WestJet's Next Chapter
Q&A With WestJet CEO Alexis von Hoensbroech
Alexis von Hoensbroech made a leap last year when he left a 16-year career with the Lufthansa Group, including as CEO of Austrian Airlines, to lead Canada’s second carrier, WestJet.
The Calgary-based airline faced numerous challenges. A multi-year effort to go upmarket and position itself as a national competitor to Air Canada, saw costs rise and margins shrink to the bane of investors at the long solidly profitable airline. The Onex Group took the carrier private in a deal worth roughly C$5 billion ($3.7 billion) in late 2019. Then, as luck would have it, the Covid-19 pandemic hit several months later and the airline’s plans went up in smoke. Von Hoensbroech became CEO in May 2022, succeeding Ed Sims who retired at the end of 2021, and wasted no time in tearing up the playbook and laying down a new back-to-the-future plan for WestJet.
Von Hoensbroech recently spoke with Edward Russell on his strategic plan for WestJet, and the airline’s positioning in the increasingly competitive Canadian market. The interview has been edited and condensed for clarity.
Airline Weekly: WestJet is about to launch its summer schedule, including new nonstops to Detroit, Nashville, and Washington Dulles. How does the season look?
Alexis von Hoensbroech: What we’re seeing is that the Canadian market is finally recovering from the pandemic, which, by the way, sees about one year delay compared to the U.S. We are seeing our first post-pandemic year in 2023. The demand environment is currently strong. That gives us a lot of confidence going into the summer. The winter term was also pretty strong. So, this all looks pretty solid. And we are growing pretty significantly this summer. We are putting a lot of capacity, especially into Western Canada. We are up double-digits, probably significantly up double-digit across most Western Canadian airports.
AW: Would you describe demand as fully recovered?
AVH: It’s always hard to tell, because the overall capacity in the market is actually still a bit below pre- pandemic. But the underlying demand structure is pretty strong, and so I think if there was more capacity in the market, demand would probably also be higher. The demand is back to pre-pandemic across most segments, especially in the leisure segments. On corporate travel, we still see some softness but we, as WestJet, are primarily flying leisure travelers, and our demand structure is actually really strong.
AW: Nearly a year ago, you unveiled a new strategy for WestJet that, among other things, focused on lower costs, a shift back towards Western Canada, and expanded leisure flying. How is the execution going?
AVH: We have decided that we need to refocus WestJet on those things that made WestJet successful in the first place. And this is everything that is centered around Western Canada, this is everything centered around leisure flying for all of Canada, for East and West, and it’s around being a low-cost brand and low-cost airline.
We are executing actually quite diligently on this. We are growing double digits, significantly double digits in Western communities. Calgary, for instance, is seeing 28 percent capacity growth this summer, which, by the way, is also 25 percent capacity growth over 2019. So, this is major, major shift of capacity into Western Canada. And we do the same across many other airports in Western Canada.
Low cost means that we have to take complexity out of our system. We have to fly with high productivity, run less connecting traffic, and go more point to point. It means that we have to simplify our fleet or at least grow the share of our backbone aircraft type, which is the [Boeing] 737. We operate very few widebodies that we are placing in Calgary — just in Calgary — that we’re previously split across three hubs, including Vancouver and Toronto. So, we are dismantling those two hubs. We are operating Calgary as the only hub, because that’s the only place where we actually have sufficient scale to operate widebodies. And we are not investing any more into widebodies. So, these are seven airplanes out of 180. It’s the icing of the cake, and no more.
We have a pretty sizable regional fleet that we will maintain, but we will shrink it by roughly a third. So, the number of regional airplanes will go down. And, we have a large order out with volume for growing our 737 fleet. So, this means that pretty soon about 80 percent of our entire fleet will be 737s, and it will be largely Max airplanes. Including options, we have 85 Max airplanes on order on option over the next five years. This will bring a lot of additional capacity into the group.
AW: Got it. Any word on when the 737-10s will begin arriving?
AVH: We expect to receive our first Max 10 in the second half of next year. So, that’s the plan that we made with Boeing. And Boeing is giving us confidence that they expect the certification by the FAA before next year. So, that’s our expectation. We also require Transport Canada to certify this airplane. This is maybe more of a concern from our end that they will be able to certify it in time after the FAA has certified it. What we don’t want to see and what Canadians don’t want to see is a brand new super fuel efficient airplane sitting on the ground because the certification agency did not have sufficient time or resources to certify this aircraft. That’s something that is a concern for us. But we are talking to Transport Canada about this, and are confident that they will be able to do their certification process in time as well.
AW: A lot of airlines have seen costs permanently adjust higher post-pandemic than they were before. How does WestJet reduce costs in this higher-cost environment?
AVH: Cost management is something that we will continuously do, and make sure that we will maintain a significant cost advantage over our main competitors in Canada. Having said that, we do see inflationary pressures, just as everyone is seeing them. Everything is up, up, and up. The APPR [Air Passenger Protection Regulations], which is the Canadian, this basically wasn’t in place or was hardly in place pre-pandemic, so this becoming a big cost factor and so on. And of course, we have to factor all these things into our ticket prices. So, this is all driving ticket prices up. At the same time we are working on productivity with bigger airplanes and so on and so forth, and making sure that we have a strong technology base and processes.
AW: So the goal is lower costs than your competitors, not necessarily than pre-pandemic levels?
AVH: If you eliminate inflation from the equation, then we will go below pre-pandemic. But if you take it just on face value, because inflation is so strong right now, I think no airline will be able to be below pre-pandemic. But if you clean the math for the inflation piece, we will be below pre-pandemic for sure.
AW: Is WestJet profitable today?
AVH: The three years of the pandemic were tough for all airlines. For U.S.-based airlines it was two years but, unfortunately for us, it was three years of straight losses. And you can see that with those airlines that are publicly posting their profits and losses, that they have posted three consecutive years of massive losses. We don’t publish our results, but you can rightly assume that the last three years were also losses on our side.
Right now, we are seeing that the picture is turning. Our first quarter was actually really strong. It’s the first normal quarter where we’re seeing profitability now that is comparable to pre-pandemic. And that’s good. That gives us a lot of confidence going forward. Having said that, we also have to acknowledge that we had to absorb the entire pandemic losses on our balance sheet. So, our debts are up and interest rates are up. So, to pay down our debt will be one of the main priorities going forward, which also means that we can’t fulfill all wishes that various groups are raising to our direction.
AW: Post-pandemic debt has raised restructuring concerns at airlines elsewhere, for example Azul in Brazil. Do you have any similar concerns about WestJet’s debt levels?
AVH: No, no, no. We have a strong positive cashflow. That’s good. And we have a leverage ratio that is absolutely on the data that is in line with the market and that is acceptable going forward. Still, I prefer to reduce our interest expenses.
AW: Tell me a bit about WestJet’s capacity shifts. You mentioned significant growth in Western Canada, but what about Eastern Canada?
AVH: We are re-pointing our network in Eastern Canada. Our assets are much better used serving undersupplied markets in Western Canada than oversupplied markets in Eastern Canada. However, there are two segments that we are strongly growing in Eastern Canada. One is transcontinental flying where we are connecting lots of Eastern Canadian communities to Western Canadian communities. I think we are up double-digit this year in transcontinental. And leisure flying; we are flying from lots of bigger and smaller communities in Eastern Canada into leisure destinations down south. This is also up.
AW: In terms of where WestJet is growing out west, where do you see significant opportunities?
AVH: There’s more that we can do in Calgary but also at many other airports, like Edmonton. Edmonton and Calgary are roughly the same population, but the passenger [numbers] in Edmonton are about half of what they are in Calgary. This tells you that there is actually quite some growth potential in Edmonton as well. Our positioning in Vancouver is certainly also something that we can grow. Over the years, we’ve recognized that this is a market that is very transpacific oriented for other carriers, but in the local markets we actually have very strong position that we can grow.
And then, there are also many secondary airports where we think that the growth potential is actually quite remarkable. There’s Kelowna, Victoria, or Winnipeg, or Regina, or Saskatoon, and other spaces where we are already the, by far, strongest carrier. We are their own carrier, and as their own carrier we believe we can do more, whether it’s flying within Western Canada, whether it’s connecting to Eastern provinces, or whether it’s connecting to leisure destinations.
AW: The Canadian airline market is awash in new competition, including startups Flair and Jetlines, and Porter’s Embraer E2 jet operation. Does this concern you?
AVH: I think everyone can see that the Canadian aviation space is a very competitive now. If you were to compare just Canada’s largest route, Vancouver to Toronto, pre-pandemic there were two players — this summer there will be six and the capacity up 20 percent. This is a very competitive environment. We at WestJet, we welcome competition. In the end, everyone has to make sure that their various business models are successful, and we will see how this plays out. I can’t speak for the others, I can only speak for us and the business model that we are pursuing is actually very successful and it’s very robust.
AW: Can you tell me more about the Sunwing acquisiton?
AVH: We received regulatory approval in March. There’s some legal wood to be chopped, and it takes a bit longer than I expected, but I expect that this is going to close within the next couple of weeks. I don’t see any major roadblocks, but timelines are always a bit fluid.
AW: Will WestJet keep the Sunwing brand?
AVH: At start, nothing will change. Sunwing will stay a separate airline and then, over time, we will decide how we develop the various airlines and all.
AW: On the partnership front, what is the status of WestJet’s relationship with Delta? Do you plan to reapply for antitrust immunity for a transborder joint venture?
AVH: We are very happy with our partnership with Delta Air Lines, which is a non-joint venture, classical marketing partnership. And that’s very successful for both sides. It adds a lot of Delta passengers to the WestJet network, and a lot of WestJet passengers to the Delta network. So, it’s actually increasing our collective market share. So, that’s really good. For the time being we are happy with what we are doing, and we haven’t decided to take any decision on potentially refiling a joint venture.