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Prospering in Harsh Conditions

A region of Canada that has forever captured the imagination of people from around the world is its north – specifically, the land above the 60th parallel. Canada’s north has a storied past, given its ever-changing mix of inhabitants and their cultures


February 4, 2009
By Frederick K. Larkin

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A position report on Canadian North


The Legacy Lives On

A region of Canada that has forever captured the imagination of people from around the world is its north – specifically, the land above the 60th parallel. Canada’s north has a storied past, given its ever-changing mix of inhabitants andtheir cultures; its strategic location that prompted some to search for a maritime passage to Asia; and its treasure trove of natural resources that has sparked economic activity over the past two centuries.
Likewise, the history of aviation in Northern Canada has a rich folklore. The innovative aircraft, the personalities who flew them and the companies that employed them have provided a bounty of fantastic tales. Thirty years ago, the two largest air carriers operating “north of 60” were Pacific Western Airlines of Calgary and Nordair of Montreal. They operated Boeing 737 jets to such spots as Yellowknife, Norman Wells and Inuvik in the west, Resolute in the Far North and Hall Beach and Frobisher Bay (now Iqaluit) in the east. These airlines’ spirits fly on with Canadian North.
The Arctic has always provided its visitors with challenges that all too often have proven to be unforgiving. Not only do companies operating in the North have to deal with the hardships brought on by uninhabitable conditions, they also have to face today’s harsh economic environment.
One might ask, “Will it be possible for Canadian North to continue to survive, let alone prosper, in such a daunting situation?” Before we attempt to answer that, let’s briefly review its history.

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Canadian North serves a total of 21 communities in Nunavut, the Northwest Territories, Alberta and Ontario.

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That Was Then…
Since its earliest days, the Canadian airline industry has witnessed a never-ending string of corporate takeovers. Such was the case in the late 1980s. In December 1986, after almost a year’s effort, Canadian Pacific Airlines of Vancouver acquired Nordair. On Feb. 1, 1987, Pacific Western bought Canadian Pacific. The merged airline became Canadian Airlines International (CAI) on March 26 that year. The northern operations were now integrated into a route network that connected more than 90 destinations in 16 countries on five continents. About two and a half years later, in an attempt to provide a more parochial focus, CAI created a division aptly named Canadian North. It initiated service on Oct. 29, 1989 with a fleet of nine Boeing 737-200Cs to 10 communities in the Northwest Territories and Nunavut from bases at Edmonton and Montreal. Its aircraft, previously operated by Pacific Western, Nordair and Dome Petroleum, were all able to carry a variable mix of passengers and cargo.
In June 1993, two of its aircraft were repatriated by CAI to serve as dedicated freighters on domestic transcontinental routes. Another 737 was returned to its lessor in October 1995. Six years after start-up, the division’s fleet was down 33 per cent. In early 1997, four of its jets returned to CAI to operate in a dual-class passenger configuration as the battle for domestic market share with Air Canada raged. This left Canadian North with only two of its original nine aircraft.
After nine years of operating as a low-priority division of a financially challenged international airline, Canadian North was sold on Sept. 10, 1998.The buyer was Air NorTerra, a subsidiary of NorTerra Inc. of Edmonton. Founded in 1987, NorTerra was and remains owned equally by Inuvialuit Development Corporation of Inuvik, N.W.T. and Nunasi Corporation of Iqaluit, Nunavut. These companies represent the Inuvialuit of the Western Arctic and the Inuit of Nunavut, respectively.
Now the company was in the hands of owners who had a keen sense of what its customers required. Under its new ownership, Canadian North continued to market itself as part of the CAI system. In March 2001, the company’s fleet doubled with the addition of a pair of 737-200Cs. Later that year, Canadian North became an independent carrier. In July 2001, a second type of aircraft was added to the fleet when two 51-seat Fokker F-28 jets were acquired. A third F-28 joined the fleet in March 2002. The growing concern now had seven aircraft.
In August 2002, the company added a fifth 737 to replace one of the F-28s. Effective Dec. 21, 2002 Canadian North started selling tickets on its website and tempted customers to use the cost effective distribution system by offering a $5 discount on every sale. To emphasize its independence the carrier introduced its current logo and livery that features a polar bear, the midnight sun and the northern lights. The first aircraft to wear the new scheme (C-GDPA, a 737) exited a paint shop in Calgary on Feb. 19, 2003.
By 2006 Canadian North had acquired another 737-200, and in June of that year a pair of 105-seat Fokker 100s joined the fleet and replaced one of the two remaining F-28s. The fleet was now back to nine aircraft: six 737s, two F-100s and one F-28.
An important step in the carrier’s development came on June 3, 2007 when it began service to four communities in the Kitikmeot region of Nunavut. Matching capacity with demand, the company introduced de Havilland Canada DHC-8-100 Dash 8s on the new routes. The turboprops have a variable cabin configuration and carry between 21 and 37 passengers, depending on the amount of cargo. The fl eet underwent some rightsizing when it shed the two F-100s in 2007/8. In April 2008 Dash 8 service was expanded to seven communities in the Qikiqtani region of Nunavut.


This is Now…

Today Canadian North serves 21 communities including 14 in Nunavut, four in the Northwest Territories, two in Alberta and one in Ontario. An additional 29 communities are connected to the Canadian North network by its four partner carriers: Air Tindi of Yellowknife; Aklak Air of Inuvik; Calm Air of Thompson, Man.; and North-Wright Airways of Norman Wells, N.W.T.
Its operational fleet consists of nine B737-200s and four Dash 8s. The 737s are the workhorses of the fleet. Five of the nine are -200C models that offer six cabin layouts with variable layouts of seats/cargo pallets as follows: Seats 112 76 60 34 24 6    Pallets 0 2 3 4 5 6 
Given seasonal demand and customer requirements, this flexibility is necessary. The average daily block times logged by each 737 is 7.4 hours, while the Dash 8s each clock 7.7 hours. The company has approximately 430 full time equivalent employees, including about 180 flight crew (pilots and flight attendants). The average company wide length of employment is approximately three years. This number is skewed down by the large number of part-time positions that experience higher turnover. Among pilots, the average length of service is more than five years. As pilots hear of opportunities to fly larger aircraft in the south, they sometimes become migratory.
The pilots and flight attendants each have their own in-house associations to represent them. Customer service representatives and cargo personnel are members of the Canadian Auto Workers union. All other employees, including administrative and maintenance personnel, are non-union. Canadian North farms out its heavy maintenance. Aveos Fleet Performance (née Air Canada Technical Services) looks after the 737s and Avmax Group takes care of the Dash 8s.
The company’s revenues are derived from its scheduled passenger traffic (44%), scheduled cargo traffic (12%) and charter operations (44%). The mix of passenger traffic on scheduled services is largely from government and the natural resources industry. Bookings come from three sources: travel agents and direct sales (49%), the internet (27%) and the company’s call centre (24%). Charters are operated on behalf of governments, corporations and leisure travel companies.
Canadian North’s mission is to earn a profit by providing safe and reliable air transport while promoting the employment and career development of citizens of the Northwest Territories and Nunavut – its ultimate owners. Adhering to the three tenets of profit, safety and community involvement has served the company well since its change of ownership a little more than a decade ago.
To gain a better understanding of any business model and therefore appreciate how a company may perform in the future, it is useful to perform a S.W.O.T. analysis (Strengths, Weaknesses, Opportunities and Threats). Doing so with Canadian North yields the following insights:

S.W.O.T. Analysis of Canadian North
Strengths:

Dominant mode – When moving people or things in the Far North, aviation doesn’t have much competition from other modes of transport.
Respected service – Its focus on service, be it convenient scheduling, constructive relationships with customers, or the provision of hot meals on its flights, has enabled the company to develop a loyal following.
Strong corporate culture – By paying its employees competitively and providing a profit-sharing program, Canadian North is able to attract and retain good people.
Diversified revenue base – The company has developed a diversified customer base within its scheduled services, with only 23 per cent of those revenues coming from its top 15 customers. Canadian North does not receive any type of subsidy.
Simplified fleet – Over the past two years, the fleet has been rationalized and now consists of two aircraft types. They are each ideally suited for the tasks that they perform. Fleet standardization provides savings related to maintenance, rotable inventories and personnel training.
Reasonable capital expenditures – In addition to the planned acquisition of two 140-seat Boeing 737-300s, the carrier is building a new hangar at Iqaluit and new cargo facility at Cambridge Bay. These expenditures are expected to be funded largely through internally generated cash flow. When it comes to spending, management appears to have a governor on the cash throttle.
Community relationships – Canadian North has established relationships with the communities it serves by sponsoring events that primarily relate to sports and health. Last year, the company spent more than $1 million on its community relations sponsorship program. Since airline service is the only link to the rest of the world for most northern communities, it only makes sense for a carrier to develop a healthy rapport with its customers.

Weaknesses:
Geographic consequences – The north has extreme weather conditions, somewhat rustic aviation infrastructure and a sparse population that is spread across three million square kilometres. Operating in this region is not a strategic priority for many airline executives.
Competition – Canadian North’s primary competitor is Bradley Air Services, which markets itself as First Air. Using a fleet of 737-200s and ATR42-300s, First Air flies to 17 of the 21 communities served by Canadian North. The resulting competitive pricing demands a disciplined approach to operating costs.

Opportunities:
Network expansion – Additional destinations and new nonstop routes are both possibilities. Increased use of Dash 8s to smaller communities is the most likely move. Over the past decade, the company has found that as it broadened its reach, its results improved.
Increased charter work – The movement of personnel from across Canada to oilsands projects and mining developments is a core part of its charter business. This activity is expected to increase at a gradual pace over time. Further down the road, there is the potential of additional natural resource developments. The Mackenzie Gas Project is planning to build and operate a 1,220-kilometre natural gas pipeline from the Beaufort Sea south along the Mackenzie River to northern Alberta. Inuvik and Norman Wells, both Canadian North stations, are expected to be active hubs during the project’s construction phase from 2011 until 2014.

Threats:
Volatile commodity prices – The prices of base and precious metals, oil and natural gas have been extremely volatile during the past year. The development of mines, petroleum exploration activity, construction of oilsands upgraders and new pipeline projects are all dependent upon high commodity prices. While positive for operating expenses, weaker commodity prices could result in delayed or missed opportunities for the company.
Fleet renewal – Finding a suitable replacement for the 737-200Cs will likely be a difficult task. No other jet can operate from gravel strips and provide the operating flexibility of the quick-change cabin. While the renewal program is not a pressing priority, it will eventually have to be addressed.
Labour contracts – The contract with its pilots expired at the end of 2008 and the contracts with its flight attendants, customer service representatives and cargo personnel will expire at the end of this year.

What Does This all Mean?
Canadian North’s business model may not be unique, but it certainly operates in an environment that is unique within North America. As such, it requires aircraft that are specially designed to meet the requirements for arctic operations and personnel who are capable of performing in situations that are vastly different from the southern norms. A successful assembly of these resources is not easily accomplished, hence it would be difficult for significant new competition to develop in short order.
While its northern market may not provide opportunities for rapid growth, neither is it significantly cyclical. Given the lack of any alternative mode of transport, there should be an ongoing level of demand for its services. Canadian North’s challenge, therefore, is to obtain a share of the traffic that permits it to remain viable.
If the airline continues to provide a positive experience for its customers, maintains its standard of operational reliability and takes a conservative approach toward expansion, Canadian North will most likely be around to celebrate its 20th anniversary in 2018.

What Does the Future Hold?
Asked what the company might look like in 10 years’ time, Tracy Medve (Canadian North’s president) comments concisely: “Similar to how it looks today, but larger.” She explains that the focus will remain on its northern scheduled operations. In other words, look for more black dots on the route map. The airline has supportive shareholders, makes meaningful efforts to integrate itself into the communities that it serves, and is relentlessly customer-oriented.
Since the airspace “north of 60” is deregulated, it is theoretically possible that some ambitious group could come north to challenge the region’s two dominant players. While such an effort would require significant funding, appropriate assets and skilled employees, not to mention psychological testing for the protagonists, it seems unlikely that the region’s competitive landscape will be altered anytime soon.
Where there has been increased competition is at the western gateway to the North – Yellowknife. Air Canada, utilizing Bombardier CRJs operated by Jazz Air, offers single daily nonstop flights from Yellowknife to Edmonton, Calgary and Vancouver. These may be only 50-seat aircraft, but they are nonetheless a burr under the saddles of the two major northern carriers. This has led some to suggest that such a practice is nothing more than “cherry picking” the best routes while ignoring the more difficult northern markets. It should be noted that Air Canada ended its presence in the North when it sold its Northwest Territorial Airways subsidiary to First Air in June 1997 and that it hasn’t expressed much interest in the region since then.

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Tracy Medve is president of Canadian North.


 

Conclusion
The company’s logo includes the branding slogan “Seriously Northern.” That implies that one cannot afford to be anything but focused on the task at hand when operating in the North. As nice as it is to have second chances, that option is often not available there. From dealing with demanding customers in a friendly but efficient manner, to making a safe approach at an isolated airfield in ugly meteorological conditions, getting it done right the first time is imperative for the continuing success of the business. It appears that Canadian North has filed its flight plan and that the routing will be more evolutionary than revolutionary. Seriously Northern indeed.