WestJet Airlines’ pilots recent decision to unionize will create challenges for the company’s ambitious growth strategy, analysts say, and brings uncertainty as the airline looks to expand internationally and launch an ultra low cost carrier.
More than 1,400 WestJet pilots will join the Air Line Pilots Association, an international pilots union, after 62 of the 97 per cent of eligible pilots participating voted to unionize last Friday.
While the move was not surprising — WestJet pilots had previously tried to unionize in 2015 but 55 per cent voted against it at the time — president and chief executive Gregg Saretsky said the airline was “disappointed with the outcome of the vote.”
On Monday, Moody’s revised its rating outlook for WestJet from stable to negative, in part due to execution risk of moving towards an ultra-low-cost carrier and expanding its international reach.
“The negative outlook reflects our view that WestJet will be challenged to achieve the deleveraging we had previously expected, with its concurrent wide body expansion program and the creation of an ultra-low-cost carrier,” said Moody’s vice president and senior analyst Jamie Koutsoukis.
WestJet’s stock dropped four per cent shortly after the union vote Friday, and dropped just under one per cent to $21.81 on Monday.
Earlier this month, WestJet announced it has agreed to purchase at least 10 Dreamliner aircraft from Boeing Inc., part of a larger strategy that will see the company look for growth in both longer haul and ultra-low-cost segments.
Analysts initially cautioned that WestJet may be taking on too much risk by simultaneously expanding with an ultra-low-cost carrier — which would have to compete against several other companies preparing to do the same — and longer-haul, international routes.
With the new union set to weigh in on those plans, analysts say WestJet’s growth strategy is in for a period of uncertainty.
“In our view, operating flexibility is a major downside risk facing WestJet given the fact that the company is about to further expand its wide body services in 2019, and roll out its ULCC initiative in late 2017/early 2018,” said Canaccord Genuity Corp. analyst Doug Taylor in a note to clients.
“Obviously, this unionizations will create additional roadblocks to profitable execution of growth plans put forward by WestJet.”
WestJet declined an interview request on Monday.
Capt. Dan Adamus, president of the ALPA Canada, said it was too early to say how the union would respond to WestJet’s expansion plans. Adamus said the pilots are currently focused on choosing permanent representatives within a maximum of 60 days, surveying pilots, and moving forward on a legally binding contract.
“We support all forms of improvements and airline expansion,” Adamus said. “We’ll just want to make sure that the pilots work (with the ULCC) is going to be theirs to do, that the work is not farmed out to some other third party… we’ll have to wait and see exactly what the company has planned in that area.”
Chris Murray, an analyst with AltaCorp Capital Inc., says the union push adds uncertainty, and will affect WestJet’s ability to drive down the costs of operating a ULCC.
“Is there a possibility that they decide not to proceed because of it? Absolutely. But we won’t know what we’re dealing with until we’re there,” Murray said.
“All we know is that it’s probably not going to reduce costs and make things easier to do, but how much more complicated it gets, is unknown.”