Canada’s WestJet announced, in a briefing to its pilots, that it is planning to acquire wide-body aircraft and begin flying internationally in 2015. The carrier currently wet-leases Boeing 757s from Thomas Cook for Hawaii operations, and those contracts expire next year. The company wants to have a contract with its pilots in place before moving forward to be certain of its cost structure prior to expansion.
WestJet’s CEO, Gregg Saretsky, indicated that he would like to compete with Air Canada for international routes in the Americas, Europe and Asia over the longer term. He also indicated that the company is in discussions with leasing companies and aircraft manufacturers regarding new lift 18-36 months from now. In the near term, lift will be from used Boeing 767 or Airbus A330 aircraft available in the marketplace.
WestJet has been known for its “all in” strategy — when it sets an objective, it goes after it aggressively. Moving into the international market certainly has significant implications for the competitive marketplace, and particularly Air Canada.
Air Canada itself announced a new focus on international operations after delivery of its first Boeing 787 Dreamliner in May 2014. At that time, Craig Landry, Air Canada’s VP marketing, indicated that the company would increase its international marketing budget from 25% to close to 50% in an effort to build international traffic. With WestJet entering the market, the competition will become more intense.
Air Canada itself has developed a low cost operation, branded Rouge, to operate primarily holiday routes to warm weather destinations with lower fares and service levels than Air Canada branded services.
When compared with its competition, particularly Porter and WestJet, Air Canada ranked behind its rivals in surveys asking whether the airline cared about its passengers. The flag carrier is trying to regain the human touch that its competitors have clearly established. That isn’t an easy transition.
Having increased international operations 20% over the last few years, Air Canada may be vulnerable to inroads from carriers like WestJet, which can undercut fares and impact the relative profitability for international routes, just as they have domestically. WestJet and Porter have made significant domestic inroads . With WestJet expanding internationally, the competitive heat will be turned up on Air Canada, which will need to up its game.
For Air Canada, the good news is that WestJet will begin small, leasing used aircraft for 2015. But by 2017-2018, the carrier may be well enough along to take delivery of new aircraft from Boeing or Airbus. As a large 737 customer, we suspect the 787 would be an ideal fit for WestJet’s low cost operations, particularly the 787-9 and -10 which feature very low seat-mile costs. The 787 is popular with low cost carriers for two reasons — attractive economics in high density configurations, and adequate range for long-haul market. With Asian markets growing rapidly, we would expect WestJet to leverage its Western Canada geographic position with flights into Asia, which would require a 787 for non-stop service from Calgary or Vancouver to China.
WestJet already flies from St. John to Dublin using 737s across the Atlantic, and has the computer systems and customs capabilities for international service. Expansion, once the right aircraft are acquired, could happen quite rapidly.
The Bottom Line: We look for WestJet to acquire 767-300s in the near term, replace Thomas Cook on Hawaiian routes, and develop new international destinations from both Western and Eastern Canada during 2015-2016. This will turn up the competitive heat on Air Canada, and benefit consumers who will have more choice, including low cost options, to additional destinations. When we compare WestJet and Air Canada, we have an airline that is popular with consumers and on the way up, versus one that is perceived as stodgy and inefficient, and had to put off acquiring new aircraft due to massive first quarter financial losses. The trend lines are clear. Unless something changes, the question is when, rather than if, they will cross each other. WestJet’s international move will carry that battle to a second front. One can put on some Rouge, but in the end, its the same Air Canada underneath.