WestJet Airlines Ltd. will charge travellers a checked baggage fee in a search for new revenue sources as it begins to pay a dividend to shareholders for the first time since the airline was founded.
The Calgary-based airline (TSX:WJA) will begin charging a $20 fee for a second checked bag on flights on or after Jan. 19.
“This will enable us to maintain and gain cost efficiency and allow us to continue to be the low-fare leader in all of our markets,” Gregg Saretsky, WestJet’s president and CEO, said on a conference call to discuss the company’s 72 per cent profit surge in the third quarter.
In a sign of confidence about future growth, WestJet also announced plans to pay shareholder dividends in the next quarter, a move that is extremely rare in the airline industry.
WestJet projects that the new baggage charge will be a boon to shareholders and generate an extra $8 million to $10 million in revenue per year. The change is expected to affect less than 25 per cent of WestJet’s passengers.
WestJet already charges for a third and fourth checked bag. That fee will be reduced to $50 from $75, a level that WestJet says strikes the right balance.
The second-bag fee will also help offset the impact of rising fuel costs and is consistent with WestJet’s pay-per-use business model, in which passengers who choose to consume more services — including snacks, pillows and audio headsets — pay for them on top of their fare.
“We believe this new checked baggage approach more closely aligns us with standard industry practices as most of our competitors already charge for a second bag and many in fact already charge for a first bag too,” Saretsky said.
Further to its move toward greater efficiency, WestJet plans to have self-serve baggage check-in booths at all Canadian airports by next year.
Airlines were hit hard during the recession as fewer people went on vacation and business travel slowed during the global economic downturn. Many are searching for ways to improve profit margins and margins.
WestJet’s passenger levels have improved over last year’s by about 13 per cent, according to monthly statistics released Wednesday by the company.
Airline analyst Rick Erickson of RP Erickson and Associates said WestJet’s decision to implement the new baggage fees indicates it is confident about its future.
“The market is probably reasonably strong right now compared to what it has been in the past 30 months so … they must be feeling with some confidence that they can introduce this charge,” Erickson said.
Most North American airlines already charge checked luggage fees. WestJet’s $20 charge comes in lower than that charged by Air Canada’s $30 for bags on U.S. bound flights.
Erickson expects Air Canada to follow suit and charge for a second checked bag within Canada as the airlines tend to make those types of changes in tandem.
Many U.S. airlines charge passengers for even one checked bag and Erickson said WestJet’s new charge makes it very likely that the airline will eventually charge a fee for all checked luggage as well.
However, airline analyst Robert Kokonis says WestJet’s new charge could be a bit of a gamble in light of continuing economic uncertainty. Unless Air Canada does follow, WestJet will be at a competitive disadvantage, he added.
“Air Canada allows two free checked pieces for economy-class passengers. (After it) dropped its second bag charge within Canada in 2008,” Kokonis wrote in an email.
The WestJet quarterly dividend announced Wednesday — five cents to be paid Jan. 21 — is the first since the airline was founded in 1996.
That will cost WestJet about $28 million per year in payouts, and the baggage charge was likely introduced to help pay that dividend, Erickson said.
It is extremely rare for airline companies to payout dividends to shareholders, signalling that WestJet is very confident about its future, Erickson said, adding that its major rival Air Canada does not. However, low cost rival Jazz Air Income Fund is one of the only other airlines in the world that does.
The dividend and revenue enhancing announcements were welcome news for shareholders after years of WestJet’s lacklustre share performance, Erickson said.
WestJet also said it is also prepared to buy back about 7.3 million of its shares, or about five per cent of its outstanding stock, which will cost the company about $9.2 million, but will also benefit shareholders in the long run, Saretsky added.
Shares in the company were up 57 cents, or 4.5 per cent, at $13.36 Wednesday afternoon on the TSX.
In its earnings report, WestJet said third-quarter profits rose to $54 million, or 37 cents per share, from $31.4 million, or 24 cents in the third quarter of 2009 — in line with analyst estimates compiled by Thomson Reuters.
WestJet’s revenue increased as well, rising to $684.5 million from $600.6 million. Analysts had expected revenue to be just $5 million higher.
During the quarter, the company also entered its first code-share agreement, with Cathay Pacific Airways, and the first interline agreement with a U.S. carrier, American Airlines.
Interline pacts often pave the way for code-share deals, in which airlines sell seats on each another’s flights under the same code.
At first, Cathay Pacific connections will be made through the gateways of Vancouver and Toronto, with the option to continue on to Calgary, Edmonton, Winnipeg, Ottawa, Montreal and Halifax.
WestJet has also entered into a baggage agreement with Dragon Air, a regional Cathay Pacific subsidiary. All reservations for interline bookings will be handled by Cathay Pacific.
Code sharing is key for Calgary-based WestJet to tap into international markets, since its own planes don’t have enough range for transoceanic flights.
Saretsky has said he wants the airline to eventually tap into markets on every continent.
It already has a deal with Air France and the Netherlands’ KLM to bring European traffic into its network.
A code-share deal with Dallas-based Southwest Airlines (NYSE:LUV) fell through earlier this year, because the two airlines disagreed on changes WestJet wanted to be made to the agreement, first reached in 2008.