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
