If you’ve boarded a plane lately, you may well have been disappointed to find that you don’t have an empty seat next to you in which you can spread out and that even those unpleasantly cramped middle seats are all taken. And that’s not a passing phenomenon: after several years of trouble following the 9/11 terrorist attacks, the airline industry is once again flying high thanks to big cuts in capacity. Some airlines aren’t feeling the full benefit of those higher passenger loads, as they are battling the impact of soaring jet fuel prices on their profit margins. Canadian carrier WestJet (WJAFF.PK), however, seems to have found a way to manage the sky-high fuel costs and still reap the benefits of higher load factors.

WestJet is the final company in a series of 10 that the StarMine research team at Thomson Reuters identified as most likely to post significant positive or negative surprises when they report their earnings for just-ended first quarter of 2012. With a positive Predicted Surprise of 5.4%, WestJet seems to be among the winners, likely to report stronger earnings than analysts currently anticipate when it announces its first-quarter results on May 2, 2012.

Analysts expect WestJet to report that a revenue-paying passenger occupied about 80% of the seats on its planes during the first quarter of 2012. That’s quite an achievement, given that the company raised its prices to help offset the surge in the price of jet fuel. Whenever an airline can raise prices and yet still manage to fill their planes to 80% of capacity, that is good news for its earnings. That may explain why the top-rated analyst following WestJet – awarded five stars by StarMine for her track record of timely and accurate predictions – expects the airline to report earnings of 49 Canadian cents a share, well above the consensus forecast of 37 Canadian cents a share.

This analyst and others also have been busy raising their forecasts for WestJet’s earnings in recent months. Since February, the I/B/E/S consensus estimate has risen from 32 cents to 37 Canadian cents. The SmartEstimate, however, which places a greater weight on the most recent forecasts, has consistently remained higher still and today stands at 39 Canadian cents a share. It is that large differential between the SmartEstimate and the consensus that translates to the company’s large Predicted Surprise. That, in turn, signals that other analysts may raise their own estimates, thus driving the consensus higher, or that the company will beat that consensus when it reports its earnings in a week’s time.

It isn’t just that the airline’s earnings will be strong that is of interest, but also the signs that those strong earnings will be sustainable. That hasn’t always been the case for WestJet, which saw its free cash flow (FCF) lag net income significantly up until 2006. (See the chart on the left below; the red bars represent the magnitude of the gap between FCF and net income.) Since then, however, FCF has exceeded net income every year (as seen in the green bars in the same chart); in 2011, FCF hit C$388 million, its highest level in ten years. Earnings that are backed by FCF tend to be sustainable and thus reassuring to investors.

The chart on the right, below, shows WestJet’s return on net operating assets (represented by the blue line) compared to the industry median (represented by the gold line). WestJet’s return has been climbing steadily since 2010 and now stands at 26%, the highest level it has reached in five years, and well above the industry median of 17%. These are some of the reasons the company scores an impressive 95 out of a possible 100 on the StarMine Earnings Quality (EQ) model. Such a high score indicates that the company’s earnings are coming from sustainable sources; all things being equal, WestJet is likely to be able to continue to deliver solid profits to its shareholders in coming quarters.

During WestJet’s earnings conference call on February 8, 2012, after the company had announced its results for 2011, Greg Saretsky, the airline’s president and CEO, told listeners that the company had managed to “fully offset” higher fuel costs, in spite of the prevailing climate of economic uncertainty. WestJet also managed to achieve higher profit margins and boost other financial measures of wellbeing during the year, Saretsky added. (A full transcript of the conference call discussion can be accessed via Thomson Reuters StreetEvents.)

If WestJet can fly high even amidst the headwinds created by high fuel costs and an uncertain economic outlook, the airline seems likely to fare even better if those headwinds become tailwinds. Even if crude oil prices remain north of $100 a barrel, propping up the cost of jet fuel, WestJet seems likely to do well on both an absolute and relative basis, as passengers remain willing to pay up for seats on its flights within North America and to the Caribbean, and even to be squeezed into full cabins. That leaves WestJet in a position to take advantage of the woes at other airlines, notably major labor strife at its principal domestic rival, Air Canada. And for now, investors can prepare to celebrate a positive earnings surprise when the company announces its first-quarter results next week.

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