WestJet Airlines Ltd. wants to sell itself to Onex Corp. to buy itself the ultimate luxury: time.
Once known as an low-cost airline that flew out of smaller, underserved airports, WestJet has blossomed into a formidable challenger to Air Canada in its home market. Yet 23 years after its launch, WestJet faces an identity crisis: It’s no longer a discount carrier, but not yet a truly global airline, either.
Caught between two market segments, it effectively split itself in two to service both. Lately WestJet has committed to targeting premium and business travellers, while in 2018 it launched a new discount carrier, Swoop, to serve its original market.
The strategy would be tough to execute in the best of times, but just as the heavy lifting started, WestJet endured several setbacks, including the threat of a pilot strike last year. Many investors threw in the towel last year, while its archrival saw its stock soar. From 2015 through the end of 2018, while Air Canada stock more than doubled (up 119 per cent), WestJet shares fell 46 per cent.
Rather than continue to face relentless pressure from investors each quarter, WestJet has decided to accept the refuge of Onex, with its more patient capital. Private ownership, WestJet chief executive Ed Sims said, takes the airline “away from an environment where [investors are] almost constantly pulling up the roots of the vegetables to see if they’re still growing, and then are puzzled when that growth slows down.”
While WestJet will get some breathing room if the buyout is approved by shareholders this summer, its challenges will not dissipate. The company is largely betting on moving upscale to capture the extra margin provided by premium travellers, but Air Canada has a strong position in this segment.
Amid this shift, no detail can be spared – and that means big investments. To date, WestJet has already said it will spend heavily on new planes, new seat configurations, new systems to forecast inventory and new airport lounges. And, of course, it will also spend millions to launch its low-cost brand.
If it can pull it off, the potential profits are large. The airline has estimated that within Canada the average “premium economy” seat garners fares 60-per-cent higher than the average economy seat does. Even better, the average business seat generates three times more revenue than economy seats do. Seat premiums are even higher for international travel.
But none of this is in WestJet’s DNA. The Calgary-based airline was modelled on U.S. low-fare carrier Southwest Airlines. Rather than go head to head with the incumbent players, co-founder Clive Beddoe focused his small fleet of 737-200s on smaller airports. The idea was to keep prices low to compete, not against major airlines but against buses and cars.
After the airline went public in 1999, the ownership stake of its employees was a major selling point to consumers. WestJet also pushed its informal corporate culture, which emphasized customer service among its “WestJetters” and cabin announcements peppered with corny jokes.
For many years, it worked. WestJet was the only survivor of the era’s low-fare boom in Canada, outlasting such entrants as Greyhound Air and Canada 3000.
Its image took its first major hit with revelations that senior executives had spied on Air Canada in 2003 and 2004 through surreptitious tactics – dubbed the “007 Project” – to gather confidential information about passenger loads on specific routes. Air Canada launched a lawsuit, and the two sides eventually reached an out-of-court settlement.
In some ways, WestJet took a long time to evolve. As recently as five years ago it still had one brand, one format for airplane cabins, one fare type and one tier in its loyalty program. This spelled trouble as the low-cost market turned extremely competitive and Air Canada launched its own low-cost offering, Rouge.
WestJet has not stood still in recent years, though. It has launched a second brand and added new planes – 787s and 737 Max 8s – that have allowed it to reconfigure its cabins. It now offers tiers such as premium economy and has expanded its fare bundles to seven different segments.
Analysts have given the company credit for this. “WestJet laid out a credible plan on how it will look to expand revenue," CIBC World Markets analyst Kevin Chiang wrote in a research note after the airline’s investor day in December.
Yet investors are impatient, particularly after operational troubles in 2018 that included the threat of a pilot strike, the loss of American Airlines as a partner, an overcapacity of seats in the Canadian market and an underestimation of start-up costs for the new 787s.
The threat of a recession also hangs over the industry. “The biggest concern we have,” Mr. Chiang added, "is that WestJet is still in relatively early innings with respect to these growth initiatives with an elevated [capital expenditure] plan over the next three years at a minimum. This is concerning because of fears that the economic cycle is in the late innings with signs of a slowdown in 2019.”
If WestJet had stayed public, its share price would have been even more at risk in a recession. Instead, Onex offered a going-private deal at $31 a share, a 67-per-cent premium over Friday’s close on the Toronto Stock Exchange.
“WestJet shares have only ever briefly traded above $31 per share during the late 2014 time frame,” National Bank Financial analyst Cameron Doerksen wrote in a note to clients. “We therefore consider the offer to be fair, especially given some of the challenges WestJet faces including risks around its strategic initiatives (international growth and the refocus of business towards more premium travelers), labour relations and the potential threat of new ultra-low-cost carrier competition.”