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Canada aviation: WestJet defining its priorities under new owner Onex

Canada’s second largest airline, WestJet, has gone through numerous changes to its business model during the last decade – introducing two new subsidiaries, Encore and Swoop, adding new regional partners, forging a new joint venture and launching long haul operations, first with 767s and then with next generation 787s. 

The dizzying pace of change has drawn its fair share of scrutiny from the investment community, reflecting the dichotomy that airlines face in satisfying the shortsightedness of markets while also crafting long term strategic plans. 

WestJet won’t be subject to the quarterly whiplash that other airlines face now that it is being bought by the private equity firm Onex for CAD5 billion. But the airline continues to forge a clear growth strategy that entails building deep partnerships to broaden its international reach and continuing to capture a larger share of Canada’s corporate travellers. 

Summary

  • Going private allows WestJet to avoid the perils of politics and trade dragging down valuations.
  • WestJet is embarking on holistic growth that includes research, development and innovation, as well as more traditional capacity expansion. 
  • The airline continues to work on building deep partnerships and capturing more corporate share. 

Going private allows WestJet to escape being at the mercy of markets 

In May-2019 Onex and WestJet announced their groundbreaking deal, which was the largest private equity agreement in the history of the airline industry.

At the time the deal was unveiled WestJet CEO Ed Sims said that the company now had an ability to focus on its long term strategy to deliver against the lifetime of its assets, which include aircraft with a life span of 20-25 years.

See related report: WestJet and Onex, a new privatisation trend? 

During the recent CAPA Canada Summit Mr Sims explained the process of being evaluated every quarter by buy-side analysts “is like being a market gardener, you are constantly pulling up your carrots saying, ‘why aren’t these growing?’”.  

WestJet executives including CEO Ed Sims engage in a discussion at the recent CAPA Canada Summit 

In the context of introducing new strategic elements to a business, such as the 787 or WestJet’s new ULCC Swoop, Mr Sims said: “Every single quarter you have children in the back seat of your car going, are we there yet? Is it profitable? Has it wiped its face in terms of its financial performance?” 

Offering insight into some of the advantages WestJet gains through the Onex deal, Mr Sims explained that it removes the company “from the volatility of Dow Jones, the impact of the Chinese-US trade war, the impact, frankly, of [US] President Trump’s tweets that can actually affect our share price beyond our way of actually being able to control our inherent value in the business”.

For WestJet there are many attractions in going private, and “we can start capitalising on areas behind a veil that we don’t have to share with our largest competitor”, Mr Sims said. 

WestJet looks to grow in a variety of areas, including research and innovation 

As it adjusts to becoming part of a private company, WestJet also appears to be shifting its growth strategy from a focus on available seat mile (ASM) production to a more holistic approach to expanding its business. 

“I would argue in the previous five years from 2013 to 2018 we grew too big and too fast”, Mr Sims said. WestJet was adding 15 aircraft a year during that period, which was difficult to sustain, he explained.

“We now have a forward order book where we will continue to grow, but closer to a rate of five aircraft per year for the next five years.” 

WestJet mainline fleet summary as of early Oct-2019 

Mr Sims said that growth for WestJet would come in other areas: through enhancements in technology, a greater investment in learning and development internally with the organisation, and “even greater investment than we have had to date with the sophistication of our safety monitoring”. 

WestJet will continue to grow its ASMs, but Mr Sims stressed that there will be growth in more areas related to research and innovation. 

As it builds strong ties with SkyTeam members, WestJet feels no pressure to join 

A significant proportion of WestJet’s future growth will come from building deep partnerships in North America, the trans Atlantic and trans Pacific. 

WestJet is in the midst of working through the approval process for its JV with Delta. The two companies have already gained approval from Canadian regulators and are in the early stages of building what executives call a “deep relationship” with Air France-KLM in the trans Atlantic. 

Delta and Air France-KLM are anchor members of the SkyTeam alliance, but that is by no means a precursor for WestJet joining the group.

“I had ten years at Air New Zealand where I was a prisoner of Star Alliance", Mr Sims quipped. He stated that in WestJet’s conversations with Delta there is no sense of any obligation to join SkyTeam

Delta itself has partnered with various airlines outside SkyTeam in order to remain competitive in pertinent geographical regions, including the groundbreaking deal to take a 20% stake in LATAM Airlines Group and forge a JV with one of Latin America’s largest operators. As a result, LATAM is leaving the oneworld alliance after being a steadfast member of the group for 18 years or so. 

Joining Mr Sims in the discussion, WestJet VP of Network and Alliances Brian Znotins explained that based on his past experience, “alliances are 30 airlines sitting around a table not able to agree on anything”, and JVs spring from that disagreement. 

Those JVs allow the participating airlines to build investments in technology and flights across geographies with benefits created for passengers in a much faster way than “the alliances would permit”, Mr Znotins stated. “From a geographical point of view, we’re building a very deep relationship with Delta, and from a trans Atlantic point of view we’re in the early stages of building a relationship with Air France-KLM”, he concluded. 

The 787 is key to WestJet's strategy of capturing more business travellers 

During the past few years WestJet has been working to build up its base of corporate customers, and much runway remains for the company to capture a larger share of lucrative business passengers. 

Mr Sims stated that WestJet represents approximately 37% of Canada’s domestic market, however, “we are considerably less than that in the corporate market because of the routes we started from. I often talk to corporates and they say, ‘I do my business traffic on your competitor, and I will travel on leisure with you’". 

Unashamedly, Mr Sims declared: “I want share of wallet as much I want share of heart”. 

The 787 is WestJet’s way of ensuring it has a competitive and high quality product offering to be fed by a high quality domestic offering. “We had a brilliant strategy, it was to have the widebody [787] Dreamliner and the equivalent of a narrowbody Dreamliner called the MAX, and it was a brilliant strategy until March 13 [2019]”, Mr Sims explained.

Since Mar-2019 all 737 MAX jets worldwide have been grounded, and WestJet has 13 737 MAX 8 narrowbodies that are out of service. WestJet’s MAX 8 Jets feature a dedicated premium section of the cabin.

“We want to get back to operating a consistent premium offering for those corporate road warriors and frankly, to improve our presence and penetration of Eastern Canada to the levels that we’ve been able to manage in the West”, said Mr Sims. 

Obviously, Air Canada has no plans to cede any of its advantage among corporate travellers to WestJet.

“Why should they?” Mr Sims said. “In fact, we’ve seen them respond in a very different way since we launched the 787.”

Mr Sims also explained that WestJet has been assiduously building up strength in its hubs during the past couple of years and the guests that Air Canada are fighting hardest to retain are the guests that are migrating at the greatest rate to WestJet since it introduced the 787

Free of market scrutiny, WestJet can now tend to important initiatives in due course

Mr Sims remarked that for the past ten years WestJet had been consistently keeping its domestic share between 36% and 37%,”but in terms of growing that, it is not enough to keep an order book of 15 aircraft per year, you have to change the nature of the business through widebodies and through partnerships”. 

In addition to adding widebodies and more meaningful partnerships, WestJet has made numerous changes to its business model in order to compete more effectively in the unique Canadian aviation landscape.

Some of the more significant changes take time to reach a certain level of maturity and now, through its purchase by Onex, WestJet has the space to allow those initiatives to reach their potential in due course, without the glare of financial markets. 

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