Flair Makes Predatory Pricing Complaint Against WestJet
Dec 12, 2018, 10:40 am
#1
Original Poster
Join Date: Mar 2010
Location: Calgary
Posts: 1,444
Flair Makes Predatory Pricing Complaint Against WestJet
https://business.financialpost.com/p...etition-agency
I think what WestJet will need to do is demonstrate that Swoop at least broke even on the disputed routes over a reasonable period of time (perhaps a one month period).
My quick analysis on the YEG to YXX route that Flair claims was sold for $39 and only brought in $0.02 after taxes and fees is:
Sector length 482 miles
Load factor 95% (Ed has been quoted as hitting these levels in the press), leading to 180 seats sold per flight
CASM ex-fuel $0.08 (their average aiming point discussed in the press for average sectors is $0.07, bumped this up due to being a shorter sector)
CASM including fuel $0.12
This leads to an operating cost of 189 x 0.12 x 482 = $10,932 for the flight plus $39 in taxes and fees for each of 180 passengers, for a total of $17,952 in costs
On the revenue side, say 60 seats sold at $39, 60 at $69 and 60 at $99 with 60 people having only a personal item, 60 people with a carry-on at $35 and 60 with a checked bag at $35, 20 people pay for extra legroom seats at $21, 40 people pay for a specific seat at $10 and 60 people use the call centre to book, leading to a total revenue of $18,340.
It looks as though the mix of pricing structure and ancilliary revenue will determine profitability, but Ed did say Swoop ancilliary revenue had averaged $40 per passenger in the analysts conference call (would be $7200 for this scenario, leading to revenue of $19,620).
I think if they have followed the normal WestJet pattern of a set number of fares in each fare bucket, they should be able to defend their pricing as being competitive, not predatory.
I think what WestJet will need to do is demonstrate that Swoop at least broke even on the disputed routes over a reasonable period of time (perhaps a one month period).
My quick analysis on the YEG to YXX route that Flair claims was sold for $39 and only brought in $0.02 after taxes and fees is:
Sector length 482 miles
Load factor 95% (Ed has been quoted as hitting these levels in the press), leading to 180 seats sold per flight
CASM ex-fuel $0.08 (their average aiming point discussed in the press for average sectors is $0.07, bumped this up due to being a shorter sector)
CASM including fuel $0.12
This leads to an operating cost of 189 x 0.12 x 482 = $10,932 for the flight plus $39 in taxes and fees for each of 180 passengers, for a total of $17,952 in costs
On the revenue side, say 60 seats sold at $39, 60 at $69 and 60 at $99 with 60 people having only a personal item, 60 people with a carry-on at $35 and 60 with a checked bag at $35, 20 people pay for extra legroom seats at $21, 40 people pay for a specific seat at $10 and 60 people use the call centre to book, leading to a total revenue of $18,340.
It looks as though the mix of pricing structure and ancilliary revenue will determine profitability, but Ed did say Swoop ancilliary revenue had averaged $40 per passenger in the analysts conference call (would be $7200 for this scenario, leading to revenue of $19,620).
I think if they have followed the normal WestJet pattern of a set number of fares in each fare bucket, they should be able to defend their pricing as being competitive, not predatory.
Dec 12, 2018, 1:49 pm
#2
A FlyerTalk Posting Legend
Join Date: May 2002
Location: YEG
Programs: HH Silver
Posts: 56,446
Interim competition commissioner Matthew Boswell states in a Dec. 5 motion that he “has reason to believe that the parties have engaged in a conduct that constitutes an abuse of dominant position,” in violation of the Competition Act.
He states that WestJet and Swoop “are engaging in predatory anti-competitive practices, more specifically predatory pricing, by significantly decreasing the prices of their passenger tickets to a level that appears to be below their avoidable costs,” leading to less competition.
The accusation applies to three routes that WestJet and Swoop “substantially or completely control” — Edmonton-Abbotsford, Edmonton-Hamilton and Edmonton-Winnipeg routes — according to the commissioner.
He states that WestJet and Swoop “are engaging in predatory anti-competitive practices, more specifically predatory pricing, by significantly decreasing the prices of their passenger tickets to a level that appears to be below their avoidable costs,” leading to less competition.
The accusation applies to three routes that WestJet and Swoop “substantially or completely control” — Edmonton-Abbotsford, Edmonton-Hamilton and Edmonton-Winnipeg routes — according to the commissioner.
Dec 12, 2018, 5:34 pm
#3
Join Date: Feb 2007
Location: YVR
Programs: Erstwhile Accidental AC E35K
Posts: 2,916
@aerobod: Thanks for this, an interesting analysis. I assume the CASM includes all the overhead and not just direct costs of the flight.
Reminds me of the old maxim: the quickest way to become a millionaire is to start off as a billionaire and buy an airline. Why on earth (or in the skies) anyone would start up an airline these days is beyond me!
Reminds me of the old maxim: the quickest way to become a millionaire is to start off as a billionaire and buy an airline. Why on earth (or in the skies) anyone would start up an airline these days is beyond me!
Dec 12, 2018, 5:57 pm
#4
Original Poster
Join Date: Mar 2010
Location: Calgary
Posts: 1,444
@aerobod: Thanks for this, an interesting analysis. I assume the CASM includes all the overhead and not just direct costs of the flight.
Reminds me of the old maxim: the quickest way to become a millionaire is to start off as a billionaire and buy an airline. Why on earth (or in the skies) anyone would start up an airline these days is beyond me!
Reminds me of the old maxim: the quickest way to become a millionaire is to start off as a billionaire and buy an airline. Why on earth (or in the skies) anyone would start up an airline these days is beyond me!
Dec 12, 2018, 6:17 pm
#5
Join Date: Dec 2008
Posts: 797
The Raymond James comprehensive analysis published in Jan 2018, titled “The Scoop on Swoop”, concluded that fares at these levels would result in Swoop generating an operating margin of 10-11%, with load factors lower than those that have been achieved.
That analysis was done by a guy who knows his way around the industry and has modeled a number of highly successful startups, now collectively generating close to $3.5b in revenue a quarter and operating close to 500 jets.
WJ was profitable during the complaint period, (net of the huge revenue hit as a result of potential strike impact in 2Q). That, in of itself, makes Flairs claim very dubious.
It is exceedingly complex and brain numbing trying to sort out what precisely is the variable / incremental cost of a seat that would otherwise be empty were it not sold. Trust me. Harvard mathematicians and economists have struggled for years trying to figure that one out.
Anyone involved in the WJ vs AC complaint 18 years ago on both sides of the table. knows all about that.
That file kind of died a miserable death after about 3 years. Hearings in Ottawa on Sept 11 2001 were postponed for a long, long time.
The modelling also proved that Flairs fully allocated unit costs with those old low density -400’s, were considerably higher than Swoops costs.
It comes as no surprise to anyone in the business that Flair lost $10m in the peak summer season operating a high cost, ULCC operation. How much are they losing now in the dog days of winter? It must be ugly.
It will be exceedingly difficult for Flair to prove anything in this case.
More importantly, when one looks at this rather desperate move, (and recall WJ went after AC in 2000 when WJ was highly profitable and AC was obviously not), combined with CUPE backing off the Flair strike action when they got a peak at the books and realized that ANY work stoppage would guarantee a permanent Flair shutdown,(has CUPE ever done that before?) and it’s pretty obvious to even the most obtuse observer that Flair is struggling to survive.
I wouldn’t be making any travel plans on the basis of Flair being around in mid Jan, and perhaps even earlier.
The best defence against competition has always been low costs. Flair does not have them and that, together with a dumb business plan, is fundamentally why they are in the pickle they are in.
That analysis was done by a guy who knows his way around the industry and has modeled a number of highly successful startups, now collectively generating close to $3.5b in revenue a quarter and operating close to 500 jets.
WJ was profitable during the complaint period, (net of the huge revenue hit as a result of potential strike impact in 2Q). That, in of itself, makes Flairs claim very dubious.
It is exceedingly complex and brain numbing trying to sort out what precisely is the variable / incremental cost of a seat that would otherwise be empty were it not sold. Trust me. Harvard mathematicians and economists have struggled for years trying to figure that one out.
Anyone involved in the WJ vs AC complaint 18 years ago on both sides of the table. knows all about that.
That file kind of died a miserable death after about 3 years. Hearings in Ottawa on Sept 11 2001 were postponed for a long, long time.
The modelling also proved that Flairs fully allocated unit costs with those old low density -400’s, were considerably higher than Swoops costs.
It comes as no surprise to anyone in the business that Flair lost $10m in the peak summer season operating a high cost, ULCC operation. How much are they losing now in the dog days of winter? It must be ugly.
It will be exceedingly difficult for Flair to prove anything in this case.
More importantly, when one looks at this rather desperate move, (and recall WJ went after AC in 2000 when WJ was highly profitable and AC was obviously not), combined with CUPE backing off the Flair strike action when they got a peak at the books and realized that ANY work stoppage would guarantee a permanent Flair shutdown,(has CUPE ever done that before?) and it’s pretty obvious to even the most obtuse observer that Flair is struggling to survive.
I wouldn’t be making any travel plans on the basis of Flair being around in mid Jan, and perhaps even earlier.
The best defence against competition has always been low costs. Flair does not have them and that, together with a dumb business plan, is fundamentally why they are in the pickle they are in.
Last edited by HangTen; Dec 12, 2018 at 6:27 pm
Dec 13, 2018, 7:23 am
#6
Join Date: Jun 2010
Location: YYG
Programs: airlines and hotels and rental cars - oh my!
Posts: 2,995
Flair's complaint is hilarious given that their own business model calls for them to compete on price and essentially undercut competitors like WS and AC.
Apparently they didn't expect someone else to do exactly the same thing to them.
Apparently they didn't expect someone else to do exactly the same thing to them.
Dec 13, 2018, 10:42 am
#7
Join Date: Dec 2008
Location: Delta, BC
Posts: 1,646
Pricing competitively to undercut is not necessarily the same as predatory pricing. It is the intent of the pricing that the Competition Bureau cares about and intent is a very hard thing to prove.
"“The Bureau considers predatory pricing to be a firm deliberately setting prices to incur losses for a sufficiently long period of time to eliminate, discipline, or deter entry by a competitor, in the expectation that the firm will subsequently be able to recoup its losses by charging prices above the level that would have prevailed in the absence of the impugned conduct, with the effect that competition would be substantially lessened or prevented.”
(Competition Bureau, Predatory Pricing Enforcement Guidelines)"
"To establish that a firm has engaged in predatory pricing, the elements of section 79 of the Act must be established by the Bureau on an application to the Competition Tribunal (“Tribunal”) – i.e., that a dominant firm (or firms – section 79 includes joint dominance) has engaged in a practice of anti-competitive acts (i.e., predatory pricing conduct) that has prevented or lessened competition substantially (or is likely to do so).
Where an abuse of dominance is established, the Tribunal has the power to make a number of types of orders, including for the conduct to stop or for a firm to pay “administrative monetary penalty” of up to $10 million ($15 million for subsequent orders)."
Dec 13, 2018, 5:26 pm
#9
Join Date: Dec 2008
Posts: 797
The big difference is that even with the 2000 complaint, WJ was a verifiably profitable underdog with significantly lower costs than its principle competitor who was losing $1m a day at the time.
Flair has acknowledged losing $10m in the best 5 months of the year and has stage length adjusted unit costs at least 10% higher than Swoops. Not a pretty picture.
https://raymondjames.bluematrix.com/...ca&source=mail
To be complaining that a lower cost operator is undercutting them in a business that relies on low costs and price stimulation is absurd, but typical of the naivety we’ve seen from Flair since day 1.
You can can imagine how thrilled potential and existing Jetlines investors must be upon hearing that Flair lost $10m during the strongest 5 months of the year.
If it looks like a duck........
Flair has acknowledged losing $10m in the best 5 months of the year and has stage length adjusted unit costs at least 10% higher than Swoops. Not a pretty picture.
https://raymondjames.bluematrix.com/...ca&source=mail
To be complaining that a lower cost operator is undercutting them in a business that relies on low costs and price stimulation is absurd, but typical of the naivety we’ve seen from Flair since day 1.
You can can imagine how thrilled potential and existing Jetlines investors must be upon hearing that Flair lost $10m during the strongest 5 months of the year.
If it looks like a duck........
Last edited by HangTen; Dec 13, 2018 at 5:32 pm
Dec 13, 2018, 9:58 pm
#10
Join Date: Dec 2002
Posts: 8,002
Nav Canada bills the airline by the flight, not by the passenger.
The Nav Canada line on a ticket is a "hidden" form of revenue for the airline.
Dec 13, 2018, 11:29 pm
#11
Original Poster
Join Date: Mar 2010
Location: Calgary
Posts: 1,444
The items that definitely shouldn’t be included in revenue are GST/PST/HST/VAT, AIF / Airport Departure Taxes, ATSC, APD (UK), Transportation Tax (US), IUF (US), CUF (US), APHIS (US) and any other taxes specific countries may impose.
Dec 14, 2018, 8:17 am
#12
Join Date: Dec 2002
Posts: 8,002
Except Nav Canada has reduced it's fees a couple times this decade.
The Nav Canada line should be revenue in the same way fuel and insurance surcharges are revenue.
These lines are just an excuse for the airline to not give the full discount when codes are used.
The Nav Canada line should be revenue in the same way fuel and insurance surcharges are revenue.
These lines are just an excuse for the airline to not give the full discount when codes are used.
Dec 14, 2018, 8:56 am
#13
Join Date: Jun 2010
Location: YYG
Programs: airlines and hotels and rental cars - oh my!
Posts: 2,995
Except Nav Canada has reduced it's fees a couple times this decade.
The Nav Canada line should be revenue in the same way fuel and insurance surcharges are revenue.
These lines are just an excuse for the airline to not give the full discount when codes are used.
The Nav Canada line should be revenue in the same way fuel and insurance surcharges are revenue.
These lines are just an excuse for the airline to not give the full discount when codes are used.
Dec 14, 2018, 10:19 am
#14
Original Poster
Join Date: Mar 2010
Location: Calgary
Posts: 1,444
Airline 53%
US Government 23%
Airport 15%
Canadian Government 9%
....and on the way out:
Airline 79%
US Government 21%
Dec 14, 2018, 2:16 pm
#15
Join Date: Aug 2003
Location: Canada
Programs: Marriott Plat; Air Canada E75K; Westjet Platinum
Posts: 1,161
The big difference is that even with the 2000 complaint, WJ was a verifiably profitable underdog with significantly lower costs than its principle competitor who was losing $1m a day at the time.
Flair has acknowledged losing $10m in the best 5 months of the year and has stage length adjusted unit costs at least 10% higher than Swoops. Not a pretty picture.
https://raymondjames.bluematrix.com/...ca&source=mail
To be complaining that a lower cost operator is undercutting them in a business that relies on low costs and price stimulation is absurd, but typical of the naivety we’ve seen from Flair since day 1.
You can can imagine how thrilled potential and existing Jetlines investors must be upon hearing that Flair lost $10m during the strongest 5 months of the year.
If it looks like a duck........
Flair has acknowledged losing $10m in the best 5 months of the year and has stage length adjusted unit costs at least 10% higher than Swoops. Not a pretty picture.
https://raymondjames.bluematrix.com/...ca&source=mail
To be complaining that a lower cost operator is undercutting them in a business that relies on low costs and price stimulation is absurd, but typical of the naivety we’ve seen from Flair since day 1.
You can can imagine how thrilled potential and existing Jetlines investors must be upon hearing that Flair lost $10m during the strongest 5 months of the year.
If it looks like a duck........