Onex Corp.’s offer to buy WestJet Airlines Ltd. (TSX:WJA) for $3.5 billion and assume debt to make the offer worth $5 billion could be good news for the country’s ultra-low-cost carriers, such as Flair Air and Canada Jetlines.
Vancouver-based Canada Jetlines executive chairman Mark Morabito told Business in Vancouver that while he doubts that Onex CEO and founder Gerry Schwartz will take a hands-on approach at Calgary-based WestJet and immediately make huge changes, it is likely that Schwartz has a “master plan” for what he wants the airline to become.
Schwartz in 1999 had Onex offer $1.8 billion to acquire and merge Canadian Airlines and Air Canada. A Quebec court then scuttled the proposal. Morabito believes that Onex' offer for WestJet, which was revealed May 13, could have similarities to that first attempt to get into the airline business.
“I expect them to go head-to-head with Air Canada, and other major carriers, and become a true international carrier,” Morabito said.
“If that is correct, they will abandon the money-losing Swoop, which is attracting regulatory scrutiny.”
Indeed, Canada’s competition watchdog, the Competition Bureau of Canada, is looking into whether WestJet’s discount carrier, Swoop, has been offering airline tickets below cost as a way to prevent rivals, such as Canada Jetlines, from being able to compete.
“The bureau has used their full subpoena power against WestJet for production of documentation, and compelling witnesses to testify under oath,” Morabito said. “They have used the strongest powers they have in the book.”
WestJet CEO Edward Sims sounded positive about Swoop’s operations on a conference call on May 7, saying “We're pleased with Swoop's performance as it continues to do exactly what it was designed to do.”
The company’s CFO, Harry Taylor, however, in the same call, revealed some doubts about the ultra-low-cost carrier’s performance.
“Swoop was weaker than we expected and would have liked,” Taylor said. “The shoulder seasons have proven to be more variable…. awareness is so low.”
Given money-losing operations at the ultra-low-cost carrier, partly as a result of a cost structure that is higher than other ultra-low-cost carriers, as well as regulatory scrutiny, Morabito believes that it is only a matter of time before WestJet phases out Swoop and focuses all of its assets on competing head-on against Air Canada.
Future money infusions, he said, could come from an airline such as Delta Air Lines Inc. (NYSE:DAL) – an airline with which WestJet has in the past partnered to share flights.
Last year, Delta and WestJet also agreed to create a comprehensive transborder joint venture that would offer customers an extensive route network within the U.S. and Canada.
The federal government’s recent loosening of foreign-investment restrictions mean that foreign companies are able to buy up to 25% of a Canadian airline. The new regime also allows a total of up to 49% foreign ownership.
Were Delta to become an equity partner with WestJet, Morabito believes that WestJet would become a partner in the SkyTeam airline alliance and go full throttle against Air Canada, which is part of the Star Alliance group of airlines.
Those alliances help give customers a more cost effective and convenient global reach.
