Canada has rapidly lost two of its low-cost airlines, leaving WestJet as sole survivor. David Knibb looks at the lessons which should be learned and examines the prospects for any future Canadian new entrants.

Like a tree shedding leaves in autumn, two of Canada's three low-cost airlines - Greyhound Air and VistaJet - fell to earth in September. In the past year and a half the three carriers had between them revolutionised air travel in Canada, reversing a long decline in air traffic with passenger numbers doubling between some cities and 20 per cent growth nationwide. Because of these airlines, more people flew for the first time than in any other 18-month period in Canada's history.

These budget-conscious carriers did not only boost their own traffic. Air Canada and Canadian Airlines stimulated even more business when they matched the upstarts' low fares. Even as the majors were shifting more capacity overseas and to trans-border US routes, their revenue passenger miles within Canada grew 2.5 per cent compared to a year earlier when the new entrants were only just emerging.

Does the demise of Greyhound Air and VistaJet signal the end of this shortlived but tumultuous era, or is this simply a pause in the development of a more permanent differentiation between full service and low-cost Canadian airlines?

The reasons for Greyhound's and VistaJet's disappearance may provide part of the answer, especially when compared with the strategy of WestJet, which remains a stable, albeit sole survivor, among Canada's low-cost scheduled airlines.

Greyhound was bought out by Laidlaw for its intercity bus operations but Laidlaw wanted nothing to do with running an airline. Laidlaw's forte lies in various forms of ground transport, from garbage collection to school and tour buses. As one observer notes, 'Laidlaw is accustomed to dominating whatever it does, and it knew it could not dominate air services with Greyhound.'

But the reasons for Greyhound Air's demise run deeper. It needed and actively sought a deep pocket. Brent Statton, Greyhound's senior vice president for air services - the man responsible for Greyhound Air - admits it 'lost significant money in its first 15 months of operation.' Greyhound only made a modest US$72,000 profit during early summer over a three month period when loads were typically climbing. 'We'll never know whether Greyhound Air would have been successful financially,' says Statton.

Many reasons have been advanced for why Greyhound failed to do better. It did not have its own operating certificate; indeed, the regulatory wrangle over that delayed its launch by months and allegedly cost millions. Instead Greyhound chartered Boeing 727-200s with crews from Kelowna FlightCraft, using its operating certificate, which loaded it with extra costs. Some sources suggest Greyhound used the wrong aircraft, but Statton, an airline veteran, says the B727 was right for Greyhound's 950-mile average stage length, offered commonality with Kelowna's existing fleet and, unlike other types, could be maintained in Canada. Debates also continue about whether Greyhound's strategy of intermodal bus-plane feed was ever viable and whether it waited too long before allowing travel agents to make reservations.

But the most obvious point is the similarity between the east-west networks of Greyhound Air and VistaJet, which have both disappeared, and the contrast with WestJet's, which still survives. With one stop in the middle, Greyhound and VistaJet spanned the 1,800 miles between Canada's eastern triangle of Toronto-Montreal-Ottawa and its western triangle of Calgary-Edmonton-Vancouver. Except for Winnipeg and wheat fields stretching to the horizon, there is little in between. In contrast to that trans-prairie network, WestJet stayed firmly within the western triangle.

Local axiom

Clive Beddoe, president and CEO of Calgary-based WestJet, points his finger straight at this. 'Both [Greyhound and VistaJet] tried to offer low fares on a long-haul basis. That market is already supplied by some charter carriers. I don't believe you can stimulate that market again economically.'

The charters Beddoe refers to have become major players in Canada. A decade ago Toronto-based Canada 3000 and Montreal-based Air Transat and Royal Aviation carried only around 5 per cent of total traffic. Now they control 25 to 30 per cent. They take advantage of Canada's peak summer season to add frequencies on domestic trunk routes, then shift to sun destinations in the US, Caribbean, and Mexico during winter. Canada's charters exploit the local axiom that success comes from flying east-west in summer and north-south in winter.

Statton concedes the charter carriers took some traffic away from Greyhound, but claims Greyhound also took some from them. Who won that skirmish is unclear, but there is no doubt the charters depressed yield. 'In the markets where charters operate, even the majors have charter-competitive pricing,' notes Statton. Had Greyhound continued to fly, Statton says his emphasis would not have been on lowering costs - they were already down to about 8 Canadian cents per seat mile compared to the 11.5 to 13 cent range for the majors - but in boosting revenue. Too many promotional fares to make up for lost time and woo passengers away from the charters hurt Greyhound Air during most of its short life span, he says.

By contrast Mark Hill, WestJet's director of corporate planning, can boast: ' We haven't tried and won't try to compete with charter fares.' This is mainly because WestJet's network hardly overlaps with any charter routes. 'Charters offer some Calgary-Vancouver seats,' says WestJet's Beddoe, 'but we're not really competing in the same market'.

While head-to-head long-haul competition between the low-cost scheduled carriers and seasonal charters was a major cause for the demise of Greyhound and VistaJet, it was not the only one.

Based in London, Ontario, VistaJet launched service last May. VistaJet flew between the eastern cities of Toronto, Ottawa, and Windsor. Then, while struggling to break even there, it added east-west flights through Thunder Bay and Winnipeg to Calgary. Unlike Greyhound, VistaJet did not fly further west, but turned around at Calgary. Thus, its base and major emphasis remained the eastern triangle.

Experience has shown that triangle to be a black hole for every newcomer who ever tried it. Several factors conspire against them. First, the geography and demographics do not favour air travel. Flight times are an hour or less. As Statton notes, the major cities in eastern Canada are 'too close to make surface transport unattractive.' Longer routes from these population centres to such northern Ontario cities as Thunder Bay are a better distance, according to Statton, but 'so small that it's difficult to offer jet service with any frequency.'

Second, 'marketing in eastern Canada is the most expensive in North America,' moans Don Boyington, a Calgary-based Greyhound public affairs representative. 'It's a huge, fragmented market where everything must be bilingual.'

Finally, Air Canada, Canadian, and their local partners have a lock on eastern Canada's trunk routes. Filling the skies with small jets and big turboprops, they offer at least hourly service on all major routes. 'These are shuttle markets, well served,' warns Greyhound's Statton.

The list of those who have tried and failed includes Intair, which broke away from Canadian Airlines to seek its own stake in the eastern triangle; Nationair; and several now-defunct charters. 'How many times do they have to bang their heads against the wall?' ponders WestJet's Hill. Commenting on a published VistaJet post-mortem, Hill adds, 'It's true that they didn't have an adequate reservation system, but that's not the reason they failed. Their business plan didn't work.'

Turning from what didn't work for VistaJet or Greyhound to what seems to be working for WestJet offers some keys to the possible future of low-cost Canadian carriers.

WestJet has not only survived, but claims to be Canada's most profitable airline on both a per aircraft and percentage of sales basis. Privately held, it does not disclose profits, but CEO Clive Beddoe says margins are 'in the 10 to 12 per cent range.'

WestJet operates a fleet of six B737-200 Advanced on an eight-city circuit throughout western Canada. From its launch in February last year, WestJet has paid cash for its own aircraft, operated without tickets, shunned the use of any CRS, served no in-flight meals, avoided interlining, and had non-union employees. 'We've patterned WestJet in many ways after Southwest Airlines,' says Beddoe, 'but Southwest is a high frequency carrier and the US population base allows that more than Canada.' Still, WestJet operates up to seven daily flights between some cities.

Greyhound's Statton concedes that WestJet may have staked its claim on the part of Canada best suited to a low-cost carrier. ' Western Canada has the right geography and city distribution for a low-cost regional airline,' he says.

Further apart

Unlike the eastern triangle, western Canada's cities are further apart and better spaced for jet service. WestJet's stage lengths average about 350 miles. 'It is absolutely essential that we maintain short stage lengths,' Beddoe stresses. They could be longer than now, he admits, but 'our internal mandate to ourselves is that we will not fly long-haul,' he explains, defining this as over 700 miles.

However Beddoe does foresee some increase in stage lengths. With Greyhound's demise 'Winnipeg may come back in our focus', he suspects. WestJet served Winnipeg when it first started up but withdrew in favour of closer cities in Saskatchewan. He talks of other potential destinations within western Canada - 'we've only scratched the surface' - but envisages nothing east of Winnipeg. The airline has no formal hub though it offers twice as many departures from Calgary and Edmonton as from any other city.

Heading into its second winter, WestJet has also learned the importance of managing Canada's seasonality, whose peaks and troughs between summer and winter are more pronounced than in the US. WestJet has authority to fly anywhere in the US, but has no plans for scheduled service there. Instead, this winter it will fly a series of charters to California and Nevada for tour operators. It is too soon to tell whether these flights will lead to scheduled service, Beddoe cautions.

WestJet was the first of the scheduled low-cost airlines. When it launched last year Beddoe recalls strong opposition from Air Canada and Canadian Airlines. 'First, they tried to belittle us, secondly, to match our fares. The longer we were around the more capacity they threw at us.' Did they dump capacity? 'Absolutely!' replies Beddoe. ' They did everything in their power to get rid of us.'

And well they might, because WestJet offered fares 50 to 60 per cent lower than theirs. The majors matched but with more strings attached than WestJet. The result was what Beddoe loves to call ' the WestJet Factor.' Traffic grew 80 to 90 per cent wherever WestJet flew. 'We see that continuing,' he says. 'Our model forecasts market growth of 130 per cent.'

For that reason Beddoe insists that WestJet has not diverted market share. 'We haven't taken any traffic away from the majors. We've taken yield, but not passengers.' WestJet's share of the bigger pie varies widely from one route to the next. Beddoe has no estimate for, and little interest in, WestJet's overall average market share. What does concern him is the prospect of being pressed into a bigger role than he wants. Beddoe and Hill both stress their preference for cautious growth - one aircraft at a time. 'Every time we've added capacity the market has absorbed it,' says Hill, 'but I still wouldn't want to run out and add six aircraft at a time.'

Yet events could threaten this approach. 'The airline industry in Canada is in significant turmoil,' Beddoe warns. He is not convinced that the darkest days are over at Calgary's other airline. 'The big question is what's going to happen to Canadian Airlines,' says Beddoe. 'From what we understand, they lose money significantly in the western triangle. We suspect that will ultimately lead to a reduction in capacity - that may put demand on us for more aircraft.'

Canada has debated for at least a decade whether it is big enough for two major airlines. Beddoe thinks not. 'The problem has always been that the alternative was pretty horrific.' Now he sees low-cost carriers 'providing some alternative to a monopoly. Instead of having a market severed vertically, we foresee that the market will be stratified horizontally,' he says. This would see one or more full service majors focusing on full fare passengers and low-cost airlines such as WestJet handling 'the back of the bus', he adds.

Who else might do that besides WestJet? Kelowna FlightCraft, which provided jets and flight crews for Greyhound Air, is now mentioned as a possible entrant. But Barry Lapointe, Kelowna's president, is cautious. 'Operating in our own right is not high on my priorities. I recognise there's a real expertise in doing that.'

Flying for others

Without a reservation system or marketing experience, Lapointe sees Kelowna's future in doing what it has done best for the past 27 years - flying for others. 'We are actively looking for a participant to continue domestic service maybe in the spring. We'll look at the charter market, we're looking at tour operators. We have lots of options.'

Lapointe may not view his company as a candidate, but he thinks others will emerge to fill the void left by Greyhound and VistaJet. 'It [low-cost air service] is viable from an economic viewpoint but, like anything else, it has to be well managed,' he says.

The question now is how long it will be before someone else surfaces. 'Not now,' says Beddoe, who thinks it will take Canadians some time to recover from the abrupt loss of two startup airlines and says: 'The capital markets will be deterred.' Maybe, but Lapointe adds: 'There's definitely going to be a place in Canada for lowcost carriers.'

Source: Airline Business