Reference no: EM132216568

WestJet’s Strategy WestJet is a fast-growing Canadian discount airline headquartered in Calgary. It started in 1996 with three used airplanes targeting short trips in Western Canada (between Calgary, Edmonton, Kelowna, Winnipeg, and Vancouver). Clive Beddoe, one of the founders of WestJet, got the idea for WestJet after having to pay exorbitant fares to Air Canada for his frequent flights between Calgary (his hometown) and Edmonton and Vancouver, where he owned plastic manufacturing plants. According to Beddoe, “the key to expanding the market and luring masses of people who don’t travel and those who drive is to charge them bargainbasement fares.” He called this market the “visiting friends and relatives” market. In order to be able to offer low prices, WestJet needed to run low-cost operations. WestJet studied successful discount airlines in the United States such as Southwest Airlines, and copied most of their operations principles. How could WestJet have planned for an operating cost per available seat mile approximately half that of Air Canada? The main principles of WestJet’s plan were: • Short-distance flights. • Single class of passengers (no first or business class). • Purchase only one type of aircraft: Boeing 737. • Fly to smaller cities. • Recruit young enthusiastic employees whose salary is slightly lower than average, but who receive profit-sharing bonuses. • Emphasize “fun and friendly culture” and empower the employees (i.e., bottom-up management). • Use equity financing and tight financial controls. • Use paperless tickets (first in North America to do so). • No connecting flights and no baggage transfers. • No frequent flyer program. To further motivate its employees, WestJet later introduced an employee share purchase program. WestJet has gradually and carefully added to its flights. In 2000 WestJet expanded eastward to Hamilton then to Windsor, Halifax, Montreal, Gander, St. John’s, and in 2002 to Toronto. Now, WestJet has flights to 88 Canadian, U.S., Mexican, and Caribbean cities. The sun destinations flights are seasonal, offered in winter, when travel inside Canada dips. However, this expansion in flights has resulted in WestJet’s flying some medium-distance flights (e.g., to Hawaii), flying to big cities, and performing baggage transfers. In concert with increased flights, WestJet has been gradually adding to its fleet of planes, simultaneously replacing the old 737-200 (with 125 seats) with new next-generation 737s in three sizes: 737-600 (119 seats), 737-700 (136 seats), and 737-800 (166 seats). Now it has 98 next-generation 737 planes, which are 30 percent more fuel efficient. The average age of WestJet planes is only 3 to 4 years now. New planes can be operated close to 12 hours a day vs. 10 hours for the old planes. Clearly, their maintenance cost is lower than the old planes. The new planes have leather seats and individual live seat-back satellite TV for each passenger. WestJet owns most of its planes. Recently, the legroom in the first three rows of planes haves been expanded (these seats have a higher fare). WestJet is not afraid to spend money on useful technology. An example is the installation of blended winglets on the end of the wings of new planes, which will increase lift and reduce drag, thus increasing fuel economy by approximately 4 percent. The approximately $600,000 investment per plane pays back in about four years. Another example is the use of dual boarding bridges in certain airports such as Calgary and Vancouver. This allows boarding and un-boarding from both front and back doors simultaneously, halving the time. WestJet has entered in over 30 interline partnerships with international airlines, 8 of which involve code sharing. it has upgraded its online booking system recently at the cost of $40 million. WestJet has recently started a regional subsidiary called Encore, and uses a handful of Bombardier Q400 turboprops on some flights in BC. Encore plans to expand to the East. Also, WestJet is planning to fly to Europe in the next few years. WestJet now employs approximately 9,700 employees (still nonunionized, but over 85 percent own WestJet shares) and has about 25 percent of the air travel market in Canada. WestJet’s revenue-passenger-miles was approximately 18 billion in 2012 whereas Air Canada’s was 56 billion (including overseas flights). WestJet has one of the best on-time (within 15 minutes of the scheduled time) arrival performances and is one of the most profitable airlines in North America, despite the sharp increase in jet fuel cost in recent years. Its load factor (percentage of seats occupied) has been increasing from 70 percent in the late 1990s to 80–85 percent, and its revenue is over $3.4 billion. Questions 1. What competitive priority did WestJet originally have? 2. How has WestJet kept its low operating costs and increased the utilization of its planes, while growing more than 10 percent per year?