Will a Lower Loonie Ground WestJet’s Profits?

Are 2013’s gains about to be erased?

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The Motley Fool

As the loonie continues its descent, different industries are affected in different ways — for some it could be a boost in revenues while for others it could erode their bottom lines.

For WestJet Airlines (TSX:WJA) it could be a mixed bag; a lower dollar could discourage Canadian travelers from jumping the border for flights, but it may also hurt its U.S. expansion plans.

Year-end results have touched down

Before we look into the future let’s take at WestJet’s February 4 release of its Q4 and year end results. Full year earnings set another record in 2013 with an 11% increase over last year with $268.7 million brought in. Converting this to earnings per share, 2013 worked out to $2.03 per diluted share up from $1.78 in 2012.

This jump in earnings and a 35 consecutive profitable quarter has brought with it a 20% boost to its quarterly dividend, now priced at $0.12 per share. Last year proved to be a good one for WestJet, between the launching of Encore, unveiled plans to expand into Europe and even the its own TV channel. The question is can this success carry into 2014?

A lower dollar equals higher fuel costs

As I mentioned above, one issue that could hurt WestJet in 2014 is the falling loonie — as the currency drops, the cost to purchase fuel in the U.S. rises. The company anticipates that for every cent the loonie drops it will see a $13 million increase in operating costs. Of that, $11 million would be directly related to an increased cost of fuel in the U.S. A falling dollar has the potential to undo several years of aggressive expansion in the US.

Passing the buck to the consumers

One way WestJet is looking to offset this cost is to pass it onto its customers by introducing a fee for the first checked bag (currently it is free). It is unknown what the cost would be the company is claiming to be following in the footsteps of similarly sized U.S. companies.

WestJet claims that its US equivalents “don’t appear to be suffering” from introductions of the new first checked bag fee. It could be a risky move digging deeper into customers’ pockets after a year that saw a 1.1% drop in “load factor”. Perhaps the coming introduction of inflight Wi-Fi service could cushion the bad news.

Foolish bottom line

Back in January WestJet was named “2014 Value Airline of the Year” by Air Transport World magazine’s 40th annual global airlines industry achievement awards. Whether investors feel the same way remains to be seen, as the stock has seen a steady decline over the past two months, since hitting a 52 week high of $28.99 on December 12.

Some analysts have set their targets for WestJet at $30, well above Monday’s closing price of $21.40. While a lower loonie could provide some turbulence for WestJet there is still the potential that new programs such as new “premium economy seating” or the growth of Encore could carry the number two airline throughout 2014.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Cameron Conway does not own any shares in the companies mentioned.

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