Westjet’s Third Quarter Report

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Hi everyone today’s post is on Westjet’s Third Quarter Report. I am a shareholder of Westjet are you? If not and thinking of becoming an investor in the company than I hope this post helps you.

Before I start with the post I am going to list some acronyms that will appear throughout the post this will help you understand what they mean.

  • Available Seat Miles (ASM): A measure of total guest capacity, calculated by multiplying the number of seats available for guest use in an aircraft by stage length.
  • Cost Per Available Seat Mile (CASM): Operating expenses divided by available seat miles.
  • Revenue Passenger Miles (RPM). A measure of guest traffic, calculated by multiplying the number of segment guests by stage length.
  • Return On Invested Capital (ROIC): Is a measure commonly used to assess the efficiency with which a company allocates its capital to generate returns. Invested capital includes average long-term debt, average finance lease obligations, average shareholders’ equity and off-balance-sheet aircraft operating leases.

About Westjet

Westjet is Canada’s second biggest airline based in Calgary, Alberta. Through scheduled flights across a growing network, Westjet also operates Westjet Vacations, which provides air, hotel, car and excursion packages, and Westjet Encore, a regional airline which operates a fleet of turboprop aircraft in a network of destinations in Canada and the United States. As of September 30, 2016, the airline offered scheduled services to 102 destinations in North America, Central America, the Caribbean and Europe with a fleet of 113 Boeing 737s, 32 Bombardier Q400s and 4 Boeing 767-300ERW aircraft.

Third Quarter Financial and Operational Highlights

Three Months Ended September 30, 2016
($ in thousands, unless otherwise noted) 2016 2015 Change
Revenue 1,124,342 1,045,055 7.6%
Operating Expenses 954,209 885,537 7.8%
Earnings from Operations 170,133 159,518 6.7%
Operating Margin (per cent) 15.1% 15.3% (0.2 pts.)
Earnings Before Income Taxes (EBT) 162,563 146,295 11.1%
EBT Margin (per cent) 14.5% 14.0% 0.5 pts.
Net Earnings 115,971 101,803 13.9%
Earnings Per Share:
Basic 0.97 0.82 18.3%
Diluted 0.97 0.82 18.3%
ROIC (per cent) 11.6% 15.3% (3.7 pts.)

Overview

The third quarter results represent a record third quarter for Westjet it was the 46th consecutive quarter of reported profitability with net earnings of $116 million. Total revenue increased by 7.6% per cent year over year, driven primarily by increases in both guest and ancillary revenue. During the quarter the operating margin was 15.1 per cent.

Westjetters (what Westjet calls it’s employees) flew a record 5.9 million guests in the quarter an increase of 7%. Westjet returned approximately $40 million to it’s shareholders through dividend and share buy backs. Since 2010 almost $900 million have been returned to shareholders.

On September 20, 2016 Westjet announced a multi-year agreement with Suncor Energy, as the primary charter to fly employees and contractors to and from it’s oil sands operations in Northern Alberta, starting in early November of 2016.Through the agreement Westjet will provide over 100 flights weekly to the cities of Edmonton, Calgary, Vancouver, Kelowna, Saskatoon, and Fort McMurray.

Capacity

 

Three Months Ended September 30, 2016
2016 2015 Change
ASMs % of Total ASMs % of Total ASMs
Domestic 4,880,593,632 63.9% 4,824,830,557 69.9% 1.2%
Transborder and International 2,754,483,507 36.1% 2,079,363,424 30.1% 32.5%
Total 7,635,077,139 100.0% 6,904,193,981 100.0% 10.6%

For the three months ended September 30, 2016 overall capacity was up 10.6 per cent. The increase was primarily a result of the start of flights to London Gatwick which started in May 2016. Also capacity increased due to increased frequencies and new destinations flown by Boeing 737 NG(Next Generation) aircraft and the growing Q400 fleet.

Revenue

Three Months Ended September 30, 2016
($ in thousands) 2016 2015 Change
Guest 988,329 928,821 6.4%
Other 136,013 116,234 17.0%
Total Revenue 1,124,342 1,045,055 7.6%
Load Factor 84.0% 81.8% 2.2 pts.
Yield (cents) 17.53 18.51 -5.3%
RASM (cents 14.73 15.14 -2.7%

Revenue in the quarter increased by 7.6% to $1,124.3 million compared to $1,045.1 million. The overall increase in total revenue was primarily driven by an increase in ancillary revenue included in other revenue combined with an increase in guest revenue.

Westjet saw an improved load factor from traffic growth across the transborder and international network compared to the same period of 2015, predominantly due to the new London Gatwick flights which are operating at higher than average load factors. Yield was reduced in the domestic network due to the impact of fare reductions as a result of the economic downturn in the energy sector in Alberta.

Other Revenue

Included in other revenue are amounts related to ancillary revenue, Westjet Vacations’ non-air revenue, cargo and charter operations. During the three months  other revenue increased by 17% to $136 million from $116.2 million. This increase is mainly by an increase in ancillary revenue.

Three Months Ended September 30, 2016
2016 2015 Change
Ancillary Revenue ($ in thousands) 104,255 90,510 15.2%
Ancillary Revenue Per Guest 17.82 16.44 8.4%

For the three months ancillary revenue was $104.3 million an increase of 15.2 per cent from $90.5 million. On a per guest bases, ancillary fees for the quarter increased by 8.4% to $17.82, from $16.44 per guest. This is mainly attributed to increased upgrade fees related to the enhanced Plus product, and the continued success of the Westjet RBC MasterCard program, pre-reserved seating fees and first checked bag fees.

Operating Expenses

Expense ($ in thousands) CASM (cents)
Three Months Ended September 30, 2016 Three Months Ended September 30, 2016
2016 2015 Change 2016 2015 Change
Aircraft Fuel 206,381 206,924 -0.3 2.7 3 -10
Salaries and Benefits 208,804 197,811 5.6% 2.74 2.87 -4.5
Rates and Fees 160,586 150,505 6.7% 2.1 2.17 -3.2
Depreciation and Amortization 88,171 69,739 26.4% 1.15 1.01 13.9%
Sales and Marketing 92,030 84,019 9.5% 1.21 1.22 -0.8
Maintenance 50,958 44,659 14.1% 0.67 0.65 3.1%
Aircraft Leasing 45,178 40,572 11.4% 0.59 0.59 0.0%
Other 70,522 58,334 20.9% 0.92 0.84 9.5%
Employee Profit Share 31,579 32,974 -4.2 0.42 0.48 -12.5
Total Operating Expenses 954,209 885,537 7.8% 12.5 12.83 -2.6
Total, Excluding Fuel and Profit Share 716,249 645,639 10.9% 9.38 9.35 0.3%

In the third quarter operating expenses increased by 7.8% to $954.2 million compared to $885.5 million in the same period of 2015. The increase was driven by the year over year ASM growth of 10.6 per cent as well as increased depreciation and amortization, maintenance and other operating expenses.

On an ASM basis, operating expenses decreased by 2.6 per cent to 12.50 cents from 12.83. This is due to a decrease in aircraft fuel and employee profit share expenses.

Aircraft Fuel

Three Months Ended September 30, 2016
2016 2015 Change
Aircraft Fuel Expense ($ in thousands) 206,381 206,924 -0.3
Aircraft Fuel Expense as a Percent of Operating Expenses 21.60% 23.40% (1.8 pts)
Fuel Consumption (litres) 361,737,466 326,531,738 10.8%
Fuel Cost Per Litre (cents) 57 63 -9.5
Average Market Price For Jet Fuel in US Dollars (per barrel) 56 65 -13.8
Average Market Price For Jet Fuel in Canadian Dollars (per barrel) 73 85 -14.1

Fuel is a significant expense for Westjet representing 21.6 per cent of total operating expenses compared to 23.4 per cent in 2015. Aircraft fuel expense decreased by 0.3 per cent to $206.4 million from $206.9 million primarily due to the 9.5 per cent year over year decrease in fuel cost per litre, partially offset by increased fuel consumption.

Fuel costs per ASM for the three months were 2.70 cents compared to 3.00 cents in 2015, a decrease of 10 per cent. This was driven by the decrease in the Canadian market price of jet fuel.

Depreciation and Amortization

Three Months Ended September 30, 2016
2016 2015 Change
Depreciation and Amortization 88,171 69,739 26.4%
CASM (cents) 1.15 1.01 13.9%
Total Number of Owned Aircraft 107 88 21.6%

Depreciation and amortization expense was $88.2 million, a $18.4 million or 26.4 per cent increase from $69.7 million. Per ASM depreciation and amortization expense was 1.15 cents representing an increase of 13.9 per cent from 1.01 cents. The year over year increases were due to the growth of Westjet’s fleet and the impact of the devaluation of the Canadian dollar as certain aircraft purchases are in US dollars.

Maintenance

Expense ($ in thousands) CASM (cents)
Three Months Ended September 30, 2016
2016 2015 Change 2016 2015 Change
Technical Maintenance 33,060 25,821 28.0% 0.43 0.38 13.2%
Maintenance Provision 17,898 18,838 -5 0.24 0.27 -11.1
Total Maintenance 50,958 44,659 14.1% 0.67 0.65 3.1%

The maintenance expense in the quarter was $51 million an increase of $6.3 million or a 14.1 per cent increase from $44.7 million. Maintenance expense per ASM was 0.67 cents an increase of 3.1 per cent from 0.65 cents. The increase in maintenance expenses is due to the growing fleet of aircraft.

Employee Profit Share

All Westjet employees are eligible to participate in Westjet’s employee profit sharing plan. The plan is a variable cost, employees receive larger awards when the company is more profitable, and is reduced when the company is less profitable. The profit share expense was $31.6 million representing a decrease of 4.2 per cent from $33 million.

Cash Flow Information

Three Months Ended September 30, 2016
($ in thousands) 2016 2015 Change
Cash Provided by Operating Activities 277,037 331,384 -54,347
Less:
Cash Used by Investing Activities -150,585 -150,009 -576
Cash Used by Financing Activities -51,738 -110,787 59,049
Cash Flow From Operating, Investing and Financing Activities 74,714 70,588 4,126
Effect of Foreign Exchange on Cash and Cash Equivalents 288 19,539 -19,251
Net Change In Cash and Cash Equivalents 75,002 90,127 -15,125
Cash and Cash Equivalents, Beginning of Period 1,698,248 1,329,552 368,696
Cash and Cash Equivalents, End of Period 1,773,250 1,419,679 353,571

Operating Cash Flows

For the quarter Westjet’s cash flow from operations decreased 16.4 % to $277 million compared to $331.4 million in the same quarter of 2015. The year over year decrease was mainly a result of lower contributions from working capital.

Investing Cash Flows

Westjet’s cash flow used for investing activities totaled $150.6 million as compared to $150 million in the same period last year. The year over year increase in cash outflows is the result of increased capital spending in the current period, lower contributions from working capital, as well as the impact of cash proceeds received on the sale of two aircraft in the prior year comparative period. The majority of the investing activities related to the delivery of two Q400 aircraft, additional deposits for future Boeing MAXs, Boeing 737 NGs and Q400 aircraft, overhauls of owned engines, as well as installation of new inflight entertainment system and slim-line seats with power being installed in the planes.

Financing Cash Flows

Financing cash outflows totaled $51.7 million compared to $110.8 million in 2015. Westjet’s financing activities consisted of cash inflows of $41.2 million related to the financing of two Q400 aircraft, offset by cash outflows related to long-term debt repayments of $37.4 million, dividends paid of $16.6 million, cash interest paid of $14.8 million and $23.3 million in shares repurchased.

Free Cash Flow

Free cash flow in the quarter was a positive $126.5 million compared to a positive $181.4 million last year. On a per share basis (diluted), this equated to positive $1.05 per share, compared to a positive $1.45 per share. The decline is due to increased capital expenditures compounded by a decrease in earnings compared to the same period last year.

Current and Future Fleet

Total Future Deliveries Total
Dec. 31, 2015 Sept 30, 2016 Q4 2016 2017 2018 2019-20 2021-23 2024-27 Total 2027
Narrow Body Aircraft
Boeing 737-600 NG 13 13 13
Boeing 737-700 NG(i) 59 57 57
Boeing 737-800 NG(ii) 42 43 3 2 5 48
Boeing 737 Max 7(iii) 6 4 15 25 25
Boeing Max 8(iii) 4 7 12 11 6 40 40
Wide Body Aircraft
Boeing 767-300 ERW 2 4 4
Regional Aircraft
Bombardier Q400 NextGen 24 32 2 7 4 13 45
Fleet Before Lease Expiries 140 149 5 13 11 18 15 21 83 232
Lease Expiries -1 -6 -9 -12 -14 -42 -42
Fleet After Lease Expiries 140 149 4 7 2 6 1 21 41 190
(i) On Sept 30, 2016 of the 57 Boeing 737-700NG 28 are leased and 29 are owned
(ii) On Sept 30, 2016 of the 43 Boeing 737-800NG 14 are leased and 29 are owned
(iii) There are options to purchase an additional 10 Boeing Max aircraft between the years 2020 and 2021

Shareholder Returns

In the third quarter Westjet paid $16.6 million in dividends and spent $23.3 million repurchasing shares.

Stock Information

  • Ticker WJA on the Toronto Stock Exchange
  • P/E is 8.34
  • Market Cap: $2.56B
  • Quarterly Dividend $0.14 (Annual $0.56)
  • Yield (3.72%)

The information used in this post was found in Westjet’s Third Quarter Report and on Yahoo Finance.

I hope you enjoyed this post please send me a comment I would love to hear your thoughts.

Thanks

Matthew

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