WestJet Eyes International Expansion But Vows To Defend Space At Home

Open Jaw
by Bruce Parkinson

After 20 years of building a successful domestic competitor to AC, WS wants to continue expanding its international horizons, but the airline that just posted its 46th consecutive profitable quarter also vows to fiercely defend its space at home.

Positioned from the beginning as Canada’s ‘low-cost leader,’ WS is now facing competition – albeit minnow-sized – from NewLeaf Travel. Another fledgling ‘ultra low-cost’ entrant, Canada Jetlines, is seeking an exemption to foreign ownership restrictions before it takes flight.

WS CEO Gregg Saretsky offers no apologies for matching NewLeaf’s fares. “We worked hard to build our franchise and we’re not going to let somebody come in and try to rob it,” Saretsky said during a Q3 results call with financial analysts. “There is not a moment in Canada’s 70 years of aviation history where more than 2 companies have performed profitably.”

That’s one thing WS has done with admirable consistency. Q3 2016 not only marked more than 11 years of unblemished profitability, it was also the airline’s best ever 3rd quarter and the 2nd most profitable quarter in its history. WS posted a Q3 profit of $116 million, up from $101.8 million in the year-before quarter.

The current backdrop to this success is tumultuous: Alberta is WS’s home base and 40% of its flights touch the province where low oil prices have hit the economy hard.

This year also marked WS’s 1st major foray into international flying with a significant transatlantic program. The fleet of 4 used Boeing 767s encountered numerous performance issues in the early days of the program, resulting in cancelled flights, disgruntled pax and high compensation costs under Europe’s tough passenger protection rules.

Saretsky says that has turned around now, and the program to LGA is performing well and making money. Further international expansion is in the plans, and if a tentative deal with pilots on longer-haul flying reached just last weekend is ratified, that could come sooner than later.

During the call with investors, Saretsky and other WS executives offered a long list of strengths as the airline moves into its 3rd decade:

Among them:

  •  Full planes – WS filled 84% of its seats in Q3 up 2.2 percentage point year-over-year
  •  Ancillary revenue growth – bag and seat selection fees were up over 15%, with pax now spending an average of nearly $18.00 on top of the fare price
  • A strong balance sheet -- with $1.8 billion in cash and equivalents
  • A young fleet – averaging just 7.3 years
  • More unencumbered aircraft – 1/3 of WS’s planes are completely paid for
  • A stronger business mix – WS is making strides in the business travel market and now has a nice fixed block of business with 120 charter flights per week for Suncor employees
  • Inroads into the lucrative business travel market – WS is growing its rewards program, finding success with its business-friendly Plus product and beginning to offer global solutions through joint contracting with partners like DL
  • A growing WestJet Encore – the fleet of Q400 turboprops will total 34 by year end, and the regional subsidiary is feeding the WS mainline with nearly 200 daily departures to 35 destinations
  • More partners – growing relationships with international carriers are helping to feed WestJet’s network.

 

One cloud on the horizon is the growing push for taxes on carbon emissions. Saretsky says the Alberta carbon tax that will go into effect next year won’t have a major impact on operations, but the federal government is also considering a tax on carbon, and that would be a bigger issue.

“We’re currently paying $60 million a year in fuel tax across the various provincial and federal jurisdictions in which we operate. Alberta starting 01JAN will have a carbon tax that’ll add another couple or 3 million dollars in 2017,” Saretsky said.

He says a federal tax could represent an incremental cost of as much as $60 to $70 million per year, which WS would seek to pass through to pax through fare hikes. “It’s not a good story for consumers,” Saretsky said.

As WS continues to grow, its non-unionized work force is an increasingly attractive target for labour leaders. And the proposed federal Bill C-4 would make it easier for workers to organize. Airline executives made it clear during the earnings call that they would prefer to stay union-free.

“We pay above market average and offer good profit sharing. I don’t see anything better in any collective bargaining agreement at any airline in North America,” Saretsky said. “We will continue to treat our employees well and give them all the information to make an informed decision.”





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