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WestJet Airlines Ltd. (TSX:WJA): Buy Now or Sell?

WestJet Airlines (TSX:WJA) reported results for the most recent quarter last week that were mixed at best. Gone are the record-breaking quarters and streaks of earnings beats. Instead, the airline has to cope with rapidly rising fuel costs and labour issues.

Here’s what the quarterly report means for investors and if WestJet should remain in your portfolio.

Quarterly results: A change is coming

WestJet reported a profit of $45.9 million in the third quarter, which represented a whopping 66% decline over the $135.9 million that was posted in the same quarter last year. Much of that decline was absorbed in rising fuel costs, which realized a $0.85, or 37%, gain over the same period last year. Labour issues also weighed in on the results, as potential strike action by the WestJet pilots earlier in the year had an impact on overall traffic, as weary travelers made alternative travel plans.

A strike was narrowly avoided this past spring; the airline agreed to a settlement just two weeks after a strike vote as cast by the union.

A third headwind came through by way of competition. WestJet has a two-pronged approach to growing revenue, with one end contingent on WestJet’s expanding role in the lucrative international market, where fares, margins, and traffic potential are high, and the other being on the opposite end of the market by serving the low-cost domestic and cross-border traveller, which also serves as a feeder for the growing international network.

Despite those slowdowns, there were positives to take from the quarter. Revenue topped $1.26 billion in the quarter, surpassing the $1.21 billion reported in the same period last year. WestJet’s available seat miles, which is a measure of capacity, saw a 9.9% increase over the same period last year, and overall traffic by revenue passenger mile saw an equally healthy bump of 8.6% over the same quarter last year.

Is WestJet still a good investment?

Depending on your outlook, WestJet could be viewed as a great investment, or one that investors should dump and invest elsewhere.

WestJet’s growing international network is going to be flying one of the most advanced and sought-after jets in the world: the Dreamliner. WestJet’s commitment to offering aggressively priced fares on those routes coupled with full-service amenities that rival traditional carriers are bound to attract a healthy influx of passengers in both directions.

The same could be said about WestJet’s Swoop ULCC offering. Despite the market beginning to crowd among a variety of new entrants, WestJet’s use of neighbouring airports over more expensive metro area hubs, such as Hamilton over Pearson, can draw in even more traffic while keeping costs low.

In my opinion, while WestJet and the entire airline segment is not without risk, long-term investors should stay the course with WestJet, which comes down to the following three key reasons.

First, WestJet’s launch of Swoop and its own international venture are still very much in its infancy. Growth in both of these segments should continue to see moderate growth over the next few quarters.

Second, while rising fuel costs are a concern, it is a concern that impacts the entire industry, not just WestJet. Much of that potential added expense can be offset by some belt-tightening. The company hasn’t been coy about cutting or reducing service on less-profitable routes in the past, and, for the moment, traffic is still up. In the same vein, WestJet continues to add new routes where there is potential demand, such as the recently announced St. John’s to Fort Lauderdale service beginning in March of next year.

Finally, there’s WestJet’s dividend. The current quarterly payout amounts to a respectable 2.87% yield, which is exceptionally generous when compared to many of its peers in the airline sector, and WestJet’s dividend has remained attractive, despite not seeing a bump in well over a year.

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Fool contributor Demetris Afxentiou has no position in any of the stocks mentioned.

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