WestJet Boldly Goes In New Directions

By Bruce Parkinson

After spending most of its two-decade existence as Canada's lower-cost alternative in a party of two, WestJet is making a sharp bank into uncharted waters.

The airline is diversifying in the segments both above and below its traditional market position. It recently announced it would create a separately-branded ultra-low-cost subsidiary, mostly to be used as a flyswatter against NewLeaf and other prospective no-frills entrants, and to attempt to capture the millions of Canadians who cross the border to save on airfare.

The yet-to-be-named ULCC will feature 10 737-800s packed with 189 seats – up from 168 on WestJet. Few details have been released, but during yesterday's Q1 results call, CEO Gregg Saretsky advised analysts that it would be "more like Allegiant, less like Rouge."

But yesterday also saw a bold WestJet move in another direction – an order for 10 Boeing 787 Dreamliners with options for 10 more. In so doing, WS essentially cancelled 15 737MAX orders and signalled an entry into long-haul international travel with potential destinations including South America, Europe and Asia. They're even talking three classes of service on the Dreamliners, including a business class with lie-flat seats.

With the ULCC catering to the bottom of the market, WestJet covering the middle and the wide-body fleet offering comfortable long-haul, Saretsky says WestJet will offer three very distinct products.

"We'll have everything from thrifty to luxury, all with an appropriate cost structure."

WestJet's Q1 2017 marked the 48th-consecutive profitable quarter, a remarkable achievement in any industry, more so in the famously volatile aviation business. Most of that time the airline has had a singular focus on being a polite, uniquely Canadian version of an LCC. Service is friendly and casual, legroom has been generous by comparison, there are free snacks and other frills.

Over the past five years, the maturing airline has branched out, adding a successful 43-plane turboprop feeder airline in Encore, targeted price-sensitive biz travellers with WestJet Plus, and crossed the Atlantic in leased 767s. All of that has been a prelude to the developments in recent days.

The big news from WestJet came as executives discussed quarterly results that fell below analyst expectations. While revenue was up and load factors strong, earnings were down 45% year-over-year and the important metric ROIC – return on invested capital – dipped to 10%, below the company's 13-16% goal.

Saretsky said the airline endured "a rather difficult operational Q1." Between severe weather and complications from the runway resurfacing project at YYZ, there were 29 IROP (irregular operation) days in the first quarter, more than in the two previous first quarters of 2015 and 2016 combined. Higher fuel costs and the still-slumping Alberta market were other headwinds.

Saretsky believes the airline's plans will help raise returns to the levels it wants. "ROIC is a function of two things," he says. "Getting more revenue from existing assets and taking costs out."

The CEO says the airline is getting more out of existing assets with its popular Plus product targeting biz travellers. And, in a move that also exploits existing assets but might not be so popular with regular customers, WestJet will add another row of seats to its 737-700 and 737-800 planes.

"The core of our business is 737 operations," Saretsky says. We need to generate more returns. We're also working on IT initiatives that will drive more self-service and take out costs."

More efficient planes like the 737MAX that are now arriving, combined with the order for 787s, will help cut costs too.

"We always say, 'he with the lowest cost wins,'" Saretsky says.

"We have a cost-advantage in the domestic space and we can be a value player in the long-haul space, also with a cost advantage over our primary competition. I think we're going to have a great mousetrap here."

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