Case Study – Turbulent Flight Plan

Eighty-two percent. That’s the market share held by Air Canada, the sole remaining major Canadian airline, after its takeover of money-losing Canadian Airline in the spring of 2000. And the Canadian airline industry now is going through some major upheavals. Consumer facing an airline market that’s more reliant on a single carrier than any other major western nation—even Germany’s Lufthansa only has 60 percent of the market—are complaining about the almost total monopoly. They are critical of flights being overbooked, extremely long lines at check-in, and telephone call centers with half-hour-plus waits on hold, and prices that cost the passenger less to fly to Europe than to the next province. In response, the Canadian government encouraged discount airlines and stood behind their attempts to make it in the market. The house of commons passed legislation in May 2000 that defined “abuse of dominant position” and empowered the competition Bureau (equivalent to U.S. Federal Trade Commission) to punish companies engaging in price gouging. This legislative move was promoted by Air Canada’s competitive attack on WestJet Airline for moving into markets in eastern Canada. WestJet Airlines is one discount airline struggling for a smooth flight in this increasingly turbulent environment.

Of the six scheduled discount airlines started in Canada in the last 20 years, only WestJet based in Calgary, Alberta, is still flying. It serves 13 western Canadian cities and has 5 % of the Canadian market. But Stephen C. Smith, president of WestJet, has made a strategic decision to take the company national.

WestJet, started in 1996, mimic’s the southwest Airlines Strategic model. Southwest Airlines, a U.S. airline, has enjoyed phenomenal success with a strategic formula of low fares and short-haul routes. WestJet’s fares are an average of 40 % lower than Air Canada’s. it offers one class of seating has no meals on board or executive lounges in airports, and concentrates on flight of 400 miles or less. Passengers don’t have tickets, only confirmation numbers. And to cut costs, WestJet encourages ticket sales through the internet, which now accounts for about 11 percent of its tickets sold. Whenever possible, it lands at smaller airports that charge low user fees. One deviation from southwest’s strategy is the WestJet does assign passenger—or guest—to specific seats.

As many of these strategies illustrate, Smith has made a commitment to keeping operating cost low. In addition, like Southwest, WestJet flies one class of jet, the Boeing 737, which minimize pilot training, maintenance costs, and gate turnaround time. To keep its employees (over 1,100 of them) nonunionized and thus, giving the company more control over wages and salaries, WestJet uses several incentives. A major one is that all workers who have Been with the company at least three months participate in a profit sharing plan --$4 million was shared among eligible employed 1999. In addition, 70 percent of the employees participate in a stock purchase plan, in which WestJet matches employee’s contribution up to 20 % of their salary.

Smith’s no-frills model appears to be working. During its four year of operation, WestJet growth has been steady. Revenue passenger miles (a key operating measure in the airline industry) were up $4 % for the first four months of 2000. In April 2000, 78 % of available seats were filled, compared to 71% in April 1999. WestJet also consistently makes a profit. A spokes person for a Canadian consumer group said, “WestJet is tightly run and well managed… There are not many (passengers) complaints.” However, some experts say that Smith’s strategic decision to compete nationally is a gamble that will either make or break WestJet. “it’s a risk, and this isn’t and industry that tolerates a lot of mistakes.” To accommodate its national expansion, WestJet ordered 20 new Boeing 737 jets to be delivered over eight year and plans to lease 10 more. Also, WestJet competitor, Air Canada started its own discount carrier in summer 2000, serving WestJet stronghold, western Canada. Although industry analysts say that unionized Air Canada will have a hard time matching nonunionized WestJet cost structure, some feel that WestJet may be overextending itself and expending faster than demand for its services.

Questions

1. What competitive advantages do you think WestJet has? What competitive advantages do you think Air Canada has? Explain your choices.

2. What competitive strategy does WestJet appear to be following? Explain your choice.

3. How could Stephen Smith have used SWOT analysis in developing his strategy to go national? Do an abbreviated SWOT analysis using information from case.

4. What do you think of WestJet strategic decision to compete nationally? What suggestions might you make to Stephen Smith?

Reference; - Strategic Management, Chapter – 8, Management by Stephen P. Robbins, 7th Edition