Westjet Case Study
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Issues
WestJet must decide if it should move its base of operations for the Toronto area from Munro airport in Hamilton to Pearson airport in Toronto. A base in Toronto could increase WestJets attractiveness to certain customer segments and increase their potential market size. However, the costs of operating from Pearson are higher than Munro and Pearsons greater congestion would impact WestJets cost structure. The change in cost structure would force them to operate more like Air Canada, reducing their competitive advantage on price and speed. Additionally, WestJet is facing increased competition from Air Canada and their Tango discount division.
Analysis
The Southwest business model which WestJet is replicating is intended to target customers who would otherwise take the bus, train or drive. By placing themselves away from the population, WestJet is making it harder for those customers to take a plane instead of other means of transport. 75% of those using Pearson airport started or ended their journey in Toronto. The Munro airport forces the Toronto customers to arrange and pay the additional cost of a lengthier trip to the airport, or to simply avoid the hassle and fly Air Canada Tango.
Toronto is Canadas busiest airport and holds a large percentage of the population. WestJet is giving Air Canada Tango a practical monopoly in the most heavily trafficked Canadian hub by not directly competing with them. Air Canada holds a frequent flyer loyalty program so the longer WestJet delays moving to Toronto, the more entrenched customers will be into Air Canadas program. With the number of passengers using Pearson expected to increase from 24.7 million passengers now to 50 million by 2020, WestJet needs to embrace this market as early as possible. Furthermore, leaving Air Canada alone in Toronto increases the threat of new entrants; WestJet must fill this gap to alleviate that threat.
The increase in cost of $9 per ticket is negligible compared to the sheer amount of customers WestJet would be expanding to. Exhibit 6 of the case shows Air Canada is flying almost 7 times as many flights from Toronto to Vancouver than WestJet is from Hamilton to Vancouver. A flight from Toronto to Vancouver costs around $250 during non-peak times, a $9 increase in price is only a 3.6% ticket price increase. Furthermore, increased economies of scale and market share should prevent WestJet from having to pass the entire cost increase to customers.
The Canadian market is different from the American market and that the Southwest and JetBlue business plans must be altered accordingly. JetBlue flies primarily out of smaller cities in America but such a strategy would not work in Canada. 40% of Canada lives in the five largest cities as opposed to 22% in America. Canadas second-tier cities