So WestJet Airlines, once Canada’s LCC is starting all over again with another LCC airline of its own ? is this to counter the growing competion from Air Canada’s “LCC” rouge, and the new Canadian planned start-ups like Canada Jetlines, Fly Too (Enerjet with Indigo partners) and NewLeaf now that foreign ownership of a Canadian airline is upped to 49%.
MORE on LCC’s and ULCC’s in Canada and the USA in BLOG articles of: July 27, 2014 – May 12, 2015 – Sept 5, 2015 – Jan 12, 2016
There is also talk of “the BIG gorilla” of low cost airlines in North America, Southwest Airlines coming to Canada now that its CRS has been upgraded and able to handle foreign bookings, currencies, etc.
This concept of “low cost airline” within a full service/hybrid airline is not new, but it has rarely worked, but signs are improving with airlines like Eurowings (Lufthansa), rouge (Air Canada), NAI (Norwegian), Scoot (SIA).
South of us we had failed attempts by Delta (Delta Express and Song), United (Ted, Shuttle), Continental (Continental Lite), US Airways (MetroJet), in Europe SAS (Snowflake), BA (Go), Lufthansa (Eurowings), Air France/KLM (Transavia) etc.
The problem has been that they were still part of the parent full service airline, tied to labor unions and their business mentality is not like that of the real ULCC success stories from Ryanair (Ireland), Wizz Air (Hungary) and Norwegian (Norway) low costs per seat, that is what many travelers want.
These dedicated LCC (low cost airlines) or ULCC (ultra low cost airlines) work and make money, one can point to the above plus Spirit, Allegiant and Frontier in the USA, or Air Asia, Lion Air, VietJet, etc. in Asia, there costs are much lower than traditional full service airlines.
The key cornerstones of a ultra low cost airline is low costs through using new single aisle B737 or A320 aircraft at very high utilization rates (+11 hours per day) to keep capital unit costs to a minimum, lower wages, un-bundling of amenities and charging extra for them when needed (seat selection, ticket change, food, drinks, baggage fee), using cheaper secondary airports when possible, fast turnarounds, and a corporate of constant cost control.
In Canada, Air Canada experimented with its own LCC’s called ZIP and Tango and few years ago set up rouge, a low cost subsidiary, yes it has lower costs than mainline Air Canada, but do not be fooled, it achieves the majority of those savings by cramming in more seats into its aircraft, with 29” pitch the tightest in North America, and believe me its hell for anything longer than 2 hours.
I have noticed they do not really lower the prices on rouge flights they just get away with lower costs and thus margins, but be weary of rouge on long flights, my recent flight to the Caribbean will not be repeated, you are better off on WestJet, trust me.
Same aircraft, same company, but one costs 30% less to operate, of that savings 82% can be contributed to the fact rouge is cramming in 33% more seats into the cabin, 282 seats versus just 211 on Air Canada, the other 18% of the 30% total savings is made up by using older aircraft, cheaper flight and cabin crews, and lower overheads allocated to rouge, so NOT a real LCC just what has been done by others, aircraft not needed, lower salaries but still same organization, mentality and culture.
Air Canada has transferred 46 aircraft to rouge so far, it is allowed up to 50 under an agreement with pilot’s union, these older 21 x B767-300ER’s have 282 seats in total, of which 29 are premium rouge seats (basic economy elsewhere), while Air Canada’s B767-300ER’s have just 211 seats, so with 33% more seats, you get much less comfort and a very tight pitch, which combine to give Air Canada 24.6% lower seat costs per flight with rouge’s B767-300ER vs mainline Air Canada B767-300ER, just based on seat density, yes it lowers unit costs but is that a real “low cost carrier” ? NO.
Changing seat density does not make you a low cost carrier, its all about the corporate culture of cost control, and you will not find that with a Full Service Carrier (FSC), and its why all the LCC by major US carriers failed in the past.
This rouge high density seating equates to +/-82% of the total 30% savings claimed by Air Canada versus its own B767-300ER, the rest is lower cost flight and cabin crew, less overheads applied to rouge but still on Air Canada books (“accounting shuffle”) using older aircraft with no IFE, you need your IPad or cell phone and download the app.
Most passengers I have talked to, dislike flying rouge and where it was originally set up to fly low yield leisure destinations in Europe (B767-300ER) and Caribbean/Florida destinations (A319), it is now being used to supplement mainline services, and hurting the Air Canada brand, as people book Air Canada and then find out they are on a high density rouge flight with no IFE and crap food. Air Canada needs to be careful not to erode its brand perception, because its happening as rouge is taking over more and more routes.
So is it really a LCC success for Air Canada, well it has made it more competitive and it has dramatically improved its overall costs at Air Canada, and closing the gap with WestJet and hence the new ULCC (ultra low cost carrier) from WestJet.
In 2016, WestJet average load factor was 81.8% (up from 80.0% in 2015) , its yield was $0.1720/RPM (down 8.1% on 2015, ouch), its PRASM was $0.1407 (down 6.0% on 2015), and the CASM was $0.1257 (down 2.2% in 2015), and an average utilization of 11.2 flight hours per day and net earnings for 2016 were $295.5 million.
If you are a Michael O’Leary fan (Ryanair) WJ cost is $137 per seat per flight segment, as that is what you sell and that is what customers buy, a seat not the above yields, PRASM, etc.
Let’s be clear, WestJet is no longer a LCC, it’s a hybrid airline, it started off as a LCC, but abandoned it when they realized they did not have to be a LCC to compete with just Air Canada domestically, it had better service and brand recognition and needed to match AC fares. The ONLY ultra low cost airline we have today serving Canadians is WOW from Iceland, presently serving Toronto and Montreal with great deals, but we need more.
This is the kind of airline one can say WOW to, only 5 years old, 12 aircraft (2 x A320, 7 x A321, 3 x A330-200) plus 13 on order (4 x A330-900 and 2 X A321neo and 6 x A321ceo) serving 28 destinations with very low fares, check it out, and maybe Southwest Airlines now that it has modernized its CRS for international bookings and currencies and gone international, that would be very nice, and put the pressure on our status quo duopoly.
Now, Air Canada’s 2016 average load factor was 82.5% (down slightly), yield was $0.1680/PRM (down 6.6% on 2015), PRASM was $0.139 (down 7.7% on 2015) and CASM was $0.144 (down 6.0%), while average utilization was 10.2 flight hours per day.
Interesting to note that PRASM is lower than CASM, which indicates that AC passenger revenue of $13.148B (89.5% of total revenue) on its own would be a loss and thanks to $1.528B in cargo and ‘other’ revenue it had a net profit of $876M in 2016.
As of April 21, 2017, the 3 year stock performance of Air Canada (AC) and Westjet Airlines (WJA) on the Toronto Stock Exchange are below. One can see they both were down and up at the same time, but Air Canada’s stock has outperformed WestJet stock for some time going up higher and going down lower thanks to changes by CEO Calin Rovinescu, who has spearheaded many positive changes to the once shunned Canadian airline.
Obviously, not all is perfect at WestJet and changes are in order, the B767 entry into service was very poor and again ALPA (Airline Pilots Association) is trying to unionize the 1,380 pilots at WestJet Airlines by the end of this May, which means increasing costs just when yields are heading down and full prices are slowly coming up, making 2017 a year of big changes at WestJet.
WESTJET AIRLINES (WJA) stock price of $22.50 per share, market capitalization of $2.61 billion, P/E (price to earnings) 9.135, which when inverted gives me a 10.9% return on earnings from WJA.
AIR CANADA (AC) stock price $13.03 per share, market capitalization of $3.53 billion, P/E (price to earnings) 4.205, which when inverted gives me a 23.8% return on earnings from AC.
So, quickly what is a ultra low cost carrier (ULCC) you ask? lets quickly look at Spirit Airlines (USA) (NASDAQ:SAVE) which in 2016 had an average load factor of 84.7%, yield of $0.1076/RPM, and a CASM of just $0.0737 by flying 100 aircraft 12.4 flight hours per day in high density seating (31 x A319s with 145 seats, 45 x A320s with 178 seats, 5 new A320neos with 182 seats and 19 A321s with 228 seats) and 71 on order ! and Bombardier thinks its going to crack this airline ?
Yes, Spirit is going into secondary cities now but with United, American and Delta offering new Basic Economy fares with many restrictions (fees for checked bags and carry-on, no seat selection), boarding last with no carry on, no meal to match Spirit, Frontier and Allegiant the 3 ULCC in the US.
The business model is seems simple enough, but implementing it successfully is another story, just in North America we have a huge list of failed low cost carriers:
USA: People’s Express, Skybus Airlines, ValuJet, Vanguard Airlines, Tower Air, PSA , Western Pacific plus the Mainline attempts discussed earlier.
Canada: Greyhound Air, Jetsgo, Wardair, Zoom Air, Canada 3000, Odyssey, Harmony Airways, plus the Air Canada failed attempts with ZIP and Tango.
Simple model no ? see below how simple Ryanair business models looks on paper, but its a complicated business that is tough as nails, fit as a prize fighter with +400 x B737-800’s in high density seating and another 190 on order, ready to take on anyone with very low CASM at around $US 0.057 which is 54% less than Westjet’s CASM !
Below is a glimpse of the Business Model Vigin America adopted to much success, though it took time to implement, and how it positioned itself between the Network and low cost carriers as a higher end hybrid airline with 3 class seating, and loved by many, now part of Alaska Airlines, and the brand will sadly end this year.
Offering a stripped down version of your product, can back fire, as now you have on any given domestic flight 4 classes (first, business, economy and now basic economy), and the amenities and service is wide ranging, who wants to be seen as the poor traveler in basic economy ? rather fly with the other poor travelers on ULCC no ? and be sparred the humiliation and ‘looks’ from pompous travelers in higher class. When you fly Frontier or Spirit you are all budget fliers, price sensitive just trying to save money.
How do you get to such low CASM’s with a 130-150 seater ? you don’t, its why they are taking A320/321’s, as in the ULCC market is all about cost per seat in the ULCC market especially !
Spirit’s 2016 average ticket revenue per passenger flight segment was $55.54 PLUS average non-ticket revenue per passenger flight segment of $51.87, for a combined revenue per passenger flight segment of just $107.41 (with the ticket or “seat” revenue being 51.7% of the total revenue per passenger, the rest is ancillary revenues (baggage, change of ticket, seat selection, food and drinks on board, etc.), that is a ULCC model.
A quick look at CASM using 2016 numbers in the USA for legacy, hybrid and ULCC operators, United ($0.125), American ($0.110), Delta ($0.135), JetBlue ($0.102), Alaska ($0.090), Southwest ($0.108), Allegiant ($0.076), Spirit ($0.072) and Frontier ($0.080), the gaps are still big between ULCC and the Major 3 but coming down.
The difference between a Spirit Airlines at a CASM of $0.072 the lowest in the US and then Delta at $0.135 per ASM or 87.5.% higher, that is a huge difference, Spirit may have received only $107 per passenger in Ticket and Non-ticket revenue (or $87 per seat), but its cost per seat per flight segment was only $70.80, and that is tough to beat on price.
The Big 3 are now introducing “Basic Economy” fares, they think they can capture market share from the ULCC, which should be interesting, as yields are coming down, and keeping RASM steady in 2017 is the key for all airlines in 2017.
The ULCC market is expanding with 5 new start-ups in 2016, Air Seoul (S. Korea), Volaris Costa Rica (owned by Volaris of Mexico), Wingo (Colombia) owned by COPA (Panama), and AzalJet (Azerbaijan), Salam Air (Oman) and in 2017 already a new up-start backed by Indigo Partners in Chile, JetSmart will be up and running this year.
It takes time to develop the business model, and the graph below shows the evolution of the low cost business model in the USA, and how many airlines failed in this process to get to where it is today, hats off to the early pioneers of the Low Cost Carrier (LCC), like Braniff Airlines, American Trans Air (ATA), Air Florida, Midway,USA 3000, etc. they opened the way for the new ULCC and LCC airlines of today.
You can read a lot more about Low Cost Airlines on my Blog (Aviation Doctor), I was involved with 2 LCC start-ups and I know a thing or two about the business model and track the changes now going on especially long haul low cost airlines a new disruption that has huge implications for many long haul airlines in the future (LH, ME3, etc.).
Don’t forget to read the other articles on LCC and ULCC if interested, and good luck to all new entries, the market needs you.
SIDE NOTE: Sadly, on a personal note, when I look for inspiration from aviation companies, I can never find anything in Canada, only outside of Canada, the years of the duopoly in our airline industry and status quo in business aviation has sucked our industry and leaders dry of innovation, excitement and the boldness to do bigger things, very sad, and its why I don’t work with Canadian companies, dull and lacking vision and innovation.
I rather work overseas, the difference is black and white, but only someone that has been away for 20+ years could see it, locally they think all is well in our aviation industry and yet the changes going on everywhere on this globe are huge, here they do not notice, live in their own little word, yet major disruptions are coming in so many forms and areas of the industry, but all is good and calm in Canada, no worries, be happy ! must be nice to live a plastic bubble.
Till next time, cheers. and thank you for reading my blog and keep the comments coming.