The Ups and Downs of Aviation: An Interview with WestJet’s CEO
This week Alexis von Hoensbroech, Chief Executive Officer at WestJet joins as our guest.
The last few years have been very difficult for airlines. COVID restrictions caused the industry to shrink overnight, then in the summer of 2022 people started traveling again but the airports and airlines were collectively challenged by the surge in demand. On top of all that pressure and change, airlines are being asked to reduce their GHG emissions.
Here are some of the questions that Peter and Jackie asked Alexis: How did WestJet manage during the pandemic and the pent-up demand in 2022? How is WestJet dealing with greater competition in the Canadian market? What are the advantages of the new planes that WestJet is purchasing? What commitments have you made to reduce GHG emissions? What technologies will be needed to achieve these reductions? Carbon offsets are an option today, how many customers voluntarily purchase offsets for their flights?
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Episode 181 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. Well, Jackie, we are getting close to the holiday season. I even know some friends that have jetted away to vacation destinations. How about you? Are you going anywhere?
Jackie Forrest:
Oh, I’m staying here, for sure. But it is exciting that you have that option after a couple of years of lockdowns at Christmas.
Peter Tertzakian:
Absolutely. No, we’re staying here as well and enjoy the white Christmas. I think it’s going to be a white and cold Christmas, so put the fireplace on and enjoy. But for all of those who are going away on a vacation to warmer destinations or destinations with their relatives, we have a special guest today to talk about travel and flying. We are delighted to have Alexis von Hoensbroech, who is the Chief Executive Officer of WestJet. Welcome, Alexis.
Alexis von Hoensbroech:
Thank you. Happy to be with you.
Jackie Forrest:
Great. Well, it’s great to have you and obviously, lots going on in the world of aviation. Things have gotten back to be busier than they were a couple years ago, but still not back where we were before Covid, also greenhouse gas emissions is an important topic. But before we get to all of those, we want to hear a little bit about yourself. You joined WestJet less than one year ago, so tell us about your career and how you came to come to Calgary and lead WestJet.
Alexis von Hoensbroech:
Yeah, that was quite a journey. So, my educational background is actually very different. So, I studied physics in university, did my PhD in astrophysics and was working as a researcher for some time before getting a bit bored in doing research. Then, got an offer from a consulting company and joined the consulting world. Did work for about six years in the consulting world for a company, BCG, actually as well know, as a great consulting firm and did a lot of aviation work with them. And then, got an offer in 2005 by Lufthansa, which was my biggest client, and they employed me. Then I worked with the Lufthansa Group for a total of 16 years in various roles, did spreadsheets, did integration, did commercial. I was the chief commercial of Lufthansa Cargo, which is one of the largest cargo companies of the world. And then went to Austrian Airlines, which is a subsidiary of Lufthansa and did work for them as the Chief Executive Officer for three and a half years.
Went through the pandemic and all the worst that could happen during the pandemic. Had to ground the entire fleet, close down the entire airline, negotiate, stay dates, getting bailouts from the government. So, had to with all these very difficult things and then, somehow got ready for a change and then I received a call from a headhunter that proposed that there’s a very nice airline in Canada that would be interested. So, then I engaged in discussions around WestJet, which both my family and I found very exciting. So then, we decided to go down this road and take this adventure and move over to Canada and now, I’m here.
Peter Tertzakian:
Well, we’re happy to have you. Well, just keying in on the pandemic, which was a very difficult time for travel, as you said, almost completely shut down and grounded entire airline fleets. What are some of the leadership learnings from that era, given your wide-ranging experience in the airline business?
Alexis von Hoensbroech:
So, the pandemic was suddenly the most extreme leadership situation I ever got in. And I think this is the type of thing that you never learn in a business school. Basically, within three weeks, the demand went from a 100 to 0 and the company went from being a healthy company to a candidate for bankruptcy. So that changes a lot, and this coupled with this incredible uncertainty around how long will this take, and when will demand come back, and will it ever come back? That made it very difficult. And in terms of leadership skills, I think what’s very important in such a situation is to be very determined on the measures, to be very honest about the situation, especially in communications. So not try to paint things nicer as they are but be very honest because both staff and guests, they know how severe the situation is.
So, communication was absolute key. Of course, also, to still be able to show confidence into the future and these things were important ones. So, to stay close to the staff even though we had to send 7,000 people home without being able to tell them when they could potentially come back. But still to show them confidence and show them that everyone who was in the management of the company is getting up every day very early to fight for the future. That was very important I think, and that’s what kept people mentally and emotionally with us and eventually made us succeed.
Jackie Forrest:
You have to believe that there’ll be a better future and communicate that every day to people. Well, let’s talk a little bit about Canada. Now, airlines are a critical service here, especially because we’re such a large country and it’s very difficult to get from place to place without the airlines. Now, they came under a lot of financial strain. The government of Canada did offer support, but WestJet was the only Canadian operator that did not take support from the federal government. How did WestJet manage that pandemic without the support?
Alexis von Hoensbroech:
I think this is a great testament to the strong business model of WestJet, because the balance sheet was apparently strong enough to weather the pandemic, despite heavy losses included by the pandemic. So, I think this is a really strong statement how great the underlying business model of WestJet is. So that’s good and that’s how we survived it. But we of course, have our scars on the balance sheet and that’s why it’s so important that we get back to the profitable and successful business model we were on before. Having said that, I think the way the Canadian government approached the pandemic was very different to many other countries. And in my previous role when we got our bailout, we got actually half of the money as grants. When you look into the US, they got tons of money actually very early in the pandemic. And a big share of these were grants.
So, all the US carriers are now exiting the pandemic with a pretty healthy balance sheet. While in Canada, there were actually no sector specific grants, so these were all loans and high interest loans. So, it was pretty unattractive. And as a result, all Canadian carriers are now exiting the pandemic with pretty strained balance sheets. Also, it puts them at the disadvantage over other carriers in that are based in other countries, which I think is a pity and given how strategically important the air traffic is for Canadians. I mean, this is one of the countries with which needs air traffic probably more than others. I was a bit surprised to see how the Canadian government approached this.
Peter Tertzakian:
Yeah, it was a very difficult period. And then, of course, the difficulties were compounded over the summer when the demand started to really pick up again as restrictions for travel were lifted and there was all sorts of labor issues, big lineups at the airports, security baggage handlers, shortages, all sorts of labor and logistical issues. How have things improved, and what can people expect as they head to the airport now for the holiday season? Are things back to normal at Canadian airports and Canadian airlines or airlines in general?
Alexis von Hoensbroech:
Yes, I think by now, things have normalized quite a bit. I think that the second quarter of this year was of course pretty difficult and there was no surprise, and this was actually around the planet because this was when the aviation industry did rebuild itself after two years of being on the ground. And no wonder that this comes with some operational challenges, but I think we were able to overcome most of these challenges. So, by now, we are more or less back on our own in terms of targets, in terms of reliability. And we are also very proud that we as WestJet have been consistently the most reliable airline in Canada over this year, and we will certainly maintain this. There are still some pockets where things can be a little bit challenging, but we know these pockets and we do whatever we can do to improve those pockets where we still see challenges. But overall, I think we are on a good track.
Jackie Forrest:
So, Alexis, the IEA, the International Energy Agency, has an expectation that jet fuel demand will grow next year but still be about 15% below pre-COVID. So, I guess, we could just translate that into airline activity still not getting back to pre-COVID. From your perspective, what’s stopping travel from returning to those levels? Is it constraints in labor or what?
Peter Tertzakian:
Or the economy?
Alexis von Hoensbroech:
Yeah. So, there are a couple of things that are driving this. One is that especially in Asia, the air travel hasn’t returned to the level where has returned to in North America and in Europe basically. So that’s a part of geographic of the world that is not yet participating in the entire recovery. So, this is probably one piece that drives it down. The other piece is that we can see that capacities have now come back close to where they were on the pre-pandemic. But since there is a certain lack, especially in with regard to pilot supply, many airlines are keeping regional fleets on the ground or partly on the ground and this is reducing the overall number of movements. So, if I also look at our own business, so in terms of capacity, we are pretty close seats. We are pretty close to where we’re pre-pandemic. But movements, we are still 20% below where we were pre-pandemic. And this is mainly driven by some pilot shortages, but also, the high fuel price is suppressing some of the marginal flying as well.
Peter Tertzakian:
You mentioned the competitive challenges globally coming out of the pandemic in Canada, but now, we’re also seeing some new entrants come into the market. Again, how does WestJet an established carrier, think about the new entrants, and how do you see yourselves as having a competitive advantage over the new entrants?
Alexis von Hoensbroech:
So, first of all, we always welcome competition. I think WestJet has been the competitive force in Canada changing the market very dramatically. And so, therefore, I think we feel in a very good spot. We have always been very competitive, and we will stay to be very competitive going forward. Now, we, of course, observe that many new entrants entering the market, especially in Canada. Actually, there’s probably no other major aviation markets on the world that has seen three startup airlines starting during the pandemic, so quite courageous thing to do. Now, we don’t worry too much about what they do, but we worry about what we do, and we have always been an airline that has been very strong in western Canada. We are an airline that is Canadians pay airline to go into, fly to leisure destinations, basically actually all across Canada. And we have always been a low-cost airline that has its roots in being an efficient airline and therefore, being able to offer affordable tickets.
And this is what we will continue doing. And you may have seen that we have placed a pretty big order for new airplanes. So, we are now expecting another 65, 737 MAX airplanes. So, there’s no other Canadian airline that is receiving as many or that has an order book with that many fixed orders as we have. So, we are Canada of the strongest growing airline, and we are actually buying very efficient airplanes. So, we order the MAX 10, which is the latest and most efficient version of the 737 family. So, it’s very efficient in terms of fuel, but it’s also pretty big. So, we will see significantly above 200 seats in this airplane. So, this will give us the by far, lowest seat cost per available seat mile across all Canadian airlines. I think this is going to put us into a very good spot in terms of being able to offer in on a competitive way that will allow us to offer very affordable.
Peter Tertzakian:
So, what percentage less fuel does a MAX 10 get relative to the average airline fleet?
Alexis von Hoensbroech:
Typically, when you look at generation by generation, so you compare a max airplane against a NG (next generation) airplane, this would be the previous 737 generation, you are typically looking at something like 20 plus percent fuel efficiency. And the NG generation, that’s still the majority of the airplanes that we have. So, this will flip, by 2028, we will have the majority of our fleet as MAX airplanes, so the latest generation. And with the MAX 10, we will see the first 737 generation that has more than 200 seats and we will be significantly above 200 seats. So, this will be both in terms of fuel efficiency but also in terms of seed cost efficiency, the above far most cost-efficient plane that’s in the market.
Jackie Forrest:
So, Alexis, you also have made a big investment in the Dreamliners, the 787 planes. Just talk a little bit about your strategy there and the advantages of these aircrafts over others.
Alexis von Hoensbroech:
So, the Dreamliners, they are maybe the icing on the cake. So, we have a total of 180 aircraft and seven of them are Dreamliners. So, it’s like a business on the margin that we do because there’s actually very strong summer demand between Europe and Canada and occupation in Asia and Canada. And we believe that especially western Canada, especially Alberta is underserved in this regard. So, this is what we use them for in summer. And then, in winter, we use the very same airplanes to fly south to get Canadians into the Caribbean and to Mexico and those places. So therefore, there’s a good use for those airplanes, but they are not at the core of our strategy, and I think on the cake that we do to connect some intercontinental markets. But the core of our strategy is running a very efficient and very large 737 narrow body fleet serving the mid-range destinations. So basically, flying within North America.
Jackie Forrest:
Yeah, I would say they’re the icing though, because they’re pretty nice. They’re pretty safe.
Alexis von Hoensbroech:
The 737, they’re probably the cake.
Jackie Forrest:
Yeah, for anyone that hasn’t tried one. Sometimes you run them between Calgary, Toronto and I guess, they have things like different pressure, better humidity, but you literally feel better coming off a Dreamliner I think than a regular plane.
Alexis von Hoensbroech:
Yeah. They’re very nice airplanes. But the business model that we run is less 787 centric. It’s more 737 centric and therefore, it’s a combination. We have such a strong positioning in category, and we are growing dramatically in category. So, from this year to next year, more than 25% growth and having such a strong presence allows us also to produce a lot of flow traffic. So, people that actually don’t originate that trip from category, but they connect through category and this flow traffic allows us to fill up those Dreamliners when they go into Europe.
Jackie Forrest:
So, Alexis, with the new low-cost carriers entering the market, how do you think the airline industry’s going to change or develop over the coming years?
Alexis von Hoensbroech:
Yeah, that’s a good question. No one knows, really knows the future, but I’ve been working in probably the most competitive low-cost markets in Europe in the past. I’ve seen many low-cost carrier startups come and I’ve seen only a few stay in the past. Actually, Canada has only seen one low-cost carrier to ever succeed, which is actually WestJet. Part of the reasons probably that Canada is a pretty expensive market. So, it’s from an infrastructure point of view. So, for instance, if you fly from Toronto to Calgary and back, you have to account for about $130 of infrastructure piece alone. So that’s for airport and for navigation and for security and so on. And then, you burn another $140 per person on fuel. So, on this return flight you have $280 paid already before you start paying for an airplane or for pilot or for anything else.
So, this actually very much limits the options to offer low pricing, which I think is actually a pity because we would like to be even more affordable than we currently are. So, I don’t know how it works out for others. Sometimes we do notice some interesting things like we are getting, some of these companies are offering us airplanes that have already been painted for some of those players, brand-new airplanes that are being offered to us to the back channel of some lease companies. So, they seem to be struggling, some of them at least to get their business model running. But we will see that. So, we don’t focus too much on them, but we do what we think is the right thing for us and having a very productive and affordable offering to our guests.
Peter Tertzakian:
Can you explain one thing? How is it that in Europe, these ultra-low-cost airlines can offer London to Athens for 20 British pounds or something like it just seems ridiculously low that you don’t even cover the cost per person for fuel. How do they do that?
Alexis von Hoensbroech:
The first thing one has to keep in mind is these are marketing fairs. So, the vast majority of the fairs are more expensive and then, this is the base fair. And usually as an airline you also charge number of additional fees for baggage for extra legroom for whatsoever. So also, the total revenue per passengers then a bit higher, but the European cost level for the infrastructure is just much lower. So, at whatever you’re looking at, whether it’s navigation, whether it’s airports, whether it’s security, it’s typically about half of what you pay in Canada. And that just makes it easier to offer at least some promotional pass on the low level. But if you would see anyone in Canada offering a Toronto to Calgary flight at whatever, I’m making this up now, $59. Then you know that this carrier has already is already at a loss of $80, which is the differential up on the fees on this very particular passenger. So therefore, this is a market that’s very challenging for offering a low pass.
Peter Tertzakian:
Talk about your choice of Calgary. I mean, of course, WestJet has its roots in Calgary, but using Calgary as a hub and how that’s starting to really grow with the number of destinations that are increasing that you’re serving.
Alexis von Hoensbroech:
So, this is basically related to the fact that we can build those connections in Caldary, because we have the critical mass. So, Calgary will be the only place where we will actually do some intentional connectivity. So, to have arrival banks and then get people connect and then have departure banks where all these planes depart again. So, this is the only airport or the airport where we have most critical mass to do this. And that’s why we run this as a connecting hub. But we, of course, also fly to and from many other airports as well. So, the rest of the system, we basically see a very high productivity network that is mainly targeting the local markets. And that’s basically the business model that WestJest has always been using from the very beginning. It’s like Southwest Airlines running a very high efficient point-to-point focus market and that’s what we do across the rest of the system. And then, again, at Calgary, we create connections to fly to very nice overseas markets.
Peter Tertzakian:
So, we can expect to see even more destinations out of Calgary as a hub?
Alexis von Hoensbroech:
Yeah, we will see more destinations. So, we will grow the number of destinations in Calgary. I think pre-pandemic we had 70 something, maybe 75 destinations, and we expect that by 2028, we will see more than a hundred. So that’s actually pretty good. So, we will see this growing.
Jackie Forrest:
Well, last week was pretty exciting because you announced Calgary directs to places like Tokyo, Barcelona and Edinburgh and as well as more flights from some of the other locations that you already go to. Can you just talk a little bit about Calgary airport? Is that an advantage over, I mean, the obvious one is why would you fly those out of Pearson in Toronto?
Alexis von Hoensbroech:
Toronto and also Vancouver have actually a very good coverage of intercontinental markets and Calgary doesn’t. And pre-pandemic and also even until the summer, we were actually flying intercontinental destinations from Toronto, Vancouver, and Calgary. So, we had all seven Dreamliners spread over three airports, and we have now decided that we’ll put all of them into Calgary. So, this is no net new flying for us as a company, but it is net new flying for Calgary. So as Toronto and Vancouver are already very well served, we just put them into this market where that is has been underserved traditionally, and that’s why it makes most sense for us. Also, it allows us to build more scale, which is obviously also important.
Peter Tertzakian:
Well, let’s move on to sustainability. The environment, GHG emissions, which of course, is very topical in Canada and abroad. So, there’s a lot of pressure on the airline industry to reduce its emissions. So, what commitments has WestJet made to reducing emissions, say by 2030, 2050, and so on?
Alexis von Hoensbroech:
As WestJet, we are, of course, committed to the very same target as the entire IATA, so that’s the Global Aviation Association, and we want to be down to net zero by 2050. So that’s our ambition. So, to bring down emissions in aviation is obviously very important. So, the global footprint of aviation is between 2 and 3% depending on how you count global emissions. So, this is a lot, this is about the same amount as the entire emission of Germany, just to give you a comparison. It’s important to bring this down, although this alone won’t solve the climate crisis either.
Jackie Forrest:
Well, you know the airlines we were talking before about all the low-cost airlines coming in, it’s a very cost competitive business. Are you concerned to reach these environmental goals that other competitors that don’t do that are going to take more market share? Or how do you handle that?
Alexis von Hoensbroech:
Well, this has to be something that is being achieved by the entire industry, so this can’t be something that a single airline does on its own. But let me maybe just talk about how to get there because investments, I think that’s probably also interesting for your audience to listen to. So, we see three levers to reduce emissions. So first one is procedures, so to have more efficient way of flying or flight path, single engine taxiing on the ground and stuff like that. So that’s the procedure piece, that’s probably the smartest one of the three. The second one is technology. So, investing into new technology, airplanes and specifically new technology engines. This is very meaningful. As I mentioned before, the 20 to 25% advantage you get on a new generation airplane and WestJet has one of the youngest fleets in North America. So, we are actually very advanced in this and therefore, also far more fuel efficient than most other airlines.
So, this will help us significantly, but this will also not take us to zero because even the most efficient engine is still burning fuel. Then, the third piece is sustainable aviation fuels, and this is what ultimately will bring emissions down to zero. So, as you know, there’s no physical law that jet fuel has to be produced out of crude oil. You can produce it out of actually many different things and ultimately, you could even do something called power to liquid. So, you basically take carbon off the atmosphere and then, you take emission free power from whatever, from renewables or nuclear or whatsoever and use this to actually create jet fuel by converting the combustion process. So that’s what we ultimately need. And this can be used in normal engines, so you don’t need to change any of the infrastructure or of the technology can, if you have sufficient sustainability fuel, you can actually run them in an engine, and this will be entirely at emission zero.
Peter Tertzakian:
Yeah, that’s one angle. I want to go back to number two, technology, different types of propulsion, I’ll call it. Are you experimenting with some of the short haul electric airplane things that are emerging?
Alexis von Hoensbroech:
Well, first of all, the vast majority of the emission is emitted on long haul and not on short haul. So, 75% of all emissions are emitted on flight distances greater than 1,500 kilometers. So short haul is nice and symbolic, but it doesn’t solve the problem. With regard to alternative propulsion like electro propulsion in air, that’s certainly a technology worthwhile working on, but I think it will take a long time until this hits the commercial market for longer distance flying. Just the energy content of one kilo of jet fuel, if you want to have this very same energy content in a high-performance battery, you’re looking at something like 50 kilos of battery. And if you take one of our Dreamliners as an example here, when it takes a full load of jet fuel, it takes on 100 tons of jet fuel. And if you multiply this by 50, you’re looking at 5,000 tons of battery. So, this is not going to work out for the foreseeable future.
Peter Tertzakian:
No.
Jackie Forrest:
Well, and another issue, you mentioned is the planes you’re using today or buying today, are going to be used for decades in the future. And so, I think the sustainable aviation fuel is important because you can continue to use existing assets, but I want to make one clarity. So sometimes when we talk about sustainable aviation fuels, people think about biofuels and then, they think from food and there’s not very much of that. But what you are saying is you’re going to manufacture this fuel from CO2 and chemical processes so that the supply won’t be as big of a constraint as maybe people think. Is that right?
Alexis von Hoensbroech:
So, the biofuels are obviously the short-term solution, but as you are rightly saying, this is limited because you also don’t want to get into competition of producing food over fuel or fuel over food. So therefore, this can be a bridge technology. But on the long run, we need a power to liquid technology. This is, by the way, nothing that we would do as an airline. This is something that the jet fuel producers would have to do and will eventually do. The challenge around this will be the cost side because this type of fuels that cost many times more than traditional jet fuel. So, the question will be how to pay for this, and this is where the governments come in. So as with every technology, there’s a ramp up phase where the production scale is so low that the cost per litre is very high. So probably, the industry globally needs some support to get over this until production has been scaled up. And then, I’m pretty confident that the price for any types of sustainable aviation fuels will come down by quite substantially.
Peter Tertzakian:
Yeah. So, let’s talk about the consumer, because you’ve talked about what you are doing as a supplier of service and what the fuel supply could be like. But let’s talk about the consumer and their attitudes towards carbon emissions. I think to offset emissions for one person on a return trip between Calgary and Toronto, actually, I think it’s less than $20. How many people are doing that at WestJet?
Alexis von Hoensbroech:
Yeah, it’s always interesting to listen to what consumers say and then, to watch what they do. So also, they would say that this is a little money and that they think that’s a reasonable thing to do. As a matter of fact, we see less than 0.5% of our guests buying this type of compensation.
Peter Tertzakian:
A lot of people clamor just to avoid a $20 baggage fee. They jam everything into their hand luggage to avoid package fees.
Alexis von Hoensbroech:
Exactly. And even if you look over to Europe, which is far more advanced than in the social discussions around emissions. So even if you go to Scandinavia, which is probably the most advanced market in this regard, even in Scandinavia, it’s only 5%. So, it’s more than 10 times higher share than in Canada. But it’s still very low compared to the public attention that this topic gets.
Jackie Forrest:
Well, and I did want to mention that you have some projects when you buy credits or offset credits to offset your flight. Your projects are going towards Canadian nature-based solutions and seem quite credible. I think one of the problems with offsets is they’re viewed to be not that credible. Any comments on sort of the time you’ve put into selecting those projects?
Alexis von Hoensbroech:
We take high value projects where we really know that this is going to create real offsets. So, we look at this very closely and this is what we’re offering through our website for those offsets. Having said that, on the long run, I think we have to find ways that bring us down to net zero without offsets, through sustainable aviation fuel and potentially also carbon capture. But offsets are probably also just bridging a method to bring emissions down.
Jackie Forrest:
Well, and I guess, the important point I’d asked you about competitiveness, you can’t expect people to voluntarily do this. We are going to need something where the airlines altogether make these changes because people aren’t going to voluntarily pay more. I guess, that’s what the data’s showing.
Alexis von Hoensbroech:
That’s probably a pretty right observation.
Peter Tertzakian:
Well, Jackie, I know you have a lot of friends and I have a lot of friends that are looking forward to jetting off, as I said in the introduction, and I know many of them will be taking WestJet. And now, we’ve had the backstory from Alexis von Hoensbroech, who’s the Chief Executive Officer of WestJet. Alexis, thanks very much for joining us.
Alexis von Hoensbroech:
Hey, you’re welcome. It was great talking to you.
Jackie Forrest:
Yes, thank you. And thanks to our listeners, if you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
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