Entrance of ULCCs in Canada, can they survive and thrive?

• Why Canada is one of the most expensive nations for air travel?
• Canada’s airline industry’s duopoly, Air Canada and WestJet commands c. 85% of the market
• Introduction of ULCC’s into Canada

 

Canada is said to be one of the most expensive countries for air travel in the world. It is estimated that every year approx. five million Canadians cross the border into the US for merely catching up cheaper flights. According to the online travel website, Kiwi.com, Canada ranks 70 out of the 75 countries, in terms of flying 100 kilometres at c. USD $38.71, which is followed by only a few nations, that is, Japan, Netherlands, Qatar, Finland and the UAE.

The country has so far been devoid of a full-fledged ultra-low-cost carrier (ULCC) industry making it the only exception among the G7 nations. So, what is the reason for a country of approx. 10 million price-sensitive passengers to be void of a thriving ULCC industry? Well, the reasons are many including, but not limited to a sparse population spread over a wide geography, which, in turn, entails that its small population base leads to a dampened demand for too many airlines. Moreover, the airline industry has been rather protected, the former Canadian law restricted foreign investors/airlines from either owning a significant number of shares (25%) in Canadian airlines or financing of newer ones, which limited the capital available for both the new and the present airline companies. Addedly, Canada has higher than average tax and fee structure, for instance, the nation charges a comparatively steeper security fee of US$25/passenger, besides there is a mandate to its 26 largest airports to pay an annual payment in lieu of the local tax to their respective municipalities. For example, if one were to compare airfares from Buffalo (US) and Toronto (Canada), the two cities close to each other but on different sides of the border. The ticket prices would include c.15% taxes in the United States vis-à-vis a steep 43% in Canada. This is precisely the reason why it is cheaper to fly international destinations from Canada to the like of Las Vegas and Hawaii than to fly domestic. The OECD (Organisation for Economic Co-operation and Development) ranks Canada at the 31^st spot out of the 32 when it comes to the competitiveness of airport taxes and fees. Let us briefly look at some of the statistics in the current airline industry in Canada.

The airline industry in Canada has a market duopoly of WestJet (LCC) and Air Canada (Canada’s flag carrier), with a combined market share of c. 85%. While other regional and charter operators like Porter Airlines, Air Transat, Sunwing airlines, etc. serve a small segment of the market. This domination stems from the country’s protectionist policies which once served the country well when it wanted its domestic players to thrive, but at present, it does little good to the nation by restricting competition by foreign players. Quite naturally, a lack of competition has disincentivised Air Canada and WestJet to cut down their prices. This has not been fruitful for Canadian consumers, who pay a high price as well as for the Canadian travel and tourism sector which ends up losing the market share due to high costs.

Hence, while a heavy fee applies to all the airlines in Canada, it makes it especially harder for ULCCs as their existence is based on the maintenance of low operating cost. It is due to the above factors that Canada had a rather unglorified history of airlines going defunct including, but not limited to CanJet Airlines, Jetsgo, Harmony Airways, Zoom Airlines, Canada 3000 Inc. besides others, with the first three aforesaid going defunct (or putting a stop to scheduled flights) in the past nine years. The country has witnessed a host of emerging LCCs, which failed miserably after trying to compete with Air Canada over the years (refer to the below table).

However, the country’s airline industry is facing a newfound disruption with the entrance of new ULCC carriers; namely Flair, WestJet’s Swoop and Wow Air. Additionally, Jetlines and Norwegian Air are set to enter the market soon. While the concept of ULCC is rather very new in Canada, it is anticipated to put downward pressure on the ticket pricing with airlines like Swoop already charging rock bottom prices to ward off any competition. However, given the unglorified history of several airlines tanking in Canada, it is not entirely necessary for the Canadian market to be capable of replicating the success of ULCCs in other countries. As stated, above, Canadian flyers pay way more in various airport fees and other surcharges besides other key differences in population density, airport governance and regulatory environment. ULCCs will need to chart their own course in order to create a sustainable and profitable business model. They will need to find innovative ways to keep costs as low as possible and efficiently utilise secondary airports. In addition, the government needs to introduce structural changes to make the industry more competitive. The recent change introduced by the Federal government (May 2018) to increase the limit from 25% to 49% is a good first step towards somewhat opening up a protected industry since its inception. Besides this, the lowering of airport and government mandated fees, surcharges and security charges can help boost the growth in the industry, especially tourism related travel, by attracting price-sensitive customers.