WestJet Aims to Be Canada's Answer to Southwest - TheStreet

WestJet Aims to Be Canada's Answer to Southwest

The regional upstart went public in July, and with the company's strong revenue and earnings, its stock is poised for continued solid performance.
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Flying Canada's skies has typically been a turbulent affair.

The two national carriers,

Air Canada

(AC:Toronto) and

Canadian Airlines

(CA:Toronto), have had to contend with the daunting geography of the world's second-largest country and a sparse population of 30 million people. Throw in airfare wars, labor strife and the ongoing competition from airlines flying out of border towns like Buffalo, N.Y., and Detroit, and it becomes clear why the Great White North is not the place where airborne cash cows come to graze.

The tough environment has given way to a dramatic restructuring of the unpredictable Canadian airline industry, which could result in the union of Air Canada and the ever-troubled Canadian Airlines by year's end. Cruising in the slipstream of this volatile environment, however, is Calgary-based

WestJet

(WJA:Toronto), Canada's fastest-growing airline. With its no-frills service and low fares, the 3-year-old airline is doing what many thought impossible: maintaining substantial growth and profits without tapping into the country's most competitive routes -- the Toronto-Ottawa-Montreal corridor.

Like the name suggests, WestJet serves 12 western Canadian cities, from Thunder Bay, Ontario, to Victoria, British Columbia. And while destinations like Grande Prairie and Saskatoon may not give WestJet the cachet that a Hong Kong, Paris or New York departure could deliver, the upstart doesn't seem to mind.

After all, this is an airline that has openly modeled itself after Dallas-based

Southwest Airlines

(LUV) - Get Report

, the hugely successful low-fare carrier which continues to prosper in the fiercely competitive U.S. market. Like Southwest, WestJet has focused on simple route structures, lower operating costs, high utilization rates, homogeneous equipment and, of course, competitive pricing. The company was founded by Clive Beddoe, a Calgary developer frustrated by the high fares he had to pay on frequent business trips to Vancouver.

Since the company's initial public offering at C$10 ($6.79) on July 13, the stock's performance has been solid. Shares of WestJet, which trade on the

Toronto Stock Exchange

, currently hover around $C13.80 and have traded as high as $C16.50.

WestJet's second-quarter revenue rose to $C45 million from $C28 million in the same period a year ago, while earnings per share for the quarter almost doubled to 11 Canadian cents from 6 Canadian cents.

David Gillen, an economist and air-transport specialist at

Wilfred Laurier University

in Ontario, notes that while low-fare airlines are typically easy prey for industry behemoths, WestJet has been the benefactor of a sound growth strategy, as well as great timing. It has steered clear of the eastern part of the country, where Air Canada has been known to drive out upstart competitors, while western Canada's traditional air power, Canadian, is too distracted by its own woes to concern itself with the new kid on the block.

"WestJet's cost structure is so much lower than Canadian's and Air Canada's, and that gives them a credible position in terms of how low they can set their fares," Gillen says. "They have followed the Southwest Airlines strategy ... and they have not deviated from it at all. As a consequence, their revenue per flight is substantial."

At the same time, the Calgary company has cultivated its own base of customers, one that isn't easily swayed by the pomp and perks of its bigger industry brethren. "They haven't tried to take on the incumbents, but rather have built the market," Gillen says of the company, noting that WestJet has yet to take aim at the business-class jet set. In some regards, Gillen argues, WestJet is really in competition with all modes of transport: planes, trains and, of course, automobiles.

And staying west might not be such a bad thing, says Julius Maldutis, a New York-based airlines analyst with

CIBC World Markets

, who rates WestJet shares strong buy. "The western Canadian market is a billion-dollar revenue market," he says. "They have 11 more cities in western Canada that they can serve that they currently do not serve." These could include Kamloops, British Columbia, and Lethbridge, Alberta. (CIBC was the lead underwriter for WestJet's IPO.)

In the midst of turmoil on the national airline front, anything can happen. The economic Darwinism currently playing itself out in the Canadian skies may not bode well for dinosaurs like Canadian and Air Canada, but for little guys like WestJet, it's shaping up to be clear skies ahead.

For more on WestJet and the Canadian airlines industry, please see stories by

TheStreet.com

columnist

Holly Hegeman

on

Aug. 26,

Sept. 13 and

Oct. 19.

Derek Moscato is a Vancouver-based freelance journalist.