WestJet plans new fees, despite record profit

Despite posting record profits, WestJet Airlines says it is eliminating free checked bags on all economy fare flights to Europe and sun destinations starting early in the new year.

The Calgary-based airline announced Tuesday that a new, $25 baggage fee will apply to new economy bookings for flights as of Jan. 6.

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WestJet (TSX:WJA) will also raise fees for some reserved seating, with the increases ranging between $10 and $20 for exit rows on flights longer than 300 miles (some 500 kilometres) with the amount determined by actual distance flown.

The two initiatives are expected to generate $15 million to $25 million in additional annual revenue.

Chief executive Gregg Saretsky said the charges are in line with those of competitors and support the airline's strategy of keeping fares low and allowing passengers to pay only for the services they want.

"With airfares that start at $299 to Europe from Toronto, for example, we're not going to apologize for charging $25 for a first checked bag," he said during a conference call to discuss WestJet's third-quarter results.

"These fares are significantly lower than the market has seen and we're very proud to be bringing our brand of low cost to these markets."

The airline said it doesn't expect to see many complaints from passengers because it believes 75 per cent of them will avoid the fees by purchasing higher-priced Flex or Plus fares, or are members of the top tiers of its rewards program or have a WestJet RBC World Elite MasterCard.

Canada's airlines have increasingly tacked on fees for a variety of charges, including checked bags, in flight entertainment, advance seat bookings and cancellations as they pursue a so-called "unbundling strategy."

WestJet earned $90.5 million in ancillary fees in the third quarter, up from $51.3 million a year ago. That translated into $16.44 per passenger, up 68 per cent from $9.80 in the 2014 quarter.

Overall, the airline earned a record $101.8 million, helped by these fees and lower fuel expenses.

Total revenue was up 3.5 per cent from or $35.3 million from last year to $1.045 billion, although ticket revenues dropped slightly.

Air Canada (TSX:AC) charges for checked bags on flights to sun destinations but not to Europe. The country's largest airline said it has no plans to follow WestJet's lead.

But Robert Kokonis, president of airline consulting firm AirTrav Inc., said the temptation will ultimately be too great not to chase extra revenues.

The experience of past introduction of fees has shown that any passenger backlash is short-lived. "After a month or so they begrudgingly accept it, so WestJet's just keeping with the trend of unbundling," he said in an interview.

"The financial model of the airline has changed after decades of losses and finally finding a way to make sustainable profits is not a bad thing."

A decline in fuel prices dropped about $50 million from WestJet's operating expenses, largely offsetting increases in most other areas, including airport operations, flight operations, sales, marketing, maintenance and in flight amenities.

WestJet's profit for the three months ended Sept. 30 — which includes the seasonally busy summer vacation months — was 82 cents per share, on both a reported and adjusted basis — better than analyst estimates.

Analysts had estimated 75 cents per share of adjusted earnings, up from 66 cents per share in last year's third quarter, according to Thomson Reuters.