TORONTO -(Dow Jones)- The high price of oil is discouraging Canadians from flying, say executives at one of the country's largest airlines.

Demand for air travel is starting to fall even in the midst of the traditionally busy summer season, officials at WestJet Airlines Ltd. (WJA.T) said Wednesday. Fare increases driven by fuel surcharges haven't been absorbed as easily as had been hoped, while a slowing economy - especially in Ontario and eastern Canada - is eating into discretionary spending.

"It's difficult to speak confidently about future demand," WestJet Chief Executive Sean Durfy said on a second-quarter earnings conference call. The Calgary-based airline is "seeing a slowing of certain bookings on certain routes" at certain times, he said.

Tellingly, Durfy noted, the number of bookings rise whenever the price of oil comes down, and drops off when it spikes. Moreover, he said, booking patterns have "dramatically" changed for the airline, which used to see many last-minute passengers attracted to its low fares. Now, Durfy said, passengers are booking well ahead of time in a bid to beat any potential fuel-price increase.

The "bottom 10%" of the airline's "guest profile" are no longer flying, not just because of high fuel prices, but also because of the uncertain economic outlook, Durfy said. Meanwhile, the more active business traveller appears to be cutting back.

Still, the airline plans to increase capacity by 18% in the third quarter, which began July 1, and by 10% in the fourth quarter. It expects to increase capacity by 16% in 2008 overall, and by 8% in 2009.

"We have not deviated from our growth plan and will continue with it," Durfy said in an interview following the call.

Durfy said WestJet is in a "hell of a position" to take advantage of the struggles of its competitors in Canada and the U.S. The carrier with the lowest- cost and best business model is going to "win" in this environment, he said, " and that's us."

WestJet's lower-cost structure "allows us to go in and take market share," he said. "There's going to be a tremendous amount of opportunity in the transborder market as the U.S. takes capacity out. We're going to see opportunities."

Most U.S. carriers have reduced capacity this year in the face of a 60% increase in fuel prices, with a substantial amount of that cutback in the highly competitive transborder market. WestJet's largest domestic competitor, Air Canada (AC.B.T), announced earlier this year it would cut overall system capacity this fall by 7% due to high fuel prices, the vast majority of the cuts in transborder traffic.

WestJet is also counting on its recent deal with Southwest Airlines Co. (LUV) to help sell its transborder flights. Under the agreement, WestJet will be able to list its flights on Southwest's Web site later this year. (The deal will evolve into a full-fledged codeshare by the end of 2009.) That new exposure is expected to help increase WestJet's U.S. sales, which are now at less than 10%.

WestJet plans to increase its share of the U.S. transborder market to 20-25% over the next few years, compared to about 8% currently.

Bob Cummings, WestJet's head of guest experience and marketing, noted in an interview the current situation is similar to that seen following the Sept. 11, 2001 terrorist attacks. At that time, airlines around the world cut back on flights in the belief that travel demand would fall permanently. Cummings said WestJet continued to grow instead, using the opportunity to establish itself as a national carrier.

"We're very confident in this company for the next five years," he said. "As the industry adjusts and capacity is taken out, that will just make us stronger."

Nevertheless, the airline fully expects its profit margins to be pressured by fuel costs, which now represent 38% of total operating costs, compared to 26% a year earlier.

Margins slipped to 7.1% in the second quarter, down 2.6 percentage points from a year earlier, while load factors decreased to 79.5% from 80.9% a year ago.

However, WestJet was still able to report a 23.6% increase in revenue to C$616 million from $498.2 million in the same period of 2007. CASM, or cost per available seat-mile, rose 7.3% in the quarter, but that was mainly on the spike in fuel prices. Excluding fuel and profit sharing, CASM fell to 8.13 Canadian cents from 8.72 Canadian cents a year earlier, a drop of 6.8%.

The airline earned C$30.2 million or 23 Canadian cents a share in the quarter, easily beating analyst estimates for earnings of 19 Canadian cents a share.

In Toronto Wednesday, WestJet is up 26 Canadian cents to C$15.24 on 867,000 shares.

Company Web Site: http://www.westjet.com

-Monica Gutschi, Dow Jones Newswires; 416-306-2017; monica.gutschi@ dowjones.com

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  07-30-08 1413ET
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