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Morningstar | WestJet Agrees to Go Private With Onex Buyout

Westjet succeeded in the Canadian domestic market for years capitalizing on the low-cost carrier model and operating a duopoly with Air Canada. However, after 13 years of consistent profit generation, the carrier registered its first loss on rising oil prices and labor strike fears that stymied bookings. Westjet plans to improve returns by turning away from its low-budget origins, catering to more affluent travelers, and incorporating transatlantic and transpacific routes into its network. To facilitate this new strategy, Westjet added widebody jets to its fleet, purchasing four 767s from Qantas, ordering 10 787s, and by adding the 737 Max.Westjet expects roughly CAD 300 million to CAD 500 million in revenue growth from the development of its exposure to premium travelers. Per management, the meat of its enhanced revenue is expected to stem from enhanced share from domestic premium travelers. The other portion of its increased revenue is expected to hail from increased globalization, and an enhanced transborder travel network shared with Delta Airlines in its recently established joint venture.Along with shifting to a network carrier strategy, Westjet also plans to combat newly inducted ultra-low-cost carrier capacity with an ultra-low-cost subsidiary. Westjet’s newly formed ultra-low-cost-carrier, Swoop, is expected to have costs per available seat mile about 40% lower than Westjet’s mainline operations. While Westjet has taken steps to make sure its mainline operations and low-cost-operations don’t overlap, union conflicts threaten to upend the cost competitiveness of Westjet’s low-cost arm.At its peak, Swoop will operate 10 737-800 aircraft on domestic and transborder routes to sunshine states and routes too expensive for the traditional fleet to fly on. Westjet plans to reach a sustainable return on invested capital of 13%-16% on long-term capacity growth of 4%-7%. We expect this growth will weigh on Westjet’s ability to consistently build accretive margins. What’s more, Westjet still hasn’t settled ongoing unionization issues and oil remains a near-term headwind for the unhedged carrier.