WestJet aiming to get back on track with tiered strategy
WestJet Airlines Ltd. TORONTO built its business on a simplified offer of low fares and no business class, but two decades later it’s betting on a more traditional structure of premium prices and segmented seating to help it recover from a year where its profits nosedived.
Executives from the Calgary-based airline presented their turnaround plan at an investor conference in Toronto on Tuesday after missing 2018 financial targets, blaming WestJet’s troubles on high fuel costs, aggressive competition, labour strife with its pilots and higher-than-expected startup costs for the new Boeing 787 aircraft. These factors led to WestJet’s first quarterly loss in 13 years in the second quarter.
Despite the challenges and the admission that it went “off track,” WestJet expects its tiered strategy will take off in 2019 and beyond. It released performance targets for the next four years described as “ambitious” by BMO Capital Markets analyst Fadi Chamoun.
It expects compound annual growth rate of 40 per cent between 2019 and 2022 and a return on invested capital of 13 per cent by 2022. These targets are largely revenue dependent and include heavy investments, Chamoun said in a research note.
But executives were confident they’re pursuing the right strategy.
“We think there’s a huge amount of upside in premium cabin revenue,” said John Weatherill, WestJet’s vice-president of revenue management and pricing.
WestJet will now compete for higher-end customers that were previously “uncontested profit generators” for its primary competitor, Air Canada, Weatherill said.
It predicts revenue per available seat mile, an important industry metric, will grow between two to four per cent next year thanks to the introduction of branded fares across all routes, where customers will pay extra for the privilege to cancel a flight, change an itinerary, get extra leg room or fly in business class. It will also revamp its loyalty program to include a higher tier with more rewards.
It’s a big change for a brand that five years ago advertised one cabin, one fare type and one loyalty card. But customers appear to be open to the idea of premium pricing, with the percentage of clients choosing higher fares rising to 32 per cent in November from six per cent when WestJet introduced the concept in the first quarter, Weatherill said.
It will also change its partnership strategy to focus on fewer, deeper relationships to attract business passengers that demand frequent flyer benefits that are recognized by global partners.
Still, WestJet has a way to go before it can take on Air Canada in the business segment. Only two of its planes have business sections so far, although it plans to retrofit its entire fleet of 174 jets over the next 18 months, CEO Ed Sims told investors. Its planes will start with only 16 business class seats.
This upgrade, alongside the purchase of expensive Boeing 787 jets, means higher capital spending of about $1 billion per year for the next three years. While the airline is buying fewer jets, the aircraft it plans to purchase are pricier and designed for long-haul routes. It will fund half of its 2019 capital spending by selling and leasing back the first three 787 Dreamliners.
WestJet expects to maintain its cost per available seat mile. This metric is slated to remain flat or grow up to two per cent, excluding fuel and profit share costs.
WestJet also expects to keep costs lower with Swoop, its ultra low cost carrier that charges for everything from drinks to carry on bags. It estimates it will eventually be able to get up to $40 per passenger in ancillary revenue.
While executives took an optimistic tone, Wolfe Research analyst Hunter Keay questioned the strategy if the economy falters, fuel costs skyrocket and WestJet finds itself off track again.