Latest Consolidation Transforms Canadian Aviation Industry

Latest Consolidation Transforms Canadian Aviation Industry

Competitive Pricing Drives New Entrants into Market

Fourteen months after the merger of Canada’s two largest carriers, Air Canada [AC] and Canadian Airlines, the aviation landscape in Canada has changed dramatically, forcing the dominant carrier’s growth to zero while low cost and new entrant carriers attempt to compete aggressively for the country’s 30 million travelers.

The two major carriers and their regional partners were hurt with implementation of the North American Free Trade Agreement in 1994, which, among other things, allowed more access for U.S. carriers with more direct flights between the countries.

The December 1999 combination of Air Canada and Canadian resulted in Canada’s regulatory authorities carefully scrutinizing each step of the process to ensure the country’s sustained competition in air travel.

Thus far, the government seems pleased with its efforts. Transport Minister David Collenette recently said that the new Canadian aviation framework was effective in allowing existing carriers to grow and producing a favorable climate for new entrants.

Jacques Kavafian of Yorktown Securities agreed. “There is more competition the way we had anticipated,” he said. However, he warned that “all new competition has to be based on price, no one can compete on service and networks.”

The weakening Canadian economy is an advantage to those carriers competing on price, according to Kavafian, as a result of consumers searching for cheap tickets.

Carriers scramble to compete with Air Canada

Air Canada has been feeling increased pressure from start-up carriers hoping to take advantage of the enhanced competitive landscape. They have been offering things such as lower fares or higher levels of service.

The carrier that seems to be thriving most is Calgary, Alberta-based WestJet [WJA.CA], which took to the skies in February 1996 as a Southwest [LUV]- styled carrier, focusing on markets in Western Canada. In 1999, the carrier completed an IPO that helped fund both its move toward Eastern Canada and the purchase of new Boeing [BA] 737s.

In January, the carrier saw capacity jump almost 70 percent to 199.8 million ASMs in just one month. Load factor rose 3 percentage points to 65.6 percent, and traffic grew by 70 percent to 131.2 million RPMs. Flights to Toronto begin in July, for a total of 19 cities served by the summer.

Roots Air, a partnership between Skyservice Airlines Inc. and clothing firm Roots Canada, plans to distinguish itself as premium service carrier, focusing on offering gourmet food and other amenities. The airline starts service March 26 with flights from Toronto to Calgary, Montreal and Los Angeles.

Kavafian questioned the viability of the Roots Air business model. “The three-hour flight from Toronto-Calgary is not long enough to distinguish service. Their pricing is not substantially below Air Canada. They’re modeling themselves after Virgin Atlantic, but Virgin never flew domestically, they started internationally. It’s a mistake starting domestically,” he said.

CanJet has been spending most of its time battling Air Canada over ticket prices. The Canadian Competition Bureau is reviewing an October 2000 complaint by the startup accusing Air Canada of predatory pricing on fares in Atlantic Canada. On Feb. 14, CanJet issued a public complaint again accusing Air Canada of predatory pricing on routes including Toronto-Halifax, and Halifax-Ottawa/St. Johns.

A fair response

Air Canada responded to the attack, saying it was simply exercising its right to offer matching prices on the routes. “It’s not a question of preventing new entrants from doing business. CanJet has had a chance to establish itself,” said the airline’s John Reber.

Kavafian said CanJet’s strategy was straightforward. “CanJet would not stay in business if Air Canada continued discounting as it is doing. They could sty in business if Air Canada would cut them some slack,” he said.

And we can’t forget to mention Air Canada’s own effort to start a low- fare unit, announced earlier this month during a conference call with financial analysts.

The carrier reportedly is talking to other airlines to join forces to form a low-fare carrier that would serve Canada and U.S. markets.

Intended zero growth

The combination of airlines like Canada 3000 enhancing domestic routes and a softening of the Canadian economy led Air Canada to declare its intention of zero growth domestically for the upcoming year, according Reber.

Air Canada issued an earnings warning Dec. 21, 2001 saying it would not meet financial community forecasts and as a result the carrier declared plans to reduce its labor force by 8 percent.

“Our strategy going forward is controlling costs and adjusting capacity to meet demand. We won’t be adding new routes or capacity domestically, but we’re not cutting service either,” Reber told World Airline News.

Fine tuning

The strategy is a result of fine-tuning to eliminate excess capacity in the Air Canada/Canadian integrated schedule. In addition, Air Canada has opted to cancel international routes including Toronto-Amsterdam and Montreal-Tel Aviv.

Reber emphasized the growth of low-fare and new entrant carriers is evidence of dynamic and open environment, but he warned there are limitations in the Canadian aviation market.

“Economic conditions change and spending habits of consumers change. A successful carrier has to be able to adapt,” he said. Reber added that the aviation market in Canada is one-tenth of the U.S. aviation industry.

And the low-cost “Southwest” effect cannot be replicated indefinitely, according to Kavafian. “A lot of hamburger chains model themselves after McDonalds. But, there is jut one McDonald’s,” he said.

Brief Overview of Canada’s Airlines

Canada 3000 – Launched service in 1998 as a low-cost carrier. The airline announced Jan. 29, 2001 its purchase of Royal Aviation Inc. that will result in an increase from 30 to 40 domestic routes by the end of the summer. Canada 3000 currently serves 90 global destinations. Canada 3000 has a fleet of 5 Boeing 737-200s, 6 Airbus A320s and 4 A330-200s.

CanJet – Launched low fare operations in Sept. 2000 serving primary eastern destination including St. John’s, Halifax, Winnipeg, Montreal, Ottawa and Toronto. CanJet’s fleet includes 6 Boeing 737-200s. The carrier attempted to lease three additional aircraft in early 2001, but lease negotiations with US Airways are stalled.

Roots Air – Scheduled to launch operations March 26, 2001 on three daily frequencies from Toronto to Calgary and two daily flights from Toronto to Montreal. The carrier also plans to serve the Toronto-Los Angeles market. Roots Air’s fleet includes Airbus A320 and widebody A330 aircraft with three classes of service. The airline said it plans to provide competition in the full airline service sector at reasonable ticket prices.

WestJet – The group’s veteran, WestJet began service in 1996 and has often been dubbed Canada’s “Southwest.” In 2000 the carrier expanded eastward bringing its low cost operation to Hamilton, Moncton and Ottawa. WestJet serves a total of sixteen destinations with twenty-two Boeing 737-200s.

Source: Airlines’ press releases

COPYRIGHT 2001 Phillips Publishing International, Inc.

COPYRIGHT 2001 Gale Group