NATIONAL POST BUSINESS MAGAZINE
Financial Post
Subject: WestJet Airlines Ltd.
Paul Vieira
National Post
September 1, 2004
COMPANY: Canada's second-largest airline and pioneer discount carrier
PROBLEM: Too many empty seats and a lawsuit that's damaging its reputation
QUESTION: How can WestJet woo more passengers and reclaim its darling status?
It might have been confidence or it might have been cockiness. Either way, Clive Beddoe had a lot of it on display on January 14 when his Calgary-based company, WestJet Airlines Ltd., announced plans for an ambitious expansion in Canada's central and eastern markets. The CEO was smiling broadly when he sat down for a lunchtime interview to outline the details. WestJet, the pioneer in Canada's discount airline industry, was going to move its eastern hub from Hamilton, Ont., to Toronto, he said. It would also triple its number of flights out of Pearson International, Canada's busiest airport, he said. By April, it would compete head-to-head against Air Canada on the key Toronto-Montreal-Ottawa axis. And it would offer more than its famously low fares and folksy, no-frills service to woo travellers away from the insolvent national carrier. Passengers would be flying in style and passing the time watching LiveTV, a satellite television service, on sets installed in the back of each seat. "It will be positive," Beddoe vowed. "It will be very interesting to watch."
It's been interesting all right, although "depressing" might be a more appropriate word from WestJet's point of view. The expansion -- a bid to become Canada's second national carrier -- has been nothing short of turbulent. WestJet's costs have been rising and its revenues have dropped. Its much-publicized satellite television service has been slow to get off the ground, while the competition for passengers has been unexpectedly fierce. Another problem: WestJet's squeaky-clean image has been tarnished thanks to Air Canada, which has launched a $220-million lawsuit accusing its upstart rival of dirty-tricks corporate espionage.
Indeed, it was a humbled Clive Beddoe who spoke to analysts on August 3, during a conference call to discuss the airline's second quarter earnings. The news wasn't all bad. WestJet reported its 30th consecutive quarter of profit, and revenues were up 25%, having turned the corner after a weak first quarter. Still, Beddoe had some explaining to do. Net profit had plunged almost 50% over the same quarter in 2003, and WestJet's costs were rising thanks to higher fuel prices, more expensive fees paid to airports and marketing costs to promote its eastern push. That wasn't all. Growth in passenger traffic was lagging behind WestJet's increasing capacity as it added new jets and new routes. Finally, he was forced to apologize to WestJet employees and shareholders for the confidence-shaking dirt dished out as a result of the Air Canada suit.
After listening to Beddoe, one could be forgiven for thinking that history had repeated itself. Canada has never really supported two national airlines. Wardair, Canadian Airlines and Canada 3000 had all tried and failed. But it's unlikely that WestJet is headed for a similar fate. The company isn't at the abyss, and its current woes are a stumble rather than a disaster. It is, however, unfamiliar airspace for an outfit that most believed could do no wrong.
Up until April, WestJet had been the Midas of Canadian airlines -- like the legendary king of Greek myth, everything it touched turned to gold. Founded in 1996 with three airplanes and 220 employees, it grew quickly on a business strategy that borrowed heavily from Southwest Airlines Co., the Dallas-based founder of the discount carrier business model. Like Southwest, WestJet attracted travellers by offering low fares on routes where high costs encouraged people to favour travel by cars, buses and trains, or skip it altogether. Controlling costs was the key to WestJet's competitive position, and the airline shone in this area, thanks largely to the efficiencies of maintaining a fleet based on a single model of aircraft -- the Boeing 737 -- and hiring non-union staff. Its unit cost -- the cost to fly one seat one mile, a standard measure of efficiency in the airline business -- declined steadily over the years. (At roughly 11 cents, it is today around the benchmarks set by carriers such as Southwest, last reported at US7.6 cents, and JetBlue Airways Corp., last reported at US6.1 cents.)
As WestJet soared, Air Canada struggled, its operating costs running at least 50% higher due to rigid labour contracts and maintenance of a fleet that featured several models of aircraft. Eroding market share and rising costs forced the national airline to enter into bankruptcy protection on April 1, 2003, by which time WestJet had become Canada's second-largest and, arguably, most popular airline. Westjet's fleet was growing -- it now stands at 50 aircraft, and the company will add nine Boeing 737-700 jets to its fleet by January 2006 -- and it had captured 24% of Canada's domestic air-travel market, a six-fold increase from the share it held just five years earlier. The airline had also recorded an unbroken string of profitable quarters while carriers around the world bled billions, or simply went bust, a trend exacerbated by the September 11, 2001, terrorist attacks on New York and Washington. Perhaps best of all, it had rewarded stockholders, many of them employees, with a share price that's more than quadrupled since its 1999 initial public offering. To top it all off, WestJet enjoyed a sterling reputation, winning kudos from both the general public and the business community. This year, it was named Canada's second most respected and admired organization in a poll of Canadian chief executives for its track record in human resource management, corporate social responsibility and innovation.
But then WestJet's golden touch turned to lead. It recorded poor-to-mediocre operating statistics in April, May and June of this year as passenger growth lagged or barely kept up with increases in the number of seats for sale. Its load factor -- the percentage of seats sold on flights -- dropped or remained flat compared to the same period a year earlier. May was WestJet's first full month of eastern operations, and it was one of the most disappointing in the company's history. The load factor plunged year-over-year to 65% from 72%, while the number of passengers grew only 18%, compared to the 31% boost in the number of seats available.
Why all the problems? The answer to that question boils down to Economics 101: WestJet is trying to expand at a time when there are too many seats chasing too few passengers. Starting in April, its capacity has increased 30% system-wide and 300% in Toronto. Its success has inspired imitators -- notably Jetsgo, a privately held company run by Michel Leblanc, formerly of Royal Airlines, and CanJet Airlines, the Halifax concern owned by Kenneth Rowe -- and Canada's skies are getting crowded. According to Nadi Tadros, an analyst who covers airlines for brokerage house Desjardins Securities, total domestic capacity in the first six months of this year was 17% higher than domestic capacity in the first half of 2003. At the same time, Air Canada is becoming a stronger competitor as it completes its restructuring, and will likely be in a better position to challenge WestJet and other discounters when it emerges from bankruptcy protection this month.
As a result, it's getting harder for WestJet to stimulate traffic on new routes with its traditional low-fare strategy, and there is an emerging need to compete on more than price. This might explain why WestJet has been so keen to add the LiveTV satellite service to all its new planes, and why it now offers loyalty-rewards through its deal with Air Miles, a benefit that low-cost carriers typically refrain from offering to keep their costs under control.
Efforts to improve service, however, have probably suffered from the damage dealt to WestJet's image as an efficient, down-to-earth company -- an anti-Air Canada -- by allegations that it engaged in corporate espionage against its main rival. In April, Air Canada launched a lawsuit alleging that WestJet executives unlawfully acquired confidential business data from an internal Air Canada database -- mostly load factors on flights -- over a 10-month period that ended on March 19. Air Canada further claimed WestJet used this information to challenge it on its most profitable routes by adjusting schedule and fares based on the data. None of Air Canada's claims have been proven in court, and WestJet has launched a countersuit. That suit claims Air Canada hired private detectives to rummage through the garbage at the home of former WestJet executive and co-founder Mark Hill, who was forced to resign over the alleged spying conspiracy. The battle between the airlines has been fought out in the media, and it has surely left a bitter taste in Beddoe's mouth, given the verbal shots he has previously delivered to Air Canada and other carriers.
But even as WestJet has been struggling through some difficult months, it is still going forward with a handful of advantages and opportunities. For starters, it has a balance sheet second to none among North American airlines, with roughly $264 million in cash on hand. It remains efficient, with the equivalent of 70 employees per plane, about one-half less than Air Canada. Moreover, the company's share-purchase plan gives those employees more than enough incentive to right the airline.
Also working in WestJet's favour is that Air Canada is expected to cut capacity in the second half of this year. The insolvent airline, in the final stages of its court-supervised bankruptcy reorganization, has said growth in its system-wide capacity will be limited to 4% in 2004. So far this year, though, the overall increase in seats available has been in the 7% range. To cut that number, analysts anticipate Air Canada will remove capacity from domestic and transborder routes, as opposed to international flights, this year. This may relieve the pressures created by overcapacity and provide some breathing room for the industry.
WestJet, nevertheless, will continue to face challenges from both strong competition and rising costs.
Q: What can WestJet do to capture market share, rebuild its performance and repair its damaged image?
DOUGLAS REID
Airline expert and professor - Queen's School of Business
Douglas Reid attributes some of WestJet's problems to growing pains: Trouble sets in at airlines when they start trying to be all things to all people. "It's almost like a middle-age phenomenon. ... WestJet is reaching maturity. They're beyond adolescence, and the growth spurt is being confronted by the operating problems of predictable middle age. For example, some managers are getting too comfy in their chairs."
WestJet, he continues, should consider slowing its growth strategy and attempt to manage both load factors and yields, the revenue generated by each passenger the airline carries. "Don't grow so fast that you lose yields," he says. It should also stop flying money-losing routes. "The industry has been wrongfully obsessed with growth for its own sake for too long. It's been obsessed with market share. It's certainly true with Air Canada, and it was true with Canadian [Airlines]. ... There's no driving relationship between share of market and profitability." The most important thing, Reid continues, is to stay focussed on what really matters, and that's profitability. "Any airline with enough money can deploy aircraft. It takes a real manager to do that and make money. Now that we have seen some decline in performance, what does WestJet do to arrest that decline? It may mean being more aggressive about what routes to exit if they are not working. And exiting a route is not a failure. It's just an experiment."
Reid believes the LiveTV service, once it's fully installed on all of WestJet's 737-700s, its new planes, is going to help set the company apart from its competitors and, more importantly, attract new customers. Satellite television was originally scheduled to be installed in time for summer, the peak season for the airline industry, but its introduction has been bogged down due to delays stemming from technical issues. The planes will not be equipped by the end of the year, which will hamper WestJet's ability to compete. "They should have concentrated on getting things right before they expanded," Reid says. "The LiveTV will actually be a cool differentiator for WestJet, and I think it's actually going to work for them quite nicely. Part of it now is that the expectation for LiveTV is out there, but it's not working. The only conclusion people can reach is that there is something wrong with the airline -- that's not true. In the urge to get headlines, WestJet might have taken its eyes off the ball."
Finally, Reid says the company must settle its lawsuit with Air Canada, and it shouldn't waste any time in bringing the matter to a full close. Failure to do so could have implications across the company and beyond the balance sheet. "What the lawsuit really does is remove the advantage the company had by being the virtuous challenger. WestJet isn't the virtuous challenger any longer. They've given away something that was quite valuable.
"This is no longer going to be the little airline that could," he adds. "[The lawsuit] could leave WestJet as the little airline that cheated. That's hard, because part of WestJet's appeal is that it is not Air Canada. The issue for the company really comes down to how does the CEO, Beddoe, act in terms of enforcing integrity. Beddoe has to do something that is a statement of assertion of what will not be tolerated at this company." Beddoe's mea culpa in August, he continues, did not go far enough. He should have apologized to Air Canada, too, to show he's sorry for any perception that WestJet engaged in unethical behaviour.
TED LARKIN
Airline analyst - Orion Securities Inc.
For Larkin, a long-time Bay Street airline watcher, WestJet's next task is quite simple. It must focus on two areas: the product and its employees. Staying on top of these priorities has worked for WestJet in the past, and it will work for the carrier again. "The crucial thing for this company is that it provides a superior product. This is a service business. So you should provide a clean aircraft, and I am talking about its interior; a good frequency of flights on a given route; on-time reliability; and friendly, helpful staff that makes the travel experience pleasant from check-in until pickup of baggage."
Looking forward, he adds, WestJet has a number of things in its favour. Its on-time performance of 86% is outstanding compared to its domestic peers and is among the tops in North America. Moreover, federal Air Travel Complaints Commissioner Liette Lacroix Kenniff lauded the carrier in her most recent report for "doing things right" from the customer's perspective. On the employee front, it has built an admirable workplace culture, showing trust in staff, for example, by allowing them to make on-the-spot decisions. It has also worked to align their interests with those of the company through its share purchase plan, and about 90% have stock in the company. Maintaining that culture should continue to be a primary objective. "If you asked Clive to describe his biggest challenge, I think he'd say the same thing," Larkin says. "[If] you provide a product or service that people want -- and will come back to buy more of it -- that gets employees charged up and makes them very proud of being a member of the team."
WestJet should also avoid any temptation to stray from its current business plan, Larkin warns. Any variation from that course could have negative implications. "They have to keep the blinders on. They can't get distracted by what other people are doing. The industry is much like the jet engine that can turn fuel into noise. ... As long as they can stick to their knitting and don't get distracted into doing many things, they will do OK."
Larkin says he's not overly concerned by what other analysts call WestJet's current problems. In fact, he says he doesn't think there are any problems at all; it just takes time for a business to develop and mature. "I'm not as negative about the situation," he says. "You will have low load factors to begin with, and low introductory fares are often used to stimulate traffic in the beginning. We've seen WestJet take on a good number of airplanes this year -- they are adding new routes -- so you get a combination and it takes a while for the load factors to mature or kick in. That's not a negative. It's a fact of life for any carrier."
RICK ERICKSON
Independent airline analyst - RP Erickson & Associates
WestJet may be struggling, but people shouldn't panic, given the company's track record of producing good margins, steady cash flow and consistent quarterly profits, Calgary-based analyst Rick Erickson says. "I wouldn't be ringing any alarm bells. There are still many, many positive indicators within the airline. Yes, things have slowed down a bit, and yes, it's very competitive. But that point was coming for WestJet and I think it has arrived."
Like Reid, Erickson attributes WestJet's current struggles to growing pains. Part of the problem, he adds, is that a business can only grow so much within the confines of Canada. "They've grown to a certain size within the country, [growth that] the country could absorb pretty readily. They've been top dog in a lot of the smaller markets, but they've had no choice but to play in the larger markets. And they've found the competition rather severe, particularly on the Jetsgo front. And with a renewed Air Canada coming forward with a clean balance sheet, I don't think things are going to get any easier for WestJet."
But instead of engaging in a bitter price war with its low-cost rivals, Erickson says WestJet should look to the U.S. market, which offers better opportunities in terms of revenue and profit. The company plans to do just that starting this month, when it will initiate service to American cities such as San Francisco, Los Angeles, and Orlando, Fla., mostly from its Calgary base.
Erickson adds that WestJest should time the ramp up of its transborder business to match the delivery schedule for its new aircraft. As an alternative, WestJet could add frequency to its most successful routes. "There's more growth potential in the United States with a higher yield, in terms of point spread between their costs and their profit. There are more plums in the U.S. right now than there are in Canada."
The Air Canada lawsuit is Erickson's biggest concern with the airline. "I think it's a drag on investors, and that has got to be resolved -- sooner rather than later. I'm surprised at how aggressively WestJet is counter-fighting this suit publicly. It's damaging their previously squeaky-clean culture ... and their reputation among customers. Western Canadians in particular like a fight -- but they like a fair fight." When the lawsuit is out of the way, Erickson concludes, WestJet will be free to focus on the business of aviation, building traffic on profitable routes and leaving those that don't make money. "I think that's part of their business strategy, and I don't think they should play with that."
STRUGGLING FOR ALTITUDE: WestJet's share price reflects its fortunes:
Year ended June 30 2004 2003
Revenues ($mil.) 257.3 205.9
Earnings ($mil.) 7.5 14.7
Profile of WestJet Airlines Ltd.
© National Post 2004
Paul Vieira
National Post
September 1, 2004
COMPANY: Canada's second-largest airline and pioneer discount carrier
PROBLEM: Too many empty seats and a lawsuit that's damaging its reputation
QUESTION: How can WestJet woo more passengers and reclaim its darling status?
It might have been confidence or it might have been cockiness. Either way, Clive Beddoe had a lot of it on display on January 14 when his Calgary-based company, WestJet Airlines Ltd., announced plans for an ambitious expansion in Canada's central and eastern markets. The CEO was smiling broadly when he sat down for a lunchtime interview to outline the details. WestJet, the pioneer in Canada's discount airline industry, was going to move its eastern hub from Hamilton, Ont., to Toronto, he said. It would also triple its number of flights out of Pearson International, Canada's busiest airport, he said. By April, it would compete head-to-head against Air Canada on the key Toronto-Montreal-Ottawa axis. And it would offer more than its famously low fares and folksy, no-frills service to woo travellers away from the insolvent national carrier. Passengers would be flying in style and passing the time watching LiveTV, a satellite television service, on sets installed in the back of each seat. "It will be positive," Beddoe vowed. "It will be very interesting to watch."
It's been interesting all right, although "depressing" might be a more appropriate word from WestJet's point of view. The expansion -- a bid to become Canada's second national carrier -- has been nothing short of turbulent. WestJet's costs have been rising and its revenues have dropped. Its much-publicized satellite television service has been slow to get off the ground, while the competition for passengers has been unexpectedly fierce. Another problem: WestJet's squeaky-clean image has been tarnished thanks to Air Canada, which has launched a $220-million lawsuit accusing its upstart rival of dirty-tricks corporate espionage.
Indeed, it was a humbled Clive Beddoe who spoke to analysts on August 3, during a conference call to discuss the airline's second quarter earnings. The news wasn't all bad. WestJet reported its 30th consecutive quarter of profit, and revenues were up 25%, having turned the corner after a weak first quarter. Still, Beddoe had some explaining to do. Net profit had plunged almost 50% over the same quarter in 2003, and WestJet's costs were rising thanks to higher fuel prices, more expensive fees paid to airports and marketing costs to promote its eastern push. That wasn't all. Growth in passenger traffic was lagging behind WestJet's increasing capacity as it added new jets and new routes. Finally, he was forced to apologize to WestJet employees and shareholders for the confidence-shaking dirt dished out as a result of the Air Canada suit.
After listening to Beddoe, one could be forgiven for thinking that history had repeated itself. Canada has never really supported two national airlines. Wardair, Canadian Airlines and Canada 3000 had all tried and failed. But it's unlikely that WestJet is headed for a similar fate. The company isn't at the abyss, and its current woes are a stumble rather than a disaster. It is, however, unfamiliar airspace for an outfit that most believed could do no wrong.
Up until April, WestJet had been the Midas of Canadian airlines -- like the legendary king of Greek myth, everything it touched turned to gold. Founded in 1996 with three airplanes and 220 employees, it grew quickly on a business strategy that borrowed heavily from Southwest Airlines Co., the Dallas-based founder of the discount carrier business model. Like Southwest, WestJet attracted travellers by offering low fares on routes where high costs encouraged people to favour travel by cars, buses and trains, or skip it altogether. Controlling costs was the key to WestJet's competitive position, and the airline shone in this area, thanks largely to the efficiencies of maintaining a fleet based on a single model of aircraft -- the Boeing 737 -- and hiring non-union staff. Its unit cost -- the cost to fly one seat one mile, a standard measure of efficiency in the airline business -- declined steadily over the years. (At roughly 11 cents, it is today around the benchmarks set by carriers such as Southwest, last reported at US7.6 cents, and JetBlue Airways Corp., last reported at US6.1 cents.)
As WestJet soared, Air Canada struggled, its operating costs running at least 50% higher due to rigid labour contracts and maintenance of a fleet that featured several models of aircraft. Eroding market share and rising costs forced the national airline to enter into bankruptcy protection on April 1, 2003, by which time WestJet had become Canada's second-largest and, arguably, most popular airline. Westjet's fleet was growing -- it now stands at 50 aircraft, and the company will add nine Boeing 737-700 jets to its fleet by January 2006 -- and it had captured 24% of Canada's domestic air-travel market, a six-fold increase from the share it held just five years earlier. The airline had also recorded an unbroken string of profitable quarters while carriers around the world bled billions, or simply went bust, a trend exacerbated by the September 11, 2001, terrorist attacks on New York and Washington. Perhaps best of all, it had rewarded stockholders, many of them employees, with a share price that's more than quadrupled since its 1999 initial public offering. To top it all off, WestJet enjoyed a sterling reputation, winning kudos from both the general public and the business community. This year, it was named Canada's second most respected and admired organization in a poll of Canadian chief executives for its track record in human resource management, corporate social responsibility and innovation.
But then WestJet's golden touch turned to lead. It recorded poor-to-mediocre operating statistics in April, May and June of this year as passenger growth lagged or barely kept up with increases in the number of seats for sale. Its load factor -- the percentage of seats sold on flights -- dropped or remained flat compared to the same period a year earlier. May was WestJet's first full month of eastern operations, and it was one of the most disappointing in the company's history. The load factor plunged year-over-year to 65% from 72%, while the number of passengers grew only 18%, compared to the 31% boost in the number of seats available.
Why all the problems? The answer to that question boils down to Economics 101: WestJet is trying to expand at a time when there are too many seats chasing too few passengers. Starting in April, its capacity has increased 30% system-wide and 300% in Toronto. Its success has inspired imitators -- notably Jetsgo, a privately held company run by Michel Leblanc, formerly of Royal Airlines, and CanJet Airlines, the Halifax concern owned by Kenneth Rowe -- and Canada's skies are getting crowded. According to Nadi Tadros, an analyst who covers airlines for brokerage house Desjardins Securities, total domestic capacity in the first six months of this year was 17% higher than domestic capacity in the first half of 2003. At the same time, Air Canada is becoming a stronger competitor as it completes its restructuring, and will likely be in a better position to challenge WestJet and other discounters when it emerges from bankruptcy protection this month.
As a result, it's getting harder for WestJet to stimulate traffic on new routes with its traditional low-fare strategy, and there is an emerging need to compete on more than price. This might explain why WestJet has been so keen to add the LiveTV satellite service to all its new planes, and why it now offers loyalty-rewards through its deal with Air Miles, a benefit that low-cost carriers typically refrain from offering to keep their costs under control.
Efforts to improve service, however, have probably suffered from the damage dealt to WestJet's image as an efficient, down-to-earth company -- an anti-Air Canada -- by allegations that it engaged in corporate espionage against its main rival. In April, Air Canada launched a lawsuit alleging that WestJet executives unlawfully acquired confidential business data from an internal Air Canada database -- mostly load factors on flights -- over a 10-month period that ended on March 19. Air Canada further claimed WestJet used this information to challenge it on its most profitable routes by adjusting schedule and fares based on the data. None of Air Canada's claims have been proven in court, and WestJet has launched a countersuit. That suit claims Air Canada hired private detectives to rummage through the garbage at the home of former WestJet executive and co-founder Mark Hill, who was forced to resign over the alleged spying conspiracy. The battle between the airlines has been fought out in the media, and it has surely left a bitter taste in Beddoe's mouth, given the verbal shots he has previously delivered to Air Canada and other carriers.
But even as WestJet has been struggling through some difficult months, it is still going forward with a handful of advantages and opportunities. For starters, it has a balance sheet second to none among North American airlines, with roughly $264 million in cash on hand. It remains efficient, with the equivalent of 70 employees per plane, about one-half less than Air Canada. Moreover, the company's share-purchase plan gives those employees more than enough incentive to right the airline.
Also working in WestJet's favour is that Air Canada is expected to cut capacity in the second half of this year. The insolvent airline, in the final stages of its court-supervised bankruptcy reorganization, has said growth in its system-wide capacity will be limited to 4% in 2004. So far this year, though, the overall increase in seats available has been in the 7% range. To cut that number, analysts anticipate Air Canada will remove capacity from domestic and transborder routes, as opposed to international flights, this year. This may relieve the pressures created by overcapacity and provide some breathing room for the industry.
WestJet, nevertheless, will continue to face challenges from both strong competition and rising costs.
Q: What can WestJet do to capture market share, rebuild its performance and repair its damaged image?
DOUGLAS REID
Airline expert and professor - Queen's School of Business
Douglas Reid attributes some of WestJet's problems to growing pains: Trouble sets in at airlines when they start trying to be all things to all people. "It's almost like a middle-age phenomenon. ... WestJet is reaching maturity. They're beyond adolescence, and the growth spurt is being confronted by the operating problems of predictable middle age. For example, some managers are getting too comfy in their chairs."
WestJet, he continues, should consider slowing its growth strategy and attempt to manage both load factors and yields, the revenue generated by each passenger the airline carries. "Don't grow so fast that you lose yields," he says. It should also stop flying money-losing routes. "The industry has been wrongfully obsessed with growth for its own sake for too long. It's been obsessed with market share. It's certainly true with Air Canada, and it was true with Canadian [Airlines]. ... There's no driving relationship between share of market and profitability." The most important thing, Reid continues, is to stay focussed on what really matters, and that's profitability. "Any airline with enough money can deploy aircraft. It takes a real manager to do that and make money. Now that we have seen some decline in performance, what does WestJet do to arrest that decline? It may mean being more aggressive about what routes to exit if they are not working. And exiting a route is not a failure. It's just an experiment."
Reid believes the LiveTV service, once it's fully installed on all of WestJet's 737-700s, its new planes, is going to help set the company apart from its competitors and, more importantly, attract new customers. Satellite television was originally scheduled to be installed in time for summer, the peak season for the airline industry, but its introduction has been bogged down due to delays stemming from technical issues. The planes will not be equipped by the end of the year, which will hamper WestJet's ability to compete. "They should have concentrated on getting things right before they expanded," Reid says. "The LiveTV will actually be a cool differentiator for WestJet, and I think it's actually going to work for them quite nicely. Part of it now is that the expectation for LiveTV is out there, but it's not working. The only conclusion people can reach is that there is something wrong with the airline -- that's not true. In the urge to get headlines, WestJet might have taken its eyes off the ball."
Finally, Reid says the company must settle its lawsuit with Air Canada, and it shouldn't waste any time in bringing the matter to a full close. Failure to do so could have implications across the company and beyond the balance sheet. "What the lawsuit really does is remove the advantage the company had by being the virtuous challenger. WestJet isn't the virtuous challenger any longer. They've given away something that was quite valuable.
"This is no longer going to be the little airline that could," he adds. "[The lawsuit] could leave WestJet as the little airline that cheated. That's hard, because part of WestJet's appeal is that it is not Air Canada. The issue for the company really comes down to how does the CEO, Beddoe, act in terms of enforcing integrity. Beddoe has to do something that is a statement of assertion of what will not be tolerated at this company." Beddoe's mea culpa in August, he continues, did not go far enough. He should have apologized to Air Canada, too, to show he's sorry for any perception that WestJet engaged in unethical behaviour.
TED LARKIN
Airline analyst - Orion Securities Inc.
For Larkin, a long-time Bay Street airline watcher, WestJet's next task is quite simple. It must focus on two areas: the product and its employees. Staying on top of these priorities has worked for WestJet in the past, and it will work for the carrier again. "The crucial thing for this company is that it provides a superior product. This is a service business. So you should provide a clean aircraft, and I am talking about its interior; a good frequency of flights on a given route; on-time reliability; and friendly, helpful staff that makes the travel experience pleasant from check-in until pickup of baggage."
Looking forward, he adds, WestJet has a number of things in its favour. Its on-time performance of 86% is outstanding compared to its domestic peers and is among the tops in North America. Moreover, federal Air Travel Complaints Commissioner Liette Lacroix Kenniff lauded the carrier in her most recent report for "doing things right" from the customer's perspective. On the employee front, it has built an admirable workplace culture, showing trust in staff, for example, by allowing them to make on-the-spot decisions. It has also worked to align their interests with those of the company through its share purchase plan, and about 90% have stock in the company. Maintaining that culture should continue to be a primary objective. "If you asked Clive to describe his biggest challenge, I think he'd say the same thing," Larkin says. "[If] you provide a product or service that people want -- and will come back to buy more of it -- that gets employees charged up and makes them very proud of being a member of the team."
WestJet should also avoid any temptation to stray from its current business plan, Larkin warns. Any variation from that course could have negative implications. "They have to keep the blinders on. They can't get distracted by what other people are doing. The industry is much like the jet engine that can turn fuel into noise. ... As long as they can stick to their knitting and don't get distracted into doing many things, they will do OK."
Larkin says he's not overly concerned by what other analysts call WestJet's current problems. In fact, he says he doesn't think there are any problems at all; it just takes time for a business to develop and mature. "I'm not as negative about the situation," he says. "You will have low load factors to begin with, and low introductory fares are often used to stimulate traffic in the beginning. We've seen WestJet take on a good number of airplanes this year -- they are adding new routes -- so you get a combination and it takes a while for the load factors to mature or kick in. That's not a negative. It's a fact of life for any carrier."
RICK ERICKSON
Independent airline analyst - RP Erickson & Associates
WestJet may be struggling, but people shouldn't panic, given the company's track record of producing good margins, steady cash flow and consistent quarterly profits, Calgary-based analyst Rick Erickson says. "I wouldn't be ringing any alarm bells. There are still many, many positive indicators within the airline. Yes, things have slowed down a bit, and yes, it's very competitive. But that point was coming for WestJet and I think it has arrived."
Like Reid, Erickson attributes WestJet's current struggles to growing pains. Part of the problem, he adds, is that a business can only grow so much within the confines of Canada. "They've grown to a certain size within the country, [growth that] the country could absorb pretty readily. They've been top dog in a lot of the smaller markets, but they've had no choice but to play in the larger markets. And they've found the competition rather severe, particularly on the Jetsgo front. And with a renewed Air Canada coming forward with a clean balance sheet, I don't think things are going to get any easier for WestJet."
But instead of engaging in a bitter price war with its low-cost rivals, Erickson says WestJet should look to the U.S. market, which offers better opportunities in terms of revenue and profit. The company plans to do just that starting this month, when it will initiate service to American cities such as San Francisco, Los Angeles, and Orlando, Fla., mostly from its Calgary base.
Erickson adds that WestJest should time the ramp up of its transborder business to match the delivery schedule for its new aircraft. As an alternative, WestJet could add frequency to its most successful routes. "There's more growth potential in the United States with a higher yield, in terms of point spread between their costs and their profit. There are more plums in the U.S. right now than there are in Canada."
The Air Canada lawsuit is Erickson's biggest concern with the airline. "I think it's a drag on investors, and that has got to be resolved -- sooner rather than later. I'm surprised at how aggressively WestJet is counter-fighting this suit publicly. It's damaging their previously squeaky-clean culture ... and their reputation among customers. Western Canadians in particular like a fight -- but they like a fair fight." When the lawsuit is out of the way, Erickson concludes, WestJet will be free to focus on the business of aviation, building traffic on profitable routes and leaving those that don't make money. "I think that's part of their business strategy, and I don't think they should play with that."
STRUGGLING FOR ALTITUDE: WestJet's share price reflects its fortunes:
Year ended June 30 2004 2003
Revenues ($mil.) 257.3 205.9
Earnings ($mil.) 7.5 14.7
Profile of WestJet Airlines Ltd.
© National Post 2004
Subject: WestJet Airlines Ltd.
Moderators: Sulako, lilfssister, North Shore, sky's the limit, sepia, I WAS Birddog
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Vic Vector
- Rank 0
- Posts: 2
- Joined: Wed Sep 08, 2004 8:16 pm
The above posts were quite informative, however I will wait to see what happens this fall before I pass judgement on Westjet. Rebel, I find your posts to be quite informative for the most part and you seem to keep up in the affairs of all aviation sides. The other slander involving credit cards, leather seats, and live TV are unnecessary. Westjet pioneered the LCC method in Canada. They were the first and they were bound to hit a few bumps in the road. That is what I see presented in the previously quoted articles--just bumps in the road. For those of you continuing to potshot Westjet, I have to ask you how does outfitting aircraft with Leather seats, winglets, and Live TV define a LCC? I think this just displays some of the innovative thinking that goes on at this airline and should be occuring in different forms at most airlines. In the end it will prove as one more way to entice Joe six-pack to buy a ticket.
As Air Canada emerges from bankruptcy it will be interesting to see what operational procedures change. With the Z*P brand parked, the experiment is over and the last couple of months proved fruitful. With this in mind, I think the lines between main line carrier and low cost carrier will become blurrier. The bottom line, at any cost, will be selling a seat on the airplane. What will Air Canada do to entice lo-frill customers back? How will their domestic service be different from Westjet?
As Air Canada emerges from bankruptcy it will be interesting to see what operational procedures change. With the Z*P brand parked, the experiment is over and the last couple of months proved fruitful. With this in mind, I think the lines between main line carrier and low cost carrier will become blurrier. The bottom line, at any cost, will be selling a seat on the airplane. What will Air Canada do to entice lo-frill customers back? How will their domestic service be different from Westjet?
Another prospective..
00:00 EDT Thursday, September 09, 2004
So the rascals at WestJet Airlines are in the middle of another stink, are they?
First they bust into Air Canada's computer reservation system, which can be accessed only by a select group of about 978,000 current and former employees, and dig up supposedly confidential data on Mapleflot's passenger bookings. Now they stand accused by Jetsgo CEO Michel Leblanc of getting their hands on secret documents that show how many bums are filling the seats on his airplanes. Running a low-cost airline? By the sound of it, these guys at WestJet should become private detectives instead. For an encore, WestJet boss Clive Beddoe will tell us where Hoffa is buried.
The airline has said nothing about Mr. Leblanc's latest allegations, other than that it's looking into them. But it would be a mistake for investors to get distracted by the espionage tales, fascinating though they are. There are more serious issues to worry about for this company. Such as:
What happens to its costs if its stock keeps drifting lower?
Every airline has costs that are mostly beyond its control: fuel, landing fees, maintenance. The only way to keep a low-cost advantage is to trim the expenses it can control as much as possible.
At WestJet, that has meant keeping wages and benefits below Air Canada's. Its employees accept smaller paycheques partly because of the company's culture, but also because WestJet eases the heartache with generous helpings of stock options. At the end of June, the company's employees held more than 11 million stock options, on a share base of about 125 million.
That's a fine strategy as long as the share price is going up, as WestJet's has with few interruptions since its initial public offering in 1999. But we don't know what will happen to employee morale if the airline suffers a prolonged period where its stock falls.
The average exercise price on those 11 million options is $12.29 a share, not so far below the current share price of $13.24. How much farther does the stock have to fall before employees start to demand more money? About 95 per cent of the new options granted this year will go to the pilots, the most skilled group of workers and the ones who could do the most financial damage if they agitated for more cash.
What happens to the airline's returns as it gets bigger?
We're not talking about stock market returns, but returns on capital. For an airline, WestJet's have been quite good, averaging 14 per cent over the past five years, according to Bloomberg.
But Mr. Beddoe is preparing to spend quite a bit as the airline buys new Boeing 737-700s to replace its older-model planes. The amounts are substantial and, for WestJet, unprecedented: as of late March, it had committed to spending more than $650-million by 2006. The balance sheet is going to balloon in size.
The new planes will be more efficient, but some still question whether Mr. Beddoe is so blinded by growth prospects that he's overreaching.
"Their return on capital is going to sink like a stone," predicts one investment manager who looked at the company and decided to avoid buying the shares. When companies can't make a decent return from their investments, the shareholders always feel the pain, eventually.
How much longer will investors pay this much for the stock?
Even with a 30-per-cent decline so far in 2004, WestJet shares still trade for about 29 times this year's projected profit, according to estimates by Raymond James analyst Ben Cherniavsky. That's on the high side, even by the historical standards of this stock, and higher than several other low-cost airlines.
What would make it worth that much? If Jetsgo were to retrench or die, that would help, the analyst said. But it doesn't look like that's going to happen any time soon, and if anything, it's probably a safer bet that Jetsgo will continue to be the pest that Clive Beddoe wishes would go away.
00:00 EDT Thursday, September 09, 2004
So the rascals at WestJet Airlines are in the middle of another stink, are they?
First they bust into Air Canada's computer reservation system, which can be accessed only by a select group of about 978,000 current and former employees, and dig up supposedly confidential data on Mapleflot's passenger bookings. Now they stand accused by Jetsgo CEO Michel Leblanc of getting their hands on secret documents that show how many bums are filling the seats on his airplanes. Running a low-cost airline? By the sound of it, these guys at WestJet should become private detectives instead. For an encore, WestJet boss Clive Beddoe will tell us where Hoffa is buried.
The airline has said nothing about Mr. Leblanc's latest allegations, other than that it's looking into them. But it would be a mistake for investors to get distracted by the espionage tales, fascinating though they are. There are more serious issues to worry about for this company. Such as:
What happens to its costs if its stock keeps drifting lower?
Every airline has costs that are mostly beyond its control: fuel, landing fees, maintenance. The only way to keep a low-cost advantage is to trim the expenses it can control as much as possible.
At WestJet, that has meant keeping wages and benefits below Air Canada's. Its employees accept smaller paycheques partly because of the company's culture, but also because WestJet eases the heartache with generous helpings of stock options. At the end of June, the company's employees held more than 11 million stock options, on a share base of about 125 million.
That's a fine strategy as long as the share price is going up, as WestJet's has with few interruptions since its initial public offering in 1999. But we don't know what will happen to employee morale if the airline suffers a prolonged period where its stock falls.
The average exercise price on those 11 million options is $12.29 a share, not so far below the current share price of $13.24. How much farther does the stock have to fall before employees start to demand more money? About 95 per cent of the new options granted this year will go to the pilots, the most skilled group of workers and the ones who could do the most financial damage if they agitated for more cash.
What happens to the airline's returns as it gets bigger?
We're not talking about stock market returns, but returns on capital. For an airline, WestJet's have been quite good, averaging 14 per cent over the past five years, according to Bloomberg.
But Mr. Beddoe is preparing to spend quite a bit as the airline buys new Boeing 737-700s to replace its older-model planes. The amounts are substantial and, for WestJet, unprecedented: as of late March, it had committed to spending more than $650-million by 2006. The balance sheet is going to balloon in size.
The new planes will be more efficient, but some still question whether Mr. Beddoe is so blinded by growth prospects that he's overreaching.
"Their return on capital is going to sink like a stone," predicts one investment manager who looked at the company and decided to avoid buying the shares. When companies can't make a decent return from their investments, the shareholders always feel the pain, eventually.
How much longer will investors pay this much for the stock?
Even with a 30-per-cent decline so far in 2004, WestJet shares still trade for about 29 times this year's projected profit, according to estimates by Raymond James analyst Ben Cherniavsky. That's on the high side, even by the historical standards of this stock, and higher than several other low-cost airlines.
What would make it worth that much? If Jetsgo were to retrench or die, that would help, the analyst said. But it doesn't look like that's going to happen any time soon, and if anything, it's probably a safer bet that Jetsgo will continue to be the pest that Clive Beddoe wishes would go away.
We get so caught up in the day-to-day happenings of our industry that we often overlook the bigger picture. Since there's a lot to digest in these articles I'll try to make this as brief as possible:
Lawsuits aside, Air Canada's emergence from CCAA will be good for the entire industry. There will be shareholders to be accountable for and a "focus" on international flights instead of protecting domestic marketshare. This will benefit Westjet and the "other" guys (Canjet, Jetsgo, etc.).
As for our costs and "expnditures", with the retirement of our -200's and our move to an all-NG fleet (-600/-700/-800) we will reduce costs even further. While spending all this cash may look bad to some, our debt-to-equity ratio is second to none and we still have a very healthy balance sheet with plenty of cash on hand. LiveTV will provide a great value to our product and attract more customers, as will many of the new initiatives that will be announced in the near future.
As for our share price/value, it's going to remain around where it is until this lawsuit is cleared up. Our pilots continue to remain happy with their options and our employees, for the most part, are also happy with their ESP plan. Blastor and Rebel, I know how much pleasure you two take in knocking our share price (as it is directly tied to our pockets), but when you look outside the box and further down the road this "slump" will be nothing more than a minor blip. Our company has always treated the employees first and if morale starts to break, rest assured that something will be done to fix it.
If you look at the LCC's around the world, you'll notice that most of them are also in some sort of "trouble". Are all those airlines going to drop, die, and go away? Don't bet on it. Each and every "major" carrier has faced adversity at some point during its existance and it just so happens that we are experiencing that adversity right now.
The above quote was from a ROBtv interview today regarding Air Canada sifting through garbage. While his opinion isn't entirely credible, it's interesting nonetheless that he would say that. If he is correct, Air Canada's lawsuit will be reduced to nothing. Westjet would also have a very legitimate reason for its counter-suit.(When asked if Air Canada was in the clear on this)
"...My suspicion is that it was still on private property therefore not available to others..."
-Norm Inkster, President, Inkster Group
& Former Head Of The RCMP
Lawsuits aside, Air Canada's emergence from CCAA will be good for the entire industry. There will be shareholders to be accountable for and a "focus" on international flights instead of protecting domestic marketshare. This will benefit Westjet and the "other" guys (Canjet, Jetsgo, etc.).
As for our costs and "expnditures", with the retirement of our -200's and our move to an all-NG fleet (-600/-700/-800) we will reduce costs even further. While spending all this cash may look bad to some, our debt-to-equity ratio is second to none and we still have a very healthy balance sheet with plenty of cash on hand. LiveTV will provide a great value to our product and attract more customers, as will many of the new initiatives that will be announced in the near future.
As for our share price/value, it's going to remain around where it is until this lawsuit is cleared up. Our pilots continue to remain happy with their options and our employees, for the most part, are also happy with their ESP plan. Blastor and Rebel, I know how much pleasure you two take in knocking our share price (as it is directly tied to our pockets), but when you look outside the box and further down the road this "slump" will be nothing more than a minor blip. Our company has always treated the employees first and if morale starts to break, rest assured that something will be done to fix it.
If you look at the LCC's around the world, you'll notice that most of them are also in some sort of "trouble". Are all those airlines going to drop, die, and go away? Don't bet on it. Each and every "major" carrier has faced adversity at some point during its existance and it just so happens that we are experiencing that adversity right now.
CanadaEH
Knowing a little bit about the workings of the AC legal department rest assured that AC, or for that matter, any big corporation would not get involved in a lawsuit unless their allegations were on solid ground.
The legal precedent for garbage/recycling roadside ownership/privacy has a long legal history in this country. In a nutshell if it’s roadside it’s public property. It will be up to the courts to decide if all the rules were followed not some ex-RCMP officer who probably got carried away by the moment. Was this ex- officer present when this caper went down? No I didn't think so but it makes for interesting press and certainly gives his new business venture lots of exposure..
I don’t get any delight in reading about the follies of WJ or their share price as it’s possible that a mutual fund that I have shares in might also own shares in WJ. Actually WJ like Ryanair has become an embarrassment to the industry and one the industry doesn’t need at this time. No one forced WJ to take the low road. The damage being done to WJ’s share price and reputation is self-inflicted.
Knowing a little bit about the workings of the AC legal department rest assured that AC, or for that matter, any big corporation would not get involved in a lawsuit unless their allegations were on solid ground.
The legal precedent for garbage/recycling roadside ownership/privacy has a long legal history in this country. In a nutshell if it’s roadside it’s public property. It will be up to the courts to decide if all the rules were followed not some ex-RCMP officer who probably got carried away by the moment. Was this ex- officer present when this caper went down? No I didn't think so but it makes for interesting press and certainly gives his new business venture lots of exposure..
I don’t get any delight in reading about the follies of WJ or their share price as it’s possible that a mutual fund that I have shares in might also own shares in WJ. Actually WJ like Ryanair has become an embarrassment to the industry and one the industry doesn’t need at this time. No one forced WJ to take the low road. The damage being done to WJ’s share price and reputation is self-inflicted.
Rebel, it is entirely possible that corporations can/do lose lawsuits. I haven't had a chance to watch that ROBtv interview, but another quote had that same individual say something about a fence immediately before the above quote. He very well could have some knowledge of this particular case. I'm not defending the guy, but you have to admit that he is more credible than some of the armchair lawyers that post in some of these forums. I think the only arguement I can come up with regarding the trash and its seizure is the location - was is curbside? I've read some articles saying it was and I've read others that say it wasn't, so until the courts decide there's going to be a grey area surrounding location.
If you think Westjet has become an embarrassment to this industry I truly feel sorry for you. Westjet has provided thousands of people a great place to work (with stable jobs, mind you) in a volatile industry. Oh, we also continue to make money and haven't had to "trim" our workforce. If we are an embarrassment, how do you view Air Canada's position?
Our shares have taken a hit recently, and yes the lawsuit does play a large part in it. So to do lower than expected earnings, increased competition, fuel prices, our move to YYZ, and many other factors. While I agree that our reputation has been damaged, the hit that our shares have taken are not limited to the lawsuit.
If you think Westjet has become an embarrassment to this industry I truly feel sorry for you. Westjet has provided thousands of people a great place to work (with stable jobs, mind you) in a volatile industry. Oh, we also continue to make money and haven't had to "trim" our workforce. If we are an embarrassment, how do you view Air Canada's position?
Our shares have taken a hit recently, and yes the lawsuit does play a large part in it. So to do lower than expected earnings, increased competition, fuel prices, our move to YYZ, and many other factors. While I agree that our reputation has been damaged, the hit that our shares have taken are not limited to the lawsuit.
Regarding the trash caper, remember we are talking a civil proceeding here; not criminal. The rules of evidence are different. Even if the AC documents were taken from Hill's property it may not automatically make them inadmissable in a civil proceeding. Inkster is an ex-cop with expertise in the criminal system. He may or may not know what he is talking about regarding civil rules. Hell, maybe WJ has retained his firm to investigate and help the lawyers cook up a defence.
Whatever the outcome of these legal issues, both AC and now maybe Jetsgo, the potential financial penalties are peanuts in the big scheme of things. The more injurious aspects by far is the damage being done to WJ's reputation and the senior management resources (time) being devoted to this issue rather than productive company business.
The other thing to consider regarding future success is, how much were they depending on "ill gotten" data in making their business decisions? What will the quality of their decisions be without this data going into the future? They have had the expertise to build a very successful low cost regional airline, but do they have what it takes to make the transformation into a much larger national/international carrier?
Whatever the outcome of these legal issues, both AC and now maybe Jetsgo, the potential financial penalties are peanuts in the big scheme of things. The more injurious aspects by far is the damage being done to WJ's reputation and the senior management resources (time) being devoted to this issue rather than productive company business.
The other thing to consider regarding future success is, how much were they depending on "ill gotten" data in making their business decisions? What will the quality of their decisions be without this data going into the future? They have had the expertise to build a very successful low cost regional airline, but do they have what it takes to make the transformation into a much larger national/international carrier?
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Flightlevels
- Rank 7
- Posts: 703
- Joined: Sun Feb 29, 2004 7:16 pm
I have never felt to date that westjet is an embarrasment to the industry. On the other hand having worked at big red I found them to be the embarrasment. examples of agents yelling at the pax. Releasing the parkbrake to get "on the payrole" getting in late to make that extra few hundred a month on pay...the list goes on and on. Milton has been out to get WJ for sometime now and it was underscored when he said"I think we may get WJ here" It's no secret that WJ has been a thorn in the side to AC much like Jetsgo is to WJ. The lawsuit has done what it was intended to do in the public eye. WJ will get through this and I'm assuming, it will benifit the employees. It will battle harden them a little more, as many have not felt the unkind industry before. I often ask in my briefings what my coworkers think...and moral is simply put....high.
Flightlevels
I am not aware of any airline in Canada that has ever been accused of corporate espionage. That is until WJ came along. Has this been an embarrassment to the industry? Well I’ve never seen AC referred to as the little airline that could, but had to cheat…
It’s unbelievable that WJ still refuses to accept accountability for their actions. It must be part of the WJ culture..
Senior WJ management has already admitted their guilt. Did their ego get in the way of apologizing to all concerned and moving on or do they somehow expect the court system to vindicate their actions. I don’t think that’s going to happen...
I am not aware of any airline in Canada that has ever been accused of corporate espionage. That is until WJ came along. Has this been an embarrassment to the industry? Well I’ve never seen AC referred to as the little airline that could, but had to cheat…
It’s unbelievable that WJ still refuses to accept accountability for their actions. It must be part of the WJ culture..
Senior WJ management has already admitted their guilt. Did their ego get in the way of apologizing to all concerned and moving on or do they somehow expect the court system to vindicate their actions. I don’t think that’s going to happen...
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Flightlevels
- Rank 7
- Posts: 703
- Joined: Sun Feb 29, 2004 7:16 pm
Accused being the key word. IF it is proven how do you explain the success for the prior 6 or 7 years? Look at AC's track record...why do they try to squish little guys by flooding the market with seats..undercutting by huge margins..did you already forget about the competion ruling. my favorite is when I got written up by a CSA for pushing a wheelchair...this stuff is embarrasing. Let the courts play it out. I think you have made your judgement already, now let them. Don't get me wrong I'm not anti AC in fact they have alot of things that are great. They have tought me alot as well.
