The proposed $3.5-billion bid by Onex Crop. to take over WestJet speaks to a metamorphosis of the airline that was already in the making, according to industry analysts.
Toronto-based private equity firm Onex announced on Monday its intention to buy out Canada’s second-largest carrier in a deal valued at $5 billion including debt, according to a joint statement released by the two companies.
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The news came as a surprise to industry watchers but continues an ongoing transition in which Calgary-based WestJet has morphed from regional low-cost carrier to a national player with international ambitions.
“WestJet is in the middle of a significant transformation as they move to be a full-service airline with products from barebones fares to high-end, first-class offerings,” wrote analysts Helane Becker and Conor Cunningham of Cowen and Co. in a research note.
It’s hard to know whether the proposed acquisition by Onex will change WestJet’s corporate culture, said John Korenic, adjunct professor at the University of British Columbia’s Sauder School of Business. That will largely depend on whether the deal brings about a management shakeup, he said.
The airline has pledged its headquarters will remain in Calgary.
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But WestJet was already undergoing a profound transformation that the backing of a deep-pocketed investor like Onex could help cement, Korenic said.
WestJet has come a long way from being Canada’s version of Southwest Airlines, with its friendly demeanour and fleet of Boeing 737s flying passengers to a range of short- and medium-range destinations.
WestJet has become a “hybrid” airline, Korenic said.
Departing from its origins as a regional carrier, WestJet has been going both high and low, he said.
On one hand, it is building up a fleet of Boeing 787 long-haul aircraft, which Korenic calls a “perfect-sized aircraft” for travel to international destinations like Europe and Asia.
The change came as the company unveiled its first-ever business class cabins in May of last year. Business class service would feature on-demand dining, lay-flat mattresses and turn-down service, the airline said.
“The introduction of Boeing’s 787-9 Dreamliner, a state-of-the-art aircraft, is the dawn of a new era for WestJet and the next step in our transformation to a global network airline,” said Ed Sims, WestJet president and CEO, at the time.
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At the other end of the two-pronged strategy was the launch of Swoop, WestJet’s ultra-low-cost airline, which took to the skies in June 2018.
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In a way, the company created a subsidiary to fill the void it was leaving by up-scaling its mainline carrier, Korenic said.
The deal with Onex could now help WestJet reach its global and business-class ambitions faster, according to analysts.
“WestJet has been challenged by all this diversification that’s been crunched into this very short space of time,” said Robert Kokonis, president of Toronto-based consulting firm AirTrav Inc. “Shareholders were wondering whether WestJet could execute all these things.”
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Business class, international flights and a rewards program with global reach
While it’s not clear yet what vision Onex has for WestJet, the takeover could bring Canadians more business class choice, more international flights and more power to the WestJet rewards program, Korenic told Global News.
A full-fledged business class offering is “the big advantage” Air Canada currently has over WestJet, he said. “I would anticipate that there would be potentially a real focus of Onex to head more in that direction.”
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Another area where WestJet has room to catch up with Air Canada is adding international destinations, particularly in Asia, Korenic added.
And if the focus will be on business class and global travel, it would make sense for WestJet to become part of a global airline alliance like Oneworld or SkyTeam, according to Korenic.
That would allow WestJet passengers to accrue miles when flying with member airlines across the alliance, a prospect that would be particularly attractive to business travellers, who could quickly earn lounge access and other perks at international airports, Korenic said.
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Deal likely to receive shareholder approval
Onex’s takeover is likely to receive approval from WestJet’s shareholders, as the private equity firm is offering $31 a share, a 67 per cent premium over the airline’s stock price as of the end of the trading session on May 10, Cowen’s Becker and Cunningham wrote.
It’s a different scenario than the one that played out 20 years ago, when Onex teamed up with American Airlines parent company AMR Corp. in a hostile $1.8-billion bid to acquire and merge Canadian Airlines — then the country’s second-biggest carrier — and Air Canada. The plan was dropped after being ruled illegal by a Quebec court.
Onex also failed in its effort in 2007 as part of a consortium to buy Australia’s Qantas Airways Ltd.
But Onex has made a number of investments in the aerospace sector, including Spirit AeroSystems, a former Boeing manufacturing unit, which completed selling in 2014.
Analyst Benoit Poirier of Desjardins Securities said Onex might also look to acquire Transat A.T.
The tour operator, which owns Air Transat, competes with WestJet for sun destinations and launched in 2017 a $750-million plan to develop a hotel chain in Mexico and the Caribbean.
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“We believe it would be easier for WestJet to acquire Transat once the company is integrated within Onex, as unlocking Transat’s full potential could take a few years (3-5 years) — which might be less suited for a public entity,” Poirier said in an investor note.
The Quebec-based travel company has been in buyout discussions with several suitors since last August, including Quebecor CEO Pierre Karl Peladeau, Montreal developer Groupe Mach and financial services company FNC Capital.
WestJet’s current growth spurt could also generate profits that offset the rising cost of labour. The nearly 4,000 flight attendants at WestJet and regional carrier WestJet Encore have unionized over the past year. Meanwhile, Encore pilots have voted in favour of a five-year agreement that runs until Jan. 1, 2024, and WestJet pilots agreed to a settlement process last May, auguring “labour peace,” Kokonis said.
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Analyst Doug Taylor of Canaccord Genuity said the Onex deal is unlikely to “dramatically alter” the competitive landscape.
“WestJet was generally well-funded and was already embarking on a large and highly competitive expansion plan. In our view, a private equity owner of an airline is likely to remain rational with respect to its approach to yields and profitability vs. market share,” he said in a note to clients.
Completion of the transaction is subject to a court and regulatory approval in addition to a shareholder vote. WestJet’s board of directors has unanimously recommended shareholders vote in favour of the deal at a meeting expected to be held in July.
— With files from the Canadian Press