WestJet CEO Says High Fuel Prices, Lack of Planes Should Deter Startups

TORONTO (CP) - The high price of jet fuel, combined with a shortage of new and used aircraft, will make it difficult for new airlines to enter the Canadian market, WestJet CEO Clive Beddoe predicted Tuesday.

''My view of the next few years is actually very bullish, for a couple of reasons,'' Beddoe told a transportation and logistics conference organized by National Bank of Canada (TSX:NA).

''No. 1, you cannot buy or acquire old airplanes today, which has been the traditional way in which startups have got into business.''

Secondly, startups won't be able to make a go of it with the price of West Texas Intermediate, a benchmark crude oil, at $65 US a barrel, Beddoe added.

''It's not to suggest that somebody won't try it, but the prospects of being able to make it work are negligible.''

He also scoffed at the competitive threats from Air Canada Jazz, which is expanding its capacity on domestic and U.S. routes by about 10 per cent this year by beefing up its fleet of Bombardier and Embraer regional aircraft, or from Air Canada, which flies larger Boeing and Airbus planes, and focussing most of its capacity growth outside this country.

Beddoe said the average age of Air Canada's Airbus planes is now more than 17 years and he predicted the maintenance costs will go up very dramatically over the next few years.

''The opportunities to replace those aircraft is negligible. Boeing and Airbus, both, are significantly sold out into about 2010. So there's very little opportunity for our competitors to replicate our fleet.''

In addition, he said Jazz's cost per seat-mile is ''about double ours ... I think it's a very weak competitor from a cost perspective.''

Jazz was recently converted into a publicly traded trust that's still controlled by Air Canada parent ACE Aviation Holdings (TSX:ACE.B).

ACE's new chief financial officer, Brian Dunne, didn't respond directly to Beddoe's barbs when he made a later presentation. However, he noted that Jazz's operating costs are about 30 per cent lower than the main airline.

Dunne also acknowledged that, apart from the increased capacity at Jazz, there won't be much growth this year at Air Canada's international routes given that the airline is waiting for delivery of new Boeing aircraft to begin early in 2007.

''Clearly, there are many opportunities in the domestic market to continue to add routes, particularly on a point-to-point basis, and equally on transborder markets (in the United States),'' Dunne said.

He also said Air Canada's plans to evolve its innovative pricing initiatives - including an expanding number of multi-trip passes that are pioneers in the North American market.

''Our intention, over time, is to drive a substantial amount of our revenue onto a multi-trip flight-pass basis - away from a single-flight basis,'' Dunne said.

Allan Rowe, chief financial officer for Jazz, said that operating expenses in the fourth quarter of 2005 were $270.2 million, up $104.4 million or 63 per cent compared with the year-earlier period.

However, he said the unit costs were down 10 per cent in the fourth quarter compared with prior year ''despite an increase in fuel expense of 113 per cent.''

''If we exclude aircraft fuel, then unit costs ... improved almost 16 per cent in the fourth quarter, versus the comparable period in 2004,'' Rowe said.

Beddoe admitted in his speech that WestJet is deferring the use of its new reservation system until either November 2006 or February 2007, when there are two slower travel times during which the change can be made.

''The reservation system itself is actually complete. The use of it is going to be deferred because the testing of it is actually becoming a bigger problem for us than we anticipated,'' Beddoe said.

He added that problems won't affect the April launch of WestJet Vacations, which will sell hotel accommodations, car rentals as well as flights.

WestJet also continues to increase the number of French-speaking, bilingual flight attendants in order to begin service to Quebec City, the only major Canadian city not currently served by WestJet.

''Our expectation is that we will get to the prerequisite number that we feel we need, probably by the end of this year,'' Beddoe said

WestJet shares ended Tuesday at $10.80, up 13 cents or 1.2 per cent, on the Toronto Stock Exchange. ACE shares were at $33.32, up 27 cents or 0.82 per cent and Jazz units were at $9.75, down 15 cents or 1.5 per cent.



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