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To: Brian Giffen, CEO From: WestJet Business Consultancy Team RE: WestJets 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 WestJets 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 WestJets future; consequently, we have provided recommendations of what we feel are the best ways to leverage these situations. Additionally, this report examines WestJets 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.
WestJets Market
WestJets primary target market is split evenly between price-conscious travelers looking to take trips (less than 10 hours long) by vehicle, and business travelers.
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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.
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). WestJets 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 Americas 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 WestJets 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 Canadas 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 airlines reputation. The WestJet Care-antee is a promise to consumers to provide friendly, professional service with a smile. This promise ties back in to WestJets 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 WestJets 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.
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))
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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 todays 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 nations 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
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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. WestJets reasonably priced airfare will appeal to these older individuals who make up the majority of Canadas population, thus, it is pertinent that WestJet leverage this overwhelming population trend. The second major trend of increased immigration will also greatly affect Canadas population composition and how WestJet will address this opportunity. According to Statistics Canadas same population projection report, immigration will have the largest impact on population size. In the highest growth scenario, Canadas 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 Canadas 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 Canadas 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.
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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)
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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.
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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.
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Bibliography
Energy Information Administration. (2010 10-Frebruary). Forecasts & Analysis. Retrieved 2010 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 29-January). WestJet chooses SabreSonic CSS. Retrieved 2010 27-January from Shephard Group: http://www.shephard.co.uk/news/1603/WestJet-chooses-sabresonic-css/ VTB Capital. (2009 6-October). Oil Back on the $100 Track. Retrieved 2010 24-February from Business News Europe: http://businessneweurope.eu/story1811 WestJet. (n.d.). Backgrounder. Retrieved 2010 20-January from WestJet Website: http://www.WestJet.com/pdf/investorMedia/WestJetBackgrounder.pdf WestJet. (n.d.). Our Fleet. Retrieved 2010 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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