MIAMI – Canadian low-cost carrier (LCC), WestJet Airlines, has placed an order for up to 20 Boeing 787-9 Dreamliners, in a deal worth up to $5.4 billion at list prices.

The agreement consists of 10 firm orders for delivery between the first quarter (Q1) of 2019 and December 2021, with a further 10 purchase options for aircraft to be delivered between 2020 and 2024. WestJet has selected the General Electric GEnx-1B as the engine for its Dreamliners.

As part of the agreement, WestJet has also converted 15 firm orders for the Boeing 737 MAX narrowbody which were scheduled for delivery in the same timeframe (2019-2021) to purchase options for delivery slots between 2022 and 2024. WestJet still retains orders for 50 737 MAX jets with the first four scheduled to be delivered this year.

“This order represents an exciting new chapter in WestJet’s history,” said Gregg Saretsky, WestJet President, and CEO. “We have carefully executed on our strategic plan, first launching WestJet Encore to connect smaller communities across Canada to our growing network followed by our successful venture into wide-body flying to Hawaii and London Gatwick. Now, with the most sophisticated commercial airliner available, we turn our attention to further growing our international presence and introducing, even more, travelers to our award-winning guest experience.”

“We welcome WestJet to the Dreamliner family and look forward to the new destinations they will serve,” said Ray Conner, Vice Chairman of The Boeing Company. “WestJet, for its entire 21-year history, has been a loyal all-Boeing jet customer and we’re excited to see them expand their fleet with the 787.”

The 787 will help iron out the issues that WestJet faced with its 767 operations, but its size induces risk

WestJet’s fleet of four Boeing 767-300ER aircraft was added in summer 2015, and currently flies year round from London Gatwick to Toronto and Calgary, and seasonally in the summer from Edmonton, Vancouver, and Winnipeg (all less than daily). In the winter, some of the 767s are switched over to serve Hawaiian routes such as Edmonton – Maui, and Calgary – Honolulu.

Financially, these routes have clearly been successful enough to justify further expansion on longer distance flying, but their operation has been far from perfect. WestJet has faced intense reliability issues and rising maintenance costs on its 24-year-old 767s, leading to several canceled flights and weak overall operational performance.

Despite these teething problems, WestJet clearly believes that there is a market here. The challenge for WestJet is that going up from the 262 seat 767-300ER (24 Y+ / 238 Y) to the likely 330+ of the 787-9 is a huge step up in capacity. And no one has really de-risked low-cost long-haul to Asia and South America (cited as potential 787-9 destinations), though Air Canada Rouge is trying.

We still don’t know if long-haul low-cost can work in the Canadian market, and that adds risk to this transaction.

The radical overhaul of WestJet continues apace

The 787-9 order is the culmination of a five-year transformation for WestJet, that has seen the LCC evolve from its Southwest-esque origins into functionally a network carrier, not unlike Alaska Airlines in the United States or Virgin Australia in Australia.

WestJet, like most LCCs around the world, began its business in 1996 flying a single family of mainline aircraft (initially 737-200s) between large Canadian cities like Calgary and Edmonton. Over the next decade and a half, WestJet upgraded its fleet to 737 Next Generation (737NG) jets across three variants seating 113-168 seats. The carrier’s initial focus was in Western Canada at its home base of Calgary and to a lesser extent at Vancouver.

In the mid-2000s WestJet shifted its business model to include more of an East Coast nexus, and Toronto is now its second largest hub by capacity and daily departures (Vancouver is third largest). This added new cities like Moncton and Charlottetown to WestJet’s network. But by 2010 or so, WestJet had run out of domestic and transborder cities to grow into.

Lack of growth is frequently a death knell for LCCs because their structural costs naturally rise as a young (in terms of experience) workforce ages. Normally the way to avoid this problem is to grow really fast, which works reasonably well for airlines in large markets like the United States (Southwest pulled off the growth trick for 40+ years) or Europe (Ryanair still has plenty of runway). But in a limited, mature market like Canada, there are only so many flights within the range of a 737.

This is where Encore, WestJet’s regional operation flown by Bombardier Dash 8 Q400 turboprops came into play.

Encore opened up both service to smaller cities like Kamloops and Brandon, as well as higher frequency service on business routes. Launched in June 2013, Encore has been a smashing success with large route portfolios at Calgary and Toronto, and the operation now encompasses 35 destinations (33 in Canada, 2 in the US) with a fleet of 38 Q400s (and 7 more on order).

Moreover, there is plenty of room for transborder growth, particularly from Toronto to smaller U.S. cities in the Northeast and Midwest. The Q400 could also be a credible growth aircraft for domestic services at arguably the only hole in WestJet’s Canadian network, Montreal.

In addition to growing in smaller destinations, WestJet also made the decision in the same year to spread its wings and test out longer distance flying. In the long run, WestJet knew that it needed new sources of revenue and the 737 operations to Dublin from Toronto via St. Johns (Newfoundland) and Glasgow on a Toronto – Halifax – Glasgow routing.

In 2014, buoyed by initial success on those routes, WestJet expanded by adding the 767s, and despite the challenges outlined above, it has now positioned its business for aggressive future growth.