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WestJet warns of financially-difficult second quarter

Threat of a pilot strike and higher-than-anticipated transformation costs will push up WestJet's unit costs and pull down unit revenues in the coming quarters.

The Calgary-based airline on 8 May says it expects adjusted cost per available seat mile (CASM), excluding fuel and employee profit sharing expenses, will surge 7.5-8.5% year-over-year in the second quarter of 2018.

By comparison, WestJet's first quarter 2018 CASM inched up just 2.6% year-over-year.

WestJet chief financial officer Harry Taylor says several factors contribute to WestJet's anticipation of a "uniquely high" second quarter CASM.

Those include expenses related to the planned 20 June launch of operations by WestJet's new ultra-discount unit Swoop, preparation for acceptance of Boeing 787-9s, an "elevated" level of service on the company's 737s and "other costs associated with the transformation".

"The start-up on the 787 has been higher than we expected," Taylor says during WestJet's first quarter earnings call on 8 May.

WestJet expects to take delivery of its first of ten 787-9s in January 2019.

Expansion of regional subsidiary Encore, which operates higher-unit-cost turboprops, and higher maintenance costs will also push up second quarter unit costs, the company says.

Meanwhile, WestJet expects revenue per available seat mile (RASM) in the second quarter will be flat to -2%.

For that decline it cites increased competition domestically, loss of revenue following the end of a codeshare deal with American Airlines and the threat of a pilot strike.

Pilot union Air Line Pilots Association, International has warned of a possible strike on 19 May if the parties do not reach an agreement.

"That has really thrown a wrench into RASM for the quarter," says Taylor.

The company expects total second quarter capacity will increase 4.5-5.5% year-over-year, with domestic capacity estimated to be up 3-4%.

WestJet also released updated full-year 2018 adjusted CASM figures. It now expects full-year adjusted CASM will increase 2.5-3.5%, up from a previous expectation of a 1-2% gain.

The carrier leaves unchanged its expectation that full-year capacity, and domestic capacity, will each be 5-6% higher than in 2017.

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