Ultra low-cost airlines may finally be ready for takeoff in Canada

The list of airlines that have spectacularly failed in the notoriously turbulent — and expensive — Canadian aviation industry is a long one.

There was Zoom Airlines Inc., which at one point offered one-way fares between a handful of Canadian cities and Glasgow or London for $199. It hit financial problems when the price of jet fuel soared during the 2008 recession, leaving hundreds stranded when it abruptly suspended operations.

Before Zoom came Jetsgo Corp., which was still taking reservations mere hours before it filed for bankruptcy protection. Its claim to fame now is less about the $1 fare promotion it offered, and more about the 17,000 passengers left holding their bags when it went under in 2005.

And then there was Canada 3000 Inc., which charged $69 for flights between Toronto and Montreal, even though it cost the airline $122 per person. It conked out in 2001.

As Raymond James analyst Ben Cherniavsky said in a report released earlier this year: “It’s easy to start an airline that lowers fares, stimulates demand, and fills planes. What’s hard to do is this while also making good money.”

That has certainly been the case in Canada, the last G7 nation without an ultra low-cost carrier (ULCC), a distinct type of airline that keeps fares as low as possible while charging for extras such as assigned seats and carry-on luggage. But all that is about to change.

 

Despite some obstacles — including, among other things, contentious labour issues, a lawsuit related to “cybersquatting” and questions about funding — at least two new ULCCs are set to take off, and many analysts think they should be here to stay.

Flair Airlines Ltd., a Kelowna, B.C.-based charter service that acquired seat reseller New Leaf Travel Co. Inc. last year, is already flying and is in the midst of adjusting its operations to be more ULCC-focused.

It will face increased competition next month when Calgary-based WestJet Airlines Ltd. officially launches Swoop, an airline within an airline that will be distinct from the company’s mainline operations. 

There are also two aspiring carriers hoping to join Flair and Swoop: Both startup Canada Jetlines Ltd. and charter carrier Enerjet received a foreign-ownership exemption from the federal government to raise the limit of shares held by foreign investors to 49 per cent from 25 per cent. Both are hoping to finish raising the needed funds to launch in the near future. 

 

 

“We definitely have a market for it in this country. I think we need to have a ULCC,” said Robert Kokonis, president of aviation consulting firm AirTrav Inc. “Yes, we have all these factors that are conspiring against us, but even given the taxes, fees, charges and economies of scale, there are a lot of people who don’t travel at all and cannot be satisfied by Air Canada- or WestJet-branded fares.” 

There are many reasons why Canada hasn’t had a ULCC to this point, including a sparse population spread over a massive geography, and taxes and fees that are higher than in other countries where ULCCs have set up. The hefty costs apply to all airlines in Canada, but they can make it especially difficult for ULCCs, which need to keep operating costs as low as possible in order to offer the lowest possible fares. 

According to Cherniavsky’s analysis, the most expensive airport based on a cost-per-enplanement (CPE) basis is Montreal at $45.38. The average CPE for major airports in Canada comes in at $40.99, 50 per cent more than the average for the 10 most expensive U.S. airports and about nine times more than the average for the 10 least expensive U.S. airports. 

“Adding it all up, we see Canada’s very high taxes and airport expenses — combined with the small and dispersed size of the market — to be a major impediment to any highly successful growth-oriented ULCC,” Cherniavsky said in his report. 

 

Still, analysts and airlines alike see opportunities for ULCCs. 

The Conference Board of Canada estimates about five million Canadians each year cross the border into the U.S. to take advantage of cheaper flights offered by the likes of Spirit Airlines Inc. and Allegiant Air.

Chris Murray, an analyst at AltaCorp Capital Inc., estimates the market in Canada for a ULCC is made up of 10 million price-sensitive passengers, enough for roughly 50 Boeing 737 aircraft, or two to three airlines.

These passengers, Murray said, aren’t the same ones that Air Canada’s and WestJet’s mainline are targeting. ULCCs will stimulate the market, not cannibalize it, he said, although there will likely be some passengers shifting to ULCCs.

“A low-cost-carrier model isn’t going to cut it,” he said. “It’s flying RyanAir versus Air Canada. It’s a different airline, and a different experience. You are stimulating passengers because of price, as opposed to stimulating price because of service level.”

But the journey to launching Canada’s first ULCC hasn’t been easy. 

For example, both Swoop and Jetlines have already delayed their initial 2017 launch dates.

Swoop has now marked June 20 as its starting date, but even that is potentially at risk depending on how labour negotiations with its new pilots union unfold in the coming days and weeks. Flair is also in the midst of negotiations with Unifor 2002, the union representing its pilots. This week, members of that union voted in favour of strike action, if necessary.

Jetlines delayed its June launch after a lease for two Boeing 737 aircraft fell through. Since then, the company has said it concluded a term sheet to lease two Airbus A320 aircraft, making a deposit of US$876,000. The aspiring airline will provide an update once a definitive lease agreement for those jets is reached. 

Flair Airlines is already flying, and will begin using all seven of its aircraft for commercial service beginning June 15, when it launches a new schedule and completes its outstanding charter-service contracts. 

Still, Flair has faced some customer service issues and is in the midst of a legal battle over an alleged cybersquatting incident. 

In the months after Flair acquired airline seat reseller New Leaf, its website was allegedly taken hostage by a consulting company, potentially costing the airline hundreds of thousands in sales just as it began ramping up its ULCC operations. 

The details of the cybersquatting incident were revealed in a civil lawsuit filed on March 20 by Flair in the U.S. The lawsuit is against two companies — web designer Gregor LLC and travel company Vacabo Services LLC — and director Dusan Milisevic and his partner Froska Miteva.

The lawsuit alleges Milisevic refused to turn over control of Flair’s website unless the airline paid him US$400,000 for “alleged outstanding invoices and as a termination fee.” The loss of control of its own website caused Flair “substantial losses and irreparable harm”, the complaint said.

The lawsuit said Flair’s new chief executive Jim Scott found there were delays and that many customer complaints and inquiries were never addressed. When Scott conducted a site inspection in Chicago, where the call centre was based, the complaint said he found one person staffing it. He was also allegedly told “that Vacabo was dropping an estimated 75 per cent of all inbound calls a day.” 

In a response to Flair’s lawsuit, the defendants denied most of the allegations outlined in the claim. They also filed a countersuit, alleging breach of contract, unjust enrichment and breach of fiduciary duty, and are seeking hundreds of thousands of dollars in damages.

Stephen Boulton, a lawyer who represents the defendants in the case, said “Flair has presented a very inaccurate version of what happened between these parties” and that the US$400,000 accounts for expenses his clients are owed by Flair. The case is ongoing. 

In the meantime, Scott is focusing on shifting Flair’s operations to be more ULCC-centred and educating customers on what that kind of experience actually entails — something he admits has been a challenge. So far, he said, passengers are still expecting the full-service experience you get on a mainline carrier.

“One of the biggest issues of contention is that when people showed up late for their flight, they didn’t realize that at the price point they paid, it didn’t include rebooking for a different price,” Scott said. “We’ve had to explain that this is why you’re getting a lower price. You’re not going to get all the options you normally do on that ticket.”

Before Scott’s arrival at Flair in January, the airline stopped charging passengers who wanted to bring carry-on luggage, a common practice at ULCCs around the world. It’s a move he believes was a mistake and Flair will gradually re-introduce the fee into the system going forward. 

Scott said Swoop’s entry into the market could help Flair in terms of consumer education and raising awareness. 

“The market is big enough,” he said. “We’re seeing that in today’s market, when our competitors are lowering their prices at the same time of day that we’re flying, we’re still able to fill our aircraft.” 

Kokonis at AirTrav believes two ULCCs can survive in the Canadian market, in addition to the basic economy fares being offered by Air Canada and WestJet. Jetlines, he said, will not likely be one of those two.

“I believe Swoop will get past their labour issues and, providing it can withstand the competition from Swoop, there’s a reasonable chance that Flair can survive,” Kokonis said. “The odds of Jetlines launching are much diminished.” 

Cherniavsky said in his report that “Swoop will make it very difficult for any other ULCC to stay in the air or get off the ground.” 

According to Jetlines’ year-end financial statement, the airline reported a loss of nearly $9.1 million from continuing operations. It spent $2.3 million on aircraft launch activities, including the leasing of initial aircraft, more than $1 million on general and administrative expenses and more than $600,000 on marketing.

Jetlines, in its December 2017 management discussion and analysis, acknowledged further financing will be key.

“The ability of the company to execute its build-out strategy and achieve operations will depend on acquiring substantial additional financing through debt financing, equity financing or other means,” the company said.

“Failure to obtain such financing may result in the delay or indefinite postponement of such growth strategy or even impact the ability of the company to continue as a going concern.”

Calgary-based charter airline Enerjet is also still striving to transition its operations to a ULCC. Although Enerjet has not made any funding announcement recently, chief executive Tim Morgan — one of WestJet’s co-founders — said the company is moving ahead with plans to launch as a ULCC. 

“It’s still early days, but I think everybody agrees that the model will work at the right scale,” Murray said. “What’s different this time is you have two of the four potential entrants actually being operating airlines. That’s a different starting point.”