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WestJet to launch lower-cost airline subsidiary in late 2017

Canadian carrier WestJet plans to launch a lower-cost subsidiary in late 2017, a move that comes amid heightened competitive pressure from several prospective low-cost start-ups.

The Calgary-based airline says the planned ultra-low cost carrier (ULCC) will initially operate a fleet of 10 Boeing 737-800s configured with "high-density" seating.

Launch of the subsidiary remains contingent on WestJet reaching agreements with pilots and receiving regulatory approval, the company adds.

WestJet provides few other details about its plan.

"Launching a ULCC will broaden WestJet's growth opportunities and open new market segments by offering more choice to those Canadians looking for lower fares," says WestJet board chair Clive Beddoe.

"The complete unbundling of services and products in order to lower fares for the price-sensitive traveler has created the ULCC category, and our new airline will provide Canadians a pro-competitive, cheap and cheerful flying experience," adds WestJet chief executive Gregg Saretsky.

WestJet operates 119 aircraft, including 46 Boeing 737-800s, according to Flight Fleets Analyzer. The company has outstanding orders for two 737-800s, 25 737 Max 7s and 40 737 Max 8s, data shows.

News of WestJet's plan comes amid broader competitive changes in Canada's skies.

In November 2016, Canada's government announced it would lift the cap on foreign ownership of Canadian airlines to 49%, up from 25%.

That measure had been advocated by at least two companies that have in recent years sought to launch ultra-low-cost operations: Vancouver-based Jetlines and Calgary-based EnerJet.

Those companies argued that Canada lacks sufficient financing to fund a new airline, and said raising the cap would open their business plans to international investment.

Immediately following the news, EnerJet announced it expects to receive funding from Phoenix-based private equity firm Indigo Partners, which also owns Frontier Airlines.

Jetlines also then executed an initial public offering of stock – an achievement company executives said had previously been impossible due to insufficient financing in Canada.

Jetlines has said it will launch ultra-low-cost operations within Canada as soon as the end of this year, though executives have suggested the launch date could be pushed back to coincide with a period of strong travel demand.

In addition, in 2016 another company, Winnipeg- based NewLeaf, launched ultra-low-cost domestic flights in Canada using 737 aircraft. Unlike traditional carriers, NewLeaf is a "indirect air service provider" – it sells seats, but partner company Flair Airlines operates the aircraft.

In recent months WestJet's executives downplayed threats posed by the three incumbents, even while responding aggressively to competitive encroachment.

Canada's sprawling geography and high infrastructure costs would make "very difficult" the ability of an ultra-low-cost airline to turn a profit, WestJet chief financial officer Harry Taylor said in September 2016.

"We have airport costs and navigation fees that are… the highest, at least, in North America, if not the world," Taylor said. "I think it’s a tough road for ultra-low-cost carriers."

Meanwhile, WestJet swiftly launched new flights that overlapped NewLeaf's network. For instance, NewLeaf in November 2016 announced plans to fly to Phoenix from both Edmonton and Calgary; days later, WestJet announced it would launch the same route.

WESTJET EVOLUTION

WestJet's move marks another planned evolution of a company that has recently moved beyond its roots as a domestic low-cost 737 operator.

In the last few years, the airline launched a regional operation called Encore using Bombardier Q400s, and it acquired widebody 767s, with which it launched service from five Canadian cities to London Gatwick airport in 2016.

Meanwhile, Canada's other prime airline, Air Canada, responded to WestJet's growth in 2013 with the launch of its own low-cost unit, Rouge.

Air Canada executives have repeatedly praised Rouge, saying the division enables Air Canada to compete on routes to leisure destinations where its higher-cost mainline operation could not effectively compete.

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