Westjet readies for Air Canada face-off after a highly successful 2012

WestJet Airlines Ltd. posted higher fourth-quarter earnings than analysts estimated and boosted its dividend 25 percent after operating fuller flights.

Profit of 46 cents a share compared with an average projection of 43 cents from analysts in a Bloomberg survey. Net income at Canada’s second-largest carrier rose 71 percent to C$60.9 million ($61 million), from C$35.6 million, or 26 cents a share, a year earlier, the Calgary-based company said.

WestJet is gearing up for the mid-2013 start of its Encore regional unit, which will compete with Air Canada and seek part of a C$2 billion market for short-haul Canadian and trans-border flights.

The airline’s dividend increase, and its announcement today that it will continue a share-buyback program, “are good indications that management is confident in their ability to generate strong free cash flow growth,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said in a note to clients. He rates the shares outperform.

WestJet agreed last year to purchase 20 Bombardier Inc. Q400 aircraft for its regional unit through 2016, with options for 25 more. Encore plans to take delivery of seven turboprops each this year and next, Chief Financial Officer Vito Culmone said.

The airline said today it signed an C$820 million commitment with Export Development Canada, which will provide financing support for the Bombardier planes. The company plans to announce a schedule for Encore, including the names of cities it will serve, later this month.

Share Repurchase

In the fourth quarter, WestJet filled 81.9 percent of its seats, an improvement of 3.2 percentage points from a year earlier. Through January, the carrier had posted occupancy records for each of the past seven months.

WestJet declared a dividend of 10 cents a share, up from 8 cents, payable on March 28 to shareholders of record as of March 13. The company said it plans to buy back as much as 5 percent of its outstanding shares.

The airline rose 0.6 percent to C$22.68 at 9:41 a.m. in Toronto today. The shares have gained 69 percent in the past 12 months, outpacing a 1.7 percent advance by the benchmark S&P Toronto Stock Exchange Composite Index.

Seating Room

To boost revenue, WestJet is preparing to introduce so- called premium economy seating aimed at business travelers who want extra legroom. The reconfiguration, which involves the installation of four rows of seats with 36 inches of legroom, will be fully completed by the end of the first quarter, WestJet said in a regulatory filing today.

The airline plans to introduce three bundles with varying fares and additional services, starting in the first half of this year, to take advantage of the new seating. The bundles will generate additional revenue of C$50 million to C$80 million annually, the company said today.

WestJet said today it expects “moderate” growth in revenue per available seat mile and margin expansion in the first quarter. Fuel costs in the period will probably be 94 cents to 96 cents a liter, the company said.

For all of 2013, the airline said it expects costs per available seat mile, excluding fuel and employee profit sharing, to increase 2 percent to 3 percent on a year-over-year basis.

Editors: James Langford and John Lear.

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net. To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net.