WestJet allegedly carries no debt and is modelling its low-cost, no-frills operation on successful US role models Southwest and ValuJet. Based in Calgary, Alberta, the startup has been operating three B737-200s between six cities in the western provinces since 29 February.
Greyhound Lines of Canada, the country's largest intercity bus company, has meanwhile been trying since late last year to launch an airline that would feed its bus passengers onto flights operated by Kelowna Flightcraft, mainly a cargo charter carrier, through a hub in Winnipeg. Canada's National Transportation Agency has so far prohibited this operation, dubbed Greyhound Canada, from taking off, claiming it lacks the necessary domestic licence.
Prospects for both new entrants are mixed at best. Between the recent expansion, particularly in the western sector, by majors Air Canada and Canadian Airlines, and pre-existing services by charter carriers like Canada 3000 and Royal Airlines, the Canadian domestic marketplace already appears to have an excess of capacity.
Nor do the majors seem to want to give WestJet - or ultimately Greyhound, if it flies - the slightest advantage. Each has matched WestJet since its first day of operations, offering capacity-controlled fares comparable to the tiny new entrant's on all services on its routes. WestJet's financial staying power in terms of its ability to survive the majors' competitive onslaught will therefore be crucial.
WestJet is the brainchild of several executives. They include Clive Beddoe, president of the Hanover Group of Companies, a Calgary firm with interests in real estate, plastics and education, and David Neeleman, former president of Morris Air, a Salt Lake city based start-up bought by Southwest in late 1993.
Cost of commuting
An avid private pilot, Beddoe was first inspired to launch WestJet several years ago, when he made an investment that required weekly travel between Calgary and Vancouver. Appalled by the cost of commuting on one of the Canadian majors, he bought a Cessna 421 for his Calgary-Vancouver trips, chartering the aircraft out when it was not in use.
Demand for the chartered Cessna was so great that in the summer of 1994, Beddoe and several associates began to look into starting a scheduled airline. They brought in Neeleman to fine-tune their business plan. By then, he was bound by a non-compete clause with Southwest that prohibited him from working for any US carrier for five years.
To launch WestJet, Beddoe raised an estimated C$25- 30 million (US$18-22 million) through share offerings in May 1995 and in January this year. Neeleman is the largest non-Canadian shareholder, holding 5 per cent of the airline, while the Ontario Teachers' Pension Plan Board owns 24 per cent.
Currently the chief executive officer and chairman of WestJet, Beddoe says he had several motives for raising so much cash and not accumulating any debt. First, he was determined that WestJet fully own its aircraft, so that 'we could control our destiny a lot more'. Despite this, some observers question whether WestJet actually does indeed fully own its equipment.
Beddoe also wanted 'a large war chest, so the other airlines would understand that we could withstand any fare war they would want to launch.' Since its launch, WestJet has increased its service from 96 flights per week to 152, flying to Calgary, Edmonton, Winnipeg, Vancouver, Victoria and Kelowna with Boeing 737-200s. It offers deeply discounted fares - it claims its rates are on average 50 to 70 per cent below the Canadian majors'- as well as a ticketless, no-frills service featuring snacks and inflight games. There is no frequent flyer plan. The carrier buys reservations and yield management services from Neeleman, who bases his operation in Salt Lake City, Utah. According to Beddoe, only 20 per cent of WestJet's sales are generated by travel agents.
Competitors estimate the carrier's cost per available seat mile is approximately 10 cents; in the first quarter of this year, Air Canada's was 11.5 cents and Canadian's 12.01 cents. WestJet, which has a workforce of 200 non-unionised employees, said its average load factor was 52.5 per cent in March and 60 per cent in April; and that the latter was 10 points higher than forecast. May traffic was 'on target for another substantial increase,' the company said.
According to Neeleman, WestJet's break-even load factor ranges from below 50 per cent to 60 per cent, depending on the time of year. Beddoe says the carrier's cash-flow is positive and predicts WestJet will post a profit in its first quarter, also contrary to the original forecast.
Greyhound Canada's experience so far has been far more turbulent than WestJet's. In February, Greyhound Lines of Canada - which is 69 per cent owned by Phoenix-based Dial Corporation - reached an agreement with Kelowna Flightcraft Air Charter of Kelowna, British Columbia, to start an intermodal operation feeding Greyhound's bus passengers onto flights operated by Kelowna.
The plan was for Kelowna to operate six leased B727-200s twice daily via a Winnipeg hub, beginning on 22 May. The carrier's flights would link Vancouver, Kelowna, Calgary and Edmonton in western Canada, and Ottawa, Toronto and Hamilton in eastern Canada. Greyhound Lines, which said it would invest less than $10 million in the operation, was slated to provide booking and check-in services through its bus operation, eliminating travel agents entirely from the sales process. It began selling tickets - which it said were up to 65 per cent cheaper than the majors'- in early April.
Protested
Both WestJet and Canadian Airlines promptly complained to Canada's National Transportation Agency. WestJet protested over Greyhound Lines' majority American ownership and Canadian over its lack of an operating licence (which it cannot obtain because it is controlled by a US company). Greyhound has maintained it does not need a licence, claiming Kelowna - which is licensed - will operate Greyhound Air's flights, while it will act merely as a tour operator, chartering seats from Kelowna.
But in mid-April, the National Transportation Agency ruled that Greyhound Lines did need a licence for Greyhound Canada, a decision upheld in early May, after a review was requested by Greyhound and Kelowna. Stating that its proposed operations were 'consistent with Canadian transportation policy,' Greyhound still said it would pursue 'all avenues of appeal open to us,' with resolution 'by mid to late June or earlier if possible.'
Greyhound Lines' shareholders also were expected to vote 29 May on a proposal to spin the bus business off into a Canadian-controlled company. This company, which would provide marketing services to Kelowna, could then legally obtain an operating licence for Greyhound Air.
Perhaps the prime challenge facing both start-ups is whether the Canadian market is large enough to sustain their presence. There is already a glut of capacity in western Canadian markets, where, by the end of August 1996, Air Canada will have increased its capacity by 10 per cent over the previous year. Meanwhile Canadian is increasing its frequencies in Air Canada's eastern stronghold of Toronto, Ottawa and Montreal. Air Canada will add even more capacity in western Canada next year, when it replaces its McDonnell Douglas DC-9s with Airbus A319s.
Both Air Canada and Canadian currently operate massive domestic shuttle services that are geared to business travellers, with dedicated check-in and free coffee and newspapers, on routes connecting western Canada's largest cities. Canadian flies 31 times daily between Vancouver and Calgary and 42 times daily between Edmonton and Calgary. Air Canada serves the two routes 28 times and 34 times respectively. Both carriers serve the Edmonton-Vancouver route 14 times each day. WestJet, on the other hand, offers only 10 daily flights at best in these markets, some one-stop. 'You could take 15 to 20 per cent of the capacity out of western markets and everybody would be better off,' one long-time observer says.
It is doubtful any carrier - except maybe WestJet - is making money there now. Air Canada's domestic capacity and traffic jumped 8 and 11 per cent respectively in the first quarter this year, but domestic yields plummeted 9 per cent. The carrier posted a C$96 million net loss for the period, compared to a loss of C$88 million in 1995's first quarter. Canadian posted a loss of C$110.9 million in the first quarter, an improvement over its loss of C$138.6 million in the first quarter of 1995. But while its domestic capacity and traffic grew 2.9 and 14.9 per cent in the period, its domestic yields dropped by over 5 per cent.
Cheaper charters
Frederick Larkin, analyst for Bunting Warburg, points out that in the transcontinental Canadian market targeted by Greyhound, one-fifth of summertime capacity is now flown by charter carriers like Canada 3000, Royal Airlines and Air Club International. And Royal's fares on these routes are half of Greyhound's, says the carrier's president and CEO, Michel Leblanc.
Not surprisingly, neither Air Canada nor Canadian has great expectations for either start-up. According to Gregg Saretsky, Canadian's vice president passenger marketing, WestJet has stimulated traffic by only 20 to 30 per cent since its launch. He points out that Beddoe predicted the carrier would double demand and needed to capture only 14 per cent of this doubled market to be profitable. 'If WestJet's markets have grown only one-third, it needs considerably more than a 14 per cent share to survive,' says Saretsky.
It is also not clear whether the Southwest and ValuJet strategies, based on market entry stimulating traffic and in some cases moving people from cars onto aircraft, can work in Canada. About one-fourth of Canada's 30 million population is based in western Canada.
Already there are signs that some of WestJet's markets are not dense enough to warrant its service alongside the majors. In early May, it dropped Winnipeg from its route structure, substituting this city with Regina. 'There may not be enough density on these routes for three carriers,' one observer says. 'WestJet's pulling out of Winnipeg indicates this could be a problem.'
Some also suspect that, unlike Southwest and ValuJet which fill seats year-round, the Canadian new entrants will have a somewhat seasonal business. 'You can't stimulate Canadians to fly to Edmonton in February; it's freezing cold and they go to warm places like Florida. There aren't enough Canadians willing to fly year-round' on western Canadian routes, says Robert Milton, Air Canada's executive vice president and chief operating officer.
Both Canadian and Air Canada also believe most passengers will prefer them over the new entrants because of their frequent service, frills and frequent flyer plans. Saretsky estimates the Canadian market is divided into around 65 per cent business travellers and 35 per cent leisure travellers, adding the former would certainly choose a major over WestJet or Greyhound.
It is conceivable, though unlikely, that the relative financial weakness of Canadian and, to a lesser extent, Air Canada, might at some point prevent them from competing as robustly as they currently do against WestJet. The majors' balance sheets are less than healthy and Canadian's cash position is particularly anaemic: at the end of the first quarter, it had only C$109.6 million in cash compared to Air Canada's C$735 million.
Not everyone prophesies doom for the two new entrants. Larkin believes there is room for both in the Canadian marketplace, if their managements 'are willing to be content with limited market share and the available capacity. But if they go beyond that, they'll receive the full blast of the big guys.'
But, however healthy their operations, WestJet and Greyhound could become victims of the ongoing battle between Air Canada and Canadian. As one source points out: 'When there's shooting in a war, you can get killed in the crossfire.'
Source: Airline Business
