Why low-cost airlines can’t survive in Canada

NewLeaf Travel Company’s plan to disrupt the status quo by introducing an ultra-low-cost carrier has done the opposite – reinforcing the idea that the status quo of legacy airlines like Air Canada and WestJet is just too hard to break.

The airline, which roused the budget traveller community in early January with its tagline – “Your fare gets you the two essentials: a seat and a seatbelt. The rest is up to you.” – announced it would be postponing its plans to start service in February due to “ambiguous” licensing woes.

“Now, there is ambiguity in the air as to whether we need to amend the relationship with our air service provider, or whether we need to have a license ourselves. While Canada has many other indirect air service providers, NewLeaf is in a unique position as we are the first large-scale (indirect provider),” NewLeaf CEO Jim Young told CBC. “We welcome a regulatory system in which businesses like ours can thrive in Canada as they do in other countries.”

The main glitch, it seems, is the company’s business scheme. Technically speaking, NewLeaf is a “tour operator” selling seats via a charter arrangement with Kelowna, B.C.-based Flair Airlines. It’s Flair that holds the actual Canadian Transportation Agency operating license.

Initially, the company’s goal was to launch flights to Abbotsford, Kelowna, Regina, Saskatoon, Winnipeg, Hamilton and Halifax on Feb. 12 with prices ranging from $89 to $149.

It’s not a new model but an attempt to emulate the success of budget airlines in Europe.

The idea behind low-cost and ultra low-cost airlines is to “unbundle” the commercial flight experience in an attempt to make it easier on the customer’s pocketbook. Elements like bringing a piece of carry-on, priority boarding and seat selection will cost extra.

Air Canada Rouge, for instance, has brought costs down by adding 25 per cent more seats to the plane.

But the hallmarks that define low-cost-carriers in European markets – more seats crammed on a plane, pay-per-service and premium class categories between first class and second – are being employed by “legacy” airlines like Air Canada and WestJet.

Air Canada’s new 777s for instance have 480 seats as opposed to 350. That dominating attitude by the bigger airlines, among other things, has made it difficult for startup low-cost carriers to really gain a foothold, says Fred Lazar, aviation analyst and professor at the Schulich School of Business.

“In Canada there isn’t much of an appetite for airlines – WestJet and Air Canada have been around, they’re profitable, successful,” says Lazar.

It’s not that regulators have drowned ultra low-cost carriers in red tape in Canada; from a regulatory point of view, an airline is and airline. But investors just aren’t ready to prop up the little guys.

“For startups, Canadian investors are by and large quite risk averse, given the history of startups in the airline industry they’re going to be short-lived so why throw away your money?” says Lazar.

Not that it stops anyone from trying. While NewLeaf is trying to kick-start its foray through a workaround, two other entrants are trying the traditional route – raise enough money to get a seat at the table.

Canada Jetlines Ltd. recently announced plans to list on the TSX Venture exchange and hopes to raise $40-million to begin flying. Jet Naked, schemed up by Tim Morgan, one of WestJet’s co-founders, pegs its startup costs at $30- to $50-million.

But competition is stiff.

Two similar discounted airlines, SkyGreece and CanJet, tried the NewLeaf approach but shuttered last summer, adding their names to a list of similar low-cost carriers, including JetsGo, Roots Air and Zoom Airways.

Lazar points out that Porter Airlines, which flies from downtown Toronto, seems to be the rarity.

“They have a very niche market and dominance of the airport,” he says. But he doesn’t have much faith in low-cost-carriers succeeding in the Canadian market anytime soon.

“They may last six or seven weeks or maybe even a couple years,” he says. “Eventually, so far, they’ve all failed.”