Better fares remain up in the air
Minister’s plan to raise cap on foreign ownership not enough to decrease prices, critics say
Canadians have long complained about sky-high air fares and fees on domestic routes, and on flights down south, millions are willing to trek across the border in search of better deals at U.S. airports.
Transport Minister Marc Garneau says he’s heard the gripes, and is taking steps to open up competition by raising the limits on foreign ownership in Canadian airlines, in hopes of spurring no-frills airlines, known in the industry as ultra-low-cost carriers.
Those carriers like Allegiant Air in the U.S. or Ireland’s Ryanair offer only the basics — and passengers will often pay for any extras, whether it’s to bring a carry-on bag or to print a boarding pass at the airport.
In a speech last week in Montreal, Garneau said the Liberal government would bring in legislation to raise the foreign ownership cap from the current 25 per cent to 49 per cent — though no single investor can own more than 25 per cent.
“This will lead to more options for Canadians, and allow the creation of new, low-cost airlines in Canada,” Garneau said.
But it’s unclear whether the raising of foreign ownership caps will be enough to lower the price of flights within Canada, with some calling for additional relief for existing airlines or even more dramatic changes to long-held airline regulations.
Garneau’s move certainly seemed to have an immediate positive impact on the industry.
In an unusual move, the minister granted exemptions to two companies — Vancouver’s Canada Jetlines and Calgary’s Enerjet — which had asked for the restrictions to be lifted, not wanting to wait for Parliament to enact legislation.
Later that same day, Enerjet announced it already has an investor lined up — Phoenix-based Indigo Partners, which helped launch low-cost carriers Spirit Airlines and which also owns Frontier Airlines.
Enerjet chief commercial officer Darcy Morgan says his carrier has a working name — FlyToo — which signals its goal of ensuring everyone can afford to fly, too.
“We truly believe we are on a path to democratize travel in this country,” he said, arguing cheaper air fares will have a ripple effect on the economy and create jobs.
Canada Jetlines president Jim Scott also praised the swift action. “We were very surprised, and very pleased,” he said. “But it also signals that this government is very serious about establishing a third carrier to provide affordable air fare.”
His company is planning on going public by doing a reverse takeover, which is when a private company merges with a dormant or shell company that already has a public listing, without having to go through an initial public offering process.
It plans to team up with junior miner Jet Metal, which has the ticker JET on the TSX venture exchange, and Scott estimates it needs to first raise $6 million by year’s end. Then it will look for other investors to help the carrier get off the ground, including paying for jets already on order with Boeing.
“I’ve had steady calls from interested parties,” he said, adding partners should be finalized and announced in March, with launch by next summer, promising lower fares for consumers.
Next week, Jetlines staff will be touring southern Ontario airports looking at options that include Hamilton, Waterloo and London, and possibly others like Windsor or Kingston.
Jetlines has said it plans to have main bases in Vancouver and Hamilton, and will fly across Canada, the U.S., Mexico and Caribbean, starting with six Boeing 737 aircraft in the first year.
In theory, more competition should bring better prices, but not everyone thinks that will happen.
“Don’t hold your breath,” says Ambarish Chandra, an economics professor at the University of Toronto.
“I am skeptical. I’ll cheer them on. I would be happy to see more airlines, especially domestic airlines, but I would be surprised to see them build the network they need.”
That’s because Canada’s geography and population base just doesn’t have the market size to support the kind of competition that is required, Chandra said.
“To run a nation-wide airline with an efficient network requires economies of scale,” he said.
“The odds are stacked against them (new airlines). I would be surprised to see them grow very fast, or do very well.” NewLeaf Travel, which has launched service out of Hamilton, argues it’s already growing, offering seats on Kelowna-based Flair Air, to cities in the west and east.
NewLeaf emphasizes it is not an airline, but a travel company, so not subject to any foreign ownership rules.
“We have managed to find a way into the marketplace under the current constraints,” New Leaf CEO Jim Young said. “We have carried 80,000 customers since July.”
NewLeaf runs a very limited schedule — often flying to certain destinations just once a week — with three planes.
Its launch did prompt WestJet to begin to match routes including Hamilton to Edmonton — and just this week, WestJet says it will fly between Hamilton and Vancouver four times a week, starting next April.
NewLeaf’s launch was initially delayed over licensing questions — which forced the company to cancel reservations and refund customers.
Enerjet’s Morgan argues his company is in a much better position to
“Don’t hold your breath . . . I would be happy to see more airlines, especially domestic airlines, but I would be surprised to see them build the network they need.” AMBARISH CHANDRA U OF T ECONOMICS PROFESSOR
take off, given it already has an aviation operating licence, and is just looking for funding from investor.
It has also operated charters to send workers to oilsands projects in northern Alberta, down south to sun destinations for Transat, overseas in Europe for European airlines.
He acknowledged that the deal with Indigo Partners still needs to be finalized, but he touted the experience of its executives.
“They are the pre-eminent financial backer (for low-cost carriers) and have an excellent track record,” Morgan said, adding Indigo Partners will be the lead backer but not the only investor. He estimates tens of millions of dollars will need to be raised.
“We would have a year advantage or maybe 18 months, just to get started,” he said, though the company would have preferred no restrictions on foreign ownership as long as it was Canadian controlled.
Canada’s two biggest airlines, Air Canada and WestJet Airlines, are not happy with the exemptions granted to the two carriers, adding the government should also tackle high airport fees and aviation taxes.
“We don’t necessarily like where the playing field is not levelled, in terms of the speed with which exemptions and other decisions are made,” Air Canada CEO Calin Rovinescu said on a conference call this week.
“If there is a process to change laws, to change restrictions, then we look forward to everybody having the opportunity to benefit within the same time frame.”
Air Canada said it’s prepared to compete on fares, noting it has faced low-cost competition from the likes of Transat and WestJet for years, resulting in competitive fares.
Rovinescu also pointed to its discount carrier Rouge, which has a lower operating cost structure, saying it could be deployed on domestic routes, if needed. Rouge has flown routes during peak summer travel season and is flying now between Toronto and Kelowna, B.C., and Toronto and Deer Lake, N.L.
WestJet CEO Gregg Saretsky said in a statement that the biggest challenge to ensuring low fares for Canadian consumers is the rising cost of aviation infrastructure.
“Canada is a much more expensive jurisdiction in which to operate than other jurisdictions,” Saretsky said last week.
In fact, Chandra believes the best way to ensure lower fares in Canada is to open up domestic routes to foreign carriers, allowing U.S. airlines or British Airways or Lufthansa to fly between Toronto and Vancouver, or Halifax and Montreal. That’s not permitted now and foreign airlines are not allowed to fly domestic routes inside the United States. But in Europe, carriers from other countries are permitted to fly such routes, resulting in cheap fares within European cities.
“Given how large Canada is geographically and how small our population is, we need to be bold and think of new measures to create competition,” Chandra said.
“In an ideal world, we would have more competition. But it would take bold thinking, beyond just raising ownership caps,” he said.