Discount airlines are coming. Sound familiar?

A new crop of cheap carriers is coming to shake up Air Canada and WestJet’s duopoly—but it’s unclear if that’ll work this time around

Bruce Bennett/Getty Images

Bruce Bennett/Getty Images

The Canadian business landscape has been visited by a rare species of late: the wide-eyed airline entrepreneur. After nearly a decade of watching Air Canada and WestJet Airlines effectively split the country’s air-travel market into a cozy duopoly, two groups of industry veterans are trying to launch new discount carriers that promise more flight options for air travellers and super-cheap airfares.

One proposal, dubbed Jet Naked, is led by WestJet co-founder Tim Morgan, who left that company in 2005 and later started his own Calgary-based charter business called Enerjet. The plan is reportedly to fly a fleet of three Boeing 737s on underserved routes and lure customers by advertising airfares as much as 60 per cent lower than the competition’s. Meanwhile, in Vancouver, another industry veteran, Dave Solloway, is proposing a similar “ultra-low-cost” carrier called Canada Jetlines. He says the idea is to keep base fares at rock bottom by offering passengers “a seat and a seat belt” and nothing else—unless they pay extra. “You build an airline that people want to fly on; you don’t build the airline of your dreams,” he says.

The model isn’t altogether new, of course. Ireland’s Ryanair popularized the bare-bones approach in Europe over the past decade, while Spirit Airlines and Allegiant Air later successfully imported it to the United States. But Canadians have so far missed out on the experience of flying the equivalent of, say, New York to San Francisco (Oakland) for US$320 return—largely because Air Canada and WestJet don’t believe the flying-cattle-car approach suits a vast, sparsely populated country, not to mention their bottom lines.

While Canadians will no doubt welcome the promise of cheaper flights, experts warn that the newcomers face an uphill climb in a country where airlines go bankrupt far more often than not. In just the past nine years, three airlines have gone out of business or stopped scheduled flights: Jetsgo, CanJet Airlines and Harmony Airways. More important, the new entrants could find themselves fighting it out at a time when Canada’s once impressive-looking economy is on the wane. “None of these guys are economists, so it doesn’t factor into their analysis,” says Ben Cherniavsky, an analyst at Raymond James. “They all think airlines are a growth business.”

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Despite the long odds, Solloway argues the Canadian market is ripe for a shake-up. Both Air Canada and WestJet recently reported healthy profits in the second quarter—$223 million and $51.8 million, respectively—and are flying their planes fuller than ever. Airfares, meanwhile, have generally been on the rise in recent years, leaving air travellers grumbling. Cherniavsky says fares drifted upward by as much as 25 per cent between late 2010 and the spring of last year, although they’ve come down slightly since.

The business plan for Canada Jetlines initially calls for flying two Airbus A-319s or A-320s between smaller cities such as Prince George, B.C., and Regina, while making use of cheaper secondary airports, such as the one in Abbotsford, B.C., to serve larger cities like Vancouver. Eventually, the plan is to add 14 more planes and expand service across the country, Solloway says.

But wooing passengers with low fares is the easy part, as Jetsgo once demonstrated with its now-infamous $1 fare promotions. The challenge is making a profit. Key to the whole operation is generating sufficient “ancillary” revenue to offset lower ticket prices by charging fees for checked bags, schedule changes and on-board snacks and drinks, among other things. To get an idea of how far some are willing to go, consider that Spirit Airlines now charges up to $45 for each carry-on bag, while Ryanair CEO Michael O’Leary has mulled charging passengers to use the toilets. A spokesperson for Enerjet declined to comment on the specifics of the Jet Naked plan, although it’s believed to be contemplating a similar approach.

Even so, many analysts are doubtful there are enough underserved markets left in the country for a third national airline to successfully exploit, let alone a fourth. “WestJet looked at these [Canadian] routes and, if they thought there was sufficient traffic to support three or four daily trips with a 737, they would have done that,” says Fred Lazar, an associate professor at York University’s Schulich School of Business. While it’s true WestJet has more or less abandoned its discount airline roots—it no longer uses a single aircraft type to keep maintenance and training costs down, for instance, and it’s getting into the complex partnerships with foreign airlines that it once avoided—it’s hardly the big, bloated mess Canadian Airlines or Air Canada were when WestJet first brought discount airfares to the Canadian market in 1996.

More important, most of the innovations Solloway and others are discussing have already been adopted by Air Canada and WestJet, to varying degrees. Both offer pay-as-you-go pricing for snacks, upgrades and checking a second piece of luggage, and neither is above figuring out ingenious ways to pack more people onto their planes—the other main weapon in the ultra-low-cost carriers’ arsenal. Spirit, for example, crams 178 economy class seats onto its Airbus A-320s in a bid to spread the cost of flying among more paying customers, whereas Air Canada’s A-320s hold just 146 seats in a mix of business and economy. However, Air Canada also flies several “high-density” Boeing 777s on overseas routes that carry 458 passengers instead of the usual 349, thanks to new economy class seats that are three centimetres narrower. Meantime, the Boeing 767s flown by the airline’s discount subsidiary, Rouge, have about 51 more seats than usual. Air Canada CEO Calin Rovinescu has already threatened to use the bigger, denser Rouge jets on domestic routes to do battle with any new low-cost competitors.

Solloway, however, argues that a pure, ultra-low-cost approach has never been tested in Canada. And he dismisses the usual argument that Canada’s expansive geography and sparse population make the model unworkable—the idea that passengers require free beverages and seatback entertainment to endure a five-hour flight from Toronto to Vancouver. If that were true, Solloway says, Canadians wouldn’t drive to airports on the other side of the border to avail themselves of cheaper U.S. flights. A 2012 Conference Board of Canada study estimated that as many as five million Canadians make the trek every year, a phenomenon that’s also attracted the attention of Texas-based Southwest Airlines, which is eyeing Canada as part of its cross-border expansion plans. “Can Canada support another [regular] airline? The answer is: absolutely not,” Solloway says. “But can it support an ultra-low-cost carrier that champions non-stop jet service, safety and cheap airfares? Absolutely.”

New airline launches have a nasty habit of making mere millionaires out of billionaires, to paraphrase Richard Branson (whose Virgin brand name graces three different carriers). Canada, with its high taxes and vast territory, may be tougher than most. But cash-strapped air travellers take heart: Someone is finally trying to save you money again.




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Discount airlines are coming. Sound familiar?

  1. “Both Air Canada and WestJet recently reported healthy profits in the second quarter—$223 million and $51.8 million, respectively”

    Healthy for the airline industry, perhaps. Still, $51.8 million earnings on revenue of $930 million is only 8% margin. Most industries typically need margins of 30%+ to make a viable business. Each new 737 lists at about $80-90 million – capital intensive, high fixed labour costs, wildly variable fuel prices as a key cost – kind of amazing anybody bothers to run an airline at all!

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