After a tough year, WestJet is looking for growth. Here’s the new CEO’s plan

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Last May, Ed Sims took the stage in an airplane hangar in Calgary in front of throngs of WestJet Airlines Ltd. employees. With the sweaty, almost endearing awkwardness that middle-aged men can’t shake during moments like this, the CEO goosed his audience to wave their hands in the air. “Play louder! Give it more!” Sims shouted to the DJ, and whipped off his suit jacket and tie. Once he deemed the crowd sufficiently enthused, Sims got to the matter at hand. “It’s not every day an airline gets to usher in a completely new business model,” he said.

Standing onstage wasn't a place Sims expected to be when he joined WestJet a year earlier. CEO succession wasn't even part of the discussion when he left New Zealand to move 12,000 kilometres to Calgary to join WestJet as an executive vice-president. But last March, then-CEO Gregg Saretsky stepped down abruptly, and two months later, here Sims was, charged with spearheading an ambitious international expansion plan.

Sims was showcasing an artist's rendering of WestJet's new Boeing 787-9 Dreamliner, a fuel-efficient widebody jet that will allow the airline to fly greater distances—perhaps someday to Asia. Ensconced in the 787s will be WestJet's first true business class cabin. Onstage, he cued up a promo video. The camera lingered on the stitching of the leather seats before panning to a businessman dining with a cloth napkin. Other passengers wandered around blissfully, stopping to chat at a wine bar. Come nighttime, our businessman donned pajamas and cozied up with a blanket, fully reclined in a lie-flat seat and still scrolling through his smartphone. Work never stops for our road warrior.

Born in 1996 as a scrappy domestic discount airline, WestJet now wants to attract well-heeled business travellers who will drop thousands for first-class service. In 2017, WestJet placed orders for 10 Dreamliners with an option for 10 more and will take delivery of three by March. Seven more will arrive over the next two years. The first international Dreamliner takes flight from Calgary to London in April, with Paris and Dublin to follow. The airline has also added a new highend tier to its loyalty program to entice bigger spenders.

It's all very unlike WestJet, the once-humble, low-cost, lowfare carrier known for corny in-flight jokes. But just what kind of airline it is these days is up in the air. Three of its four founders left long ago. The exception, and one of the last links to WestJet's early days, is Clive Beddoe, 72, who remains chair and a large shareholder.

If you ask Sims, he’ll tell you that “WestJet is a low-fare domestic airline, with a premium international arm,” which is a mouthful. What he won’t quite say directly is that WestJet increasingly resembles its archrival. Sims won’t even say the name Air Canada in an interview, referring to it as “our competitor.” He also jokes he’ll call it Voldemort, named after Harry Potter’s nemesis. Both carriers have separate budget-oriented airlines, regional brands and mainline offerings. Sims’s play for business travellers marks another push into Air Canada’s territory.

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But as WestJet strays from its roots, it risks losing what made it unique. WestJet's appeal to investors over Air Canada has always been its lower cost structure, healthy balance sheet and gung-ho workplace culture. “We see these advantages quickly disappearing,” wrote CIBC analyst Kevin Chiang in a note last year. WestJet pilots unionized in 2017, and flight attendants joined the Canadian Union of Public Employees (CUPE) last August. There are rumblings other groups could be next. “It's just so shocking that it would happen at WestJet,” says Helane Becker, an analyst with Cowen and Co. LLC.

The company’s sagging share price reflects the stock market’s deep concern. WestJet suffered its first quarterly loss in 13 years in 2018, as its non-union operation started to crack. Over the past five years, WestJet’s share price has sunk by about 25%, while Air Canada’s has soared by more than 270%.

WestJet’s push for growth is putting more pressure on the airline’s culture and its financials. Sims, 55, will have to repair relations with employees and improve profitability, all while guiding the airline into uncertain territory when the 787s take flight. The market is clearly skeptical, but Sims is fully committed to reversing the malaise. After revealing a 3-D rendering of WestJet’s 787 on stage last May, he wiped a mock tear from his eye and asked, “Isn’t that beautiful?”

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Early on the morning of March 8 last year, WestJet issued a news release announcing the immediate retirement of Saretsky. The news surprised Canada’s aviation industry. Saretsky had been at the helm for eight years, but there had been no sign he was preparing to step down.

Saretsky had presided over phenomenal growth after he took over in 2010. WestJet carried 15 million passengers that year, and the total ballooned to 24 million by 2017. Fleet count nearly doubled, and WestJet added close to 40 new destinations. Saretsky also launched Encore, WestJet's regional carrier, drew up plans for an ultra-low-cost airline and laid the groundwork for transoceanic expansion with service to Dublin in 2014. Two years ago, WestJet placed orders for up to 20 Dreamliners, which list for $282 million (U.S.) apiece.

WestJet's stock price actually climbed during Saretsky's first few years at the helm. But it then began to flag, and frontline workers grew restless. The pilots' decision to join the Air Line Pilots Association, International (ALPA) baffled him. “I wish I had the answer because then I would know how to head that off at the pass,” Saretsky said in 2017.

A non-unionized workforce was integral to WestJet's model when the airline launched in 1996. Without the legacy employment costs of older airlines, WestJet could be nimble and undercut competitors. Beddoe declined to comment for this article, but in the airline's early years, he hosted a 90-minute information session with every group of new hires. “I would talk about how I thought the whole union movement had done an enormous disservice to its members,” he told students at the Marshall School of Business at the University of Southern California in 2012. “They've bitten the hand that fed them and found themselves out on the street without a job.”

But beyond such blunt statements, Beddoe instilled an ownership culture in WestJet. Employees shared in the profits and could enrol in a generous share-purchase program. The founders were accessible, and they pitched in on flights to help serve food and drinks, a practice that executives continue. Early employees talk unironically about WestJet feeling like a family, a place where everyone had a stake in its success.

Beddoe stayed on as the other founders left, but there were problems when he pulled back. Stephen Smith, who became CEO in 1999, lasted less than two years. Beddoe said he thought Smith was a micromanager, and Beddoe returned as CEO for another seven years. Sean Durfy took over in 2007, but then resigned in 2010, citing personal reasons. WestJet had also botched the rollout of a new reservation system.

Management and frontline workers grew apart as the company grew. More layers of management impeded communication, and with the addition of new routes, plane types and hubs across the country, WestJet became a much more complex organization. The jobs of pilots and flight attendants also got harder and less fun. Longer routes meant more time away from home and difficulties getting in the minimum rest periods between flights. New fare classes and baggage fees meant that check-in and cabin staff had to police passengers.

Plane grooming, once a hallmark of WestJet's culture and a unique cost-saving measure, became contentious for some employees. In theory, they volunteer for clean-up duty, and they're not paid directly for their time, but benefit through the profit-sharing program. The trouble is that flight attendants and pilots can work several flights a day and end up grooming far more than other employee groups. Union representation began to look like an effective way to be heard.

Saretsky feared unionization could divide the company. “We need to trust that we’re in this together,” he pleaded at a company event in 2016. “Stop bringing each other down.” He encouraged staff to unite against a common enemy outside of WestJet. “I believe we can build an even stronger culture and disrupt the negative forces that are weighing us down.”

Saretsky questioned pilots, but was confounded by what he heard. Many of them believed joining a union would result in higher pay and better work rules. It's generally true that base salaries for pilots are lower at WestJet than at Air Canada. But WestJet has always contended that when other benefits are taken into consideration, such as the airline's profit-sharing program, compensation is comparable, if not better. Pilots, however, argued they couldn't always rely on the program.

David Colquhoun, a WestJet pilot and chairman of the ALPA master executive council at the airline, says unionizing was never about pay, but was a consequence of growth. “We needed to be able to speak with one voice and be heard,” he says. Likewise, a spokesperson for CUPE says that no one event pushed flight attendants to unionize. Rather, it was an accumulation of issues over the years.

A year after his departure, Saretsky still isn't sure why pilots unionized. “I can only guess, because I never got an answer,” he says. Saretsky believes he and his team didn't manage the change process as well as they could have. Each part of the organization should have explained in every venue why changes were necessary and beneficial.

“We assumed that because we had published an article internally on our intranet, they read it and understood it,” Saretsky says. But some employees never read internal memos. Others do but need more explanation. “The change management process needs a tonne of effort, and perhaps on some of these changes, we didn't do enough,” Saretsky says.

Before WestJet launched regional airline Encore in 2013, for example, management held a plebiscite for employees, and waged an extensive information campaign. Saretsky was even prepared to resign if the vote failed, but it passed with 91% support.

WestJet offered no vote when it announced the creation of Swoop, its ultra-low-cost subsidiary, in April 2017. Instead, Swoop led to the most raucous period in WestJet’s history. The budget airline was partly a competitive response to a crop of cheap airlines trying to get off the ground in Canada. Swoop was supposed to be completely distinct from WestJet, with a separate brand, offices and employees. The company believed that was the only way to operate as a true ultra-lowcost carrier.

But there was still overlap. Swoop deployed repurposed WestJet planes, and pilots could join the subsidiary if they took a leave of absence from the parent. They would earn a lower salary but had more opportunities for promotion.

The ALPA complained that WestJet refused to discuss the issue and filed a complaint with the Canada Industrial Relations Board (CIRB) in February 2018. The CIRB issued an interim injunction the following month, ordering the company to stop its hiring practices. But WestJet then started hiring pilots away from other airlines to fly for Swoop. The union was outraged. “That really was a very unifying moment when our company decided to, from our perspective, start outsourcing our work,” Colquhoun says.

Beddoe never wanted to fight with employees. “If we get into that type of battle, then we're sunk,” he told Marshall business school students in 2012. But that's exactly where WestJet landed in 2018. Amid the tension, WestJet announced Saretsky's retirement and appointed Sims. He has nothing but praise for his predecessor, noting the “phenomenal growth” under Saretsky. “I think Gregg felt that he'd achieved what he needed to achieve at WestJet,” Sims says.

Saretsky declined to comment on his departure. But he spoke about how the animosity between the company and pilots coalesced around him. “Was I a flashpoint? You can be made to be a villain, and when things get tense, they always look to blame it on the person at the top,” Saretsky says. “Was I that person? Perhaps.” Still, he has no regrets about his approach, given what happened next.

Sims had been with WestJet for less than a year when the board of directors tapped him for the top job. “I never felt that I was anointed or groomed to be the successor,” he says. “I happened to be in the right place, and I was the right person at the right time.” Sims had experience with unions and widebody planes like the 787, and he had been involved in a difficult financial turnaround before—three attributes the board felt were necessary, he says.

Sims is compact, sporting a closely cropped haircut not uncommon among pilots, and can exude an almost boyish enthusiasm when talking about his work. Sims grew up in Swansea in South Wales. His father was a professor of English literature and his mother was an actress who later became a lawyer. Sims pursued an erudite path at University of Oxford. Reading continues to be his escape from work, and gloomy Irish novels are a favourite. “It just makes me feel better. There's always somebody worse off than you,” Sims quips. “It's the same reason I listen to the Smiths.”

His parents assumed he would continue on a path to academia, but Sims tried to crack into marketing and advertising, and applied for dozens of copywriting jobs. About half the employers sent rejection letters; the rest never replied. “That other half never made it on to a pitch list in my 30-year career,” he says. After I chuckle at what I thought was a joke, he corrects me. “Quite seriously, I’ve never put them on a pitch list. If people treat young, aspiring recruits with that degree of disdain, there will be somebody, somewhere with a long memory.”

Instead, Sims found work as a checking agent at London's Gatwick Airport, and later as a vacation sales rep for a travel company that offered tours across Europe. While his colleagues slept late, Sims headed out early to sell tour packages and excursions. He figured tourists were more susceptible then, either because they hadn't yet planned their day or they were hung over.

After a stretch working at Virgin Group, Sims moved with his wife and children to Melbourne in 2001 to join a subsidiary of Air New Zealand called Ansett Australia. Just a few months later, the money-losing division sought legal protection from its creditors. Sims was prepared to pack up and move his family back to the U.K. But Air New Zealand offered him a position running marketing, loyalty and alliance programs in Auckland.

The troubled airline survived thanks to a massive government bailout, and Air New Zealand rebuilt itself as a lowcost airline. Sims later ran the company's international arm, adding new Boeing aircraft to expand long-haul service. The period he remembers most fondly was born of a near disaster. Air New Zealand was one of the first customers for the 787 Dreamliner, but Boeing fell far behind its delivery dates.

Air New Zealand mulled legal action, but in 2007, it proposed an alternative and asked Boeing to build a prototype 787 interior so it could test new seating configurations. Sims headed the three-year initiative, partnering with California-based design firm Ideo. (See “Lab tested,” opposite).

WestJet first interviewed Sims in 2010 when looking to hire an executive vice-president of operations. But he wasn’t ready to move to Canada. WestJet reached out again in 2017. By then, Sims was heading New Zealand’s air navigation service provider. This time he said yes, signing on as executive vice-president of commercial operations.

LAB TESTED

WestJet CEO Ed Sims held senior executive jobs in aviation in Australia and New Zealand for more than 15 years before he arrived in Canada two years ago. Starting in 2006, he headed a three-year research project at Air New Zealand that experimented with interior designs for new long-haul Boeing 787 Dreamliner jets. Together with the California-based design firm Ideo, the airline hired actors to sit in a prototype cabin for hours at a stretch, with simulated engine noise piped in and a cabin crew serving food and drinks. A lot of ideas flopped, but some worked.

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If WestJet’s board of directors thought replacing Saretsky would quickly ease tensions, they were wrong. Sims’s first few months on the job were rocked by the threat of a strike over hiring practices at Swoop. The dispute peaked last May. Pilots girded themselves for a lockout, and about 200 pilots and supporters protested at WestJet’s annual meeting. Members gave the union a 91% strike vote. Job action was only averted when both sides agreed to binding arbitration. “We went to the edge of the cliff, looked down and said, ‘We’ve got a good airline here. Let’s not jump,’ “ Colquhoun says. (The arbitrator issued a decision in December, and at press time, neither side had disclosed details, pending further review.)

The turmoil led customers to cancel flights and Air Canada scooped up business. WestJet reported a $20.8-million loss for its second quarter ending June 30, 2018, its first quarterly loss since 2005. The company turned a profit in the next quarter, but net earnings were still down 66% compared to the same period the year before.

Sims has been working to repair the relationship with employees. “There has been an erosion of trust and a loss of confidence in senior management,” he says. “I take that very personally.” One step he's taken is to send a company-wide email each Friday called EdTalks.

Last fall, he took on the topic of plane grooming, acknowledging that it had been hotly debated on the company's Yammer channel. “I was pretty disheartened to see the respect I advocated so sadly lacking in many of these exchanges,” he wrote. Sims referenced the All Blacks, New Zealand's national rugby union team, who clean up their own dressing room. “It grounds them and reminds them (as it should remind us) that we all started somewhere,” he wrote.

The comparison between wealthy athletes cleaning up after themselves and airline employees mopping after others struck some as out of touch. “He thought it was an innocent comment, but because of the environment and the toxicity that already existed, it got so spun out of proportion,” says one flight attendant. “If my comment was taken out of context, I apologize for that,” Sims says.

He's also devoting 20% of his time to working in the field, helping attend to passengers on flights or loading bags. “The conversations on those days do far more to build trust than any email exchange,” he says. Sims says he's actually looking forward to the next round of union negotiations. “Hopefully the second round will be so much more harmonious,” he says.

The pace of expansion has added to employees' stress, and Sims is trying to reduce some of the pressure. Late last year, WestJet cut its capacity growth plans—basically, the number of seats it offers for sale—by 6%. The past few years, Canadian airlines have been battling for market share, adding new routes and flights. But the extra capacity squeezed profit margins. Sims's cuts so far have been well-received by analysts. “I'm not going to get locked into a market-share battle that just sees the value inherent in our services get destroyed,” he says.

Sims concedes the airline has grown too fast and that the “swashbuckling attitude” of yore needs to mature. Internally, he preaches the mantra of “structure, process and discipline.” Konark Gupta, an analyst with Macquarie Group, says Sims “is definitely looking to focus more on the financial profile of the company.” As part of that discipline, WestJet has pushed back financial targets by two years to 2022, and wants to cut $200 million in costs by the end of next year.

But many analysts say WestJet still lags behind Air Canada in several key metrics. The country's largest airline has improved its balance sheet, increased revenue per available seat mile and struck long-term collective agreements with its unions. Air Canada's scale also means it's not as tethered to Alberta's struggling energy economy. WestJet is still in the early stages of many of its initiatives, but Gupta believes that earnings should improve. “They have at least given some hope to the market,” he says.

Considerable uncertainties remain, however. Sims will face a big test when WestJet's first 787 takes flight in April. It's tough for a low-cost airline to move upscale. Business travellers aren't as price-sensitive as WestJet's traditional customers. The segment is already dominated by Air Canada, and those passengers tend to be loyal. Air Canada can afford to lose money on domestic routes because its premium market is so lucrative—which means it's not a segment the airline will easily relinquish.

Analysts also worry about the timing of WestJet's initiatives. The airline is planning $3.2 billion in capital expenditures over the next three years, according to CIBC analyst Kevin Chiang, just as Canada's economy is entering a late stage of growth. WestJet says it won't discount business class fares, either. Sims insists the service will be worth paying for.

Ben Cherniavsky, an analyst with Raymond James, questions that decision. “I don’t think the market for superpremium traffic in Canada is big enough for two full-service carriers to offer the same product at the same price,” he says. WestJet has always used its lower cost structure to undercut Air Canada. Besides, with more business class seats on the market, competition could drive down prices anyway.

“You do a bit of a head scratch and say, ‘So, what’s your advantage?’ “ says Chris Murray, an analyst with AltaCorp Capital Inc. He’s puzzled by some of WestJet’s route choices. On service to London, WestJet isn’t flying into Heathrow, but into Gatwick, the second-tier airport. “I’ll stand corrected, but I don’t think there is anybody else who will be offering a full lie-flat bed service into Gatwick,” Murray says. “There’s probably a reason the other guys don’t do it.”

Sims’s defences of Gatwick have yet to impress the Street. “Gatwick gets bad press,” he says. The airport has direct train service into London, and it’s smaller and easier to navigate than Heathrow. Sims is encouraged by Gatwick’s plans to grow too. “They’re going to grow by having more high-quality, premium connecting operators,” Sims says.

WestJet doesn’t intend to expand totally on its own, either. Sims wants to be more strategic in forming alliances with other airlines. The company is forming a joint venture with Delta Air Lines Inc. that will allow it to broaden services across the U.S.-Canadian border, and it is forging closer ties with Air France-KLM to better access European destinations.

WestJet has also revamped its loyalty program, with a new platinum tier at the top designed to attract disgruntled Aeroplan members. WestJet contends its competitor has invested in its biggest spenders, while devaluing benefits for everyone else. “There's definitely a huge chance to pull people over eventually,” says Patrick Sojka, founder of Rewards Canada in Calgary, which tracks the loyalty world.

WestJet’s cashback for platinum status at 8% is generous, Sojka says, but the airline will have to do more to win over frequent flyers, such as allowing members to redeem points for premium and business seats on partner airlines. “Some people may see value in platinum, but there’s not a huge amount yet,” he says. “If they don’t get everything right the first time, they’re going to have a hard time pulling those higher-revenue flyers from Air Canada.”

WestJet will also need better passenger lounges to offer a truly premium experience. The airline currently rents space from other providers. In the next 18 months, Sims wants to have new lounges in Calgary, Toronto and Vancouver. He likes the idea of pop-up lounges, maybe in refurbished shipping containers, where services are driven by technology. “They’re ordering coffee through apps. They’re maybe ordering a fresh juice through a juicing machine that’s controlled by an app,” he says. Maybe there’s a social networking component, he adds, that sends out alerts about nearby business associates.

It’s a bit odd that Sims sounds most excited when talking about slightly out-of-left-field concepts such as pop-up lounges, given that analysts have been most impressed by his conservative tone so far. “It’s the first time I’ve heard anyone express caution on the rate of growth in the international business,” Murray says. The business class cabin on WestJet’s Dreamliners, for example, will be small, with 16 lie-flat beds. Some other carriers flying 787s have double that amount. The company has also signed a letter of intent to sell and lease back the first three planes, easing the financial impact.

Sims can certainly see the challenges WestJet is up against, especially as it grows internationally. Pre-sale prices for the airline’s 787 flights are below Air Canada’s on some routes.

Despite WestJet’s talk of not discounting its premium fares, Cherniavsky believes that is the only way the company can compete in business class. WestJet, it seems, may not have strayed so far from its roots after all.

Losing Altitude

Once known for being a focused domestic discount rival to Air Canada, WestJet’s share price has fallen far behind as the airline has added new routes and fare classes