Weighing the merits of WestJet’s regional carrier plans

Earlier this year, WestJet President and CEO Gregg Saretsky announced the company’ plan to launch a regional subsidiary which will focus on underserved Canadian cities. The company plans on acquiring a fleet specific to the market so that it can secure profitability on these routes.

For an airline that proclaimed not too long ago that it wants to be one of the top 5 global carriers in the world by 2015, focusing on the intra-Canadian market seems like small fish compared to the major traffic it can reap from its numerous partnerships.

Three reasons in favor:

-Introducing a "Southwest Effect" to new parts of the Canadian market. The routes WestJet are evaluating for the regional carrier are currently very expensive. WestJet coming in with a more cost-effective offering can increase traffic that is otherwise stymied by the prices and capture market share.

-WestJet for WestJet traffic: Much of WestJet’s growth had been focused on forming partnerships to capture international traffic. While it does have some influence on Caribbean traffic with its own flights to the region, it has minimal control at best on international passengers coming into Canada. Revenues coming from within Canada can serve as a hedge if international traffic takes a serious hit.

-Beat Air Canada to the punch: Air Canada’s LCC plans have had many obstacles since its announcement, with President and CEO Calin Rovinescu stating internally that a re-envisioning of Air Canada needs to take place to avoid the pitfalls of what happened to American Airlines. Meanwhile, WestJet quickly secured very strong approval of its staff and is in the process of determining best aircraft. Capturing further market share and knocking down Air Canada’s revenues could start a spiral effect that will allow WestJet to scale quickly in response.

There is inherent risk since WestJet will be undertaking a major investment to establish a regional subsidiary. However, the potential bounty it presents, particularly if all three reasons ring true as the carrier is launched and scaled, could very well justify the upfront costs.