WestJet new direction with ULCC integration

[Aviator12]

Interesting article written by Alexis on why the Swoop ULCC integration into mainline. Basically every aircraft will now fly business, economy and ULCC passengers on the same flight.
His example of a yyc-yyz flight cost was surprising to me. $320 per seat in fees and fuel. That’s before the crew and aircraft payments are made. Gotta wonder the long term sustainability of ULCCs in Canada…

https://www.linkedin.com/pulse/how-prov ... wLww%3D%3D

WestJet's decision to integrate Swoop

Written by Alexis von Hoensbroech, CEO WestJet Group

WestJet entered the Canadian aviation market in 1996 on the promise of making flying more accessible and more affordable, with remarkable success. When WestJet joined a market, Canadians saw air fares cut in half and the number of people travelling grew by 50%.

As WestJet grew to serve more diverse guest segments, we pioneered a new venture to establish the first pure play, ultra-low-cost carrier (ULCC) in Canada under the brand of Swoop, just over five years ago.

In many ways, Swoop was a great success. As the first to market, Swoop quickly built up to 16 aircraft. Swoop met cost projections and had an unbeatable cost per available seat mile (CASM excluding fuel) of less than six cents. Swoop pioneered the no frills product in Canada and was best in class in generating ancillary revenues. It had a young fresh brand, a passionate team and was loved by its travellers. It achieved its ultimate objective, to make air travel super affordable for the most price sensitive of Canadians.

So why did we choose to integrate Swoop into WestJet?

The ULCC business model

I’ve been working in Europe for most of my career and have seen the extremely successful spread of ULCCs across the entire continent, offering super low fares from anywhere to everywhere. They operate a simple and robust business model of one aircraft type, high aircraft and crew productivity, and high-volume point-to-point flying, often from secondary low-cost airports. This allows them to offer super low fares that stimulate incremental travellers, making it a commercial success. At first glance, it appears obvious that the same should work in Canada, so why wouldn’t WestJet continue to be at the forefront of this.

After operating in the Canadian ULCC space for five years with Swoop, we have real-world experience and can now recognize a few remarkable and structural differences in this domestic market.

High Infrastructure cost to operating an airline in Canada

Have you ever wondered why $39 tickets in Canada are not the norm like in Europe? Have you ever wondered why not even one American ULCC is flying to Canada?

A major barrier to stimulating air travel is Canada’s high structural cost, that every flight must cover, irrespective of the business model. Canada is one of the most expensive places to operate an airline. Fees, taxes and charges for airports, air traffic control, security and other shared services are among the highest of any country. Since flights in Canada are usually long, the fuel bill is also much higher than in Europe or in the US.

To buy a return trip from Calgary to Toronto on one of our Boeing 737-800s, as an example, your ticket is burdened with $70 in AIF, $28 in landing and terminal fees, $30 in provincial GST/HST, $22 in NAV Canada fee, and $14 security fee (this doesn’t even account for other infrastructure fees such as loading, apron usage, de-icing, slot administration, and more). This adds up to more than $160 at minimum for just using the infrastructure. A comparable trip infrastructure cost in the US would be around $80. On top of this, the long flight distance adds another $160 fuel costs per passenger at current fuel price. So, the first $320 of your ticket is already accounted for before an airline even starts paying for aircraft, crew, or any other service the airline provides. It is very tough to run a pure play ULCC that needs to stimulate traffic if the floor price for operating profitably is so high.

It is an interesting observation, that American legacy carriers like Delta or United frequently fly to Canada, as their business model can support high infrastructure fees. However, not a single American ULCCs like Frontier, Spirit, or even Southwest dares to fly into Canada as this would impede their cost centric business model. Instead, they fly into US airports that are close to the Canadian border like Bellingham, WA or Buffalo, NY. In doing so, they can attract Canadians willing to drive across the border to those airports, while avoiding the expensive Canadian infrastructure fees.




Pictures taken from space at night nicely show the difference in population in Canada vs. Europe
Canada’s vast geography and low population density

The European Union covers 450 million inhabitants on a geography that is not even half the size of Canada. This creates thousands of high demand city pairs that airlines can serve. Canada, with its 40 million inhabitants on the other hand, has just eight major population centres, which allows for only a small number of high demand routes you can serve on a frequent basis with a large jet aircraft. All of these markets are actively well served by strong and competitive airlines.

The average flight length in Europe is just one hour, which favours a business model of quick turnarounds that allows a ULCC to squeeze in one or two additional flights a day to increase asset utilization. Canada’s geography requires around 2.5 hours of average flight time, which leaves far less room to use fast turns to accumulate sufficient time to squeeze in additional flights. This impedes one of the fundamentals in the ULCC business model.

Difficulty to stimulate demand

The European population density allows for people travelling on many modes of transportation, such as cars, trains, busses, and planes. A lot of the stimulation from ULCCs in Europe comes from poaching passengers from cars, trains, and busses into the air. Canada in contrast already heavily relies on air transportation with almost no public ground transportation options across most of its geography, so it lacks this uber important source of stimulation.

Another source of stimulation for European ULCCs is offering super low fares from secondary airports and thus attracting passengers willing to drive from cities a few hours away. In Europe, this usually gives you a catchment area with 10 million or more inhabitants, no matter where your airport is located. This is very different in Canada, where the next major population centre is often a full day drive or more away.




Future: WestJet will segment its guests within all its aircraft and not across different airlines
Canada is special - and needs a special ULCC approach

So, what’s the solution for all those Canadians who are looking for ultra-affordable fares?

The answer is a flexible product onboard every aircraft. Instead of deploying just 16 ULCC aircraft, WestJet will offer a ULCC product on all 180+ of our airplanes. We will densify the back part of our 737 aircraft to distribute costs across even more seats, allowing us to charge a lower fare. At the same time, we will maintain the premium cabin at the front and expand the number of extra legroom seats in economy class. This lets us offer more differentiated products to our guests aligned with their preferences.

As an example: Swoop has been operating a daily ULCC flight from Kelowna to Toronto with 189 seats. Given the market size of Kelowna, there are not 189 people every day looking to fly this route for a super low price, but there may be 60 price seekers. At the same time, there are many retirees living in Kelowna who prefer a higher level of comfort and service. Today, these guests have to settle for a no-frills product on Swoop, connect on WestJet through Calgary or fly on a competitor. In the future, we’ll accommodate all preferences onboard the very same aircraft: ULCC at the back, more comfort and service in the front.

WestJet has the largest narrow body aircraft order book in Canada, with up to 80 Boeing 737 MAX aircraft arriving over the next five years, most of them in the largest MAX10 version. The MAX10 will have 212 seats making it, by far, the lowest unit cost of any midrange aircraft in the Canadian market. This will allow us to offer the lowest fares in the market, while still maintaining a viable business model in this very special Canadian geography.

Given future fleet plans, WestJet is well positioned to serve the ULCC market in Canada. For comparison, the US market currently supports 350 aircraft worth of ULCC flying. Canada, being a tenth of the population size of the US, in theory could support 35 ULCC aircraft, everything else being equal. By offering a ULCC product in the back of every WestJet aircraft, we can easily provide a net ULCC capacity worth that much, providing plenty of ultra-affordable fares to all Canadian markets in a way that is more conducive to growing this segment over time.

We have turned a corner as we see demand and profitability returning. The strength of our business is robust, and WestJet is unrelenting in our commitment to increase affordability of air travel in Canada, just as we have done for the past 27 years. We are grateful for all that we have learned from five years of operating our Swoop business. We will transfer all that was good at Swoop into WestJet to create the best of both worlds. And as we significantly grow our capacity in the coming years, we look forward to seeing more Canadians on board our aircraft, no matter where they chose to sit.

[sstaurus]

He left out the part where the real reason for swoop was to attempt to restart salaries and implement a B-scale. Glad to see it failed.

[dontcallmeshirley]

New direction? Getting in line with DL/AF to eventually have 49% bought out by them and become DL/AF/WS.

Dumping the ULCC.

Going 3-class.

No more "Spirit of Canada."

[FL410AV8R]

He left out the part where the real reason for swoop was to attempt to restart salaries and implement a B-scale. Glad to see it failed.

Yup. It took 4 years of pain and BS but I too am glad the reset attempt spearheaded by a specific individual failed. Alexis has said in this article exactly what the pilots and their representatives have told him, when he arrived on the scene, and his predecessors since Swoop's inception. Thankfully RevengeJet is no more and Alexis and his executive team seem much more willing to work collaboratively with ALPA and the pilots as opposed to fighting us at every step.

[dontcallmeshirley]

Yup. It took 4 years of pain and BS but I too am glad the reset attempt spearheaded by a specific individual failed. Alexis has said in this article exactly what the pilots and their representatives have told him, when he arrived on the scene, and his predecessors since Swoop's inception. Thankfully RevengeJet is no more and Alexis and his executive team seem much more willing to work collaboratively with ALPA and the pilots as opposed to fighting us at every step.

It's a good thing that we'll be able to put your theory to the test in the next three months as Encore negotiates their new contract.

[MontrealCanucks]

ALPA killed Swoop

RIP

[dontcallmeshirley]

ALPA killed Swoop

RIP

Bullshit. Swoop was created to undermine employee wages. It has succeeded in screwing pilots for two contracts. Now that they have Sunwing, Swoop is no longer required.

[YYT_Dill]

It's seems unlikely that ALPA single handedly killed swoop.

What appears to be most probable is that Swoop was already struggling financially with unwanted negative customer brand damage to WJ and the company saw an opportunity to unload it without taking press for a poor executive decision. It's better to seem amenable to the pilot group than admit the board led the company down an empty wishing well.

That's not to say ALPA didn't have it as a top priority, which I'm sure it was, but it was also a company trading chip for wage concessions. To a moderate extent win-win.

Nevertheless, may the Magenta abomination rest in peace until they bring it out of retirement in 2028.

[rooster]

Alexis is a t*at. Hope he gets booted.

[dontcallmeshirley]

Alexis is a t*at. Hope he gets booted.

And then there's Diederik with his history at Wizz Air...

And Alex Cruz, a new member of the board of directors with his history at British Airways...

And Christoph Mueller, another board member with history at Malaysia Airlines... admittedly not nearly as concerning as the above two.

[CaptainHaddock]

ALPA and the pilot shortage killed Swoop, not ‘costs and finding synergies’. All the crap (fees, costs) he talks about didn’t just magically appear with Swoop, they were fully aware as they were already running an airline.
In the initial Swoop roadshows GGG actually said they figured Swoop would cost WJ about a million a tail to operate, he was not a Swoop supporter either and was ‘retired’. WJ board got rid of Swoop because it was collapsing on itself do to crew shortages, which was due to the ridiculous contract they were able to get out of arbitration (great enticement during a pilot shortage). That, and faced with great solidarity in the pilot group, good negotiators and MEC/LEC killed Swoop-the CEO is just talking smack after the fact. It was totally about punishing the pilot group for certifying and creating a ‘B’ class along with the past 5-6 years of brinkmanship and petty fights. Hopefully that is behind us.

[billhill]

This is hilarious. People in Canada are financially illiterate. I do not in any way defend Westjet or Alexis. But the numbers are the reason. It makes no financial sense unless you are running a money laundering/tax write off business. And that has been done/ is done. But there is no question that a ULCC as per the European or US model cannot work in Canada. So bring on the wailing about Flair, etc. And then refer back to money laundering/tax write offs. It is an old story.

[tbaylx]

This is hilarious. People in Canada are financially illiterate. I do not in any way defend Westjet or Alexis. But the numbers are the reason. It makes no financial sense unless you are running a money laundering/tax write off business. And that has been done/ is done. But there is no question that a ULCC as per the European or US model cannot work in Canada. So bring on the wailing about Flair, etc. And then refer back to money laundering/tax write offs. It is an old story.

The level of fees reflects the final ticket price. To argue that a ULCC model doesn't work because fees are higher in Canada is missing the whole point. The ULCC model isn't to sell a ticket at XX $$ and if you can't then the whole model is broken.

In Canada, all airlines pay the same fees. The variable is the other costs. A ULCC has lower costs than domestic competitors due to a simplification of the business. One fleet type, high-density seating, higher ancillary revenues, no business lounges etc.

Since fees in Canada are higher than Europe and USA then Canadian ULCCs will naturally have higher ticket prices than Ryan Air or Spirit. But they'll still have lower costs and ticket prices than their Canadian non-ULCC competitors, and the public generally shops price.

[billhill]

Apples to oranges..it's different here... there is no ulcc in Canada..period.. just cut rate operators losing money hand over fist..has been that way since WardAir started breaking it open, then Nationair, Worldways, Transat (they are different because they realised the money was in the vacation package) and a flood of others who are all gone now because...wait for it..it is simply not sustainable..unless you are ok with losing money. Yes there is a big market for losing money. Hard for a lot of people to fathom that. Oh well.

[fish4life]

This is hilarious. People in Canada are financially illiterate. I do not in any way defend Westjet or Alexis. But the numbers are the reason. It makes no financial sense unless you are running a money laundering/tax write off business. And that has been done/ is done. But there is no question that a ULCC as per the European or US model cannot work in Canada. So bring on the wailing about Flair, etc. And then refer back to money laundering/tax write offs. It is an old story.

The level of fees reflects the final ticket price. To argue that a ULCC model doesn't work because fees are higher in Canada is missing the whole point. The ULCC model isn't to sell a ticket at XX $$ and if you can't then the whole model is broken.

In Canada, all airlines pay the same fees. The variable is the other costs. A ULCC has lower costs than domestic competitors due to a simplification of the business. One fleet type, high-density seating, higher ancillary revenues, no business lounges etc.

Since fees in Canada are higher than Europe and USA then Canadian ULCCs will naturally have higher ticket prices than Ryan Air or Spirit. But they'll still have lower costs and ticket prices than their Canadian non-ULCC competitors, and the public generally shops price.

The problem is the base level of fees in canada prices out an entire potential market in canada that can afford to fly in other countries without the fees reducing the ability for the ulcc to scale the way it does in other countries.

[tbaylx]

This is hilarious. People in Canada are financially illiterate. I do not in any way defend Westjet or Alexis. But the numbers are the reason. It makes no financial sense unless you are running a money laundering/tax write off business. And that has been done/ is done. But there is no question that a ULCC as per the European or US model cannot work in Canada. So bring on the wailing about Flair, etc. And then refer back to money laundering/tax write offs. It is an old story.

The level of fees reflects the final ticket price. To argue that a ULCC model doesn't work because fees are higher in Canada is missing the whole point. The ULCC model isn't to sell a ticket at XX $$ and if you can't then the whole model is broken.

In Canada, all airlines pay the same fees. The variable is the other costs. A ULCC has lower costs than domestic competitors due to a simplification of the business. One fleet type, high-density seating, higher ancillary revenues, no business lounges etc.

Since fees in Canada are higher than Europe and USA then Canadian ULCCs will naturally have higher ticket prices than Ryan Air or Spirit. But they'll still have lower costs and ticket prices than their Canadian non-ULCC competitors, and the public generally shops price.

The problem is the base level of fees in canada prices out an entire potential market in canada that can afford to fly in other countries without the fees reducing the ability for the ulcc to scale the way it does in other countries.

That hasn't been our experience so far. The difference between fares in a market with no Canadian ULCC are significant.

There may still be even more potential if the fees were dropped further however, there are many people who wouldn't have flown at previous price points who are now flying for the first time on a ULCC. There are also many people who previously would have only taken one trip per year and are now taking two or more.