Airline CEO interview with WestJet, President & CEO, Ed Sims

Transcript

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Peter Harbison:A big warm welcome to CAPA Live to Ed Sims, who's the CEO of WestJet, Canada's, uh, uh, present circumstances leading airline. Great to have you with us, Ed.

Ed Sims:It's great to be back, Peter, and thank you to the audience so much, uh, for joining us today, and thank you for the invitation to come speak.

Peter Harbison:Great pleasure. A lot to talk about. Let's kick off. You've had a pretty— I guess interesting is the term for it— period with WestJet over the last few years. A lot of things have happened. Gone private, one thing. It also has 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 tail of what would you have done differently if you had the benefit, COVID aside? I mean, nobody expected that.

Ed Sims:Yes, isn't hindsight a wonderful thing? It's incredible how many travelers on airlines have the benefit of hindsight that, you know, we who are running the organizations don't have when we make those calls. You know, I'll start by, I guess, you know, coming right to the present day. You know, 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, you know, for the stresses that we've been under, you know, that's— 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 4 years that I've been running the organization, we started with, you know, real challenges around collectivization. We'd never had unions on the premises in 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 wide-bodied aircraft, replacing our old 767s with brand new 787s. We then moved on to the grounding of the MAX. We had 13 MAXs coupled with those Dreamliners, and that strategy was on hiatus until we were able to get the MAXs back in the air. And in your introduction, you mentioned that we then privatized in 2019, the largest private equity deal in aviation history.

Voiceover:Right.

Ed Sims:And of course, the new owners had about 3 months to enjoy running the organization in normal times before COVID began to hit us really hard at the end of February in 2020. So, you know, 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, you know, 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 travelers 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 2 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.

Peter Harbison:Yeah, there's certainly a book in there, I would think, Ed, for that. But— Well, I've written the first chapter, Peter.

Ed Sims:So I wrote the first 8,000 words But I think it's going to be, you know, it's going to be a war and peace by the time I finish.

Peter Harbison:Well, I hope it's got a happy ending anyway.

Ed Sims:It's— well, so far, I mean, I feel more confident than I have done, 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 that 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, you know, 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'd 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 sort of 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 6 months. And so for those armchair quarterbacks and those guys who 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 sort of things are worth fighting for even when we're struggling to make sure that we can match these new levels of demand.

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

Ed Sims: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 have done with a greater discipline. It's just sticking to the strategy. Not deviating. You know, a great quote from, you know, one of the all-time great wartime leaders who saw, you know, crises 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 less stones at noisy dogs that were barking in the background.

Peter Harbison:I like it. Okay, well, let's look forward, Ed. So, I mean, 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, also the other aircraft?

Ed Sims:Yeah, I mean, obviously we're building— firstly, I'm building back to our 5-year plan. I think that's the most important aspect of the rebuild is that you stick to the, 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 recognizes that'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 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 Saab 340s or Beech 1900s. 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 minimize risk, to operate with prudence and with caution. So we're really consolidating European network. We're really building a network from 3 hubs. So for us, Calgary, Vancouver, Toronto. We're really trying to make sure that we fly to a broad swathe of European destinations, but really built around central European hubs. We've just started operating from August 4th to Schiphol with astonishing load factors. We've been obviously operating to Charles de Gaulle and to London. And I think those 3 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. 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, you know, 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 7th, we expanded the ability for double-vaccinated travelers from all across the world. We, we offered the same opportunity to visitors from the U.S. from August 8th. 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&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 re-establishing first principles. of the way in which we'll fly that 787 fleet. And within the next 6 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.

Peter Harbison:Right, right. Yeah, very interesting. And in terms of, I mean, you were talking about continuity, continuity of strategy. You, like a number of other carriers now, have actually 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?

Ed Sims:It was something that was always going to be there. We grew from, you know, narrow-bodied low cost, and so cargo doesn't always, you know, 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 programs 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 really high yield. It'll be very much premium traffic. The majority of dedicated freighters are still widebodies, and they still tend to be older 757s, 767s. We are now moving into the area of having 4 dedicated 737-800s. 800 BCFs. 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, like Amazon. And I think that's, that's the great opportunity for us. So in some ways, it was always part of the strategy because, you know, for too long cargo has been around 1% of our revenue. I think cargo should be somewhere between 3% to 5%.

Peter Harbison:Okay.

Ed Sims: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.

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

Ed Sims:Well, we've got some pretty strong competition. You know, our, 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.

Peter Harbison:I was talking to— 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, right?

Ed Sims:Oh, absolutely. I mean, we will stick to the core of the business. And that's why I think, you know, getting dedicated 737-800s is a really easy transition, obviously, for our pilots who've been flying the 737 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, you know, 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 and, but watching with great interest what's happening elsewhere around the world with people like AirAsia.

Peter Harbison:Yeah, 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, innovation going on at the moment. And you mentioned before partnerships. Now, you've historically fitted into that role of looking at servicing the, the 2 other main, main global networks of Oneworld and SkyTeam, while Air Canada has obviously looked after Star Alliance. You now look as if you're moving to get much closer to the SkyTeam members, particularly with your Delta flight. Do you want to take us through that strategy?

Ed Sims:Yeah, sure. You know, we would be one of the few remaining non-aligned carriers of scale. I mean, we fly 181 aircraft, you know, turnover approaching $6 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 genuinely believe there's— 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 penalize 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, you know, for us, that's the future, rather than thinking we need to rush into an alliance where, you know, a lot of our carefully earned dollars could go into creating centres of excellence or going to creating head offices for the alliance rather than—

Peter Harbison:Right.

Ed Sims:channeling that value into a really deep, sustainable, long-lasting joint venture.

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

Ed Sims:We're looking, I mean, obviously not 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.

Peter Harbison:Right. But would that head you off with your relationship obviously competing with Oneworld?

Ed Sims: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.

Peter Harbison:It's like a nice strategy if you can manipulate, if you can not That's the wrong word— maneuver effectively through it. It does take a fair bit of skill, I guess, though, rather than just taking the sort of stratified approach that the big carriers are doing.

Ed Sims: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.

Peter Harbison:Just backtracking to the North Atlantic particularly. I mean, 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 3 or 4 months, which is, I guess, your time horizon with WestJet too, although you'll be planning beyond that? What do you see coming in the next 3 months? Because there is a Obviously Delta, 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 3 or 4 months? What signs are you seeing in terms of customer sensitivity, but also in terms of your basic planning?

Ed Sims:Yeah, I think there's 2 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-shaped 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, for— to the US, who were typically 3 to 4 months ahead of us in their vaccination spread, now stalling at around the 52% rate. What we are 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 31st, all federally regulated workers, but all domestic travelers 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 expat population on both sides of the Atlantic between 2 countries, and focused on the leisure market, less focused on filling premium seats. And, you know, 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 notwithstanding the Delta variant, I'm feeling pretty confident about the projections on the Atlantic.

Peter Harbison:That's good. And in passing, I would just say I'm impressed by Canada's— 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. Yeah, so I mean, we— you've touched on Configuration and business travel. Ed, 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.

Ed Sims:Yeah, 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, you know, I think the big deficit, to be honest, Peter, is going to be people will no longer be traveling for internal meetings. They'll no longer be traveling to address large numbers of staff at environments or simply to attend meetings where, you know, particularly in a geography as vast as Canada, you know, people like myself were traveling often 5 or 6 hours, changing 2 or 3 time zones just for a 1-hour meeting and then coming 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 hand, you know, face-to-face meetings will, I think, come back as part of the pent-up demand. Because a lot of commercial organizations 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 6 to 8 hours, as opposed to those journeys of 12 hours plus, we are already seeing strong signs of pent-up demand.

Peter Harbison:Right. Link the 2 things together too. I mean, one of the factors which is going to influence the way businesses come back is their need in turn to reduce their carbon footprints.

Ed Sims:Oh yeah.

Peter Harbison:This is going to be very tough on them as well, so they want to stick with it now. There's also a nice synergy between low cost in terms of unit seat cost and unit emissions. I mean, 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 network where your unit emissions are lower. But what are you doing on a broader scale in terms of reducing your profile environmentally?

Ed Sims: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, you know, one of the areas that 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 of synthetics. You know, I think there's some really exciting work going on on synthetic fuels, particularly here in British Columbia or in our next-door province. But you've got to be really careful that you've actually— you can pipe, because tanking can often again burn more fossil fuels than 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? I mean, it's very It's a relatively simple answer for a carrier like WestJet. 95% of our carbon emissions come from the burning of Jet A-1 and aviation fuel. 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 2.5 to 4 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 So we're working incredibly closely with our air traffic control organization, Nav Canada, to make sure that we have the most fuel-efficient glide descents that we can do, you know, single-engine descents where appropriate and certainly single-engine taxis at most of our major hub airports. And as you've already pointed out, actually increasing the density of your aircraft, increasing our average 737 capacity.

Voiceover:Right.

Ed Sims:For example, from an NG 600 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 A1 is probably the right sequence to make sure that we don't get accused as an industry of greenwashing in the way that we did back in 2007, 2008. So I'm wary of commitments with too long a timescale. You know, 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.

Peter Harbison:Yeah, it 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— was it 4 years with WestJet? And thank you. The most roller coaster ride you've had with a lot of downs. Nice to see you heading on the way out. I've got a— 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? Yes.

Ed Sims:You only allowed me one word, so I won't couch it. That's what I'm driving towards.

Peter Harbison: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.

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

Peter Harbison:Thank you. Bye-bye.

Ed Sims:Thank you.

Peter Harbison:Bye-bye.

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