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?

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LARRY MACDOUGAL / CP

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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