There’s no reason to own WestJet stock, James Hodgins says

As far as WestJet Airlines (Quote, Chart TSX:WJA) is concerned, don’t expect a quick turnaround, says James Hodgins of Curvature Hedge Strategies, who claims Canada’s number two carrier will continue to underperform.

Last week, WestJet announced it would be cutting services with the aim of reducing costs and improving profitability, trimming back flights between cities in Canada’s Western provinces along with routes to southern destinations like Palm Springs, California, and Cancun, Mexico, and, notably, cancelling a Montreal-Quebec City service that the airline had taken on last year as part of its expansion plans.

In hindsight, those moves appear to have been ill-timed, according to Hodgins.

“WestJet built out too much capacity, effectively,” says Hodgins, president and chief investment officer at Curvature, to BNN Bloomberg. “Their [revenue per available seat mile and cost per available seat mile] numbers have been weak the last few quarters. They’ve got these union issues —and that used to be a big selling point for the company. And so, we see no reason to own it.”

WJA closed down 1.08 per cent to $18.79 in trading today, leaving the stock down 28 per cent for the year. WestJet’s share price took a tumble at the end of July as investors reacted to its latest earnings report.

On July 31, WestJet’s second quarter financials featured its first quarterly profit loss in 13 years, a $20.8 million loss or $0.18 per diluted share, a slide from the $48.6 million in profit or $0.41 per diluted share over Q2/17. Newly minted CEO Ed Sims put the blame on increased competition and rising fuel costs.

“Our 2018 results are off track from the path to our 2020 targets and we are now operating in a very different fuel and competitive environment against earlier assumptions,” said Sims. “To maximize our returns for this challenging period, we are taking action to improve interim results while also re-evaluating the pace and implementation of our strategic initiatives.”

Hodgins says his firm is currently shorting WestJet while taking a long position on rival Air Canada.

“Tax loss selling season is coming up soon and companies like WestJet who have been underperforming will stay under pressure,” he says.