Apr. 15, 2003. 08:25 AM
SPYROS BOURBOULIS FOR CANADIAN PRESS
Michel Leblanc has challenged the airline industry's conventional wisdom before. But with his upstart discount carrier Jetsgo, he just might be pulling off a miracle.
Jetsgo smiles through industry's, hard times, Prides himself for pinching pennies, Skeptics question apparent success
Believe it or not, Michel Leblanc is ebullient. He's enthusiastic. He's even jovial.
Talking of his discount airline Jetsgo Corp. - the one, naturally, with the big green smiley face on the tail fin - he punctuates his sentences with a vigorous laugh. He slaps the table with his palm to emphasize his points, even the less-than-salient ones. If this guy isn't having a ball in the middle of one of the most tumultuous periods in recent airline history, he's doing a hell of a job faking it.
And if the thrill is genuine, then that makes him one of the few airline presidents in North America feeling at all good right now. A U.S. recession, terrorism, the war in Iraq and the outbreak of a mysterious new strain of killer pneumonia have crippled the air travel market, with some of the biggest in the business - such as Air Canada and United Airlines - facing bankruptcy.
But Leblanc is full of defiance, too. He's angry with the numerous skeptics who distrust his claims about how successful his Montreal-based airline is - and with those who have come right out and accused him of lying.
"I take a little exception," says Leblanc. "There was a reporter that said we were padding our load factor numbers. I said, `Look, guy, I don't have any obligation to release these numbers. I decided to do so and I welcome you to come with anybody that can figure out how to punch on the computer key'" - Leblanc abruptly cuts himself off. "I'll do it right now!" he announces.
With that, Leblanc leaps up and marches to the marketing department, which - like everything in this redbrick low-rise that shares a parking lot with the Quality Inn motel near Dorval airport - is a cramped, colourless huddle of cubicles. Leblanc orders one of the four young workers to print up the load factor (the percentage of seats filled) since the beginning of the month.
"You see, Air Canada couldn't do that," he says. "It would take them days." Moments later, the printouts are in his hand. "There you go," he says, keeping the papers close to his chest. "A 73.7 per cent load factor for the month of March. An airline with that kind of load factor - if you can't make money on that, there's something wrong."
Not surprisingly, Leblanc keeps the finer details of his business to himself. Jetsgo is a privately held corporation and, unlike publicly traded Air Canada and WestJet, he is not only entitled to his confidentiality, but can use it as something of a competitive advantage. Since Jetsgo first took to the skies in June, Leblanc has been making a lot of noise about load factors in the mid-70 per cent range (WestJet's are typically in the 60s), and that's information few private airlines release.
More recently, he's been crowing about the airline's profitability even as Jetsgo grows at a breathtaking pace - from three airplanes to a fleet of eight, and from just five destinations to 17, in barely 10 months. Leblanc even insists that his costs are 20 per cent lower than those of seven-year-old WestJet.
Yet competitors and industry watchers have found themselves at a loss to explain Jetsgo's apparent prosperity in the midst of one of the meanest eras in the business.
Statistics Canada reported in April that air travel last year had declined for the third year in a row, down by 5 per cent. Some say Leblanc is embellishing Jetsgo's success.
"The airline business is a confidence business," says one competitor, who requested anonymity. "He saw what happened when Canadian Airlines said they might not survive. He saw what happened when Canada 3000 said it."
Travellers and agents tend to boycott airlines that appear to be failing because buying tickets in advance becomes risky. (It's expected that many ticket holders left hanging by the 2001 bankruptcy of Canada 3000 will never get their money.) But Leblanc has got a lot of people talking about Jetsgo.
Running a discount airline isn't rocket science. And by all appearances, Leblanc has taken to heart many of the tenets that have propelled Calgary-based WestJet and U.S. discounters to tremendous success.
"We are a lean and mean organization," says Leblanc. He prides himself on being a penny-pincher. For instance, the unusual-looking black leather jackets worn by Jetsgo flight attendants save "a fortune in dry cleaning - now we're talking about putting in leather seats," he says. "It's a contrary image to a discount carrier and the capital upfront cost is higher, but it would save us so much dry cleaning. You can just wipe them down and they last three times as long."
Leblanc rented Jetsgo's bland head office for $15 a square foot - a fraction of the going rate for top buildings in Montreal - and it operates on a skeleton staff. His team is paid discount wages, too. Pilots earn $65,000 a year to start; full-service airlines typically pay six-figure salaries. Jetsgo doesn't issue any paper tickets, and operates a robust e-commerce business through its Web site, Jetsgo.net. About 90 per cent of Jetsgo tickets are bought online, Leblanc claims - he says it's the highest in North America. (Why dot-net? Because "dot-coms have a kind of negative aura," he argues.)
Like all viable discount carriers, Jetsgo flies just one aircraft type - in this case, the Boeing MD-83 - so the firm keeps parts inventories low and needn't train pilots on different planes.
By comparison, Air Canada has been unable to offer the same low fares as discounters CanJet, WestJet and Jetsgo at a profit, not only because of a larger and higher-paid labour force, but also because the carrier operates more than a dozen different types of aircraft. Its parts inventories are huge, and pilots often have to be trained on different aircraft, costing tens of thousands of dollars per pilot.
The fact that Jetsgo was launched after the Sept. 11, 2001, terrorist attacks is not accidental. "It was part of the opportunity," says Leblanc. "Right now, we're paying basically less than half of what these planes cost before Sept. 11 - and it's still going down." Analysts figure the MD-83s cost about a third as much to lease as WestJet's 737s.
"It's a very simple model, but it works as long as you achieve this low-cost proposition," says Leblanc. "You operate at the lowest cost possible and then transfer the benefit to the consumer, which makes it a huge force because you stimulate the market with low fares and you earn a profit. It works for WestJet, it works for JetBlue, and it works for Jetsgo."
`You operate at the lowest cost possible and then transfer the benefit to the consumer' Michel Leblanc, founder of Jetsgo
The formula works so well, in fact, that even while some of the continent's biggest airlines have stumbled into receivership, discount carriers like WestJet, Southwest Airlines of Dallas and New York's JetBlue have managed to stay in the black.
But then, they've been around a while, and followed more gradual growth patterns than Jetsgo has - it was three years before WestJet had eight airplanes. If Leblanc has managed to match all that success in just a few months - simple business model or not - the man is one of the most gifted airline managers in North America.
To be sure, Leblanc is an industry veteran and likely has learned a thing or two since 1978, when he started flying professionally for a forestry-spraying business he co-owned in the Gaspé. In 1986, he and two partners won control of regional carrier Quebecair after the provincial government privatized it. By 1990, newspapers were reporting that the airline, dubbed Intair, was profitable.
Though Leblanc himself didn't stick around much longer (he now says there was a divergence of strategy between him and his partners), by the end of the year Intair had lost millions and filed for bankruptcy protection.
Leblanc resurfaced in 1991 to create charter carrier Royal Aviation Inc., with partner Guy Bernier. After a decade of rapid growth - and, Leblanc says, profitability - Royal began challenging Air Canada as a scheduled domestic carrier after the giant's merger with Canadian Airlines. Rival Canada 3000 purchased Royal in early 2001 and handed Leblanc $84 million in company shares.
"The idea was to create a synergy large enough to provide some competition to Air Canada," says former Canada 3000 chief Angus Kinnear, who's now chief operating officer of USA 3000 airlines in Philadelphia. "The only way to do that was to acquire Royal rather than to keep pounding away competing with one another."
Shortly after the merger, Leblanc, who as vice-chairman was supposed to run the domestic operations while Kinnear ran the international flights, was fired, and the airline filed a lawsuit against him and Royal's former chief financial officer Roland Blais. In a statement of claim, the airline asserted that projections made by Leblanc that the Montreal airline was on course to earn $12 million in pretax profit for fiscal 2001 were not accurate. According to the suit, Royal was in default on payments on some of its aircraft leases; all the discrepancies combined made what was allegedly a pre-tax loss appear as though Royal was, as Leblanc still maintains, profitable.
"I guess it depends what books you were looking at," says Kinnear, who claimed Leblanc had refused to let him check financials before the merger for fear of revealing competitive secrets. Canada 3000 asked the court for $40 million in damages.
Leblanc, who denied all the allegations, countersued for the harm the lawsuit had inflicted on his reputation. But after Sept. 11, Canada's second-largest airline was forced into bankruptcy. None of the allegations against Leblanc was ever proved in court. After the bankruptcy filing, Leblanc offered to buy the former Royal back from receivers for $25 million, but was unsuccessful.
By liquidating most of his Canada 3000 shares before they ceased trading, however, Leblanc accumulated enough cash to start the airline he'd been dreaming of for years. "There are things I couldn't do with Royal that I can do with Jetsgo, because I started with a clean sheet," he says. "I could not transform Royal into a pure discount model airline because we were already committed to three kinds of airplanes, three inventories of spare parts, three types of trained mechanics, so we had an inherently high cost structure."
Still, there's more to discount airlines than keeping costs down with low wages and a standardized fleet. Analysts have long been impressed by Southwest's and WestJet's employees - the people who ultimately ensure not only that customers stay happy despite the no-frills ambience, but also that costs stay low by allying themselves with management and constantly working to help make the airline more efficient. "Southwest spends an extraordinary amount of time on recruitment," says Doug Reid, a professor of business strategy at Queen's School of Business. "But they had the luxury of starting slowly. Jetsgo's trajectory has been a bit more acute." WestJet, which had roughly 60,000 applicants last year to fill 900 positions, offers its employees profit-sharing and stock ownership plans, something that has made millionaires out of many of its long-time workers. At WestJet, pilots get out of the cockpit after landing and groom the airplane themselves; peppy flight attendants frequently entertain passengers with amateur comedy.
Jetsgo employees, who are largely ex-Royal workers, enjoy no similar benefits. "When you start up, you can't address every damn issue," says Leblanc. "But we're going to look at incentivizing our employees in stock ownership, profit-sharing, options or something. It's harder to do when you're private." To ensure that pilots did not defect to other airlines, Leblanc insisted that each one fork over $30,000 of their own money - a "training bond" - before learning to fly the MD-83s, money that will be repaid to them over the next three years. "I'm glad I did it," says Leblanc, "because some of them did leave." Even the leather jackets the flight attendants wear as uniforms must be paid for, in part, by workers themselves.
Some observers are highly skeptical about the claims Leblanc makes about cost structure and load factor. After less than a year in business, how can Jetsgo enjoy lower seat-mile costs than WestJet - particularly since almost all its aircraft are flown out of pricey Pearson airport in Toronto, while WestJet primarily uses low-rent Hamilton? That's easy, says Leblanc. The MD-83 is a bigger aircraft than the 737s WestJet uses, so the cost of the pilots, the plane and other overhead are spread over more seats.
"You might as well let the secret out," says Leblanc. "Damn, we're using a 160-seat airplane. The size of the airplane is so evident that it baffles me nobody mentions it in the press."
An executive at one of Jetsgo's competitors questions that logic. "If I buy 747s and fly them between Montreal and Toronto, does that mean I'm going to have even lower costs than him?" asks the executive, who spoke on condition of anonymity. Several observers note that MD-83s are less fuel efficient than the 737s most discounters fly, while some wonder whether Jetsgo's aircraft have too many seats for the marketplace.
Leblanc says no. His load factors, he argues, prove that the capacity is warranted. "Between Toronto and Vancouver, I'm flying my 160-seaters at a 90 per cent load factor," he says. "I don't need a smaller airplane, that's for sure."
But competitors question the significance of the load factor numbers. Because almost all of the upstart's flights use Toronto as a stopover hub, critics point to Greater Toronto Airports Authority data (released to all industry players) that record passenger counts for airplanes that come and go through Pearson. The figures indicate that most of Jetsgo's planes are lighter than the load numbers would indicate - suggesting the load factor calculus is being skewed by higher loads on the longer flights (the passenger load on one Toronto-Vancouver flight counts for more than six shorter-haul flights).
In any event, controversy over the value of load factor numbers is widespread in the industry, says Reid. "They're a little less clear than we would all desire," he adds. "They're more of an estimate than what is known."
Only Leblanc knows for sure how much Jetsgo is making. For now, even his critics don't question the man's perseverance. "Michel is a long-term survivor by whatever means," says Kinnear.
With the Canadian airline industry in the midst of a massive restructuring, there are bound to be opportunities where there weren't before. Winter is the hardest season for any airline, and it's not unusual for many players to incur losses while waiting for more profitable summer fliers.
"If they've made it this far, then they'll have no trouble making it through summer," says Barry Prentice, director of the Transport Institute at the University of Manitoba. Once the warmer weather goes, however, plenty of folks will be anxious to see if the airline with the big smiley face can manage to outlast a punishing marketplace - or if Leblanc's grin gets even wider.