SUMMARY: A small airline in Thunder Bay, Ontario, North Star Air Ltd. has been bought for $C 31M ($US 23M) by Winnipeg based North West Company (NWC), a large Canadian grocery and retail company with +218 stores, many in remote and isolated communities across Canada’s North. The driver of this deal was to control its distribution by having its own cargo airline, and not being dependent on what is basically a air cargo monopoly by Calm Air in the Manitoba, Nunavut and Kivalliq regions, where NWC has many stores, and where the First Nations communities are totally dependent on aircraft for all their local needs for most of the year. The acquisition raises the problem of a lack of competition in many parts of the North, where communities and suppliers have all but one choice of airline in and out of many communities, which in many cases allows for high margin “monopoly” pricing. Canada has no Essential Air Service (EAS) like the USA, which subsidizes scheduled air services to 150 markets of which 44 are in remote parts of Alaska with single engine turboprops like the CE-208B to SF340’s and CRJ-200’s at a cost of $250M a year (President Trump looking to cut that). Canadian passengers and suppliers in the North have no choice but to pay the very high fares and freight rates demanded by air operators. Time for a new fresh look at affordable air access in the North ? if we are to develop the North as Ottawa says, then we cannot burden and punish the people there with high fares and freight rates, that make life their very expensive as everything in most communities goes by air, from groceries, lumber to even fuel for electric generators.

It has been pretty quite on the Canadian airline mergers and acquisition front since the late June, 2016 acquisition of Transwest Airlines (Prince Albert, Saskatchewan) by local rival West Wind Aviation (Saskatoon, Saskatchewan).

That deal created another Provincial regional airline monopoly, just as EIC (Exchange Income Corporation) has in neighboring Manitoba, where it now owns Perimeter Aviation (2004-regional airline), Keewatin Air (2005-Medivac) Calm Air (2009 regional airline), Bearskin Airlines (2009 regional airline), what dominate the Manitoba, lower Nunavut and NW Ontario markets.

On April, 28, 2017 North West Company (NWC) (of Winnipeg, Manitoba) (TSX:NWC) a large Canadian multinational grocery and retail company (218 stores) bought Thunder Bay, Ontario) based North Star Air Ltd. (NSA) for $C 31M ($US 23M).

The interest is the big cargo business but it also operates some scheduled services throughout NW Ontario, though I would think that at some point will be sold off to local First Nations owned operator, Wasaya Airways, as NWC is after the cargo business which is so critical to its business in Canada’s northern communities especially its 122 Northern stores and 6 NorthMart stores, many of which are in NW Ontario, Nunavut, Northwest Territories, Manitoba and Saskatchewan.

It seems to me they paid a very high price, way above the “rough” EBITDA multiple of +/- 4.5 I normally use, as no way can 11 CE-208B Grand Caravans and PC-12’s create that kind of EBITDA (in this case it would have to be a EBITDA of around $C 6.9M) or $627,000 per single engine turboprop, seriously ? The EBITDA multiple is most likely +/- 8.0 on this deal.

Anyway, not my place to judge, but it does not add up, but what is clear that NWC was pretty desperate to have its own cargo airline, and is paying a “need it ” premium, which I get, as there are few options when travelling or shipping to the North.

NWC CEO Edward Kennedy, is quoted as saying “cost is a big factor, no question” and “we have taken some big freight increases and we are not happy with that, we understand the carriers need to get a return, but it is still a pain point for us”. That says novels about their reasoning to get away from Calm Air and buy NSA, to take control of their own distribution, lower costs and make some new revenue with the NSA operation.

The freight rates have been a source of frustration for many of the communities along the west coast of the Hudson’s Bay (Arviat, Baker Lake, Repulse Bay, Rankin Inlet, Whale Cove,etc.), and at a time when fuel prices are 50% of what they were say 2 years ago, one questions freight increases especially after First Air pulled out some of those communities.

Many of these northern First Nations communities are totally dependent on air for all their supplies and medical flights to nearest doctors or hospitals. Having been a GM of a regional scheduled airline in the north, I know the importance of such services and I also know the lack of competition and what that does to pricing when there is no alternative, “monopoly pricing” produces very high profit margins.

In Canada we do not have a US style Essential Air Service (EAS) that subsidizes scheduled air services to remote communities in the lower 48 and Alaska. If the Americans can spend $250M on subsidizing air services to 150 markets (44 in Alaska) per year, or $10 to $977 per passenger, then Canada needs to look at some ways to alleviate the incredibly high fares and freight rates in and out of some of the most remote communities in the world.

At a time when other countries are laying claim to ‘Canada’s’ North (Denmark, Russia, Norway), we should be developing the North, gravel runways ? are you serious ? time to pave them and get rid of the 40+ year of B737-200’s that are around because they can land on gravel runways, and bring more people to the North and develop it.

The Economist says “the arctic as it is known today is almost certainly gone” yes there is potential for oil development and ports, but on the sad side, by 20240 when the Arctic Ocean will be ice free all summer, the fight to stem the tide of global warming will be lost and and we will have to face the facts and adapt to a new world where oceans sea levels will rise, major cities will be under water and huge changes in climatic patterns around the world will bring about more famine, floods, droughts and environmental refugees.

The Arctic is ice partially ice free now during the summer for international shipping between Europe and Asia, large ship port in the North, like Murmansk ? time to get of the “can” Canada and get pro-active in the North or other countries will. Lots of talk from ex-PM Harper about naval and air bases, and all we got are local “Rangers” on Ski-Do’s with a rifle to patrol our territory ? Would we even know if a large ship docked and unloaded 1,000 illegals or troops ? probably not.

Anyway, I worked up North, the rates from these communities is “milked” pretty good by local operators where you can spend $C 1,400+ from a community in the Northwest Territories to Edmonton on a 2 hour flight each way or drive 18 hours, and yet fly for much less to Hawaii or Europe from Edmonton, because there is no competition, other than out of Yellowknife, Whitehorse or Iqaluit, but still fares and cargo rates. So will we continue to suppress business development in the North or will we help the locals and new comers with better and more affordable air services ?

Now back to the blog story, NWC already provides 17% of NSA’s revenue and that now should go up to 45% as NWC has already informed Exchange Income Corporation (TSX:EIC) the owner of Calm Air, that it is ending the cargo business relationship in 90 days, which till now was worth $C14M a year to Calm Air in Manitoba, Nunavut and Kivalliq.

Calm Air claims its profit impact will be minimum as the competitive price NWC received generated only $C 1M annually (or just 7% margin) for Calm Air, which I don’t buy it, as the freight goes by dedicated cargo aircraft, so it will impact utilization equal to +/- 2  dedicated ATR-72/42 freighters per year, as $C14M in revenue should be around +/- 3,500 flying hours per year (at +/- $C 4,000/FH) for an ATR-72/42 freighter.

I think EIC is down playing the news as its stock dropped a little on the news, no big deal EIC stock has been a “gold” mine for savvy investors, showing their is money to make in aviation, when done properly by professionals with money behind them.

The $C 31M investment in NSA, is expected to save NWC $C2M in air carrier cost increases and provide $C 8M in annual earnings for NWC, sounds like a good investment assuming they got the numbers right. The company will still use third party carriers as it will analyze its cost and benefits and see where it makes sense in house and where to outsource again.

NWC will have to make some changes to comply with Canadian ownership rules under the CTA, which are going to 49% foreign ownership, but it will have to create variable voting shares to stay within the 51% Canadian ownership requirements.

NSA is relatively new company, founded in 2012 ,it is or was owned by Frank Kelner with the merger of Cargo North and and North Star Air, and had at one time 3 x Basler BT-67 turboprop DC-3’s, which are $US 7.0M ‘modernized’ DC-3’s with PT6A-67R engines each with 1,424 shp each cruise at +200 kts and a payload of 11,000 lbs, just what the North needs, though a good old second hand ATR-72 can be had for $4M and carry anywhere between 13,000 lbs to 17,000 lbs and +270 kts.

A few months back I wrote an article about Wasaya Airways looking to buy up to 5 x Airbus C295W’s at a list price of around $US 28M to carry 20,000 lbs at 260 kts ? the aircraft was selected by Canada for its FWSAR role, but so far NO commercial orders, which says novels after 20 years of production and +140 deliveries and just 185 orders by 25 countries, seriously $28M for an aircraft that carries +/-5,000 lbs more than a $4M used ATR-72-200 ? why, off course the cost would be born by the customers, in this case the First Nations people of NW Ontario.

Check Out:

ATR Cargo

Now, Frank Keller, is a Canadian legend, I was away for 20+ years overseas, but I knew of his achievements, the Pilatus Center that is the PC-12 distributor to Canada has done tremendously well with many now in service in Canada from airlines to business aviation.

Anyway, NWC is planning to add 2 new aircraft worth $C14M ($US 10.5M) to the NSA fleet of 11 aircraft a mix of PC-12’s and CE208B Caravans, given the price they must be used DHC-8-300 or ATR-42/72 freighters, Basler BT-67 turbine DC-3’s ? or even BAe 146-200/300 freighters ? but no word on what type they are buying, but something with surely +10,000 lbs cargo capacity, as Calm Air has 8 x ATR-42-300’s and 5 x ATR-72-200’s in passenger, combi and all cargo configuration, while its remaining 2 x Do328Jets (30-32 passenger) are possibly for sale as EIC’s Regional One subsidiary is advertising msn 3145 and msn 3185, great aircraft for the North, and I was with Dornier in Germany for 3 years a long time ag0.

I suspect NWC has been paying very high cargo rates, as there is no competition in Manitoba, Nunavut and Kivalliq, its one of EIC’s company’s or the highway, as First Air has withdrawn many ATR-42 routes in Nunavut, and Calm Air was happy to take them over, just as First Air sold its 2 x Lockheed Hercules L-100-30’s (382G) in April, 2015 to Lynden Air Cargo (Anchorage, Alaska) due to soft mining sector.

Meanwhile, Summit Air (owned by Ledcor) is growing out of Yellowknife with 4 x ATR-72-200’s and 2 x BAe RJ85’s are great for Northern conditions and runways, a lot better than old radial engine DC-3’s of Buffalo Airways or old Boeing B737-200’s with gravel kits, its time for new thinking and equipment in Canada, from the outside some of our fleets look very “third world”, sad no ?

Now, if First Air wants or needs a Hercules, they have to call Lynden Air Cargo to ferry one over from Anchorage ? look the north needs freighters, and I just think Hercules sale was a huge mistake, if demand is low, one can find contract work all over the world, UNHCR, WFP, U.N., etc. I did some work with civilian Hercules, and with so few in the world, and some creativity, the work is there, if you want to find it, the sale was just the easy way out, in my opinion by First Air.

As a side note, there are only +/- 35 civilan Hercules in operation in the world, a rare bird, only 114 were built, and no replacement for it, unless you want the new $67M per unit recently launched LM-100J. Today, just 3 main operators, Safair (South Africa), Lynden Air Cargo (USA and Papua New Guinea and Transafrik International (Sao Tome & Principe and now Angola).

You can read more on the Hercules and their clandestine use in Africa, Central America and the numerous civilian Hercs shot down in my BLOG of August, 2014.

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A little history for those too young, but since we are talking about NorthStar Air, I could not help myself thinking about the Canadair North Star, which was a Canadian modification to the DC-4/C-54 designed for TCA (Trans Canada Airlines, later to be known as, Air Canada), with 50 first class seats economy.

In short, Canadair installed 4 x Rolls Royce Merlin 622 liquid cooled V-12 engines with 1,760 hp each (basically the engine that powered the legendary Avro Lancaster bombers, de Havilland Mosquito, Supermarine Spitfire and the north American P-51 Mustangs).

Only 71 North Star’s were built (DC-4-M2 North Star) between 1946 and 1950, and on top of the engine change, there was a DC-6 nose, landing gear and fuselage (though shortened by 6.6 feet) and cabin pressurization (51 of 71 aircraft). In the end only 80 x DC-4’s were built and 1,163 x C-54’s (military versions).

The result blew away the PW R-2800 powered (1,450 hp each) DC-4/C-54 with a top speed of 307 kts (vs 243 kts for DC-4) and cruise of 282 kts (versus 197 kts of DC-4), and range was 6,212 Km (versus 6,839 Km).

The last aircraft flew up to 1975, but it served TCA and BOAC well, and is a part of Canadian aviation history, followed by the Canadian 44+ seat Avro C102 jet airliner which flew on August 10, 1949 only 13 days after the de Havilland Comet which became the first jet commercial airliner, we were second by just 13 days ! but second means zip, and only 1 prototype was made before the project was cancelled and the Comet went into production with just 114 built.

Thank you as always ! I always like challenge the status quo, and look and address problems that need attention, thank you. Cheers till next time.