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WestJet’s evolution: 767s, Encore, etc.

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While WestJet is rapidly evolving, the evolution has been relatively cautious.

WestJet, Canada’s second largest airline, was founded in 1996 and for most of its history adhered to a core business model with little deviation. It operated only Boeing 737s in a single-class configuration, steadily expanding in the Canadian domestic market while strategically growing transborder flights to the US and winter services to the Caribbean. Costs were kept low, the operation was clean and simple, and WestJet kept making money.

But the low-cost carrier is not standing pat. In a dizzying pace of activity since the middle of 2013, WestJet jettisoned the pure single-class model and added premium economy seats; launched WestJet Encore, a regional affiliate that operates Bombardier Q400s and has already carried 1 million passengers; launched its first transatlantic service to Dublin; and announced that it has lined up four 767-300ERs for delivery by 2016, to be used first on winter seasonal flights to Hawaii starting in late 2015 and later to “expand overseas markets,” in the words of president and CEO Gregg Saretsky. The 767s will take WestJet into widebody operations for the first time.

And now the LCC largely fashioned after Southwest Airlines is considering bag fees. “We’re thinking about it,” Saretsky said during WestJet’s second-quarter earnings conference call when asked by an analyst about charging passengers for checked baggage. He added, “There are a whole bunch of dependencies here, including on the technology side, that need to come together before we make a decision.”

A decision on bag fees is likely by the end of this year. “We see it as an opportunity to take our fares down,” Saretsky said. “We see this as a big revenue opportunity … I’m very bullish on the prospects for ancillary revenue.”

Saretsky noted that the premium economy product, unveiled last year, is expected to generate more than $80 million in incremental revenue this year, more than WestJet anticipated when it announced the additional seating option.

Encore, which is now operating 13 Q400s with 17 more on firm order, is a big part of WestJet’s growth. The regional carrier is tapping smaller Canadian markets WestJet couldn’t access with its all-737NG fleet, feeding the mainline network. The LCC plans to grow system capacity 6%-7% for the full-year 2014. “You’ve got every Canadian airline expanding,” Saretsky said. “We’re not at the mature state that these US carriers are.”

WestJet’s rapid evolution is partly in response to continued robust demand and partly in anticipation of new competition. Saretsky referenced persistent “rumors” in Canada of new LCC startups. Southwest has now moved beyond the US domestic market and is eyeing Canada as part of its future route network. And Saretsky noted that US ultra-low cost carriers Spirit Airlines and Allegiant Air don’t even have to operate to Canadian airports to pose a threat. Just by operating flights with extremely low fares from cities near the Canadian border, the ULCCs are enticing Canadians to drive across the border.

Even with all the changes, Saretsky emphasized that WestJet won’t stray from its fundamental business model, which he described as “staying lean, keeping fares low and creating a remarkable experience for our guests,” i.e. passengers.

Indeed, while WestJet is rapidly evolving, the evolution has been relatively cautious. Encore spent its first year focusing on western Canada, the market Calgary-based WestJet knows best. Only now is it slowly entering eastern Canada. While WestJet is now offering premium economy seats, it does not have a business class section on its aircraft and, according to Saretsky, is not considering adding a business class, even on the 767s.

The 767s themselves represent a restrained step into widebody services. The airline could have placed a splashy—and expensive—order with Boeing or Airbus for 787s or A350s, but instead will start widebody flying operating used aircraft on seasonal flights to Hawaii, a proven winner in Canada in the winter. And while the transatlantic flight to Dublin was a bold step, it is just one flight. WestJet didn’t suddenly try to start competing with Air Canada on flights to Paris and Amsterdam.    

The biggest indicator that WestJet’s new initiatives are succeeding is the bottom line. The carrier just reported its highest-ever second-quarter net profit—the 37th consecutive quarter it has been in the black and the eighth straight quarter it has exceeded its 12% return on invested capital (ROIC) target. “We’ve got some good momentum and we’re going to keep our foot on the accelerator,” Saretsky said.

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