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Canada Jetlines hopes to succeed where others fail

Dec. 2, 2013, Vancouver - The soaring profits at Air Canada and WestJet Airlines Ltd. this year has caught the attention of others who hope to share in the spoils by launching their own airline.


December 2, 2013
By The National Post

But some industry observers think would-be entrants will face a hard time.

 

A group unveiled plans this week to the Financial Post to
launch an ultra-low cost carrier next fall aimed at filling a hole in
the market by offering discount, no-frill flights in Western Canada.

 

The Vancouver-based trio, consisting of Jim Scott, David Solloway and
Dix Lawson, aim to launch Canada Jetlines Ltd., modeled after the
success of other similar budget carriers, like Ryanair, Allegiant and
Spirit Airlines.

 

David Newman, Cormark Securities analyst, said the launch of an
ultra-low cost competitor in Canada is not overly surprising given the
industry’s relatively strong fundamentals, the soaring earnings,
WestJet’s strategic initiatives to appeal to a broader array of
travellers, including business, and the backdrop of an improving
economy.

 

In the U.S., ultra-low cost carriers like Spirit and Allegiant have
recognized industry-leading margins by stimulating low-yielding traffic
with low fares, he said.

They have been able to do so because of their extremely lower cost structure.

 

“Spirit essentially came in to the low end of the market that was
previously occupied by Southwest Airlines, which pursued more of a
full-service strategy. Jetlines hopes to replicate this success in
Canada as WestJet pursues more of a full-service strategy,” Mr. Newman
said in a note to clients.

 

But pushing ahead with the plan is not without a sizable risk, he
said. The Canadian airline industry has not been kind to new airlines,
with the exception of Porter Airlines, in recent years, in part, because
of its defensible position on the Toronto Island, he said.

 

For certain, the history of Canadian aviation is littered with the
remains of several failed competitors, including JetsGo, Canada 3000,
and Roots Air.

 

Tim Morgan, chief executive of charter operator Enerjet and one of
the founders of WestJet, has a lot of experience in launching low-cost
alternatives.

Enerjet launched in 2009 with an eye for breaking into the charter
travel market to sun destinations but eventually found the company’s
bread and butter in transporting oil sands workers.

 

Rumours have been circulating that Enerjet was interested in breaking
into the ultra-low cost market after hiring a new president, David
Lancelot, and new chief commercial officer, Cameron Trant, who are
former executives at Spirit Airlines.

 

“Right now, we have no comment on that stuff,” Mr. Morgan said in an interview.

 

But he added that if the right opportunity came along, he’d look at it.

 

Vancouver’s Salman Partners has agreed to raise $100-million in
financing to get Jetlines off the ground, according to the airline’s
management.

 

“Raising $100-million in this market, no matter what airline you
have, would be difficult,” Mr. Morgan said. “We kind of thought of that
number two years ago, and there was just no appetite. To tell you the
truth, it’s not much different now.”

 

At the core of Jetlines business model is the belief that ultra-low
cost carrier’s can derive as much as 40% of their total sales from
ancillary revenues by unbundling and selling only services the customers
want to them.

 

But the “low-cost” is as much about their cost structure as the fares
they offer. Ultra-low cost carriers rely on the cost creeping up over
time at older airlines, as has occurred at Air Canada and WestJet, so
they can undercut the market.

 

In Canada, the challenge has always been the higher taxes and fees on aviation and the smaller population here.

 

At the same time, both WestJet and Air Canada have recognized their
creeping costs and implemented measures to contain them, including
launching their own low-cost subsidiaries Encore and Rouge respectively
this year.

 

In its business plan, Jetlines plans to recover the higher fees in
Canada as an “ATC surcharge” and by garnering ancillary revenue per
flight on average of 18% by charging for things like premium economy
seats, in-flight snacks and drinks, and renting iPads, and even things
like onboard nanny services.

 

Kevin Chiang, CIBC World Markets analyst, said Jetlines will still have its challenges.

 

“Never say never,” he said. “Whether they can make money to doing it, I’m not sure.”

 

He said Jetlines could expect the larger carriers to use their larger
networks and fleets to try to squeeze the new entrant out of the
market.