Category Archives: Airlines

WestJet’s financial climb performance

WestJet announced its fourth-quarter profit yesterday. and the airline continues to show remarkably strong growth and a share price that keeps headed north, closing yesterday on the TSX at $$22.55. The share price has almost doubled in the past year. Here’s a chart. Amazing recent performance.

Oh, here is my standard boiler plate when I write about WestJet: I used to work for them and have a definite bias in favour.

But rival Air Canada is doing well, too. Although its stock price is much lower compared to WestJet’s, it, too, has nearly doubled in price, closing yesterday at $2.44. Late last March it was as low as 79 cents.

What’s intriguing is that although the share prices of the two airlines differ greatly, their increase on a percentage basis has been somewhat uniform. Here’s an overlay (below) of the two. WestJet is in blue, Air Canada in green.

Still waiting to hear from WestJet about the initial routes for their new regional, Encore. The announcement was to have been made at the end of the January but for some reason has been delayed. In a tweet yesterday, WestJet said:

So. We’ll just have to stand by.

 

Porter Airlines girds for battle

Porter Airlines today announced its third interline agreement in the past sixth months, this one with Singapore Airlines. It’s a development that that adds yet another layer of intrigue to the fascinating competitive jockeying taking place among the Canadian big three — WestJet, Air Canada and Porter.

porter1Porter, for those who don’t know, flies Q400 turbojets out of Toronto’s Billy Bishop Airport (CYTZ, formerly known as City Centre and the Island Airport), located right downtown via a short ferry ride. It’s attractive service if you’re a businessperson or if you live in Toronto’s city core. It saves having to make the miserable drive out to Pearson (CYYZ), a commute that’s particularly dreadful if it’s at rush hour. Porter’s airplanes and terminal are modern, the service is good. You can fly Porter from Toronto to Montreal, Chicago, Boston, Washington, New York and Halifax, just to name a few destinations.

Singapore flies into Newark’s Liberty International (KEWR), as does Porter from Toronto, and that’s where the two airlines will swap passengers (an interline agreement allows passengers to travel on both airlines using one ticket; it’s less formal than a code-share agreement, which allows airlines to sell seats on each other’s aircraft).

The three interline agreements that Porter has signed have to be viewed in context of the service Air Canada has recently added out of the Island and the service that WestJet plans to eventually introduce to Toronto with its new regional, Encore. Encore will run Q400 service to what will almost certainly be many of the same destinations as Porter, except it will do so out of Pearson.

Porter’s great strength and weakness is it flies out of the Island rather than Pearson. The strength is it’s convenient service if you live downtown. Porter’s glaring weakness, however, is that, unlike Air Canada and WestJet, you can’t connect to other airlines from the Island or to the vast networks both Air Canada and WestJet operate.

(While Air Canada also has a handful of flights to Montreal from the Island, it will never amount to the robust schedule that Porter has — nearly 90 flights a day — and will continue to focus its operation out of Pearson).

So. The three interline moves Porter has made are defensive in nature, and they’re smart defence insofar as they begin to add to Porter’s network and convenience.

WestJet plans to use Encore as a feeder to its mainline, which goes across Canada and much of the U.S., Mexico and the Caribbean using 737s. While it won’t be able to offer the downtown convenience that Porter can, it will be able to connect to places Porter can’t.

But Porter’s interline deals put in place structure that will begin to erode WestJet’s advantage. If they get more, and they likely will, that advantage erodes further.

Porter also has interline deals with South African Airways and Qatar Airways. South African flies into Washington’s Dulles (KIAD), as does Porter. Qatar flies into Dulles and Montreal, as does Porter.

So Porter now has three airlines under its belt, and has taken three airlines away from WestJet as possible partners. WestJet has been aggressively adding code share and interline partners in the past few years.

The Singapore deal has the added bonus of allowing Porter to tweak Air Canada’s nose. Singapore and Air Canada are already partners via the Star Alliance. Here is one of Air Canada’s partners signing an agreement with one of its local rivals. Moreover, Singapore doesn’t fly into Toronto, or Canada, for that matter, and relies on the Star Alliance to do so. So Porter is mowing Air Canada’s lawn with this one. And by the way, South African is also a Star Alliance member, so this is the second time Porter has pulled this off.

Aviation geeks are, of course, watching to see how this plays out. Once WestJet enters the market with its Q400s (it likely will set up a regional hub in Calgary before Toronto and the announcement of its initial schedule is due in the next few days), there will be a great deal of price slashing and many more seats suddenly available in the marketplace. Will Porter be strong enough to weather the coming storm? Porter’s announcement of its interline with Singapore appears to be part of its determination to shore up of the bulwarks before the winds begin to howl.

WestJet’s quiet lobbying campaign

AirCanada vs WestJet

All-but lost last month amid all the hoopla over the launch by Air Canada of its latest low-cost carrier, Rouge, was a fascinating item in several newspapers and websites about WestJet’s concern regarding the special treatment given Air Canada by the federal government.

According the stories, and the federal register of lobbyists,WestJet officials launched “a concerted lobbying campaign with the federal government regarding pensions.” A series of meetings was held over two days last November and included no fewer than four members of cabinet, among them Finance Minister Jim Flaherty.

Neither WestJet nor the federal government will divulge what was discussed, but it isn’t too difficult to link up the dots and get a good idea where the discussion went. Not-so-coincidentally, Air Canada, which is WestJet’s chief rival, is seeking leniency from the government regarding a massive pension funding deficit.

“We won’t comment on the specifics of individual meetings like these,” said WestJet spokesman Robert Palmer, quoted by Reuters. “But at a general level, we are concerned about the impact on the state of competition caused by Air Canada repeatedly asking the federal government for special assistance, especially at a time when they are expanding their fleet, buying new aircraft and have billions of dollars on the balance sheet.”

The issue, as the Reuters story explains, is this: Even as WestJet was meeting with government officials, Flaherty was considering a request by Air Canada to be granted a 10-year extension to the cap on special payments it must make to reduce the deficit in its defined-benefit pension funds, which reached C$4.2 billion at the start of 2012.

I’ll pause while you digest that number:  AC has a pension deficit of $4.2 billion.

So you can understand WestJet’s concern. Here’s Air Canada asking for help from the government and at the same time talking about how well they’re doing financially, launching a new airline and buying airplanes. If you’re WestJet, hard not to view that that sucking and blowing at the same time.

(Once again I’m obliged to point out I am a former WestJet employee and have a definite bias in favour of the airline, which I consider to be one of the best run companies in the country.)

WestJet’s point of view would be thus: Here it is doing its level best to run a smart, efficient business, and then has to additionally compete in an environment where its main competitor has the playing field tilted in its favour by the federal government.

By the way, WestJet doesn’t have a defined pension plan. Instead, it offers its employees profit sharing, and matches any shares that employees buy with their profit sharing on a 1-1 basis.

As with most things, however, it’s difficult to draw a conclusion that black-and-white, no matter how black-and-white the issue appears on the surface.

Air Canada is a legacy carrier, and prior to 1989 was owned by the federal government. Airline ownership, and the protections afforded Air Canada, was the government’s way of ensuring that Canadians were well served by air in a land that was long on geography and thin on population. You can debate, endlessly, whether that policy was successful.

Regardless, even though AC is no longer a crown corporation, it operates under conditions and rules different than other airlines due to its past.  Some of these restrictions impose added costs. For example, Air Canada is legally obligated to provide services in French and English, unlike WestJet, which merely must provide safety announcements in both.

No doubt a portion of that pension deficit was incurred while Air Canada was operated as a Crown Corp., and decisions made by its executives, such as buying Airbus A320 aircraft in 1988, not only received government blessing, but were imposed upon it when politically expedient. The government has, shall we say, something of a moral and historical obligation to help it out.

And help it does. When Air Canada sales and service agents walked off the job in June of 2011, the federal government tabled back-to-work-legislation. When Air Canada flight attendants threatened to strike in October of 2011, the federal government referred the dispute to Canadian Industrial Relations Board, blocking the FAs from job action. When Air Canada pilots and machinists threatened the same last March, the government yet again stepped in, referring the dispute to the CIRB.

The pattern is the same paternalism displayed when AC was a Crown Corp., insofar as it remains of the view that without Air Canada, Canadians would be in a pickle where air travel goes.

If Air Canada were to fold, my take is that about 11.3 seconds after Air Canada disappeared private companies would trip over one another to fill the void. Money loves a vacuum. That said, it could well be that with Air Canada gone, and less competition in the marketplace, the flying public ends up served less well. It’s one of things no one would really know until they knew.

The WestJet issue has the government by the short hairs.One one hand it has a historical obligation to Air Canada, views it as an essential service, and at the same time purports to be pro-business, believes in marketplace freedom, and is a booster of Western Canada. Remember, WestJet is Calgary based, and Alberta is the heart of the Conservatives power base (Calgary Southwest is Prime Minister Stephen Harper’s own riding). Rubbing WestJet the wrong way is not something a Harper government wants to do.

Hence the fascinating dilemma. On one hand, Air Canada is viewed as the favourite son. On the other, WestJet is the pretty daughter looking for equal treatment.

Welcome to aviation, Canada style.

 

WestJet lands a wide-body blow

Let’s open with some relatively recent news, namely, that WestJet has begun talks with Boeing and Airbus to acquire wide-body aircraft.

WestJet & AirCanada aircraft

WestJet has begun talks with Boeing and Airbus about buying wide-body aircraft, suggesting it plans to go head-to-head with Air Canada on overseas routes.
Photo: MacLeans Magazine

In Canada, a country where scheduled service is basically carved up by two major carriers, this is a big deal, and no doubt caught the attention of executives at rival Air Canada. No doubt it was intended to. The message: We’re coming.

WestJet CEO Gregg Saretsky, who made the announcement in a presentation to investors and analysts on Dec. 6, did his best to hose down the drama component by stating the talks are of a preliminary nature only.

“It’s way too early for us to be interested in any serious way,” Saretsky was quoted by Bloomberg as saying. “We don’t want to be asleep at the switch should an opportunity present itself, so we are engaging early just to be ready, but without any specific plans.”

Specific or not, the significance of the announcement will not be lost on Air Canada, because it more than suggests that WestJet is girding to battle its rival on the lucrative trans-ocean routes to Europe and Asia. This will be a significant change to the Canadian aviation landscape.

And it will be a ballsy, and even a somewhat risky, decision internally for WestJet, which has built its brand offering service in North America using one type, and one type only, since its inception in 1996 – the venerable 737. It currently uses three versions of the type, the 600 (configured at 119 seats), the 700 (136 seats) and the 800 (166 seats).

The devotion to the one-type model, and the cost savings utilizing just one type reaps, has played a significant role in the company’s remarkable success – 30 consecutive quarters of profit, many of those quarters defying the gravity of the worst recession in decades.

Introducing other types will drastically complicate the training and certification of crew and maintenance personnel and  the acquisition and storage of parts. Associated costs will be enormous.

And yet, why not? The airline will be able to leverage its existing human and brick-and-mortar  infrastructure, procedures, policies, government and stakeholder relationships, etc. So while the cost will be significant, the existing structure will make those costs far more manageable than if it were starting from scratch.

(A disclaimer is in order. I worked at WestJet for nearly three years, most of that time spent as a flight attendant. I think it’s one of the best companies to work for in Canada and one of the best-run companies, period.)

In fairness to the news value, the notion of WestJet eventually acquiring wide-body airplanes was talked about openly by Saretsky himself back in December of 2011, when it announced plans to start a domestic regional airline (WestJet Encore). Encore is due to lift off in the second half of 2013. In fact, the regional itself, which will feature the Q400 product, was a break from the one-aircraft type model and there was concern among critics at the time of inception that breaking the one-type model was dangerous.

But managed, calculated risk is what allows us all to get out of bed each morning. Same for a business.

Even before the announcement of the Q400-based regional, airline had been flexing its wings vis-à-vis  other aircraft types, using a leased Boeing 757 during the past few winters to augment its service to Hawaii. The experiment gave a window into the associated problems that another type would introduce and a safe platform from which to problem solve.

Once the regional is up and running, the airline will have a seamless feed-in structure: A turboprop serving small communities and feeding a medium jet service serving North America, which in turn will funnel guests – WestJet doesn’t call them passengers – to points of departure for flights overseas. The logic is difficult to defy.

Air Canada, the country’s dominant carrier, knows this is coming. It has already said it will lower fares on routes that WestJet begins to serve with the Q400 and on Dec. 18 rolled out its new discount carrier, Rouge, which will begin flying next July to Europe the Caribbean.

Air Canada has gone the discount route before, and each time it collapsed under the weight of the airline’s existing structure. It’s worth noting that WestJet has a cost structure about one-third less than Air Canada’s, which is a large reason why it has thrived. The difference this time, and what makes Air Canada Rouge a more formidable adversary, is the arbitration decision imposed on pilots last summer that gave the airline the pay scale and flexibility it said it needed to compete.

Watching the two heavyweight adversaries slug it out is like watching Ali-Foreman. More blows, of course, have to yet to land. Certainly where WestJet goes, one of the most highly anticipated will be its choice of wide-body product.  Thoughts, anyone?