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Planes: The friendly skies of Westjet

Paul Sullivan

One endlessly fascinating subject is the price of a stock. (I don't get out much.)

Take WestJet, for example. I noticed it was trading today at $18.31.

Then I wondered why. Why does something like RIM, which produces handy little communications devices, fetch an asking price somewhere north of $90: four and a half times more expensive than Canada's perennially successful airline?

Many analysts will get out their calculators and figure out the price to earnings ratio, the debt to equity ratio, or the return on equity ratio and set a target price for the stock. Sadly, stock prices fail to follow such meaningful benchmarks. For example, WestJet has a P/E of 16.5 while RIM is a bloated 46.9.

Somehow, the street has decided to pay $18.31 a share for WestJet and the heck with the tangibles, never mind the intangibles. They're interesting too. This just in: for the third year in a row, WestJet tops the annual list of Canada's Most Admired Corporate Cultures, as selected by Waterstone Human Capital. This list turns out to be a pretty reliable benchmark for growth this year's 10 most admired average three-year growth of 56 per cent, outperforming the TSX which has had three pretty good years at 16 per cent.

Of course, there are lots of reasons to wring your hands about this stock. No industry is more dependent on petroleum, and with the price of that commodity achieving breakthrough records, the skies aren't exactly friendly to jet fuel guzzling fleets. WestJet, which still sells itself as low cost and no-frills (I can attest to that), has so far only raised fares by 5 per cent; because it is perceived as the low-cost ride, doesn't have a lot of room to move.

Yet, this price pressure is offset by the continued increase in the number of bums in seats. The airline recently posted 9 consecutive record months of passenger levels. Its "load factor" or percentage of seats filled was up around 83 per cent in December and that's after a 14.4 per cent increase in capacity since 2006. Year over year, WestJet flew 18 per cent more passenger miles in September. Meanwhile, Air Canada is grimly holding on to a slightly slipping load factor.

Perhaps most telling: it didn't matter that November was a seasonally slow month and Air Canada's load factor went down year over year. WestJet logged yet another record month up 18.3 per cent over the previous November, with a load factor of 75.6 per cent.

We'll have to wait until Feb. 13 for Q4 results, but if they're anything like Q3, they'll be nearly unbelievable. Net profit was up 44 per cent year over year to $76-million on revenue of $502-million, with earnings per share at 58 cents. It would have been better but for the price of fuel jet fuel amounts to 26 per cent of total expenses.

Right now, WestJet has 35 per cent of the Canadian market, but is aiming to draw even with rival Air Canada, which still owns 60 per cent. WestJet will add seven more jets this year to its fleet of 70 Boeing 737s which will total 87 737s by 2013. The airline will fill those new planes by opening new holiday destinations in Mexico and the Caribbean, flying to 60 destinations by 2013.

WestJet is also proactively pursuing alliances discussions are under way with AirFrance/KLM for a commercial partnership, covering everything from interline flights to baggage tagging.

WestJet has (so far) successfully weathered a bloodless transition from its founding CEO Clive Beddoes, who stepped aside in September to allow young blood in the form of 40-year old Sean Durfy to take the captain's chair, but only after Durfy had two years to watch the 61-year-old Beddoes fly the plane.

This company does everything right, all the time. Well, almost everything. Recently flight personnel somehow allowed a five-year old girl, traveling alone, to be escorted off the plane by a stranger, instead of doing it themselves, but that's it for bad news.

Customers obviously prefer WestJet. So why don't analysts and investors? The stock is down 13 per cent since Jan. 1, which, uh, flies in the face of the company's performance. One item that has analysts and investors spooked is the report of the Competition Bureau recommending that Ottawa allow foreign competitors to stage point-to-point flights within Canada, regardless of whether or not other countries reciprocate. But while it's not exactly an idle threat, it's a long way from happening, and WestJet seems more capable of weathering turbulence than its competitors.

By any measure WestJet is good at what it does, from the way it treats it employees (all of whom own stock in the company) to the way it treats its customers equitably. Despite a tendency to add frills to its no-frills package, there's still only one class on a WestJet plane, which compares favorable with the competition, which have at least two classes: executives and cattle. WestJet has never had to remove services (meals, blankets, pillows, legroom, etc.) because it's never had any. Instead, it focuses on cheerful acceptance of the budget travel experience and getting you there on time without losing your luggage. Most Canadians appreciate the fact that without WestJet, we'd still be flying cattle class at premium prices.

Still, a nation's gratitude is not reflected in the WestJet share price. At least one analyst, Jacques Kafavian of Research Capital Corp, has set a target price of $28.50, and continues to see the stock as a buy So does Versant Partners analyst Cameron Doerksen, who downgraded the stock only last week, then reversed his field this week and upgraded it from "hold" to "buy". His target is a more conservative $23.50, but it is still 30 per cent plus higher than the current price.

I have watched WestJet grow from three airplanes flying to five destinations in 1996 to its current $2-billion in revenue in a mere 11 years. Beddoe, who was one of the people who founded the airline with less than $125-million in capital, summed it up when he turn over the reins to Durfy last September: "We've got a very strong balance sheet, a very strong cash position and we've been profitable almost our entire history." Hard to argue with that record.

You can argue that WestJet has never really seen rough air, that Air Canada has stolen all of its business advantages, that the cost of fuel makes running an airline prohibitive, and we're about the dive into a recession, at least in the U.S., but you could also argue that this little airline is just getting started, and that's what I'm excited about. So far, it has managed to grow in every year of its existence, whatever the challenge. Why bet against it, especially when the price is right?

Paul Sullivan is a longtime Vancouver journalist and president of Sullivan Media. He also writes for The Globe and Mail.

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