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Varcoe: WestJet navigates through turbulence rocking Alberta economy

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Alberta’s economy is expected to slow this year because of weak energy prices and the effect of oil curtailment, yet one area appears to be cutting through the choppy headwinds.

Air travel.

Calgary-based WestJet Airlines released its fourth-quarter results on Tuesday and is moving ahead on its international expansion plans, growing its new ultra-low-cost carrier, and continuing efforts to contain costs after a bumpy ride in 2018.

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One area that isn’t causing concern is the state of business on its home turf of Alberta.

Speaking on a conference call with analysts, WestJet CEO Ed Sims noted the province’s economy is expected to decelerate, with GDP growth slowing from 2.5 per cent last year to around 1.5 per cent in 2019.

A 30-per-cent decline in global oil prices since last fall and the province’s decision to restrict crude production are projected to limit Alberta’s economic expansion, although the drop is only expected to be temporary.

“We see a strong recovery for 2020 forecast, the highest in Canada still,” Sims said of the outlook for Alberta.

“Despite that (economic) dip and despite the impacts of pro-rationing on the energy industry, we are still seeing strong underlying demand, both in Alberta but right across Canada.”

Last week, the Calgary International Airport reported its strongest passenger growth since 2014, before oil prices collapsed and triggered a full-blown recession.

The number of passengers moving through the airport last year shot up by 6.6 per cent to top 17 million travellers.

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More than one-third of all passengers were headed to other places and this trend has “recession-proofed” the facility, Calgary Airport Authority CEO Bob Sartor told Postmedia’s Amanda Stephenson.

Equally impressive is the fact that even with today’s economic pressures, the airport still expects traffic to increase by about one million travellers in 2019, in part because of WestJet’s international strategy.

The company will be flying three new Boeing 787 Dreamliner aircraft out of Calgary to European destinations — Dublin, Paris and London’s Gatwick Airport, beginning in late April — and it’s adding new direct flights into U.S. cities.

WestJet officials said Tuesday they are not seeing any hint of a slowdown or reduced bookings in the first quarter coming out of Edmonton or Calgary, and the corporate travel market continues to perform well.

During the 2015-16 recession, the company was squeezed by the sudden drop-off in Alberta business and leisure travel.

In response, WestJet cut its Alberta capacity by five per cent in 2016, shifting some planes to more profitable routes in other parts of the country.

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The company estimates revenue from Alberta’s air industry fell by $1 billion from the peak of 2015 through the summer of 2018, but has since recovered by about $200 million.

WestJet says 36 per cent of the company’s total capacity connects through Calgary, and 48 per cent through the province.

Analyst Chris Murray of AltaCorp Capital said the company’s effort to move more traffic originating from outside the province — such as from British Columbia or the United States — through its Calgary hub is one way that WestJet “helps mitigate what directly happens in Alberta.”

And Alberta air travel isn’t deteriorating, as some had expected.

“While we have seen a bit of an (economic) downturn in Alberta, the demand for travel has still stayed fairly healthy,” Murray said.

“Air travel is a pretty good indicator of where we are heading and it looks like for the next three to six months, everyone is still thinking I am taking my winter vacation or, if needed, still travelling for business.”

The past 12 months have been a challenging period for the airline and Sims, who took over as CEO last March.

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The company launched its new ultra-low-cost carrier Swoop last year, and plans to grow its fleet from six to 10 planes by the fourth quarter.

It’s also preparing to expand internationally with its new wide-body planes, and is focusing on attracting more premium travellers to WestJet.

The threat of a strike last spring by its pilots saw bookings fall sharply due to the potential for travel disruption. WestJet lost money in the second quarter, ending a streak of 52 consecutive quarters of profitability.

(In the October-to-December period, the company reported net earnings of $29.2 million, down from $47.8 million a year earlier.)

Negotiations with the pilots went to arbitration, while the company is preparing to talk with other employee groups that have unionized, including its flight attendants.

“We remain very aware that we’re in the early stages of our turnaround efforts and we have a lot of heavy lifting still ahead of us,” Sims said.

“Nonetheless, we remain confident in the underlying strength of the fundamentals of our business model.”

Analyst Cameron Doerksen of National Bank said the company’s fourth-quarter results were ahead of forecast and travel demand appears solid, with bookings for WestJet’s Dreamliner routes tracking at or ahead of target.

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However, the company faces ongoing labour uncertainty, competitive pressures from the potential start-up of new ultra-low-cost carriers, and needs to execute on major growth initiatives.

“As far as getting the company back on track to higher profitability year over year, I think we are almost certainly going to see that in 2019,” Doerksen said.

“So I’d say the turnaround, if you want to call it that, is well underway.”

And if Alberta’s air travel business remains resilient throughout 2019, the journey ahead should be that much smoother for WestJet.

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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