Business Case study

Question

  1. Format: 12 pt font,1 inch margin)
  2. Business report format
  3. Provide brief background /summery of the WestJet airline ( SWAT analysis)and identify four key issues including employee compensation and benefits (example: should WestJet have individual pay base or team pay based? or profit sharing? short term or long term incentive plan?)- The issue of unionization or leadership issues
  4. conduct a detailed discussion of the case: relevant research or theory
  5. suggest financially feasible recommendation

Answer

WestJet Airline case study

Contents

Executive summary. 2

Brief background and overview of the WestJet Airlines. 2

SWOT analysis. 5

Strengths. 5

Weaknesses. 6

Opportunities. 7

Threats. 8

Key human resource (HR) issues at WestJet Airlines. 9

Employee compensation and employee benefits. 9

Profit sharing at WestJet 10

Owners’ Performance Award. 11

Individual-based pay versus team-based pay approach. 11

Short-term versus long-term incentive plan. 12

Labor relations and unionization. 13

Leadership issues: CEO replacement and viable solutions. 13

Recommendations. 15

References. 16

 

Executive summary

This report explores the case study of WestJet, an airline company based in Canada. The airlines industry is the most turbulent industry in Canada today. This is an indication of the importance attached to this case as far as efforts to chart a path for a sustainable future for WestJet is concerned. To start with, this report provides a brief background of WestJet Airlines, followed by SWOT analysis. The main strength of the company is its culture that motivates employees to have a stake in the company’s ownership and overall strategy. The main weakness is that the WestJet does not operate as a global airline. Moreover, the airline has an excellent opportunity of venturing into crucial international destinations. In the quest for these opportunities, the company faces the ever-present threat of other means of transportation as well as competing airlines.

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This report also addresses various Human Resource (HR) issues affecting WestJet. These issues include employee compensation, profit sharing, incentive plans, and labor relations. Regarding leadership, the greatest challenge is that of CEO replacement. On the basis of this analysis, recommendations are presented. The main issues presented in the recommendations include the introduction of benefit pension plans, long-term incentive plans, as well as work-life balance and succession planning for CEOs.

Brief background and overview of the WestJet Airlines

WestJet Airlines is a Canadian low-cost airline that was established in 1996 in Alberta. It is the second largest air carrier in Canada after Air Canada. In 2009, the airline won the award for Canadian Airline of the Year. WestJet operates in the global airline industry, which has been undergoing numerous changes during the past fifty years. With some 220 employees, the company embarked on the task of providing flights to Vancouver, Edmonton, Calgary, Kelowna, and Winnipeg (Mark, 2002). Since embarking on this air transport business, the company has retained its headquarters in Calgary, Alberta.

Today, the company offers flights to more than 60 destinations in Canada, Mexico, United States, and the Caribbean. The airline is already in possession of some 81 Boeing 737s, which make approximately 383 flights daily. The airline’s managers have succeeded in establishing, promoting, and maintaining the reputation of the WestJet brand, an undertaking that has made the company to become the preferred air carrier in Canada. Moreover, between 2005 and 2008, Waterstone Human Capital listed the airline among Canada’s Most Admired Corporate Cultures (Francis, 2012).

WestJet’s mission is to maintain low costs throughout its operations and to ensure consistent and manageable growth. The company also remains committed to the integration of technology with the aim of ensuring efficiency and excellence in service to customers. Moreover, the company endeavors to support and empower its people as well as maintain the WestJet culture as a trademark and the main pillar of corporate success.

The company’s vision is to become one of the most successful global airlines by providing its customers with a friendly experience that will transform air travel forever. In the company’s strategic plan, four pillars of ensuring the achievement of long-term success are identified. They include people and culture, guest experience, revenue and growth, and costs. In terms of people and culture, the objective is to invest in and foster growth, development and commitment among all people at the airline. By focusing on guest experience, the objective is to continuously and consistently provide high-quality air travel services to all customers. In terms of revenue and growth, the airline’s top management has set a goal of an annual revenue increase of ten percent. The company is also committed to the goal of reducing costs in a way that will enable it maintain a sustainable profit margin that will propel it to the position of the leading airline in North America.

WestJet Airline has been reporting impressive financial performance in recent years. For instance, the company’s sales increased from $1.05 billion in 2004 to $2.54 billion in 2008 (Karp, 2009). In 2004, WestJet reported losses amounting to $17.17 million (Karp, 2009). The following year, it reverted to the path of profitability, and it went on to report a rapid increase in profitability (Karp, 2009). In 2008, the company reported profits amounting to $178.14 million (Karp, 2009).

WestJet’s competitive advantage rests on its corporate culture and the various tools the company uses to align the interests of all its employees with those of the airline (Verburg, 2000). One of these tools is the profit-sharing plan. WestJet borrowed this plan from Southwest Airlines, which offers ten percent of all its profits to its employees. WestJet has taken this idea even further; employees not only receive the ten percent profit share, they also get additional percentage increments depending on their contribution to the airline’s profitability (Flint, 2003). This growth in profit share is capped at twenty percent (Flint, 2003). This plan has been in place since the establishment of the airline, with the aim being to encourage all employees to have the same mindset as far as the importance of profitability is concerned. The aim was to create a positive perception of profitability as a common cause that all employees could strive to achieve

SWOT analysis

Strengths

In November 2009, WestJet was voted the Canadian Airline of the Year by the tourism industry in Mazatlan, Mexico. In-depth analysis of the company’s strengths easily justifies this award. To achieve success, the company has adopted adhered to the core objective of maintaining the lowest airfare costs across Canada, thereby giving it an automatic advantage over all other airlines in Canada. This way, the airline has succeeded in establishing a rapidly expanding fleet of planes.

In recent years, WestJet has also managed to buy even the Boeing 747 jets, whose fuel efficiency is thirty percent higher than that of ordinary planes (Martin, 2005). The company has also succeeded in integrating its strengths through the establishment of an online community through which flyers are constantly updated via the company website. Furthermore, the company runs a user-friendly website for vacation planning known as WestJet Vacations. Moreover, WestJet continues to maximize its strengths through funny flight attendants and unbeatable customer service.

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Another major strength of WestJet is that the airline operates many flights to more than 60 destinations across North America and the Caribbean. The airline also makes approximately 383 flights every day. Additionally, it has made a major achievement by purchasing the new-generation Boeing 737-600s, 700s, and 800s. Moreover, the airline has no fuel surcharges. This makes it attractive to more people not only in Canada but also across North America.

Many airlines have in recent years resorted to the introduction of fuel surcharges to reduce the vulnerability caused by increase in fuel prices (Grescoe, 2004). They have been facing pressure to introduce fuel surcharges on flights to North America mainly because fuel prices have been on a long-term upward trend. However, WestJet has so far succeeded in rejecting the idea, arguing that it would jolt many customers. The other major strengths include impressive on-time performance and the fact that it is a low-cost airline.

Weaknesses

On face value, WestJet seems to be operating as an efficient, reliable, and profitable company. Its services create the impression that few weaknesses exist at the company. However, the reality of the matter is that the company faces several serious weaknesses that may jeopardize its continued prosperity in the industry. One of these weaknesses is that the aspect of trans-continental flights is missing. In a world where global economies and markets are rapidly rising, this turns out to be a major weakness. The company may not always provide travelers with the international destination they may be looking for. This forces them to turn to other airlines. Whenever customers turn elsewhere for service delivery, the risk of losing these customers to those other airlines becomes very high.

Another weakness arises from the fact that WestJet is a low-class airline. This means that it is always being shunned by higher-class travelers who want to fly in an environment of some added luxury, comfort, and service (Mentzer, 2000). Such a first-class seating arrangement is not provided at WestJet. This turns out to be a major factor as far as the problem of lost business is concerned. Moreover, some travelers are opposed to the situation in which only complimentary snacks are served for flights that last for two or more hours. Such customers would prefer to be served with more wholesome meals during these flights.

Additionally, as WestJet raises its quest for profitability, it increases its risk of facing more flight delays. These delays arise simply because of strain on operations. Like many other low-cost airlines, WestJet faces the challenge of maintaining a delicate balance in the quest to maximize profits by ensuring that planes are filled closer to capacity while at the same time increasing their level of utilization by ensuring that they are flown for more hours each day. Both measures hold a great potential for improvement of profitability. A major weakness arises from WestJet’s tendency to push these measures too far, thereby increasing the likelihood of a situation where minor disruptions are quickly transformed into major headaches. It becomes extremely difficult for delayed passengers to be directed to a later flight, get a plane that is heading to their next destination in a timely manner, as well as transfer them onto connecting flights (Flint, 1999).

WestJet Airlines has in recent years been reporting record load factors. Load factor refers to the average number of seats an airline fills in its planes. This has been occurring in a marketplace that is characterized by tight capacity, a phenomenon that allows the airline to raise prices steadily with the aim of improving profitability. In this strategy, the greatest weakness is that on-time performance has started to show signs of serious strain. It is therefore not surprising that in the fourth quarter of 2012, the on-time performance of the airline fell from 78 percent to 64 percent.

Opportunities

            WestJet has been growing alarmingly since its establishment in 1996. The airline has succeeded in covering all the major destination spots in Canada and most of North America. Today, the airline’s best opportunities are to be found in the international scene. Since 2010, WestJet has been exploring ways of venturing into crucial international destinations. To start with, WestJet has been looking into the likelihood of starting flights to Ireland and Bermuda. A major breakthrough in this expansion plan came when the airline preordered 53 new aircrafts to support the expected increase in demand once the company starts flying to major international destinations by 2016.

In the context of these developments, it is evident that WestJet has identified the international airline market as the best source of opportunities in the foreseeable future. In fact, to demonstrate its preparedness to venture into this market, the company’s top executives boldly declared that the WestJet would be among the five leading international airline companies by 2016. The airline is hopes to build on this new plan by taking advantage of the opportunities that keep emerging in the online network world. WestJet is keen to launch and implement a Loyalty Program via Facebook and Twitter, with the aim being to secure crucial details of frequent flyers, such that the airline no longer needs to keep requesting for such information every time these loyal clients are booking flights.

Threats

            WestJet faces many threats in its day-to-day operations as well as in long-term planning. The biggest threat arises from the fact that the airline industry is just but one component within the larger transportation industry. All the company’s customers are always faced with alternative means of transportation, including train systems, bus lines, ferry services, hiring vehicles, or driving their own cars. They are also faced with the alternative of booking flights with competing airlines. Some of the main competing airlines include Canadian Airlines, Air Canada, and American Airlines. This threat is compounded whenever the airline ventures into the North American market, where many established airline companies have already established a market niche. As the airline plans to venture into the international airline market, this threat will increase because of stiff competition from major international airlines.

In the broader international environment, the airline faces many threats particularly because the margin of revenue is very small when compared with operation costs. One of the reasons why the margin of revenue remains small is the ever-rising cost of fuel. This puts the company in a precarious position where it must keep raising fares to remain profitable. Moreover, it must continue operating in a fluctuating economy that sometimes leads to a reduction in demand.

Key human resource (HR) issues at WestJet Airlines

The main HR issues at WestJet include employee compensation, employee benefits, profit sharing, incentive plans, and labor relations. The company’s main competitive advantage rests on the issue of organizational culture. WestJet has retained a tradition of involving all its employees in its overall growth strategy as a way of motivating them. This is mainly demonstrated in the profit-sharing strategy that was founded on a model adopted by Southwest Airlines. For this reason, it is imperative for this report to focus a great deal on HR issues at WestJet and their influence on the airline’s long-term success.

Employee compensation and employee benefits

Employee compensation is an integral component of WestJet’s organizational culture. The airline fondly refers to its employees as “WestJetters”, who are accorded the overall responsibility of creating a caring, safe, and sustainable experience for the WestJet’s customers or “guests”. The company understands that for the employees to succeed in this responsibility, the best experience must be created for them. In 2011, a Mediacorp Study named WestJet as one of the Top 100 Employers in Canada.

WestJet’s compensation philosophy focuses on aligning personal and corporate success. Employees are encouraged to have an ownership stake at WestJet. This inspires them to have a personal vested interest in the airline’s success. For this reason, the employees tend to be keen on the company’s growth trends, results, and accomplishments. However, the company is yet to establish a benefit pension plan. Instead, WestJet has put in place programs that allow all employees to participate actively in the company’s success both in financial and operational terms as well as provide them opportunities for saving for retirement.

Profit sharing at WestJet

The profit-sharing program at WestJet makes all WestJetters eligible to have a share of the airline’s profits. The amount of earnings before tax margin is always used as the basis for determining the share of profits earned by WestJetters. A specific percentage of this amount of earnings is allocated as profits earned by the employees each quarter. This means what huge profit payouts to employees always indicate that the company is become more profitable. In 2011, WestJet’s profit share expense stood at $23.8 million. Between 1996 and 2011, WestJet’s total profit share payout stood at around $224 million. By ensuring that employees share in the company’s profits, WestJet is able to reinforce decisions that serve the best interests of all its shareholders, guests, and employees.

The profit sharing program is facilitated through the Employee Share Purchase Plan (ESPP). In this plan, employees are encouraged to become owners of the company’s shares. The ESPP contains specifications on terms of share purchase. Under these specifications, every employee must buy shares on the basis of their current market value. The upward limit has been set at twenty percent of the employee’s gross pay, and WestJet matches these contributions dollar for dollar.

Owners’ Performance Award

In 2011 WestJet announced a new incentive plan known as the Owners’ Performance Award. This award is designed in such a way that WestJet’s employees are rewarded and recognized for their efforts in critical performance areas. These areas include guest experience, safety, on-time performance, and cost. Through this initiative, the company’s employees have already been awarded some $0.8 million. This amount was based on WestJet’s financial and operational results for 2011.

Individual-based pay versus team-based pay approach

The profit sharing approach adopted by WestJet makes use of individual-based approach as far as payments are concerned. The percentage of profits that are offered to each employee depends on the amount of shares he or she has bought at the airline. Moreover, the basic salary and allowances offered to each employee depend on the qualifications, merit, efforts made as indicated in the scheduling program, and overtime hours worked.

However, elements of team-based pay approach are evident particularly in the context of the Owners’ Performance Award. The critical performance areas that form the basis of this award require a lot of teamwork among employees working in different areas within the company. For example, the goal of improvement in guest experience cannot be achieved without teamwork among the WestJetters. The same case applies to the other performance areas, including safety, cost, and on-time performance.

Short-term versus long-term incentive plan

At WestJet, more emphasis seems to be on long-term incentive plans as opposed to short-term incentive programs. However, the airline’s management has been making efforts to maintain a healthy blend of short-term and long-term incentive plans for all employees. The share purchase arrangement is an example of a long-term incentive plan. Another example of  long-term incentive plans is the ongoing employee development program that comes with subsidies in the form of in-house apprenticeship opportunities, professional accreditation, online skills inventory, and career planning courses.

The airline has also put in place a long-term incentive plan in which all employees are given unlimited standby travel at discounted rates. Moreover, the employees are given fifty percent discounts on all booked flights. Additionally, employees can easily obtain discounted passes for their families and friends. These incentives give many employees a reason to continue working with the airline on a long-term basis.

Most of the short-term incentive plans focus on the wellbeing of the employees in terms of their working conditions and their health. At WestJet’s new headquarters completed in 2009, the more than 1,000 employees working there have access to a state-of-the-art onsite fitness facility that offers various Yoga and aerobics classes. There is also an employee lounge at every floor, where employees have access to a television, a music system, board games, video games, an onsite cafeteria, a nap room.

At WestJet, preference ought to be on a long-term incentive plans. Short-term incentive plans only give employee a feeling of satisfaction while engaging in day-to-day tasks while long-term incentive plans motivate them to work towards ensuring that the company’s long-term objectives are achieved. In this way, it is evident that long-term incentives are of utmost relevance in providing a general sense of direction of the business organization in the long run.

Labor relations and unionization

Unlike in the case of many companies operating in the airline industry, the employees of WestJet do not belong to any union. During the early years of WestJet’s existence, the executive team explicitly recognized the importance of interest-based employee relations. With this concept firmly in place, employees saw no need to belong to unions. This is because they were in control of their interests by virtue of working in an airline in which they had an ownership stake.

To ensure that the concerns of employees are heard, WestJet introduced the Proactive Communications Team (PACT). PACT was established as a company-wide organization whose role was to represent the interests of the company’s non-management employees. The importance of PACT has been fully recognized by WestJet’s Executive team. In fact, this team works in collaboration with PACT with the objective of meeting the needs of both WestJet’s employees and the airline. To demonstrate this spirit of collaboration, the company allows the chairperson of PACT, who is a flight attendant at WestJet, to sit in company’s Board of Directors.

Leadership issues: CEO replacement and viable solutions

One of the most serious leadership challenges facing WestJet is CEO replacement. In recent years, a trend has emerged whereby founder-CEOs are being forced by circumstances to relinquish their day-to-day oversight roles to newcomer-CEOs. For example, in July 2007, Clive Beddoe, one of the founders of the airline company, yielded his role as CEO to President Sean Durfy. In this change of guard, Clive Beddoe assumed a behind-the-scenes role that entails crafting the broad, long-term strategy of the company.

In efforts to replace the founding CEOs with new faces, one of the most serious challenges entails the need to bring in young, energetic executives while at the same time ensuring that the long-time objectives of the WestJet are continually being sought. According to Zajac (1990), the process of CEO selection should be addressed from a perspective that looks into aspects of compensation, succession, and firm performance. Zajac (1990) adds that for the succession planning process to be seamless, the insider-outsider distinction should be accorded special attention as far as the selection of CEOs is concerned.

Another challenge arises in the form of a trend in which WestJet’s CEOs continue to resign for personal reasons. One of the most viable solutions to this problem should involve the introduction of a new strategy in which issues of work-life balance among CEOs are addressed. According to Harris (1998), it is important for CEOs’ perceptions regarding the link between firm wealth and personal wealth to be put into consideration during CEOs’ succession planning. At WestJet, there is a tendency for stockholder reaction to be observed whenever a new CEO takes over the airline’s top management. Friedman (1998) uses the agency theory to analyze reaction of this nature. In Friedman’s (1998) view, the main contents of CEO succession events that need to be put into consideration include the force triggering the change of CEO, the disposition of the predecessor, and the background of the incoming CEO.

Recommendations

  1. WestJet should establish a comprehensive benefit pension plan for its employees.
  2. Preference should be on a long-term incentive plan. Short-term incentive plans only give employee a feeling of satisfaction while they are engaging in day-to-day tasks. On the other hand, long-term incentive plans motivate them to work towards ensuring that the company’s long-term objectives are achieved.
  3. WestJet’s top management should continue supporting the Proactive Communications Team (PACT), which acts as a link between employees and WestJet’s management.
  4. Leadership issues (CEO replacement): the most viable solutions to this problem should involve the introduction of a new strategy in which issues of work-life balance among CEOs are addressed.
  5. There is a need for efforts to be made for principles of succession planning to be adhered to. Through such a solution, opportunities are created for the outgoing CEO to prepare adequately for a comprehensive and well-timed handover of oversight duties to the incoming CEO.
  6. A new strategy should be introduced at WestJet characterized by consideration for issues of work-life balance among CEOs. This will enable the company succeed in succession planning, thereby avoiding controversies whenever a takeover of the overall management by a new CEO is imminent.

References

Flint, P. (1999). Cover-Airlines: WestJet defies the odds-Canada’s upstart prospers with low fares and simplicity. Toronto: Air Transport World.

Flint, P. (2003). Happy family : WestJet transplanted the Southwest Airlines operating model into Canada with stunning results, but its success really rests on its approach to managing people. Air Transport World, 40(11), 46-51.

Francis, G. (2006). Where next for low cost airlines? A spatial and temporal comparative study. Journal of Transport Geography, 14(2), 83–94.

Friedman, S. (1989). CEO Succession and Stockholder Reaction: The Influence of Organizational Context and Event Content. Academy of Management Journal, 32(4), 718-744.

Grescoe, P. (2004). Flight path: how WestJet is flying high in Canada’s most turbulent industry. Toronto: Blackwell Publishing.

Harris, D. (1998). CEO duality, succession, capabilities and agency theory: commentary and research agenda. Strategic Management Journal, 19(9), 901–904.

Karp, A. (2006). WestJet is Growing Up. Air Transport World, 43(11), 26-32.

Mark, K. (2002). WestJet Airlines: The culture that breeds a passion to succeed. Ivey Business Journal, 4(2), 29-43.

Martin, B. (2005). A tale of two airlines: WestJet and Canada 3000. Journal of the International Academy for Case Studies, 11(1), 97-106.

Mentzer, M. (2000). The Impact of Discount Airlines on Domestic Fares in Canada. Transportation Journal, 39(4), 35-42.

Verburg, P. (2000). Reach for the bottom – When WestJet introduced bargain flights to Western Canada, competitors lost their shirts. Now the down-market upstart is …. Canadian Business, 5(12), 132-147.

Zajac, E. (1990). CEO selection, succession, compensation and firm performance: A theoretical integration and empirical analysis. Strategic Management Journal, 11(3),  217–230.

 

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