West Jet HRM Case - Caso West Jet PDF

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WESTJET: BUILDING A HIGH-ENGAGEMENT CULTURE Ken Mark wrote this case under the supervision of Professor Gerard Seijts solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2009, Ivey Management Services

Version: (A) 2009-08-11

INTRODUCTION

In late April, 2009, a senior manager at WestJet Airlines (WestJet) came across two news articles — one in Maclean’s, a Canadian news magazine, and the other in the Globe and Mail, Canada’s national newspaper — that hinted at a dilemma faced by WestJet: How to continue to build its high-engagement culture as it experienced high rates of growth?1 WestJet stood out from other Canadian airlines in many ways. For example, despite a difficult year in 2008, WestJet was one of only a few airlines worldwide that were profitable that year. Whereas other airlines had cut their available seats, WestJet had continued to expand its reach. The company was able to not only survive but to thrive in a depressed environment because of its combination of low operating costs, a non-union environment and, most importantly, a unique corporate culture that, among other things, encouraged employees to share suggestions for improvements openly. WestJet press releases were typically full of good news about how the company was continuing to succeed, whereas other airlines — especially WestJet’s chief rival, Air Canada — were stumbling. The article in Maclean’s suggested that WestJet, in an attempt to capitalize on an impending bankruptcy filing by Air Canada, was doubling its efforts to achieve market dominance in Canada by 2013. The article also mentioned a set of customer service standards — known as the WestJet Care-antee — that the company would publish, thus clearly setting itself apart from any rival, which would have little or no hope of matching its offer (see Exhibit 1). On the other hand, the Globe and Mail article suggested that all was not well inside WestJet. Negotiations between WestJet and its pilots had stalled two weeks before their three-year agreement was set to expire on April 30, 2009. Further, the article reprinted part of a memo that WestJet’s chief executive officer (CEO), Sean Durfy, had written to pilots, urging them to reconsider the proposal for the purpose of “… maintaining our wonderful corporate culture and competitive advantage.” Negotiations had started in June 1 http://www2.macleans.ca/2009/04/30/westjet%e2%80%99s-plan-to-crush-air-canada/print/ accessed June 2, 2009 and http://www.globeadvisor.com/servlet/ArticleNews/story/gam/20090417/RTICKER17ART1937-9 accessed June 2, 2009.

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The senior manager was aware of WestJet’s ambitious goals to become the dominant airline in Canada by 2013 and one of the five most successful international airlines in the world by 2016. Achieving these goals would mean continued expansion in the WestJet organization. Growth was seen as positive because it would provide new and exciting opportunities for the employees. The senior manager wondered, however, whether the rapid growth at WestJet — which already employed 6,187 full-time equivalent staff (including approximately 950 pilots and 2,000 flight attendants), as of the end of December 2008 — would come at the cost of building and maintaining a high-engagement culture. This point was important because, as the founders and senior executives of the company continued to reiterate at every opportunity, culture was everything at WestJet. It would be unfortunate if WestJet developed into a big and bureaucratic organization that was unable to sustain its unorthodox culture because of its success in the marketplace. THE HISTORY OF WESTJET AIRLINES2

In 1994, Clive Beddoe, an entrepreneur active in the real estate sector, purchased an aircraft for his weekly business travel between Calgary and Vancouver. Beddoe made the aircraft available for charter to other cost-conscious business people through Morgan Air, which was owned and operated by Tim Morgan. The response to this venture caused Morgan, along with Calgary businessmen Donald Bell and Mark Hill, to realize an opportunity to satisfy the need for affordable air travel in Western Canada by starting an airline. The odds appeared stacked against Beddoe and his colleagues because the airline industry was a tough business. Beddoe was aware of the dozens of failed airlines in Canada; in the recent past, these failures included Greyhound Air, Roots Air, Vistajet, Royal Airlines and Canada 3000. Historical data showed that almost 97 per cent of start-up airlines failed within their first seven years of operations. Competition was tough, and many travelers had their misgivings against airlines because of delays, lost luggage, cranky flight attendants, inflexible schedules, onerous rules, uncomfortable seats and a host of other servicerelated problems. Thus, the founders realized they needed to approach the task of building a successful airline in an unconventional manner. Said Richard Bartrem, vice-president of Culture and Communications: “… to not behave differently from the other airlines would lead us to fail.”3 Beddoe and his colleagues researched the market and focused on low-cost (not discount) carriers, including Southwest Airlines and Morris Air, both of which operated in the United States. David Neeleman, president of Morris Air, was contacted for assistance in developing a business plan. Neeleman, along with Morgan, Bell, Hill and Beddoe, became the founding team of the concept that would become WestJet Airlines. The potent differentiator that the team agreed on was straightforward: People working at WestJet must demonstrate a caring attitude toward their colleagues and the passengers (or guests). A culture of care was regarded as necessary for providing good customer service. The founders developed a strong belief: If we as a corporation take care of our people, then our people will take care of our guests, and our guests will

2

This section is based in part on information presented in the case: WestJet Airlines: The culture that breeds a passion to succeed. 3 Personal communication, May 14, 2009.

Authorized for use only by Juan Cordero in HR Management 2 at Oklahoma State University from Mar 25, 2015 to Jul 07, 2015. Use outside these parameters is a copyright violation.

2008. Both the pilots and the senior leadership team had agreed on the introduction of interest based bargaining; and both parties had attended a training program together.

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WestJet commenced operations on February 29, 1996, flying to Vancouver, Kelowna, Calgary, Edmonton and Winnipeg. The company started with approximately 200 employees. Rather than fighting for market share with larger carriers, WestJet’s initial strategy was to use low prices and unrestricted tickets to lure people who would otherwise drive, take the bus or train, or stay home. WestJet was started in an ideal environment — Western Canada — where the main competitor was the financially troubled Canadian Airlines. Although Canadian Airlines initially tried to match WestJet’s rock-bottom fares, it could not compete against the upstart’s low-cost structure. For example, WestJet offered no paper tickets, in-flight meals or frequent flier programs, and passengers were offered only one class of seating. These choices allowed WestJet to keep its fares competitive with travel by car or train. An initial public offering in July 1999 offered 2.5 million common voting shares to investors. In late 1999, taking advantage of turmoil in the Canadian airline industry, WestJet expanded its service across Canada, including flights to Thunder Bay, Ontario. On April 17, 2000, WestJet’s equity market capitalization surpassed that of Air Canada, the country’s leading airline. Later that year, the company returned to the capital markets for a second round of funds, raising $52.1 million to finance the purchase of new aircraft and a new headquarters building. WestJet continued its expansion despite slowdowns in the industry in 2001, due to a downturn in the economy as a result of the dot-com bust and the terrorist attacks of September 11, 2001, which dampened enthusiasm for air travel. Service was started to Eastern Canadian cities, including Hamilton, Moncton and Ottawa. WestJet was receiving 3,000 to 4,000 résumés each week. Most of the new hires were new to the airline industry. “We prefer it that way,” stated Beddoe. “This is a new culture, a new vision. It’s better to start with a clean slate.” 4 In 2002, WestJet was named one of Canada’s Top 100 Employers (see http://www.canadastop100.com/index.html). In 2003, WestJet captured 25 per cent of the domestic Canadian market despite a reduction in skiing tourism due to low snowfall in the West, two outbreaks of severe acute respiratory syndrome (SARS), the North American appearance of bovine spongiform encephalopathy (BSE, or more commonly known as “mad cow disease”) and higher fuel prices. WestJet added new destinations including Montreal, Windsor, Halifax and St. John’s. In 2004, WestJet began to offer trans-border flights from Canada to several U.S. cities, including Los Angeles, San Francisco, Tampa and Orlando. Sean Durfy joined WestJet in December 2004 as executive vice-president, Marketing and Sales, and was responsible for the development of marketing strategies. Durfy had previously spent 10 years in the Alberta energy industry, where he had been president and CEO of ENMAX Corporation, an energy supply, distribution and service company. As a result of rapidly rising fuel prices, WestJet stepped up the retirement of its older 737-200 aircraft in 2005, replacing them with the Boeing Next Generation 737s. In 2006, WestJet added its first international service to Nassau, Bahamas; and other international destinations soon followed: Maui, Honolulu, Montego Bay, Mazatlan, St. Lucia, among others. That same year, Beddoe moved to become the chairman of WestJet’s board of directors, and Durfy was promoted to president.

4

Peter Verburg, “Prepare for Take-off,” Canadian Business, 2000, p. 96.

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take care of our profits. A simple, one-line mission statement was developed: To enrich the lives of everyone in WestJet’s world by providing safe, friendly and affordable air travel.

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WestJet had a record-breaking year in 2007, when revenues exceeded $2 billion and earnings were $193 million. When Beddoe stepped down as CEO on September 4, 2007, the company promoted Durfy in his place.

Revenues grew an additional 20 per cent in 2008 to $2.5 billion, and, despite tough economic conditions, WestJet earned $178 million in net income. WestJet flew to 55 destinations in Canada, the United States, Mexico and the Caribbean (see Exhibit 2). WestJet employed seven times more people in 2008 than it did in 1998. The days were long gone when Beddoe could fit all WestJetters (as the employees were called) into one room for a fire-side chat to explain how and where the business was going. WestJet management knew that the tremendous growth at WestJet would put pressures on its unique and vibrant culture. The leaders across the organization (e.g. front-line leaders, directors and vice-presidents) would be under pressure to communicate and to sustain the culture. This challenge led to the inevitable question: What skills and competencies would be required by those leaders who were now expected to drive the culture?

WESTJET’S PERFORMANCE

Since its beginnings, WestJet was consistently ranked among the most profitable airlines in the world. The company had grown revenues at an average annual rate of 37.4 per cent over 11 years. During the same period, net profit grew at an average annual rate of 35.8 per cent. By the end of 2008, WestJet had captured 36 per cent of the domestic market for air travel. For perspective, consider that Air Canada had 57 per cent of the domestic market. WestJet took pride in the customer service it provided to its guests. Since the Air Travel Complaints Commission began tracking passenger complaints in 2000, WestJet had far fewer complaints than its main competitor, Air Canada (see Table 1). Thus, the airline had appeared to have executed well against the differentiator that the founding team had envisioned: a caring attitude. In 2008, for the third year in a row, WestJet was awarded the title of Canada’s Most Admired Corporate Culture by Waterstone Human Capital, an executive search firm (see http://www.waterstonehc.com/). Table 1 COMPLAINTS INVESTIGATED ABOUT CANADIAN AIR CARRIERS, 2005–2008

Air Canada (including Jazz) Air Transat Zoom Airlines Skyservice WestJet Sunwing CanJet Other Total

2005–2006 385 40 20 33 15 0 3 10 506

2006–2007 334 26 17 22 10 7 9 7 432

2007–2008 310 38 18 14 8 17 2 5 412

Source: 2007–2008 Annual Report, Canadian Transportation Agency, Minister of Public Works and Government Services Canada, Ottawa, Ontario, 2008. (See http://www.cta-otc.gc.ca/doc.php?sid=2004&lang=eng).

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At the end of 2008, WestJet had approximately 128 million shares outstanding. Beddoe and Durfy owned, respectively, 4,416,049 and 28,266 common voting shares in their company.

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Prior to launching WestJet, Beddoe and his colleagues had no experience running a scheduled airline. As they learned more about the airline industry, the founders realized that one of the industry’s biggest problems was dealing with a largely absentee workforce spread all over the country, working at airports, in hangars or in the air. Communication proved to be a challenge. Beddoe stated, “What occurred to me … is we had to overcome the inherent difficulty of trying to manage people and to hone the process into one where people wanted to manage themselves.”7 NURTURING THE WESTJET CULTURE

WestJet’s work environment could be described as friendly, caring, fun and youthful. The average age of the workforce at the end of 2008 was 34; the average age of the leadership team (people at the rank of director and up) was 38 to 40. Creativity and innovation were both encouraged and rewarded. In addition, WestJetters were expected to take the initiative and resolve issues on their own. Decision-making responsibility was pushed as far down to the front line as possible. The company’s core values were expected to guide the decision-making process. WestJetters were encouraged to ask themselves a straightforward question: Do these actions live the values of the company or contravene them? The following values were defined by WestJet defined as core: • • • • • •

Commitment to safety Positive and passionate in everything we do Appreciative of our people and guests Fun, friendly and caring Align the interests of WestJetters with the interests of the company Honest, open and keep our commitments

Building and maintaining the processes that nurtured the WestJet culture was a task that management and staff took very seriously. To management, culture was defined by the actions of the executives. Some focused on empowerment and trust, whereas others focused on profit sharing. The combined actions of executives contributed to and formed part of the WestJet brand. When executives were seen taking actions that were not aligned with WestJet’s values, those activities, too, had an effect on the WestJet culture. Every two weeks, Durfy and Ken McKenzie, executive vice-president of Operations, held informal meetings with a group of staff members. “What most airlines are missing is the people component,” McKenzie stated. “It’s not just numbers — on-time performance, getting the aircraft away on time — it’s the relationships.” Leadership teams at most airlines were “populated by incredibly smart people who know how to run a business,” said McKenzie, but he added that most seemed to miss the significance of

5

Peter Verburg, “Prepare for Take-off,” Canadian Business, 2000, p. 96. http://www.financialpost.com/story.html?id=1200493, accessed June 2, 2009. 7 Peter Verburg, “Prepare for Take-off,” Canadian Business, 2000, p. 96. 6

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Beddoe, who encouraged employees to address him as Clive, insisted that WestJet’s corporate culture was the primary reason for the airline’s superb performance. “The entire environment is conducive to bringing out the best in people,” explained Beddoe.5 “It’s the culture that creates the passion to succeed.” Durfy echoed a similar sentiment: “For us, that’s the key driver to our success.”6

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I just had a hellish night last week and the Director of Flight Operations just sent out an email to the crew and myself, thanking us for our efforts and showing a bunch of data on how it helped the customers and company recover. It’s the little stuff like a boss taking the time to do such a thing in the busiest time of the year, or the fact that the crew actually had a good time doing it because the night was just so bad we had to laugh it off. Somehow that little gesture from above rubs off and reciprocates. The culture is the people, and the people having 100% accountability with 0 excuses.9 Recognizing employees for their hard work was a task that management took seriously. For example, Durfy and his team were known to show up at the Calgary Airport to distribute buttercream cupcakes to WestJet employees. Traveling through the entire airport with the cupcakes stacked on luggage carts, Durfy ensured that every employee received a cupcake, from the ticket counters to the baggage-handling operations.10 The commitment to nurture a culture about caring extended beyond thanking flight and crew members for a job well done. WestJet had a group called CARE, or Creating A Remarkable Experience, whose purpose was to propagate the culture throughout WestJet’s operations. CARE helped WestJetters produce videos and plays that entertained staff. It planned more than 250 events a year, including the profit-sharing events, the twice-annual events at which WestJetters received their profit-sharing cheques face-to-face from a WestJet executive as a personal thank you.11 According to Don Bell, one of the founders of WestJet, one of the keys to reinforcing an “intelligent” culture was to re-label tasks and responsibilities. WestJetters were passionate about using the “right” language in treating their guests and working with their colleagues. For example, the call center was dubbed the “Super Sales Centre”; accounting was referred to as “Beanland”; executives were called “Big Shots”; passengers were “Guests”; employe...