MKTG 4401 Term Project−WestJet

Due: Monday March15, 2010, Brian Giffen

Jill Vassallo Pam Malapas Nikki Wong Paul Dunn Ryan Snelling Set L

WestJet Internal Memorandum

To: Brian Giffen, CEO From: WestJet Business Consultancy Team RE: WestJet’s Five Year Plan Date: Monday March 15, 2010

As a successful company on the threshold of expansion, WestJet is presented with many factors of consideration when making decisions for the next five years and the future beyond that. As you are well aware, WestJet has found great success positioning itself as a small, homegrown company; yet to sustain WestJet’s success, measures must be taken to grow the company in a way that still aligns with its current brand image. We have identified the following to be the most pressing issues:      Fuel The Canadian Market The International Market The Plane of the Future Political and Legal Regulations

These factors must be taken into consideration when deciding the WestJet’s future; consequently, we have provided recommendations of what we feel are the best ways to leverage these situations. Additionally, this report examines WestJet’s current business model and which current practices will continue to serve WestJet well in the future.

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Introduction
When WestJet first began business in 1996, it positioned itself as a high-value, low-cost air carrier, specializing in short-haul travel within Western Canada. WestJet targeted leisure travelers visiting family and friends, who otherwise would have taken a long car trip to do so. Price-savvy business travelers eventually caught on, and also began flying with WestJet. This low-cost carrier eventually became known as the likable underdog, despite having expanded its service to the United States and the Caribbean. Today, WestJet is popular with leisure and business travelers alike, who share a need for personable and reasonably priced air travel.

WestJet’s Current Business Model
The following sections outline WestJet’s current business model.

WestJet’s Market
WestJet’s primary target market is split evenly between price-conscious travelers looking to take trips (less than 10 hours long) by vehicle, and business travelers.

The Airline Industry
WestJet’s current markets consist of the areas in which they conduct flights. Currently, they fly to 67 destinations throughout North America, including 30 cities in Canada and 17 in the United States. WestJet's largest focal city is its home base at Calgary International Airport. Toronto Pearson International Airport serves as the airline's second-largest focus city, and main connection point in eastern Canada. The airline also has a strong presence at Edmonton International Airport, Vancouver International Airport and Winnipeg James Armstrong Richardson International Airport. These are their main locations for departures, including trips across North America and the Caribbean. WestJet’s secondary markets include major US airports such as Los Angeles International Airport, Las Vegas McCarran International Airport, Newark Liberty International Airport and San Francisco International Airport, the latter two on a seasonal basis. The airline provides the most Canadian flights to Las Vegas and Orlando, offering non-stop routes (some of them seasonal) from ten Canadian cities to Las Vegas and eight to Orlando. In the first months of 2009, WestJet became the largest international carrier to Las Vegas (WestJet, 2009). WestJet also serves 13 destinations in the Caribbean and six in Mexico, some on a seasonal basis.

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Products/Services
WestJet offers travel experiences with outstanding customer service for affordable prices, having over 60 domestic and international flight destinations. WestJet also provides custommade travel packages to over 30 destinations in Canada and the U.S. In addition to offering vacation packages, groups, teams, and school groups can travel together at a group rate. Additional features offered by WestJet include flight and baggage tracking, accommodation for people with disabilities, travel insurance, and partnerships with hotels and car rental companies.

WestJet Fleet and Reservation System
WestJet currently holds 86 Boeing Next-Generation 737 aircrafts, including the 737-600, 737700 and the 737-800, with capacities of 119, 136 and 166 passengers, respectively. The aircrafts are all equipped with spacious legroom, leather seats and individual televisions provided by Bell TV (WestJet, 2010). Recently updated, the reservation program currently in use by WestJet is the SabreSonic Customer Sales and Service Solution (CSS) system. With this system, ticket purchases and reservations are combined with inventory and merchandising capabilities (Shephard Group Organization, 2009).

Green Movement
WestJet continually finds ways to employ environmental initiatives in every aspect of the company. It stays strong to its principles of being socially responsible and investing in ways to positively reduce impact on the environment (WestJet, 2010). WestJet’s fleet of aircrafts is constructed with the best parts and highest technology to lower the emission produced. The Boeing Next-Generation 737-series of aircrafts are built with blended winglets (wing-tip extensions) that reduce fuel burn (WestJet, 2010). Each flight also uses Required Navigation Performance (RNP) technology, which operates on GPR satellites to shorten flight time and miles flown by flying a more precise flight path. However, the initiatives do not stop there. WestJet also strives to apply environmental initiatives in their ground services. The newly built Calgary office was constructed according to the Leadership in Energy and Environmental Design (LEED) Green Building Rating SystemTM. Through these guidelines, the energy consumption of the office building is 35% less than the other buildings that followed the market construction practice (WestJet, 2010). Research is constantly being done to find more efficient ways to fly in order to reduce the environmental impact.

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Competitive Advantage
WestJet is one of North America’s most profitable airlines. Strategically positioned as a highvalue, low-fare airline, WestJet has seen rapid growth since its creation in 1996. What began as a small airline with flights to five western Canadian cities, WestJet is now a success story: 383 flights per day to 67 destinations, made possible by over 7500 employees. This success has been garnered by WestJet’s integral dedication to its four pillar approach. These four pillars provide the basis for a growing company that keeps customers in mind. Firstly, their investment in their employees and culture has not only won them the title of one of Canada’s Most Admired Corporate Cultures for four consecutive years, but it has also enabled WestJet to provide exceptional service. Guest service, the second of their four keys to success, is the foundation of the airline’s reputation. The WestJet “Care-antee” is a promise to consumers to provide friendly, professional service with a smile. This promise ties back in to WestJet’s employee satisfaction. Offered shares in the company, 82% of eligible employees are also WestJet “owners.” This fact encourages superior service and pride in their work and their company. The third pillar that WestJet focuses on is one of revenue and growth. They strive to achieve an average compound growth rate in available seat miles of 10 per cent per year (WestJet, 2010). This is paired with their fourth focal point: costs. Their aim is to have a sustainable and targeted profit margin that is comparable, if not leading, within the airline industry in North America. These four focal points shape WestJet’s business model. Competitively, their strategies have created a niche for them in an aggressive market. What once was an oxymoron, high-value and low fare is commonplace for WestJet and serves as their competitive advantage.

Issues Facing WestJet
Although WestJet has been growing successfully since its conception, the industry and economy always moves at a dynamic pace. Therefore WestJet faces a number of key issues in the next five years:      Fuel The Canadian Market The International Market The Plane of the Future Political and Legal Regulations

The following section will examine five key concerns and the opportunities and threats that they present. Each one will be discussed according to the implications that will arise and finally, suggest an action plan to address each issue.

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Fuel
According to the Air Transportation Association (ATA), fuel is an airline's second largest expense. Fuel makes up a significant portion of an airline's total costs and short haul airlines, like WestJet, typically get lower fuel efficiency because take-offs and landings consume high amounts of jet fuel. The large expense of lower fuel efficiency combined with the volatility of fuel prices makes this one of the biggest threats facing WestJet in the next five years. WestJet has three options over the next five years. These include:  Hedging the fuel prices  Floating the expense as to be determined by the market price of oil  Employing a combination of both To determine the answer to this question, various research factors have been analyzed along with insider reports to predict a general trend in the fuel industry. From this a five year action plan will be established.

Figure 1 and 2 are showing that the Price trend of Jet Fuel and Crude Oil Prices follow the same trend: (Energy Information Administration, 2010))

Jet Fuel Price Trend and Forecast
350

Costs per Gallons

300 250 200 150

100 50
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

The US Energy Information Administration (EIA) forecast that Jet Fuel prices will follow an upward trends reaching around $200 per Gallon in 2015, up approximately 29% from today’s price. Furthermore, as of February 24, 2010 Crude Oil price closed at $80.16 a barrel. If the trend follows EIA forecasts the cost will rise to about $100 a barrel. Evidently, the oil price is the driving factor of jet fuel cost.

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Additionally many experts see total global oil production reaching a plateau or around 91-92 million barrels a day by 2012-2014. This is often referred to as “peak oil” and “is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline” (Energy Watch Group, 2007). As the global economic data continue to improve showing that the worst of the recession is over, the demand for oil/fuels will continue to rise (VTB Capital, 2009). VTB Capital predicts this demand to stay constant for the years remaining until 2015 because alternative fuels will still not be able to compete at the market level. If this demand peaks as production and supply begin to decline, the result will be a further increase in oil prices. Government Intervention in US refineries producing Jet Fuel could also have a negative impact on WestJet, providing another reason why prices may be on the rise. The US House Committee new climate change legislation, the nation’s first limits on greenhouse gas emissions linked to global warming, will be bad for refiners. It is predicted that in the coming year there could be a 25% drop of US refining capacity due to cost of compliance and the current profit picture. This will lead to higher petroleum product prices (Jet Fuel) for WestJet since most of their fuel is purchased from US based suppliers. The trend towards an increase in Jet Fuel prices, possibility of reaching “peak oil” production, and the impact of the US climate change legislation are the reasons why we are suggesting that WestJet hedges their fuel cost over the next five years. The following are possible competitive advantages that WestJet would see over the next five years:  Eliminates adding fuel surcharges to ticket prices as fuel prices rise  Allow WestJet to continue their position as low cost carrier  Increased profits compared to competition will allow for further expansions

The Canadian Market
As a quickly growing country, Canada’s population composition is quickly changing. According to Statistics Canada’s Population Projections report, two important changes will happen to Canada’s population composition: aging demographics and increased immigration. As a direct result of the baby boom that occurred after the Second World War, a large mass of the Canadian population is aging simultaneously into their 50s and 60s. Statistics Canada has created six projection scenarios of what may happen to Canada from now until 2031. In all possible scenarios, the median age will raise from 39 years old in 2005 to 43 to 46 years old in 2031. This is due mainly to the aging Baby Boomers and the subsequent mini boom of their children, the Echo Boomers or Generation Y. The proportion of senior citizens will increase rapidly over the following years, and for the first time in Canadian history, seniors will outnumber children around 2015. (Statistics Canada, 2005) This large number of Canadians retiring from the workforce will not only cause a significant drop in the working-age population, it will also bring a sharp increase in number of Canadians living off of their pension. At the same time, these newly retired individuals finally have the time to travel. The much-clichéd “50 is the new 30” is very much a reality for this demographic, and they will embrace this time to enjoy life and explore.

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With many more Canadians becoming financially savvy out of necessity yet still desiring to travel, this provides an opportunity to a low-cost carrier such as WestJet. WestJet’s reasonably priced airfare will appeal to these older individuals who make up the majority of Canada’s population, thus, it is pertinent that WestJet leverage this overwhelming population trend. The second major trend of increased immigration will also greatly affect Canada’s population composition and how WestJet will address this opportunity. According to Statistics Canada’s same population projection report, immigration will have the largest impact on population size. In the highest growth scenario, Canada’s net international immigration has the potential to reach 305,000, up from 183,000 in 2005. (Statistics Canada, 2005) The majority of immigrants come from Asia and India, and are arriving predominantly in British Columbia, Quebec and Ontario, the provinces with growing metropolitan areas: Vancouver, Montreal and Toronto, respectively. There is a direct correlation between the size of a metropolitan area and its immigration rate. These immigrant families are significantly younger than Canada’s Baby Boomer-rich population, and many have young children or are planning on expanding their family upon moving to Canada. Analysts from Statistics Canada admit that, if immigration rates continue rising at its projected steady pace, it may help balance out Canada’s aging Baby Boomer majority. (Statistics Canada, 2005) However, since immigrant families are generally arriving from countries with a significantly lower cost of living, maintaining a good life can be difficult. Immigrant families must be financially cautious, thus presenting another opportunity to WestJet. By combining these two important trends of an aging population, and increased immigration, a need for more reasonably priced products and services becomes clear. Thus, it is recommended that WestJet maintain its high-value low-cost business model within the Canadian market, and enjoy continued success by what they do best.

The International Market
The future international market poses numerous threats and opportunities for WestJet. A major threat for WestJet in its future efforts to penetrate the international market is statistics showing trends of people’s spending habits leading towards smaller, less important purchases. Additionally, through research, it was found that since the recession, Canadians have been much more likely to travel domestically; this is currently an advantage for WestJet, since the majority of WestJet’s flights are domestic or within the United States. However, it poses a setback when trying to launch their company into the international market in the future. Furthermore, many aircraft carriers reported losses in the billions in 2008 due to the global economic recession, due in large part to less international travel. (US Department of Transportation, 2009) Capitalizing on their current image of being a cost effective aircraft carrier is the opportunity that arises from WestJet’s current obstacle in entering the international market. If WestJet can continue to keep their costs low, while still offering exceptional guest services, they will continue to find success in the North American market.

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Action Plan for the next five years regarding entry to the international market: Stick to what has brought WestJet success since its inauguration – remain a low cost carrier that offers exceptional customer service, while keeping its services in North America for the time being.  In 2001, low cost carriers had only a 7.8% share of the international market. In 2008 low cost carriers held a 21.7% share of the global airline industry. (Airsavings, 2009)  Few airline companies have seen growth in recent years due to the economy. Although low cost carriers did not see significant growth in 2009, they were among the few market segments in the airline industry that saw any growth at all (1%). (Airsavings, 2009)  Low Cost Carriers are commanding more of the global market than ever, and seem well positioned not hand over that share any time soon. (Airsavings, 2009) Monitor the international market for the opportune entry time  Although recent years have seen declines in net profits, travellers and fluctuating fuel prices, 2010 is forecasted to be the first year since 2007 to see a per cent change growth in revenues for the international airline industry. (IATA, 2009)  The IATA predicted the first fall in global air traffic passengers in 35 years during 2009. (Courtois, 2009)  While predictions are that the international airline industry will see a positive growth in passenger traffic in 2010, WestJet must monitor this closely to determine whether it is the right business decision to enter the international market in the next five years.  WestJet must follow market trends and forecasts, including fuel prices, as it would be an expensive investment to enter the international market.  WestJet would need to purchase additional aircrafts in order to travel internationally.  Currently not a wise decision to enter a market that is still recovering from the global economic recession.  2010 is still forecasted to bring a loss in net profits for the international airline industry. (IATA, 2009)

The Plane of the Future
With the “green movement” in full force, virtually every industry is affected by this recent environmental shift. Reducing pollution and emissions are two factors that the airline industry faces on a daily basis. Many airlines are focusing on being more environmentally conscious, attempting to remove WestJet from their position as one of the most environmentally friendly airlines. Aircraft manufacturers such as Boeing and Airbus are exploring options to make their airplanes lighter, faster, quieter, more fuel efficient and more sustainable. Greener technology such as using “smart glass” or helium injections into the plane’s body to create a lighter, more aerodynamic plane are being discussed and tested more readily (The Amazing Plane of the Future, 2009).

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Aircraft manufacturers, and airlines alike, are faced with a choice: larger or faster. Larger airplanes fly more passengers at a cheaper price and are arguably a better choice for many airlines as load rates are increasing. Airbus defends their position of creating larger planes by referencing forecasts that the number of people traveling by plane will triple in 20-30 years. Boeing, on the other hand, is focused on faster, sleeker planes that cater to the timely traveler as they will fly 15% faster. Boeing argues that in 10-20 years, people will be far more time sensitive than they are today (What is the Plane of the Future?, 2001).

The next five years appear to be focused on tweaking planes to allow for a more efficient flight. Committed to Boeing only, WestJet has only their upgrades to consider. They may face competition from other airlines if another aircraft company introduces a revolutionary plane. In the long term, WestJet needs to explore their options. Given the nature of their business model and the fact that their load factors have been between 76 and 81% in 2008, it is assumed that WestJet will focus more on speed and efficiency in the future rather than passenger capacity (WestJet, 2009). Boeing appears to be the right choice at present, however, in the next 10-20 years substantial shifts in technology are likely. WestJet needs to ensure that they keep their commitment to environmental sustainability, regardless of new technologies.

Political and Legal Regulations
The airline industry brings with it much legality to consider. Each country has its own laws and rules regarding territory boundaries and rights to operate. WestJet faces important issues to consider in the face of looking into the future. To protect local companies and secure public safety, Canadian cabotage regulations are set in place. There are barriers to operating and offering services within the boundaries of another country. WestJet is able to have security within the local market as the regulations create a narrower list of choices for airline carriers within Canada. Competition for services within the country then becomes more limited. In order to ensure the Canadian ownership of local airlines, a 25% limit of foreign ownership was put in place. Although an issue often brought up for argument, it does create a barrier to airline companies becoming internationally owned due to large interests and investments by foreign companies. At the same time, however, it may also limit the investments that can come to the aid of local airlines. Due to the legal issues that are present for WestJet, their plans for expansion into the international market may be hindered due to the restrictions that are present in neighboring countries. Cabotage laws will obstruct the opportunity to capture more passengers by operating in a foreign market. Destinations to pick up passengers from will be limited to areas within the country, therefore hindering WestJet from catering to passengers travelling from outside Canada. Expansion plans will also be limited financially due to the ownership limit on foreign investors. There will be less room for negotiation. However, the limit will also ensure that the ownership of Canadian companies will remain held by a Canadian.

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The cabotage restrictions will allow WestJet to stay competitive in the Canadian airline industry. It will remain a leading airline within the country due to the restrictions placed on foreign airlines wanting to carry Canadian passengers. With the limitations in place, WestJet should continue to grow within the Canadian market and stabilize its position as a leader in the local airline industry. Their current reputation has been steadily leading towards becoming a market leader, and a continuation of their mission statement and customer initiatives will enable them to secure the top spot. Further expansion into the Canadian market may be profitable in the next five years, capitalizing on the local airline industry.

Action Plan Conclusion
Ultimately, it is in the best interest of the company for WestJet to continue offering affordable airfare as a low cost carrier, with exceptional customer service experiences. WestJet should hedge fuel prices to keep a competitive advantage. By hedging fuel prices, WestJet can relieve passenger fees by not charging a fuel surcharge, making them increasingly appealing to those wishing to travel with a low cost carrier. The increasing trend of retiring baby boomers travelling and the increase in people immigrating to Canada, WestJet will remain a leader in the North America market. By continuing their success in North America, it will allow WestJet to consider the international market if the opportunity presents itself. The international airline industry has seen negative growth in almost all areas in recent years due to the global economic downturn. However, despite the faltering global economy, low cost carriers were the only market that saw a positive growth of 1% in 2009. In keeping with the current business model, it is not the right time for WestJet to consider the international market, as fuel prices are predicted to keep rising. Additionally, the international airline industry is estimated to still see negative numbers in net profits during the 2010 fiscal year. With the facts and research of the opportunities and threats taken into consideration, WestJet should first capitalize on becoming a North American market leader in the airline industry, before considering international expansion.

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Bibliography
Energy Information Administration. (2010 йил 10-Frebruary). Forecasts & Analysis. Retrieved 2010 йил 24-February from EIA: http://www.eia.doe.gov/oiaf/forecasting.html Energy Watch Group. (2007). Crude Oil: The Supply Outlook. EWG. Shephard Group Organization. (2009 йил 29-January). WestJet chooses SabreSonic CSS. Retrieved 2010 йил 27-January from Shephard Group: http://www.shephard.co.uk/news/1603/WestJet-chooses-sabresonic-css/ VTB Capital. (2009 йил 6-October). Oil Back on the $100 Track. Retrieved 2010 йил 24-February from Business News Europe: http://businessneweurope.eu/story1811 WestJet. (n.d.). Backgrounder. Retrieved 2010 йил 20-January from WestJet Website: http://www.WestJet.com/pdf/investorMedia/WestJetBackgrounder.pdf WestJet. (n.d.). Our Fleet. Retrieved 2010 йил 20-January from WestJet Website: http://www.WestJet.com/guest/en/aboutUs/mediaInvestors/ourFleet.shtml

The Amazing Plane of the Future. (2009, October). Retrieved from InfoNIAC: http://www.infoniac.com/hi-tech/plane-of-the-future.html What is the Plane of the Future? (2001). Retrieved from BBC News: http://news.bbc.co.uk/2/hi/business/1251003.stm Airsavings. (2009). Airline Trends and Ancilliary Revenue Report. www.airsavings.net. Courtois, R. (2009, March). Clear Skies? Region Focus , pp. 1-4. IATA. (2009). Industry Statistics. IATA. Statistics Canada. (2005, December). Population Projections for Canada, Provinces and Territories. Retrieved February 10, 2010, from Statistics Canada: http://www.statcan.gc.ca/pub/91-520-x/91-520-x2005001-eng.pdf US Department of Transportation. (2009). Aviation Industry Performance. Secretary of Transportation.

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