WestJet's big plans to conquer Air Canada and then the world - Macleans.ca

WestJet’s big plans to conquer Air Canada and then the world

But is it biting off more than it can chew?



For most big airlines, having a chief executive with a long and accomplished history in the business would be considered a no-brainer. Not at WestJet. Since its launch nearly 15 years ago, the remarkably successful low-cost carrier has made a point of ditching industry conventions whenever possible. Economy-class only. No connecting flights. Friendly staff. And, until recently, chief executives who generally came from outside the industry.

So eyebrows were naturally raised earlier this year when WestJet, based in Calgary, named industry veteran Gregg Saretsky as a replacement for outgoing CEO Sean Durfy, who was formerly the head of Enmax, a utility company. Durfy, in turn, had replaced WestJet co-founder and chairman Clive Beddoe, who, although a hobby pilot, was in the real estate business prior to launching the airline in 1996.

In fact, WestJet has only once before attempted to tap an industry type for the top job—with little success. In 1999, Beddoe attempted to hand over the reins to Steve Smith, who had formerly been with Air Ontario, a subsidiary of Air Canada. He was replaced after 19 months (with Beddoe suggesting his top-down management style was a poor fit with WestJet’s egalitarian corporate culture). Indeed, WestJet has often prided itself on charting its own flight path, avoiding industry practices and conventions that it deemed self-destructive, including the pursuit of growth at any cost and treating paying customers as human cargo.

But Saretsky has a long history in commercial aviation, including stints at the former Canadian Airlines (which Air Canada took over in 2000) and Alaska Airlines. Since his appointment as CEO last March, speculation has been rising about whether WestJet has finally reached a point in its evolution where it’s not content to remain a folksy discount airline. It has set its sights on challenging Air Canada, not only domestically, but in the growing market for global air travel. To start, it’s looking to expand its reach through a series of partnerships with other carriers, not unlike those that Air Canada enjoys with its Star Alliance partners, although some wonder if it’s only a matter of time before WestJet begins flying far-flung routes on its own. “Our plan is to partner with carriers from each of the major geographic regions from around the world,” Saretsky told analysts during a recent conference call. “I believe we have a solid road map in place to achieve our vision to be one of the five most successful airlines in the world by 2016.”

Just last week, WestJet announced that it had finally clinched a deal with Hong Kong’s Cathay Pacific Airways, which had been talking to WestJet about a partnership, on and off, for years. Some have also speculated that Saretsky, who first came aboard WestJet last year as head of its packaged holiday division, was also behind a recent push to negotiate a deal with Delta Air Lines, at the expense of fellow discount operator Southwest Airlines (Saretsky declined to be interviewed). Southwest had signed a preliminary agreement with WestJet two years ago and was touted as an ideal partner given its similar low-cost business model (WestJet was originally modelled on Southwest). “Delta has a far more affluent, well-heeled passenger base than Southwest,” says Rick Erickson, an airline consultant who lives in Calgary. “That shows an example of where WestJet is going. It’s no longer a low-cost carrier. It has morphed itself into more of a mainline carrier of the sort that we’re familiar with.”

At Alaska, Saretsky was credited with helping transform a mostly regional player into a full-blown airline through the negotiation of alliance deals with some of the biggest names in the industry, including Continental, Delta, American, Qantas and Cathay Pacific. Tasneem Azim, an associate analyst at UBS Investment Research, estimated in a recent report that WestJet is currently in talks with as many as 70 potential partners worldwide, of which eight to 10 could become key code-sharing partners over the long term. Code sharing refers to the complex agreements that allow different airlines to coordinate schedules and sell tickets on each other’s flights.

Todd Korol / Reuters

It all threatens to create an even bigger competitive headache for Air Canada, according to industry insiders. When the country’s biggest airline flew out of bankruptcy protection six years ago, its business plan was to match WestJet’s low prices in the domestic marketplace and make up for any shortfalls by focusing its energy on exploiting its vast international network (WestJet’s costs are estimated to be about 30 per cent lower on any given domestic flight). In general, long-haul overseas flights are more profitable because airlines can charge higher fares—passengers are often willing to pay more for additional comforts on flights longer than four or five hours—and have more opportunities to make money hauling time-sensitive cargo in their holds, including everything from Atlantic lobster to auto parts. And so, Air Canada invested heavily in new aircraft, including state-of-the-art Boeing 777s and yet-to-be-delivered 787 “Dreamliners.” It also set about refurbishing cabins on older aircraft. Now most of its long-haul planes boast executive class cabins with lie-flat seats.

Erickson, for one, wonders whether WestJet’s alliance strategy is a prelude to operating its own overseas flights. The airline followed a similar pattern in the packaged holiday business: in 2003, it entered into a multi-year partnership with industry heavyweight Transat that saw it fly charter flights to destinations in Mexico and the Caribbean. But, after realizing how profitable selling packaged holidays can be, it launched its own WestJet Vacations business. “I think they’re going to do the same thing in the international arena,” says Erickson, suggesting that Boeing’s long-range 787 would be an ideal plane for the job. Unlike Air Canada, WestJet currently flies one kind of airplane—Boeing’s 737—which helps keep maintenance and pilot training costs down. But the downside is that it limits the airline mainly to destinations within North America.

Not everyone thinks overseas flights are in WestJet’s future. Peter Wallis, who worked with Saretsky at Canadian Airlines and is now the president of the Van Horne Institute at the University of Calgary, says adding another aircraft type would add too much cost and complexity to WestJet’s relatively simple business model. “I think they will stick to their knitting,” he says. “The big differentiator between WestJet and others has been costs.” However, Saretsky, like his predecessors, has suggested that WestJet’s original low-cost model is not a religion and must be adapted to market realities. Indeed, WestJet has made a number of tweaks as it has grown into a major North American player with 88 planes (and another 47 on order over the next six years). They include adding frills like seatback television sets, leather seats and, most recently, a complicated computerized reservation system that will allow it to sell Air Canada-style fare classes and add-ons.

Still, as Air Canada continues to slash costs and become more competitive on the home front, the possibility of tapping the generally higher-margin business of transoceanic flying has to be on WestJet’s radar. It wouldn’t be the first time a discount airline has tried to make the leap. In 2005, Irish discounter Ryanair tried to take over Aer Lingus, which was more of a conventional carrier with routes to North America. But the deal fell through. Others have tried without success to replicate the discount airline phenomenon on long-haul flights, including Oasis Hong Kong Airlines and Ottawa’s Zoom Airlines, both of which have since gone out of business.

The risk is that the further WestJet flies away from its low-cost roots, the greater the likelihood it will bite off more than it can chew. The graveyard of the aviation industry is littered with examples of airlines, from Canadian Airlines to Jetsgo, whose grand designs left them in financial ruin. WestJet also needs to be mindful that its other competitive advantage—its vaunted employee culture—isn’t dulled by unfettered expansion. Although it’s hard to quantify, WestJet has reaped huge rewards from its friendly, motivated staff and its decision to treat passengers as “guests” as opposed to merely “bums in seats.”

So far, WestJet has resisted the temptation to overreach. But for how long? “They keep talking about becoming one of the five best airlines in the world,” says Erickson, noting that such accolades are usually earned by major international players with vast global networks, like Singapore Airlines, Cathay Pacific and Emirates. “But how can you do that if you’re not even known outside of Canada?”

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WestJet’s big plans to conquer Air Canada and then the world

  1. If WestJet leadership are as good as they seem, adding one additional airframe to the business model, say the 787, should not sink the company, particularly if the partnerships for international routes are established beforehand. Will it be costly? Of course. But business is costly. As long as the business plan is truly solid, WestJet should be able to branch out internationally while remaining competitive and profitable.

    To be top-5 by 2016, though? I'm skeptical of that timeline.

    • WestJet's vision is "By 2016 to be one of the five most successful international airlines…..". This can be measured in many ways other than size, such as margin, on-time performance, employee engagement, etc. By most of these "quality" measures of a successful airline, it has already reached these goals in North America. It now needs to concentrate in doing this worldwide.

  2. It’s going to be tough now that Air Canada’s employee culture is improving dramatically, as seen with their Best North American Airline Award two years running.

    • John you seem to be ignoring the $100's of millions of dollars Air Canada is losing every quarter vs Westjets consistent profits. At this time Air Canada is still fighting for its survival despite all the cheery talk by Calin R and others … with the latest sovereign debt issues trashing economies and stock markets around the world a second trip into bankruptcy by Air Canada is not out of the question!

      • Just wishful thinking on your part.

    • Culture at AC has always been fleeting. The old timers talk about how great the culture used to be at AC and then tell war stories about the strike of 88'. Just wait until next year when it's time to negotiate, and then the old feelings of distrust will permeate throughout the entire corporation like it always has.

    • I agree that Air Canada's new emerging employee culture will make way to be the airline of choice for many Canadians over Westjet. Air Canada is the airline of choice in North America, is it not?

  3. I love Westjet, but there are signs of trouble.

    The satelite TV system doesn't work properly, and doesn't work at all on international routes once the aircraft leaves Canadian air space. Frankly, I'd rather pay $10 for Wi-Fi (and an outlet to plug my computer into) than watch the same Canadian TV stations I have at home, and on which there's universally nothing to watch.

    The introduction of food service also meant the addition of those aisle-blocking carts. The new loyalty plan is nice, but hell if I can figure it out. And why can't I add pre-paid items to my booking, like meal vouchers and airport lounge passes, which Air Canada makes so easy?

    And staff attitudes have changed. Not only are the corny jokes gone, but I simply don't sense the general happiness among staff that was the original hallmark of the company.

    Once Westjet works out the glitches of it's new reservation system and gets a few code share agreements ironed out, it's time to re-examine the fundamentals of good customer service.

    • TV in the sky is still crappy TV. I much prefer AC system where i can watch shows or movies i select pretty much commercial free. No computer plugs also a downer.

    • "The new loyalty plan is nice, but hell if I can figure it out"

      Really? It's got to be the simplest Loyalty program on the planet. As you spend you earn dollars. Dollars can be used on any flight at any time.

  4. West Jet was conceived in the single jet low cost regional model successfully practiced by South West, Easy Jet Ryan Air and others. Their refreshing corporate identity and a strong consumer backlash against their main competition worked to propel them into success in an arena which has killed off three other airlines since they began. Moving on into the highly competitive (and political) international market and competing against the "big boys" is more than just a new business plan; it is a whole new business. They may pull it off, but the odds and history are against them. When Pacific Western bought Canadian Pacific way back when the boys from Alberta believed that success in one market gave them credibility in another… CAI bled to death slowly and painfully.

  5. Competition is good. Hopefully Air Canada will rise to the challenge and improve their business so that we continue to have two Canadian airlines to choose from.

  6. I agree with everything Rick Hurlburt says. And I'll add this….WJ should be careful not to underestimate how fickle the buying public can be.
    Another fiasco like the 3-hour waits during their computer change-over period will have normally loyal customers leaving enmasse. Especially if, at the same time, they perceive a loss of friendliness in the staff as Rick H alludes to.

  7. LARRY MACDOUGAL / CP says Economy-class only. (So What? It works) No connecting flights. (So how does one get from Vancouver to Halifax? he got that wrong!!) Friendly staff. (He is right with this one)

    West Jet will do just fine.

  8. According to Wikipedia, the Boeing 737-700ER has a range of up to 10,205 km, which puts in range the most common routes from Eastern Canada to Europe, or even Vancouver to Tokyo or Vancouver to London.

    • You are quite right. That model is capable of transocean flights. But first Pilots and Mechanics require certification to the ETOPS standard. That shouldn't be a problem but certainly WJ costs associated with training and operations will rise. However here is what WJ is up against if WJA attempts scheduled service to destinations served by Air Canada. They will compete against Star Alliance benefits, flight frequency, the twin aisle comfort and speed of the B777 Air Canada will soon take delivery of their B787s which will be more cost efficient, more comfortable and faster than the B737-700ER and AC's B767 ER that they will replace. Transocean service has different costs and makes different demands on a compay than regional service.

      • MORE — It will be interesting to see what happens to WJ 's bottom line as they attempt to leave the low cost regional model that has been their success. WJ's past profits are more attributable to the efficiency that the B737 offers than anything management and the employees have done. As well Customer Service, Aircraft Servicing and Maintenance at their destination will be personnel leased part time from other airlines. The penalty for biting off morethan can be chewed is to choke and throw up. In the case of WJ that means loss of image and financial losses.

  9. Hmmm – the more they take on, the more they seem to have problems – witness their entertainment system that has been giving them trouble, their move to the new reservation system. Their codeshare with Cathay isn't really much to crow about either since it's only in one direction. Numerous allusions to a decline in service don't bode well if they are going to take on the added complexities of code sharing (and all that comes with it – baggage transfers, aligning policies etc) or varied fleet. In addition international flying opens you up to world events outside of your home country – ie the effect of the Icelandic volcano on international carriers which was barely felt at all by NA carriers that don't operate internatinally. Air Canada has a recent string of awards to its credit and its recent financial results seem to indicate they are on the right track. It will certainly be interesting to watch WJ try to play in the bigger leagues! Perhaps travellers will begin to start to find their corny jokes a little harder to bear!

  10. WJ best not try to get too cute….otherwise another westjet may emerge and do to them what WJ did to CAI and now AC

  11. Westjet keeps pushing their "luxurious leather seats" in their adds but their seats are the most uncomfortable of any 120+ seat jet flying in Canada. AC has stepped up in a big way over the last few years while WJ has lost it's luster.

    • There is a reason why they use leather.nothing luxurious about it on a plane. They require less maintenance and so they push them longer to the point where they are so uncomfortable. I just flew them again tonight and again crap hard sats.tiny oldschool screens. Then you have to pay for the good video content. No thanks. I pref air canada because i fly other star alliance airlines thus accumulating miles collectively.

  12. Never liked WEST JET service is 0 Air Canada is # 1+

  13. Air Canada all the way!! Just wait till the 35 787’s arrive

  14. Air Canada suxks. I travel often from Calgary to San Francisco. Since wesjet offers this route seasonally, the cost if competitive..but after westjet ends its seasonal service on this route on Oct 31, 2010, Air Canada has hiked up the rates by $150 more roundtrip…..damn, UNBELIEVABLE. We should boycott Air Canada. Its a big ripoff to consumers. we need more competition in Western Canada.

  15. Hyperboles are figures of speech that are exaggerated in order to create emphasis or effect. They are not to be taken literally. Use of hyperboles can bring free advertising and prop up the price of the company's stock and corporate image, by extolling confidence. My experience is that the more hyperbole that surrounds a corporation the more risk there is for the investor. Hyperboles surrounding Porter is a clear example of a "pig in a poke" investment that only small retail investors fall for. This article makes me wonder if WJA may have some surprises for investors, not of the good kind, later in 2010. The daily trading volume has been very low recently.

  16. The best way to get to be a millionaire in the airline business is to start out as a billionaire. It's cut throat. I would not underestimate Air Canada. Their service has come a long way (although there are still lots of old entilted AC types or bitter CAI types), their aircraft are becoming top notch – those new triple 7's or the new 787 will make a huge difference and it won't be long before they ditch the other Airbus's as well – although they seem to have the cabins well laid out now. The biggest thing Air Canada has going for it however is Aeroplan and their ticketing/reservation systems. They have lots of flexibility there – like those great passes, the ability to upgrade from your blackberry/iphone, etc. Their IT systems are heads and tails above Westjet and for business travellers… it's a slam dunk. Air Canada.

  17. West jet will have to lose the mentality that it is '…funny to have the speaker breakdown during French translation,' before they can ever become global… and anything more than a backwoods rebel cowboy from Alberta

  18. Westjets corny kool aid drinking biscuit shooters are a pain in the …

  19. The 737-700NG has a 3600nm (6600kms) at best, range. WJ has trouble making it to HNL.
    They can not fly overseas with 737

  20. Au contraire mon Ami. There is this to be said. The nominees for Staff Service Excellence North America were WestJet, Alaska Airlines, Virgin America, JetBlue and Southwest Airlines

    The announcement neglects to say that WJ was competing in the Small Airlines (Regional) Category. You will notice that none of the "Big Boy" airlines are in that nominee list. In 2009 and again in 2010 Air Canada won that award and others in the Major Airline Category where the competition is stiffer. Apples & Oranges. Case closed.

  21. West Jet has nearly completed its transition into just another big, clumsy company concerned only with its bean counting and not at all with the best interests of its customers. The conversion to the new reservations system, done without advance warning to people who already had tickets, was inconsiderate and disrespectful. Their total inability to respond to customer calls was scandalous. Switching to their own rewards program and credit card programs are further examples of moves that are intended to be good for them, although I don't think they will be, while making them less valuable to customers. WestJet was my preferred airline. Now they are not.

  22. The last three or four trips I priced, had Air Canada cheaper on EVERY FLIGHT. Some by quite a bit. There is absolutely NO reason to fly Westjet. Air Canada almost Always has the same price or a lot of times is even cheaper!

  23. WestJet is starting to look like Canada 3000 when it tried to expand and didn't get it right.

  24. There is absolutely NO reason to fly Westjet. Air Canada almost Always has the same price or a lot of times is even cheaper!

  25. I have seen a real shift towards a customer oriented attitude at Air Canada, and can only say that most of my experiences with them have been excellent. WestJet doesn't have the routing, connections or partnerships that business travellers need and expect. Is there a place for WestJet ? Absolutely, but not as a replacement for Air Canada.