WestJet to avoid passing on lower fuel costs to passengers, if demand remains strong

WestJet passengers hoping for a break on airfares from lower fuel prices should think again.

The airline says it plans to pocket as much of the savings as possible if demand remains strong.

“Our plan is not to pass anything on,” CEO Gregg Saretsky said Tuesday, noting that airline margins are very small. “If demand stays robust we will continue the pricing strategy we have had in effect and will take the opportunity to improve our bottom line.”

Fuel is the largest airline cost, accounting for about 30 per cent of total operating expenses, meaning a big drop in price can have a substantial positive impact on profits. The spot price of fuel has dropped 28 per cent to 65 cents per litre, down from 90 cents in 2014.

Walter Spracklin of RBC Capital Markets says both of Canada’s major airlines are hanging on to the benefits lower fuel prices. RBC’s Fare Tracker points to Air Canada’s core fares increasing 0.2 per cent in the quarter, with WestJet’s fares going up 1.6 per cent.

Airlines typically lower fares to fill seats and keep them elevated when demand is strong.

An 11 per cent increase in capacity by competitors to southern sun destinations, for example, may force WestJet to reduce fares in order to spur demand.

WestJet (TSX:WJA) boosted its quarterly dividend 17 per cent Tuesday after it capped 2014 with a record fourth-quarter profit that was up nearly 34 per cent from a year ago.

The dividend increase to 14 cents per share came as WestJet said it earned $90.7 million or 70 cents per diluted share in the three months ended Dec. 31, up from $67.8 million or 52 cents per share a year earlier.

Revenue was up 7.3 per cent to $994.4 million.

For the full year, it earned $284 million or $2.20 per diluted share, up from $268.7 million or $2.03 per share in 2013. Excluding a $33.2 million non-cash loss from the sale of 10 old Boeing 737 aircraft, it earned $317 million or $2.46 per share last year. Revenues grew 8.7 per cent to $3.98 billion.

Ancillary revenues from checked bags, reserved seating and upgrades increased 46 per cent in the quarter to $67 million, or $13.89 per passenger. For the year, ancillary revenues increased 31 per cent to $216.5 million or $11.05 per passenger.

WestJet said the new $25 checked baggage fee introduced in October was better received by passengers than expected, prompting it to raise forecasted annual revenues to $100 million.

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