WestJet (A Low Cost Carrier) Is Launching A New Ultra Low Cost Carrier

All airlines have been adjusting their business strategy as they’ve faced increased competition, both in shorthaul and longhaul markets. For example, Air Canada has Rouge, which is a low cost carrier with tighter seats, fewer frills, crews on different (cheaper) contracts, etc. It allows Air Canada to compete more effectively in markets that traditionally have lower yields.

Air Canada Rouge aircraft arrives in Toronto Pearson Airport on June 5, 2013

Over the years we’ve seen quite a few airlines start their own low cost carriers, but there’s something especially interesting about an announcement that come out today. WestJet, Canada’s second largest airline, which was founded as a low cost carrier in 1996, announced that they plan on launching an ultra low cost carrier by the end of 2017. The new airline will initially launch with 10 high density 737-800s. Here’s how WestJet describes the new airline:

“We have built WestJet from its low-cost, regional roots into a renowned, international airline with service to 21 countries and today it’s all about disrupting at the price-sensitive end of the market,” said Clive Beddoe, co-founder of WestJet and Chair of the Board of the Directors. “Launching a ULCC will broaden WestJet’s growth opportunities and open new market segments by offering more choice to those Canadians looking for lower fares.”

“The worldview on low-cost airlines has changed since the launch of WestJet in 1996 and we are responding,” commented Gregg Saretsky, WestJet President and CEO. “The complete unbundling of services and products in order to lower fares for the price-sensitive traveller has created the ULCC category and our new airline will provide Canadians a pro-competitive, cheap and cheerful flying experience from a company with a proven track record.”

westjet-767

As it stands, WestJet offers free soft drinks in economy, has decent legroom, charges for seat assignments, and charges for checked bags on discounted fares. So on the surface it’s a bit puzzling that they want to start an ultra low cost carrier, given that their biggest competitors will be Air Canada Rouge and… WestJet.

It seems that the idea is to completely unbundle their fare structure and make this as no-frills as possible, so I imagine:

  • They’ll reconfigure their 737-800s with around 190 seats (they presently have 168 seats, but the max seems to be around 190, as that’s what airlines like Ryanair have)
  • They’ll hire employees under separate contracts with a lower pay scale
  • They will charge for everything onboard, including water, soft drinks, etc.
  • They’ll not only charge for checked bags, but also carry-ons
  • They won’t have WestJet Plus, which is basically economy with a blocked middle seat and a bit more legroom, as well as free food and drinks

WestJet-Plus

I can’t really think of many other revenue opportunities for the new airline. On one hand this seems like a gamble for WestJet, since they’re potentially cannibalizing their own yields. Perhaps they plan to launch this first in markets that are served by Air Canada Rouge. On the other hand, on the surface you’d think they would first try to unbundle their own fares more by introducing the equivalent of “basic economy” fares, as we’ve seen in the US.

It’ll be interesting to see if this decision pays off. While we’ve seen lots of legacy carriers introduce low cost carriers, a low cost carrier introducing an ultra low cost carrier is a rarer concept.

Big picture, what this all comes down to is how elastic the demand for air travel is. Do ultra low cost carriers in developed countries disproportionately increase the demand for air travel, or do they simply offer consumers lower fares? We know that the number of people traveling is growing significantly, but how much of that can be attributed to ultra low cost carriers rather than other factors, like more fuel efficient planes, a growing middle class globally, etc.

What do you make of WestJet launching an ultra low cost carrier?

Comments

  1. Point of information – 190 seats on a 737-800 is not possible. The type certificate is only for a maximum of 189 seats.

  2. It’s possible WJ is looking at this being their core business model moving forward, if successful.

  3. As Heather mentioned newleaf is the main source of ULCC competition and there is another ULCC carrier that has been planning to launch out of Vancouver called Jetlines. So reactive to newleaf (although WestJet already has by launching flights to Mesa Arizona which pushed out newleaf before they even started their Mesa routes) and proactive to Jetlines

  4. Why are they doing this? You answered it here: They’ll hire employees under separate contracts with a lower pay scale

  5. Westjet is NOT a low cost carrier. It may had been founded as one, but today Westjet is a regular carrier just like Air Canada with fares mostly identical to Air Canada.

  6. This is a cannon aimed directly at NewLeaf and other planned startup ULCCs in Canada. There will a couple token standalone routes, then everything else will be in direct competition with competitors. It will remain in existence as long as there is a threat of new competitors stepping up.

  7. Echino is right. Westjet is a low service airline at a standard price point. They started low cost, but now they match Air Canada’s prices as a duopoly on all major routes, and have for over a decade. Their main competitive advantage in their current market is, “we’re not Air Canada”, which is losing steam in the face of Newleaf and the potential startup of Jetlines.

  8. I suspect they’re preparing to join an alliance. They’ll add a more ‘real’ Premium cabin to mainline Westjet, so they can function properly in Oneworld or SkyTeam (my money’s on OneWorld), but their junior line will have recliners up front (Premium Economy for international flights, “business” for domestic, as Rouge does).

    Canada has only one carrier in an alliance: Air Canada (StarAlliance). Westjet already codeshares with numerous partners but it’s always been nobbled by the absence of a Premium cabin. Westjet has always been at a disadvantage in that it doesn’t get the travellers that play the Points and Miles game, doesn’t get premium business travellers, doesn’t get Alliance benefits. Their route network and schedule are robust, so they have a lot to offer an Alliance.

  9. Newleaf and Jetlines. Will see how it plays out. People in Canada tend to have a high regard for WS service (think JetBlue) so having their brand associated with something like Spirit will be interesting.

  10. i don’t see the value of WS anymore. When they’re charging the same fares as AC, the consumer is coughing up just as much dough without any benefits of frequent schedules or an alliance.

  11. Can we bring our own oxygen so we can breathe on the plane or we have to buy from them before they close the doors?

  12. AC Rouge was the best marketing scheme I’ve ever witnessed and I assume that now WS wants a piece of that too.
    AC created Rouge by converting mostly old aircraft (not all) to higher density without J, stepping down the service, and converting almost all leisure destinations to this new brand. It’s a low-cost carrier, except the cost is the same as it was when the routes were legacy AC! So basically they invested some money in the conversion and now they generate more revenue per aircraft (more seats) while maintaining similar expenses. And we suckers keep paying the premium on this sub-par product.

  13. Plenty of revenue opportunities:

    1) A booking fee
    2) A payment type fee (credit card, debit card, paypal)
    3) A printing-your-boarding-pass-at-the-airport fee
    4) A “personal assistance” fee (e.g. a FA helping you label your bag)
    5) A seat selection fee
    6) An extra legroom fee
    7) A carry-on/overhead bin fee
    8) A underseat storage fee
    9) An on-board bathroom fee
    10) Beverages for sale
    11) Snacks for sale

  14. Great quick analysis Lucky. Spot on. My guess is that Westjet may also transform into more of a traditional carrier as well.

  15. I wonder if Westjet is going to capture more of a premium market and perhaps unveil more business class like seating.

    Lucky, I would love a review of Westjet now that you can book them through Delta miles.

  16. I feel like buying a 737 with 189 seats and bolting a folding chair to the floor just to see the look on Sean M.’s face.

  17. My hope is the governments start banning ‘you’ fees- aka airlines charging us for -their- problems. I’m all for unbundling, but we gotta talk about some of these-

    1. Booking fees / Payment Fees –
    Booking / Payment are kind of essential to what an airline does. Charging me a fee to take my money and do business with me makes zero sense. That’s a -you- fee.

    2. Water Fees –
    As long as there’s a TSA Liquid ban, at least drinkable water should be required to be provided free onboard. I can live without a coke, but it’s not cost effective to have potable water tanks, that’s a -you- fee for bringing bottles of water onboard.

    3. Print-your-ticket fees-
    Spirit charges $10.00 , Frontier charges $5.00 . Unless they’re printing it with unicorn blood, the correct cost should be closer to 50 cents, which is still 5 times what Kinko’s charges. Again, that’s a -you- fee.

  18. The other way low-cost airlines have cut costs is to fly to “regional” airports. Southwest used to fly into MacArthur (Islip), not JFK or LGA; SkyBus flew into Stewart of the standard NY airports, and into Gary, Indiana instead of ORD or Midway.

    This is the same technique used by RyanAir. They fly flights out of “Paris” that don’t use CDG or ORY, but use Beauvais-Tillé instead.

  19. Matter of time before WS realised their 174 seat 73H couldnt compete with TS or WG 189 seat aircraft. 189 is type certificate max for NGs.
    Startling coincidence that their “main line” pilots just applied to join ALPA. Can the F/A be far behind?

  20. The westjet pilot’s association filed union cards for ratification with the CIRB today. This announcement was simply an effort to bust up the union organization efforts or, failing that, then to shift existing aircraft to a new operating certificate and hire new staff at ever lower wages. Business analysts should really investigate this aspect of the announcement.

  21. The westjet pilot’s association filed union cards for ratification with the CIRB today. This announcement was simply an effort to bust up the union organization efforts or, failing that, then to shift existing aircraft to a new operating certificate and hire new staff at ever lower wages. Business analysts should really investigate this aspect of the announcement.

  22. I won’t fly on an airline that charges to use the rest room. First of all it discriminates against those with small bladders and drinkers, whom are paying too much for alcohol anyway. Ryan air, as well as, Spirit has ruined people’s holidays by being cheap. Ryan air has actually put lives in danger by not filling up with enough petrol. Scared my young daughter to death over Spain.

  23. Ed,
    Nice list, but Ryanair has it focused down even further.
    They sell their own lottery tickets and perfume and “duty free” junk…and push the stuff relentlessly the whole time you are one the plane. Not just one ‘opportunity,’ but four lengthy hardsells per 90 minute flight.
    “We have a winner here in Row 12, a twenty-five pound voucher for any Ryanair flight!” Oh, you’ve won before! Wonderful! What a lucky lady.”
    They take meal orders as the plane taxis out and “serve” the meal to you in a microwave heated box just by passing it over the crowd with a plastic fork and spoon. It was too hot to even hold much less eat. Oh well, we’ll just take that for you; order something different next time.
    I wouldn’t worry about being charged to use the toilet. There was so much commerce going on with so many attendants (sellers) there was not a hope in hell of getting to any toilet or even having a line form.
    Btw, Ryanair outsources locally for people to look at your boarding pass. They know nothing about anything; just push you onto the plane and that not very well. My last trip on Ryanair, after one ground person made us all line up by seat number, someone else came along and made the brilliant decision to help one person on board (he did need a lot of help) in the front and have the other 188 people enter from the rear. What chaos.
    Oh there are a lot of opportunities to make money by charging less and to make flying fun in the process.

  24. My fear, being a huge WS fan and user is it will eventually become Rouge all over again. No cheaper for a cramped seat and poor service. Then they will run all the sun flights (LAX, LAS, PHX etc) from their YYC hub through the crap airline and no longer have the choice to fly the “regular” WS. Bummer

  25. Nobody has mentioned Air Transat. That’s the real competition for Rouge, though AC has now “Rouged” a bunch of not-really leisure destinations e.g. YYZ-SAN. So yes, NewLeaf and Jetlines are part of it, but their capacity is tiny. Competing with TS is the real driver behind both AC Rouge and to a great extent this move by WS. Pure leisure airlines like TS are not typically on the radar of the miles-and-points set – they don’t offer any, let alone showers in the sky 😉 – but TS represent a ton of capacity transatlantic in the summer and southbound in the winter.

  26. @ Stuart — Well many airlines have tried to create unique brands/low cost carriers. But the reason it doesn’t make as much sense is because airlines operate the planes themselves, and own/lease them directly. Meanwhile the hotel business is more about franchising/management, so their goals are different.

  27. WestJet is a limited-service airline, not low-cost. They try to compete against Air Canada’s economy class (though I greatly prefer AC).

    People regularly call it low-cost, but the only difference is they do not have business class.

  28. You are looking for reasons to launch an ULCC in Canada? Compare the price of the short hops between YUL and YYZ and prices offered by European (true) LCC for similar flights! There is room to lower the prices and generate new demand!! And as mentionnes above AC Rouge is mainly competing with TS (transatlantic and winter south routes). TS has very few flights between Canadian cities. There is no real LCC for domestic flying!

  29. Three points:

    1) Before Rouge there was Tango (was an airline within an airline, now a fare class);
    2) No one seems to have worked out that you could charge for OLCI;
    3) Low cost doesn’t necessarily mean low price.

    Friends don’t let friends fly Wetjet.

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