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January 26, 2009
By Carey Fredericks
 18
Nationally, WestJet will step up its game against Air Canada in 2009, with multi-tiered fares, a frequent flyer program and alliances with  foreign airlines.
 

The predictable collapse of Zoom Airlines notwithstanding, Canadian air transport appears to have survived the great gas pains of 2008. Good news for established players and start-ups, of which there is one.

It may be too soon to fully gauge the impact the global credit meltdown will have on Canadian air transport. Passenger volume at Toronto’s Pearson International Airport is five per cent ahead of last year, but the airport authority is predicting a slight downtick in traffic for 2009, and has delayed construction of an $850-million U.S. pier scheduled to begin in 2011.

Still, neither record-high fuel prices nor a softening economy appear to have caused lasting damage to load factors at either Air Canada or WestJet. The absence of a national low-cost competitor has helped, giving both airlines the breathing room to increase fares and pile on hefty surcharges.

Nevertheless, the tectonic plates beneath Canadian air transport are shifting. Canada’s supporting cast of smaller airlines is set for a readjustment, triggered by the collapse of Ottawa-based Zoom Airlines and the revving up of another newcomer from the west. It is unlikely that player realignments in the niche market will put downward pressure on airfares on the scale of a Jetsgo, although it may force a shift in how the two national airlines serve smaller markets.

Zoom Airlines is one of 30 airlines that have gone bust this year, while the Alitalia deathwatch continues after a group of Italian investors turned their back on even the profitable bits of the beleagured airline. The Zoom demise surprised few. Fuel costs and the collapse of a 13th-hour rescue package may have been the final cuts, but a business plan that went head-to-head against established players on crowded U.K. routes and a fleet of Boeing 767-300 airplanes that limited the carrier to big markets suggests that bankruptcy was only a matter of time. As if to emphasize the point, U.K.-based discounter Flyglobespan, which launched service between London/Gatwick and Hamilton, Ont. in spring 2007 had already scaled back frequency and more than doubled fares.

“There is no room in Canada for a ‘me too’ product,” explains airline analyst Jacques Kavafian of Toronto-based Research Capital. “You have to be a Porter and add value,” a reference to Porter Airlines, which operates Bombardier Q400 turboprops out of Toronto’s City Centre Airport, on the doorstep of the city’s financial district.

New York/Newark has become Porter’s most successful new destination to date, receiving more bookings ahead of the March launch than its other routes combined. The privately-owned airline reports revenue from the route to be 80 per cent ahead of projections, and has recently ordered an additional two Q400s, bringing the fleet to 12 by the end of 2009. Porter also plans to add two new US destinations over the next 12-months, beginning with service to Chicago on November 12.

While details are sketchy, traffic on Porter’s routes is building, and the airline recently introduced a frequent flyer program, which may help to blunt a superior marketing advantage held by Air Canada and Jazz. If the high-service upstart has vulnerability it is being sole tenant at the Toronto City Centre Airport. To-date, the Toronto Port Authority, the money-losing board that operates the island airport, has been successful in shutting Jazz out, but for how long? Jazz, which is considering replacing its ageing fleet of early-generation Dash 8s with Q400s, would like to plant its flag on the island, if only long enough to drive Porter out.


But on this occasion it would be the established carrier ‘me too-ing’ the upstart, and it is not clear whether Jazz would raise the service bar on a few select routes just to match Porter.

With Zoom following Canada 3000, Jetsgo, CanJet’s scheduled operation and Harmony into the graveyard, the main players in Canada’s air transport industry are comfortably positioned to chase different markets. Nationally, WestJet will step up its game against Air Canada in 2009, with multi-tiered fares, a frequent flyer program and alliances with foreign airlines. Porter will continue selling convenience out of downtown Toronto, Air Transat will stimulate the leisure market as part of the world’s fifth-largest and North America’s biggest vertically integrated tour operator and is reported to be kicking the tires of both the Boeing 787 and Airbus A350 as a potential replacement for its fleet of Airbus A310s and A330s. Meanwhile, smaller Sunwing will expand its “bring the plane to your door” strategy of offering a limited number of sun destinations from smaller, underserved markets.

It is a good plan. Tourism patterns have changed dramatically over the last ten years, and ease of travel is one of the criteria when selecting a destination. Air Canada, WestJet and Air Transat will always offer the broadest selection of tour destinations and greater frequencies to smaller markets, but the package will likely include a layover and aircraft change at a larger hub. An airline that offers nonstop or direct service to one destination once a week may have greater appeal for consumers anxious to avoid airport and transfer hassles. “That’s what they are banking on,” says Kavafian. “People will go where it is convenient.”

Tim Morgan, president of Calgary-based Morgan Air Services, co-founder and former WestJet executive, and CEO of NewAir & Tours Group, Canada’s newest leisure airline, which will also target underserved markets, agrees. “The opportunity exists to play in those markets where nobody has played before. We won’t be stepping on anybody’s toes.”

NewAir is expected to launch in October or November 2008, using a single Boeing 737-700 and a WestJet standard of in-flight service. Otherwise, Morgan was playing his cards close to his vest at the time of writing, including the airline’s brand name, first route and whether the upstart will be based in Calgary. “We’ve not made a decision on that yet,” he added.

Both NewAir and Sunwing have the flexibility to get in and out of a market quickly. Toronto-based Sunwing has been aggressively hiring out-of-work Zoom flight and cabin crew and plans to pre-sell 700,000 seats to sun destinations this winter, wet leasing airplanes from Europe whenever its own fleet of three Boeing 737-800s is not large enough to fill the order.
NewAir estimates it does not need to stay in any one market for more than six weeks, and expects routes to change dramatically from season to season, a smart hedge against Air Canada or WestJet wedging into a thin market. “We’re not tied to anything,” Morgan adds. “If a market gets flooded with competitors, we can pull out.”

The Canadian air transport industry appears to be flying into 2009 with full airplanes, a competitive market balance and a stabilized fare structure.

The credit crunch is likely to keep the industry in check at least for the next 18 months. The wild card will continue to be the price of crude that almost hit US$150 a barrel in July before settling back to earth.

In September, Air Canada responded to the drop in fuel prices by becoming the first North American airline to stop charging to check a second piece of luggage. The airline also promised a more transparent fare structure by eliminating its fuel surcharge and rolling the cost of filling the tanks into the ticket. WestJet and Porter Airlines have followed suit. That probably means a more volatile fare structure, but an easing of ‘sticker shock’ after pressing the submit button online.

With less flexibility to lower price to gain market share, service may become the battle ground for the next 12 months.

There are early indications that passengers may have already had a belly full of escalating service charges for shrinking levels of service. United Airlines recently faced a passenger revolt when it tried to suspend meal service on transatlantic flights between Washington and Europe. United is the largest airline in the Star Alliance chain, which includes Air Canada and Germany’s Lufthansa, and probably its weakest service link. A passenger revolt where service expectations are already at their lowest may be a harbinger of things to come if some players insist on reducing the product to the point where, with the exception of a guaranteed seat, is indistinguishable from a city bus.