Q&A

‘HOW MUCH IS ENOUGH?’

LIVE BEDDOE April 28 2003
Q&A

‘HOW MUCH IS ENOUGH?’

LIVE BEDDOE April 28 2003

‘HOW MUCH IS ENOUGH?’

Q&A

WestJet’s CEO says the government should resist bailing out Air Canada

LIVE BEDDOE

IT IS, by now, one of those classic Calgary business legends. Seven years ago, real estate developer Clive Beddoe, along with several fellow Calgary executives, grew exasperated with the high cost of business air travel on the country’s two major carriers, Air Canada and Canadian Airlines International Ltd. Their solution? Start their own no-frills, discount airline modelled on the hugely successful Dallas-based Southwest Airlines. From its base in Western Canada, Westjet Airlines Ltd. rapidly expanded: it now runs 1,430 flights weekly, and services 25 per cent of the domestic air passenger market. Moreover, Westjet, with Beddoe as its CEO, has consistently turned a profit. Meanwhile, Canadian Airlines was taken over by Air Canada in 1999, and earlier this month a debtridden Air Canada sought bankruptcy protection. The blunt-spoken Beddoe takes obvious delight in the competition’s woes—and is not shy about offering both Air Canada and the federal government advice about their future options. Beddoe, 56, spoke with Maclean’s Calgary Bureau Chief Brian Bergman at WestJet’s head office.

The country’s largest airline is in bankruptcy protection. Is that a good thing?

For the health of the industry, I think it is. It will force Air Canada to be more realistic. This is an airline that has lost huge amounts of money on its domestic operations for a long time.

You’ve said Air Canada has no one to blame but itself. Can you expand on that?

The whole Air Canada philosophy stems from one of dominance. Drive everyone else out of business and you force the public onto your system. Then, you don’t really have to worry about things like customer service or on-time performance. You can charge whatever you like and the flying public has no choice. The danger in this is that you leave yourself wide open to the emergence of a more efficient carrier that does concentrate on customer service. The net result

is that when we came on the scene, we were welcomed with opened arms. So we’ve prospered whilst they’ve suffered.

What is an example of what you view as Air Canada’s determination to dominate?

The absolutely classic one is Abbotsford, B.C. We went in there five years ago, a completely new market, and built it up to about six flights a day, serving Calgary and Edmonton. We charged the same fares as on our flights out of Vancouver. And we did very well. Air Canada couldn’t stand to see this. They went in with three flights a day or so, matching our fares. Now, their operating costs are double ours, so there is no way they could cover that route with our fares. So what on earth were they doing there? Worse yet, the people of Abbotsford had no tolerance for this and supported us. We were flying out of there with planes 70 per cent full; Air Canada’s passenger loads were about half of that. Can you imagine how much money they were losing? I mean, I can understand them giving it a try, but when it didn’t work, why not stop? Absolutely stupid, beyond belief.

Air Canada is now looking for concessions from its employees. Should it get them?

The first thing the employees should demand is a rational business model. If I was one of them, I’d say “You want me to take a huge cut in my income, but for what? Your ego?” Air Canada needs to deliver a product people want to buy. Not everyone wants to fly on Westjet. There are people who want something of a premium product.

What should Ottawa do to make the airline industry more viable?

They can start by having a transportation policy that encourages people to travel. This is an industry that has been whacked by taxes and surcharges. Our frustration is that we’ve stimulated this market. We cut fares by an average of 50 per cent wherever we went— and made money doing it. Then Ottawa comes along and slaps charges after charges,

sucking up that differential. Look, we’ve generated $2 billion in gross revenue since we started, and earned a total net income after tax of about $135 million. We’ve paid out about $550 million in taxes and charges to various government entities. I mean, how much is enough?

What should Ottawa not do?

They should not bail out Air Canada. To do so is to continue to sustain an unsustainable business enterprise. They bailed out Canadian twice. And it didn’t work.

How will your own business plan change as a result of Air Canada’s troubles?

We’re building our own network in Canada, so our first priority is to make sure that it’s efficient and works well. We added Toronto and London, Ont., last year. We’ve just started flights into Windsor, Ont., and Halifax and we go into Montreal as of April 24. So we’ll gradually connect those cities together, adding flights and frequency. Once that’s done, we will penetrate the U.S.

If you look five years ahead, how do you see the state of Canada’s airline industry?

I see two charter carriers and two scheduled carriers. That’s all the market will likely sustain. I see more of the domestic market going to us, with Air Canada concentrating on the longer haul and the higher end. They have to differentiate their product. Mercedes doesn’t try to sell cars at Volkswagen prices. Air Canada is a high-cost carrier and it’s ridiculous to imagine it can be otherwise. Painting aircraft different colours and giving them different names doesn’t change their cost of doing business.

How do you see the domestic market splitting between Westlet and Air Canada?

If Air Canada is ultimately smart enough to understand what it needs to do, my guess is that the market will be split 60/40 between us. The question will then be: who gets the majority share?

If Air Canada abandons certain routes and Westlet enjoys a monopoly, what’s to stop you from gouging the customer?

Nothing would prevent us, but that’s not part of our philosophy or what makes us work. The market is very elastic. If you start putting up airfares unreasonably, people won’t fly. In Abbotsford, before Air Canada came in, we had a monopoly market. We didn’t hike fares. Why? Because we need low fares to stimulate people to fly.

Didn’t the same logic apply to Air Canada?

Look, they had 85 per cent market share at one point. What they did was take the people who had to fly and gouged them. If

you’re a businessman trying to seal an important deal and have to go to Toronto, what does it matter if the ticket price is $3,000 or $4,000? That’s what they did.

How important is it that Westlet’s staff is not unionized and are you concerned there may be a push to start a union?

It’s the employees who choose not to have a union. What we’ve done is aligned the interest of our employees with the company. They share in our profits and have a stake in our success. All of the people at Westjet are concerned about sustaining the culture of this company, not just me and the other executives.

And all of us have a lack of tolerance for people who aren’t prepared to be part of the Westjet team. There’s a need to do whatever it takes to make sure that airplanes get out on time, that bags are moved, even if it means getting down on the ramp and throwing some bags or helping clean up the airplane. We all do it, all of us.

WestJet has enjoyed tremendous customer loyalty. Do you expect that to continue as you become a much bigger fish?

Customer loyalty comes from customer service. Friendly, affordable, reliable, safe service. If we lose that, then we will lose our support in the community. M