Issue No. 705
Canada's Changing Airline Landscape
Who said Canadians are so nice? Its airlines aren’t being nice to each other, that’s for sure. Right now, Canada’s airline industry looks something like a hockey fight.
On January 24, high in the mountains of British Columbia, Canada’s two leading airlines shared their latest observations. The venue: a CIBC investor conference in Whistler, where the skiers weren’t the only ones headed downhill. WestJet too saw its earnings tumble down the mountain in 2018. The carrier will report its full-year financial results this week, but no matter how strong its fourth quarter was, the LCC will not have made up for a devastating second quarter loss, followed by greatly disappointing third-quarter profits—its Q3 operating margin fell from 17% to 6%. Ouch.
As it happened, WestJet made it through the Alberta economic slump just fine. Its home province, sure enough, faced a harsh recession after the price of oil — Alberta’s top export — plummeted in late 2014. But low oil prices, of course had an upside for WestJet, and the LCC ended 2015 with a triumphant 14% operating margin, its best figure all decade.
Conditions got somewhat tougher in 2016 and 2017, but WestJet still managed double-digit operating margins in both years. Looking from afar, things might have seemed no different than they’d always been: WestJet entered 2018 a strongly profitable airline, and one still more profitable than its legacy archrival Air Canada.
But WestJet still felt uneasy. There weren’t many Canadian markets left that it didn’t already serve. How and where would it grow? It watched with envy as Air Canada and the U.S. Big Three reaped the rewards of a booming corporate premium market on intercontinental routes. WestJet saw its own corporate business increase, as mentioned, but there was only so much it could achieve in the segment, given its mostly shorthaul network, all-narrowbody fleet, lack of joint venture partners, coach-only seats and so on.
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