Where Canada’s new budget carriers will likely take you (and not take you)

Two-thousand and eighteen will presumably be the Year of the Ultra-Low-Cost Carrier in Canada. Already one such operation — the little-known Flair Airlines, which acquired the assets of “virtual airline” NewLeaf Travel this year — is in the air serving domestic routes, but has yet to make a substantial impact on the market. Three others, meanwhile, are planning to make an entrance.

  • Swoop, WestJet’s ultra-low-cost subsidiary, which is expected to begin selling seats in February in preparation for a June 1 launch. Destinations have yet to be announced, but Swoop will use 189-seat Boeing 737-800s — 21 more than are currently installed on WestJet’s 168-seat 737-800s.
  • Canada Jetlines, which is also planning on a June 1 launch. They plan to start with only domestic flights, from Hamilton, Ont. to Halifax, Winnipeg, Edmonton, Calgary and Abbotsford, B.C. Flights from Hamilton to holiday destinations in the U.S., Mexico and the Dominican Republic would follow in the winter of 2018-19. Like Swoop, Jetlines also plans to operate 189-seat Boeing 737-800 aircraft.
  • FlyToo, a proposed spin-off of charter carrier EnerJet, is considering getting into the market. As of late-November, however, no final decisions had been made yet on whether the airline would operate Boeing 737s or Airbus A320s, focus on domestic or international routes, or even stick with the “FlyToo” name or give the airline a different brand.

These airlines propose to offer Canadian travellers low base fares. Jetlines has said that it will offer fares comparable to the price of a pair of jeans, while Swoop has suggested that base fares will be about one-half of WestJet’s typical fares.

These carriers propose to emulate Ryanair and EasyJet in Europe, which offer very low base fares but charge extra not just for baggage and beverages, but even for having your boarding pass printed at the airport (€15, or $23 Cdn., on Ryanair) or to use their telephone call centre (£0.13, or $0.22 Cdn., per minute to call Ryanair’s U.K. call centre to make bookings; service not available during the evening or overnight hours.)

But if you think the extra charges are a small price to pay in exchange for being able to go visit Aunt Suzy in Ottawa for $250 round-trip or being able to hop over to Calgary for the same price to see a football game — not so fast.

There is a logic to how ultra-low-cost carriers make their money. It’s by going to the places where passenger loads increase rapidly as fares go down — and not going to the places where that correlation does not exist. (Or, if they do, they risk losing money and going out of business.)

For example, what if I offer you a non-stop flight from Winnipeg to Honolulu in February for $750 round-trip? You might think about it.

What if I offer you that trip for $500? Your interest has likely gone up a bit.

Now how about $400? Your interest has likely gone up still more.

Now forget all about Honolulu. What if I offer you a February round-trip to Thunder Bay for just $400?

“Ugh, no thanks,” you’d likely say.

Fine; I’ll lower the price to $200 round-trip, plus you can go in nice, warm July instead of frigid February.

“Thanks, but no thanks.”

$100 round-trip? Your golden opportunity to spend a week in Thunder Bay!

“Forget it. What the hell am I going to do in Thunder Bay?”

The first map below shows a number of destinations in Europe and the Mediterranean served by Ryanair and/or EasyJet — except for the fictitious Zurich hub in the middle. If you ran a traditional hub-and-spoke system, you could connect all of these cities to each other through the hub. Since this requires a lot of passenger processing and daily (or near-daily) service to all destinations to work effectively, it’s a very expensive way of doing business — and the fares reflect that.

The traditional hub-and-spoke model: It offers frequent and convenient transportation between many cities, including those with too little traffic to ever support a non-stop flight, such as Belfast-to-Vilnius. But it’s a costly service to provide, so fares tend to be higher. (Map generated on gcmap.com)

So, the ultra-low-cost carriers fly point-to-point. They pick up a load of passengers in one city, drop them off in another, and then the jetliner flies away to someplace else. Only the most popular routes get daily service year-round. Many routes are only served two or three times per week on a seasonal basis; some routes even only get one flight per week.

Note the pattern in this map, which represents a random selection of routes on which Ryanair and/or EasyJet will be offering at least one non-stop per week in January 2018. Note that these carriers largely exist, with only the occasional exception, to bridge two divides:

– The divide between “cold and cloudy” northern Europe and the “hot and sunny” destinations;

– The divide between “richer Europe” and “poorer Europe”, following the prevailing migration patterns.

Note also that almost all of these routes are north/south. Very few are truly east/west.

A random selection of city-pairs that will have nonstop Ryanair and/or EasyJet service in January. Note how these are mostly north/south holiday routes; though some follow migration paths between richer and poorer areas of Europe. Cheaper for passengers — especially for tourists and people who’ve moved abroad in search of work — but only a few routes are offered on both a daily and year-round basis.

Now, consider the following random city-pairs that the ultra-low cost carriers will not be serving at all. Note that ultra-low-cost carriers largely do not exist to connect business capitals or cities with similar climates and similar levels of economic development.

A “non-service” map: Random city-pairs where neither Ryanair nor EasyJet can take you (at least on a cheap, non-stop basis) in January, despite serving these cities. Note that service between places with similar climates and similar levels of economic development — and thus more limited migration — is not the purpose of ultra-low-cost carriers.

In short, outside of a few exceptions, you need either a disparity in wealth or a disparity in climate to make an ultra-low-cost model work.

So, what should we expect from a successful ultra-low-cost carrier in Canada?

First — at least during the winter months — it will need to exist primarily to carry Canadians non-stop to warmer climates. If I were to place a bet, it would be on Swoop replacing WestJet entirely on some of its U.S. routes and most, if not all, of its Mexican, Bermudan, Cuban and other Caribbean routes. The other upstarts should consider doing the same: climate differences and the popular tourism paths are where the money is in the ultra-low-cost carrier business.

Second, to the extent that ultra-low-cost carriers do offer east-west routes, expect this to follow existing tourism and migration flows, at days and times that suit the holiday traveler. Do not expect daily or year-round service — this is what Air Canada and WestJet exist to do, and not what ultra-low-cost carriers make their money on.

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The challenge of making an ultra-low-cost airline work in Canada

We haven’t seen a rush of potential new entrants into the Canadian airline market like this in 15 years.

Winnipeg-based NewLeaf Travel started operations just over a year ago as a “virtual airline”, selling low-priced tickets to places like Edmonton and Hamilton on chartered Boeing 737s. In recent months, Flair Air, NewLeaf’s primary chartered-aircraft provider, purchased NewLeaf’s assets and started operating the service under the Flair brand.

More recently, WestJet announced plans to start an ultra-low-cost “airline within an airline” to compete on price-sensitive routes. Jetlines, a completely new startup, announced a Summer 2018 proposed launch date; and Enerjet, a small Calgary-based charter operator, also hopes to get a proposed ultra-low-cost airline called FlyToo into the air.

All hope to avoid the fate of the low-cost startups of the late ‘90s and early ‘00s. These included Greyhound Air (Greyhound quit the industry in 1997, aircraft operator Kelowna Flightcraft survived), JetsGo (bankrupt, 2005), CanJet (changed from a scheduled operator to charter operator, 2006; suspended operations, 2015) and Harmony Airways (suspended operations, 2007).

If Europe’s Ryanair can take you from London to Portugal for fares as low as £101 round-trip ($166 Cdn.), and Australia’s JetStar can offer a Sydney-Adelaide round-trip for as little as $224 (same in Canadian dollars), why has it been so difficult to make low-fares work in Canada.*

Quite often, high taxes and fees have been blamed. For example, a Sept. 6-13 round-trip between Winnipeg and Montreal on Air Canada can be booked for $391.57 if you’re willing to fly on the less heavily booked flights. Of this, $89.57 — or 23 percent — is made up of taxes, fees and charges.

The other challenge is in convincing enough passengers to part with enough money to make the venture profitable.

Let’s take Ryanair, one of the industry’s fiercest penny-pinchers, as an example. This is the airline alleged to have pressured flight attendants to meet sales targets, spread families and couples randomly throughout the cabin for not paying extra for seat selection, and which mused about charging passengers to use the toilet.

Ryanair’s costs are impressively low, averaging out to just 3.63 U.S. cents (4.6 cents Cdn.) per seat per kilometre in recent times. Only a few airlines, such as Air Asia, have been able to wrestle their costs any lower. One way Ryanair does this is by packing more seats into each aircraft: one of their Boeing 737-800s can carry 189 passengers; WestJet only fits 168 seats into the same space.

What if a Canadian operator, hypothetically called JetManitoba, started flying Boeing 737-800s around North America, and matched Ryanair’s low costs through a combination of low wages, no overnight crew stops, high-density seating and a stringent nobody-gets-anything-for-free pricing model?

JetManitoba Flight 1, our hometown low-fare leader, starts out early in the morning with a round-trip to Vancouver and back. In the afternoon, it does another round-trip to somewhere else.

At a rock-bottom cost of 4.6 cents per seat-kilometre, JetManitoba’s 189-seat Boeing 737 needs sales of $32,516 (before taxes, fees and charges) to make each Winnipeg-Vancouver round-trip nominally break even.

No problem, you might think. $32,516 divided by 189 seats is a very reasonable $172 per seat round-trip. Add the taxes, fees and charges to that, and you can still offer a no-frills round-trip to Vancouver for less than $300. Just make the profit off of charging people $25 per checked bag or roll-aboard, $15 per person each way for seat selection (at risk of being assigned a random seat if you don’t pay up), and $15 per person for a drink and a sandwich (because JetManitoba has a monopoly on food sales at 36,000 feet).

Now, imagine it’s early February. The Canadian tourism industry is largely in hibernation. Winnipeg is under a Wind Chill Warning because it’s -24°C at midday, with the wind blowing from the northwest at 30 gusting to 50 kilometres per hour. In Vancouver, it’s raining as usual and no one has actually seen the sun in more than a week. Hardly anyone wants to be on holiday in either city.

Then what? The business travellers, who have no choice but to travel, tend to prefer Air Canada and WestJet over JetManitoba because of the better schedules. That leaves you largely with a tiny pool of would-be passengers that you somehow need to get at least $32,516 from to make each Winnipeg-Vancouver round-trip break even.

It doesn’t matter if you convince 189 people to part with $172 (plus taxes, etc.) each or 50 people to part with $650 each. It’s raising enough to cover that average of $32,516 in bills per round-trip that counts.

You could have a sale, offering 25 seats you know you will never sell for $172 for $99 or even $59 just to get a bit of cash flow to help you get through the low season, even if the flights are unprofitable.

Or cancel your Winnipeg-Vancouver service until the summer and fly to places that people actually want to fly to in February, such as southern resorts, competing directly with other airlines already serving these destinations. Again, for each round trip, you need to find a way of separating enough people in the community from enough money to keep your bills from falling into arrears. Not easy if there are more seats available than people capable of filling them.

Or just park the plane and lay people off until the tourism business starts to pick up again in the summer. You’ll still need to pay for the plane, if you can’t rent it out for the season, but at least your payroll and fuel costs will come way down.

Those are the challenges of running an ultra-low-cost airline in Canada. It is very difficult to make it work in a country where domestic leisure tourism all but shuts down for two-thirds of the year, the less price-sensitive business travel market is already well-served, and the seasonal international leisure routes are also well served by existing operators.

The ultra-low-cost-carrier business might start out with four contestants. Don’t bet on it carrying on like that.

 

* – Seat-only prices. Baggage, seat selection, food, beverages, etc. all extra.