The COVID-19 pandemic has created an opportunity for smaller airlines to make gains in the Canadian market, but they face a steep challenge against Air Canada and WestJet, according to financial analysts.
National Bank's Cameron Doerksen and associate Alex Hutton wrote in a note to clients last week that while the airline industry has been disrupted by the pandemic, it has also "created an opportunity for smaller airlines to aggressively expand and for new players to enter the market."
"Even though travel demand remains depressed, conditions are arguably favourable for new competitors to make their mark," the analysts wrote, pointing to several contributing factors including aircraft availability and low lease rates, a larger pool of qualified pilots, and airports that are looking to attract new airlines in order to make up for lost revenue.
"Perhaps most importantly, the pandemic has significantly impacted Canada's large incumbent carriers Air Canada (AC.TO), WestJet, Transat (TRZ.TO) and Sunwing, all of which have taken on more debt to survive the crisis. Furthermore, all these carriers have significantly reduced their networks and trimmed capacity, which could provide an opening for other smaller airlines to fill the void."
The Canadian airline market is currently dominated by Air Canada and WestJet, which control about 80 per cent of total domestic seat capacity. But, as Doerksen and Hutton noted, there is potential for a "land grab" in market share by airlines such as Flair Airlines and Porter Airlines.
Flair has positioned itself as an Ultra Low-Cost Carrier (ULCC), a no-frills airline that keeps base fares low while charging for extras including seat selection and carry-on baggage. The Edmonton-based company has aggressively expanded within Canada in recent years, increasing the size of its fleet, and adding more routes including to new sun destinations.
"We believe Flair is already having an impact on pricing on routes where it competes directly with Air Canada and WestJet," the analysts wrote.
"Even when considering Flair's unbundled fare structure (carry-on bags can be an extra fee ranging from $19 to $39 for instance), its all-in fare generally comes in lower than the other two airlines."
Porter Airlines is also expanding operations, announcing in July that it will purchase 30 Embraer E195-E2 aircraft with right to option to purchase an additional 50 jets, an order valued at up to US$5.82 billion. Porter's expansion includes service out of Ottawa, Montreal, Halifax and Toronto's Pearson International Airport, the first time the airline will fly out of Toronto's biggest airport.
But whether those airlines – and other entrants such as Canada Jetlines, Enerjet and OWG – will be able to challenge Canada's incumbent carriers over the long term remains to be seen. While the analysts say the current environment is reminiscent of the early 2000's market when WestJet rapidly expanded and other entrants were in the market, they note that the Canadian aviation market today "will be much more challenging to penetrate."
"As evidenced by the long list of failed airlines in Canada over the past (approximately) 20 years, history would suggest that new airlines face long odds of success," the analysts wrote.
"Given that developing new routes can take many months to turn profitable and attempting to take market share from larger incumbent airlines can be costly, any successful new airline in Canada will need to be well-capitalized."
Global travel recovery has stalled in recent months, according to the latest statistics from the International Air Transport Association (IATA), an industry group which represents 290 airlines around the world including Air Canada and WestJet. IATA says total global demand for air travel in August, as measured in revenue passenger kilometres, was down 56 per cent compared to August 2019, led by a slowdown in domestic travel around the world. International demand also slowed, falling 69 per cent compared to August 2019 levels.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.