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WestJet CEO Ed Sims: "it's a roller coaster"

Analysis

Talking at the CAPA Live on 8-Sep-2021, WestJet President & CEO Ed Sims spoke with CAPA’s chairman emeritus Peter Harbison. Some of the key highlights can be found below.

Mr Sims talks about prospects with the 737MAX, the effective configuration of the Dreamliner ("a relatively modest business class cabin, a 16 seat cabin, 28 seats in premium economy"), the anticipated rebound in travel, the business travel outlook ("the big deficit is going to be people will no longer be travelling for internal meetings"), SAFs ("one of the areas I'm incredibly conscious of is to avoid greenwashing"), and will WestJet operate to (his home country) New Zealand - "Yes".

 View the full CAPA Live interview here: Interview with WestJet CEO Ed Sims

PH: Well, a very warm welcome to CAPA Live, to Ed Sims who's the President and CEO of WestJet, Canada's leading airline. Great to have you with us Ed.

ES: “It's great to be back Peter, and thank you to the audience so much for joining us today. And thank you for the invitation to come speak."

PH: Great pleasure. Lots to talk about. But also it's been a really turbulent marketplace. Let's have a quick look back, a quick retrospective at what's happened. And maybe a little sting in the tale, but what would you have done different if you'd had the benefit. And COVID aside, nobody expected that.

To say it's a roller coaster I don't think would do it justice, because the sharp drop of the downs on the roller coaster were deeper than the peaks were high on the roller coaster. What an incredible time to learn about the resilience of people in the aviation industry. What an incredible time to learn about the expectations of guests and travellers and politicians about the management of airlines

ES: “Yeah, isn't hindsight a wonderful thing? It's incredible how many travellers on airlines have the benefit of hindsight that we who are running the organisations don't have when we make those calls. I'll start by I guess coming right to the present day, I will be obviously leaving towards the end of the year. I was a little concerned that aspects of your invitation to come and speak read a little bit like an obituary, so I just want to reassure the audience that I am actually still alive. I'm not actually dead just yet.

“But for the stresses that we've been under, it's put a huge amount of pressure on psychological and physical health of a lot of people in our positions. But if I look back over the four years that I've been running the organisation, we started with real challenges around collectivisation. We'd never had unions on the premises, and the very first challenge that I had in this role was dealing with the potential strike threat.

“Then we worked through the introduction of new wideboded aircraft replacing our old 767s with brand new 787s. We then moved onto the grounding of the MAX, we had 13 MAX's coupled with those Dreamliners, and that strategy was in hiatus until we were able to get the MAX's back in the air. And in your introduction you mentioned that we then privatised in 2019, the largest private equity deal in aviation history. And of course the new owners had about three months to enjoy running the organisation in normal times before COVID began to hit us really hard at the end of February in 2020.

“So to say it's a roller coaster I don't think would do it justice, because the sharp drop of the downs on the roller coaster were deeper than the peaks were high on the roller coaster. So it's felt like much of a downward journey, but what an incredible learning experience. What an incredible time to learn about the resilience of people in the aviation industry. What an incredible time to learn about the expectations of guests and travellers and politicians about the management of airlines, and what an incredible time it's been in Canada to remind people in this country how fortunate we are compared to other countries that we have two equally robust national and international airlines.

“And I think that's become a cause of actual national celebration and a cause of real pride in the strengths of one operator out in the east of this vast geography, one operator out in the west, both of whom found different ways of navigating through the crisis and both of whom I think are now coming out in a very, very strong position.”

PH: Yeah, there's certainly a book in there I would think Ed for that.

ES: “Well, I've written the first chapter Peter. So I wrote the first 8,000 words, but I think it's going to be a "War and Peace" by the time I've finished."

PH: Well I hope it's got a happy ending anyway.

Demand is at such a level, it's almost as if the whole world wants to travel on the same day. I think that's been part of the supply challenge in that we've all been so fastidiously guarding our liquidity, guarding our cash reserves, trying to drive cost and productivity efficiencies, that we haven't been able to spool up fast enough for the whole world travelling on the same day

ES: “Yes, well so far I feel more confident than I have done in not just in the last 18 months but at any stage here, that actually this market, when it rebounds will rebound very quickly. Demand is at such a level, it's almost as if the whole world wants to travel on the same day.

“And I think that's been part of the supply challenge in that we've all been so fastidiously guarding our liquidity, guarding our cash reserves, trying to drive cost and productivity efficiencies, that we haven't been able to spool up fast enough for the whole world travelling on the same day. So for a carrier like WestJet, I was incredibly proud during the crisis that we took over 70% of the cost base out of the operation in the early stages.

“And if you said to me even as recently as the middle of May that I would then recall twice as many staff as we're actually operating throughout the crisis, I would have thought you were mad, but as the demand came back and particularly peaked for our peak season during July and August, that's exactly what we're needing to do. And what we are finding ourselves in is a situation where the last time we grew at the numbers that we're talking about in terms of recall staff, was between 2001 and 2013.

“So right now we're trying to replicate 12 years of growth in less than six months. And so for those armchair quarterbacks and those guys to say, "How hard can it be to actually match this incredible level of demand?" Well, the answer is actually that's extremely difficult while we are trying to make sure that we maintain WestJet's reputation as the lower cost national and international carrier, and we maintain a double-digit chasm advantage over our competitor. And those things are worth fighting for even when we are struggling to make sure that we can match these new levels of demand."

PH: Well, that's probably the nicest problem you can have at the moment, isn't it Ed? But just one last question on the retrospective, what one thing particularly would you have done differently had you had the benefit of hindsight? 

ES: The thing I would do differently Peter is I would have probably thrown fewer stones at noisy dogs that were barking in the background.

“Yeah look, it's a great question. I think sticking... It's not one thing I would have done differently, it's one thing I might've done with a greater discipline, is just sticking to the strategy, not deviating. A great quote from one of the all-time great wartime leaders who saw crisis that make this one pale into comparison, but Winston Churchill said, "You will never reach your destination if you stop and throw stones at every dog that barks." And the thing I would do differently Peter is I would have probably thrown stones at noisy dogs that were barking in the background."

PH: I like it. Okay, well let's look forward Ed. So obviously there's a lot happening, there's a lot that's still uncertain, particularly internationally. You are rapidly gearing up and you're commencing a lot of new routes, and I guess in that the Max is intricately engaged. Just give us a bit of a picture of where you're going, what the strategy is for the network now, and how the Max fits into that in particular, or for the other aircrafts.

One of the things that COVID has taught me is to minimise risk, to operate with prudence and with caution. So we're really consolidating a European network, we're really building a network from three hubs, Calgary, Vancouver, Toronto

ES: “Yeah, obviously we're building... Firstly, I'm building back to our five-year plan. I think that's the most important aspect of the rebuild is that you stick to the map that we had prior to COVID. I'm still convinced that's the right strategy.

“So clearly demand is more robust domestically, so shorter haul point to point is recovering. I think everybody recognises that it's recovering at a faster rate. International, and particularly ultra long haul is recovering more slowly and the corporate market is recovering at the slowest rate of all.

“So we are making sure that firstly our foundations are really robust right across our national Canadian network, across the 42 ports that we now fly. So making sure that we can continue to build our hubs but also continue to grow our trans-Canadian footprint, whether with our own metal or with partners, particularly in regions where they can be better served perhaps by a smaller model than our Q400. And working with carriers that fly SAAB340's or Beech 1900's, that's a really exciting opportunity for us to build that footprint.

“From an international perspective, one of the things that COVID has taught me is to minimise risk, to operate with prudence and with caution. So we're really consolidating a European network, we're really building a network from three hubs. So for us, Calgary, Vancouver, Toronto, we're really trying to make sure that we fly to a broad sways of European destinations but really built around central European hubs.

“We've just started operating from August the fourth to Schiphol with astonishing load factors. We've been obviously operating to Charles de Gaulle and to London, and I think those three then give us the basis to start building out back to destinations like Rome Fiumicino, to Dublin. We announced last week that we'll be flying the MAX to Glasgow and Edinburgh.

I would have liked by now to be flying Asia Pacific. And that's probably another couple of years down the track, but it will come

“So I'm really excited about building that European network. What's frustrating for me is I would have liked by now to be flying Asia Pacific. And that's probably another couple of years down the track, but it will come. So I'm excited about building from our core strengths, building where we already have those foundations, spreading that international network across Canada. And of course bringing thousands of visitors.

“Today was a very significant day here in Canada. So on September the seventh, we expanded the ability for double vaccinated travellers from all across the world. We offered the same opportunity to visitors from the US from August the eighth. And now we can say with all assurance that all double vaccinated guests, irrespective of destinations, are now welcome into Canada. So I'm very excited about building route structures where we have equal weighting of O and D at both ends of the route. And that's working very successfully.

“So it's almost not quite coming back to basics but it is effectively reestablishing first principles of the way in which we'll fly that 787 fleet. And within the next six months we'll have increased that fleet up to 10 aircraft. And I'm hoping that as the recovery continues to gain momentum, we'll have a great opportunity to build beyond those 10 787s."

PH: Right. Yeah, very interesting. And in terms of you were talking about continuity of strategy. Like a number of other carriers, now you have started a mainstream business in cargo, which I guess to some extent comes out of COVID. Or was that something that was always going to be there? 

One of the key lessons that's come out of COVID for me is that airlines like WestJet can become too dependent on commercial passenger traffic and not develop more ancillary revenue streams, whether that's through the rewards and frequent flyer programmes or whether that's through areas like cargo

ES: “It was something that was always going to be there. We grew from narrowbodied, low cost. And so cargo doesn't always figure at the top of the agenda when you don't necessarily have the right aircraft vehicle, or you're really, really focused on driving that chasm differential and therefore driving lower fares for commercial guests. But one of the key lessons that's come out of COVID for me is that airlines like WestJet can become too dependent on commercial passenger traffic and not develop more ancillary revenue streams, whether that's through the rewards and frequent flyer programmes or whether that's through areas like cargo.

“And the real growth area, and I know I'm preaching to the converted in terms of your audience today, but the real growth in cargo is clearly coming from e-commerce. But the trick that we are very, very intrigued by is the ability to do same-day deliveries to smaller conurbations and smaller centres. That I believe will be a really high yield. It will be very much premium traffic.

We are now moving into the area of having four dedicated 737 800 BCS, and I think that's the key is when you can start doing same-day deliveries outside of your main hubs. That's the great opportunity for us.

“The majority of dedicated freighters are still widebodies, they still tend to be older 757s, 767s. We are now moving into the area of having four dedicated 737 800 BCS, and I think that's the key is when you can start doing same-day deliveries outside of your main hubs. That will come at a premium. It obviously works extremely well with operators like Amazon. And I think that's the great opportunity for us.

“So in some ways it was always part of the strategy, because for too long cargo has been around 1% of our revenue. I think cargo should be somewhere between three to 5% of the total group revenue. But I think in this post COVID world, that's the time to fast track and accelerate our growth in that area."

PH: How much competition do you think you'll have domestically, particularly in that area Ed?

One of the interesting aspects for me is there's no way in the commercial passenger business that an airline would be allowed to grow typically to shares above 60 to 70% of a market without attracting new entrants

ES: “Well, we've got some pretty strong competition. Our red competitor over in Montreal have been seeing what we've been seeing and they've been diverting a lot of their focus when their passenger loads have been significantly lower. But we have an operator here in Canada called Cargojet. And one of the interesting aspects for me is there's no way in the commercial passenger business that an airline would be allowed to grow typically to shares above 60 to 70% of a market without attracting new entrants.

“Cargojet have a share of approaching 90% of the premium yield market. So I think that is an opportunity just as we saw back in 96, when the opportunity was there to provide competition and lower costs on the passenger side. That opportunity very much now exists here in Canada."

PH: Talking of red aircraft. I was talking to Tony Fernandes a couple of months ago and they're embarking very strongly on the cargo front as well. But also going that little bit further into the last mile, presumably you're not considering that, you're just staying as an airline operator?

ES: “Oh absolutely, we will stick to the core of the business. And that's why I think getting dedicated 73 800s is a really easy transition obviously for our pilots who've been flying the 73 for the last 25 years. So it's a really natural fit with the business and it's a natural fit with the route network.

“So Tony is a fantastic ideas person, went to a great university, supports a terrible football team, but in all other respects we're forging our own destiny but watching with great interest what's happening elsewhere around the world with people like AirAsia.”

PH: Yes, it's great to see... Going back to your good friend, Winston Churchill, necessity is definitely the mother of invention. And there's a lot of invention going on and innovation going on at the moment. Ed, you mentioned before partnerships. Now you've historically fitted into that role of looking at servicing the two other main global networks of oneworld and SkyTeam, while Air Canada has obviously looked at the Star Alliance. You now look as if you're moving to get much closer to the SkyTeam members, particularly with your Delta flying. Do you want to take me through that strategy?

We've been exploring a transborder joint venture with Delta over the course of the last couple of years, and we're very interested in looking at the potential for both transatlantic and potentially transpacific joint ventures

ES: “Yeah, sure. We would be one of the few remaining non-aligned carriers of scale. We fly 181 aircraft, turnover approaching USD6 billion, and yet we're not embedded in one of the alliances. And I think that's indicative actually of the way the world is going. We are exploring, and it's been very public that we've been exploring a transborder joint venture with Delta over the course of the last couple of years, and we're very interested in looking at the potential for both transatlantic and potentially at some stage transpacific joint ventures.

“I think that's the model for partnerships rather than the conventional alliance model. We code and interline with around 55 carriers, some are in SkyTeam, some are in oneworld, some are non-aligned. Some even dare I say it are in Star Alliance. But the secret for us is how you can build deeper with fewer partnerships.

“So I don't see a great deal of upside for us in joining SkyTeam, but I see tremendous upside in working with culturally and commercially-aligned carriers on full profit share JVs. I think the days of revenue share tend to penalise carriers like us who operate on a lower chasm basis, but I think when you get into fully fledged joint ventures, our lower cost base is a huge attraction for other carriers who have broader international networks.

“And for us that's the future, rather than thinking we need to rush into an alliance where a lot of our carefully earned dollars could go into creating centres of excellence or go into creating head offices for the alliance rather than channelling that value into a really deep, sustainable, long-lasting joint venture.”

PH: If I'm interpreting you right, getting into bed with a very major carrier like Delta, and am I right? You're thinking in terms of the joint venture across the Atlantic?

ES: “We're looking... Obviously not just with Delta, but we're looking at transatlantic carriers who are more closely affiliated with Delta, like Air France, KLM, Virgin Atlantic. And that makes a lot more sense for us when we have daily operations into Charles de Gaulle, Schiphol, and into the UK.”

PH: Right. Well, would that head you off with your relationship, obviously competing with oneworld?  

So I think for us to remain non-aligned and independent gives carriers, whether they're in oneworld or any other alliance or non aligned, the opportunity to work with us on a very young fleet and on a very low cost base

ES: “We've got great relationships with carriers like JAL in Japan and with Qantas, and I don't see anything that compromises those relationships. They, like us, are competing every day with carriers in Star Alliance. And I think that's really healthy.

“So I think for us to remain non-aligned and independent gives carriers, whether they're in oneworld or any other alliance or non aligned, the opportunity to work with us on a very young fleet and on a very low cost base.” 

PH: Looks like a nice strategy if you can manoeuvre effectively through it, does take a fair bit of skill I guess. So rather than just taking the stratified approach that the big carriers are doing."

COVID could be an advantage because it changes the landscape, and I think it fast tracks this concept of moving in a less aligned world with fewer deeper relationships at a much faster rate than perhaps might otherwise have been the case

ES: “And that's where COVID could be an advantage because it changes the landscape, and I think it fast tracks this concept of moving in a less aligned world with fewer deeper relationships at a much faster rate than perhaps might otherwise have been the case." 

PH: Just backtracking to the North Atlantic particularly, you have established some new routes and as you say, quite successfully in some cases. What outlook do you see there in say the next three or four months, which is I guess your personal time horizon with WestJet too, although you'll be planning beyond that. What do you see coming in the next three months? Because there is obviously Delta, and I'm talking about the virus now rather than the airline. Delta is having a big impact in the US and increasingly in Europe now. How do you see things coming in the next three or four months? What signs are you seeing in terms of customer sensitivity, but also in terms of your basic planning?

Canada has a wonderful opportunity to establish ourselves as one of the safest countries to travel to, from, and within. And that gives us then a very strong platform on the Atlantic where people are now so used to carrying a digital passport with a QR code to get access to a whole range of services

ES: “Yeah, I think there's two concerns that we are actively monitoring on the horizon. One as you say is the Delta variant or the Lambda variant, or whatever may come next in terms of variants, and what impact they have not just globally, but specifically here in Canada where we have provinces with differing approaches to issues like vaccine passports. But you've also got what the economists are calling this K-shape recovery, where the upside for heavily vaccinated countries can potentially be mitigated by the downside of less successfully vaccinated countries.

“One thing that I think we can take a great deal of pride on here in Canada is we've now got a mid 60s% double vaccination rate, which compares say to the US who are typically three to four months ahead of us in their vaccination spread, now stalling at around the 52% rate.

“What we're looking forward to is getting to a critical mass, which we think we will reach in the next couple of months of getting that double shot rate north of around 70%.

“The government I think has introduced very timely legislation that says as of October the 31st, all federally regulated workers, but all domestic travellers need to have a double vaccine in order to be able to travel.

“So I think Canada has a wonderful opportunity to establish ourselves as one of the safest countries to travel to, from, and within. And that gives us then a very strong platform on the Atlantic where people are now so used to carrying a digital passport with a QR code to get access to a whole range of services.

“So I am concerned about the Delta variant, but I think while we are focusing primarily on both VFR traffic, and of course there's a very high ex-pat population on both sides of the Atlantic between two countries, and focused on the leisure market, less focused on filling premium seats.

“So our Dreamliner has a relatively modest business class cabin, it's a 16 seat cabin, 28 seats in premium economy. So there's less emphasis for us or less obligation to fill those forward cabins and a greater opportunity I think to fill the aircraft with both VFR and with leisure traffic. So not withstanding the Delta variant, I'm feeling pretty confident about the projections on the Atlantic."

PH: That's good. And in passing, I would just say I'm impressed by the government's approach in terms of biting the bullet and just saying vaccines are mandated. I think if a few other administrations did that we'd all be in a better place. So you've touched on configuration and business travel. And what forward signs are you seeing in terms of business willingness to travel now and in the future? How much is it going to reduce by? Because it obviously is going to reduce by a relatively substantial amount.

The big deficit is going to be people will no longer be travelling for internal meetings. They'll no longer be travelling to address large numbers of staff at environments, or simply to attend meetings. But one thing we are seeing is that the quality of handshakes, the quality of face-to-face meetings will I think come back as part of the pent up demand, because a lot of commercial organisations are really struggling without the ability to seal contracts face-to-face 

ES: “Yes, we are seeing some pent up demand in those forward cabins, from people who simply haven't been able to make commercial contacts and contracts. But I think the big deficit to be honest is going to be people will no longer be travelling for internal meetings. They'll no longer be travelling to address large numbers of staff at environments, or simply to attend meetings. Where particularly in a geography as vast as Canada, people like myself were travelling often five or six hours, changing two or three times zones just for a one hour meeting and then coming back.

“I think that traffic is going to take a long, long time if it ever recovers. But one thing we are seeing is that the quality of handshakes, the quality of face-to-face meetings will I think come back as part of the pent up demand, because a lot of commercial organisations are really struggling without the ability to seal contracts face-to-face.

“So we are starting to see early signs, but I don't think that's going to come back at anything like the volume that we saw pre 2019. But certainly I think for journeys between six to eight hours, as opposed to those journeys of 12 hours plus, we are already seeing strong signs of pent up demand."

PH: Let's link the two things together too. One of the factors which is going to influence the way businesses come back is their need in turn to reduce their carbon footprints. There's also a nice synergy between low cost in terms of unit seat cost and unit emissions. That's a nice little as we'd say in Australia, Dorothy Dixer, to set you up to say you've got a nice low cost and that your unit emissions are lower. What are you doing on a broader scale in terms of reducing your profile environmentally?

One of the traps some of us fell into with regards to biofuels or synthetics in the past was that sometimes people were burning more fossil fuels to carry new biofuels than was actually reducing your carbon footprint.

ES: “Yeah. Well look, age has very few advantages, but one advantage that a veteran like myself has is that we've seen this cycle happen before. And one of the areas I'm incredibly conscious of is to avoid greenwashing. One of the traps some of us fell into with regards to biofuels or synthetics in the past was that sometimes people were burning more fossil fuels to carry new biofuels than was actually reducing your carbon footprint. And the same is true with synthetics. I think there's some really exciting work going on synthetic fuels, particularly here in British Columbia or in our next door province, but you've got to be really careful that you can pipe, because tanking can often again burn more fossil fuels and you're actually saving by creating these synthetics.

So I think the key lesson here is what do we do on scale from either biofuels or synthetics to make sure that it becomes a genuinely viable alternative? But the other is what can you do close to home? It's a relatively simple answer for a carrier like WestJet, 95% of our carbon emissions come from the burning of Jet A-1 aviation fuel.

Increasing our average 737 for example from an NG6 or 700 up to a MAX allows us to get 30 to 40 more seats per flight, which is obviously far more efficient in terms of reducing the numbers of takeoffs and landings to carry the same number of guests

“So the first thing to do is to make sure that we maintain the youngest fleet in Canada. We have the youngest fleet by between two and a half to four years over our largest competitor, so about a 40% age advantage over their fleet.

“The second is what can you do every day from a procedural perspective? So we're working incredibly closely with our air traffic control organisation, NAV CANADA, to make sure that we have the most fuel efficient glide descents that we can do single engine descents where appropriate and certainly single engine tax that eats most of our major hub airports.

“And as you've already pointed out, actually increasing the density of your aircraft, increasing our average 737 for example from an NG6 or 700 up to a MAX allows us to get 30 to 40 more seats per flight, which is obviously far more efficient in terms of reducing the numbers of takeoffs and landings to carry the same number of guests.

“So I think average fleet age, improving your procedures, and only then thinking what are genuine alternatives that can be transported safely and efficiently to Jet A-1 is probably the right sequence to make sure that we don't get accused as industry of greenwashing in the way that we did back in 2007, 2008.

“So I'm wary of commitments with too long a time scale. When we declare what steps we'll be taking to net carbon zero I want to do that within a realistic time span, because I think those targets that are being pushed out to 2050 tend to wash over people's heads. So we want to have really robust, realistic targets that we can deliver on by 2030."

PH: Yes, sounds very sensible, certainly greenwashing is not the place to be. And we're running out of time, before we go I do want to congratulate you on a great four years with WestJet? And the almost roller coaster ride you've had, with a lot of downs. Nice to see you heading on the way up as you go.
I've got one one-word answer question for you. You're returning to heaven I guess you might think in a few months time. Will there be a new WestJet service down to New Zealand do you think in the near future?

ES: “Yes - You only allowed me one word so I won't couch it, that's where I'm driving towards.”

PH: Good on you Ed. Well, it's been great working with you and I look forward to seeing you more at this end of the world afterwards as well.

ES: “Yeah, I look forward to that, Peter. Thanks so much to everyone who's joining us today.”

 View the full interview here: Interview with WestJet CEO Ed Sims

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