Best in the West: “The Low Fare Pioneer” targets Rouge with new low-cost subsidiary

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20 years ago a gutsy start-up took to the skies looking at upsetting the established Canadian market. In a shade of irony, WestJet has become that which it sought to defeat: a legacy carrier.  (Photo: John Jamieson, Sept 1/2012, YVR)

In an era where social media is replacing traditional advertising, WestJet has built a modern brand without a shred of corporate monotony. WestJet’s new campaign on “anti-overbooking” comes at a time when many legacy carriers have been called out by the media for poor customer service. The airline deserves all the plaudits for its customer service and their consecutive years of profitable operations. WestJet has established itself in the market with competitive fares and an expanding route network.

In a touch of irony, as WestJet has grown into a de facto legacy carrier; it has come to look more like Canadian Airlines, a privatized Canadian carrier which ceased operations in 2001. WestJet’s low fare structure and their rapid growth, along with many other factors, contributed to Canadian’s Demise.

Four years ago in 2013, WestJet launched its regional subsidiary Encore. On April 20th of this year, WestJet announced its intention of launching a new Ultra Low-Cost subsidiary with the goal of competing against Air Canada’s subsidiary ROUGE. At the time of writing, WestJet had yet to announce a name or route network for its new subsidiary. It was announced, however, that the 737-800 will form the backbone of the fleet and that operations are to begin in early 2018.

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Along with Rouge, WestJet’s new “ULCC” division is expected to compete against market entrants Newleaf and Canada Jetlines. This “crowding” of the market is a similar tactic used by Air Canada in the early 2000’s against WestJet. (Photo: John Jamieson, Jan/7th 2013, YYC)

For a carrier which has managed to avoid major conflict since its inception, the implications of launching an ultra-low-cost subsidiary must be considered. Low-Cost airlines rely on operational cost savings. The largest costs incurred by a carrier tend to be the crucial fixed costs tied down in cabin crew wages and pilot contracts. Should WestJet become embroiled in a battle with its employees over wages and working conditions, it’s ULCC subsidiary will struggle to get off the ground. From a cost perspective, if the carrier can manage to negotiate contracts which make financial sense for itself and its employees, it stands a chance competing with other low-cost carriers.

Another important factor to consider when launching Low-cost subsidiaries is network growth and route development. It is essential that the aircraft achieves load factors between 80 & 90 percent. Because the cost per passenger is reduced through lower fares, the airline needs to operate on high-density routes. One of the problems facing WestJet’s ULCC is that there are few domestic routes which the airline can operate without competing against mainline service. This limits the ULCC to vacation markets (where there are few business travelers) and lower volume domestic routes.

 

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San Diego was a market formerly served by Rouge from Vancouver (now served by AC Express); WestJet continues to offer year-round mainline service to Calgary- a flight I experienced in February 2014 (John Jamieson, Feb/22 2014, KSAN)

From an outsiders view, this seems like an odd time for WestJet to launch a Low-Cost Subsidiary. The carrier’s position in the market, while relatively established, has slumped slightly as the oil industry in Western Canada has declined. On domestic flights, I find the level of service on the two carriers (WestJet & Air Canada mainline) to be perfectly comparable; however, from a long haul perspective, flight reviews and media reports would suggest that WestJet’s 767 operations are far closer to Rouge’s long haul product. Despite potential contrary claims from WestJet, I would suggest that their overall mainline service falls somewhere between Air Canada’s and Rouge; this presents an interesting problem: enhance mainline service or try and undercut Rouge.

With the announcement of its new ULCC, it appears WestJet has chosen the latter and is trying to undercut Rouge with a comparable product. This could be successful if the subsidiary is given the appropriate resources to grow: slot access, joint venture marketing, ground handling services, etc. Additionally, if “LessJet” were to integrate components of WestJet Vacations into its booking process there’s no reason why the subsidiary couldn’t effectively compete against Rouge or Transat Vacations. If “LessJet” can handle the “excess baggage” associated with potential labor issues and carefully build a dense route network, this could be a successful venture.

 

 

 

 

 

 

 

 

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