Case Analysis Please read the attached case and answer the following questions below with deep understanding of case information, and present exemplary cases of applying theories and pulling informat

Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected].

Copyright © 2009, Ivey Management Services Version: (A) 2010-08-26 INTRODUCTION On April 27, 2009, a senior executive at WestJet Airlines Ltd. (WestJet) was reviewing his company’s expansion goals for the next few years. In support of its future growth, WestJet was considering adding smaller Bombardier or Embraer airplanes to its fleet of single-model Boeing 737s. Although adding smaller planes would allow WestJet to increase its market share by offering short-haul trips and connections, the senior executive considered the impact the decision would have on WestJet’s strategy.

“We don’t feel any time pressure to go to a second fleet,” said Bob Cummings, WestJet’s executive vice- president of guest experience and marketing. “But there is definitely a tipping point where this organization needs to seriously consider going to a second fleet. It just makes sense that in the life cycle of this organization, we would move beyond the consideration phase.” 2 WestJet was well-known in Canada for its cheerful employees, irreverent corporate culture, low fares and upbeat commercials. From its roots as a Calgary-based startup in 1996, WestJet had become the second largest airline in Canada, growing revenues at an average annual rate of 37 per cent for 11 years. It had been profitable in 11 out of 12 fiscal years since 1997, and was poised to become Canada’s dominant airline. Despite the economic downturn in 2008, WestJet was one of only three global airlines that were profitable in 2008, leaving it well-positioned to take advantage of an economic recovery. By the start of 2009, WestJet had a 36 per cent share of its domestic market to Air Canada’s 57 per cent.

According to rumors, Air Canada was poised to suffer another setback: in early April 2009, a news report suggested Air Canada was preparing to restructure its operations, possibly including a bankruptcy filing.

The timing seemed right for WestJet to continue gaining ground on its chief rival. The addition of new, smaller jets could be the catalyst for further growth.

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of WestJet or any of its employees.

2 Brent Jang, “WestJet Eyes Smaller Planes,” The Globe and Mail , April 14, 2009, p. B7. For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 58Page 2 9B09M063 THE CANADIAN AIRLINE INDUSTRY In Canada, the deregulation of the airline industry, which started in 1988, allowed carriers to establish airfare and conditions of carriage without government regulation. Competition within the industry was fierce, and the price wars benefited consumers looking for bargains. From 1988 to 2008, the cost of air travel, defined as “cents per revenue passenger mile,” fell from 15.1 cents to 12.4 cents. 3 Air Canada, along with its affiliated regional carrier, Jazz Air, was the dominant airline, with 57 per cent of the market in 2008. WestJet was in second place, with 36 per cent of the market. The remaining market share comprised small regional carriers, such as Toronto-based Porter Airlines and Air Transat, a charter airline. For U.S. or international flights originating in Canada, domestic airlines competed with major U.S.

airlines, such as American Airlines, Delta Airlines, Continental Airlines and Alaska Airlines. In addition to being highly competitive, the airline industry was sensitive to macro factors, such as general economic conditions, weather and fluctuations in jet fuel prices. From 2000 to 2008, a series of events had affected demand for air travel: the terrorist attacks of September 11, 2001, Severe Acute Respiratory Syndrome (SARS), BSE (Bovine spongiform encephalopathy, more commonly known as “mad cow disease”), the appreciation of the Canadian dollar, record-high fuel prices and the 2008 recession. 4 Thus, despite a growing number of competitors offering new routes and lower prices in an attempt to boost demand, between 2000 and 2008, the number of passengers flying by air had grown at just 3.6 per cent per year. As a result of the competitive nature of the market, several of these new airlines had failed over the years: Greyhound, VistaJet, Astoria, Harmony, Jetsgo and Canada 3000. In 2008, of the 110 million airline passengers who enplaned or deplaned in a Canadian airport, approximately 69 million were travelling within Canada. Because Canada’s population base was concentrated in major cities, most air traffic in Canada originated from four major hubs: Toronto, Montreal, Vancouver and Calgary. WESTJET AIRLINES LTD. 1996-1997: The Early Years WestJet was founded in 1996 by a group of Calgary businessmen headed by Clive Beddoe, an entrepreneur. WestJet raised $8.5 million from local investors, and, in January 1996, the team completed a second offering to retail and institutional investors. WestJet commenced operations on February 29, 1996, with three aircraft and 220 employees, offering flights to Vancouver, Kelowna, Calgary and Edmonton. To some, the plan must have seemed ambitious. The Canadian economy was just recovering after the recession of the early 1990s, and Canada’s two largest airlines were locked in a multi-year price war that saw both airlines lose a cumulative $2.15 billion between 1990 and 1995. However, Beddoe and his team saw an opportunity to build a different kind of airline, one modeled after Southwest Airlines (Southwest), a highly successful discount carrier in the United States. 3 Economic Analysis Policy, “Transport Canada – Assumptions Report, 2008–2022,” Transport Canada, December 11, 2008, page 26. The figures have been deflated to 1996 dollars.

4 Economic Analysis Policy, “Transport Canada – Assumptions Report, 2008–2022,” Transport Canada, December 11, 2008, page 5. For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 59Page 3 9B09M063 Southwest had pioneered, developed and exploited a low-fare airline model to the point of being the most consistently profitable airline in the world. Like Southwest, by starting with short-haul service, WestJet’s initial focus was to stimulate demand for air travel by offering consumers a lower-cost airline alternative to surface transportation such as automobile, bus and rail. Other aspects of Southwest’s strategy were also copied. Like Southwest, WestJet’s prices could be set low enough to be attractive because costs would be held to a minimum. WestJet started with a single model of airplane, the Boeing 737-200. Keeping to a single type of aircraft meant that maintenance and operating costs would be lower than for a fleet of different planes. WestJet’s route structure was one of the most significant factors of its marketing strategy. It aimed to design a route structure that met the needs of customers and provided low-fare capacity that generated demand. For example, unlike the major carriers that aggregated passengers at central hubs before flying them to their destination, WestJet flew point to point. Non-stop routes were added not only to increase travel convenience for customers but also to provide the most cost-effective way to transport customers to their destination: connection times did not need to be coordinated, and baggage did not need to be transferred from one plane to the next.

To ensure aircraft utilization was high, WestJet searched for opportunities to offer flights in the evenings, when aircraft would otherwise be idle. These evening flights served markets that were not as time sensitive and those that were better served by evening flights. To achieve lower airport fees and avoid lengthy take- off queues, WestJet targeted routes originating from secondary airports instead of from major metropolitan hubs. Customers had a choice of sales channels through which to book their flights: WestJet’s call center (which WestJet referred to as the Sales Super Centre), airport counters and travel agents. Instead of issuing tickets in triplicate, WestJet was the first to issue electronic tickets. All WestJet’s fares were based on one-way travel. Unlike Air Canada’s fares, no discounts were offered for booking round trip flights or for segments that included a Saturday night stay. WestJet did not need to overbook its flights because seats were paid for at the time of reservation and were non-refundable. Changes or cancellations could be made for a nominal fee and payment of any differences in fare. Amenities were kept to a minimum. Unlike the major airlines, WestJet did not offer reserved seating, and only a single class of fare was available. No hot meals were served during flights, which eliminated the need for an onboard heating station. WestJet did not offer customers a loyalty program, nor did it operate airport lounges.

Beddoe and his team wanted to foster a work culture similar to that of Southwest: fun, casual and customer-oriented. The organization was designed to be flat, with few supervisory layers. During flights, WestJet flight attendants entertained customers by telling jokes and involving them in games. The objective of being lively and irreverent was an attempt to set the WestJet experience apart from the service at its competitors. Unlike their unionized counterparts at Air Canada and Canadian Airlines, WestJet’s employees, known as “WestJetters,” often took on tasks that were outside of their job descriptions. For example, as soon as a plane landed, pilots, engineers and other WestJet employees on the flight were expected to work together with the flight attendants to prepare the plane for the next flight. If members of the senior management team were on board a flight, they were also expected to help out. As a result, WestJet’s average turnaround time for aircraft was 15 to 20 minutes as opposed to 30 to 60 minutes for its competitors. For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 60Page 4 9B09M063 WestJet’s value proposition seemed to resonate with customers. One month after WestJet’s launch, Victoria was added as a destination. By the end of 1996, WestJet added Regina and Saskatoon to its schedule. In 1997, its first full year of operations, WestJet earned $6.2 million in net income on $77.1 million in revenues. 1998-2003: WestJet Expands East WestJet started to build its network in the east with service to Winnipeg, Manitoba, in 1998. The company began setting aside between 10 and 20 per cent of pre-tax operating income for the employee bonus pool.

In 1998, $1.7 million was distributed to employees. WestJet employees had access to an Employee Share Purchase Plan (ESPP), which allowed them to accumulate an equity stake in their firm. Contributions up until 20 per cent of an employee’s salary were matched dollar-for-dollar by WestJet. The funds were used to buy voting shares in the open market during each calendar month.

The growing organization had a selective hiring policy, only adding employees who would be a fit for the WestJet corporate culture. Unlike other major airlines, WestJet did not have a unionized workforce. It had the Pro-Active Communication Team, or PACT, an employee association formed in 1999 by non- management employees with the support and encouragement of management. WestJet management supported the continuing appointment of a PACT representative to WestJet’s board of directors.

WestJet continued its eastward expansion in 1999, adding Thunder Bay, Ontario, to the destinations served. WestJet also tested out new routes by offering “limited addition” services; if demand were high enough, the temporary service would become a permanent route. To help fund its expansion, WestJet held an initial public offering on July 13, 1999, raising $25 million to purchase more Boeing 737 aircraft. At that time, WestJet officials believed the company could profitably operate up to 30 jets in total. 5 Air Canada and Canadian Airlines sought to match WestJet’s low prices, which were up to 60 per cent less than the nominal economy prices of the major airlines; however, in doing so, they raised “fences” to limit their overall revenue erosion. For example, the competing airlines limited the number of seats available in varying discount ranges by restricting the times when the low fares were available and by requiring minimum stay-overs. Both airlines also used bonus point offers to help stem the loss of high-yield customers. On occasion, the major airlines would price fares at less than cost on selected routes.

Throughout these various forays, WestJet claimed that it made money on all its routes. 6 To maintain an edge over its competitors, WestJet continued its focus on cost reduction. WestJet aimed to maintain on-time flight operations, ensuring that guests were not inconvenienced and that costs associated with delayed flights — such as guest compensation for hotel stays, meals and other incidentals — were minimized. To ensure that WestJet staff at each airport had the best available information with which to assist customers, WestJet had an Operations Control Centre (OCC) working 24 hours a day to monitor passenger traffic. The objective of the OCC was to assist with on-time performance goals and minimize idle time for aircraft. The OCC controlled and monitored aircraft movement across the WestJet network.

For example, if poor weather conditions or mechanical issues forced an unexpected change in the schedule, the OCC worked with Guest Relations to ensure that guests were accommodated with as little inconvenience as possible. The OCC could also assist in re-deploying flight crews and monitor weight limits per airplane. 5 CBC News, “WestJet IPO Makes a Strong Debut,” November 10, 2000, http://www.cbc.ca/money/story/1999/07/13/westjet990713.html, accessed August 4, 2009.

6 Joseph N. Fry and Roderick E. White, “WestJet (A): Looks East”, 9B00M036, page 15. For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 61Page 5 9B09M063 Ideas for cost reduction came from anywhere in the organization. For example, a WestJet pilot suggested that fuel could be saved by taxiing down a runway using only one engine, a suggestion that was implemented across the airline.

WestJet management had communicated that the company would add perhaps three to four aircraft per year and focus on Western Canada. The potential for growth in Eastern Canada became apparent after Air Canada’s merger with Canadian Airlines (Canadian) in the fall of 1999, following a difficult takeover battle that involved Onex Corporation, an investment holding company. As a condition of its merger with Canadian, Air Canada undertook not to start a low-fare airline in Eastern Canada until September 2001. 7 To test the market for a service near the largest metropolitan area in Canada — and close to its rival’s home base — WestJet added a service from Hamilton, Ontario.

In December 2000, WestJet completed a second common share offering, generating net proceeds of $52.1 million, which it used to purchase new aircraft (Boeing 737s) and new facilities. That year, WestJet reached even further east, adding a service from Moncton, New Brunswick. In 2001, WestJet expanded its ability to sell tickets through its partnership with Sabre, a worldwide airline ticket distribution system. By the end of the year, five per cent of WestJet’s sales originated through Sabre. 8 Despite the negative impact on travel of the September 11, 2001 terrorist attacks in New York, WestJet generated a profit of $36.7 million on $478 million in sales, and achieved a load factor of 74.7 per cent. 9 When opportunities to expand appeared, WestJet was ready to capitalize on them. In May 2002, WestJet began service from Toronto’s Pearson International Airport (Pearson) — Canada’s busiest airport — just months after Canada 3000 declared bankruptcy. WestJet continued to look for ways to broaden its offer to customers. In October 2002, WestJet signed an agreement with Worldwide Travel Exchange, also known as Expedia.ca, to offer car and hotel bookings on WestJet.com. As an incentive to frequent flyers, in 2003, WestJet started offering AIR MILES reward miles to customers. WestJet increased the number of distribution points by signing an agreement with Worldspan, a global distribution system, to provide access to WestJet fares to thousands of travel agents around the world.

WestJet saw an opportunity to increase the utilization of its aircraft in the winter months, signing a two- year charter agreement in 2002 with Transat Holidays (Transat) that would generate $29 million in revenues in the first year. As a result of this agreement, WestJet began flying a charter service to the Dominican Republic, Cuba, Mexico and select holiday destinations in the United States.

By the end of 2003, WestJet had a cost and revenue structure similar to Southwest, the airline upon which it modeled itself. This differed sharply from Air Canada’s operating metrics, which were more similar to those of United, its partner in the Star Alliance. Exhibit 1 illustrates passenger revenue and operating costs per available seat mile for each airline. The shorter stage lengths for WestJet and Southwest reflect their domestic route structures while the hub and spoke international routes of Air Canada and United result in longer average flights. Jet Blue operates longer haul point-to-point (e.g., New York – Los Angeles) 7 Joseph N. Fry and Roderick E. White, “WestJet (A): Looks East”, 9B00M036, page 16. 8 WestJet Annual Report 2001, page 26. 9 Load factor is a common airline measure of capacity utilization calculated as passenger kilometers flown per available passenger seat kilometers. For example, a half-full plane would have a load factor of 50 per cent. For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 62Page 6 9B09M063 resulting in a cost-revenue structure similar to WestJet and Southwest while stage length is roughly double that of the other low-cost carriers.

2004-2008: Growth Continues In April 2004, WestJet moved its main hub in Hamilton, in southern Ontario to Pearson airport, tripling its number of flights out of Pearson to 182 each week. The move brought WestJet into direct competition with Air Canada. Beddoe defended the move, stating that the additional costs of flying in and out of Toronto amounted to about $20 per passenger. 10 As a result of the shift to Pearson, WestJet stopped more than 70 of its 130 flights out of the Hamilton airport.

WestJet entered the U.S. market in the fall of 2004, when it began regular service to seven U.S.

destinations. The next year, it added four additional U.S. cities to its reach. To service its international destinations, WestJet acquired new Next-Generation Boeing 737-600, -700 and -800 aircraft to replace its aging 737-200 fleet. The new planes were longer-range aircraft that offered customers leather seats, increased legroom and live satellite television. Air Canada and other airlines offered in-seat screen systems where media content was stored on servers on the aircraft. In contrast, live satellite television was a low- cost solution for WestJet and allowed the delivery of a wide variety of content. To reduce the satellite television maintenance costs, WestJet offered minimal content development, management and system uploading. The new planes were also 30 per cent more fuel efficient, a positive feature in a period of rising oil prices. Despite these efforts, the high price of fuel, along with increased landing fees, terminal fees and airport improvement fees led WestJet to its first loss in 2004.

To manage the growing organization, two levels of vice-presidents were created: the executive vice- presidents and the vice-presidents. In 2005, nine new vice-presidents were hired or appointed. In 2006, WestJet Vacations Inc. (WVI) was launched as a subsidiary of WestJet. WVI would partner with car rental and hotel companies to offer a one-stop shop for travel packages to all its destinations. Sean Durfy, WestJet’s president, explained the rationale behind the initiative:

A vacation company is a logical product expansion for WestJet. With the cost of air travel and the ability to produce high margins being the biggest struggle for Canadian tour operators, WestJet Vacations has a clear advantage. Leveraging WestJet’s aircraft, network, loyal guest base and exceptional guest service, while operating with the same low-cost model, WestJet Vacations has the potential to become the premier vacation provider for Canadians and our U.S. friends coming to Canada. 11 WestJet continued to improve its service at airports. Customers could use self-service check-in booths and, starting in 2007, flow-through check-in. In flow-through check-ins, customers placed their bags on the baggage conveyer belts themselves, which avoided congestion at traditional counters. Although all airlines printed boarding passes for customers, WestJet customers who had mobile devices could have their electronic boarding passes sent directly to their cell phone or personal digital assistant. WestJet was the first airline in North America to introduce this option.

10 CBC News, “WestJet Shifts Operations to Toronto from Hamilton,” http://www.cbc.ca/money/story/2004/01/14/westjet_040114.html, accessed August 3, 2009.

11 WestJet Annual Report 2006, page 8. For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 63Page 7 9B09M063 During its flights, WestJet began to offer a variety of features and services: in-seat entertainment with 24 channels of live satellite television from Bell ExpressVu and four pay-per-view movie channels; leather seats and chairs that reclined further than those of its competitors; and buy-on-board food products.

To ensure that the airline was reaching as many of its target audience as possible, WestJet’s marketing strategy included a broad range of vehicles, such as television, print, radio, outdoor signs and online advertising. The key objective was to generate awareness of WestJet among potential customers. The main theme in the advertising was that WestJet employees cared about guests because the employees owned the airline. Establishing WestJet as a national airline in customers’ minds was important because WestJet had ambitious goals. By 2016, WestJet aimed to be one of the five most successful international airlines in the world. To achieve this goal, it would focus on four pillars it considered fundamental: 1. Achieving revenue growth of at least 10 per cent in available seat miles through fleet expansion and an increased number of flights (which it termed “commercialization of our schedule”). It would also grow revenues with WVI and ancillary products and services; 2. Maintaining its low-cost model and growing its margins: WestJet aimed to have the lowest equivalent sustainable cost per available seat mile, excluding fuel, in North America. This goal would be achieved thorough cost control, cost reduction and increased fleet utilization; 3. Delivering “an amazing guest experience” measured by on-time performance, completion and baggage rates. WestJet would continue to showcase its “differentiating service, delivered by our friendly and caring front-line” staff; 4. Building its unique corporate culture by ensuring that the right training and tools were available, and creating a fun and positive work environment. WestJet’s competitive compensation plan would continue to include employee profit share and the ESPP. 12 WestJet managed its load factor to more than 80 per cent in 2007 by shifting capacity between domestic, charter, transborder and international flights. By the end of 2008, approximately one-third of WestJet’s capacity was allocated to international flights. Between 1999 and 2008, WestJet’s longer flight segments had resulted in an increase in its average stage length from 383 miles to 913 miles. Exhibit 2 illustrates the cost and revenue structures for WestJet, AirCanada, Southwest, United and Jet Blue along with their respective stage lengths in 2008. Refer to Exhibit 3 for selected financial information and operational highlights for WestJet from 1997 to 2008.

WestJet’s other revenue-generating initiatives also began to gain traction. In 2008, WestJet reported higher revenues from charter fees and an increase of approximately $30 million in ancillary revenues from fees associated with guest itinerary changes and excess baggage charges, and from sales of buy-on-board food products, pay-per-view movies and headsets. 13 Refer to Exhibit 4 for WestJet’s latest income statements and balance sheets WestJet also offered different classes of fares. By offering multiple fare levels, WestJet maximized profitability by balancing revenues with optimal load factors. Depending on competitive pricing, temporary seat sales could be offered in the marketplace featuring fares lower than those booked further in advance of the travel date.

In 2008, WestJet entered into an agreement with Southwest Airlines to implement code-share flights across both networks to start in late 2009. Code sharing referred to a program where a flight operated by an airline is jointly marketed as a flight for another airline. Most major airlines had code sharing partnerships with 12 WestJet Annual Report 2006, page 9. 13 WestJet Annual Report 2007, page 13. For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 64Page 8 9B09M063 other airlines and code sharing was a key feature of the major airline alliances. 14 To ensure that its systems were compatible with Southwest’s, WestJet switched from an in-house reservation system to Sabre Airline Solution Inc.’s SabreSonic system. Going forward, this new reservation system would allow WestJet to take on ancillary revenue and code-share agreements with other airlines. In 2008, the Internet was WestJet’s largest distribution channel with two-thirds of its flights booked through WestJet.com. Another 18 per cent of sales came through WestJet’s Sales Super Centre. With its charter programs from Calgary and Vancouver to Cancun, Mexico, WVI had become a significant player in the Canadian tour operator industry. Exhibit 5 lists WestJet’s route development from 1996 to 2009. Exhibit 6 is a snapshot of WestJet’s route structure in 2008. By the end of 2008, WVI was the top provider of hotel rooms in Las Vegas. 15 Because WestJet was seeking to build WVI on its own, in February 2009, WestJet and Transat agreed to terminate their charter agreement effective May 10, 2009.

WestJet also transported cargo to and from every city in its Canadian network. Because cargo services were a small portion of its business, WestJet used a third party, ELS Marketing Inc., to handle the sales, accounting and staff training for cargo services.

At the end of 2008, WestJet ended its participation as a sponsor of the AIR MILES reward program. The original objective of participating in AIR MILES was to entice frequent travelers to switch from collecting Air Canada’s Aeroplan miles and thus switch airlines. In 2009, WestJet was working on a new reward program for frequent travelers. In particular, WestJet wanted to gain a foothold in the lucrative business travel market. Business travelers who were not WestJet customers looked for a variety of reward features, including air miles (in particular air miles from Air Canada’s Aeroplan unit), flight frequency, business- class flight service and lounges. To try to entice business travelers to switch to WestJet, the company aligned itself with oneWorld, a global network of airlines that competed with the Star Alliance, a network that included Air Canada. WestJet’s offer combined its Canadian network with oneWorld’s transborder and international reach to offer customers special rates on business air travel. While waiting for their flights, WestJet customers could now use WestJet’s pay-per-use departure lounge. After 12 years of trying to set itself apart from other airlines, WestJet continued to retain its unique culture. In fact, in each year from 2005 to 2008, WestJet had been named one of Canada’s most admired corporate cultures.

Competitors may be able to replicate our technologies, products and low-cost infrastructure; however, it is much more difficult to assemble a team who can rival our highly-motivated people. The quality of guest service provided by our WestJetters influences the relationship between our company and our guests, which causes many guests to return after experiencing the fun, friendly, casual atmosphere and the high level of guest service provided by our people. 16 2009: Looking Ahead WestJet entered 2009 with just more than 6,000 full-time equivalent employees. In 2009, WestJet flew to 55 destinations: 30 in Canada, 14 in the United States, four in Mexico and seven in the Caribbean. It had a modern fleet of 77 single-model Boeing 737 New Generation planes, with an average age of 4.1 years at 14 http://en.wikipedia.org/wiki/Codeshare_agreement, accessed August 16, 2009. 15 WestJet Annual Report 2008, page 18. 16 WestJet Annual Information Form 2007, March 11, 2008, page 13. For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 65Page 9 9B09M063 March 16, 2009. New aircraft maintenance costs were low, in part because the aircraft were under warranty for several years. In February 2009, WestJet signed a memorandum of understanding with Air France and KLM, both members of SkyTeam, on a new commercial relationship — to be jointly negotiated — among the three airlines by late 2009 or early 2010. Although battered by the financial crisis, WestJet continued to stay the course. See Exhibit 7 for WestJet’s share price from July 1999 to January 2009. Although WestJet anticipated no changes to its operating plan, it kept a cash cushion of $820 million. WestJet’s strong position stood in stark contrast to its key rival, Air Canada. In February 2009, a stock analyst suggested that Air Canada could be forced to file for bankruptcy protection if it did not obtain additional financing through asset sales and renegotiate its credit card agreement covenants. In addition, Air Canada faced pension and labor issues. Its pension deficit had increased to $1.2 billion as a result of the decline in financial markets and an additional $410 million in cash — in pension funding obligations — could be required. All of Air Canada’s major union agreements were up for renewal in 2009. If Air Canada were to file for bankruptcy protection, it would be the second time in six years that the airline would have failed financially. Given that Canada — and the world — was mired in a financial crisis, the prospects for Canada’s largest airline looked bleak. 17 The WestJet senior executive looked at the comparative data of Air Canada and WestJet. (Refer to Exhibit 8 for market share data in the Canadian airline industry.) He was aware that WestJet had come a long way to become the second largest carrier in Canada. WestJet continued to have “plenty of growth opportunities to deploy Boeing 737s in Canada, Mexico and the Caribbean.” 18 But aircraft were generally designed to be efficient at different stage lengths, which meant that it would be inefficient to deploy the Boeing 737s for shorter-haul markets. If WestJet were to service the shorter-haul market, smaller planes would be needed. With the promise of high growth that lay ahead, the senior executive wondered whether adding a second fleet was consistent with WestJet’s long-term strategy.

17“Air Canada Could Face Bankruptcy Protection,” Financial Post Trading Desk, http://network.nationalpost.com/np/blogs/tradingdesk/archive/2009/02/17/air-canada-could-face-bankruptcy-protection.aspx, accessed August 3, 2009.

18 Brent Jang, “WestJet Eyes Smaller Planes,” The Globe and Mail, April 14, 2009, p B7. For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 66Page 10 9B09M063 Exhibit 1 STAGE LENGTH AND REVENUE AND OPERATING COST PER ASM (2003) 8.0 10.0 12.0 14.0 16.0 18.0 20.0 500 700 900 1100 1300 1500 1700 Canadian Cents / Mile Passenger Revenue / ASM Operating Cost / ASM SouthwestWestJet JetBlue United Air Canada Source: Rod White, “WestJet – Pearson Decision,” Ivey case, product #9B05M054. For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 67Page 11 9B09M063 Exhibit 2 STAGE LENGTH AND REVENUE AND OPERATING COST PER ASM (2008) 8.0 10.0 12.0 14.0 16.0 18.0 20.0 500 700 900 1100 1300 1500 1700 Canadian Cents / Mile Passenger Revenue / ASM Operating Cost / ASM SouthwestWestJet United JetBlue Air Canada Source: Airline annual reports. http://ir.united.com/phoenix.zhtml?c=83680&p=irol-newsArticle&ID=1133168&highlight=. Stage length last reported for March 31, 2008 For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 68Page 12 9B09M063 Exhibit 3 WESTJET –SELECTED FINANCIAL INFORMATION AND OPERATIONAL HIGHLIGHTS, 1997–2002 1 99 7 1 9 98 19 99 20 00 20 0 1 20 0 2 C on s ol id at e d f in a nc i al i n fo rma t io n Revenue 77,100 125,400 203,574 332,519 478,393 679,996 Earnings (l oss) before income taxes 9,000 12,400 29,348 52,706 57,789 82,844 Net earnin gs (lo ss ) 6, 2 00 6,500 15,832 30,254 36,710 51,780 Consolidated operational highlights Average stage length 349 378 383 419 458 552 Available seat miles (ASM) 575,746,918 893,008,646 1,249,316,243 1,906,863,288 2,995,516,958 4,650,990,031 Revenue passenger miles (RPM) 406,376,456 639,157,206 90 2, 9 45 , 13 1 1,453,245,522 2,236,270,397 3,406,663,632 L o ad fa c t or 7 0 .6 0 % 71 . 6 0% 7 2. 3 0% 7 6. 2 0% 7 4. 7 0% 7 3. 2 0% Yield (cents) 19 20 22.5 22.9 21.4 20 Revenue per ASM (cents ) 13 14 16.3 17.4 16 14.6 O p er at i ng c os t pe r A SM (c e nt s ) 17 13 13.9 14.6 14 12.8 Oper ati ng cost per ASM , excludi ng fuel and employee profit share (cents) 13.24 9.19 11.5 11.7 11.2 10.4 2 00 3 2 0 04 20 05 20 06 20 0 7 20 0 8 C on s ol id at e d f in a nc i al i n fo rma t io n Revenue 859,596 1,050,009 1,378,794 1,751,269 2,127,156 2,546,506 Earnings (l oss) before income taxes 97,395 (20,383) 46,786 162,424 236,757 254,837 Net earnings (loss) 60,539 (17,168) 24,001 114,676 192,833 178,135 Consolidated operational highlights Average stage length 659 758 802 833 856 913 Available seat miles (AS M ) 6, 8 71 , 71 5, 6 36 8,963,103,389 10,672,983,797 12,524,379,943 14,544,737,340 17,138,883,465 Revenue passenger miles (RPM) 4, 8 52 , 50 6, 6 52 6,277,332,668 7,957,738,384 9,791,878,403 11,739,063,003 13,730,960,234 L o ad fa c t or 7 0 .6 0 % 70 . 0 0% 7 4. 6 0% 7 8. 2 0% 8 0. 7 0% 8 0. 1 0% Yield (cents) 17.7 16.73 17.33 17.88 18.12 18.57 Revenue per ASM (cents) 12.5 11.71 12.92 13.98 14.62 14.88 O p er at i n g cost per ASM (cents ) 10 . 8 10 . 9 5* 11 . 99 12 . 12 1 2. 3 4* 1 3. 1 7 Oper ati ng cost per ASM , excludi ng fuel and employee profit share (cents) 8.5 8.23 8.61 8.56 8.55 8.28 *Excludes reservation sy stem impairment of $31.9 million in 2007 and $47.6 million impairment related to retirement of 200-series ai rcraft in 204.

Terms A S M - a me as u re of t ot a l p as s e n ge r c a pa c it y , c al c ul at e d b y mu lt i pl y in g t h e t ot a l n umb er of s ea t s av a il ab le fo r s a le by t he t ot al distance fl own.

RPM - a measure of passenger traffic, calculated as the number of revenue passengers multiplied by the total distance flown.

L o ad fa c t or - a me as u re o f t o ta l c a pa c it y u ti li z at io n , c a lc u la t ed as t he pr op o rt io n o f to t al av a il ab le s ea t mi le s oc c u pi ed by rev e n ue pa s s en g er s .

Y ie ld - re v e nu e p er RPM - a me as u re of u ni t r ev e nu e , c a lc u la t ed as t he g ro s s r ev e n ue ge ne ra t ed pe r r ev e nu e p a s s en ge r mi le . Source: WestJet Annual Reports, 1999–2008.

For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 69Page 13 9B09M063 Exhibit 4 WESTJET – INCOME STATEMENTS, 2007–2008 Source: WestJet Annual Report 2008.

For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 70Page 14 9B09M063 Exhibit 4 (continued) WESTJET – BALANCE SHEETS Source: WestJet Annual Report 2008.

For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 71Page 15 9B09M063 Exhibit 5 WESTJET – ROUTE DEVELOPMENT, 1996–2009 Bridgetown, Barbados La Romana, D.Republic Cancun, Mexico Puerto Val larta, Mexico INT ERN ATION ALMontego Bay, Jamaica Puerto Plata, D.Republ ic P un t a Ca na , D. Rep u bl ic Mazatl an, M exico C abo San Lucas, M exico St . Lu c i a N assau, Bahamas Los Angeles, C A San Francisco, CA Ph oe n ix , A Z New Y or k, N Y Orlando, F L U.S.

F ort Lauderdale, F L Ta mpa , F L Palm Springs, CA Fo rt Mye rs, FL San Die g o, CA Ho no lu lu , HI Maui, HI Kona, HI Windsor, ON Pr in c e G e or ge , BC S t . J o h n' s , NL Thunder Bay, ON Gander, NL Grand Prairie, AB Montreal, QC Hamil ton, ON H al ifax, NS C ANADA Winnipeg, MB London, ON Tor on to, ON Abbotsford, B.C.Sy d n ey , NS F or t McM ur ra y, A B Ye ll owkn if e , NW T Calgar y, AB Comox, BC Vancouver, BC Thompson, MB Kamloops, B.C.

Ke l o wna , BC S u db ur y , O N Q ue be c C it y , Q C Edmonton, AB Sault Ste. Marie, ON Victoria, BC Kitchener-Waterloo, ON Reg in a , S K Ottawa , ON Sai nt Joh n , NB Saskatoon, SK Moncton, NB Deer Lake, NL 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: WestJet Annual Reports, 1999–2008; case writers.

For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 72Page 16 9B09M063 Exhibit 6 WESTJET – ROUTE STRUCTURE IN 2008 Source: WestJet Annual Information Form 2008.

For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 73Page 17 9B09M063 Exhibit 7 WESTJET – STOCK PRICE WestJet Airlines Stock Price - July 1999 to April 2009 0.00 5.00 10.00 15.00 20.00 25.00 7/13/1999 1/13/2000 7/13/2000 1/13/2001 7/13/2001 1/13/2002 7/13/2002 1/13/2003 7/13/2003 1/13/2004 7/13/2004 1/13/2005 7/13/2005 1/13/2006 7/13/2006 1/13/2007 7/13/2007 1/13/2008 7/13/2008 1/13/2009Stock Price - Adjusted for spl its Source: ca.finance.yahoo.com For use only in the course Administrative Policy at University of Manitoba taught by Jijun Gao from May 06, 2019 to August 02, 2019. Use outside these parameters is a copyright violation. 74Page 18 9B09M063 Exhibit 8 MARKET SHARE – AIRLINES IN CANADA 19 19 AA = American Airlines; UA: UAL Corporation; NW: Northwest Airlines; CO: Continental Airlines; AS: Alaska Air Group; DL: Delta Airlines; BA: British Airways; TS: Air Transat; AF: Air France; KL: KLM Royal Dutch Airlines; CX: Cathay Pacific Airways; LH: Deutsche Lufthansa.