Speculation mounts in WestJet’s role in Canadian restructuring

Washington DC
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A potential formal restructuring by Air Canada is triggering scrutiny of a response by rival WestJet in how quickly it could expand to fill any potential gaps in the Canadian market.

The return of Air Canada's former restructuring officer Calin Rovinescu to take the helm as CEO earlier this month had fuelled speculation that the carrier could once again seek reorganization under the Companies' Credit Arrangement Act (CCAA).

But in a recent memo to employees acknowledging challenging times and a "vigorous domestic competitor whose cost structure is significantly lower" Rovinescu made no mention of seeking creditor protection and vowed not to shrink Air Canada to profitability.

Still some analysts are examining various scenarios for the Canadian market if Air Canada enters CCAA, or experiences strikes with any of its labour groups. Added to its liquidity issues that include significant debt maturities and a pension funding deficit, Air Canada also faces contract talks with most of its unionized workforce who believe they deserve compensation for concessions agreed to during its last restructuring.

"WestJet has about 37% market share of domestic travel, with Air Canada retaining approximately 56% and currently supplies about 7% of transborder flying," says CIBC World Markets analyst Chris Murray. He points to challenges faced by WestJet in filling any potential void where the carrier currently has no operations "including smaller communities where the economics of operating a 737-sized aircraft normally do not work".

Erosion of yields triggered by the current global economic situation "all ties into Air Canada's urgent need for cash", says Raymond James analyst Ben Cherniavksy. He notes this has also forced WestJet to offer more frequent and aggressive seat sales to remain competitive in the market.

WestJet's decision to grow capacity by 5% in 2009 "is not helping the situation", Cherniavsky explains "But this may all be part of the plan. The more low cost capacity WestJet throws into a depressed market, the more a weakened Air Canada will arguably have to back off."

Recently WestJet CFO Vito Culmore said during an investor conference that aggregate Canadian domestic capacity was shrinking in 2009 despite WestJet's planned growth.

Culmore highlights WestJet's significant cost advantage "allows us to penetrate markets profitably and especially in times like today where the economic situation provides for a weaker pricing environment".

Versant Partners analyst Cameron Doerksen says as Air Canada navigates through is liquidity issues and labour talks, it should cede domestic market share on routes where its costs are uncompetitive and focus on growing its international presence.