Canada's WestJet Plans Ultra-Low-Cost Unit to Fight Upstarts

(Bloomberg) -- Canadian discounter WestJet Airlines Ltd. is arming itself for more fare wars by planning to start an ultra-low-cost carrier to fend off domestic upstarts.

Service is expected to begin late this year with a fleet of 10 Boeing Co. 737-800s in “high density” configuration, Calgary-based WestJet said in a statement Thursday. The venture will aim to offer “no frills, lower-cost travel options,” Canada’s No. 2 carrier said.

Founded in 1996 to cater to leisure travelers, WestJet has been moving away from its original no-frills model -- patterned after U.S.-based Southwest Airlines Co. -- by adding premium economy seats, rolling out a short-haul unit and starting overseas flights to European destinations such as London. Its fleet, meanwhile, has expanded from single-aisle 737s to include turboprops and double-aisle jets.

“This makes a lot of sense,” said AltaCorp Capital analyst Chris Murray. “This ULCC lets them use existing aircraft, fly to routes they already know, densify their network, plus it spreads their overhead costs better. It’s a lower-risk proposition than going to a wide-body strategy.”

Canada Jetlines Ltd. and Enerjet Ltd. have announced plans to begin operating ultra-low-cost carriers to challenge WestJet and larger rival Air Canada. Jim Scott, chief executive officer of Canada Jetlines, dismissed WestJet’s plan as “nothing more than an ‘airline within an airline’ that will not increase competition and it remains to be seen whether it will be able to achieve the full benefits of a ULCC.”

Complicates Plans

WestJet’s new carrier “significantly complicates the plans of other participants,” Murray wrote in a note Thursday. The new service will also protect WestJet from “market erosion in the highly sensitive fare category of travelers.”

The decision to move ahead with the new unit came after years of studying the market, Bob Cummings, WestJet’s executive vice president, said in a telephone interview.

“The new entrants are a factor, but only one of five or six,” Cummings said. “We think the timing is right. Were the new entrants a tipping point? No.”

Cummings declined to provide details on fares, routes or seating configurations, saying they will be announced later “for competitive reasons.”

Not Available

Canada is the only member of the Group of Seven industrialized nations that doesn’t have access to an ultra-low-cost carrier, Murray wrote. While the country probably would support an ultra-low-cost market of about 50 aircraft and 10 million passengers a year, “significant stimulation” through lower prices is “required to be effective in the space.”

With its Encore short-haul unit and widebody jets to Europe, WestJet “already has a lot of initiatives underway and we question whether there are enough human resources to also launch an all-new ULCC,” Cameron Doerksen, a National Bank Financial analyst, said in a note.

WestJet is continuing to weigh whether to add widebody jets to its own fleet on a permanent basis, Cummings said. The carrier now flies some leased Boeing 767 aircraft that are more than 20 years old.

“We’re evaluating widebodies as a line of business,” Cummings said. “That includes being able to come to terms with a manufacturer on an order, but we’re not there yet. Widebody certainly isn’t on the shelf.”

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Bruce Rule, Anne Riley Moffat