WestJet plans to become global-network airline

Bloomberg

Out in western Canada, the airline world is about to watch a unique business experiment. If it goes as planned, in a few years there will be a new favourite carrier battling for your airfare dollars, regardless of whether you’re a penny pincher or a rich banker.
WestJet Airlines Ltd., which flies Boeing Co. 737s in Canada much the same way Southwest Airlines Co. does in the US, is embarking on a radical shift to become a global-network airline, replete with fancy foods, plush beds up front and nine new, spiffier airport lounges and many more top-dollar business customers. Simultaneously, it’s launching an ultra-low-cost airline called Swoop to pursue those with the smallest budgets.
This “high-end, low-end” strategy comes as airlines the world over struggle to combat the grand ambitions of lower-cost rivals. The response has largely been defensive, with new fare classes or new airlines that have lower cost structures.
WestJet had a different idea. Next June, the carrier will debut no-frills Swoop, which is modelled on ultra-low-cost carrier Ryanair Holdings Plc. Swoop is squeezing 189 seats onto its 10 Boeing 737-800s, which is 21 more seats than WestJet flies on the same airplane.
It’s simultaneously preparing for the first of 10 new Boeing 787-9 Dreamliners, which arrive in January 2019, to fly to Europe and Asia, with options for 10 more of the large planes.
WestJet’s attempt to strengthen its position comes amid a collective bargaining push by employees. In May, its pilots voted to unionise, as did pilots at its regional carrier, Encore, five months later. Multiple unions are looking to organise other groups at WestJet, including flight attendants and mechanics. These efforts are likely to mean higher labour costs. With that threat hanging over its bottom line, not to mention the cost of long-haul flights, the planned expansion with Swoop and long-haul jets could endanger what is currently a profitable franchise.
WestJet executives, who are quick to boast of 50 consecutive quarters of profit, said they’re not worried.
“We just got to the point where the single brand can no longer fulfill all of the missions,” Chief Executive Officer Gregg Saretsky said. He acknowledged the skeptical feedback his airline has received over Swoop: “Many people are scratching their heads and wondering if that will work.”
“We’ve heard concerns about execution and our ability to successfully move upmarket and downmarket at the same time,” he said.
Calgary-based WestJet knows the dismal history of US airlines that battled low-cost upstarts by establishing new carriers such as Swoop. In the early 2000s, Delta Air Lines Inc. formed Song to battle JetBlue Airways Corp., while United Airlines established a low-cost airline called Ted. Neither brand had operating costs that were sufficiently below its parent, and both were dissolved within five years.
WestJet executives, however, point to a different model: the experience of Melbourne-based Jetstar Airways, which Qantas Airways Ltd. launched 13 years ago to combat low-cost rival Virgin Blue (now called Virgin Australia Pty). Jetstar is a completely separate operation that flies in Australia and New Zealand and has helped Qantas cater to the thriftier end of the travel market.
Jetstar is “the one major exception in the world to the rule about low-cost airlines-within-an-airline never working,” said Seth Kaplan, managing partner of trade journal Airline Weekly. He also noted that Australia and Canada share some critical similarities in terms of population, the size of economies, major industries focussed on natural resources and currencies that are heavily influenced by commodity markets.
WestJet said Swoop will fly primarily domestically, with a cost base that’s 40 percent below the mainline carrier—and only 0.1 cent above the average 5.9 cent cost per seat mile of the three US ultra-low-cost airlines. “Our view is that the network that Swoop builds will be incremental to the WestJet network, rather than cannibalising it,” Ed Sims, EVP of commercial at the airline, said.
In America, the Big Three legacy carriers have tried this “high-low strategy” without creating new carriers. In Europe, the global behemoths have begun new, lower-cost offshoots: Air France-KLM Group made a play for younger customers with an airline called Joon; IAG SA, British Airways’ parent, is starting a cheaper brand, Level, for trips across the Atlantic, starting in June; and Deutsche Lufthansa AG is busy expanding Eurowings with new, longer flights, mainly into the US. This trio is chasing budget-minded travellers with new subsidiaries.
WestJet’s big changes weren’t born in an aviation vacuum. The airline is responding to a variety of threats, from new ultra-low-cost Canadian rivals plotting new service to its bigger rival Air Canada, which has made international growth. Air Canada also operates a budget unit called Rouge, which battles for price-sensitive customers, as do Canadian leisure airlines Air Transat and Sunwing Airlines Inc.
Analysts have been cautiously optimistic about WestJet’s plans, noting that Swoop is likely to be profitable from the start, but said there will have to be significant follow-through.