WestJet Airlines Ltd.

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WestJet Airlines Ltd.

35 McTavish Place NE
Calgary, Alberta T2E 7J7
Canada
Telephone: (403) 735-2600
Toll Free: (877) 937-8538
Fax: (403) 571-5367
Web site: http://www.westjet.com

Public Company
Incorporated: 1994
Employees: 1,400
Sales: C$203.57 million (US$140.7 million) (1999)
Stock Exchanges: Toronto
Ticker Symbol: WJA
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation; 481211 Nonscheduled Chartered Passenger Air Transportation

WestJet Airlines Ltd. brought the Southwest Airlines model of no-frills short hops to Canada. Following four years of success in the west of the country, in 2000 the airline brought low-cost flights to a new hub near Toronto. WestJet’s strategy closely mirrors that of Texas-based Southwest Airlines Co. Its fleet included about 20 or so Boeing 737 jets in 2000. More than two million passengers flew the airline in 1999.

A Mid-1990s Start-Up

Clive Beddoe was born in England in 1947. He emigrated to western Canada and, as president of the Hanover Group, Beddoe made a fortune developing commercial real estate in the Calgary area. He also owned a small private technical school called Career College.

According to Canadian Business, in 1994 Beddoe bought Western Concord Manufacturing Ltd., which brought him into the flying business. The company’s executive air travel bills were totaling C$3,000 a week. He bought a twin engine Cessna 421 and flew it himself, saving thousands on fuel costs and pilot fees.

Further, he leased the plane to other businesses via local charter operation Morgan Air Services Co. Ltd. Morgan Air President Tim Morgan and investors Don Bell and Mark Hill joined Beddoe in the idea of starting their own discount airline. Hill wrote the original business plan, later becoming the director of strategic planning, while Morgan and Bell were named vice-presidents in charge of operations and customer service, respectively. Beddoe would be chairman and CEO.

Much to its credit, the group consulted Morris Air founder David Neeleman for advice. He had sold his successful Salt Lake City-based airline to Southwest Airlines Co. in 1993. He had also developed a computer reservations system, One Skies, which he sold to Hewlett-Packard. Neeleman agreed to provide 5 percent of the start-up capital himself and helped attract other investors. Ronald Greene of Renaissance Energy Ltd. joined them; Beddoe was also a major investor. By the spring of 1995 the group had more than $8.5 million in capital accumulated. The new company was named WestJet Airlines Ltd. in May 1995.

In January 1996, Research Capital Corp. helped place $20 million in stock with other private investors, the largest of which was the Ontario Teachers’ Pension Plan Board. WestJet had become one of the most heavily capitalized airline start-ups in decades.

Still, the odds appeared stacked against the company. No scheduled airline had yet successfully competed against the market leaders, Air Canada and Canadian Airlines (also based in Calgary). (Canada 3000 Airlines Ltd. and Royal Airlines both were charter operations.) In the first place, fluctuations in the cost of fuel, an airline’s largest expense, could devastate a small operation. In addition, Western Canada’s lack of large population centers seemed to preclude the need for another airline.

However, WestJet’s plan was to expand the market, much as Southwest had done in the United States, by lowering fares to the point that a new class of travelers could afford to fly. Beddoe called it the “VFR” market—“visiting friends and relatives.” As such, WestJet would compete with cars and buses as much as planes.

Controlling costs was critical to WestJet’s plan. The airline started out with cheaper labor than that of the established, unionized carriers. In fact, the CEO drew no salary at all. Canadian Business noted that Beddoe paid for his office furnishings out of his own pocket. Stock purchase and profit sharing plans helped provide extrinsic motivation, and the company fostered a casual and upbeat working environment. Such a corporate culture was regarded as necessary for good customer service.

WestJet relied on energetic, motivated employees to perform fast turnarounds. As at Southwest, flight crew and even executives were said to help tidy up the cabins between flights. WestJet also avoided carrying large amounts of debt, although it did buy its own well-used jets rather than lease new ones. The first had an average age of 23 years.

As might be expected, many of the perks of the big airlines were missing. WestJet offered no paper tickets, in-flight meals, frequent flier program, or airport lounges. It had only one class of seating and was not a member of any of the computer reservation systems used by most airlines and travel agents.

Commercial flight operations began with three planes on February 29, 1996. Vancouver, Kelowna, Calgary, Edmonton, and Winnipeg were the first cities served; several were added in the first year.

WestJet’s fares were often more than 50 percent less than those of other airlines. The formula worked amazingly well. In its first six months, WestJet logged a profit of $2.5 million, surely one of the most successful airline launches ever.

Crisis in 1996

In September 1996, Canadian transport officials found WestJet’s maintenance record-keeping program inadequate and forced the carrier to suspend operations. The grounding cost the carrier C$300,000 a day and stranded many passengers. It was the kind of a blow that could easily bankrupt a fledgling airline, especially given the broad suspicion of budget carriers that followed the ValuJet crash in the Florida Everglades earlier that year. Beddoe later told Canadian Business, “I felt as if the company we had put so much toil and energy into was crashing down on top of me, and there was nothing I could do.” The shutdown lasted 17 days.

In fact, WestJet did recover, and quickly. In its first fiscal year, which lasted ten months, the airline managed a small profit on C$37.3 million in revenues. It carried 760,000 passengers in its first full year.

WestJet had already added another plane to its fleet, bringing the total to four. WestJet operated Boeing 737s, the small airliner Southwest Airlines used to pioneer in its widely copied strategy for connecting underserved markets. It also would not keep routes open if enough demand were not there. (It did offer “Limited Addition” temporary service to a few destinations in Manitoba and Alberta.) Often, though, the entrance of WestJet doubled or quadrupled the existing traffic on a route. A typical fare was C$39 between Calgary and Edmonton.

WestJet began operating charters in October 1997. Its first client was a major tour operator; soon the airline was regularly flying to Las Vegas on a chartered basis. The company also began carrying cargo in the fall of 1997. Early in 1998, WestJet explored the possibility of a marketing agreement with Air Canada.

Pretax profits were C$12.4 million on revenues of C$125.9 million in 1998. The airline carried 1.7 million passengers and ended the year with more than 600 employees, or “Westjetters.”

Steven Smith, formerly president of Air Ontario (a subsidiary of Air Canada), became WestJet president and CEO in March 1999. Beddoe remained chairman. (Neeleman had left to launch Jet Blue, another well-capitalized budget airline in New York City.)

The fleet was up to 11 aircraft by the middle of 1999. By this time, the company had paid out $3 million in profit sharing disbursements. About 86 percent of employees owned stock in the company.

WestJet went public on the Toronto Stock Exchange in July 1999. Canadian Business noted that its IPO was such a success that the company’s market capital was soon valued at $375 million, five times greater than that of Canadian Airlines. The company’s simple profitability in a troubled industry made WestJet stock attractive. Proceeds from the IPO were earmarked towards buying new planes and building a new hangar and headquarters.

In December 1999, Air Canada agreed to buy Canadian Airlines. The combined airline would be the world’s tenth largest and would have an 80 percent share of the domestic market. Air Canada soon announced plans to reduce its domestic capacity by 15 percent.

Heading East in 2000

By 2000, WestJet had 1,100 employees. In interviews, company executives stressed the importance of not expanding too quickly lest the vital relationship between employee and customer be strained.

Company Perspectives:

Though our geographical service areas may changes as we grow, our strategy and commitment to our business plan will not. We remain dedicated to maintaining low costs throughout our operations and to ensuring constant, consistent, and manageable growth. We also remain committed to integrating technology to ensure efficiency and excellence in customer service; to ensuring our people are supported and empowered by their company; and to maintaining the WestJet culture that has become a trademark and is paramount in our success.

Nevertheless, Air Canada’s takeover of Canadian Airlines and the prospect of other start-up airlines filling the void in the east prompted WestJet to accelerate its expansion plans. In the spring of 2000, the company announced plans to compete in the eastern half of Canada—Air Canada’s home turf. At a time when WestJet’s fleet contained 15 old Boeing 737s, the carrier ordered 20 new ones to provide capacity for the expansion.

In March 2000, West Jet opened a hub in Hamilton, three dozen miles from Toronto. Several eastern markets, including Ottawa, were added within a couple of months. Fares were as little as one-sixth those charged by Air Canada.

According to Canadian Business, entrepreneur Ken Rowe had been planning to launch his own low-fare airline, dubbed CanJet Airlines, at Hamilton. Though he was reported to have changed his mind rather than challenge the more-established, better-funded WestJet; CanJet did in fact begin flying in September 2000.

Air Canada was also planning to base its own discount airline (Air Canada Lite) at Hamilton. Some doubted the state carrier could succeed where Delta Air Lines, US Airways Inc., and Continental Airlines Inc. had failed. Even United Air Lines, Inc., the largest airline in the world, lost $200 million trying to create a low-cost unit to compete with Southwest. “The biggest risk for us,” quipped Smith, “is that eastern Canadians won’t like low fares.”

Smith resigned in September 2000, purportedly due to differences in management style with Beddoe, who resumed the roles of president and CEO. Beddoe told the National Post that Smith did not fit in with WestJet’s corporate culture and, as a result, its energy and drive were threatened. Smith denied Beddoe’s charges that he was “militaristic” and “dictatorial.”

Just about all of the statistics that were used to measure an airline’s financial performance (traffic counts, load factors, revenues, earnings) continued to rise for WestJet in 2000. During its peak season in August, it filled nearly 90 percent of its seats. The same month, WestJet stock reached a value of $29, nearly three times its initial price. Although a number of competitors, old and new, were also adding capacity to the market, WestJet looked towards an ambitious future. It held options or orders for 94 aircraft to be delivered between 2000 and 2008.

Principal Competitors

Air Canada, Inc.; Air Transat Inc.; CANADA 3000 Airlines Ltd.; CanJet Airlines; Royal Aviation Inc.

Key Dates:

1994:: Clive Beddoe and partners discuss starting a budget airline.
1995:: Calgary businessmen invest millions in venture.
1996:: WestJet flies first scheduled routes; survives 17-day grounding, imposed by Canadian transport officials for inadequate record-keeping.
1997:: Charter and cargo services are added to repertoire.
1999:: Steven Smith is named CEO; WestJet goes public.
2000:: WestJet expands into eastern Canada.