Cost reduction focus at growing WestJet

NB: WestJet will report its 4Q2009 financial results next month. For full analysis, subscribe to Peanuts Weekly or America Airline Daily.

Bold aims

Encouraged by the early signs of recovery, according to Executive VP of Operations Gregg Saretsky, the airline's goal is to move from Canada's second carrier at 35% market share to an up to 50% share by 2016.

As with the rest of the industry, the Calgary-based carrier has been building cash reserves and hasn't totally rejected the possibility of a double dip recession. Canadian consumer confidence took an unexpected dive during the fourth quarter, making flexibility its key strategy for the foreseeable future.

For that reason, it has several game plans to be flexible enough to respond to whatever economic scenario eventuates. To that end, it plans to grow its fleet from the current 86 to 135, but has the flexibility to reduce this growth profile, just in case.

"There is a lot of economic uncertainty," Saretsky said, "and a very wide delta on recovery expectations. We've built a rather large treasure chest of cash to minimize the risk and are hard at work conserving cash by managing capacity and cutting costs. We had a CAD166 million equity offering last year in order for us to be able to put cash under the mattress. We also adjusted our fleet plan and moved out deliveries, giving us a lot of flexibility going forward. We renegotiated with Boeing our delivers so now we have a delivery stream that goes out to 2016 for a fleet that can be as large as 135. We can also trim the fleet back to 112 through lease returns if necessary." He indicated WestJet is facing a "re-emboldened" competitor in Air Canada that has also raised a lot of cash.

Alliances to the fore

But WestJet's key strategy relies on its alliances. It has already rolled out its Air France/KLM alliance which focuses on Western Canada but will, in the next few months, expand into Eastern Canada. Having switched its reservations platform to Sabre to accommodate its new partnerships, it expects the new platform to give it increased ancillary revenue.

Its planned partnership with Southwest Airlines will launch in 4Q2010. Saretsky said the alliances would give WestJet additional flow regardless of what is happening in Canada, adding, with AF/KLM, it will benefit from traffic flows from Asia and Europe. "And with Southwest, that gives us the type of point of origin presence we need in the US to continue to expand there," he said.

Cost reduction focus: CAD100 million targeted

Like Southwest, WestJet is focusing on cost reduction this year, but has an advantage in being 87% employee owned which enlists employees in the effort.

Seretsky called its goal of eliminating CAD100 million in costs this year aggressive. "That's really tough for an airline built on low costs," he told investors at the CIBC World Markets Institutional Investor Conference on 21-Jan-2010 in British Columbia.

"Controlling costs is very much at the epicenter of what we do. We haven't found it all yet, but being employee owned we have a very different dialogue with our employees than most of the legacy carriers whose cost reductions have come on the backs of their employees. Our employees are motivated to run the best, most profitable airline possible. During 2009 we achieved many efficiencies, including a fleet utilisation of 11.6 hours per day, which is a high water mark for the industry for 737 operations. Air Canada uses its 737s only 9.9 hours per day. The number of employees per aircraft is 75 compared to 113 at Air Canada. We look at that all the time."

Capacity to grow by up to 10% in 2010

Saretsky said the airline is looking for opportunistic short-haul markets that allow an extra roundtrip, but still enable the airline to return home for overnight maintenance checks. He pointed to its addition of Atlantic City and noted that fares to that destination are too high. "WestJet's fares are even below Greyhound," he said, adding that stimulates the market.

Despite its optimism, it does face challenges such as the 2009 revenue dip which WestJet expects to be in the 11% to 13% range for 4Q2009. "It's been very challenging, but we have a double-digit, five-year compound growth rate and a very strong history of profitability growth so the numbers in 2009 will be fine and we'll be one of the few to report earnings on the right side of the line," he said. "We have generally strong profits and cash flows and enjoy really healthy margins. In addition to the CAD166 million raised at the end of the year at CAD11.20 per share, we are in a healthy cash position at CAD963 million and a healthy balance sheet. This is so we can maintain a strong position to afford moving on opportunities as they arise, although in a prudent manner."

Capacity growth for this year will be in the 8%-10% range with the delivery of five new aircraft. WestJet is expecting seven new aircraft in 2011 and another seven in 2012 to reach its 10%-per-year growth plans. "That will make us [one of] the fastest growing airlines in North America," he said, "at a time when most of our competitors are taking capacity out. In fact, Boeing said that capacity has shrunk 6% in 2009 and while we have taken our foot off the accelerator, we are still in a growth mode."

Some 75% of its capacity is in its core markets and is, thus, stable, year-round traffic. The other 25% is seasonal, moving aircraft around to take advantage of snow birds in the winter, for instance. Saretsky said WestJet added 11 new destinations since the fall and 12 in the last year including nine international routes and three to the US. Despite pushing capacity up 7% year-on-year, it managed record load factors for Dec-2009 of 81.7%. "We are the largest carrier to the sun and have just added new service to Cuba which is the second largest sun destination for Canada," he said. "The early returns are encouraging."

Better margins ahead, but security headaches

"When the economy turns, we are expecting to see further improvements," he said. "And, with our improving cost base and improving revenue in the top line, that should do some really nice work for the bottom line. Our goal is to maintain a CASM ex fuel that is flat."

He noted that might be tough, given the rising costs such as security. When the new security procedures were put in place in December after the Christmas bomb attempt, the entire focus was on how to get passengers on to US-bound flights quickly with all the new procedures. WestJet and other Canadian carriers are now waiting for the government not only to tell them how much the new initiatives will costs, but how it will be paid for. Saretsky indicated the security agency is deploying 750 screeners along with body scanners, which is expected to ultimately be borne by airlines.

As with all airlines, WestJet is focusing on ancillary revenues as well which in 2009 totaled about CAD25.2 million or just shy of CAD7 per passengers. "We expect to see the ancillary revenue number increase as a number of new revenue opportunities that are afforded by this new technology are rolled out," he said. See related report: Ancillary revenues: Airlines to earn USD58 billion in 2010; CAPA to review Asia Pacific prospects

"If you add that all up, it results in top line performance that is among the best in the industry. Through the third quarter we had a 6.6% unit margin, second only to Allegiant. We are targeting a 3.4-point increase in that for a margin of 10%. Our vision for 2016 is to be one of the five most successful international airlines in the world, built on our culture of service and care".

"Our plan is based on four pillars - people and culture, guest experience and performance, revenue and growth and cost and margins," he continued, noting the number of customer awards the airline has grabbed including for being among the best corporate cultures in Canada.

Also, as with its south-of-the-border counterparts, WestJet is focusing on gaining a greater share of the business traveler market. To that end it is launching a new frequent flyer programme during the first quarter along with a new affinity card with the Royal Bank. It is also putting in a more robust schedule into key business markets in both Canada and in the trans-border markets. "With our partnership alliances that provides our passengers with more global access," he said. "All of these will help us achieve that 10% growth."

Complementing that, he said, is the strength of its global brand. In a survey of brand health, in which the normative scores are 80-127, "WestJet had scores of 150-200," he said. "We score strongly in all regions except Quebec but we are growing there. Our current share of the market is 20% in all addressable markets and in Canada it is 37%. Our target market share is at 40-50% and we have the fleet strategy and cost structure, along with our alliance partners and new business products to afford the type of growth we are seeking."