WestJet vs. Air Canada: Competitive Strategy in Canadian Aviation

Introduction: A David-and-Goliath Competition

In what more than one analyst has likened to a David-and-Goliath battle, the competition between giant Air Canada and its smaller counterpart WestJet appears so lopsided in favor of the Goliath — Air Canada — as to preclude any inroads into its market share by the David, WestJet. Indeed, the U.S.–Canada market represents one of the largest air transportation markets in the world today, and Air Canada already enjoys a transborder network spanning 59 cities in both the U.S. and Canada ("United Airlines and Air Canada to Form Transborder Joint Venture" 2010). Furthermore, Air Canada is the country's largest domestic and international full-service airline, providing scheduled and charter air transportation for passengers and cargo to more than 170 destinations on five continents, serving around 31 million passengers each year ("United Airlines and Air Canada to Form Transborder Joint Venture" 2010). Besides its 118 destinations in the North American market, Air Canada also services 60 destinations throughout the Middle East, Europe, Australia, Asia, the Caribbean, and Latin America. Moreover, as a founding member of the Star Alliance — the largest air transportation network in the world — Air Canada provides air services to almost 1,200 destinations across 181 countries ("United Airlines and Air Canada to Form Transborder Joint Venture" 2010).

By sharp contrast, WestJet Airlines Ltd. provides scheduled services to a North American and Caribbean network comprised of 69 cities ("Profile: WestJet Airlines Ltd." 2010). Despite a business model that has traditionally focused on low-cost and convenient alternatives, WestJet now features extra legroom, leather seats, and live seatback television on its fleet of 87 Boeing Next-Generation 737 aircraft. As of December 31, 2009, WestJet had also leased an additional 10 aircraft — seven 737-700s and three 737-800s — bringing its total of leased aircraft to 33 ("Profile: WestJet Airlines Ltd." 2010).

The airline industry has become increasingly competitive in recent years, due in part to the severe disruption it experienced following the terrorist attacks of September 11, 2001. The ongoing global economic downturn and high energy prices have added further constraints to airline performance. In this environment, airlines that are agile and nimble in their response to changing market conditions enjoy a competitive advantage — and this has certainly been the case with WestJet's performance compared to the struggling Air Canada. By providing the flying public with no-frills, low-cost regional and international alternatives, WestJet has not only survived during this turbulent period but has also gained market share from Air Canada, continuing the decline of this former industry leader. The purpose of this study was to examine the relevant literature to identify what WestJet and Air Canada are doing right — and wrong — to achieve a competitive advantage in an increasingly competitive marketplace.

During the closing decades of the 20th century, global air transportation grew at a steady pace until the terrorist attacks of September 11, 2001 resulted in a drastic but short-lived downturn in passenger and cargo traffic. Although the industry has largely recovered since that time, many air carriers continue to struggle during a period characterized by a global economic downturn combined with escalating energy costs. In this regard, Janda, Flouris and Oum emphasize that, "At this juncture, it is important for Canada to examine its medium-term air transport policy options, taking into account the changed and changing industry environment domestically and internationally" (2005:73).

This problem is especially acute for countries such as Canada, where its large geographic size means that the airline industry plays an important role in economic performance. As Janda and his associates emphasize, "Transportation has been a cornerstone of Canada's national political and economic policy since before Confederation and continues to be vitally important to this country's future" (2005:73). Because it is vitally important, major successes and failures in the transportation sector have a very real impact on the economy of Canada and its neighbors. In this environment, identifying which factors contribute to the success of Canadian air carriers represents a timely and valuable enterprise — one that is also directly tied to the purpose of this study.

The purpose of this study was three-fold: (1) to determine the historic performance of Air Canada and what factors have contributed to its successes and failures; (2) to determine the historic performance of WestJet and what factors have contributed to its successes and failures; and (3) to develop a qualitative synthesis based on the foregoing findings to identify the superior performer and the steps being used to achieve that superior performance.

The study was guided by the following research questions: What has Air Canada been doing that has contributed to its successes and its failures? What has WestJet been doing that has contributed to its successes and its failures? Are there any airline industry best practices that can be identified which Air Canada could use to improve its performance?

Recent Trends in the Canadian Airline Industry

Taken together, the foregoing trends and the importance of the issues involved create a real need for informed policies for the Canadian airline industry. Janda et al. note that, "Given the global restructuring of the aviation industry that is well underway, it is critically important that Canada chart a clear course for Canada's airlines and air service providers" (2005:74). Although a number of steps have been taken to help the Canadian airline industry become more competitive and technological innovations have contributed to its efficiency, these initiatives have been balanced by increased security requirements and the ongoing threat of terrorism. Many carriers have experienced difficult times and some have folded as a result of increased competition combined with a wide range of external factors that have made competing in the 21st-century airline industry even more challenging. Consequently, the importance of this study directly relates to the need to determine which business models are producing the best results.

According to Flouris and Walker (2005), the new business models represented by low-cost airlines such as Canada's WestJet managed to outperform legacy carriers even following the terrorist attacks of September 11, 2001. Moreover, following deregulation of the airline industry in North America, new business models are increasingly required to compete more effectively, particularly during turbulent political and economic periods. Identifying what works best so that more of it can be replicated simply makes good business sense.

Following the terrorist attacks of September 11, 2001, many observers ventured that "things would never be the same" — and in many ways, they were right. Because of its enormous impact on the airline industry, that date serves as a useful demarcation point for before-and-after analyses. Just prior to the 9/11 attacks, there were about a dozen low-cost carriers competing in the United States alongside the industry leader, Southwest Airlines (Doganis 2001). In those relatively prosperous days for the legacy carriers, these low-cost carriers did not represent much of a threat; while major airlines continued to enjoy enormous profits, their low-cost competitors did not fare as well, particularly during 1996 and 1997 (Doganis 2001). By the turn of the century, however, these low-cost carriers had become profitable or had at least significantly reduced their losses, due in large part to concomitant increases by major carriers that were raising prices in response to decreasing yields and higher energy prices (Doganis 2001).

By and large, passenger traffic across the board increased significantly prior to September 11, 2001, and all signs indicated it would continue to increase for the foreseeable future. According to Janda, Flouris and Oum (2005), global air passenger traffic increased from 1.573 trillion revenue-passenger-kilometers (RPK) in 1985 to 3.394 trillion in 2000, representing a 116% increase during that decade-and-a-half period, or an average annual compounded growth rate of 5.26%. Furthermore, between 1985 and 2000, air freight traffic grew at an even faster rate than passenger traffic (Janda et al. 2005). These authors also emphasize that airlines are directly affected by the larger economy in which they compete: "Since, in the long run, levels of per-capita income and GDP are the main factors determining air passenger and freight volumes, it is not surprising to see that the long-term growth outlook for the air transport industry is excellent. Even in North America, where the airline markets (especially the United States and Canada) are saturated, passenger traffic is forecast to grow on average 4.5 per cent per year in the next 20 years" (Janda et al. 2005:73).

Lacking an economic crystal ball, those rosy estimates may be forgiven in view of the lingering global economic downturn, but the direct connection between macroeconomic factors and the airline industry is apparent. Janda and his associates cite a number of events that hammered the airline industry following September 11, 2001, including: the dot-com collapse and the subsequent slowdown of business travel; the 9/11 terrorist attacks and the ensuing war on terrorism; the Afghanistan and Iraq wars; and the SARS outbreak (2005:73).

The implications of these events were truly profound, particularly during a period when the airline industry was already struggling to cope with the effects of 9/11. As Janda et al. write, "These key events brought the world's airlines and the associated air transport industries to their knees. Together these events completely wiped out more than three years' worth of air traffic growth and produced a more than 15 per cent reduction in air passenger volumes globally in the short run" (2005:74). The SARS outbreak alone was enough to tip the balance for some carriers already under stress. Miller emphasizes that, "This global epidemic struck Toronto particularly hard — right at the heart of Canada's economy and its principal aviation hub. Air Canada estimates that during the month of April it lost approximately $125 million due to the SARS epidemic" (2003:267).

The adverse effects of the SARS outbreak were not restricted to April 2003 alone. Just as the Canadian airline industry was recovering, another outbreak the following month caused similar havoc, resulting in a further decline in passenger traffic of more than 26.4 per cent and losses exceeding $200 million (Miller 2003). The president of Air Canada reported that the company's operating revenues for 2003 would be fully $1 billion less than in 2002, a loss primarily attributed to the SARS outbreak. As Miller concludes, "This final blow was enough to tip the precarious balance for Air Canada and, in April, it filed for bankruptcy protection under the Companies' Creditors' Arrangement Act" (2003:267). Air Canada was faced with a dual blow from the SARS and post-September 11 environment: "What made this Perfect Storm particularly devastating was its timing. It arrived at a time when consumers were turning their backs on the traditional network carriers and flocking to low-fare alternatives. And in Canada, it came at a time when government air transportation policy was in serious disrepair" (Miller 2003:267). Clearly, though, WestJet was competing in the same turbulent regulatory environment as Air Canada, suggesting that the former was reading the signs far better than the latter.

By 2004, leading industry experts at the International Air Transport Association projected that the airline industry in Canada would recover to its pre-September 11, 2001 levels by 2005 (Janda et al. 2005). The projections by Costa, Harned and Lunquist (2002) in the immediate aftermath of the terrorist attacks specifically cited the business model used by WestJet as representing the solution for the airline industry's ailments. According to these authorities, "In the 1980s, increased yields drove recovery in the airline business. This time around, given the high levels of excess capacity and projected weakness in business travel revenues, we do not believe that yields will come back as strongly as in previous downturns. Instead, any recovery will have to come from long-term, structural cost reductions" (Costa et al. 2002:89). These projections were based on the unwieldy operational structure in place at major airlines such as Air Canada compared to the more flexible approach used by WestJet. Costa et al. add that, "For major airlines using the high-coverage hub-and-spoke model, such reductions may be difficult to achieve, and these airlines may struggle beyond 2004. In contrast, competitors that utilize a lower-cost strategy — such as WestJet in North America — look well positioned to expand their operations and profitability" (2002:90).

The overarching implication for the airline industry, particularly in North America, was a growing need for a new business model that could respond to a changing environment more efficiently. Whitelegg emphasizes that, "The 11 September 2001 attacks on New York and Washington DC accelerated a restructuring of the airline industry, whose net losers have been large flag carriers and whose net winners — so far, at least — the low-cost carriers" (2005:125). There were ample cases to support this assessment. As Whitelegg adds, "Economic prosperity was polarized: as the largest airline in the world, United Airlines, entered bankruptcy, low-cost JetBlue expanded"; likewise, "as the Belgian national carrier Sabena crashed, Ryanair aggressively redrew the aviation map of Europe" (2005:125).

These trends were visible to all, especially analysts at Air Canada and WestJet. Given the fundamental differences in their recent performance, it is clear that WestJet recognized a growing demand and responded, and the case can be made that this demand began before September 11, 2001 — with successful survivors being those that read these trends more accurately. Whitelegg also points out that WestJet's low-cost business model is not new, with early efforts to offer low-cost alternatives tied to prevailing macroeconomic conditions dating back decades: "Attempts to provide cheap air tickets date back to the Second World War. With new holiday entitlements, workers returning from the war brought with them a thirst for foreign travel" (2005:125). The charter approach to providing low-cost flying solutions for these and other would-be air travelers became the framework on which regional and national airlines would base much of their business models in the years to come. As Whitelegg concludes, "Over the next thirty years, charters became the inexpensive link between the tourist-generating markets of northern Europe and the Mediterranean sun. They were the original low-cost carriers" (2005:125).

WestJet took this low-cost business model to heart and applied it in a consistent and thoughtful manner to the dynamic marketplace in ways that its more cumbersome rival, Air Canada, could not. The timeline of events for the past several years reflects a recurrent theme of good news for WestJet and bad news for Air Canada. In 2005, Janda and his associates observed that for Air Canada, even good news was tinged with some bad: "On the Canadian scene, as of October 1, 2004, Air Canada (ACE Aviation) emerged from 18 months of bankruptcy (CCAA) protection, and its third-quarter results show a clear improvement" (2005:74). By contrast, the report for WestJet was strictly positive: "WestJet has just initiated its transborder services to the United States" (Janda et al. 2005:74).

While the competitive environment remained highly dynamic, one permanent feature to emerge from this series of events was the need for a business model such as WestJet's. As Doganis points out, "In Canada, in brief, the low-cost, no-frills model has clearly become a permanent feature of North American aviation" (2001:135).

The primary policy issues facing the Canadian airline industry in the post-September 11, 2001 climate were summed up in late 2004 by Canadian Transport Minister Jean Lapierre in his report to the Standing Committee on Transport. Among the key recommendations that emerged were: efforts to include Canada in EU–U.S. Open Aviation Area negotiations; a review of the National Airports Policy for cost-effectiveness; revisiting recommendations to relieve the burden of charges, excise taxes, and rents on the air transport industry; and improved provision of carrier-specific electronic statistics by Transport Canada. Among the most pressing policy questions debated were whether Canada should increase the foreign ownership limit on voting shares in Canadian air carriers from 25 per cent to 49 per cent; whether foreign carriers should be permitted to provide domestic Canadian air services; and how Canada should pursue negotiations with the United States on further liberalizing the bilateral air agreement, potentially toward an Open Skies arrangement (cited in Janda et al. 2005:75).

The position of major Canadian air carriers such as Air Canada on the Open Skies initiative has generally been favorable. In 2001, just three months after the September 11 attacks, Air Canada President and CEO Robert Milton recommended an Open Skies Plus initiative for Canada and the United States with a view to increasing air traffic between the two countries by an additional 40 per cent (Levin 2006). A lack of active participation in the negotiations over this proposal, however, kept the Canadian airline industry from realizing the full benefits of its adoption (Levine 2006).

This lack of government participation, combined with lopsided approaches to regulation in the past, created a situation where Air Canada became sufficiently large to protect itself because it was perceived as "too large to fail." Levine notes that, "The proliferation of business models and firms that emerged and survived in the United States did not find a counterpart in Canada. The only airline sharing Air Canada's interests was Air Canada, and it chose to lower its costs through a bankruptcy that produced the devolution of Air Canada into a whole constellation of firms all owned by Air Canada, each specialized in competing against a particular sort of competitive threat" (2006:270). Levine further observes that, "The periodic failures plus the constant drumbeat of warning of the only apparently viable low-fare competitor, WestJet, created a David vs. Goliath story for the press, with David WestJet seen as seeking help in defending the consumer from monopoly dominance by Goliath Air Canada" (2006:270). The response by the Canadian government was to introduce new pricing regulations, but these again worked in favor of Air Canada: "Air Canada has been able to persuade the government that its pricing policies should be left to the market, and that the government should focus its attention on remaining monopolies in airports and other infrastructure that inhibit entry and raise costs" (Levin 2006:270).

The origins of these issues began during the late 20th century. Levine (2006) reports that the airline industry was deregulated and the Canadian government eventually divested itself of the national airline, due in part to successful outcomes realized through deregulation in the United States: "Heavily influenced by the widely-publicized successes of airline deregulation south of its border, Canada also deregulated its airline market in its National Transportation Act, which was passed in 1987 and became law in 1988" (2006:270). Over the next dozen years, the cumulative effect of these trends created a monolithic presence in the Canadian airline industry in the form of Air Canada. As part of its National Transportation Act initiative, the Canadian government privatized its national airline; however, unlike in the United States, one legacy airline — Air Canada — "with government encouragement, acquired failing Canadian Airlines in December 1999 and emerged as a clearly dominant firm, with a domestic market share by seat kilometer of around 73 per cent and a market share by seat capacity of 64 per cent in 2002" (Levine 2006:270). As Doganis puts it plainly, "In 2000, Canadian Airlines had to be rescued from collapse by Air Canada" (2001:16).

Given this "too large to fail" approach, it is not surprising that the acquisition created a monolithic airline that could dominate the Canadian air industry landscape. Despite increasing competition from low-cost carriers, particularly WestJet, Levine also emphasizes that, "Many travelers were dependent on the dominant carrier for service and its vigorous efforts to combat efforts to gain footholds in its market generated allegations of predatory pricing" (2006:270). The net result was an increasingly negative perception of Air Canada among the Canadian flying public (Levine 2006). According to Cote, "Air Canada, the closest thing we have to a national heritage, seems to be in a profound crisis" (2002:60). Cote adds that, "Until the federal government clarifies its views on air transportation, Air Canada's future will remain in jeopardy. The airline industry suffers from chronic problems tied to capacity adjustments and excessive indebtedness and has to cope with a volatile and fickle clientele. Last, turbulent labour relations and a fully unionized workplace give the industry a rigid cost structure" (2002:60).

What Cote does not point out, however, is that WestJet was competing in that same uncertain environment as Air Canada. As Cote observes, "Air Canada's other problem is that it is an east-west airline in an economy that is increasingly forging north-south links. Does a trans-Canadian airline have any relevance in a continental context?" (2002:60). Although Air Canada has since forged new north-south links with United Airlines, Cote would likely suggest that it was "economic reality" that forced Air Canada to do so rather than foresight: "Would it be better to integrate it into the operations of a major North American carrier than to wait for economic reality to impose it? The federal government can't wash its hands of Air Canada's fate" (Cote 2002:60).

The definition provided by Black's Law Dictionary indicates that an "oligopoly" is "an economic condition where only a few companies sell substantially similar or standard products. Oligopoly markets often exhibit the lack of competition" (1999:1086). Therefore, government oversight at some level is regarded as an essential element in Canada's airline industry. As Cote notes, "The airline industry throughout the world is an oligopoly, thus requiring government intervention to ensure meaningful competition" (2002:60). Likewise, because of its vast geographic size and proximity to the United States, the air industry is an essential component in the economic infrastructure of Canada. Cote adds, "Canada's geography also makes air transport a critical industry. The federal government cannot ignore Air Canada pricing strategies and its service policies toward less populated regions. The government must ensure public interest takes precedence over the greed of airline management" (2002:60). As Cote further warns, "Particular attention has to be paid to ensure virtual abusive monopolies do not arise in big cities like Toronto, Montreal and Vancouver by the virtue of controlling landing rights. Indeed, if Air Canada were to increase its current market share, government intervention would be advisable" (2002:60).

The need for some level of Canadian government oversight is therefore required to ensure a competitive marketplace. Cote points out that, "If a crisis were to put an alternative airline such as Air Transat or WestJet in jeopardy, the government may have to intervene financially to ensure healthy competition. In short, as essential as Air Canada is to the country, it shouldn't be given free rein" (2002:60). Citing numerous examples of airlines that have failed when such oversight was absent, Cote suggests the same could easily happen in Canada, particularly given the collusive manner in which governmental regulators have approached the problem in the past. Concerning Air Canada's recent strategic partnership with United Airlines, Cote's admonition is particularly timely: "Canada needs an east-west transport policy and sufficient political leverage over the airlines serving these routes. The Canadian government should formally declare it will not let Air Canada fall into the hands of a foreign carrier" (Cote 2002:60).

A study cited by the Centre for Aviation ("Canadian airlines make argument for eliminating taxes and fees" 2010) provides useful insights into the market forces driving the competitive landscape in the Canadian airline industry. According to this report, "As with their U.S. counterparts, Canadian airlines are seeking government policy changes on taxes, saying that the increased economic output resulting from the elimination of the taxes may even provide more money to government coffers" (Canadian airlines make argument, 2010, para. 3). These findings were based on a study sponsored by the National Airlines Council of Canada (NACC), which includes WestJet, Air Canada, Air Transat, and Jazz. The study's principal researcher estimated that Canadian airlines could gain an additional 600,000 passengers each year through: elimination of ground rents; elimination of the Air Travellers' Security Charge (ATSC); elimination of the excise tax on jet fuel; and reimbursement of NAV CANADA for its annual costs for servicing the CAD$1.5 billion debt it took on when it was privatized in 1996 (Canadian airlines make argument, 2010).

From a supply-side perspective, these steps would create a multiplier effect on the overall Canadian economy. The authors of the International Air Transport Association-sponsored study emphasized that "the air transport is the only sector required to pay for its own infrastructure," which leads many airline presidents to complain that they "have to compete with subsidised rail and road transport while paying through the nose for the privilege" (Canadian airlines make argument, 2010, para. 4). The four airlines comprising the National Airlines Council of Canada provide passenger service to almost 50 million passengers each year, directly employ nearly 40,000 people (almost 85,000 total when the multiplier effect is applied), and generated combined revenues exceeding CAD$14 billion (Canadian airlines make argument, 2010). The group's members are also responsible for facilitating domestic and international trade, with imports and exports shipped by air during 2009 totaling CAD$94 billion (Canadian airlines make argument, 2010).

Finally, using various analytical methods, the researchers demonstrated how the Canadian airline industry's impact on the economy extended to less visible factors such as increased productivity levels, with estimates of contribution ranging from 2.3 per cent to 3.0 per cent of the country's GDP (Canadian airlines make argument, 2010). Notably, current regulations affect low-cost carriers such as WestJet disproportionately compared to Air Canada. The lead researcher notes that, "A survey of 10 selected domestic flights for each of Air Canada and WestJet shows that the aggregate impact of a host of government policies accounts for 20 per cent to 25 per cent of the total fares, with the relative impact being larger for the lowest fares" (Canadian airlines make argument, 2010, para. 4).

These findings clearly indicate that WestJet is having a more significant economic impact relative to its more cumbersome counterpart at Air Canada. Besides the negative public relations produced by allegations of predatory pricing and unresponsiveness to customer demands, they also served to underscore prevailing attitudes among many Canadians today — with Air Canada being the largest but least liked and WestJet being widely admired as a worthy underdog competitor.

Methodology

To improve the trustworthiness and credibility of the study's findings, this study used a triangulated study approach. According to Neuman, "Triangulation is a term borrowed from surveying the land that says looking at an object from several different points gives a more accurate view of it" (2003:547). The first part of the triangulated methodology consisted of a review of the relevant literature concerning the airline industry in Canada, including recent and current trends in the regulatory environment and market conditions. As Fraenkel and Wallen note, "Researchers usually dig into the literature to find out what has already been written about the topic they are interested in investigating. Both the opinions of experts in the field and other research studies are of interest. Such reading is referred to as a review of the literature" (2001:48).

The second component of the methodology consisted of a case study of WestJet and Air Canada. According to Neuman, the case study approach is "research in which one studies a few people or cases in great detail" (2003:530). Feagin, Orum and Sjoberg emphasize that, "The study of the single case or an array of several cases remains indispensable to the progress of the social sciences" (1991:1), and add that the case study "offers the opportunity to study these social phenomena at a relatively small price, for it requires one person, or at most a handful of people, to perform the necessary observations and interpretation of data" (1991:2). The case study approach was deemed a useful framework for increasing the study's validity for two key reasons: (1) conclusions related to a certain aspect of a phenomenon do not necessarily have to be based solely on one data source; and (2) case studies generally rely on a variety of data sources (Benz & Newman 1998).

The final component of the triangulated methodology consisted of a meta-analysis of the issues developed in the review of the relevant literature. According to Zimmerman, "Meta-analysis is a systematic synthesis, comparison, or summary of narrative reviews" (1995:123). This approach provided opportunities to develop new insights and formulate conclusions that are often more accurate and credible than findings derived from any single primary study or a single non-quantitative narrative review (Dimatteo & Rosenthal 2001). This approach is also congruent with Neuman (2003), who emphasizes that a meta-analysis does not have to employ statistics in order to develop insightful summaries from a wide variety of sources.

The literature review was conducted with a focus on peer-reviewed and scholarly resources. The case study component drew on both juried and scholarly sources as well as the popular literature, and the meta-analysis relied on sources of all types in order to add breadth to the analysis. The database of study consulted included university and public libraries as well as reliable online research resources such as EBSCO, FindArticles, and Questia.