WestJet goes “cheap and cheerful”

WestJet Airlines Ltd., which launched in 1996 as a discount carrier, wants to be a disruptor again.

WestJet's new ultra-low-cost carrier will be branded separately from the main airline and crew will wear different uniforms. The new service will initially field a fleet of 10 Boeing 737-800 aircraft, shown here in mainline WestJet livery. WestJet Photo
WestJet’s new ultra-low-cost carrier will be branded separately from the main airline and crew will wear different uniforms. The new service will initially field a fleet of 10 Boeing 737-800 aircraft, shown here in mainline WestJet livery. WestJet Photo
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Calgary-based WestJet announced plans in April to begin service with its own ultra-low-cost carrier (ULCC). Plans call for the initial deployment of 10 narrow-body Boeing 737-800s.

“The new ULCC will provide Canadians with no frills, lower-cost-level travel options while broadening our growth opportunities and opening new market segments,” WestJet president and CEO Gregg Saretsky said during a conference call with industry analysts.

The circumstances in 2017, however, are much different than in 1996. Back then, WestJet emerged as a low-cost alternative to the two major carriers–Air Canada and Canadian Airlines International Ltd.

This time around, Air Canada and WestJet are the two major airlines in the country. Over the years, WestJet has drifted away from its discount roots, gradually adding frills and expanding its network.

In May, WestJet announced that it will be acquiring up to 20 wide-body Boeing 787-9 Dreamliners, a move that will allow the airline to add new international destinations–including service to Asia, where Canadian Airlines flew before it merged with Air Canada in 2000.

The combination of international growth from the 787s and continental expansion from the 737s will form the basis of WestJet’s agenda in the coming years. WestJet is also continuing to nurture its four-year-old regional operation, Encore. Charles Duncan, former senior vice-president of technical operations at United Airlines, became Encore’s new president in June.

Saretsky said the ULCC will be separately branded and will even have uniforms that are different from WestJet’s brand.

“There’ll be more opportunity to drive ancillary charges because the focus on ULCC is just to have an absolutely rock-bottom entry fare. And then you pay as you consume for all the other products and services,” he said.

WestJet’s ULCC is headed by Bob Cummings, who joined the carrier in 2005. Cummings calls the new venture an exciting chapter in the airline’s history.

The goal to launch by the end of 2017 faces some turbulence on the labour front. WestJet pilots voted in May to join the Air Line Pilots Association (ALPA).

Saretsky gave a presentation to the Greater Vancouver Board of Trade in June. He said routes for the new ULCC will be announced in the fourth quarter of 2017. The new brand “will be cheap and cheerful,” said Saretsky.

After his speech, he addressed the issue of WestJet pilots voting to join the U.S.-based union. “It hasn’t altered our course but clearly, there’s a party now that has to negotiate a new agreement,” said Saretsky. “We have bargained with our WestJet Pilots Association. It wasn’t a union but it was an employee association that looked like a union. They paid dues. We bargained an agreement, which was binding by law. We would have had to have that same negotiation with the WJPA as we now will have with ALPA.”

Ben Cherniavsky, an analyst with Raymond James Ltd., said it is a new era for labour relations. “WestJet has always paid ‘competitive wages,’ but gone are the days of the lucrative options and expanding profit cheques that turned early employees into millionaires,” said Cherniavsky in a research note. “The corollary is that WestJet’s labour costs will likely rise with a pilot union in charge. And if the flight attendants follow this lead, more cost pressure will come.”

Vancouver-based Canada Jetlines Ltd. said it remains committed to its plans to start ULCC service, despite many delays.

Jetlines played down WestJet’s announcement, predicting those plans will fall short of the budget concept envisaged by Jetlines.

WestJet’s cost structure is too high to launch an “airline within an airline” to become a genuine ULCC, said former Jetlines CEO Jim Scott in an interview.

“Having high labour costs restricts your ability to actually be a true ULCC,” said Scott, who has since stepped down from both Jetlines’ management and board of directors.

Stan Gadek, former CEO of Sun Country Airlines based in Minnesota, replaced Scott in June.

“We’re going to be selling our tickets exclusively over our website, so that will dramatically reduce our distribution costs,” said Gadek in an interview.

Jetlines has not announced a planned launch date yet, but it is likely to be in 2018. The Boeing 737-300 and 737-400 are possibilities for aircraft.

“As a new company, we’re starting with a clean sheet of paper,” said Gadek. “I wish WestJet luck, but I don’t think they’re being realistic with a low-cost subsidiary. It’s a marketing gimmick. It sounds good but it doesn’t work. I’m very skeptical that WestJet will be able to pull this off because their labour groups will resist.”

Saretsky emphasized that he isn’t taking anything for granted, and considers Jetlines to be a legitimate rival.

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“We learned a long time ago to always take everybody seriously, even when maybe you shouldn’t have to,” he said during his visit to Vancouver. “It’s never good when a company loses a leader at the top. It sort of signals either a different direction or an upset for different reasons. I won’t speculate on that.”

Air Canada’s Rouge leisure division has already carved out a niche in transporting budget-minded travellers, notably to vacation destinations.

Another budding ULCC, Enerjet Corp.’s much-delayed FlyToo proposal, remains a long-term possibility.

NewLeaf, acquired in June by Flair Airlines Ltd., has focused on Abbotsford in B.C. and Hamilton in Ontario for its service.

Air Canada isn’t taking anything for granted either, but its executives point out the challenges ahead for any ULCC.

“Unlike the United States, here in Canada we have limited secondary airports, which are usually very attractive to ULCCs,” said Air Canada president of passenger airlines Ben Smith during a conference call with industry analysts.

Air Canada chief executive officer Calin Rovinescu said the proximity of U.S. airports along the Canada-U.S. border is an important factor to consider. “And so you by definition have some ULCC competition, if you like, built into the border dynamics because these U.S. border airports pick up a lot of ULCC-type traffic,” he said.

Chris Murray, an analyst with AltaCorp Capital Inc., cautioned that WestJet’s ULCC launch is subject to regulatory approval and a pact with pilots.

“We believe the launch of a flanker brand significantly complicates the plans of other participants seeking to start ULCCs in Canada and protects WestJet from market erosion in the highly sensitive fare category of travellers,” said Murray in a research note.

He added that WestJet’s 787 strategy will be vastly more complicated than the ULCC plans.

Brent Jang, a business reporter at The Globe and Mail, is the winner of two National Newspaper Awards and has been a National Magazine Award nominee. He boarded test flights for the Airbus A380 in 2007 and Boeing 787 Dreamliner in 2012.

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