Brian Dunn/MONTREAL
The skies over Canada have changed dramatically since Air Canada took over Canadian Airlines last January. Although the flag carrier now controls over 80% of the domestic market, several new or expanding airlines now want a piece of the action. Clearly some will survive, while others may be forced to merge or could go bankrupt. The smart money is backing low-cost WestJet of Calgary and Canada 3000 of Toronto, a charter airline that has metamorphosed into a scheduled carrier.
Canada has long been home to North America's biggest charter sector, while WestJet is one of the continent's most effective low-cost operators after Southwest Airlines of the USA. Now the two sectors are targeting further growth as they bid to fill a vacuum left by the Air Canada/Canadian Airlines merger. The Can-adian market is more open to new competition than it has been for years, especially given Air Canada's failure to find a buyer for Canadian's subsidiary, Canadian Regional Airlines.
Much attention has been focused on WestJet's expansion into eastern Canada to fill a void left by Canadian Airlines. Since WestJet began operations five years ago, it has thrived and grown primarily because of the strength of Alberta's oil and gas economy.
Its load factor was 77.6% on its 120-seat Boeing 737-200s at the end of October, up from 72.3 % a year earlier. Because it does not have a frequent flyer programme, it competes with Air Canada by offering deep discount fares with few restrictions. By mid-January, WestJet will serve 16 cities across Canada: 12 in the west and four in eastern Canada.
Based closely on the Southwest Airlines model, WestJet operates a fleet of 18 737s but has ordered up to 70 Next Generation 737s for delivery over the next eight years. In addition to flying one type of aircraft, WestJet keeps costs down by using the internet to sell tickets, offering electronic ticketing, providing no meals, offering minimum in-flight service, having no airport lounges or partner airlines and hedging aggressively against rising fuel costs. Profit sharing replaces wage increases and is equivalent to 30% of an employee's salary. WestJet also offers a stock plan that lets employees invest up to 20% of their wages, with the airline matching their contribution.
The programme has brought humour to flying to encourage customer loyalty. Boarding passes are "bumper stickers" with slogans such as: 'My other jet is a CF-18' or 'I brake for UFOs' and 'If you can read this, you're flying too close.' Party games are used to decide which side of the aircraft deplanes first.
The airline must be doing something right. Revenue has increased 5.5 fold since it launched in 1996 and it has registered 14 consecutive profitable quarters. And since it went public in July 1999, WestJet's share price has risen 179%.
WestJet will survive and prosper, says airline analyst Ted Larkin of HSBC Securities (Canada), because its successful business model replicates Southwest Airlines'. He says WestJet's operating margins are double most competitors' and traffic was up 60% in the first 10 months of the year while seat capacity grew 50%. "They are trying to stay out of Air Canada's face by going after the infrequent flyer who normally wouldn't fly but travel by bus, train or car," says Larkin, "They also fly to Hamilton instead of Toronto which is Air Canada's main hub and they're not flying to Montreal which is Air Canada's head office."
Larkin says Canada 3000 is also trying to stay clear of Air Canada by continuing to concentrate on its 90 destinations worldwide and by not beefing up frequencies too much on Air Canada's main domestic routes. Canada 3000 continues to enjoy an industry-leading load factor of around 85%, the analyst says.
Canadian losses
In the 12 years since Canada 3000 has been operating, Air Canada and Canadian have lost a combined C$3 billion ($2 billion) and 14 domestic airlines have gone out of business, notes its founder and president Angus Kinnear. At the same time, Canada 3000 has been profitable for 11 of those years, says Kinnear, who once worked for Sir Freddie Laker.
His philosophy is to maximise the use of his leased fleet of five Boeing 757s, six A320s and four A330s, keeping them in the air for up to 16 hours a day, seven days a week. He has 10 more leased A319s or A320s arriving over the next three years and is adding frequencies in Canada and overseas, including Brisbane and probably New Delhi next year via the polar route.
Canada 3000 is positioning itself between Air Canada and the low-cost carriers such as WestJet, CanJet of Halifax and Royal Airlines of Montreal.
Royal Airlines is the oldest surviving challenger to Air Canada. It began operations in 1979 and went public in 1993, the same year it introduced flights between Canada and Europe. Like Canada 3000, it began as a charter operator, but was transformed into a domestic scheduled carrier in October 1999, in response to the restructured Canadian marketplace. It mainly operates between Toronto, Montreal, Ottawa, Winnipeg, Halifax and Vancouver.
Last April, it was selected by the Canadian Transport Minister to serve the UK and France on a seasonal scheduled basis to provide competition to Air Canada. It also has interline agreements with 12 international carriers, including British Airways. As part of its strategy to be the main alternative to Air Canada for business travel, in September it drastically increased frequency between its Canadian destinations.
On 1 December, it begins "Royal Plus," a new service offering business passengers more legroom and enhanced service for an added fee of between C$40 and C$120. Royal's fleet consists of 10 737s, three 757s and four A310s. It is adding four 737-200s to increase frequencies on its eastern Canadian routes.
The newest airline to enter the fray is CanJet, owned by maintenance specialist IMP Group of Halifax, which began services in September. It operates six 737-200 Advs with three more being added between next February and April from US Airways Leasing and Sales. It mostly operates in eastern Canada, but flies as far west as Winnipeg, Manitoba. Like WestJet, CanJet expects to keep costs down with lower wages and by piggybacking on IMP's aircraft maintenance bases. In-flight services will be kept to a minimum with no meals.
Larkin feels CanJet and Royal would lose most by challenging Air Canada directly on home turf. An industry source told him that privately-held CanJet's load factors are less than break-even, which is normal for a new carrier.
"But CanJet has grown faster than WestJet which could spell trouble because they may have taken on too much capacity too quickly. The question remains how long will IMP Group hang in there?"
Maybe not much longer. CanJet is the first of the upstarts to show signs of stalling. It has already dropped its Toronto-Windsor, Ontario route and warns it may cease operations entirely, claiming it can't compete with Air Canada which has slashed fares by up to 80% on the routes CanJet flies. Although the fledgling airline won a court case against Air Canada for its predatory pricing, CanJet says it may shut down if the decision is overturned. "CanJet's operations are not sustainable at the projected loss attributable to Air Canada's targeted discount initiative," CanJet warns in an affidavit.
Increasing frequencies
Larkin feels Royal's game plan of increasing frequencies on its main domestic routes (and where Air Canada is extremely protective) could be a mistake. But he wonders how aggressively Air Canada can protect its turf which is being closely monitored by Canada's Comp-etition Bureau. Still, Larkin notes Air Canada is a formidable competitor. It has a mainline fleet of over 240 aircraft and a diversified revenue base divided almost equally between its domestic, trans-border and international routes. It will not easily give up market share and, unlike its new competitors, it offers high frequencies and aeroplan points programme.
Next spring, RootsAir plans to get off the ground with two A320s, growing to six in its first year. The airline will be operated by privately-owned Toronto-based charter airline Skyservice Airlines Inc. This airline has already raised C$35 million and is modelled on Virgin Atlantic. It plans to fly between Canada's eight major cities and trans-border, beginning with Los Angeles, offering business class service at slightly above economy fares. Larkin says it will not have the frequencies to pose a threat to Air Canada. "But there will be some turbulence at the low-end, low-yield market. It remains to be seen if CanJet and Royal can be low-cost carriers in this market and not just low-fare ones."
Air Canada does not seem too concerned with this sudden rise of new competition. "The pricing at the low end of the market is going after the bus, car and train market," says Air Canada president and chief executive Robert Milton. He adds: "WestJet is secure, but there will be a shakeout and a tremendous battle between Royal and CanJet."
Source: Flight International
