WestJet ULCC venture: Success depends on one key cost area – Labor.

We all have observed that as unit cost gap narrowed between network re-launched operations and LCC (Low Cost Carrier), a "revised" cost conscious and aggressively pushed ancillary revenue airline model appeared. ULCC (Ultra Low-Cost Carrier) aggressively collect ancillary revenue from unbundled services allowing them to stimulate the market through even lower fares while undercutting LCCs fares. In addition, key cost cutting efforts are taken to the next level especially in one area – Unit labor costs. Today, that is the model followed by Allegiant Air, Spirit Airlines, Frontier Airlines, Wizz Air, JetStar, Air Asia and other ULCC.

An ULCC is one which has significantly lower costs than other LCCs. On average, 35% to 50% lower unit costs. Furthermore, 40% to 50% of cost reduction comes from one key area: labor cost. On the other hand, it generates a significant portion 35% plus of its operating revenue through the sale of unbundled, ancillary services.

In the Canadian market, it is good to observe a new ULCC development but for WestJet («WJ») a number of challenges lie ahead: Market stimulation through lower fares and focus on "new" segments such as bus transportation are key, lower and revised labor contracts need to be executed for the new ULCC with a key focus on labor and capital asset productivity enhancements, union buy-in and concession negotiations (WestJet pilots voted in May 2017 to join the Air Line Pilots Association – ALPA – and flight attendant group may follow soon), route/aircraft caps as they may be imposed by the union such as it is the case with Air Canada Rouge, among others.

One key question relates to the new entity structure: Should WestJet launch its ULCC operation within parent company umbrella and use current resources? Or create a new separate entity? A brand new separate brand is recommended. Why? The advantage of using a new brand means future labour and unions conflicts can be avoided which WestJet needs to maximize profitability. As well, it will allow WestJet to take a fresh look at and further streamline unit costs. One recent example, is IAG group (British Airways and Iberia). IAG launched a separate LHLC (Low Cost Long Haul) brand called LEVEL. Launching a separate brand not only allows IAG to keep costs as low as possible but also implement revised human capital productivity and labor cost efficiencies. As we know, IAG operates a LCC brand called Vueling but decided on a new brand to further cut costs to the next level.

Finally, I observe WestJet branching out into 3 business models: Hybrid (both short and long haul), ULCC and a 2-class product LHLC. WJ current LCC operation might disappear as it is today. Short-haul hybrid and ULCC operations should provide enough feeder traffic to fill international long-haul operations as such is needed to fill higher seat density aircraft especially during non-peak periods.

About the author: René Armas Maes began his career as a Senior Analyst at Simat, Helliesen & Eichner based in New York City where he consulted global airline, regional aviation and corporate aviation customers. René is an international consultant and IATA external instructor with 15 years of experience in revenue and EBITDA growth, strategic planning, new product development, cost containment and business restructuring. Today, he manages Jet Link International LLC an aviation consultancy firm and leads a number of professional consultants on international engagements.

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