Call it a split personality. Calgary-based WestJet is set to expand in the next few years and it is doing so in two very, very different ways. A new premium product will soon be flying on 787-9 Dreamliner aircraft while some of the company’s 737-800s are converted to a high-density configuration to operate an Ultra Low Cost Carrier within a carrier model. It is all sorts of interesting.
For the long-haul product the company offered a bit of insight in today’s earnings call as to what the product will be like and where it will fit in the broader market. For those hoping to find a cheap option for flat-bed service, perhaps even a Basic Business offering, this does not appear to be that. Company executives spoke to the challenges around pricing the product, generating sufficient revenue for the on-board real estate consumed and even the premium ground handling services that business class passengers expect. Those are all things WestJet will have to learn in the coming months as it prepares for the 2019 deliveries of its 787s.
Ed Sims, EVP Commercial chimed in with a few choice comments during the call:
The trick with those premium cabins is measuring the amount of real estate taken by a seat relative to the quantum of the revenue that we can establish.
The math on the forward cabins is looking extremely attractive. We’re buying the best quality product available in the market, both in the premium economy and lie-flat business area that will get that exponential multiple of revenue compared to the real estate.
We’ll have the Premium Economy cabin and that will be priced at a value price point. The business class cabin will be charged at what others are charging for business class.
We’re not going to build a bespoke product and then give it away. That’s for sure.
Perhaps most surprising to me in the earnings call was not that WestJet plans to price business class on par with existing competition (though I expect a small discount from the new entrant) but that executives see their independence from any alliances as a means to derive better yields from the product. At one point in the call Sims suggested that the lack of partners is beneficial in yield:
Not being aligned into an alliance, we don’t have to accept low value upgrade traffic from other carriers. We get to choose who goes into those cabins and what fares and what value we establish for those cabins.
And for the life of me I cannot figure out what brought about this statement. Where alliance upgrade programs do exist they are spectacularly rare. Star Alliance has the most robust version and it requires buying the most expensive coach tickets on a native flight number, meaning high revenue to the operating airline. Plus the upgrade inventory is controlled by the carrier so it doesn’t have to release any more than it wants, especially to partners.
ULCC wrapped in an LCC
It is an airline, wrapped in an airline, a riddle, wrapped in a mystery, inside an enigma, and then wrapped in bacon. But it’ll be Canadian bacon so I’m not sure how well it will taste in the end.
The new ULCC arm of WestJet has been somewhat perplexing since it was originally announced. Even with much lower costs than Air Canada, the primary competition, WestJet wants to cut more. Rouge likely affects the play, particularly focused on leisure traffic destinations, but Rouge is a LCC play, not ULCC, and there are (at least in theory) some differences.
Today’s call unveiled some even more bizarre details about the operation. The new ULCC fleet will consist of 10 737-800 aircraft in a high density layout. We knew that was going to be the fleet so not too surprising that is holding, but the launch of the ULCC is delayed. Tickets are expected to go on sale in early 2018 for a Summer 2018 entry in service. Only a slight surprise there. The executives spoke to targeting the summer travel season as “the optimum” time to launch the ULCC, arguably conflicting with statements earlier in the call about the rebound in the Alberta economy and the bump in winter snowbird traffic expected this year, but I’ll run with that theory.
What makes very little sense to me is running a wholly separate reservations system for the new carrier. But that’s one of the factors cited by executives in the delayed launch.
Once you make a reservation system decision that says we’re going to use something different than using our existing res system that adds some time to negotiate an agreement and the physical implementation…So we’re taking our time to get it right.
Running a wholly separate system means creating feed between the two halves of the airline are much more difficult. It makes integration with existing partners and the loyalty scheme more challenging. It means additional training for agents to manage two separate operations or increasing headcount to have separate agents working the two airlines for reservations or airport ops. In short, it adds a lot of soft costs along the way. It may be cheaper in hard costs up front, but I wonder a lot about the decision there. Maybe this is the proving ground to ease the legacy WestJet operation into a new PSS platform or maybe it is just a one-off move. But that caught my ear during the call and I find it intriguing in many ways.
Header image courtesy of WestJet
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