BUSINESS

WestJet Regional Airline May Be Reality As Early As 2013

01/16/2012 09:07 EST | Updated 03/17/2012 05:12 EDT
CALGARY - WestJet is considering launching a new short-haul regional airline — a move observers says would intensify competition with its chief rival, Air Canada and benefit travellers.

Few details were available on the proposed regional operation, other than that the Calgary-based company is thinking about launching it as early as 2013 using a fleet of approximately 40 smaller, turboprop aircraft.

"It's going to represent or extra competition in many communities across the country where Air Canada's the only game in town," Robert Kokonis, president of AirTrav Inc., said Monday.

"So this does represent a material and significant new level of competition to many communities — communities where, perhaps, they would love to have the WestJet brand in place."

The airline industry is already ultra-competitive and WestJet's potential move means it would be jockeying against Air Canada for customers in markets where, to date, it hasn't had much of a presence.

"I think consumers are going to win," said Kokonis, citing Hamilton as a market where WestJet could build up a formidable presence.

The move would be a departure from WestJet's strategy of having a fleet comprising only Boeing 737s — its "secret sauce," as management has called it in the past. Having only one type of plane means cheaper and simpler training and maintenance than its competitors.

However, that business model doesn't give WestJet the flexibility it needs to grow into new markets. The 737s carry between 119 and 166 passengers — too big to shuttle business travellers between destinations as frequently as they demand and too small to fly overseas.

"From a business point of view, it's an evolution of the model," said aviation consultant Rick Erickson.

There would be higher costs associated with introducing a second type of aircraft to its fleet, but Erickson said smaller markets like Cranbrook, B.C., or Lethbridge, Alta., would be very lucrative for WestJet.

"There's more revenue to be had, and Air Canada basically has that entire marketplace to itself, all across the country," said Erickson.

"There is no other national transcontinental competitor to Air Canada's overall network in the regional markets. It's all theirs. No one else flies it."

"If I was Air Canada, I might be a little bit concerned about this."

WestJet's next step is to run the idea past its employees, who are, of course, also shareholders.

"One of the cornerstones of our success is engaging with employees early on in key decisions and I am confident they will see the strategic value of this initiative," said CEO Gregg Saretsky in a release.

He said the company has regularly evaluated the idea in the past, saying a short-haul aircraft combined with WestJet's brand, balance sheet strength and low-cost structure would allow it to profitably accomplish a number of goals.

Among other things, it would allow WestJet to fly to many smaller communities and optimize the size of aircraft to efficiently increase frequency. It would also create new connections between existing WestJet markets.

"I am excited at the prospect of repeating the entrepreneurial success of WestJet's beginnings," added Clive Beddoe, WestJet chairman and a principal founder of the company.

WestJet's current fleet of 737s would be joined by "a sister company operating a single fleet of turboprops to maintain maximum efficiencies for both airlines," Beddoe said.

Both Kokonis and Erickson said they wanted more details of what kind of relationship exactly the regional airline would have with WestJet proper.

"The operation of two separate airlines may constitute a distraction from what has been, up until now, a clear and profitable focus on the execution of a single airline strategy," said Kokonis.

"The airline sector is complex enough and we have to wonder whether the complexity of executing on a multiple-carrier operation may sacrifice some of the upside that could be, or should be, afforded by what will be a beneficial entry by turboprop service to short-haul markets."

National Bank Financial analyst Cameron Doerksen agreed adding a regional airline would increase the complexity and cost of operations, but noted there was strategic value to establishing a regional operation.

"The addition of smaller aircraft to its network will allow WestJet to optimize frequency on existing routes, create new connections between existing WestJet cities, and provide more regional feed for existing routes, especially to U.S. and sun destinations," Doerksen wrote in a note to clients.

"We believe that a regional airline with WestJet’s cost structure and culture of efficiency would be very competitive on costs versus its main competitor."

Doerksen estimated that a 40-plane fleet of Bombardier Q400s would cost less than $800 million, spread over several years.

WestJet currently offers scheduled service to 71 cities in North America and the Caribbean.

The company's stock fell 14 cents or about one per cent Monday to $11.66 on the Toronto Stock Exchange. Air Canada A shares dropped three cents or nearly three per cent to $1.05.