Competing with WestJet in London may pit Air Canada against itself
Air Canada to launch Gatwick flights
Air Canada may be shooting itself in the foot with new flights to London’s Gatwick Airport, a move that will almost certainly mean lower fares for travellers but may have the unintended consequence of cannibalizing customers from its main service to Heathrow.
Air Canada has dominated air travel between Canada and the British capital for more than three decades, but that is set to change after WestJet Airlines Ltd. announced that it will begin flying to Gatwick next spring using its new, longer-range Boeing 767-300 aircraft.
Not one to take threats to its dominance lying down, Air Canada responded a week later with an announcement that it will also offer flights to Gatwick next year on its discount Rouge service. The Rouge flights will depart from Toronto, while WestJet has said it’s looking at flying out of smaller Canadian cities.
Air Canada’s decision is “a clear and direct response” to the WestJet threat, but it may be cutting off its nose to spite its face, according to an analysis by Raymond James analyst Ben Cherniavsky.
“We believe this decision is pregnant with all sorts of challenges,” Cherniavsky wrote in a recent analysis.
First, transatlantic yields — defined as the average fare paid per passenger, per mile flown — are already under pressure.
Despite this, London is still a very profitable market for Air Canada, which currently offers 11 flights a day to Heathrow Airport from eight Canadian cities.
“Air Canada is now seemingly willing to risk their lucrative presence at Heathrow to go after WestJet at Gatwick with their low-fare product Rouge,” Cherniavsky wrote.
This is particularly problematic because Air Canada already has lower operating margins than a lot of its peers, he added.
It also comes as airline investors worry that too much capacity is being added too quickly, potentially putting pressure on fares and profits. U.S. airline stocks in particular have taken a hit over concerns that the companies are losing the capacity discipline they developed during the recession.
Air Canada chief executive Calin Rovinescu has called those fears “overblown” and said the story is different at his airline, which is focused on international expansion, whereas its American competitors are growing domestically.
“What we do in these international markets is we’ve actually been developing them
Runs the risk of brand confusion and, in turn, yield cannibalization
based on market assessments, based on a sense of how much traffic we can attract from other locations … including from the United States,” Rovinescu said in an interview earlier this month.
However, Cherniavsky questioned Air Canada’s strategy of offering discount Rouge flights to Gatwick as well as main line flights to Heathrow, saying it “runs the risk of brand confusion and, in turn, yield cannibalization.”
“WestJet’s fares into Gatwick are sure to be very ‘competitive,’ as they are in every other new market the airline enters,” he wrote.
“Now Air Canada will have to match those fares directly on their website for its Rouge flights to Gatwick, which risks diverting its higher-yielding traffic from Heathrow. Fares to Heathrow are likely to fall, which will have potential implications right across the airline’s network.”
This could even result in the bizarre situation where it would be cheaper to buy a Rouge ticket from Winnipeg to London via Toronto than it would be to buy a main line ticket from Winnipeg to Toronto, Cherniavsky said.
“With its Rouge service to Gatwick, Air Canada thus continues to break new ground for the airline-with-an-airline model.
“But what remains to be seen is whether or not they are simply digging themselves deeper into a hole.”