Cut-rate Airlines Compete
In the offices of WestJet Airlines Inc., frugality is prized. Showing a visitor around the boardroom of his upstart airline's two-storey headquarters near the Calgary airport, WestJet chairman and chief executive Clive Beddoe shows off an 18-foot-long mahogany table that, he says, was originally valued at $16,000. WestJet picked it up secondhand for a mere $1,500. WestJet is positioning itself as a low-cost, low-fare carrier in what is already a fiercely contested Canadian air market. The venture took off last week with WestJet offering its first cut-rate flights between Calgary, Edmonton, Vancouver, Kelowna and Winnipeg. (Victoria will be added this week.) And while secondhand tables alone will not ensure profits, Beddoe says that he would prefer to spend his money on things like aircraft maintenance. "I think this is a golden opportunity," he adds. "And I think quite clearly the public wants to see us succeed."
WestJet's entry into the travel business has already forced down the cost of air travel in Western Canada - to as low as $29 between Edmonton and Calgary for a one-way ticket booked two weeks in advance. WestJet is offering snacks instead of meals, no baggage connection to other airlines and a maximum of five flights a day on any given route. Canadian Airlines and Air Canada have both matched WestJet advance-purchase prices on some of their seats. And soon, yet another carrier will wade into the fray: Greyhound Lines of Canada Ltd., the country's largest bus company, has announced the launch of Greyhound Air in May. The two upstarts are taking off at a time when the major carriers are already locked in an intense battle for air supremacy. Air Canada last week announced a $52-million profit for 1995, but company officials say earnings would have been considerably higher had there not been major discounting in the industry. Canadian Airlines lost $194.7 million in 1995. "The Canadian domestic marketplace is already characterized by having too much capacity," says Canadian's vice-president for passenger marketing, Gregg Saretsky. "And it's not getting any prettier."
Beddoe counters that the major airlines need not be alarmed. For one thing, his company is currently flying only three aircraft. For another, he says his goal is not to steal market share from the major carriers, but to expand the size of the pie, convincing leisure and cost-conscious business travellers to take to the air. "What we're really doing," he says, "is attracting people into our airplanes who otherwise might have driven, or might not have travelled at all."
There are precedents for WestJet. The company points out that in the United States, where successful discounters such as ValuJet and Southwest Airlines have been burning up the airways, fare cuts of more than 40 per cent have boosted the number of travellers on short-haul routes by an average of 135 per cent. Beddoe adds that the number of air passengers is already starting to increase in Western Canada in response to WestJet's lower prices. "The biggest myth in this industry is the myth of overcapacity," Beddoe argues. "It's a very elastic market."
Canadian's Saretsky does not dispute that fare cuts help to expand the market - in the short term at least. But Canada is a much smaller market than the United States, and there are no sunny destinations to draw Canadian leisure travellers during the winter months. "The market will grow and will be sustainable," Saretsky argues, "but not at a level sufficient to fill the extra capacity that they're flying."
Historically, it has been difficult to gain a foothold in the airline industry. An estimated 100 new carriers have entered the North American market in recent decades - and only a handful have survived. For WestJet and Greyhound to succeed, says Ted Larkin, a transportation analyst with Bunting Warburg Inc. in Toronto, "the key thing will be whether or not they can prove to be truly low-cost operators." If they are satisfied with a limited market share, he adds, "there may very well be room for these two carriers."
WestJet actually grew out of a cost-saving initiative. Beddoe, 49, founded what are now the Hanover Group of companies in Calgary in 1978 - dabbling over the years in everything from property development and manufacturing to recycling. In 1994, he bought a plastics company with operations in Edmonton and Vancouver. Beddoe and his associates were making frequent trips to those two cities, paying full fare for maximum flexibility. An amateur pilot, Beddoe decided to buy an eight-seat Cessna to cut down on travel costs - and an idea was born. One of Beddoe's colleagues at Hanover started to put together the first airline business plan nearly two years ago, with two other WestJet founding shareholders. Together with Beddoe they raised enough capital - first from local businesspeople and later in an offering to institutional and other private investors - to launch their scheduled airline.
A key element in WestJet's cost-control plans is the absence of corporate debt. Although Beddoe will not say how much money WestJet has raised, he claims to have a healthy bank balance, even after buying three Boeing 737s, at about $5 million each, plus $2.5 million worth of spare parts and $750,000 in computer equipment.
In dozens of other ways, WestJet is trying to keep expenses at a minimum. Beddoe says that the highest salary at the company is $85,000 (all employees are eligible for profit sharing), adding that he draws no salary himself. The company also issues no tickets. Passengers are given a confirmation number after paying for their flights. They present the number, or photo identification, at the airport. Ticketless travel is a cost-saving innovation employed by Morris Air, a low-cost carrier in Salt Lake City, before it was bought out by Southwest Airlines in 1993. Morris's former president, David Neeleman, has joined WestJet's board of directors, bringing with him a wealth of low-cost airline experience.
WestJet's small, focused nature is perhaps even more fundamental to its strategy. "The integrated full-service carriers have huge infrastructure costs," Beddoe says. "If you've got to be responsible for baggage personnel in Bangkok as well as counter staff in Lethbridge, there's just the sheer administration involved." WestJet has only one model of aircraft, which means only one set of spare parts and one training program for crew members. With short flights of about an hour each, pilots normally return home every night, saving overnight costs. "We do not have to worry about long-distance charges to Bangkok or dealing with other currencies," Beddoe notes. WestJet does not offer its passengers connecting service to other airlines, but that also means WestJet will not have to hold planes on the tarmac for late-arriving travellers. "It's a structural difference," he says.
Greyhound has yet another structure - a hub-and-spoke system focused on Winnipeg, with planes flying in from Vancouver, Kelowna, Calgary and Edmonton in the west and from Ottawa, Hamilton and Toronto in the east. Greyhound, controlled by The Dial Corp. of Phoenix, has struck a deal with British Columbia's Kelowna Flightcraft Air Charter Ltd. that will link the bus line with a new Greyhound Air service. The idea is to use the bus company as a feeder system, channeling passengers from land to air transportation. Greyhound will take responsibility for scheduling and marketing, while Kelowna Flightcraft will operate a fleet of seven Boeing 727s. Greyhound's executive vice-president, John Munro, said that Kelowna Flightcraft already has maintenance facilities as far east as Hamilton. And Greyhound has a distribution network of more than 650 agents. "The bottom line is that low prices in the air are here to stay," says Munro. "It's not a skirmish - this is long term."
Last week, though, public attention was on WestJet and its inaugural flights over Western Canada. The company's head office was a hive of activity. The first flights were sold out and phones were ringing off the hook. Beddoe claimed to be doing "better than we forecast." He calculated that the company will need only about 13 or 14 per cent of the air traffic market in Western Canada to succeed, based on an assumption that lower prices will cause the number of travellers to nearly double. And by keeping costs down, he said, the company can be profitable even if only half its seats are sold. (Air Canada flew at 61.8 per cent last year, while Canadian flew at 65.3 per cent.)
Certainly the majors have some advantages. "We take all competition seriously," Air Canada's manager of corporate communications, Sandie Dexter, said last week. And while Air Canada is matching WestJet's prices, Dexter noted, it also offers many more departures, meals on some flights, frequent-flyer points and connections to other routes and other airlines. The importance of those benefits, however, varies from passenger to passenger. As Beddoe put its, "The public seems willing to fly both of us." It remains to be seen whether, in the long run, there are enough travellers out there to support two new carriers.
Maclean's March 11, 1996