Feds to ease ownership rules
Allowing more foreign ownership offers access to industry expertise
The race is on to launch a new ultra-low-cost airline in Canada after the federal government said Thursday it will immediately exempt two aspiring carriers from existing foreign ownership limits and eventually ease the rules for all Canadian airlines.
Enerjet, a Calgary-based charter airline, said it intends to partner with Phoenix, Ariz.-based Indigo Partners LLC, one of the world’s most influential airline investors, to get its planned ultra-low-cost carrier off the ground.
That announcement came only hours after Transport Minister Marc Garneau said he’ll exempt Enerjet and Canada Jetlines Ltd., another nascent ultra-low-cost carrier (ULCC), from a law that restricts foreigners from owning more than 25 per cent of a Canadian airline. The move is aimed at driving down fares and offering travellers more choice.
Under the exemption, Jetlines and Enerjet’s venture, tentatively dubbed FlyToo, will be able to sell up to 49 per cent of their shares to foreign investors, although no one foreign shareholder will be able to own more than 25 per cent.
“This can bring down airfares and it can also provide more destinations and more choice for consumers,” he told reporters Thursday after unveiling the government’s transportation plans for the coming decades.
The government will also pursue legislation to permanently raise the foreign ownership limit to 49 per cent for all Canadian carriers, including Air Canada and WestJet Airlines.
Indigo Partners has backed some of the world’s most successful ULCCs, including Florida-based Spirit Airlines Inc., which introduced the model to the United States under Indigo’s guidance a decade ago.
Although Enerjet and Indigo still need to reach a definitive agreement on what exactly the investment will look like, having such a prominent investor lined up will significantly cut down on the airline’s launch time, said Darcy Morgan, Enerjet’s chief commercial officer. Enerjet already has an operating certificate for its charter service, which will save it “at least a year,” and Indigo’s support will also take “months out of the cycle,” Morgan said.
“I’d like to think we’re probably 18 months ahead of anyone who would be starting from scratch.”
At Jetlines, meanwhile, CEO Jim Scott said Thursday’s announcement has made it much more likely that the airline will get off the ground, and he is targeting a summer 2017 launch date.
“It’s a lot easier for us than it was before, there’s just no question about that,” Scott said.
The prospect of two new ultralow-cost carriers could pose a threat to NewLeaf Travel Co. Inc., which launched its first flights in July.
NewLeaf has a similar ULCC model to those proposed by Enerjet and Jetlines, flying out of smaller airports and charging for extras like carry-on bags. However, it is not actually an airline but rather a travel company that has partnered with Flair Airlines, a B.C.-based charter service, to provide its aircraft and crews.
NewLeaf issued a release Thursday declaring it’s “proud to be Canadian” and advertising fares as low as $19 “to celebrate Canada.”
“We are building a network that is long-term and sustainable and not one that looks like all the others,” CEO Jim Young said in a statement.
Shares in Air Canada and WestJet both fell Thursday on the prospect of increased competition, although analysts said the biggest barrier to entry for ULCCs is not ownership rules, but rather their likelihood of success.
“Even with the exemptions, you still have to have the argument about what’s a viable business case for both Jetlines and Enerjet,” AltaCorp analyst Chris Murray said. “It’s still a difficult market and it’s still a competitive industry.”
RBC analyst Walter Spracklin agreed, saying “the difficulty startups have had in getting off the ground is not for lack of capital, but rather concerns about the risks of a new ULCC business model.”
WestJet and Air Canada both issued statements arguing the biggest issue faced by Canadian airlines is not foreign ownership rules but high fees including airport rents, security surcharges and fuel taxes.
“We are disappointed the government has not signalled more clearly a willingness to meaningfully review aviation taxation and cost structure,” said WestJet CEO Gregg Saretsky.
Garneau also said Ottawa will work to reduce waits at airport security to international standards by looking at new equipment and technology and the agency that oversees security.