Skift Take

Canada has too much government regulation to allow EasyJet and Ryanair clones to flourish. But several new startups could produce lower fares for some Canadians.

Travel nearly anywhere in the world, and you’ll find cheap airlines offering no-frills service, from European giant Ryanair Holdings Plc to Peach Aviation Ltd. in Japan, flynas in Saudi Arabia and Spirit Airlines Inc. in the U.S. But head north of the border, and the aviation landscape is untouched by ultra-low-cost airlines.

Canada ranks among the world’s most expensive countries to fly, thanks in part to high airport and security fees and limited competition, and  service is meager in many small and medium-sized cities. More than 60 percent of Canada’s 36 million people live within 100 miles of the border, and many head south to fly; about 5 million  cross the border each year for cheaper flights.

“Griping about the cost of air travel in this country is as endemic as bitching about the weather—it’s as if nothing can be done about either of them,” a columnist for Canada’s  National Post wrote in June.

Some cheaper fares may be en route. Three companies are working to bring the ultra-low-cost model to the country, where air travel is dominated two national airlines, Air Canada and WestJet Airlines Ltd.

But higher operating costs make it hard for new airlines to survive, and the dominant airlines are sure to respond to upstarts offering lower fares. WestJet, for example, has already begun new nonstop service on two routes flown by the first of these newcomers.

Canada is one of just two nations in the Group of 20 largest economies without any ultra-low-cost carriers, or ULCCs. The other, Argentina, may see one next year as Irelandia Aviation Ltd.—the Dublin-based investment firm that has established ULCCs like Ryanair in Europe and Allegiant Travel Co. in the U.S.—aims to expand its low-cost airline group  Grupo Viva Aerobus  there. Canada also charges higher security fees than most other nations—up to $25 per passenger—and its 26 largest airports must make annual payments to their municipalities in lieu of local taxes.

A 2015 report to the Canadian transport minister, reviewing the nation’s transportation system, found air travel in Canada “marked by weak accountability constraints on fees and charges; high costs for users and operators; aggressive capital expenditure programs at airports; modest traffic volumes; and limited competition.” It recommended the government reform airport ownership structure and offer the aviation sector more federal financial aid, as the U.S. does. “There is no room for complacency,” it added.

Canadians are eager for the expanded service and lower fares that ULCCs could provide, said Jim Young, chief executive of NewLeaf Travel Co., a “virtual” airline in its sixth week of operations, with three Boeing 737s flying to secondary airports in 11 cities nationwide.  NewLeaf, based in Winnipeg, Manitoba, itself has no air certificates or airplanes. It sells tickets on an established carrier, Flair Airlines—a “ wet lease”  arrangement that lets NewLeaf escape many of the costly aspects of being an airline. Flair staffs and maintains the fleet and sells capacity to NewLeaf.

Canadians  “understand the business model—they understand the fees, they understand that you pay for what you consume,” Young said in a telephone interview.

Canada is among the most expensive places for air travel— 70th out of 75 nations, in terms of the average cost to fly 100 kilometers, at $38.71, according to data released this week by the online travel agency (Only Japan, the Netherlands, Qatar, Finland and the United Arab Emirates had more expensive fares, according to Kiwi; the U.S. was 17th, with India the cheapest place to fly.)

The country’s high airport fees limit the traffic-stimulating effect that lower fares can have for low-cost airlines elsewhere, but flying to smaller, cheaper airports increases the odds of success, said NewLeaf’s chairman Ben Baldanza, calling the company the “the only ULCC option that I have seen in Canada that makes sense to me.” Baldanza, who was previously chief executive at Spirit, is also a “small investor” in the Canadian startup and serves on the board of Iceland-based low-cost carrier WOW Air.

NewLeaf eschews Canada’s primary, higher-cost airports like Toronto Pearson and Vancouver International, just as Allegiant Travel Co. does larger U.S. airports. In Canada, secondary airport fees are generally far lower than those at major airports, which is why a low-cost airline such as NewLeaf looks to towns like Hamilton over Toronto, or Abbotsford instead of Vancouver, Baldanza said.

Price is the prime selling point in the ULCC model: Fares begin under $40, and in many cases well under $40. In China, for example, Spring Airlines sells tickets for as little as 99 yuan ($14.82). The U.S. has three such carriers—Spirit, Allegiant, and Frontier Airlines Holdings Inc.—and all have been expanding voraciously.

Because of Canada’s higher costs, fares there won’t be  as low as other nations enjoy. But executives at all three of Canada’s fledgling ULCCs say they aim to underprice Air Canada and WestJet by 25 percent to 35 percent.

Calgary-based Enerjet is a charter operator that flies oil- and gas-field workers in northern Alberta and does contract work for Air Transat, another Canadian charter carrier. Now, it is transitioning to the ultra-low-cost  model .

Enerjet has been “hunkered down” for more than a year amid the collapse in oil prices and western Canada’s depressed economy, said Darcy Morgan, the company’s chief commercial officer; his brother Tim, a WestJet co-founder, is its CEO.  The company leases three Boeing 737-700s and wants to begin a new ULCC tentatively called Flytoo. (It was first called Jet Naked  for its knack for drawing publicity, but that name was abandoned.) Enerjet is working to raise C$80 million ($61 million) and hopes to begin Flytoo service by year’s end.

A third company, Calgary-based Canada Jetlines Ltd., is trying to raise C$50 million ($38 million) and begin flying from major Canadian cities to U.S. sun destinations like Las Vegas, Phoenix and Los Angeles this year or next. Jetlines has ordered five new Boeing 737 Max aircraft  for its future expansion, with options for 16 more.

Initially, Jetlines plans to expand to a half dozen 737-700s in its first year and to list shares publicly. The airline plans to offer fares 30 percent cheaper than Air Canada and WestJet but also to avoid direct competition with both, said Jim Scott, Jetlines’ president and chief executive officer.

“The passengers that we [will] move are not the passengers that Air Canada and WestJet want, anyway,” Scott said. “The focus in Canada is on the business traveler or the frequent flier. I always say everyone who gets boarded before I get boarded is the [passenger] they’re interested in.”

During the winter, all three low-cost airlines will look south to Mexico, the U.S. and the Caribbean, as Canadians seek warmer-weather respites.

“I think there’s a chance to make more money in the winter than [NewLeaf does] in the summer,” Baldanza said of NewLeaf and its focus on smaller cities. “The reality is that people who live in Moncton want to get warm just like people who live in Toronto want to get warm in the winter.”

As with nearly any airline startup, financing has been lean for all three companies so far. Scott attributes that to Canada’s conservative investment climate—where preventing losses is paramount, dwarfing a focus on the upside potential, and where realism outweighs the dream of a huge payday.  And in a nation with near-duopoly air service, airline upstarts have had a spotty record, as well as some high-profile failures in the last 15 years—including low-cost operator Jetsgo and smaller leisure-oriented carrier Harmony Airways.

To help their funding efforts, both Enerjet and Jetlines have asked to be exempted from Canada’s 25 percent cap on foreign investment in airlines, in the hopes of selling as much as a 49 percent stake to non-Canadian investors. Those exemption requests are opposed by South Beach Capital Partners, an investment group formed by Manitoba First Nations indigenous peoples that took a financial stake in NewLeaf Travel in June; Canada’s transport minister is expected to decide on the requests later this year.

That foreign ownership cap was one of the aspects of Canadian air travel that last year’s federal transportation report pointed to, advocating for raising it. “In contrast to larger markets like the U.S., there may not be enough capital in Canada to finance 75 percent of a new national carrier,” said the report, overseen by David Emerson, a former Cabinet minister, Vancouver airport executive and member of Parliament. The report also recommended sweeping changes in airport funding, airport capital spending programs, security and visa systems.

Tim Morgan, the Enerjet CEO, thinks the Canadian market, once properly stimulated with low fares, could support “more than 50” planes flying in the ultra-low-cost model—“and maybe even 100, or more than 100,” he said in a telephone interview. “And that’s without affecting the major carriers.”

  1. This type of airline business model shift has an established track record, with several U.S. examples—including Frontier Airlines’ sale to Indigo Partners LLC, which converted it to the ULCC model.
  2. Darcy Morgan likened the moniker to a bottle of soda: Lots of initial fizz, but it could go flat quickly.

©2016 Bloomberg L.P.

This article was written by Justin Bachman from Bloomberg and was legally licensed through the NewsCred publisher network.

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Tags: canada, low-cost carriers

Photo Credit: A WestJet flight arrives in Toronto. Although it's a low-cost carrier, WestJet has higher prices than its peers in other countries. Martin Cathrae / Flickr