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Dec 12, 2018

WestJet says it's co-operating with watchdog's predatory pricing probe

WestJet CEO Ed Sims: Business not performing at levels I'd like to see

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MONTREAL -- Flair Airlines chief executive Jim Scott says predatory pricing and scheduling by rival WestJet Airlines Ltd. (WJA.TO) placed his budget carrier in jeopardy, as a "David and Goliath" battle over the past six months has culminated in an investigation by Canada's competition watchdog.

On Tuesday, the Federal Court of Canada's chief justice ordered a WestJet vice-president to appear before the Competition Bureau to explain the airline's tactics, the latest development in a probe launched in the fall.

Scott said WestJet and low-cost offshoot Swoop used anti-competitive practices to crowd out Flair from several smaller markets including Saskatoon, Thunder Bay, and Kamloops.

"Whenever we go into a market, WestJet or Swoop will go into the same market with a lot of inventory, low-cost," he said in an interview.

The ultra-low-cost carrier lost about $10 million between mid-June and mid-October as a result, he claimed.

"This is a case of David and Goliath. We're here trying to provide a service to Canadians, and the entrenched incumbent is basically trying to keep a new player out of the marketplace.

"If the Canadian government didn't step in in such a timely manner, it would have been very difficult for us to continue," added Scott, who filed a complaint to the commissioner in October. "It has to end."

WestJet said in an email it is "compiling information" in response to the probe.

The Federal Court has ordered the Calgary-based carrier along with Swoop to provide the Competition Bureau with detailed pricing and other records including emails.

Interim competition commissioner Matthew Boswell states in a Dec. 5 court 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."

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.

Boswell notes that WestJet created an Edmonton-Hamilton route only after Flair did, and then ramped up capacity via Swoop's 14 flights per week versus Flair's seven. Swoop advertised all-inclusive fares for as low as $69 starting in June, compared to WestJet's $149 fares the summer prior.

Flair's CEO said his rival's pricing and scheduling practices forced his airline to drop all service at the Hamilton airport in October. On flights between Edmonton and Abbotsford, meanwhile, WestJet flight offers starting at $39 cost Flair $2 million between June 20 and Oct. 15, Scott said.

WestJet vice-president of pricing and revenue management John Weatherill is slated to appear before the commissioner in 2019.

The company has drawn the attention of competition authorities before, but in the role of David rather than Goliath. In 2003, the Competition Tribunal ruled that Air Canada engaged in anti-competitive behaviour with WestJet, then a low-cost regional upstart.

That case helped set a precedent for "avoidable costs" -- costs that could be avoided if the dominant airline opted not to offer certain flights.

Analyst Chris Murray of Altacorp Capital cited the "cost and distraction" of the investigation as a "negative."

"As well, any finding could create a monetary penalty or impact the company's continued roll out of its Swoop ultra-low cost carrier division, impacting growth and earnings in 2019 and beyond," Murray said in a note to investors.

Nonetheless, WestJet shares jumped nearly five per cent to close at $19.23 on the Toronto Stock Exchange Wednesday, up from $18.36.

Canada's second-largest airline experienced a turbulent 2018 that saw profits plunge due to soaring fuel costs, labour unrest, and steep competition at home and abroad.

CEO Ed Sims is hoping to lift his lagging revenues over the next four years, last week predicting earnings growth of 40 per cent on a per share basis between 2019 and 2022.