The primary subject matter of this case is the financial and business risks of airlines. Secondary issues examined include impact of the financial structure and different growth strategies on financial risks of airlines. The case has a difficulty level of three and should be appropriate for undergraduate and graduate courses in financial and strategic management. The case is designed to be taught in one to two class hours, with three hours of outside preparation by students.
Over the last twenty years, all airlines, from large international carriers such as United Airlines, Swiss Air, and Air Canada to small short haul carriers such as WestJet have faced enormous risks in their operations. The Gulf War and the War in Iraq, high oil price volatility, the threat of terrorism, and lately SARS all have had a negative impact on airlines around the globe. Many airlines have seen losses, resulting in reduced capacity, large layoffs and quite frequently in bankruptcy. However, a few exceptional airlines have been able to stay profitable even in such a demanding business environment. In this case study we examine two Canadian airlines: WestJet and Canada 3000. The former is an example of an airline that is thriving despite the hostile business environment while the later is an example of an airline that failed shortly after September 11, 2001. Why did this happen? Both airlines were of similar size and initially followed a similar strategy. However, one succeeded, one did not. The major factors that explain WestJet's success and Canada 3000's failure are examined. While we use two Canadian airlines for the analysis, the lessons learned apply to airlines around the world.
In February 1996, WestJet started operations with three airplanes out of Calgary, Canada. Clive Beddoe, its current president, and three other entrepreneurs saw a business opportunity in operating a low cost air carrier in Canada. In the early 1990s, the airline industry was suffering from the recession and the effects of the Gulf War that led to high fuel costs and a decline in air travel. Almost every airline's profits were negatively affected except those of low cost carriers such as SouthWest Airlines in the United States; thus, WestJet's executives chose to follow SouthWest Airlines' successful business model. SouthWest Airlines, established in 1971, had pioneered the low fare, high-efficiency airline model, and is the most consistently profitable airline in the world. WestJet started operations out of Calgary servicing other western Canadian cities.
Within three years, WestJet was servicing most of its niche market of large western Canadian cities. In 1999, WestJet reached its critical goal of completing its first IPO, which allowed the firm to continue its expansion strategy of adding a plane and a route at a time. The IPO raised C$30 million and allowed WestJet to purchase more aircrafts to add to their existing Boeing 737 aircrafts. With the additional aircraft WestJet was able to add eastern cities such as Hamilton and Ottawa to routes.
WestJet has since added many more Canadian cities to its routes and has turned itself into a national carrier. In both its prospectus and annual reports, WestJet stresses its desire to capture both leisure and business travelers during peak travel times. WestJet emphasizes everyday low fares, convenient schedules and 100% ticketless reservation system.
The small airline carrier expanded into a profitable national air carrier. It growth has been achieved by using internal capital to increase size and market share. Expansion for WestJet has come slowly without veering away from its business model and niche markets. It continues to be recognized for its outstanding achievements in meeting the diverse goals of its travelers, employees, and shareholders.
Canada 3000 began its operations in 1988 and was once considered Canada's airline alternative to the two national carriers at the time: Canadian Airlines and Air Canada. …