Wild WestJet: Everything and nothing is changing at Canada’s most profitable airline
Doing something 40 consecutive times might sound boring. But there’s nothing boring about WestJet, which will this week announce its 41st consecutive quarter of profitability. The last time it reported a quarterly loss was 2005.
In some ways, Canada’s second largest airline is, in fact, boringly if satisfyingly consistent. It earned a 9% operating margin in 2010, 8% in 2011, 11% in 2012, 11% in 2013 and 12% in 2014. You might think it was on autopilot. But nothing could be less true. WestJet is, in fact, an airline undertaking great change, at a time when market conditions and competitive conditions are changing too.
Back when it last saw red ink in 2005, WestJet was essentially an all-domestic airline. It had started a few U.S. sunshine routes in late 2004 but wouldn’t enter the Caribbean market until 2006. Today it offers no fewer than 60 destinations outside Canada, blanketing the Caribbean. More significantly, WestJet took perhaps its boldest network step ever last summer by crossing the Atlantic for the first time, flying to Dublin from Toronto via St. John’s, Newfoundland. It worked so well that it added Glasgow this year, in this case from Halifax. And in no mood to stop there, WestJet will next head for the biggest European market of them all: London.
Back at home, meanwhile, network changes are no less significant. In addition to going big, WestJet is also going small. In 2013, WestJet began challenging Air Canada in smaller Canadian cities it long ignored. The idea was to expand the scope of its network and also boost the fortunes of busier routes by providing a new source of traffic feed. Flights between Calgary and Vancouver, for example, could now count on additional passengers connecting to or from cities like Victoria, Nanaimo, Fort St. John or Terrace. To make these regional markets viable, WestJet launched a new division called Encore, with lower paid flight crews. Encore soon pushed into eastern markets and last week announced its first U.S. routes (see page eight).
As the network changes, so too does WestJet’s fleet. While able to serve Europe with its tried- and-true B737s from Canada’s far northeast, further expansion opportunities with this approach are limited. So the airline acquired a handful of used B767-300ERs, the first-ever widebodies it will fly. Some will handle Hawaii routes from cities like Calgary, a job WestJet previously outsourced to Thomas Cook and its B757s. But more excitingly, the B767s will enable the new London route, perhaps from Toronto, although it hasn’t yet…
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Unit revenues are down significantly, both at home and abroad. But what sounds discomforting is really just an afterthought for U.S. airlines, in the context of dramatically cheaper fuel. American, even with heavy yield erosion in key markets like Venezuela, Brazil and its largest hub city Dallas-Fort Worth, produced giant profits. So did United, if not quite as giant, despite a collapse in revenue from its Houston-based energy sector clients.
Oddly enough, it was Spirit—often America’s profit champ—that suffered a somewhat disappointing quarter, relative to its own lofty standards, anyway. It was still terrifically profitable, to be sure, but operating margin barely rose at all y/y as extremely sharp unit revenue declines mostly offset its fuel savings.
Not so for Southwest, which beat Spirit in the margin game—one key differentiator was Dallas, where its own flights thrived while causing misery for others. As for Alaska Airlines, there seems to be no ceiling on how high its profits can go.
Now for a letdown. Air France/KLM is in trouble, badly underperforming its peers as longhaul markets like Brazil, Japan and Africa turn from gold to dust. But what about the fuel bonanza? Air France/KLM is enjoying none of it, spoiled by hedges and forex. Throw in heavy cargo losses and heavy shorthaul losses, and the result is an airline badly in need of reform. Will it get the labor concessions it needs?
What Brazil needs is less capacity, according to TAM. It’s slashing domestic flying by as much as a tenth, hoping to sustain RASK in a badly deteriorating economy. More on the Brazilian market this week when Gol reports.
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