21 APR 2017: First there was WestJet, then there was Encore now there is to be – well something else. WestJet announced yesterday it will launch a new discount carrier later this year in a bid to offer travellers a no-frills, low-cost option. But isn’t that what WestJet was supposed to be when it launched way back in 1996? Actually, it wasn’t even no-frills – it was the low cost, friendly option! Now it could be called AC too! What happened?      

Chief executive Gregg Saretsky said the airline industry has changed since the company began.

Cheap, cheerful and un-named

“The complete unbundling of services and products in order to lower fares for the price-sensitive traveller has created the ULCC (ultra-low-cost carrier) category,” he said in a statement.

“Our new airline will provide Canadians a pro-competitive, cheap and cheerful flying experience from a company with a proven track record.” Sounds familiar.

Since WestJet started as a discount carrier with three aircraft in Western Canada, airlines have trimmed the extras and started charging for things like checked baggage and meals on flights.

The ULCC model

WestJet did not reveal details on where it plans to fly, but said the yet-to-be-named carrier is expected to start in late 2017 with an initial fleet of 10 high-density Boeing 737-800s.

What that likely means, is that for their cheap tickets, passengers will be crammed into narrow seats, with reduced legroom, and be charged extra for virtually everything, including baggage (to be expected) boarding passes printed at the airport, snacks and non-alcoholic drinks.

ULCCs have also charged credit card transaction fees, (hefty) change fees, charges for infants under two, priority boarding and seating (pretty standard) and various other add-ons. This is not to suggest that WestJet Light (a stand-in till we learn the real moniker) will be charging for all the above – but they will for some – bet on it.

The airline also said the new carrier is subject to agreement with its pilots and any required regulatory approvals. Don’t hold your breath on the pilots being happy with this development.

Will it work?

AltaCorp Capital analyst Chris Murray says the launch of a so-called flanker brand complicates the plans of others looking to start an ultra-low cost carrier in Canada and protects WestJet from market erosion.

A flanker brand is a new brand introduced into the market by a company that already has an established brand in the same product category. The new brand is designed to compete in the category without damaging the existing item’s market share by targeting a different group of consumers.

“Historically, other ULCC's including Spirit Airlines and Ryanair have generated above average returns in their markets and we believe WestJet could see similar returns,” Murray wrote in a report.

However, Murray noted that several details remain unknown including how the airline will be structured and its plans for growth.

National Bank analyst Cameron Doerksen said the new airline can only be successful if WestJet is able to negotiate separate lower labour costs with its flight crew who will work in the flights.

Doerksen said, “We also believe the ULCC may cannibalize some current traffic on WestJet's mainline.”

“Finally, we are concerned WestJet has too many new strategic initiatives underway simultaneously, including a major expansion of its widebody international routes.”

One has to believe that the ULCC would also draw from the Encore brand that would be a large concern.

So, the questions are ‘Why?’ and ‘Why now?’

Air Canada launched its discount brand Rouge with flights in 2013 servicing Europe and the Caribbean. The service has grown to add destinations within Canada, Mexico, the US, South America, Central America, Africa and Asia.

Last year, NewLeaf Travel started offering “no-frills” flights between smaller airports including Kelowna, Abbotsford, Edmonton, Calgary, Winnipeg, Hamilton, Moncton and Halifax.

WestJet’s Encore is also a regional airline that was launched in 2013 to compete with Air Canada in some of the smaller markets. A year later Encore president, Ferio Pugliese, boasted that it was, “liberating Canadians from the high cost of travel,” stimulating demand and had “woken the competition up absolutely.”

However, Encore flies Bombardier Q400 turboprops and presumably this is not the optimum fleet for a ULCC.

The model changed

WestJet famously began using the low-cost carrier business model pioneered by Southwest Airlines in the US. In fact, in 2008 WestJet announced it had signed a memorandum of understanding to build a distribution and codeshare agreement with Southwest – that deal was terminated two years later.

Since then it has wandered far afield till it is now a mainstream carrier with prices virtually indistinguishable from those of Air Canada.

Subsequently, WestJet has also partnered and code shares with 16 US and international airlines and operates a fleet of Boeing 767-300s, and the Boeing Next-Generation 737-600, 737-700 and 737-800 aircraft in addition to Encore’s Bombardier Q400 turboprops.

Meanwhile Southwest has stayed the course using only Boeing 737s, (except for a period in the eighties when it leased some Boeing 727-200s).

Clive Beddoe, co-founder of WestJet and chair of the Board of the Directors, said, "We have built WestJet from its low-cost, regional roots into a renowned, international airline with service to 21 countries and today it's all about disrupting at the price-sensitive end of the market.

"Launching a ULCC will broaden WestJet's growth opportunities and open new market segments by offering more choice to those Canadians looking for lower fares."

So, will Air Canada now be tempted to go Rouger?

 

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