Sky high

A few days before last Christmas, with airlines at their most hectic, Blair Cosgrove took his visiting parents to the airport for their flight home to Winnipeg. At the WestJet counter, a burly, wide-grinning man checked their bags. Cosgrove, owner of The Message Parlour, a Calgary public relations agency, thought he recognized the face. “Isn’t that Clive Beddoe?” he asked a WestJet agent. The reply: “Yup. It is.”

Beddoe, president and CEO of Calgary-based WestJet Airlines Ltd., has made a tradition of spending Christmas in the trenches, but his reputation as a hands-on guy is less about public relations than internal relations. No one but staff saw him when he helped change an airplane tire late one night in -30º C weather. Or when he helped replace an engine on another occasion. “And when my wife and kids fly on WestJet, they help clean the planes, too,” says Beddoe, with a what-else-would-you-expect tone.

“When management isn’t too high-falutin’ to get their hands dirty,” says Beddoe, “it breaks down communication barriers. So when it comes to me asking them to do whatever it takes to make this airline successful, they can look at me and say, ‘Well, Clive’s prepared to clean up. Clive’s prepared to change a tire. Clive’s prepared to load bags. So why wouldn’t I be prepared to do the same?”

That down-to-earth approach has helped WestJet carve out an impressive, profitable presence in an otherwise unforgiving industry. In the eight years since the discount carrier’s inaugural flight, the company has grown to control 25% of the domestic market, posted 28 consecutive quarters of profitability in an industry splattered in red ink, boasts annual revenue of $860 million and a stock price (more than $30 in mid-January) that has never faltered since the company went public in 1999. WestJet is not a freak of nature, but a gleaming example of a business run right. Not by applying esoteric management strategies that would impress Harvard MBAs, but by using simple tactics and principles that transfer to any business. Follow WestJet’s 10 tried-and-true flight paths to success, and your business can take off, too.

“Business models aren’t patentable,” says Barry Prentice, director of the University of Manitoba’s Transportation Institute, “so don’t be afraid to copy a successful company.” It’s no secret that WestJet has torn whole pages from the playbook of Southwest Airlines Co., a Texas-based discount carrier with a three-decade record of success. Among the plays: create a happy culture, share profits and empower employees. But Beddoe bristles at the suggestion that WestJet is merely a Southwest knock-off.

“We studied Southwest very closely because it is one of the most successful corporations in recent North American history,” he says. But the WestJet brain trust has also looked to other successful airlines — Ryanair, JetBlue and Valujet — for inspiration. Why lift just one model when you can lift several?

“If there is one defining lesson to be drawn from WestJet,” says Beddoe, “it’s this: Put your employees first.” Just how WestJet does this becomes obvious as you learn more about its business.

That relationship is more critical to WestJet than the airline’s relationship with its customers, maintains Beddoe: “If we have good relations with our employees, then the employees create good relationships with their customers.”

But do happy employees beget happy customers? The empirical proof may be slim, but it’s there. WestJet employees generate the fewest complaints of any Canadian airline. Since the feds set up the Air Travel Complaints Commission in 2000, a total of 4,950 objections have been filed; 76% of those were against Air Canada, while just 0.5% (25 complaints) were lodged against WestJet.

For her part, federal complaints commissioner Liette Lacroix Kenniff, with tongue planted firmly in cheek, says the wholesale elimination of such things as in-flight entertainment and meals has, ironically, reduced the number of potential irritants for passengers. “It is hard to complain about the quality of the food when there is none!”

At first glance, WestJet looks, well, stingy: the airline pays employees below industry averages. At Air Canada, for instance, a starting captain earns about $80,000 annually. At WestJet it’s $60,000. Yet there are millionaire employees at WestJet, thanks to its strongest glues: profit-sharing and an employee share purchase plan.

If the company produces a 10% pre-tax profit, it distributes 10% of that to employees in the form of profit cheques cut twice yearly; if it produces a 15% margin, 15% of that profit goes to employees; and so on. (To fairly reflect the value of each individual’s contribution to the airline, the cheques are weighted proportionally to their base wage.) In 2002, about $15.2 million in profit was distributed to 2,612 employees. That works out to an average of $5,800 per employee, comprising a 21% bonus to their base salary.

“Let’s assume we have a 20% margin,” explains Beddoe, “and we give 20% of that back to our employees. That’s four points. WestJet still ends up netting 16 points. That’s unheard of in our business. Why wouldn’t we give that to our employees if they can give us a 16-point pre-tax margin? We’d be crazy not to.”

With the employee share purchase plan, WestJet matches every dollar an employee invests in company stock, to a maximum of 20% of the employee’s annual salary. Beddoe explains that a less generous formula wouldn’t give employees a genuine opportunity to own a significant piece of the company. “It has to be lucrative enough to turn all our employees into partners,” he says. “We want them to think like filthy capitalists, think like owners, think like shareholders and then drive the company to success.”

Great perk, but isn’t there a risk of happy employees turning sour if the stock nosedives? “The fundamentals of the airline are solid,” says Tim Morgan, co-COO, “and our people know this because they’re part of it. So when the stock goes down, as it has in the past, they use it as a buying opportunity. They know they’ll be much further ahead when the stock bounces up. Absolutely everybody is an entrepreneur in this company.” And “everybody” isn’t hyperbole: 87% of WestJet’s employees own shares, investing an average of 13% of their salaries in stock purchases.

Skills can easily be improved, but WestJet managers know attitude, ingrained as it is in one’s personality, is another matter. The company has a well-honed process for screening for disposition. Potential frontline workers, such as flight attendants and call-centre staff, participate in group interviews in which they are required to tell stories and jokes, and play various games. “One game is the nuclear fallout shelter activity,” explains April Shand, a former WestJet human-resources manager who now handles HR at a Calgary high-tech firm. “You get together in a group and determine the fate of the lives of the people left over after a nuclear war.” It’s great fun, but has a serious purpose. “The leaders, those with ‘WestJettitude’, get to shine. That’s how we find fun and funky people.”

Inevitably, a few bad apples slip through the screen. But when they become apparent, they are “quickly expedited out of the company,” says Shand. Yes, they’re fired. “Getting a person with a bad attitude, well, that’s toxic. And in an environment in which you have a lot of entry-level people — and many of these people can be impressionable — the last thing you want is some toxic individual coming in and planting seeds in their head. All of a sudden, you can end up with turnover because of this one person.”

“There’s a simple secret to keeping the ‘gripe-vine’ short,” says Don Bell, WestJet’s senior vice-president and co-COO. “We empower our employees to give company money away.”

If problems crop up, employees are urged to solve them personally. In 2002, WestJet gave away just under $16 million in non-refundable guest credits — approximately 2% of annual revenue — to compensate customers for such things as late plane arrivals and overbookings.

Employees are encouraged through regular training sessions to rely on their own ingenuity and integrity to resolve issues with WestJet customers. “From handing out flight credits to sending out for hamburgers to feed stranded passengers, they take care of things up front,” says Bell. “That kind of commitment comes from hiring the right people, aligning their interests to the company and hooking the success of the business to their pocketbooks.”

Sounds good, but what prevents a softhearted rep from giving away the farm or being scammed by a corrupt customer?

“Obviously if someone gives away too much money, we would coach that person,” says Morgan. “We’d say, ‘Look: here’s what happened, here’s the result. Put that in your memory’.” That said, Morgan believes very few customers are out to fleece you, and he hopes his agents err on the side of generosity. “Once we lost a wedding dress on a flight,” he recalls. “The counter people actually went out and bought a new wedding dress for the customer. Was that the wrong thing to do? I don’t think so.”

Last year, WestJet began installing vertical-blended winglets on the wingtips of its 737s. At a cost of $635,000 per plane, the high-tech fins don’t come cheap. But WestJet, says Bell, is a company “that leverages technology as much as possible to drive down costs.”

Fuel cost is the biggest operating expense at the airline. And the winglets reduce fuel consumption by 3.4% to 7%. With the average plane burning $4 million worth of fuel a year, the winglets annually save no less than $122,500 per plane. While the winglets pay for themselves in about five years, they’re expected to last for 20.

The winglets are one of the more visible weapons with which WestJet — an already trim company that reduced costs per available seat mile by almost 16% in the third quarter of 2003 — guards its profits. But there are others.

For instance, in 1998 it invested in systems enabling consumers to book flights via the Web. It costs WestJet $2 when a customer buys direct online, compared with as much as $20 when a travel agent books the flight. The firm encourages online sales by offering Air Miles and $6 off any roundtrip fare purchased over the Web, which helps explain why 69% of WestJet bookings are now made online.

“The lesson,” says Beddoe, “is that if you make the effort to add multiples of small efficiencies, suddenly you’ve got yourself a big efficiency.”

Cash is king for any company, but none more so than a startup in a mature, high-cost industry. WestJet’s founders raised seed money by forging a solid business plan, pitching it to wealthy and familiar contacts and boosting investor confidence by sinking hundreds of thousands of their own dollars into their fledgling discount airline.

Despite initial resistance from people who thought Air Canada and the now defunct Canadian Airlines were immovable giants, a detailed business plan, which clearly demonstrated how Southwest succeeded and how WestJet could as well, quickly brought motivated investors on board. “We did 12 presentations and had 11 hits, for a minimum of a half-million apiece,” says Morgan. “It was pretty darn successful.” In just 27 days, they raised $8 million.

That capital allowed WestJet to buy its first three 737s outright. “WestJet came in small but well-financed, so it couldn’t be pushed out of the market quickly,” says the University of Manitoba’s Prentice.

Since then, WestJet has raised $25 million by going public in 1999, and another $82.5 million in a subsequent share offering. But it pulled a rabbit out of the hat last June, when it announced a highly unusual deal with the Ontario Teachers’ Pension Plan. The agreement forces the OTPP to buy as much as $100 million in stock at a slight discount from the market price on WestJet’s command. In return, WestJet pays the OTPP a standby fee of $250,000 every three months until the option is exercised.

It’s the first such arrangement for the OTPP, which invested $8 million in WestJet even before its first flight. Robert Bertram, the OTPP’s vice-president of investments, says the deal underscores the pension plan’s faith in WestJet’s strategy, and is a low-cost way for the airline to guarantee it can buy more planes to meet growth expectations. It also protects OTPP’s initial investment by insulating WestJet from vagaries in the equity market, or a dip in travel due to unexpected events such as SARS or terrorist activity.

If you have underutilized equipment, put it to work. When WestJet began acquiring Boeing 737-700s — which have triple the range of WestJet’s older 737-200s and fly about 150 kph faster — it realized the new planes could be rented to charter operators during WestJet’s off-peak winter season. The older planes didn’t have the range to fly to, say, the southern Caribbean or Mexico, and often sat idle in the off-season. And a plane sitting on the tarmac or collecting dust in a hangar isn’t earning money for the company.

Last year, to correct that wasted down-time, WestJet signed a two-year deal with Montreal-based Transat A.T. Inc. worth $29 million in the contract’s first season alone. “The 700s took our footprint of viable opportunities from here to here,” says Morgan, spreading his hands from near-prayer to bear-hug wide. “And we’ve hardly touched the other opportunities.” WestJet could, for instance, fly Kelowna, B.C. to Honolulu non-stop.

The company also rents out its three Calgary-based flight simulators, sublets hangar space in Calgary and Hamilton, and does a bit of line maintenance for other companies, primarily in Vancouver.

WestJet is currently the North American record-holder for the turnaround time for flights: a mere six minutes. It did it by having everyone, from pilots to station agents, picking up garbage, vacuuming the carpets and emptying the trash.

Mike Laverty is one of those fabled “millionaire pilots” at WestJet. He left a union job at Canadian Regional Airlines in 1996 and took a paycut to join WestJet. He has no qualms about pitching in to clean the plane with other staff.

“In a unionized airline, you couldn’t do that, because you might be crossing into someone else’s job,” says Laverty, “Here [at WestJet] one of the things you don’t hear is ‘That’s not my job’.”

Indeed, life without unions can be a beautiful thing. “Labor flexibility is key to WestJet’s success,” says U of M’s Prentice. “WestJet’s very good at getting the most out of its people, but not in a coercive way. This success has come through sharing the benefits of growth.”

To iron out potential wrinkles between management and employees, WestJet created an employee association called PACT (Pro-Active Communications Team). Composed of volunteers, including one employee who also sits on WestJet’s board of directors, the association meets with management twice a month, or whenever urgent issues arise.

“PACT is a safety valve in the relationship that we have with our people,” explains Beddoe. “If there are issues — and there always are, whether disciplinary or salary or whatever — they help us resolve these conflicts.” Having a PACT member on the board boosts the group’s access to decision-makers. “If they felt for any reason they couldn’t deal with me on an issue,” says Beddoe, “they can go directly to our board.”

One final thing WestJet does, which other companies would do well to copy, is to celebrate its success randomly — not to mention boisterously — with employees. Beddoe once rented Shanks, a large sports bar in Calgary, just to throw a staff party. There was no official reason — no anniversary, no particular achievement, nothing. Rather, the party was thrown just because. More than 700 employees showed up. And you can bet Beddoe was in the thick of it, deep in the trenches, connecting with his troops.

© 2004 Anthony Davis