WestJet targets U.S. with Delta deal

Airlines to co-ordinate schedules, pricing

WestJet Airlines Ltd. is forming a new trans-border venture with Delta Air

Lines to expand its reach into the U.S., part of a diversified growth strategy that will see the Calgary-based airline try to attract more premium customers while also launching an ultralow cost carrier.

On Wednesday, WestJet announced it has entered a preliminary memorandum of understanding to deepen its existing five-year partnership with Atlantabased Delta through a joint venture that will see the airlines coordinate schedules and pricing, expand their trans-border network and provide customers on both sides of the border with access to reciprocal frequentflyer benefits.

At the same time, the pending partnership will give WestJet the opportunity to challenge Air Canada’s dominance in the U.S. market, particularly when it comes attracting premium customers.

“It goes a long way to neutralizing the disadvantage that we have suffered, I will say, over the last decade since we launched service in the trans-border (market),” WestJet chief executive officer Gregg Saretsky said at the company’s annual investor day in Calgary, alluding to Air Canada’s existing joint venture with United Airlines.

“This morning, we are equals, joining with the partner that has a reputation (of having) among the best service levels in the U.S. and around the world.”

Saretsky said the joint venture, which has yet to be approved by U.S. and Canadian regulatory bodies, will allow the airline to capitalize on Delta’s existing partnerships with airlines such as Aeromexico and AirFranceKLM. The airlines will apply for regulatory approvals in the first half of 2018, and said they hope to officially launch the partnership in early 2019.

Edward Simms, WestJet’s executive vice-president of commercial operations, said the joint venture is about more than competing with Air Canada.

“It gives us greater product benefit in terms of the network and it potentially gives us greater insight in how we price for American journeys on both sides of the border and beyond, whether its transatlantic or pacific,” he said in an interview with the Financial Post.

“It’s going to make us a lot more robust as a competitor, but clearly the main thing is increasing choice and range of options rather than potentially damaging a competitor.”

The joint venture memorandum comes as WestJet pursues a diversified strategy looking for growth in both the low-cost and premium markets. The company, which initially began as a low-cost carrier, is focusing on capturing more business and international customers through the introduction of wide-body longhaul service in 2019 and new Boeing 737 jets that feature lie-flat business class seats.

WestJet also plans on launching Swoop, an ultralow cost carrier that will offer fares that are 30 to 40 per cent cheaper than existing prices, but charge for ancillary services including checked baggage. Bob Cummings, WestJet’s executive vice president of strategy, told analysts Wednesday that Swoop plans on targeting millennials, value-conscious boomers and young families.

WestJet said it plans on nearly doubling its fleet as it expands operations, growing from 51 aircraft as of the end of the third quarter of this year to 96 by 2020. The airline estimates that its strategy to target premium customers will see ancillary revenue growth of between $300 million and $500 million through 2022, while pursuing annual cost saving opportunities of between $140 million and $200 million through 2022.

Despite Wednesday’s announcement, some analysts remain concerned about execution of WestJet’s growth strategy. In a note to clients ahead of the investor day presentations, AltaCorp Capital analyst Chris Murray said ongoing unionization efforts among various employee groups at WestJet add to the uncertainty going forward.

“While guidance is trending in keeping with our thoughts and estimates, we remain concerned about execution with so many simultaneous initiatives underway, all in a climate of unease on the labour front,” Murray wrote.

Saretsky told investors Wednesday that it was time the company expand its strategy outside an exclusive focus on the low-cost market.

“We’ve just got to the point where the single brand can no longer fulfil all of the missions that we’re seeking to fulfil,” Saretsky said, adding that the WestJet model is “no longer one-size-fits-all.”

“It’s a model of multiple airlines that are going to be purpose-built to fight in all of the market segments, to be able to do a better job, and win.”