WestJet: Is Southwest Delay 'The Tip of the Iceberg'?

Southwest Airlines’ (LUV) decision to delay its code-share agreement with WestJet Airlines Ltd. (WJAVF.PK) this week highlights the inherent risks associated with the Calgary carrier launching its new reservation system, frequent flyer program, and code-share agreements in unison, according to Ben Cherniavsky, Raymond James analyst.

The analyst recently downgraded WestJet to a “market perform” rating due to the challenges associated with having all these balls up in the air at once.

He said in a note to clients:

They each have the potential to generate significant strategic growth for the airline over the long-term, [but] we feel the related risks of their development not going entirely according to plan must also be factored into the risk-return equation.

WestJet still intends to push ahead with its Air France/KLM code-share deal by early 2010, and management told the Financial Post this week that it has signed memorandums of understanding with “two or three” other carriers to strike similar deals that it plans to announce in the coming months. British Airways (BAIRY.PK) and Cathay Pacific (CPCAF.PK) are expected to be next in line.

While Mr. Cherniavsky said the delay of the Southwest deal is not “an enormously material setback” it does highlight the challenges inherent in launching such code-share agreements.

He added:

It also, we think, begs the question: is this just the tip of the iceberg? Only time will truly tell, which is one reason why we prefer to take more of a conservative ‘wait and see' approach to the stock in the near-term.