If you can't beat 'em, join 'em.
Canada's low-cost giant WestJet seems to have heeded that advice, announcing 20 April plans to launch an ultra-low-cost subsidiary late this year.
The news, which comes as several other companies work to get ULCC operations off the ground, marks a notable position reversal for executives at Calgary-based WestJet.
For months, they had downplayed competitive risk posed by the startups; one executive suggested Canada's aviation market poses fundamental challenges to the ULCC model.
Now WestJet intends to jump headlong into a market segment that barely exists in Canada, a pivot that upstarts describe as a validation of their own business plans.
Competitors also question if WestJet's airline-in-an-airline will achieve required cost savings. And they note WestJet's plan will fail to bring much-needed competition to a domestic air market dominated by Air Canada and WestJet.
"Prior to today, there were 35 million Canadians who were convinced they were paying too much for airfares… The only entity in all the land that seemed to be in denial was WestJet, and today they have changed their mind," Darcy Morgan, chief commercial officer at Calgary-based EnerJet, tells FlightGlobal.
Charter carrier EnerJet is among two Canadian companies working to launch a scheduled ULCC. The company first called its ULCC project Jet Naked, but later adopted the working name JetToo.
"Today's announcement by WestJet is recognition that millions of Canadians continue to be underserviced by airlines in markets throughout the country," says Jim Scott, chief executive of Vancouver-based Jetlines, the other hopeful startup. "We believe that what Canadians need, however, is a genuine ultra-low-cost carrier and greater competition."
WestJet's move "offers nothing more than an airline-within-an-airline that will not increase competition into the market. It remains to be seen whether it will be able to achieve the full benefits of a ULCC," adds Scott in a statement.
WestJet has released few details about its ULCC plans, other than to say the unit will launch in late 2017, sell "unbundled" fares and operate 10 Boeing 737-800s configured with "high-density" seating, according to a media release.
The company does not say how many seats the 737-800s will carry, though some ULCCs such as Ryanair equip the type with 189 seats, according to Flight Fleets Analyzer. WestJet's current 737-800s have 168 seats, data shows.
The move "will broaden WestJet's growth opportunities and open new market segments", says WestJet board chair Clive Beddoe in a media release.
"The worldview on low-cost airlines has changed since the launch of WestJet in 1996, and we are responding," adds CEO Gregg Saretsky in the release. "The complete unbundling of services and products in order to lower fares for the price-sensitive traveller has created the ULCC category."
TIMES HAVE CHANGED
With almost no ultra-low-cost service,Canada remains an outlier in North America.
For several years, EnerJet and Jetlines sought to launch ULCCs, but Canada lacked sufficient domestic funding for their projects, executives said. They pointed to Canadian regulations that cap foreign ownership of Canadian airlines at 25% as hindering expanded access to financing.
In November 2016, Canada's federal government granted EnerJet and Jetlines exemptions to those regulations, allowing them up to 49% foreign investment. The government will also change the regulation this year to include the higher 49% cap, Canadian transport minister Marc Garneau has told FlightGlobal.
A 2015 transportation study, submitted to the transport minister by former lawmaker David Emerson, also advocated the higher cap, noting some people call Canada "the land that ultra-low-cost carriers have forgot".
WestJet and Air Canada did not oppose the 49% limit, but had advocated it be made only if the USA also increased its cap from 25%, executives said.
Immediately following the exemption, EnerJet announced it expects investment from Indigo Partners, the US firm that owns ULCC Frontier Airlines and formerly invested in discounter Spirit Airlines.
"Our intended investor is perhaps the preeminent backer of low-cost carriers in the world. We have access to that intellectual capital," says Morgan.
Likewise, in March Jetlines achieved a longtime goal of becoming a publicly-traded company, selling shares on Toronto's stock exchange and raising C$6.8 million ($5 million) in the process.
The company hopes to raise another C$40 million in the coming months and achieve Transport Canada approval, says Scott. Launch could possibly come in 2017, though could be pushed back to coincide with a period of high travel demand, Scott has said.
As a public company, Jetlines has filed details of its plan with Canadian securities regulators.
The documents say many Canadian markets remain under-served by Air Canada and WestJet, which collectively carried 81% of all domestic Canadian seats in 2016, according to FlightGlobal schedules data.
The documents highlight several cities within "Jetlines' proposed catchment area", including western Canada cities Calgary, Edmonton, Kelowna, Ottawa, Vancouver, Victoria and Winnipeg. The list also includes eastern cities Halifax, Hamilton and Montreal.
Jetlines intends initially to operate Boeing 737s – regulatory documents suggest the types will be 149-seat 737-700s. The company also has orders for five 737 Max 7, Fleets Analyzer shows.
Thanks to high-density seating, "unbundled" pricing, internet sales and a single-fleet-type, Jetlines expects its costs will be 36% less than competitors' costs.
The company likewise anticipates fares that are up to 40% less than current fares, which will create "a new market of Canadian travellers", Jetlines says in regulatory documents.
Meanwhile, a third company called NewLeaf Travel Company actually started ULCC flights in Canada in 2016.
Unlike Jetlines and EnerJet, NewLeaf is an "indirect air service provider" under Canadian regulations – it sells seats on flights operated by a partner, Kelowna-based Flair Airlines.
DOWNPLAYING THREAT
WestJet executives had until 20 April appeared largely unconcerned with ULCC threats.
Canada's sprawling geography and high infrastructure costs would make successfully launching a ULCC "very difficult", WestJet chief financial officer Harry Taylor said in September 2016.
"The tough thing about the Canadian airline space… is that we have got a geography that is fairly punishing," Taylor said, describing Canada as having a "long, thin ribbon of population distributed across a long geography".
"I think it’s a tough road for ultra-low-cost carriers," he added.
During a March investors' conference, Taylor dismissed the higher foreign ownership cap as posing little concern
"We don't view it as a particular threat," he said. "Taking the cap up to 49%, if nothing else, opens the chance up to non-Canadians to invest in us."
Nonetheless, WestJet executives repeatedly insisted they would compete vigorously to defend their markets from encroachment.
CHANGING COURSE
WestJet's new plan to establish a lower-cost unit within the company puts it on a well-trodden path.
In the last several decades, most US carries launched, then shuttered, discount brands
Delta Air Lines formed Song and Delta Express, United Airlines carved out Shuttle by United and Ted, Continental Airlines formed Continental Lite and US Airways created MetroJet.
Air Canada in the early 2000s also launched, and then grounded, discount units Zip and Tango.
The Montreal company gave the idea another shot in 2013 when it launched Rouge.
Air Canada president of passenger airlines Benjamin Smith told FlightGlobal earlier this year that the unit has been successful largely because of lower crew costs.
Rouge pilots and flight attendants work under distinct agreements within Air Canada's overarching employment contracts, the company has said.
As a result, Rouge can operate aging Airbus A319s and 767s at a substantial discount, enabling Air Canada to compete effectively on leisure routes when mainline aircraft would be inefficient, Smith said.
Still, Jetlines' CEO Scott says discount airlines-within-airlines largely don't have impressive records.
"Most airlines-within-airlines that have attempted to offer low-cost options for air travelers have failed in North America," he says. "The continent is littered with the graves of these lower-cost airlines, precisely because the model doesn't work when the airline is owned by another airline."
ULCC that have succeeded – Allegiant Air, EasyJet, Ryanair, for example – achieved "the full benefits of a ULCC, including lower-cost, precisely because they operate independently of a parent carrier", Scott adds.
READY TO COMPETE
"The key to success is having the lowest unit operating cost. Everything has to be built on that," adds EnerJet's Morgan. "We don't plan to invent anything unique. This is not a science experiment. It is an adoption of well-proven best practices."
Unlike WestJet, EnerJet does not have "an existing platform that we have to distance ourselves" from, Morgan adds.
He sees WestJet's announcement as a tip of the hat – a glimpse at the type of competition EnerJet will face.
"As of yesterday, we knew this for certain: that WestJet was going to compete with us. We just didn't know how," says Morgan. "Now they have told us their strategy. It is going to make it easier for us to prepare."
Source: Cirium Dashboard
