This is in this week's Business in Vancouver newspaper. http://www.biv.com As it is "subscriber only" access, I have posted it here:

by Mary Charleson

Westjet soars on its price-leading strategy

All businesses strive to be powerful and profitable. To achieve this from a marketing perspective, you must own something your competitors do not. There are really only three things that can set you apart:

Delivering the lowest price and lowest cost structure.

Having an excellent product, location or service.

Owning the relationship by delivering a superior experience.

Let's look at one of these, having the lowest price and cost structure, and see how this strategy can be used to achieve maximum differentiation over competitors in meeting customer needs.

The key to successfully implementing a price-leadership strategy is to ensure you have an efficient and distinct cost structure. Since your profits are what are left over once your costs are subtracted, being the price leader without the lowest costs is a one-way ticket to bankruptcy.

The uniqueness, strength and number of distinct competencies that lower your cost structure are what make this strategy competitive. Since costs can be controlled at many levels - such as materials, manufacturing, maintenance, research and design, distribution and human resources - there are many opportunities to build a unique cost structure that is unlikely to be easily imitated.

It has been demonstrated time and again that higher market share and experience lead to lower costs. If a business has a solid price leadership strategy that gains acceptance and momentum, it can be pretty hard to beat as it grows.

The airline industry is a tough competitive environment, yet Westjet, a low-cost carrier, is one of the most successful airlines in Canadian history.

Founded in 1996 by four Calgary entrepreneurs, it is now the second most profitable airline in North America, just after Southwest Airlines, a successful U.S.-based low-cost carrier.

How has Westjet maintained a low-cost model?

-- Lower staff costs. Pilot salaries are 75 per cent of the industry average. Other staff salaries are 95 per cent of the industry median. They offer generous stock options to compensate for this. In 2002 they paid out $15 million in profit sharing to employees. Westjet uses 75 employees to support each plane, whereas Air Canada uses 180. Westjet emloyees are not unionized.

-- Lower maintenance and training costs. Westjet uses Boeing 737 airplanes exclusively. They stock parts and train staff based on one model of plane.

-- Lower food costs. They pioneered the snack and bag lunch option.

-- Lower ticketing costs and distribution overhead. Westjet was among the first to use direct consumer phone bookings and electronic ticketing. They were also leaders in on-line bookings.

-- More efficient flight schedule and service model. They use an A to B model rather than a web-and-spokes model, which is common with airlines such as Air Canada. Air Canada accumulates people in hub cities to get them to the spokes, which are smaller centres. There is a higher cost structure to support the one to two hours between flights for the hub-and-spokes model. Westjet, by efficiently providing a city-to-city service only, keeps non-flying time to a minimum and costs down.

Clive Beddoe, Westjet's president and CEO, estimates that Westjet's costs are half of Air Canada's. Air Canada may lower fares, paint the planes a different colour and brand them as Zip and Tango, but if the business model is not based on a low-cost structure, it cannot remain competitive as a low-cost carrier.

Every sector has a price leader.

Price leaders can be challenged by new entrants who articifially lower their prices to gain market share.

Since this practice is only sustainable over the long-term by businesses with deep pockets, the truly successful businesses are those with a superior low-price strategy secured by a unique and controlled cost structure.

HMY Airways, an upstart Vancouver-based international airline, is positioned as a hybrid of the low-price/low-cost structure model.

Launched in winter 2002 as a vacation travel destination airline, its business model emphasizes operational efficiency, a customer-service orientation and competitive pricing.

While still in the early stages of introducing who it is, HMY's initial success demonstrates that the competitive environment of business is not static.

Customer needs, regulations, competitors and trends all effect change.

To compete on price and remain competitive over the long-term, you must control your internal cost structure and then monitor external influences.

Mary Charleson is president of Charleson Communications, a company specializing in market research, strategy and advertising development. She writes monthly and can be reached at [email protected]


[This message has been edited by Wardair A310 (edited 09-23-2003).]