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Westjet Verses Air Canada Report


Introduction

This paper aims at contrasting two airlines, Westjet and Air Canada in terms of their financial performance and survival. The two airlines are based in Canada. Westjet is a low cost airline operating mainly within Canada and North America.

It was founded in 1996 and has since been able to acquire a fleet of 88 modern aircrafts “flying to over 70 destinations in Canada, the US, the Caribbean and Mexico” (Westjet, 2011). As at 31 December 2010, the firm had employed over 8000 workers.

Westjet is one of the most profitable airlines in North America besides being associated with the best customer services. Air Canada on the other hand is the largest full-service airline in Canada (Air Canada, 2011). It is the largest provider of passenger flights within Canada and from Canada to major destinations such as US.

It was founded in 1937 and has since achieved the status of “15th largest commercial airline globally” (Air Canada, 2011). As at 31 December 2010, the firm had employed 23200 workers. Currently, it serves 178 destinations directly and 1160 destinations in conjunction with its regional partners (Air Canada, 2011). The factors that affect the performance of these airlines are as follows.

Factors in Airline Business: PESTE Analysis

Political

Canada is one of the most politically stable countries in the world. The political stability has enabled the country to achieve rapid economic growth. This has led to high demand in the country’s aviation industry (Cotis, 2010, pp. 3-20).

Canada has strong political ties with most foreign countries thus enabling it to enjoy favorable terms of trade with them. Besides Canada is a member of major trade agreements and trading blocks such as NAFTA, Canada-Israel Free Trade Agreement and Canada-European Free Trade Association of Trade Agreement.

This has enabled Canadian airlines to join the markets operating under the trade agreements thus increasing their market shares (Clougherty, 2009, pp. 440-468).

Air Canada has particularly improved its profitability in the cargo flight business due to the increase in trade volume among NAFTA member countries. Currently, Canada is negotiating for more ‘free trade agreements’ with Asian countries and this will further increase demand for its airlines.

Economic

Canada has “the 9th largest economy in the world” (Cotis, 2010, pp. 3-20). Its economy has since recovered from the 2008/2009 global financial crisis. Currently, its economy is growing at a rate of 5.6% which has resulted into high economic activity and high disposable income among the citizens (Cotis, 2010, pp. 3-20).

This has led to high demand in its aviation industry. Besides, its low inflation rate of 1.6% as at 31st December 2010 has led a reduction in air ticket prices thus stimulating demand for flights (Cotis, 2010, pp. 3-20).

The airlines have been able to access cheap supplies such as petroleum due to the low inflation. This enables them to improve their competitiveness at international level through low prices. Robust economic growth in emerging economies in Asia and South America has also led to high demand for flights at international level.

Social

Canada has one of the wealthiest populations in the world. Canada’s GDP per capita by “purchasing power parity is $43100” (Cotis, 2010, pp. 3-20). Over 90% of its population lives above the poverty line (Cotis, 2010, pp. 3-20). Consequently, majority of Canadians especially those living in urban areas are able to afford flights.

Besides, the citizens are price sensitive and this explains the high pressure on prices in the aviation industry. Canadians are keen on service quality and this has prompted most airlines to focus on product differentiation (Wulung, 2008, pp. 178-185). Westjet in particular is distinguished in the market as the best provider of customer services.

Technology

Technology is the driving force in the aviation industry since it determines the ability of the airlines to meet safety standards, achieve innovation and product development. Both Westjet and Air Canada have invested in modern technology to differentiate their products.

For example Air Canada’s customers can book and confirm the status of their flights through their mobile phones (Air Canada, 2011). Both companies are using their websites for sales and marketing. Investments in modern aircrafts enable the firms to ensure the safety of their passengers. Besides, the modern aircrafts are efficient in fuel consumption thus lowering costs.

Environment

Air transportation is associated with air pollution due to the green house gases produced by aircrafts (Forsyth, 2010, pp. 204-255).

Consequently, the industry regulators and environmentalist have teamed up to ensure that airlines operate aircrafts that are mechanically sound in order to avoid pollution. Airlines normally pay for air pollution through emission fines or fees. They also actively engage in environmental protection programs. This results into high operating costs.

Legal

Legal factors refer to the rules used to regulate the Canadian aviation industry. The industry is highly regulated in order to promote fair competition and customers’ safety. Regulation focuses on the mechanical status of the aircrafts, routes to be served and ownership of airlines (Competition Bureau, 2010). The implementation of the Competition Act for instance, forced Air Canada to reduce its market share in order to reduce its dominance in the industry (Competition Bureau, 2010).

SWOT Analysis

Westjet Strengths

Westjet is associated with the following strengths. First, it is the best in the provision of customer services. For example, it was “named a J.D power house in 2011” (Westjet, 2011). Excellent customer services have enabled it to ensure customer loyalty.

Second, it has been able to maintain competitive prices. Consequently, it has been able to easily penetrate the market. Third, investment in modern aircrafts has enabled the firm to lower its expenditure on fuel.

Finally, it was “inducted into the corporate hall of fame in 2010 after being named one of Canada’s most admired corporate culture” (Westjet, 2011) for three consecutive years. This means that it has excellent management polices and this explains its robust economic performance.

Weaknesses

Westjet’s weaknesses are as follows. It has a relatively small market share as compared to Air Canada. It serves only 78 destinations as compared to the 1167 served by Air Canada. This limits its ability to realize high returns.

It also offers a limited number of products. It mainly concentrates on passenger flights, accommodation and car rental services (Westjet, 2011). Besides, it mainly operates in US, the Caribbean and Canada. Thus it is likely to be adversely affected in the vent of an economic crisis in the region it serves.

Opportunities

The opportunities available to Westjet include the following. First, the implementation of the Competition Act has led to elimination of monopolistic tendencies such as predator pricing in the industry. This gives it the opportunity to sell its products at optimal prices.

Second, Air Canada has given “42 peak hours slots at Toronto’s Passengers’ Airport” (Competition Bureau, 2010). Thus Westjet has the opportunity to use the slots forfeited by Air Canada to connect to East Canada. Finally, its partnerships with American airlines give it the opportunity to increase its route network by using its partners’ aircrafts to connect its passengers to destinations it does not serve (Westjet, 2011).

Threats

Westjet faces the following threats. First, Air Canada has always used its dominant position to prevent competition in the industry (Competition Bureau, 2010). Thus Westjet will have to depend on Competition Bureau’s ability to enforce fair competition in order to penetrate the market. Second, increase in oil prices has resulted into a reduction in the firm’s profits. Finally, restriction on airline ownership limits the firm’s ability to expand through partnerships with foreign airlines.

Air Canada

Strengths

Air Canada is associated with the following strengths. First, it has the largest market share of about 57% (Competition Bureau, 2010). This has enabled it to achieve high returns and profitability. Second, it offers a wide range of products which include car rental services, accommodation, cargo flights and specialized flights for sports organizations and private companies.

This has enabled it to increase its revenue and market share. Third, it has modern aircrafts with an aircraft age of 10.7 years (Air Canada, 2011). Besides, its aircrafts have the best entertainment and on-flight communication systems.

Consequently, it was voted the best airline by Skytrax in 2010. Finally, it enjoys economies of scale since it is a member of the Star Alliance. It connects its passengers to various destinations through airlines in the alliance at low costs.

Weaknesses

Air Canada’s weaknesses are as follows. It has not been able to maintain its market share following the implementation of the Competition Act. Its market share has since reduced from 70% in 2000 to 57% in 2010 (Competition Bureau, 2010).

As a network airline, it has been associated with customer dissatisfaction due to the inconveniences attributed to inefficiencies of airline alliances. Connecting passengers through Star Alliance’s airlines has always been characterized by flight delays, several stopovers and inconsistent baggage rules.

Opportunities

The opportunities available to Air Canada include the following. First, the world economy is already recovering from the 2008/2009 financial crisis (Franke and John, 2010, 19-26). Besides, emerging economies are realizing high economic growth.

These trends have led to high demand for flights at the international level. Thus Air Canada has the opportunity to increase its revenue by taking advantage of the high demand. Second, most domestic airlines in Canada have failed to expand their operations due to their poor financial performance.

Thus Air Canada has the opportunity to expand its operations by acquiring the underperforming airlines. Finally, deregulation at international level especially in Europe is an opportunity to Air Canada to join the deregulated markets hence increasing its market share (Morrell, 2008, pp. 61-67).

Threats

Air Canada faces the following threats. Firsts, fluctuations in oil prices have adversely affected its performance by increasing operating costs. Second, fluctuation in foreign exchange rates results into a reduction in its profitability.

For example, the strengthening of the Canadian dollar in 2010 resulted into high prices for Air Canada’s products at the international market thus lowering demand for its flights (Air Canada, 2011). Finally, with the implementation of the Competition Act, Air Canada will have to continue reducing its market share in order to enhance competition in the market. This will lower its profitability.

Analysis of Possible Future Trends

Factors likely to Influence Future Performance

First, technological advancement in aviation industry as well as information and communication industry will determine performance. Such technological advancements will influence operations such as ticketing, customer services and efficiency of aircrafts.

Second, oil prices will influence performance in future. Fuel costs form the greatest percentage of operation cost in aviation industry (Trethway, 2004, pp. 3-14). Thus if the prices of oil keeps rising, the demand for flights will reduce as operators pass the high oil prices to customers through high prices.

Third, economic performance both at domestic and international level will affect performance. Strong economic growth will ensure robust growth in the aviation industry. Finally regulation and competition will determine the performance of airlines (Daraban and Fournier, 2008, pp. 15-24). High competition and regulation is likely to reduce growth in the industry.

Actions to be taken by the Airlines

The following actions can be taken by the two airlines to overcome turbulent times in future. First, they can “enter into fuel hedging contracts” (Trethway, 2004, pp. 3-14) in order to reduce their vulnerability to fluctuations in oil prices.

Through such contracts, the firms will pay fixed fuel prices thus enabling them to control their fuel costs. Second, they can focus on maintaining competitive operating costs (Hazeldine, 2010, pp. 40-43). This can be achieved by acquiring modern aircrafts that are efficient in fuel consumption.

Third, Westjet can join an airline alliance while Air Canada can increase its participation in Star Alliance. This will enable them to increase their market share in future at low costs. Fourth, in order to overcome the effects of poor economic performance, the airlines can diversify their businesses by investing in other industries.

During the 2008/2009 global financial crisis, German’s Lufthansa survived since it was able to boost its passenger flight segment with revenue from its mining and real estate business segments (Hazeldine, 2010, pp. 40-43). Finally, they should focus on joining deregulated markets in order to pursue their expansion plans effectively.

Airline Product and Marketing Strategy

Marketing Strategy

Westjet’s marketing strategy focuses on maintaining low prices and providing excellent customer services. It charges low prices in order to penetrate the market and achieve its objective of being one of the top five largest airlines in Canada by 2016 (Westjet, 2011). It focuses of excellent customer services in order to ensure customer loyalty. This has been achieved by introducing new products and services such as non-stop flights and pre-reserved seating.

Air Canada’s marketing strategy focuses on product differentiation in order to maintain its dominant position in the market. This is being implemented as follows. First, the firm has introduced innovative pricing system which allows customers to “customize their tickets by paying only for services they wish to pay for” (Air Canada, 2011).

This leads to low prices and high customer satisfaction. Second, the firm is focusing on high service quality. It has since completed its purchase of new aircrafts and refurbishing its existing aircrafts. Its aircrafts are associated with comfort, memorable entertainment experiences and safety. This has enabled it to retain its existing customers.

Brand Equity

Air Canada has the highest brand equity in the industry due to its dominant market position. Through its high quality products, most customers identify with it as the best airline in the region (Air Canada, 2011). The high level of brand equity has been achieved through investing in product differentiation.

Westjet’s brand equity is relatively low as compared to Air Canada’s. Even though the firm is distinguished in the market by its low prices and excellent customer services, its brand equity has not improved due to the following reasons. First, it serves very few destinations and thus not used by many customers (Westjet, 2011). Second, it offers only a few services thus most customers find it inconvenient.

Marketing Channels

The airlines use similar marketing channels. The internet is the main marketing channel used by the airlines. They all have marketing websites through which customers can access product information, make enquiries and purchase tickets instantly.

They also use social networks to market their products. Air Canada has recently introduced marketing through mobile phones (Air Canada, 2011). The two airlines also post their adverts on both print and electronic media.

Competitors

At domestic level, Air Canada lacks intense competition especially in the full service segment of the industry. However, it competes with low cost airlines such as Canada 3000 and Westjet. At international level, it competes with major airlines such as Delta, Emirates and Lufthansa (Trethway, 2004, pp. 3-14). Westjet’s competitors in the low cost segment include Canjet, Royal and Canada 3000.

Frequent Flayer Program

Both airlines have frequent flyer programs. Westjet’s is referred to as frequent guest program (Westjet, 2011). The program allows Westjet’s customers who spend over $1500 dollars to earn ‘Westjet dollars’ which they can use to purchase Westjet tickets. The program has no restrictions on destinations. Air Canada’s is referred to as the rapider program (Air Canada, 2011). In this case, the airline’s customers can earn a minimum of 3000 miles and a maximum of 25,000 miles by flying with Air Canada regularly. However, the bonuses can only be used on limited routes such as Montreal, Toronto and Pearson.

Assessing of Success of Marketing Strategy

Passengers usually chose Westjet due to its low prices and unparalleled customer services in the industry. As discussed earlier, low prices and best customer services are the factors that differentiate Westjet. Thus these factors form its main selling point in the market. The firm’s marketing strategy led to an increase in load factor by 1.2 points to 79.9% in 2010 (Westjet, 2011).

Passengers normally chose Air Canada due to the wide range of products it offers and the high quality of its services. From earlier discussions, Air Canada is differentiated by its service quality and the wide variety of products it offers. Thus these are its main selling points. The marketing strategy enabled it to increase its load factor by 1point to 81.7% in 2010 (Air Canada, 2011).

Product Lifecycle

Airline products are at maturity stage due to the following reasons. First, there is high pressure on prices as competition increases (Trethway, 2004, pp. 3-14). Second, there is an increase in the number of firms joining the industry following the removal of entry barriers.

Third, firms are able to lower operating costs by joining airline alliances and forming regional partnerships (Trethway, 2004, pp. 3-14). Finally, the firms highly depend on product differentiation in order to increase or maintain their market shares.

Business Model

Low Cost Model

The low cost model is associated with low prices which help in increasing the sales volume, market share and profits (Graham, 2009, pp. 306-316). It is also associated with greater emphasis on efficiency in order to lower operating cost and ticket prices.

Finally it encourages fast turnaround time and full utilization of aircrafts (Graham, 2009, pp. 306-316). However, the flights are less comfortable as airlines cutback on the number of services they offer in order to reduce costs. This can lead to customer dissatisfaction. Besides, emphasis on cost reduction makes product differentiation difficult.

Full Service Model

The full service model is associated with high product quality which leads to customer satisfaction. The airlines using this model are able to offer a wide variety of services thus increasing their profits (Graham, 2009, pp. 306-316).

However, maintaining the high quality of services leads to high cost of flights which can reduce demand. These trends indicate that both models have merits and demerits and the choice of the airline depends on the customers’ preferences and financial capabilities. Thus airlines can adopt both of them to increase their competitiveness.

Financial Results

Westjet

In 2010, Westjet’s total revenue increased by 14.4% to $2.6 billion (Westjet, 2011). The firm’s operating margin also increased by 0.3 points to 9.5%. The firm’s net profit in 2010 was $136.7 million, representing a 39.3% increase from previous year’s results (Westjet, 2011).

Load factor improved by 1.2 points to 79.7%. The company’s “current asset over current liability ratio improved to 1.52” (Westjet, 2011) as compared to 1.48 in 2009. The debt-to-equity ratio was 1.39 representing a 28% improvement (Westjet, 2011).

In 2009, total revenue decreased by 10.5% to $2.3 billion (Westjet, 2011). The operating margin also dropped by 4 points to 6%. Net profit decreased by 45% to $98.2 million (Westjet, 2011). The firm’s load factor was 78%, representing a decrease of 1.4 points. “Current asset to current liability ratio” (Westjet, 2011) improved to 1.48 as compared to 2008’s 1.24. Adjusted dept-to-equity ratio also improved by 20.15 to 1.43 (Westjet, 2011).

In 2008, the firm’s total revenue increased by 19.9% to 42.5 billion (Westjet, 2011). However, operating margin dropped by 1.1 points to 10.0%. Net profit decreased by 7.6% to 178.1 million (Westjet, 2011). The diluted earnings per shared also decreased by 6.8%.

Air Canada

In 2010, total revenue increased by 11% to 10.7 billion (Air Canada, 2011). The firm’s net profit was $107 million as compared to a loss of 24 million realized in 2009 (Air Canada, 2011). Load factor improved by 1 point to 81.7% while its yield improved by 2.3 points (Air Canada, 2011).

In 2009, the firm realized 9.73 billion in total revenue which was 12% less than 2008’s total revenue (Air Canada, 2011). Consequently, the firm realized a loss of $24 million. The firm’s yield reduced to 7.6%, while the load factor reduced to 80.7% (Air Canada, 2011).

The above trends indicate that Westjet has been profitable for the last three years. Besides, it is more financially stable. Air Canada on the other hand was not able to withstand the effects of the 2008/2009 global financial crisis. This explains the huge losses it made in 2008 and 2009. Thus Westjet is performing better financially.

Conclusion and Recommendations

The SWOT analysis reveals that Westjet’s main strengths are its ability to maintain low prices and excellent customer services (Westjet, 2011). Its main weakness is that it has a small market share. The main opportunity available to it is the removal of anti-competition tendencies in the market while the greatest threat facing it is the high competition in the market.

Air Canada’s main strength is its large market share while its weakness is its inability to retain its market share (Air Canada, 2011). The greatest opportunity available to it is the rising demand for flights at the international market while its greatest threat is high regulation.

The main factors likely to affect the performance of the airlines in future include fuel costs, level of regulation and technological advancement. In order to remain profitable and competitive in the next twenty years, the airlines can adopt the following recommendations.

They should focus on fuel hedging and acquiring modern aircrafts that are efficient in fuel consumption (Trethway, 2004, pp. 3-14). Besides, they should expand into new markets as well as diversifying their businesses.

References

Air Canada, 2011. Annual reports. [Online] Available at: .

Clougherty, J. 2009. Domestic rivalry and export performance: theory and evidence from international airline markets. Canadian Journal of Economics. 42(2), 440-468.

Competition Bureau, 2010. Competition Bureau enforcement approach in the airline industry. [Online] Available at: .

Cotis, J. 2010. Benchmarking Canada’s economic performance. International Productivity Monitor. 13(1), pp. 3-20.

Daraban, B. and Fournier, G. 2008. Incumbent responses to low-cost airline entry and exit: a special autoregressive panel data analyses. Research in Transport economics. 24(1), pp. 15-24.

Forsyth, P. 2010. Environment and financial sustainability of air transport: are they incompatible? Journal of Air Transport Management. 17(8), pp. 204-255.

Franke, M. and John, F. 2010. What comes next after recession? Airline industry scenarios and potential end games. Journal of Air Transport Management. 17(1), pp. 19-26.

Graham, M. 2009. Different model in different space or liberalization optimization? Comparative strategies among low-cost carriers. Journal of Transport Geography. 17(4), pp. 306-316.

Hazeldine, T. 2010. Legacy carriers fight back: pricing and product differentiation in modern airline marketing. Journal of Air Transport Management. 17(1), pp 40-43.

Morrell, P. 2008. Can long-haul low-cost airlines be successful? Research in Transport economics. 24(1), pp. 61-67.

Trethway, M. 2004. Distortions of airline revenues: why the network airline business model is broken. Journal of Transport Management. 10(1), pp. 3-14.

Westjet, 2011. Annual reports. [Online] Available at: .

Wulung, G. 2008. Productivity growth in Canadian and US regulated industries. Canadian Productivity Review. 2(1), pp. 178-185.

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