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WestJet Long Term Growth Plans Part 2 – Ultra Low Cost Model

WestJet Boeing 737

Part 1 of the WestJet long term growth story started off with the news of the airline extending its business model into ultra low cost, an overview of the company and the differences between the low cost and ultra low cost model. This part extends the discussion of the airline in the ultra low cost space including competitive analysis and key growth opportunities.

 

WestJet

WestJet as an Ultra Low Cost Carrier

In an entry titled “WestJet announces plans to launch a new ultra-low-cost carrier” published on April 20, 2017, Chief Executive Officer, Gregg Saretsky took the time to highlight the airline’s 20-year journey and announced its future endeavors. Calgary, Canada based WestJet started with three aircrafts serving five destinations and turned itself into Canada’s second biggest with over 150 aircrafts and serving over 100 destinations through itself and subsidiary WestJet Encore.

WestJet blog entry on plans to launch ultra low cost carrier

 

Most North Americans travel on vacation once or twice yearly and choose driving as their preferred mode of transportation and are price sensitive as noted by Mr. Saretsky. That is one of many reasons why the airline decided to pursue starting new ultra low cost carrier to compete for more marketshare.  This market is currently operated by Flair Airlines (more on this travel company (formerly known as NewLeaf) in this news piece). Vancouver based Canada Jetlines also have plans to start flights soon to secondary airports in Canada and United States.

 

What Is The Ultra Low Cost Model?

Passengers are met with even less service and amenities with a ticket purchased on a ultra low cost carrier. Besides the items noted previously for the low cost model currently being operated by Westjet, travellers would have to pay more for items such as:

  • Different fee schedule for checked bags during ticketing, check-in or at the airport
  • Calls to process transactions at service centers or at the airport
  • Entertainment or food/beverage service (which might include water)
  • Full size carry on baggage stored in the overhead bins
  • All seats on board are for sale. Passengers who did not pay for an advance seat selection would be assigned one at check in automatically.

 

Competitive Analysis

There were over 133 million passengers travelling to/from Canada in 2015 according to Statistic Canada. Breaking this statistic down further showed that close to 59.6% of them flown within Canada followed by 19.9% to/from US and 20.5 to/from internationally. WestJet’s share of this total pool is around 15.2% (20,281,000 passengers).

While Air Canada and its subsidiaries (Air Canada Express and Air Canada rouge) continued to be the leader with two times more than WestJet’s market share at 30.8% (41,126,000 passengers), there is room for WestJet to grow as around 54% of the traffic was shared by other airlines. The following is a list of key Canadian players under each travel segment (full service, low cost and ultra low cost) and markets:

Full Service

  • Air Canada (including Air Canada Express) – Domestic/Transborder/International

Low Cost

  • Air Canada rouge – Domestic/Transborder/International

    Air Canada rouge
    Air Canada rouge (Image from Air Canada)
  • WestJet (including WestJet Encore) – Domestic/Transborder/International
  • Sunwing – Domestic/International
  • Air Transat – Domestic/International
  • Porter Airlines – Domestic/Transborder

    Porter Airlines Q400
    Porter Airlines Q400 (Image from Porter Airlines)

Ultra Low Cost

  • Flair Airlines – Domestic
  • Jetlines (to be launched) – Domestic
  • WestJet’s unnamed new airline (to be launched) – Domestic/Transborder

 

Growth Opportunities

As A Ultra Low Cost Carrier

WestJet’s decision to start an ultra low cost carrier can be attributable to the following reasons:

  • Lower costs – WestJet can use the opportunity to hire new employees with a lower salary and benefit base to bring overall costs down. Additionally, less service items and additional capacity associated with an ultra low cost operation could improve yield with the right revenue mix.
  • Effectively compete with Air Canada and its rouge subsidiary – Since Air Canada’s introduction of its Tango® fare offering many characteristics of a low cost carrier and Air Canada rouge (a low cost subsidiary with operations to all key leisure destinations), it is harder for travellers to differentiate the WestJet pricing advantage. Undercutting prices further with an unbundled product will provide price-sensitive Canadian travellers with more choice.
  • Block new entrants from being a runaway success – While Flair Airlines had its ups and downs prior to its launch, the airline has been able to reach out to Canadian customers who want a no-frill service for a lower price. Entering into the ultra low cost market now would enable WestJet to stop other aspirations (including Jetlines) from taking away market share quickly.

While there are benefits on starting a new ultra low cost airline, there are some challenges ahead for WestJet to pull this new business off:

  • The new airline may cannibalize WestJet and WestJet Encore’s own revenue as passengers pick the new airline over the parent. If the additional revenue earned is lower than lost cannibalized revenue plus costs, overall profits may be affected.
  • Separate staff and management may be required to run the new subsidiary. This could increase cost in the first few years to build up the operation.
  • Additional capital and opportunity costs for information system improvements, aircraft configuration and training can be high prior to launch

 

More About The New Airline

The new subsidiary will likely be based at Calgary International Airport (YYC) and will initially service secondary Canadian airports and leisure destinations in Florida, California, Arizona, Nevada with 6-10 ten Boeing 737s. During the Q2 2017 investor meeting, WestJet announced it will delay the launch of the unnamed airline to 2018. This will give the airline more time to manage configuration, technology integration, reservation system changes, build partnerships and create a brand for the new subsidiary.

Configuration

The new airline will have a 3-3 configuration. It might eliminate the Economy Plus cabin and reduce the pitch down to 29-30″. These changes can increase capacity per aircraft from 168 to 180-189 (maximum allowed). That is around 7-13% increase in seat capacity which would be used to offset the potential revenue decrease from price reduction.

Technology Integration

WestJet can further lower costs by incorporating more technologies into the passenger experience including the ticketing, on the ground experience, and on board services. Passengers requiring more human interaction may have to pay additional fees.

Reservation System

While using WestJet’s core reservation systems, the new subsidiary will have to file its own fares with Transport Canada and International Air Transport Association. Research will drive where base fares would be placed. Additionally, analysis will be performed to determine pricing for ancillary items such as advanced seat selection, baggages, food, etc.

Partnerships

Non-flying activities drove WestJet’s revenue growth in 2016.  WestJet can use the new airline to build new partnerships with other companies (including credit card offering, retailers, media agencies, travel outlets).

Branding

The new airline should have its own branding and identity. WestJet may not necessarily better off naming the new subsidiary under its own brand as it may confuse passengers who are accustomed to the amenities offered from mainline service. The branding confusion, for example, plagued Air Canada rouge’s launch initially and led to changes to that airline (e.g. changing business class configuration in narrowbody aircrafts from 3-3 with the middle seat blocked back to 2-2 and more award miles earned).

 

To End

There are opportunities and challenges for WestJet to start a new ultra low cost carrier within Canada. WestJet has delayed its launch to 2018 to configure all the moving pieces and making it a success at launch.

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