The abrupt and unexpected departure last week of WestJet chief executive Gregg Saretsky reflects increasingly contentious relations with newly-unionised pilots and other challenges posed by a broad business transformation, say financial analysts.
Those analysts describe the leadership switch as a means for the company to reset negotiations with pilots, but they also suggest new CEO Ed Sims might re-evaluate WestJet's path towards becoming an all-things-to-all-people airline company.
"With a change in management, it's very likely – or more likely now – that the path might change for this company," Raymond James managing director of industrial research Ben Cherniavsky told Canada's Business News Network last week. "We will have to wait to see what gets prioritised."
"The revenue has grown, the airline has grown, and the earnings really haven't kept up," he adds. "The margins have suffered and the returns have gone down, and this all culminated in the board holding someone accountable."
Indeed, WestJet's profits and margins declined in each of the last two years. The company earned an operating profit of C$439 million ($342 million) in 2017, at an operating margin of 9.7%. By comparison, WestJet posted a C$570 million operating profit in 2015 at a margin of 14.1%.
Saretsky's departure "magnifies the risks for what is supposed to be a banner year of transition and growth for the company", says JP Morgan in an 8 March investment update. "WestJet is in the midst of negotiating its first collective bargaining agreement with its pilots, and Saretsky's exit suggests that negotiations are increasingly testy."
Calgary-based WestJet disclosed Saretsky's departure in a media release issued early on 8 March.
"Saretsky has advised the time has come for him to retire from the company. Having found his successor, he has agreed with the company that his retirement will be effective immediately," said the release.
The company provides no specifics about Saretsky's departure, telling FlightGlobal that Saretsky and WestJet's board of directors "came to an agreement that it was the right time to retire, especially with the comfort that there is a strong successor in place with Ed Sims".
Sims had been WestJet's executive vice-president of commercial. He previously was chief executive of air service navigation provider Airways New Zealand, and also worked at Tui, Thomas Cook, Virgin Group and Air New Zealand.
Sims will speak to media outlets after he holds meetings with stakeholders, including WestJet's employees, and after he reviews WestJet's priorities with the executive team, the company says.
The leadership change, however, came just days after newly elected pilot union the Air Line Pilots Association, International (ALPA) won a labour ruling that forced WestJet to change how it recruits and hires pilots for soon-to-launch ultra-low-cost subsidiary Swoop.
"My understanding [is] that the pilots got to the point where they were prepared to take labour action over this. This is probably where the board had to step in and say, 'We are at a standstill and we have to make a change to who is on the other side of the table negotiating with the pilots,'" says Cherniavsky.
COMPLETE MAKEOVER
Saretsky, who led the company for eight years, sought to transform WestJet from a largely provincial low-cost carrier with a single fleet type into an international airline company that operates multiple types of aircraft and targets both high-end and discount travellers.
When Saretsky joined WestJet as vice-president of WestJet Vacations in June 2009, the company operated only 79 Boeing 737s, according to Flight Fleets Analyzer. In 2009 WestJet logged 17.2 billion available seat miles (ASMs), FlightGlobal Diio data shows.
At that time, WestJet primarily operated domestic flights to and from Western Canadian bases of Calgary, Edmonton and Vancouver. It also served a handful of East Coast cities from Toronto and flew to about 20 destinations in the Caribbean, Mexico and the USA, including Hawaii, FlightMaps Analytics shows.
"The beauty of WestJet in the early days was how simple their business model was," says Cherniavsky.
WestJet's routes in July 2009
FlightMaps Analytics
By comparison, at the end of 2017 WestJet and WestJet Encore operated 168 aircraft, including 121 737s, four 767-300ERs and 43 Bombardier Q400s. WestJet has unfilled orders for 50 737 Max and 10 787-9s, Flight Fleets Analyzer shows.
The company logged nearly 31 billion ASMs in 2017, up 80% since 2009, Diio shows.
WestJet's scheduled routes in July 2018
FlightMaps Analytics
Saretsky moved up quickly, becoming executive vice-president of operations in October 2009 and CEO in March 2010.
Under Saretsky WestJet continued rapid growth, but also began evolving.
First came news in January 2012 that WestJet was considering moving beyond its single-aircraft-type model by creating a regional subsidiary to operate turboprops – aircraft that would feed WestJet's 737s. WestJet ordered 20 Q400s and launched the operation, which it named WestJet Encore, in June 2013.
With the feeder service in place, WestJet executives made it clear they had interest in operating widebodies on routes outside North America.
In July 2014, the carrier confirmed it would acquire from Boeing the four used 767-300ERs – aircraft that Qantas previously operated.
After first deploying the 767s on domestic flights and routes to Hawaii, WestJet in spring 2016 used 767s to launch flights to London Gatwick from Calgary, Edmonton, Toronto, Vancouver and Winnipeg.
Those flights, which began in 2016, injected significant new capacity into the Canada-London market and brought WestJet into direct competition with major international players, chief among them Air Canada and British Airways.
In the first year of service, industrywide capacity between Canada and London jumped 11%, according to FlightGlobal Diio data.
The change concerned some financial analysts, who questioned the wisdom of complicating a successful business model.
"WestJet… is sort of morphing up into this higher-cost, more-complicated airline… I am disappointed… to see what WestJet has done in the past 10 years, moving away from what made them very, very good,” Wolfe Research analyst Hunter Keay said in 2016.
WestJet initially struggled with 767 operational issues – including high rates of cancellations and delays, and at least one high-profile mid-Atlantic diversion.
But executives said the flights performed well financially, and hinted about further widebody acquisitions.
WestJet's international ambitions became clear in May 2017, when it announced the order for 10 787-9s, with deliveries scheduled for between the first quarter of 2019 and the end of 2021.
At this point the pieces of WestJet's broader plan came into focus.
"The story today is all about evolving our airline from a low-cost regional player that participated mostly in point-to-point markets to a global champion that will serve all corners of the globe," Saretsky told investors in December 2017.
As part of that plan, WestJet is seeking to attract more bookings from high-yielding business travellers by moving its product upscale. The 787s will have lie-flat seats, and WestJet's 737s will get an improved premium economy section, WestJet has said.
The company also plans to open nine new airport lounges to coincide with the launch of 787 flights in 2019, it has said.
In the midst of those major changes, WestJet in 2017 also announced plans to target the discount end of the Canadian air travel market by creating an ultra-low-cost unit called Swoop.
The unit will operate 737-800s equipped with 189 seats and is scheduled to begin flights on 20 June.
The company says Swoop will enable it to tap demand from ultra-price-conscious flyers, including Canadian travellers who currently drive across the Canada-US border to board flights on US discount airlines.
Though WestJet's plans seemed to be progressing smoothly, labour trouble brewed behind the scenes.
In May 2017, the company's pilots, who had previously been represented by non-union employee group WestJet Pilots' Association, voted for formal union representation by the Air Line Pilots Association, International.
Then, in February, Saretsky announced that pilot troubles and labour negotiations made the company uncertain about how it would staff the cockpits of Swoop's 737s.
WestJet intended to allow WestJet and Encore pilots to use the company's "leave of absence" policy to transition, at least temporarily, to the Swoop division.
But ALPA asserted its muscle, filing an "unfair labour practice" complaint with the Canadian Industrial Relations Board in which the union accused the company of ignoring pilot work rules and bypassing the union by negotiating directly with pilots.
The labour board sided with ALPA and ordered WestJet on 2 March to shelve its leave-of-absence plan.
Saretsky was out two days later.
"It's no secret WestJet has been undergoing a tremendous amount of change," says Cherniavsky. "This change has been accelerating and it has taken a toll on the organisation."
Source: FlightGlobal.com
