Value Line has initiated coverage of WestJet (WJA.TO) in its flagship product, The Value Line Investment Survey. WestJet is a Canadian airline (with headquarters in Calgary, Alberta) that serves 88 destinations in 20 countries in North America, Central America, the Caribbean, and Europe. Combined with its airline partners, WestJet’s network reaches more than 140 destinations. The airline has 120 aircraft and more than 8,300 full-time equivalent employees.
WestJet was founded by Clive Beddoe in 1996. (Mr. Beddoe is still chairman of the board of directors.) At that time, the airline had just three jets and served five destinations. The company had its initial public offering on the Toronto Stock Exchange on July 13, 1999. A secondary offering occurred in 2002. In 2004, WestJet began service to the United States. A year later, it was serving 23 Canadian and 10 U.S. destinations. In 2006, the airline began serving the Bahamas, and has continued to expand its international offerings since then.
Investors should be aware that there are differences in stockholders’ voting rights. Under the Canadian Transportation Act, WestJet’s voting control must be at least 75% Canadian. (Every shareholder has to complete a declaration.) Shares owned by Canadians are common voting shares—one vote per share. Shares owned by non-Canadians are variable voting shares. They also have one vote per share, unless their cumulative votes would make up more than 25% of the total. If this occurs, their share of the vote is reduced to 25%. Variable shares are converted to common shares if purchased by a Canadian. Likewise, common shares are converted to variable shares if purchased by a non-Canadian.
Since its inception, WestJet has had a good record of achieving profitability in a difficult industry. Only in 2004 did the company post a loss. In fact, the second quarter of 2014 marked the airline’s 37th consecutive quarter of profitability. Management has established a goal of earning a 12% return on invested capital. It achieved this target in 2012 and 2013, but fell short in the three previous years as the worldwide economy experienced significant weakness.
In 2013, WestJet earned $268.7 million on revenues of $3662.2 billion. (Data are in Canadian dollars and are based on International Financial Reporting Standards.) The most recent earnings report, for the quarter that ended on June 30, 2014, was positive. Revenues rose 10.3%, share earnings climbed 17.6%, and trends in almost all operating statistics were favorable.
WestJet has grown by adding routes and aircraft. The airline has experienced respectable increases in revenues, passengers, and available seat miles in recent years. WestJet has also tried to improve the passenger experience by reconfiguring its aircraft to offer “plus” seating (seats with extended legroom), and it plans to install a new inflight entertainment and connectivity system over the next two years through a multiyear agreement with Panasonic (PCRFY).
Cost cutting is one of management’s objectives. In early 2013, WestJet established a goal of reducing annual expenses by $100 million by the end of 2015. The company believes that it is a year ahead of schedule. Helping in this regard is the replacement of older aircraft with new aircraft that it has agreed to purchase from Boeing (BA -Free Boeing Stock Report). WestJet also completed a $40 million information technology transformation in 2013. It should be noted that the airline’s workforce is nonunion. Management believes this gives WestJet a competitive advantage.
WestJet is returning cash to shareholders. The company pays a quarterly dividend of $0.12 a share. However, at the stock’s recent price, the dividend yield is modest, and probably not high enough to attract income-oriented investors. The company has also repurchased stock in recent years.
The risk factors for an airline are fairly obvious. A downturn in the economy reduces customer demand. WestJet might face increased competition from other airlines. Aircraft fuel is the company’s largest expense item, so any rise in fuel costs hurts the company. Labor costs must also be kept in check. Finally, WestJet’s results are subject to currency fluctuations. In view of the numerous risks that the airline industry faces, the stock is best suited for risk-tolerant investors.
For a more thorough look at WestJet, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.