WestJet Says It’s Starting an Ultra Low Cost Carrier

Westjet

Just when you thought things couldn’t get weirder north of the border, WestJet decided to step up. The airline that for years has been known as the successful, friendly mash-up of JetBlue and Southwest has made a decision to try something new. It’s going to take 10 737-800s and pack them full of seats to start its own ultra low cost carrier (ULCC). Excuse me for a moment while I grab some Pepto Bismol.

To be fair, this isn’t the first time WestJet has tried to diversify, but it may be the first time it falls completely on its face. The first big effort was Encore, the regional operation that introduced turboprops to smaller Canadian cites. While this was a big undertaking, it made sense. Canada doesn’t have all that many big cities, so for WestJet to grow, it had to look at new market opportunities that the 737 wouldn’t support. Further, it was complementary to the brand.

The second effort was getting into the long-haul game. When WestJet acquired some old 767s to fly to London, I was concerned. The Atlantic is a crowded market and the competition is fierce. This one has been a rough go with major operational issues slowing the airline down. WestJet plans to grow this part of the business, and I remain unsure. Let’s say the jury is out on this one.

Now for the third effort, we have this ultra low cost carrier idea, and I hope it never comes to fruition. Oh sure, there is the speculation that this isn’t meant to actually happen. It’s could be just a way to keep potential ULCC competitors at bay if they know WestJet is going to come in and try to crush them like a bug. That’s probably the best case scenario that we should all be hoping for.

If WestJet does go forward with this plan, I see nothing but doom and gloom. No, we don’t have details, but there are so many issues here. First and foremost, airlines-within-an-airline don’t work. (Yeah, yeah, go ahead and pitch Jetstar but I’m still not convinced. Even if you could prove it, that’s still a pretty awful track record across the industry.)

Some may point to Air Canada’s Rouge but I fail to see how that’s been successful at helping the airline. Rouge is just a way to carve out lower labor costs on a subset of old aircraft so Air Canada can find a way to fly those aircraft on lower-yielding routes. It’s also a distraction. But let’s not get too much into Rouge. This is about WestJet.

What’s the difference between WestJet and these other attempts? Well, WestJet is trying to be proactive at fighting a looming threat versus one that’s already there, as is usually the case.

While a couple of ULCCs have started up quietly in Canada, it’s been a rough go of it so far. NewLeaf knows the pain of trying to compete with the big boys. When it grew outside Canada and started service to Phoenix/Mesa in Arizona, WestJet followed. NewLeaf blinked and walked away.

That strategy is apparently not enough for WestJet. It thinks it needs its own ULCC if it wants to truly fend off competition. Or at least it says it does. I just have a hard time seeing how WestJet is going to beat a well-built ULCC at its own game. That airline may not exist yet, but it’ll probably come, and then this WestJet ULCC isn’t going to stop it.

What is more likely to stop it is the challenging Canadian market. There are few big routes with really high demand, and the taxes and fees are high. Even a successful ULCC, if one were to exist, is going to have trouble identifying a lot of growth opportunities.

So again, why is WestJet doing this? Employees can’t be happy about this. WestJet has a strong culture, but the stigma surrounding ULCC barebones service is unlikely to make WestJetters (as they’re called) feel warm and fuzzy about this plan. If anything, it will likely put them on guard about the airline eventually deciding it needs to paying people less to work in this operation.

The only plausible reason I’ve seen for this to have ever been announced is just to act as a scarecrow that shoos away any potential entrants who were on the fence. If WestJet actually moves forward with this plan… well then I think we’ve finally seen the airline jump the shark.

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26 comments on “WestJet Says It’s Starting an Ultra Low Cost Carrier

  1. How about Transavia inside Air France/KLM? Although not truly profitable (- €35M for the last two years) it serves a useful purpose as a cheap feeder to KLM and Air France flights. Despite the small loss, all its other stats are up.

    1. Maarten – It’s losing money. That says it all. This is just a desperate attempt by Air France to divert away from its primary problems. It’s a distraction.

  2. Canada imposes European style taxes on commercial aviation in a country that is physically larger than the continental US or the EU but with 1/10th of the population. The ULCC model doesn’t work with that kind of taxation and market size.
    The reason why Canadian international aviation is growing is because they siphon off so much traffic from the US due to favorable geography and low costs due to the weak Canadian dollar. Air Canada is growing its network via international markets, something WestJet is much less capable of doing.

  3. Not sure you really understand the role of Rouge in the Canadian market. We have a disproportionate amount of international leisure travel relative to the U.S., which has allowed for big growth in economically priced vacation options to Mexico, the Caribbean and Europe with the development of Transat, Sunwing and WestJet’s own WestJet Vacations. Rouge was a way for Air Canada to play in this space at a more equal footing vis a vis labour costs but with a market advantage among its loyal frequent flyer base. It gives Air Canada much more flexibility as it evolves its network. The ULCC arm would give WestJet similar flexibility, although it would be doing very different things with it.

    1. If the Rouge model is all about having lower labor cost, then why not turn take a run at all of AirCanada running on Rouge? Seems like if you can bring down labor costs, this shouldn’t be limited to only ULCC-like markets.

      1. I’m sure AC management would love to do that, but good luck convincing mainline AC crews and their unions to accept a pay cut to Rouge levels.

      2. I never said it was all about lower labour costs. Rouge also operates different missions from mainline and with a different hard product — particularly long-haul.

        1. Nonsense. Rouge is ALL about lower labour costs. That is precisely why it has replaced mainline service on so many transborder and domestic routes – two things AC said would not happen when they launched it.

    2. Danie – I’m pretty sure you just described the same thing I did. It’s a way for Air Canada to use old aircraft on low-yield (read: leisure) routes. Air Canada is trying to grow out of its problems, but it’s not going to work. Ultimately it needs to focus on the core airline, and adding a bunch of low yield stuff to feed the other growth it’s pushing isn’t likely to really pan out. It’s yet another distraction.

      1. “Grow out of its problems?” The company is having the strongest financial results it has ever had. It is winning airline customer service recognition and its CEO was just named Canadian CEO of the year. What problems are you thinking of?

        Rouge also isn’t about old planes. The company has five brand new A321s. The unit is proving successful for Air Canada so it is hardly about to be dismantled once the 767s are retired.

        1. Danie – Air Canada is good at using numbers to help promote its cause, but it masks other stuff. (The airline is also very opaque with forward guidance.) I don’t believe Q1 results are out yet for AC, but here’s a snippet from an analyst note from the Q4 results. This is from Ben Cherniavsky.

          “To be clear, we don’t take pleasure from other people’s pain! However, our bearish bias towards Canada’s airline sector did gain further validation with the release of Air Canada’s 4Q16 results. The stock fell ~7% Friday (TSX -0.2X%) following a y/y profit decline and downward revisions to management’s ROIC and margin targets. We continue to advise caution on this stock, steering investors towards U.S. airlines for sector exposure.”

          1. LOL, while I agree with your sentiments in regards to most airlines royally messing the airline within an airline…Ben Cherniavsky is ALWAYS bearish on Air Canada. He takes net Y/Y numbers because Air Canada has had a huge foreign exchange loss (one time) to bring these numbers down. These are not realized unless Air Canada was to fill some of these things now. These are adjustments to debts and obligations in US$. Otherwise, if you look at EBITDAR numbers, Air Canada is gaining year on year.

  4. Another instructive example of this phenomenon is evident in Japan. The constellation of LCCs and ULCCs started or bought out by the Big 2 might not be all that successful in stand-alone financial terms, but by existing in the first place they can crowd out the price sensitive market and arrest the growth of would-be disrupters.

    It’ll be extra instructive to see what happens now that airlines like Peach are moving into the medium-haul market with routes like HKG and BKK. I fully believe that when Norwegian gets around to announcing Japan, we’ll see ANA send over some old 787-8s to a subsidiary for the same purpose.

    1. Japan is an interesting market because you still have a largely loyal customer base that favors domestic competition and is less elastic to price. You have a large customer base that will still support the high cost services. But with the aging population and lack of wage growth, you don’t see much growth in seat numbers. ANA is only taking over the space that JAL had occupied. JAL has been very constraint on growth. I expected them to add a few routes such as Berlin or reinstating Sao Paulo. That being said with the stagnant economy, the low cost carriers have allowed for the big 2 to tap a market that has been traditionally filled by Korean Air and Asiana, getting regional to fly into Incheon as a hub and to tap the budget traveler.

      I’m curious if Norwegian would decide to go into Japan. With the huge tourism boom, I definitely can see it start.

  5. I can see how an Allegiant model could work in Canada. The Canadians are fairly well traveled and do like their sun destinations in the winter…but isn’t that what WestJet already offers to a degree? Sure they have intra-canadian routes but their international routes clearly scream leisure travel. By setting up a ULCC it seems they’ll be cannibalizing their own routes. Since taxes are fixed where are the savings. I’ve flown WestJet and it’s not like there is a ton of service to trim. Assuming labor is mostly fixed. Just not seeing the savings while going after a population base that is smaller than California.

  6. I think you hit the nail on the head — taxes and fees are ridiculously high for Canadian aviation. There’s 6 cities roughly the size of Milwaukee or bigger (and only 2-3 additional ‘big-ish” cities like Winnipeg or Quebec City), and 3 of them (Toronto, Montreal, Vancouver) serve as international hubs for Air Canada, meaning that AC could potentially slash rates on trips to/from those cities and make up some of the difference on connecting traffic.

    To work, you’d guess that a Canadian ULCC would want to fly leisure routes to the US, but they’d then be competing against Canadian and American carriers. Plus, if it started to work, there’s some big, pretty well-established American ULCCs like Spirit that already do international travel, and you’d think they’d consider entering the market to compete; but there’s probably a good reason that they haven’t yet (Spirit says it serves Montreal from Plattsburg, but that just proves the point: It’s hard to fly out of Canadian airports for cheap.)

    A crazy idea might be to start a ULCC by buying the 50 seat RJs that no one wants for basically nothing and then add service between smaller Canadian cities, but the number of ways that that wouldn’t work out is huge.

  7. What I don’t see is any assessment of demand, potential markets served or discussion of profitability. Is this another knee-jerk reaction to some concept operated by Spirit or Allegiant or does the idea have real positive cash flow and can it meet a return on equity?

    You’re right Cranky, the world is filled with failed airlines within an airline. United and Delta both failed (United at least twice not counting CAL) and Delta at least once. I can’t help but think of the ill-fated TED when I think of this.

  8. It would make more sense for them to use smaller airplanes to feed traffic from smaller cities both in Canada and the U.S. to their Mainline operation, then to try an airline within an airline.

    What do the think, if it starts to fail, the Fonz will ski in and save the day….”Eyy!”

  9. A Westjet ULCC? They have an uninspiring CEO who will ultimately pull them down. That petty accountant, fired from his previous airline, totally lacks imagination.

  10. Westjet started out modelled on Southwest but they have long since lost the plot. They look more like Air Canada every day. Which, I suppose, is good news for Air Canada. Yes, we are taxed to the max but let’s also lay blame on our good neighbours to the south. If Westjet wants to fly it’s LCC into U.S. destinations, passengers get hammered. Now is that neighbourly? Forgive me if laziness prevents an exact quote but there five (?) U.S. arriving taxes for flights orginating in Canada. Which would explain why millions of people every year (5 million?) drive across the border from Ontario to fly out of Buffalo where they can escape the arrival taxes. Taxes add almost $100 to any transborder fare.

    1. DougYWG – Taxes are nuts, but it’s on Canada too. Here’s what you’ll get on a Winnipeg nonstop roundtrip to Denver, using your namesake.

      US:
      7.5% transportation tax
      $4.10 segment tax (each way)
      $5.50 customs user fee
      $7.00 federal inspection fee
      $3.96 APHIS user fee
      $5.60 US security fee
      $4.50 passenger facility charge (usually)

      Canada:
      $9 security fee
      $18.50 airport improvement fee (for Winnipeg)
      $20.30 GST

      The US does give Canada the shaft because both international and domestic taxes apply unlike in other markets. But the Canadian airport improvement fee is generally insane. (That’s C$25 in Winnipeg, good luck absorbing that, ULCC.)

  11. Funnily enough, I recall CAPA seemingly confident about the Canadian ULCCs (NewLeaf, Jetlines, Jet Naked, etc.), even though everyone else (including you) are skeptical. I don’t get it.

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