WestJet at 20: Grown-up airline, grown-up problems

WestJet's 20th anniversary should have been a party. After all, it has been a pretty impressive two decades at the airline.

It may seem like the distant past now, but before WestJet took flight in 1996, air travel was different in Canada. Passing through security was easier, butone-way fares were often more expensive than roundtrips, you had to stay over a Saturdaynightin order to get a decent fare on a ticket, and flights were routinely overbooked.

By following the Southwest Airlines model, WestJet changed air travel in Canada, while remainingconsistently profitable over most of its 20 years. In the airline industry, that alone is a minor miracle.

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But in the past three months, it hasmissed earnings expectations andis facing a sexual assault lawsuit that threatens to harm its brand, as well as economic pressure in its home base andcontinued uniondrives among pilots and flight attendants.

As WestJet grows up, so do its problems.

Economic pressure

Daniel Lloyd is the co-founder of SuiGeneris, a Toronto-based investment fund. Late last year, his firm put out a research note making its case to hold a short position on WestJet. Shorting a stock essentially means making a bet that the shares will go down.

"Our short thesis came from the fact that 25 per cent of its flight originations came from Alberta," said Lloyd in an interview."Rising unemployment in their home base is never going to be a good thing."

Indeed, as Alberta's economy started tosuffer in 2015, so did WestJet. The company said that demand dropped in the fall of 2015,like a light switch turning off.Its fourth-quarter earnings missed Bay Street's expectations and the outlook for 2016 was weaker than expected.

WestJet reacted by shiftingsome of its capacity out of Alberta and into markets in Eastern Canada, but those markets are already very competitive, said Lloyd.

"In some ways, the airline industry is an un-investable industry," said Lloyd."As soon as things start to get good, they start to eat each other."

Eating away at Air Canada's margins has been the WestJet way of doing business for 20 years. Its costs are lower than Air Canada's and it has had success after success entering a market, causing fares to drop, stealing market share from Air Canada, and encouraging more people to fly.

Ben Cherniavsky follows WestJet for the investment dealer Raymond James. In a research note to clients in March, he said that WestJet's relentless drive to add capacity to the market to displace Air Canada can be painful when times are tough, as it brings down profit margins for all airlines.

"In the longrun, however, WestJet's strategy has been almost universally successful in creating value for shareholders, while invariablycreating structural problemsfor Air Canada," Cherniavsky wrote.

Employee pressure

Over the past few months, WestJet has been holding aseries of employee pep rallies that address themarket pressure on the airline. The airline is well aware that its engaged employee base is key to its success, and the sessionscalled Ignite 20 seemdesigned to invigorate its corporate culture.

At one meeting. there was talk about personal spirit and employees having the right tools to do their jobs, but it wasn't all cheerful.

"There areWestJetterswho don't contribute positively to the culture," said WestJet CEO GreggSaretskyat one of the meetings. "We've read the stories onWestnet[WestJet'sinternal forum], we've seen their comments and we need tobring these people back into the fold.

"And if we can't bring them back into the fold, we have to make it uncomfortable for them to stay here. They need to find their happiness elsewhere."

That comment was received with loud applause from hundreds ofWestJetstaff at the meeting, but it was also seen by someas a jab at unionizationeffortsat the airline.

WestJet declined an interview for this story.

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Amember of the group organizing flight attendants said hearing that"really made me feel unwelcome at a company that I helped create."

Over the years, there have been multiple attempts to form unions at WestJet.

Last summer,WestJet'spilotsvoted againstforming a union, with 55 per cent voting against the move and 45 per cent voting in favour. In the fall,the internal pilotsgroup threw its support behind an international pilotsunion, the Airline Pilots Association International (ALPA). That organizing drive among pilotsisunderway atWestJetnow.

The flight attendants group is still working to sign up members and is hoping that will become easier if the federal government is successful in repealing BillC-525, which imposed the requirement of a secret ballot vote for federally regulated industries. The repeal of BillC-525is working its way through Parliament now, but may be stopped in the Conservative-controlled Senate.

Brand pressure

Through this turbulence, the airline also has to maintain its brand reputation.

WestJet's main competitive advantage with consumers has always been its brand as a friendly, helpful airline. In practical terms,WestJet has empowered staff to solve its passengers' problems when they can.In marketing terms, it has relentlessly developed a brand around the idea that it is the airline that takes special care of passengers.

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"WestJet stopped being a low-fare airline many years ago," said Marvyn Ryder, a professor of strategy at McMaster University.

"Once it moved away from that low-fare brand, it became the brand of the airline that cares."

Ryder says that brand is threatened by the sexual assault lawsuit filed by former flight attendant Mandalena Lewis. In her lawsuit, which she's trying to turninto a class-action, Lewis claims that after she reported that shewas allegedly sexually assaulted by a pilot on a layover in Hawaii in2010, WestJet did not properly investigate the allegationand chose toprotect the pilot and eventually fired her for pursuing the matter.

WestJet filed astatement of defence denying that it fired Lewis for pursuing the matter, and claiming that it had immediatelylaunched an internal investigation intoLewis's sexual assault complaint. Ultimately, the company said it was unable to conclude the pilot had committed such an assault.

However, in the aftermath of the lawsuit, the airline said that it hadasked employees to come forward with information about assault andharassment, and anumber of employees did so.WestJet then hired Ernst and Young to review itsreporting procedures and practices.

Lewis's claims and WestJet'scounter-claims are set to be tested in court, and that willbe telling for WestJet's brand.

"WestJet is at a fork in the road,because it very much depends which way this plays out," said Ryder.

"They've done a great job in the minds of consumers building up this warm, fuzzy, caring organization, and these allegations run just 180 degrees in the other direction."

On the other hand, Ryder said that if many other employees don't join the potential class action and if the courts don't support her claims, "then this takes us back to the situation where WestJet is walking the talk."

The airline industry is notoriously difficult:Virgin Air founderRichard Branson hassaid the best way to become a millionaire was to start with a billion dollars and launch an airline.

Those are the odds that WestJethas beat over its first 20 years. The market is watching to see if it can continue to do so.