ANALYSIS: Nimble WestJet leaps over Air Canada in establishing a new carrier

Washington DC
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WestJet's ability to secure blessings from both its board and employees to launch a regional carrier within in weeks of revealing its plans stands in sharp contrast to efforts by rival Air Canada to gain internal traction for a proposed low cost carrier it tabled nearly 10 months ago.

With all the necessary approvals WestJet is moving towards making a firm decision between the Bombardier Q400 or ATR 72-600 by mid-year with a formal launch of its new regional subsidiary by year-end 2013.

WestJet's ease in gaining approval for its new airline reflects a nimbleness it enjoys in still being young enough to move quickly in diversifying its business, while Air Canada is still crystallising plans for its new carrier.

Air Canada has said it envisions work rules and pay scales that adhere to low-cost operations and distribution methodology different from legacy carrier models. Few carriers have managed to successfully attain those goals within a legacy structure. Air Canada has acknowledged the low success rate of what it aims to create, but believes it would use lessons learned from previous failures to steer a different course if its low cost proposal gets off the ground.

The approaches WestJet and Air Canada have taken with their employees in attempting to gain endorsement for their plans are vastly different. Air Canada made its pitch when it was engaged in negotiations with labour to replace concessionary agreements brokered in 2009 to stave off a formal restructuring. WestJet engaged its non-union employees at it approached its seventh consecutive year of profitability.

WestJet chief Gregg Saretsky during an 8 February earnings call said company management during the last few weeks had conducted town hall meetings and completed base visits with its non-unionised staff to get feedback on the proposed regional subsidiary, culminating in 91% of WestJet's 8,600 employees voting in favour of creating the new carrier.

Unions have opposed Air Canada's low cost carrier proposal from the beginning when the company attached a letter outlining its plans to a tentative pilot deal. Pilots cancelled a ratification vote on that deal.

During a recent discussion with analysts Air Canada CEO Calin Rovinescu said the airline's desire to participate in the low cost market segment "is proving contentious" among labour groups, and the carrier was studying an array of business models to "affect this transformation".

Now headlines are surfacing the carrier may move to establish a low cost carrier offshore, with Canada's Financial Post reporting Air Canada's pilot union is alleging the airline is exploring that option to avoid negotiations with employees to launch the new airline. The carrier's pilots union has also called a strike vote as a cooling off period in negotiations ends on 14 February.

At the same time Air Canada is attempting to forge new labour agreements it is also facing pressure in the domestic market from competitors increasing their capacity. Yields and unit revenues in the carrier's domestic markets grew just 0.4% year-over-year during the fourth quarter.

Carrier COO Ben Smith said unlike its two main competitors Air Canada has held capacity relatively tight in the domestic market. Capacity has increased on Canadian transcontinental routes, in the eastern triangle and for the first time in many years on intra-Ontario routes, said Smith.

Highlighting Air Canada's mature business in its Canadian domestic and North American markets, carrier Rovinescu said the carrier's strategy is to exploit those mature markets to grow its international business. However, he stressed there is no question Air Canada is seeing pressure on domestic yields.

Air Canada rival WestJet introduced flights in the eastern triangle markets dominated by business travellers in May of last year, and saw its yields in the fourth quarter jump 6.2%.

The pressure is likely to continue to mount on Air Canada domestically as WestJet aims through its new subsidiary to target its rival in many markets where Air Canada currently has monopoly on air travel.

WestJet has identified 30 Canadian cities too small for its Boeing 737 narrowbodies where fares on stage lengths under one hour can reach $1,200 roundtrip.

Air Canada is carefully monitoring WestJet's moves, said Rovinescu, who admits "they're a good, strong competitor".