ANALYSIS: Unchallenged markets could pose opportunities for WestJet Encore

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The new regional carrier WestJet Encore is set to launch next month, with a focus on connecting smaller Canadian cities.

The carrier's presence on domestic regional routes will bring more competition to smaller communities that, in many cases, only have access to scheduled flights via Air Canada Express. But at the same time, there appears to be several opportunities for the new player to bring new competition to several transborder routes in the US that are also serviced by a single carrier.

Calgary-based WestJet is preparing to launch the new regional operation on 24 June, with initial service between Fort St. John, British Columbia to Calgary and Vancouver, as well as Nanaimo, British Columbia to Calgary.

WestJet Encore is looking to stimulate traffic with competitive pricing in markets served primarily by its domestic competitor. These markets could see fares drop by 30% to 50%, says Gregg Saretsky, WestJet's chief executive.

Once it gets the regional operation up and running, WestJet Encore plans to service transborder routes between Canada and the USA. The carrier has not yet applied for approval from the US Department of Transportation to fly in the US, which it will require before starting the transborder routes considering it is on a separate operating certificate from the mainline operation. But after seeking that approval, the carrier is looking to compete with both Air Canada and US regional operators for these routes.

WestJet has outlined several new destinations south of the border where it could expand Encore service. These cities include Washington DC, Boston, Seattle, Philadelphia, Minneapolis, Portland, Oregon and Chicago.

Many of these flights to US cities are unchallenged by one carrier in the regional market, while some other cities already have significant competition.

WestJet Encore is based in Calgary, but hopes to expand the network across Canada within the next 18 to 24 months, Saretsky told investors on 16 May at the Bank of America Merrill Lynch 2013 Global Transportation Conference in Boston. As it expands to the eastern part of the country, Montreal and Toronto are contenders for hubs, but that strategy has not been laid out yet.

UNCHALLENGED TRANSBORDER MARKETS

Several city pairs between these US cities and major Canadian hubs are only serviced by one carrier, which could serve as opportunities for WestJet to stimulate pricing.

In Encore's hub city of Calgary, for example, Air Canada offers service to Portland unchallenged by any other carrier and codeshare partner Delta Air Lines is the sole carrier flying directly on the Calgary-Minneapolis route.

United Airlines flies from Winnipeg to Chicago, and the Winnipeg-Minneapolis route is flown by Delta Air Lines' regional partners.

Some flights from Montreal to US regional hubs that WestJet has outlined are also dominated by single carriers. US Airways is the only carrier flying between Montreal and Philadelphia, and Air Canada is the only carrier serving Montreal to Boston directly.

While WestJet still has to unveil its plans, those markets are ones where the carrier could implement its strategy of lowering prices and stimulating demand.

EXISTING COMPETITION

WestJet is also looking to expand service to cities that are already saturated with competition from both US regional carriers and competitors Air Canada and Porter Airlines. The latter flies to the USA from its downtown hub of Billy Bishop Toronto City Airport.

WestJet has indicated it hopes to bring Encore regional service to Portland and Seattle, hubs that already face competition from multiple carriers on several routes.

Out west, Air Canada is competing with Alaska Airlines' regional operator Horizon Air for flights between Seattle and Calgary. Horizon has about 78% of the share of seat capacity on that route, with about four million more available seat kilometres (ASKs) than Air Canada.

westjet route analysis

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The two carriers are also competing on the Vancouver-Portland route, with Air Canada occupying 57% of seat capacity. ASKs are split evenly between the carriers at two million.

vancouver-portland route analysis for westjet

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Air Canada has more market share than Horizon on the Vancouver-Portland flights, while Horizon has more seat capacity on flights between its hub of Seattle and Vancouver.

flights between seattle and vancouver. westjet analysis.

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Air Canada has about 56% of seat capacity on flights between Toronto and Boston, competing with Delta out of Toronto Pearson International airport and Porter Airlines out of Billy Bishop downtown. WestJet offers flights to Boston through codeshare partner Delta, which competes with Air Canada from Pearson Airport and Porter Airlines from the Toronto Island airport.

toronto-boston route analysis for westjet.

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In Philadelphia, Air Canada also has about 56% of seat capacity on the flights between Toronto and Philadelphia, competing with US Airways.

toronto-philadelphia route for westjet analysis.

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The market for flights between Washington and Toronto airports has four competing players: Air Canada, Porter Airlines, United Airlines and US Airways. Air Canada holds more than half of the seating capacity in this market.

westjet analysis

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While there could be room for a new carrier on these markets, overcapacity has challenged Air Canada on several routes in the northeast USA. Increased capacity in markets like Washington DC, New York and Boston challenged Air Canada's regional profitability last quarter. It recorded a 2.6% decline in transborder revenues totalling C$589 million, as traffic grew 1% and yields declined 5.5% on these transborder routes.

WestJet's mainline operation saw its transborder and international available seat miles grow to 59.4% in the first quarter of 2012, while domestic capacity grew by 14.1% in those three months. It expects system capacity in 2013 to grow 7.5% to 8.5% in 2013, and domestic capacity to be up between 5% and 6%.