WestJet’s new Encore regional subsidiary has stimulated demand and driven down fares in the smaller Canadian markets it has entered since launching in June. However, competitive pricing actions from other players have limited how much the new carrier has been able to undercut existing fares in some markets in its full quarter of operation.
“We believe those [average fares] have gone down in the 20%, 25%, 30% range and there has been some stimulation out of those communities,” says Bob Cummings, vice-president sales, marketing and guest experience for the carrier at the Raymond James Global Airline/Transportation Conference on 7 November in New York.
WestJet’s chief executive Gregg Saretsky told investors in May that it expected to bring fare reductions of between 30% and 50%, so the fare reductions Encore has achieved so far in those markets fall within the lower end of that range.
“When we launched WestJet Encore, we said that we would enter smaller Canadian communities with fares up to 50 per cent lower than our competitors," says a WestJet spokesman. “The 20-30% is where it ended up, given that in some cases carriers reacted by lowering fares in order to be more competitive prior to our service launching.”
Encore’s operations in the first three months were comprised of 40% local and 60% connecting traffic, says Cummings. So far the airline has been utilising the Bombardier Dash 8 Q400 fleet to fly to new small communities in Canada, fly between existing WestJet cities that were not economical to service with the Boeing 737s and to take over 737 routes during periods of lighter demand.
The Q400s have taken over some 737 routes in Canadian cities including Toronto, Edmonton, Kelowna, Vancouver, Victoria, Prince George, Kamloops and Saskatoon.
WestJet Encore operates five Q400s, two of which were delivered in the third quarter. The airline plans to take delivery of another 15 firm aircraft until 2015, when 25 options will then become available for delivery until 2018.
Encore launched with operations focused on Western Canada, which will be expanded to the eastern part of the country by mid-2014 with a new base in Toronto. Last quarter the airline added flights to Fort St. John and Nanaimo, British Columbia and Brandon, Manitoba. It will also begin servicing Terrace, British Columbia this month. WestJet eventually plans to expand Encore’s reach to transborder routes as well.
WestJet has sized the addressable regional market for domestic and transborder routes at $2.2 billion, says Cummings. The 78-seat turboprops in the Encore fleet are best suited to fly routes between 100 and 600 nautical miles.
“The 737 footprint is relevant to about 25.5 million Canadians, if you look at the Encore addressable market that takes us over 30 million,” says Cummings.
Air Canada, the incumbent regional player, says the new regional entrant is not having significant impact on its regional operation on an 8 November earnings call with analysts.
“To date the impact has not been significant and even at planned maturity we expect that their fleet will be one third of our regional fleet,” says Michael Rousseau, chief financial officer. "We are responding to the situation, and we are confident in our ability to deal with this new competitive environment,” he says.
Some of those actions have included positioning Q400s in western Canada last February ahead of the Encore launch and transitioning 15 Embraer 175 aircraft out of its mainline fleet to Sky Regional to fly on regional transborder routes.
Air Canada also is in the process of reviewing submissions from regional carriers for the new flying agreement, which was opened to US carriers as well as Canadian airlines. Operations under the new contract will be rolled out next year, says Air Canada’s president and chief executive Calin Rovinescu on today’s earnings call.