THE HONG KONG POLYTECHNIC UNIVERSITY

MM2021: Management & Organization

Case Study: Turbulent Flight Plan
Case Scenario
Eighty-two percent. Thats the market share held by Air Canada, the sole remaining major
Canadian airline, after its takeover of money-losing Canadian Airlines in the spring of 2000. And
the Canadian airline industry now is going through some major upheavals. Consumers facing an
airline market thats more reliant on a single carrier than any other major Western nation even
Germanys Lufthansa only has 60 percent of the market are complaining about the almost total
monopoly. They are critical of flights being overbooked, extremely long lines at check-in,
telephone call centers with half-hour-plus waits on hold, and prices that cost the passenger less to
fly to Europe than to the next province. In response, the Canadian government encouraged
discount airlines and stood behind their attempts to make it in the market. The House of
Commons passed legislation in May 2000 that defined abuse of dominant position and
empowered the Competition Bureau (equivalent to the U.S. Federal Trade Commission) to
punish companies engaging in price gouging. This legislative more was prompted by Air
Canadas competitive attack on WestJet Airlines for moving into markets in eastern Canada.
WestJet Airlines is one discount airline struggling for a smooth flight in this increasingly turbulent
environment.
Of the six scheduled discount airlines started in Canada in the last 20 years, only WestJet, based in
Calgary, Alberta, is still flying. It serves 13 western Canadian cities and has 5 percent of the
Canadian market. But Stephen C. Smith, president of WestJet, has made a strategic decision to
take the company national.
WestJet, started in 1996, mimics the Southwest Airlines strategic model. Southwest Airlines, a
U.S. airline, has enjoyed phenomenal success with a strategic formula of low fares and short-haul
routes. WestJets fares are an average of 40 percent lower than Air Canadas. It offers one class
of seating, has no meals on board or executive lounges in airports, and concentrates on flights of
400 miles or less. Passengers dont have tickets, only confirmation numbers. And to cut costs,
WestJet encourages ticket sales through the Internet, which now accounts for about 11 percent of
its tickets sold. Whenever possible, it lands at smaller airports that charge low user fees. One
deviation from Southwests strategy is that WestJet does assign passengers or guests to
specific seats.
As many of these strategies illustrate, Smith has made a commitment to keeping operating costs
low. In addition, like Southwest, WestJet files one class of jet, the Boeing 737, which minimizes
pilot training, maintenance costs, and gate turnaround time. To keep its employees (over 1,100
of them) nonunionized and, thus, giving the company more control over wages and salaries,
WestJet uses several incentives. A major one is that all workers who have been with the company
at least three months participate in a profit-sharing plan - $4 million was shared among eligible
employees in 1999. In addition, 70 percent of the employees participate in a stock purchase plan,
in which WestJet matches employee contributions up to 20 percent of their salary.
Smiths no-frills model appears to be working. During its four years of operation, WestJets
growth has been steady. Revenue passenger miles (a key operating measure in the airline
industry) were up 54 percent for the first four months of 2000. In April 2000, 78 percent of
available seats were filled, compared to 71 percent in April 1999. WestJet also consistently
makes a profit. A spokesperson for a Canadian consumer group said, WestJet is tightly run and
well managed There are not many [passenger] complaints. However, some experts say that
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Smiths strategic decision to compete nationally is a gamble that will either make or break
WestJet. Its a risk, and this isnt an industry that tolerates a lot of mistakes. To accommodate
its national expansion, WestJet ordered 20 new Boeing 737 jets to be delivered over eight years
and plans to lease 10 more. Also, WestJets competitor, Air Canada, started its own discount
carrier in summer 2000, serving WestJets stronghold, western Canada. Although industry
analysts say that unionized Air Canada will have a hard time matching nonunionized WestJets
cost structure, some feel that WestJet may be overextending itself and expanding faster than
demand for its services.
Questions
1. What competitive advantage(s) do you think WestJet has? What competitive advantages do
you think Air Canada has? Explain your choices.
2. What competitive strategy does WestJet appear to be following? Explain your choice.
3. How could Stephen Smith have used SWOT analysis in developing his strategy to go
national? Do an abbreviated SWOT analysis using information from the case.
4. What do you think of WestJets strategic decision to compete nationally? What suggestions
might you make to Stephen Smith?

Essential Readings/Reference:
J. Brooke, Taking Off? And for a Lot Less, New York Times, June 3, 2000, pp. B1+; and J.
Baglole, Canadas WestJet Battles Giant, Wall Street Journal, April 24, 2000, p. A26.