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.

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NewLeaf offers low fares, but to the wrong places

Longing to get away from this terrible winter weather to someplace warm and sunny? Well, here is a deal for you: $410 airfare per person for a quick southern getaway, leaving Friday, Feb. 12 and returning Monday, Feb. 15.

One catch: You need to be in the U.K. to take advantage of this low round-trip easyJet fare between Bristol and Malaga, in southern Spain.

Darn! There’s always a catch, isn’t there?

Europe’s cheap flights have been the envy of Canadians for years, even as Europeans ranted bitterly about poor customer service and “gotcha” penalties that brought the total cost almost up to the prices charged by full-service airlines.

A new travel company called NewLeaf — a nominal airline selling seats on Boeing 737-400s operated by Flair Air, a B.C.-based charter operator — proposes to bring European-style low fares to Canadian skies when it launches next month. The carrier will link seven Canadian cities,  with most flights operating only once or twice a week: Abbotsford, Kelowna, Saskatoon, Regina, Winnipeg, Hamilton and Halifax.

The fares are indeed attractive. As of Sunday, Jan. 17, a Mar. 2-9 Winnipeg-Abbotsford round trip sells for just $232.75, taxes and fees included.

Like other ultra low cost carriers, NewLeaf will make its real money from all the things you can sell or charge passengers for after they’ve made that modest financial commitment to be aboard the flights: bag fees that include charges for your carry-ons, seat selection fees, food and drink sales, and so on.

But NewLeaf won’t find it easy to apply the Ryanair/easyJet methodology to the Canadian market.

The European ultra low cost carriers have succeeded by selling the lingering sex appeal of travel: dreams of long weekends in Italy, stag parties in Estonia, second homes in the south of France, and trips to watch a favourite football team play abroad.

NewLeaf’s launch destinations, by comparison, lack that sort of excitement. Hamilton Airport is about 85 kilometres from both Toronto and Niagara Falls, both of which are interesting enough. But if you’ve been to each two or three times, as many Canadians have been, it’s difficult to justify an additional visit when you can go somewhere new instead. The same applies to Vancouver, which is about 70 kilometres west of Abbotsford.

Neither Hamilton nor Abbotsford nor the other launch cities (with the possible exception of Halifax, which offers a little bit of historical charm as one of Canada’s older cities) are particularly worth visiting for those who otherwise have no connection to the place.

Where could a Canadian ultra low cost carrier go that would allow it to sell the sex appeal of travel the same way that Ryanair and easyJet do? Since these carriers try to get their crews home every night to avoid the cost of putting them up in hotels, they would need to be within a few hours’ flying time of Winnipeg, and be the kinds of places people dream of going. A few suggestions:

 

  • Florida: A favourite with families. Since Winnipeg Airport has U.S. Customs and Border Protection pre-clearance gates, NewLeaf would be able to land at whichever airport offers the airline the best terms: most likely one of Orlando’s airports for the city’s central location within the state and proximity to Disney World. Approximate flying time from Winnipeg: 4 hours.

 

  • Las Vegas: The original Sin City, still popular after all these years with Canadians looking to party. Plenty of competition on this route, but also plenty of price-sensitive demand. Approximate flying time from Winnipeg: 3.25 hours.

 

  • New Orleans: Routinely one of North America’s Top 10 urban tourism draws for its rich history, gastronomy and, of course, the annual party known as Mardi Gras. Approximate flying time from Winnipeg: 3.5 hours.

 

  • New York City: One of the great cities of the world; well worth a visit, even if accommodations are notoriously expensive. Metropolitan New York’s three main airports — JFK, La Guardia and Newark — can be challenging places for an airline to get a landing slot at, but alternatives are available at Westchester County airport (35 miles north of Midtown Manhattan, but with limited public transportation links) and at Long Island MacArthur Airport (about 55 miles east, but close to the Ronkonkoma train station, which offers direct rail service to Grand Central Terminal). Approximate flying time from Winnipeg: 3.25 hours.

 

  • Quebec City: Canada’s most European city, likely its most romantic, and yet one that many Canadians have not visited. A week might be a bit long to spend there, but a long weekend visit would be ideal. Approximate flying time from Winnipeg: 3.25 hours.

 

  • San Francisco and the Bay Area: Historic San Francisco is a major tourist draw in its own right, and only 60 miles from the Napa Valley for wine connoisseurs. An airline would be able to shop around at multiple airports for the best deal, including Oakland and San Jose. Approximate flying time from Winnipeg: 3.75 hours.

 

  • Southern California: Like Florida, southern California is popular with families and those enamoured with the region’s mild year-round climate and proximity to the sea. There are many airports that a low-cost carrier could shop around at for a deal, including Santa Ana/Orange County, Ontario, San Diego, Burbank, Palm Springs and Santa Barbara. Approximate flying time from Winnipeg: 3.75 hours.