Before market opened on Wednesday, WestJet Airlines Ltd (TSE:WJA) posted June traffic results and updated its second quarter guidance. June LF of 76.9% (down 50 basis points year-over-year) was a touch better than our expectations but was partially the by-product of a more price-driven traffic growth strategy (RPMs up 7%).
ASMs were up 7.6% mainly on the back of new domestic routes with second quarter ASM growth coming in at 7.5% (50 basis points ahead of high-end of guidance). Second quarter RASM is now anticipated to be down 5.7%.
This was because of higher than anticipated ASM growth and lower yields as WestJet used price to stimulate traffic. However, CASM (ex-fuel) also remained 200 bps better than anticipated (up 0.5% versus previous outlook of up 2% to 2.5%) due to higher ASMs and good expense control in several regions (airport, marketing, & General and Administrative expense).
Fuel costs are coming in at the high end of guidance and tax rates have been bumped higher by 200 basis points (higher Alberta corporate rates). We adj. our model to indicate updated guidance – this translated in a 3% reduction in our second quarter EBITDAR estimate to $220 million. Our annual EBITDAR estimates are mainly consistent.
Despite the changes to RASM, WestJet is yet expecting margins to expand year-over-year with a record second quarter because of lower costs. Shares are inclined to react negatively to this news because of the market’s focus on RASM.
We continue to anticipate that – in spite of the negative news – WestJet shares are striking at 4.4 times EV/next twelve months EBITDAR with growing profitability, a LT growth strategy that is doing well, and a strong balance sheet.
We maintain “Sector Outperform” rating with target price of C$36.50. Lower-than-expected traffic and yield improvement and increased competition are potential risks to be considered while investing.