As it approaches a decade of service, Canada’s WestJet is certainly not slowing down, but it is adapting its business model formula
Patterned after Southwest Airlines – the grandfather of them all – WestJet started flying in February 1996. It followed the standard low-cost carrier script: single-class, point-to-point flights into secondary airports where available, with frequencies as high as the market would absorb, low frills, low fares and stage lengths tailored to a single fleet type flown with fast turnarounds to boost utilisation.
Since then, it has grown from C$37 million ($32 million) in annual revenue to C$1.1 billion and from nobody to Canada’s second airline by both revenue or passenger numbers.
Along the way it refined the low-cost carrier formula to fit Canadian expectations. It pays travel agent commissions, assigns seats and checks through bags for online connections. And it has no plan to end these or several other features that some might call “frills”.
Unlike some other maturing low-cost carriers, WestJet is not slowing down. It continues to add about 10 aircraft a year, with annual capacity growth near 3.2 billion available seat kilometres. As its network spreads, growth patterns have changed. Instead of routes to new cities, it is mostly filling in its network with different routes to the cities it already serves.
And it keeps adding frequencies. Chief executive Clive Beddoe says: “Air Canada has 22 daily flights between Vancouver and Toronto each way. We have four.” He aims to correct that.
Changing growth patterns has meant a big departure from accepted low-cost wisdom. As WestJet’s network grows, so does the amount of traffic connecting with its flights. It has not created hubs, but it offers connections to its own flights, as Beddoe says: “Almost everywhere except the ends of the spokes.”
He adds: “It’s a fallacy that low-cost carriers only operate point-to-point with no connections. JetBlue probably has more point-to-point than anybody else, but 30% of Southwest’s traffic is connecting. Ours is about 35%. The key is not to have too many connections, so that you don’t end up with one flight waiting on 10 connecting to it.”
Making connections
Several other low-cost carriers are moving in the same direction. Denmark’s Sterling Air has a bank of flights at Copenhagen. Air Berlin uses a hub at Palma in Spain to feed traffic to itself. The experience at Australia’s Virgin Blue is similar. Its chief executive Brett Godfrey flatly declares: “We’re not a low-cost carrier point-to-point [anymore]. We fly everywhere and everywhere in between. We’re a network carrier now.”
Longer-range jets helped make this possible. WestJet’s new-generation Boeing 737s brought city pairs into range that its original 737-200s could not reach. Longer-range aircraft have also opened more cross-border options. WestJet is adding routes to Florida, California and is even planning for Hawaii. It has also applied for route authority between Nova Scotia and the UK.
“Halifax-UK is about the same distance as Vancouver-Montreal,” says Beddoe. “Our new aircraft have a range of 6,000 miles [9,660km]. We’d be crazy not to look at every opportunity for that range.”
Cross-border routes are less an issue for low-cost carriers in Europe and Asia where borders are often close together. But the move to international routes is a distinct step in low-cost carrier evolution within the Americas and Australasia. US low-cost carriers are venturing into the Caribbean and Central America, GOL is breaking out of Brazil, while Freedom Air and Virgin Blue keep expanding between Australia, New Zealand and the Pacific islands.
New aircraft make it possible, but mature domestic markets provide the incentive. Canada is growing more than Australia or New Zealand, but even in Canada cross-border routes offer more attractive yields. Single-class, single-aisle aircraft are no threat to legacy carriers on longer sectors, but anything within the range of 737NGs and Airbus A320s is fair game.
The battle between low-cost and legacy carriers for marketshare within the range of low-cost carrier aircraft has become one of the biggest in commercial aviation. Fuel costs, terrorist attacks and other calamities take their toll, but mostly they compound the damage legacy carriers have already sustained by matching low-cost carrier fares when they cannot match their costs. It is no accident that most legacy airline bankruptcies and reorganisations are in markets served by low-cost carriers.
Globally, low-cost carriers claim 25-30% of their domestic markets. WestJet’s share is 30-33%. Analysts predict that US low-cost carriers will raise their marketshare from 24% now to more than 45% in the next four years. As Delta Air Lines shrinks and the likes of JetBlue move into the vacuum, that transformation is already under way. Beddoe sees a watershed change occurring in slow motion. “Low-cost carriers have just eaten the market. Air Canada can fight us all they like, but every time they match our fares they’re losing money. The legacy carriers are trying to fight the laws of economics.”
Beddoe boldly predicts that the future of legacy carriers in North America lies solely in transcontinental and international flights – the longer stage lengths where they still enjoy a unit cost advantage. Low-cost carriers, he predicts, will control most domestic routes and even feed the long-distance legacy flights.
The main reason analysts hesitate to predict a complete low-cost carrier takeover of short to medium routes is that legacy carriers still offer advantages such as alliances, interlining, frequent-flyer programmes and in-flight amenities.
Aware of this, WestJet and some other low-cost carriers are shifting the battle from marketshare alone to the higher-yield traffic that legacy carriers still dominate. So far, this is hardly a universal trend. EasyJet is trying some higher-yield routes, but generally the low-cost carrier focus in Europe is still on growth. Almost no European or Asian low-cost carriers offer seat assignment, baggage check-through or loyalty programmes.
Perhaps the difference, again, is market maturity. In much of the world, opportunities for low-cost carriers are still so vast that there is no need yet for them to evolve. But Australia’s Virgin Blue and Canada’s WestJet are pioneering what may be the next phase in low-cost carrier evolution by raising service standards to target the higher-yield market.
Virgin Blue feels some pressure to do this because the Australian market is so saturated. Beddoe’s motives are less complicated. Ignoring higher-yield traffic, he claims, means “giving up an opportunity. Why would we NOT move up?” But moving up can cause heartburn. It is hard for some low-cost carriers to depart from the tried-and-true. Canadian observers believe the recent departure of one of WestJet’s founders may have been over internal tensions about this.
WestJet and Virgin Blue both offer assigned seats, baggage check-through and in-flight entertainment systems. WestJet is ahead of Virgin Blue with its Air Miles plan already in place; Virgin Blue is ahead on user-pay upgrades. The most dramatic step for WestJet has been the shift from its secondary Toronto airport at Hamilton into Pearson International – a more expensive and congested airport, but an essential move to have any credibility with business travellers.
The danger any low-cost carrier faces when it raises service standards or moves into the higher-cost environment of legacy carriers to woo their passengers is that its own costs inevitably rise. That either puts it at a disadvantage with other low-cost carriers or makes it vulnerable to a start-up.
Yet Beddoe seems unconcerned. Perhaps emboldened by Jetsgo’s demise in March, he claims: “It would be pretty hard for someone to come in underneath us because the start-up costs are so high.”
Higher-yield traffic
The related risk is that a legacy carrier itself will form a low-cost subsidiary, as Air Canada did with Tango and Zip and Qantas with JetStar. Whether these or Mexicana’s Click or United’s Ted are really low-cost carriers is a matter of much debate, but their presence makes it harder for any low-cost carrier to go after the legacy carrier’s higher-yield traffic.
WestJet has been reassured, or perhaps lulled, by what happened at Air Canada. During its reorganisation, Air Canada reabsorbed Tango and Zip. Perhaps that allows Beddoe to say with some confidence that WestJet’s rising costs, as such, are not the issue. “The most important issue really is your relative standing against your competitor.”
WestJet and several other low-cost carriers are at the forefront in confronting another issue likely to assume more importance – computer operating and reservation systems. Most low-cost carriers use Navitaire’s Open Skies system, which works for any airline that sticks with the low-cost carrier script. But problems arise as soon as the airline tries to create its own frequent-flyer plan, interline checked baggage or form an alliance. Any low-cost carrier that aspires to grow out of the 25-30% market niche needs more sophisticated software.
As the launch customer for a new reservation system developed by Cendant Travel Distribution Services, Beddoe believes aiRES, as it is called, “will facilitate alliances”. WestJet’s current system will interface with such global distribution systems as Apollo and Sabre, he says, but not with other airlines. The new system will solve that, and thus open doors.
“The big disparity between our load factor and Air Canada’s is that we don’t have an alliance partner to feed,” Beddoe notes. “We’ve had lots of airlines knocking on our door, even some that are partners with Air Canada. Our problem was that electronically we couldn’t do it.”
WestJet is not alone in this quest for better systems. Brazil’s GOL recently formed a codeshare alliance with Panama’s COPA. Wilson Maciel, GOL’s technical vice-president complains: “We can transport but cannot market interline passengers, except on a blocked seat basis.” And even when GOL carries COPA passengers, “they cannot interline their bags”.
GOL has looked at Amadeus, but is also pressing Navitaire for a new generation of open skies. Virgin Blue is doing the same, following reports that Navitaire may have an upgrade ready in 2006. If so, Maciel says: “We would rather stay with Navitaire.”
Technology race
Software is only part of the broader challenge low-cost carriers face over new technology. WestJet is keen to stay abreast, with new cockpit navigation systems, blended winglets, the latest in-flight entertainment and so on. Saving fuel and attracting passengers partly drive this, but Beddoe sees a broader danger in not keeping up with technology.
“Southwest has been able to resist change because of the vastness of their market and because they were first,” he says. “They had a huge momentum behind them. But they must change too. Southwest has not yet put on board the navigation system we use to fly our aircraft. Now they’re facing $2-3 million per aircraft to retrofit. So they have a lot of catching up to do. Any successful company runs the risk of not keeping up with the pace of evolution in their industry.”
Some low-cost carriers do not share this view. In-flight entertainment is common among US and Australasian low-cost carriers, but has not caught on elsewhere. Ryanair’s experiment with it flopped. Only the rising cost of fuel has pushed some low-cost carriers to add winglets. Southwest, for example, finished retrofitting 169 737s in March and about half of the world’s 33 winglet customers today are low-cost carriers.
In the past 10 years, WestJet has also survived consolidation in its own sector. Jetsgo was its biggest rival; putting heavy downward pressure on WestJet yields because Beddoe was determined to win that showdown, and did so. Now Tango and Zip are also gone.
Elsewhere, low-cost carrier consolidation is still in its early stages. Ryanair bought Buzz; easyJet acquired Go; EUJet, V-Bird and Volare, among others, have ceased flying. One of Brazil’s low-cost carrier start-ups, WebJet, is off to a shaky start. Casualties seem inevitable in Mexico, where four more low-cost carriers plan in the first half of 2006 to join the two already flying.
Beddoe rejects rumours that WestJet might buy CanJet, Canada’s other low-cost carrier. In his view, CanJet lacks a network and has incompatible aircraft. A takeover would also deviate from WestJet’s policy of organic growth. “All you’re really doing is diminishing your competition,” Beddoe says. “And they only have 2-3% of the market.”
The more significant trend Beddoe sees is not consolidation among low-cost carriers, but convergence of the legacy and low-cost carrier sectors. He has seen Canadian Airlines and Canada 3000 disappear, and watched Air Canada, the only surviving legacy carrier, shed costs through reorganisation. And now Air Canada and WestJet compete for many of the same passengers.
“There’s lots of talk about legacy and low-cost carriers,” Beddoe says. “But the truth of the matter is that through bankruptcies and other [factors] the legacy carriers are moving in this direction and the low-cost carriers are moving in that direction. We are all, in the end, just carriers.”
DAVID KNIBB/CALGARY
Source: Airline Business
