When the disruptor becomes what it was trying to disrupt: Lessons from WestJet’s corporate flight path
There are a few important takeaways from the WestJet story that are representative of our overall business environment and the typical lifecycle of a Canadian success story.
It usually begins with a new entrant that has identified a low-cost, high-quality opportunity to disrupt an entrenched incumbent that has become accustomed to operating within a highly regulated and protected industry. Initial growth can be quite rapid as consumers jump on board this exciting new service offering, but over time, unfortunately, it often ends with the disruptor slowly turning into what it was trying to disrupt in the first place.
The reason: there is limited foreign capital willing to backstop what could be a nasty fight for market share among a few incumbents, or for funding a global expansion, especially when the company has disconnected with the disruptive culture it was founded upon.
As a result, financial results can only disappoint for so long before the white flag is raised via a monetization event involving one of the other incumbents or, in this particular case, a Canadian private-equity investor eagerly looking to enter the industry.
Taking a closer look at WestJet, it hit the ground running out of the gate by fostering a Western Canadian entrepreneurial culture from the ground up and directing it towards disrupting what has historically been one of the most difficult sectors to break into: the airline industry.
This meant undertaking a non-unionized, employee-empowered and customer-focused approach to doing business. Employees were also early shareholders and, therefore, acted like owners in their interactions with passengers as well as in keeping costs under control. It was a beautiful thing to watch.
This flight path worked amazingly well as consumers immediately flocked to this exciting new upstart. Following its launch in 1996, WestJet grew to employ more than 14,000 people, have a fleet of over 180 planes and fly to 100-plus global destinations. It also managed to grab 35 per cent of the domestic capacity market share, taking Air Canada down to approximately 50 per cent. Its international capacity market share increased to approximately 15 per cent, or half that of Air Canada’s position, according to industry researcher CAPA — Centre for Aviation.
Then something happened.
Having already captured a large share of the domestic low-cost travel market, the company appeared to hit a wall. Its growth profile was unable to effectively steal market share in other segments (international and trans-border bookings) from Air Canada and its strong loyalty program.
Meanwhile, rising costs resulted in margin compression and WestJet’s earnings before income taxes and return on invested capital, which peaked in 2015, have tumbled along with its share price.
For example, despite the recent takeover offer at a 67-per-cent premium, the company’s share price is still only up 25 per cent over the past five years compared to the near 400-per-cent gain by Air Canada. As a side note, Transat’s return profile looks an awful lot like WestJet’s, as it, too, is only up 38 per cent over the same period.
This evolution really isn’t that unusual. We’ve witnessed the same story unfold in other oligopoly sectors such as wealth management, banking and wireless. That said, Canada needs to end this cycle if we want to start attracting foreign capital as well as become the launching pad for homegrown globally disruptive corporations to start taking off.
Martin Pelletier, CFA is a portfolio manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.
Published at Tue, 21 May 2019 10:30:01 +0000