WestJet challenges Air Canada’s dominance with Boeing order

WestJet Airlines Ltd. has made a major move in its assault on Air Canada, signing a deal to buy at least 10 Boeing 787 airplanes that will be used on international routes.

The strategic expansion to destinations in Europe, Asia and South America could also eventually address the issue of whether Canada can sustain two airlines that operate domestically and internationally.

The real test of that, and whether WestJet does indeed plan to launch a full challenge to Air Canada, will begin in 2019. That is when the Calgary-based carrier receives the first of 10 planes – it has an option on another 10 – and Air Canada takes delivery of the last of the 37 Boeing 787s that have transformed its international operations.

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WestJet’s purchase of the wide-body, fuel-efficient planes comes just weeks after the company announced it will establish an ultra-low-cost carrier (ULCC) to defend its status as the low-fare airline in Canada and encourage some of the 5.5 million Canadians who cross the border to U.S. airports to choose WestJet instead.

The new 787s will be used on WestJet’s mainline service.

“It will diversify our network, it will derisk our dependence on the Alberta and Canadian point of sales and will provide a great new plank of revenue growth,” WestJet chief executive officer Gregg Saretsky said.

Although Mr. Saretsky would not reveal destinations yet for the new international service, he said the planes will likely have lie-flat seats, indicating a leap into full, business-class service that will compete against Air Canada and international carriers that serve the Canadian market.

“I think we’re going to have a great mousetrap here that will undoubtedly force a new equilibrium,” Mr. Saretsky said on a conference call with analysts and reporters. “He with the lowest cost wins, and we think this is a space we can certainly win in.”

If the options are exercised, the cost of the planes will amount to $5.4-billion (U.S.) at list prices. All airlines receive discounts, however, and one industry source estimated WestJet will get a 60-per-cent discount. That is because it is already a Boeing customer, orders for the plane are falling and Boeing rival Airbus is targeting airlines with a new, fuel-efficient version of its A330 plane that has about 80 per cent of the capability of a 787, the source said.

Mr. Saretsky said WestJet will finance the purchase through internal cash generation and without borrowing, although it has shifted some firm orders for smaller 737s to options, which frees up some financial resources.

Such routes as Montreal-Paris and Toronto-Paris are likely on WestJet’s radar initially, said industry consultant Robert Kokonis, who heads Toronto-based AirTrav Inc. But Asia, Australia and South America offer opportunities as well, he said.

Fares will likely drop, as will revenue yields for airlines on routes WestJet targets, he added.

“WestJet will be a very, very tough competitor. That will force everybody who’s going to compete with them to up their game.”

The creation of a ULCC makes sense for WestJet, but the international expansion is risky, noted Chris Murray, who follows the airline industry for AltaCorp Capital Corp.

Demand for travel from Canada supports the use of wide-bodied planes during the summer, Mr. Murray said, but narrow-bodied 737s are sufficient for north-south winter travel. WestJet traditionally does well on Alberta-Hawaii routes during the winter, he acknowledged.

He added that he is concerned about management pursuing the two new initiatives simultaneously.

The order came as WestJet reported a 45-per-cent slide in first-quarter profit.

Final profit fell to $48.3-million (Canadian) in the three months ended March 31, from $87.6-million a year earlier. Share profit dropped to 41 cents from 71 cents, although revenue grew 8 per cent to $1.1-billion from $1.03-billion.

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