CALGARY – WestJet Airlines Ltd. (TSX:WJA) has set out a plan to expand both internationally and into ultra-low cost offerings that has raised concerns from some analysts about being overly ambitious.
The company said Tuesday it has ordered 10 Boeing Dreamliners with the option for 10 more, that will allow it to serve new destinations in Asia, South America and Europe with higher-end offerings like lie-flat seating.
The move comes as WestJet is also moving ahead with a plan to launch a separate ultra-low cost brand that will start with 10 planes and offer a bare-bones service.
Combined, the new avenues of thrift and luxury set the company up for a new era of growth, said chief executive Gregg Saretsky at WestJet’s annual meeting Tuesday.
“The opportunity to expand both in the low cost space, while at the same time growing our long-haul business, is something that creates a platform for future growth that has been unprecedented in our 21-year history,” he said.
National Bank analyst Cameron Doerksen responded to the plan by lowering his rating of WestJet to underperform, citing in part the company’s overall ultra-low cost strategy, the significant money that will be needed to expand abroad and the complications of doing both at the same time.
“We are concerned WestJet has too many new strategic initiatives underway simultaneously, which could impair successful execution,” wrote Doerksen in an analyst note.
WestJet shares have fallen to their lowest levels in nearly a month. They were at $22.03 in mid-afternoon trading, down 81 cents or about 3.6 per cent.
Saretsky said at the annual meeting that WestJet’s recent experience of starting its Encore regional brand sets it up well for the task.
“It’s a lot of work, but only three years ago we started a brand-new airline, which has grown from nothing to 45 aircraft, so I believe we have all the foundations to make starting two new initiatives really quite doable,” he said.
Doerksen said in his note, however, that international routes add a greater degree of complexity and that while the actual cost of the 10 new planes is likely much lower than the list price of $7.4 billion, it is still significant.
WestJet has reduced some of the complexity of the plan by spacing out the launches, with the first Dreamliner 787s not scheduled to be delivered until 2019, well after it expects to launch its discount brand.
The ultra-low cost carrier, or ULCC, should be in operation by early next year with a no-frills structure modelled from the likes of European carriers Ryanair and easyJet.
“The focus on the ULCC is to have the absolutely, rock-bottom entry fare, and then you pay as you consume for all the other products and services,” Saretsky said on the conference call.
Saretsky said the new discount airline’s costs would be about 6.5 cents per available seat mile, compared with 10 cents for its WestJet operations, as it does away with free extras like snacks and squeezes more travellers into the planes.
The new offering will focus on leisure travel routes not served by WestJet to avoid cannibalizing its own business, with Saretsky saying one of the target markets is the 5.5 million flights Canadians take from airports just across the U.S. border.
The company is also pushing to lower costs across its operations, with plans to add another row of seats to its to its existing 737-700s and 800s, and to shift more customer service online and away from call centres.
WestJet’s expansion plans come as the company faces another pilot union drive, with voting set to begin on whether to join the Air Line Pilots Association.
The plans also come as the company emerges from a tough quarter after a record number of weather interruptions, pushing first quarter net earnings down to $48.3 million or 41 cents per share from $87.6 million or 71 cents per share last year.
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