Will WestJet’s culture keep on flying?
Growth, international expansion a threat to airline’s scrappy trademark
When WestJet Airlines Ltd. launched almost 20 years ago, the feisty little startup lived in constant fear — “fear that one of the big guys would roll over us and tomorrow we’d be gone,” says CEO Gregg Saretsky.
Those big guys were Air Canada and Canadian Airlines. Today Canadian is gone, and WestJet has taken its place as the big second player in a national market that’s famous for being sprawling and sparse and expensive to serve.
The Calgary-based carrier had the luck to jump into the market just before Canadian got into trouble, taking advantage of the resulting turmoil to carve out a niche for itself. With Air Canada growing only bigger and more powerful, WestJet was friendlier, cheaper and refreshingly western. Its workers, compensated partly by shares in the company, were motivated to do unheard of things such as entertaining customers, telling corny jokes on the PA, and cleaning the planes themselves.
What came to be known as the “WestJet effect” seemed to actually entice more people, with lower prices and a better experience, to fly more often. And the airline has been exceptionally successful: From 220 employees and three aircraft serving five destinations in Western Canada, it now has nearly 12,000 employees and 132 aircraft serving 101 destinations in 22 countries. Its market cap since it went public in 1999 has grown to more than $3 billion from $340 million. But as it took off, WestJet found itself struggling to maintain that trademark culture of the young, scrappy underdog. It’s only got harder since. The antiestablishment vibe is a lot harder to maintain once you’ve become part of the airline establishment.
Ben Cherniavsky, who follows the airlines for brokerage firm Raymond James, saw this coming in a prescient analysis back in 2011.
“There is more than a certain way of doing things at WestJet; there is a certain way of being,” Cherniavsky wrote. “It is, in the eyes of management, the defining feature of what makes the company different from every other airline on earth. And it is what Mr. Saretsky needs to preserve while he still recalibrates WestJet’s flight path for the next few years.”
Saretsky is not an original WestJetter. He joined the company as vice-president in 2009, 13 years after its founding, after a career spent moving up the ranks at Canadian Airlines and then Alaska Airlines. But it falls to him to try to maintain that early spirit.
“We’re not the airline that in the early days was afraid of being snuffed out,” Saretsky said. Back then, “we did whatever it took. And there are great stories of pilots coming in on their days off and buying pizza for the mechanics who were working on those 25-yearold planes to make sure they were ready to go out when they needed to go out.
Now that we’re bigger, I think that element is much tougher.”
As WestJet embarks on the first phase of a transatlantic expansion that could eventually turn it into an Air Canada-sized behemoth, it’s already given up much of its original no-frills pricing and esthetic edge, as well as the elegance of its longtime single-model plane strategy.
There are also signs of labour discord among pilots and flight attendants.
“When the organization was small, its (culture) was widely shared and deeply held,” said Gerard Seijts, executive director of the leadership institute at Western University’s Ivey Business School. “Now that the organization is getting larger and larger, to manage that becomes a little bit more challenging.”
Today, WestJet is embarking on what could arguably be the most transformative phase of its history.
With four Boeing 767s set to be delivered by next spring, the airline will be soon able to offer long-haul overseas flights for the first time, beginning with 28 flights a week from six Canadian cities to London. Saretsky has strongly hinted that WestJet’s expansion won’t stop with the U.K., saying he’s looking at “all the European capitals” and would even someday consider flights to Latin America and Asia.
But here at WestJet’s Calgary headquarters, executives are closely watching another change: Two separate union drives, one among pilots and one among flight attendants.
The non-union workplace was one of WestJet’s early advantages against Air Canada, whose workers occasionally clashed with management and whose roles were defined more rigidly. Customers who have stayed with WestJet over the past 20 years cannot have missed the cultural shift among employees, who seem less likely to crack jokes and lighten the mood than they used to be.
Now that the organization is getting larger and larger, to manage that [culture] becomes a little bit more challenging.
And Saretsky has made dramatic changes since he became CEO in 2010. The launch of regional carrier Encore expanded WestJet’s fleet from one type of aircraft — the Boeing 737 — to two, with the addition of Bombardier Inc.’s Q400 turboprop. It added a third type of aircraft when it took delivery of its first 767 in August.
Under Saretsky, the airline has also introduced bag fees, premium seating, a loyalty program and a large number of code-share agreements with other airlines.
Some of the changes haven’t been easy to digest for employees, who have seen their duties grow more complex as the airline has expanded. The launch of pricier premium economy seats, for example, initially led to nearly unheard of conflicts between flight attendants and passengers, when customers — not aware of the difference — tried jumping into more expensive empty seats.
But there was more at stake than job satisfaction.
“This was not a change-for-the-sake-of-change agenda,” the analyst, Cherniavsky, wrote this past June.
“Instead, Mr. Saretsky was astutely aware that in the very dynamic and extremely competitive airline business, if you aren’t changing to move forwards then effectively you’re moving backwards.”
The changes have clearly worked from a financial perspective: Between 2010 and 2014, WestJet’s revenue rose 52 per cent, earnings per share jumped 136 per cent and planes were fuller than ever despite the addition of 31 per cent more capacity. The airline has also exceeded its 12 per cent return-on-invested-capital target for 12 quarters in a row. Shares have returned 73 per cent since Saretsky took over, although they’ve fallen almost 30 per cent this year amid worries about the Alberta economy and overcapacity in some markets.
And so far, at least, the union drives have yet to work: 55 per cent of pilots voted against organizing in a secret ballot in August, and flight attendants have been unable to get the support needed to hold a vote. But Saretsky said he expects they’ll try again.
“This was the first attempt by pilots and it won’t be the last,” he said. “I expect we’ll have other union runs among pilots and flight attendants.”
Saretsky believes WestJet can address its employees’ concerns internally and convince them they’re better off without a union, however. “There’s an expression that companies get the unions they deserve; you treat your people poorly, you’ll get a union to protect them,” he said.
“We don’t treat our people poorly. But we’ve got a group of flight attendants and pilots who have only ever worked at WestJet and they have no idea what it’s like out there” in unionized workplaces.
“Out there” is something Saretsky thinks about a lot, especially as WestJet expands into new markets that have traditionally been the turf of Air Canada and its regional partners, such as Jazz.
This was the express goal of Encore, the small-market carrier WestJet launched in June 2013. It relies on 78-seat Q400 turboprops to serve markets that don’t warrant the larger 737s: places like Terrace, B.C., Brandon, Man., and Deer Lake, N.L. Like Air Canada with Jazz, WestJet is using Encore planes serving smaller markets to funnel passengers into its major routes.
“Those two sister companies really work symbiotically,” Saretksy said.
“They each feed the other while maintaining their purity of mission, which keeps costs low and allows us to be scrappy.”
Fergio Pugliese, president of Encore, said the domestic regional market is worth about $1 billion annually, but for a long time Air Canada and its partners had a virtual monopoly on many of those routes.
“We looked at that and said, ‘Gee, if we went and tapped into that market, we’d provide enough feed to continue to keep the 737 operation growing,’” Pugliese said. And now Encore will also make it easier for people in smaller centres to connect to WestJet’s new European destinations.
But simply rebooting that original, remarkable WestJet culture hasn’t exactly been easy. For one thing, Encore workers receive less compensation than main line WestJet employees, and the new two-tier structure initially led to some infighting.
“You see some distinct differences between Encore and the WestJet main line in terms of some of the HR practices,” said Seijts, at the Ivey Business School. “That initially created some real friction among WestJetters.”
Seijts said WestJet’s leadership is aware they have to work harder to make their Encore employees feel like they’re part of the team.
Meanwhile, Encore is vowing a rapid rate of expansion. It recently moved into Atlantic Canada and will begin its first trans-border trips in the spring with flights from Toronto and Halifax to Boston. More trans-border routes are com- ing, and Pugliese is also planning new flights to northern Ontario and Quebec.
By 2017, Pugliese expects Encore will grow to a fleet of 45 to 50 planes, up from 23 currently.
He praises his employees, saying they’re providing a “phenomenal” level of service to communities that are used to being overlooked.
“We’re using the same fundamentals that we built WestJet on, the same culture,” he said. “The whole intention behind this was not about starting a fighter brand, this was about strengthening the existing brand.”
When Encore enters a market, Pugliese said airport traffic increases by an average of 60 per cent while average airfares fall 40 per cent. “It just shows you that with the right price you can actually stimulate demand,” he said. Not surprisingly, he calls this the “Encore effect.”
“Encore is like the second coming of WestJet,” Pugliese said. “WestJet started as a regional airline with ultralow costs, and we replicated that.”
Canadians are known for voting with their feet, consistently flocking to the cheapest fares no matter how much they gripe about shrinking leg room or bag fees. But as WestJet proved in its early days, customers also appreciate the sense that the people serving them are happy to be there, and this more than anything else is what creates loyalty.
Anyone can offer low fares — maintaining a strong corporate culture is a bigger challenge.
You see some distinct differences between Encore and the WestJet ... in terms of some of the HR practices. That initially created some real friction.