Westjet executives say ultra low-cost division Swoop produced weak results in the fall and winter, dragging down what were otherwise glowing returns for the Calgary-based airline group.
While executives were pleased with Swoop’s low costs and ancillary revenues (sales of products beyond the base fare, such as bag check and on-board snacks), they say there weren’t enough bums in the seats in the division’s first winter of operations.
“Swoop was weaker than we expected and would have liked,” said Westjet Chief Financial Officer Harry Taylor. “These shoulder seasons have proven to be more variable. In the peak seasons, it’s great.”
Shock absorber for Westjet
“Is the shock absorber for the Westjet Group, shielding and protecting Westjet from new entrants who could otherwise cause significant economic challenges to our organization,” Westjet President and Chief Executive Officer Ed Sims told the company’s Annual General Meeting this week. “We know that this is an area ripe for new entrants, and we know that Swoop’s growth is fundamental to the successful and profitable long-term growth of the Westjet Group.”
Or, as David Tait, Executive Chairman at rival low-cost airline, Flair put it, “If Westjet had stuck to its knitting, it wouldn’t have needed a sort of rear-end game of Swoop, and it would have made it much more difficult for someone like ourselves to come into the market, because they owned it.”
While Westjet does not release Swoop’s results separately, they are included in the company’s overall financial picture. The company saw a 33% profit growth in the first three months of 2019 over the same period a year ago.
Sims says Swoop’s passengers are not people who would typically fly on Westjet; they tend to be millennials or older people travelling on a budget. Swoop has also stayed away from Westjet’s three hubs in Calgary, Toronto, and Vancouver. Instead, it offers a parallel network centred on Abbotsford, Edmonton, and Hamilton, Ontario.
“One of the key roles that Swoop plays is to stimulate new traffic, and to repatriate the Canadian traffic that was fleeing south of the border to places like Buffalo and Bellingham on U.S. carriers,” said Sims.
But not enough people were choosing to fill the company’s six Boeing 737-800s through the fall and winter for upper management’s taste. A seventh aircraft is expected later this month).
Hard to stimulate traffic in winter
“The impact of lower fares stimulating domestic traffic through the winter season at the ULCC end is a reasonably significant challenge,” said Sims.
To boost its fortunes, Swoop has turned away from the simplest business model – selling tickets on its own website. It is now listed on Skyscanner and Google Flights. That adds complexity to the airline’s business dealings, but at the same time, boosting sales.
The risk is if the business becomes too complex, costs start to rise, and low costs are one of Swoop’s strong points.
Seasonal fluctuations have been the bane of the airline business almost since its inception. Holiday travellers love to travel in the summer months, with a strong demand in the winter for sun destinations.
But in the fall and spring, they tend to stay home, with the exception of business travellers, who want the perks that a full-service airline brings.
That logic is driving Air Canada’s evolution. The country’s largest carrier is concentrating more and more on getting frequent travellers to its hubs. From there, passengers connect to major destinations around the world. As Air Canada released their first quarter results Monday, executives said they thought they were hitting on a winning strategy.
Diversifying the business model
“We’ve worked hard to try to make this business less seasonal and less dependent only on [summer travel],” said Calin Rovinescu, Air Canada’s President and CEO. “I think that our model, the flexibility of the fleet, the fact that it’s got all these different aircraft that can substitute, make money in different markets at different times.”
“I don’t want you to take away that we’re negative on Swoop,” said Westjet’s Taylor. “It’s doing what it was designed to do. We always knew it was going to be a lower unit revenue model, but also a lower unit cost model.”
From his office in Edmonton, 300 km north Westjet’s corporate campus, Tait is, perhaps predictably, less charitable.
“I think they’ve made a monster for themselves, there,” said Tait. “Airlines within airlines have never really worked very well.”