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WestJet readies to take on new low-cost rivals, including Southwest

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WestJet Airlines is preparing for the arrival of new low-cost competitors including Southwest Airlines by taking steps to expand its regional service and add wide-body planes to its fleet to access new international routes.

Chief executive Gregg Saretsky said the Calgary-based carrier's formula since 1996 has been to stay lean and keep fares low.

"So to the extent that there are other lower cost operators that see opportunities, they're going to be met with a pretty strong response from WestJet and our people are ready for any challenge," he said Tuesday after reporting record second-quarter results that beat analyst forecasts.

The airline's profits surged nearly 16 per cent to $51.8 million or 40 cents per diluted share for the three months ended June 30. That compared with a profit of $44.7 million or 34 cents per share a year ago.

Revenue increased 10.3 per cent to $930.3 million from $843.7 million in the second quarter of 2013.

Analysts on average had expected the airline to earn a profit of 28 cents per share, according to estimates compiled by Thomson Reuters.

WestJet's shares hit an all-time high of $29.11 and were up 4.45 per cent, or $1.22 at $28.64 in afternoon trading on the Toronto Stock Exchange.

Saretsky said the airline is continuing to study whether to offer lower base fares, but add baggage fees. A decision isn't expected before year-end.

WestJet has been increasing the revenue from ancillary fees passengers pay to upgrade seats or obtain other benefits. Non-ticket revenues increased 17 per cent in the quarter to $10 per passenger. That still lags U.S. airlines, but Saretsky said he's very optimistic of increasing those revenues.

The airline expects to bring in more than $80 million in ancillary revenue this year.

"We'll be ready to meet whatever competitor wants to come to take us on and Southwest is a very good competitor, but our job is to make sure that WestJet is in a position to be a fierce competitor as well," Saretsky said during a conference call.

Southwest's CEO recently said it is eyeing Canada, along with Hawaii, Alaska, Central America and northern South America as possible destinations for its international expansion. Canada Jetlines Ltd. of Vancouver and Jet Naked of Calgary are also musing about launching their own low-cost airline services.

Saretsky said Canadian airlines already face competition from low-cost carriers like Allegiant and Spirit Airways, that lure about five million Canadians a year to cross the border to fly from U.S. cities like Buffalo, N.Y., Burlington, Vt., and Bellingham, Wash.

A large fuel tax increase in Ontario will cost the airline up to $15 million a year when fully implemented in three years and only make the situation worse, the airline said.

WestJet announced Tuesday that it will add at least four used Boeing 767-300ERW aircraft. The first two planes will initially be used on routes between Alberta and Hawaii during the winter beginning in late 2015, replacing the smaller Boeing 757s flown on its behalf by Thomas Cook.

The bigger planes can fly further than WestJet's current fleet of Boeing 737s and allow it to compete with Air Canada (TSX:AC.B) on more routes.

The airline said it expects to expand its operation into overseas markets starting in the summer of 2016 but won't say if it will move beyond Europe to include Asia or other markets. WestJet began flying between St. John's, N.L., and Dublin last month.

The airline wouldn't immediately provide financial details about the planes, but Saretsky said more can be added, if required.

RBC Capital Markets analyst Walter Spracklin said the second-quarter results were driven by strong demand in Canada and on U.S. routes.

The improved yield "bodes well for the overall pricing environment," Spracklin said.

Costs excluding fuel were up 1.9 per cent, but less than the company's guidance for three to four per cent.

"Overall, it was a strong quarter for WestJet which highlighted both the carrier's strong operations, as well as the robust demand environment," he wrote in a report.

The airline also announced Tuesday that it has exercised options for five additional Bombardier (TSX:BBD.B) Q400 turboprops, as it expands its WestJet Encore regional service to Eastern Canada.

Follow @RossMarowits on Twitter

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