines) — none of them made it. It’s a difficult space and we’re going to continue to protect our franchise.”

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