ABSTRACT: Canada Jetline and Jet Naked are racing to be Canada’s first ULCC (ultra low cost carrier), both looking to start this summer but funding the initial $50 million start up costs is dragging on, yet Canada Jetline orders 5 x B737-Max7’s and purchase rights on 16 more but delivery is not till 2021 and start up will be with old B737-300’s, can one of them do the same that Westjet Airlines did 19 years ago when it WAS a low fare airline with 3 x B737-200’s ? and when Air Canada failed to crush it early on with its failed LCC ZIP, presently Air Canada is busy with its low cost but not low fare subsidiary Rouge, while Westjet is building up its regional network with Encore and its wide-body fleet with B767-300’s (???) for flights to Europe and Hawaii, current distractions at AC and WJ are good for the ULCC hopefuls, Canada needs a LCC as we live in the ONLY major country in the world without a locally based LCC we can turn to for low fares as the duopoly here (AC and WJ have yields of +/- 19 cents/RPM) and have NO incentive to lower theirs, it is why +4.9 million Canadians drive to US border airports to fly on US carriers every year !

Canada’s new ULLC (ultra low cost carrier), I prefer to use the term low fare airline (LFA), but anyway Canada Jetlines Ltd has signed an agreement with Boeing for 5 new B737-Max7 airliners for delivery in 2021, and has purchase rights for 16 more, while it is in the midst of raising $ C 50 million to start its planned operation this year, which will under cut Air Canada and WestJet by 30-40%, targeting western Canadian destinations served from YVR first, pitting B737’s against Q400’s of Air Canada and WestJet. History has not been good to start-ups in Canada, Wardair, Canada 3000, Jetsgo, Harmony, Roots Air, etc. have gone bust trying.

Canada Jetlines was to have started with 2 x A319’s (PHOTO above) but now plans to start with 2 x B737-300’s most likely with the maximum 148 passenger seats, and has surprisingly ordered 5 x B737-Max7’s and purchase options on 16 more. focus is on Vancouver, Winnipeg and Hamilton connecting to places like Prince Rupert, Kamloops, Sakatoon, Kitchener-Waterloo and down to Las Vegas, Florida, etc. Expects to have 7 x B737-300’s and 9 x B737-700’s rather quickly, first it needs to raise $50 million and pay Boeing $16 million down, then everyone will watch how Air Canada and Westjet react.

Note: Not sure if the B737-300 will be able to offer the economics needed, its older, last one built in 1999 so they will be more than 16 years old, requiring higher maintenance than new aircraft which have warranties to alleviate maintenance costs, it will not be able to operate the Spirit Airlines 12.7 hours per day, while the older CFM56-3B-1 engines are not as fuel efficient as the CFM56-7B26 engines on the B737NG and definitely far from the B737-Max7 and its CFM Leap-1B engines, so more maintenance costs, more fuel costs and less productvity that affects aircraft productivity, which results in lower CASM (cost per ASM).  I think a Canadian ULCC needs to get its CASM at least 25% less than WestJet’s current 13.78 cents, therefore around 10.33 cents per ASM, which is $15.30 per mile ! Cannot be a low cost carrier without low costs ! 

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This move makes the airline more realistic, as till now very little has happened and I was wondering if it was going to fade away quietly. Canada desperately needs ULCC, the duopoly in Canada must be broken. At this point Jetlines President Dave Solloway is looking to start this summer with 2 leased B737-300’s and has chosen to focus on Vancouver, Winnipeg and Hamilton, avoiding a big battle with Westjet at Calgary and Air Canada at Toronto and Montreal. The fleet will expand to 16 aircraft by the end of 2018, now Jetline needs to source its $50 million, which a company named Inovent Capital was have sourced, but Jetline has now looking at a another source, starting an airline is never easy, finding capital is that much harder.

This is the anticipated Canada Jetline route network (ABOVE-map) when they will have 16 aircraft. This map was the center of a big controversy between Canada Jetline and Inovent Capital which was mandated to source the initial $50 million for the new ULCC airline, but after the mandate expired in January, 2015, Canada Jetline broke off the planned merger between the two companies that would have seen Jetline listed on the TSX Venture Exchange.

Seems Inovent believes the route map is “secret sauce”, and should not have been released as now AC and WK know its route plans, but honestly, the domestic routes that one can serve in Canada are limited, though I question small destinations such as Prince Rupert, Prince George, Flin Flon as viable for a B737 operation, as for transborder routes, off course they will have Florida, California, Mexico and Las Vegas, as that is where the majority of Canadians vacation. Note that the hubs are Vancouver, Winnipeg and Hamilton, avoiding competition in Toronto, Calgary and Montreal, smart, initially they are going after Air Canada Express high cost (CASM) DHC-8, Q400 and CRJ routes where high yields ($/RPM) are needed to make the routes work.

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In Calgary, Jet Naked is waiting to raise its $50 million and has lined up 3 aircraft, though Enerjet owned by Tim Morgan has 3 x B737-700’s already, and they could start before Canada Jetline, the race is on, only 1 ULCC can survive in Canada, good luck to both. This comes as Air Canada marks its best year ever with a $531 million ‘adjusted’ net income, which somehow came out of a published $105 million net income on $13.272 billion in revenue !

NOTE: You can read more about LCC  (low cost carriers) in my May 20, 2014 blog and about ULCC (ultra low cost carriers) and Spirit Airlines in my May 29, 2014 blog.

Many have tried to set up scheduled airlines to compete with Air Canada and as many failed (ABOVE photo left-Jetsgo gone in 2005), (ABOVE photo-center-Harmony gone 2007) and (ABOVE photo right-long haul ZOOM Airlines gone 2008), never easy to break an oligopoly and even harder to break a duopoly, but Wetsjet did it in 1996 so there is hope yet it can happen again, the consumer will gain, AC and WJ would loose some of their domestic domination.

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In a world where LCC (low cost carriers) dominate the skies over Europe, where LCC’s in Asia are springing up in almost every country from Bangladesh to Vietnam and now even in South America and now Africa new LCC’s are springing up, we in Canada pay the highest airfares in the world (average economy yield – $ per revenue passenger mile).

The high airline fares coupled to high tax differential and higher airport costs has forced over 4.9 million Canadians per to travel from US border airports due to airfares being +30% lower, though presently the drop in Canadian dollar has somewhat altered that for now. But based on an average o/w ticket of $400 the Canadian leakage can easily be over $1.6 billion a year in revenue going to US carriers, which is 12% of Air Canada’s total revenue in 2014 ($13.2 billion).

It is estimated that Vancouver (YVR) and Abbotford (YXX) airports ‘leak’ 1.0 million passengers a year to Bellingham (BLI) and Seattle (SEA) airports in Washington state, while 1.8 million Canadians in southern Ontario drive to the US airports of Detroit (DTW), Buffalo (BUF), Niagara Falls (IAG) and another 900,000 Canadians drive to Plattsburg (PBG) and Burlington (BTV) all to catch cheaper US flights, this leakage affects Windsor airport (YQG) and Toronto’ Pearson International airport (YYZ), plus smaller leakages out of Thunder Bay, Winnipeg and Saskatoon.

The two big scheduled service airlines in Canada, Air Canada and Westjet have 91% of the Canadian domestic market ( AC 55%, WJ 36%) by revenue, and 83.5% of the domestic market by seats offered, and there is no option but Air Canada or Westjet on 95% of the routes in Canada this market is a duopoly, the most basic form of a oligopoly where 2 companies nearly all of the market, and this results in consumers paying higher prices than in a truly competitive market. WestJet is no longer a low fare airline as figures will show, its yield ($/RPM) are equal to Air Canada’s, it does not have to be cheaper than AC with only 2 airlines, it did when it started, but now it can milk the Canadian traveler just like Air Canada, while its LCC Rouge is not a low fare airline, its costs are lower so AC will make more money, but the consumer is not going to see a difference in the fares, its an internal cost saving subsidiary bent on lowering costs NOT air fares.

Just for clarity the remaining 16.5% of offered domestic seats in Canada is divided up between dozens of medium and small airlines:

#3) Porter 4.4%   #4) First Air 2.0%   #5) Canadian North 1.3%   #6) Air Inuit 1.1%   #7) Provincial 0.9%   #8) Pacific Coastal 0.8%

The remaining 6.0% offered seats is offered by many small airlines like Air North, Calm Air, Bearskin, Perimeter, Northwestern Air, Pascan, Air Creebec, Wasaya, Transwest, etc. using aircraft from Cessna Caravans, ATR-42’s to Boeing B737’s.

Now for any ULCC to survice in Canada, it needs to get through its first 2 years of operation, where losses will occur for sometime until the market recognizes and accepts the new airline’s value proposition and this will need a viable and profitable network with very low fares which requires very low unit costs and consistently reliable service and on time performance.

Remember Westjet started in 1996 with 3 B737-200’s, 220 employees and 5 destinations, and today it has 123 aircraft, 8,560 employees and serves 91 destinations directly and 15o more destinations through its 44 strong partnerships with other carriers.

Air Canada set up ZIP a LCC subsidiary to deal with Westjet in September, 2002 with 12 x B737-200’s painted in various bright neon colors and headed by ex-Westjet CEO Steve Smith, it failed to stop Westjet’s growth and was shutdown after 2 years on September 2004. It served Calgary, Edmonton, Vancouver, Abbotsford, Regina, Sakatoon and Winnipeg.

ZIP was Air Canada’s answer to Westjet in 2002, the airline had 12 x B737-200s all painted in bright neon colors, and run by ex-Westjet CEO Steve Smith, after 2 years Air Canada through in the towel and gave up, Westjet won the west. The above photo shows the ZIP fleet parked in the desert for good in 2004, Air Canada’s 1st LCC was a failure and its failure allowed Westjet, then a real LCC to grow into the hybrid LCC it is today with 123 aircraft.

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So can a ULCC challenger Air Canada and Westjet effectively today ? well yes, but it will not be easy. Canada Jetline initially planned to use the Airbus A319, now they will start with 2 x B737-300’s which most likely will have the high density seating of 148, an older generation aircraft with less seats, more maintenance costs and less reliability than a new B737-800 that Westjet uses for instance.

Canada Jetline wants to use the Spirit Airline model, this US based ULCC has the highest pre-tax margin of any airline in the US market at 19.2%, it flies its Airbus A320 fleet 12.7 hours per day (e.g. Southwest 10.8 hours/day), Spirit has 178 seats in its A320’s (e.g. Jetblue A320’s have 150 seats), so with 17.5% more flight hours per day and 18.6% more seats per aircraft, the Spirit aircraft are roughly 39% more productive than its competitors, which translates to the lowest CASM (cost per ASM) in the US market of 9.9 cents/ASM (e.g. AA 14.3 cents, DL 15.6 cents). Spirit also flies its aircraft with an average of 86.7% load factor, meaning out of 178 seats on its A320, 154 seats are sold and only 24 seats are empty, on average, very impressive.

Spirit Airlines, is the ULCC role model in North America, 67 Airbus A319 and 320’s the airline’s CASM in 2014 was 9.65 cents per ASM (5.88 cents excluding fuel), wow that is impressive, and even more impressive is that has a pre-tax margin of 19.2%, flies its aircraft 12.7 hours a day, maximum seating on each aircraft and has an average load factor of 86.7%, and 1/3 of its revenue is ancillary revenue from ‘extras’. The airline has carved out a market for itself with very low ticket prices for the price sensitive segment, the Greyhound bus of the air, and both Jet Naked and Canada Jetline want to follow its business model, Jet Naked went out and hired Spirit Airlines CFO to be its President (presently President of Enerjet) to make sure they get the model right !

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The key to cost control is maximum seating density, high aircraft utilization, high load factors and cost control on salaries, facilities and overheads.

Let’s compare Air Canada and Westjet on their basic numbers, (using full year 2014 numbers for AC and first 9 months of 2014 for WJ) in:

Average load factor: AC 81.0%, WJ 82.0%

Passenger yield: AC 19.2 cents, WJ 18.94 cents / per RPM (revenue passenger mile) is what you get per mile on your net fare.

PRASM: AC 15.6 cents, WJ 15.53 cents (LF x yield) *NOTE: this is passenger revenue per ASM, AC also has other revenue from cargo and ‘other’ which in 2014 was $1.47 billion and it has operating revenue per ASM of 17.8 cents

CASM: AC 17.2 cents, WJ 13.78 cents, *NOTE: AC’s unit cost per ASM (CASM) is 24.8% higher than WJ’s at this time, this is a very important number, low CASM is the goal of all airlines. In Europe the top 6 LCC’s (Ryanair, Wizz Air, EasyJet, Pegasus, Vueling, Norwegian) have CASM’s between 7.7 cents and 12.0 cents, this is where Canada Jetline and Jet Naked need to be to attract customers and be around 5 years after start-up. Both planned ULCC are eyeing the 148 seat B737-700/Max7 when I do believe it best to go with the 186 seat B737-800/Max8 just as WJ has done, as they have lower CASM (cost per ASM), and why most LCC around the world are using higher capacity variants of the A320 and B737.

Average aircraft utilization per day: AC 9.2 hours, WJ 11.9 hours

These are the key numbers (Yield x Load Factor) > (CASM), and the difference ULCC have versus network airlines is that they have 1. Lower yield, higher load factor and lower CASM than the networks.

From the above numbers it is clear that Westjet is no longer a LCC (low cost carrier), it started that way, and it is how it grew, but as you see above, its yield, load factor and PRASM is plus/minus the same as Air Canada’s, it discovered it did not have to be cheaper, match AC fares and keep a CASM advantage, this is how WJ has grown the past 10 years, it does not have to offer very low prices, that is the problem of a duopoly. Interesting note, is that based on PRASM and CASM numbers Air Canada does not make money flying passengers (15.6 cents – 17.2 cents), the profit comes from the cargo and other revenue, hmm this will needs more exploring.

The same situation applies to Australia, a country as big as ours, with relatively few people, it like us has had 2 airlines for a long time (QANTAS and Ansett, we had CP Air and Air Canada later Canadian and Air Canada now WestJet and Air Canada), QANTAS has Jetstar its LCC, which has grown at the expense of QANTAS shrinking, which has many problems today, will the same happened for Rouge and Air Canada ? it is a delicate balance, but we have already seen Rouge taking over domestic flights, as the temptation is there to replace AC with Rouge flights. I have flown on Rouge, the seats pitch is too tight, the tray cannot come down as you sit that close the the next seat, not sure if this is going to catch on with passengers in the long run.

Presently Wesjet is moving into the regional market in a big way with Encore and its 45 ordered Q400’s and has entered into the trans-atlantic market with B767-300’s coming this year and surely B787’s in the future, while Air Canada is targeting the leisure market with Rouge, so both are positioning themselves on all fronts.

Spirit has total average revenue per passenger of $160  ($105 for ticket + $55 for non-ticket), this non-ticket is called ancillary revenue it includes the ‘extras’ a passenger can choose, baggage fee, convenience fee, seat selection fee, change fee, drinks, food, etc.). This how they can advertise low fares, you can fly for the $105 but customers will add cost depending on what they want.

Surveys show that the number #1 consideration when buying an airline ticket is by far PRICE, then comes things like non-stop versus connecting flight, schedule, reputation of airline, airports served, etc. But most passengers want to go as cheap as possible from A to B, those that require a higher level of service and amenities know they can fly with AA or DL and get that level of service for 30-60% more, and ULCC do not cater to that crowd, but a hybrid low cost airline has emerged where some LCC (e.g. Jetblue, Westjet, Virgin America) try to cover both areas, ULCC are catering to the very price sensitive travelers.

Right now, Canada does not have a LCC, Rouge is lower cost than Air Canada but it’s fares are the same as Air Canada’s, they just have a lower cost operator to make more money with, and Westjet as already mentioned has yields the same as Air Canada, and sadly no LCC from the US fly to Canada, though Southwest has been eyeing our market.  Canadian domestic fares are very expensive, but we have no choice other than AC and WJ on 95% of the routes, and no wonder the 4.9 millions Canadians drive the US border airports to fly. The trans-border market is around 22 million passengers a year, so leakage is around $ 1.6 billion a year. Every major country in the world has at least 1 LCC (low cost carriers), it is time for Canadians to have the low cost option as well, a sample of the many LCC’s around the world:

1. Europe – Rynair, EasyJet, Wizz Air Air, Norwegian, Smart Wings, Transavia

2. USA – Spirit, Allegiant, JetBlue, Southwest, Frontier, Virgin America

3. Latin America – Volaris, Vivaerobus, Viva Colombia, GOL

4. Middle East – Air Arabia, FlyDubai.

5. India – Indigo

6. China – Spring Airlines

7. Rest of Asia – Tigerair, Lion Air, Cebu Pacific. Vietjet Air, Vanilla, Peach, Scoot, Air Asia

8. Australia – Jetstar, Tigerair Australia

9. Africa – Fastjet, FlyAfrica, Mango

Just a side note, the term low cost carrier (LCC) is the common, yet I and in Europe the term LFA (low fare airline) is widely used, as you can be a low cost airline like Emirates and Singapore Airlines as they fly mostly long haul flights with high capacity aircraft, their CASM is very low even when compared to LCC’s, but their fares are NOT low, in the end it is about low fares, that is what consumers want, they don’t care about CASM’s, just low fares.

It will be tough to crack the Canadian domestic market for any ULCC, 60.6 million passengers last year, 800,000+ flights of which 75% were flown by turboprops and regional jets, and the domestic market is 38% of Air Canada’s revenue and it grew 2.6% last year while the transborder market where AC has 35% market share grew 9.4% last year, both domestic and transborder markets are key to any ULCC in Canada to survive.

I will keep you posted, thanks for reading my blog.