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Airline Mergers & Acquisitions, Airline Restructuring, Canadian Operators, Commercial Airliners, Regional Airlines

Mega Merger Between First Air and Canadian North Will Keep Regulators Busy

The planned merger between Makivik Corporations’s First Air and NorTerra Inc.’s Canadian North will have a tough time from regulators, as reported in the previous article, 27 destinations are presently overlapped by both airlines. With only one airline serving those destinations, this will turn into a monopoly situation, for as soon as competition is taken away anywhere, and especially in the north we get exorbitant air fares, just look at routes in the north served by one carrier, be it Inuvik to Sachs Harbour or Ulukhatok by Aklak Air or Norman Wells to Forth Good Hope or Colville Lake by North Wright Air, the yields ($ per RPM or mile) of $1.60+ per mile would make any airline executive in the south drool.

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This merger will, if it goes ahead, create a “cash cow” for the new airline, as frequencies will be reduced and yields and air fares will increase, beyond what they are today. I have always wondered how Canadian North and First Air could compete with Air Canada and WestJet on Yellowknife (YZF) to Edmonton (YEG) where today it is the only route in Canada that has 4 competitors on one route. This is something that has caused a lot of problems for First Air and Canadian North, as before Air Canada/Jazz and WestJet entered that market, the two northern airlines used those routes profits to cross subsidize the routes to the remote communities of the North. Then the same happened to Iqaluit and the financial ‘model’ for both Canadian North and First Air was broken, and the idea of a merger began. Today, the pricing situation on the Yellowknife – Edmonton is such that I do not believe anyone is making money on that route, and if so then its AC and WJ only because they can feed their other flights from Edmonton to other destinations and make money on the connecting flights which First Air and Canadian North do not do.

As of 2013 Air Canada in terms of passenger revenue had 55% of the domestic market and WestJet had 36%, which is 91% of the Canadian passenger market market. That leaves only 9% for remaining major regional scheduled airlines in Canada like Air North, Canadian North, First Air, Calm Air, Pacific Coastal, Central Mountain Air, Transair, West Wind Aviation, Perimeter, Pascan, PAL and Bearskin Airlines. By offered domestic seat capacity, Air Canada has 54% and WestJet 27% for a combined 81% of the seat capacity offered in Canada, both AC and WJ are very good at filling those seats with an average load factor of 83%+, the remaining regional scheduled airlines which do offer 19% of the seat capacity in Canadad not have average load factors anywhere near that and have much lower average ticket prices per passenger as their stage lengths are much shorter than at AC and WJ, and that is why he regionals obtain only 9% of the revenue with 19% of seat capacity.

By flying into markets like Yellowknife, Iqaluit, Whitehorse and others, the heavy weights AC and WJ hurt those carriers that provide vital year round services to those markets, some services are seasonal like Whitehorse, so AC and WJ “cherry pick” the traffic during high season and leave, which hurts airlines like Air North that need to make their money in the high season summer months to have enough cash to make it through the slower winter months to be able to serve  the northern communities dependent on them all year round. It is a sad state of affairs how greedy AC and WJ are how they hurt other operators.

Back to my Yellowknife to Edmonton route example, the current fare today for a round trip on this 633 mile one way trip is as follows:

WestJet $310 = $0.24 per mile (gross yield), Canadian North $320 = $0.25 per mile (gross yield), First Air $328 = $0.26 per mile (gross yield) and Air Canada $463 = $0.36 per mile (gross yield)

So, we see 4 airlines battling it out between YZF and YEG at yields of around $0.2500/RPM but take that north or northeast or northwest of Yellowknife and the yields are much higher. As an example, let’s look at Yellowknife to Gjoa Haven which is approximately 1,354 miles from Yellowknife round trip, and both First Air and Canadian North offer it as a 1 stop service in roughly 4 hours, and the fare for both as of today is $2, 312 or a gross yield of $1.707 per mile ($1.707/RPM), which is  6.8 times higher than the gross yield to Edmonton, and some northern routes are priced much higher than $1.707 per RPM.

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I am using gross yield here, normal practice is to use net yield after all taxes, airport and security fees, basically what the airline gets (net), but for comparison the gross is sufficient to demonstrate the fare differences between flights south versus north. Yes, fuel is expensive up north as it needs to be flown up or brought up by barge in the summer, but even if I double or triple fuel costs it still does not warrant a yield 6.8 times higher.

So regulators will have their work cut out, looking at the impact to communities, the decrease in competition and its impact on fares, the market shares of the airlines and then make their findings. Its pretty obvious what will happen. frequencies go down, which impacts local airport negatively, fares will go up in time which impacts consumers negatively and really there is no one else to come in and serve these markets with large aircraft. With reduced frequencies, the new airline will have too much capacity on hand, a few aircraft, especially the old B737-200ADV can in most part be retired and people will loose jobs at the two merging airlines, as lots of positions will be duplicated. There are 1,900 employees at the two airlines which operate 39 aircraft from the 37 seat DHC-8-100 to the 147 seat Boeing B737-400, and this fleet will surely be too big for a combined airline.

The big question for me is which President & CEO is going ! First Air’s President and CEO is Dr. Brock Friesen (PhD), just hired last year after recent stints at Air Malta and Starbow Airlines (Ghana), and having worked in Europe and Africa myself for 20 years, I know how difficult it is getting things done over there, so I am firmly in support of Dr. Brock Friesen staying to run the newly merged airline. Brock spent 12 years with Canadian Airlines and then went to Europe for Star Alliance, CCO (Chief Commercial Officer) at Air Malta during its restructuring and then to start up Starbow Airlines in Ghana as CEO (4 x BAe-146’s), he is highly experienced, holds a PhD from IMB Business School and in my opinion much more qualified to lead the new company than Steve Hankik, the current President of Canadian North, who took over after Tracy Medve left at the end of 2012, he is a pilot and ex-VP of Flight Operations, Charters and Cargo for 5 years and a Confederation College graduate, and that is about it that I know of.

My experience with 30+ airlines around the world tells me that rarely do pilots make good Presidents/CEO, too operationally oriented, though hats off to Ex-Aer Lingus pilot and an MBA graduate Willie Walsh and now CEO of IAG (the parent company of British Airways and Iberia) and Joe Sparling (President Air North). There have been several changes at First Air in the past few years, long time President/CEO Bob Davies left in 2008, then came Scott Bateman and left in 2013 replaced by Dr. Brock Friesen, hopefully no more changes for a few years.

It is no secret that Makivik Corp. the owner of First Air wanted to sell to NorTerra Inc. back when Tracy Medve was still President at Canadian North, but it was resisted by Nunasi, but as my earlier article pointed out, Nunassi sold its 50% share in NorTerra at the beginning of this month to IDA, and that is why the merger is now on again.

While both airlines say this merger will improve sustainability and create a better air service and open up new economic development opportunities across the North, I think anyone should be able to see through that is nothing but a smoke screen to hide the facts, that it will not create “better” air services or new economic development and that the

The fact is this is the reality of the north, small populations equal small traffic numbers, and flying around with 112 passenger B737-200ADV’s with 25% load factors cannot be economical for either carrier. Though they are both First Nations owned Corporations they do need to make money, but with these communities totally dependent on air service it is a very captive market, that can be over exploited. The entire network needs to be optimized for convenience of service and pricing and I am sure the 30+ year Boeing B737-200ADV are not the most economical solution today.

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It needs something smaller, fast, low operating costs and able to fly into gravel runways and have the range and payload to serve the traffic and cargo needs of those communities. It should be a jet, like the high wing Dornier D0328Jet (Calm Air has 2), but it only seats 32 and carries little cargo, the 88 passenger  RJ85 (Summit Air gets 2 soon and North Cariboo has 2) has four engines and payload range could be a problem,  then there are the 48 and 68 seat ATR-42 and 72 and the 37/50 seat DHC-8-100/300, slow and lack range, best for shorter flights and multiple stop “milk runs”, some are used in combi roles (passenger and split cargo cabin) already.

Till next time, thank you.

 

 

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About Aviation Doctor - Helping aviation companies to transform the present into a more profitable tomorrow

I am a Canadian and EU national with an MBA and 33+ years experience in aviation business development with 20 years overseas and work in 25+ countries. A former investment/merchant banker (mergers and acquisitions to corporate turnarounds). airline and OEM senior executive and past owner of 6 successful aviation companies in 3 countries (executive jet charter/management companies, aircraft sales, aircraft broker, airline/aerospace consulting to aircraft insurance). I have a very diverse aviation background with 75+ aviation companies (45+ airlines of all sizes, OEM's, airports, lessors, MRO to service providers) as consultant, executive management, business analyst and business development adviser. Excellent success track record in International Business Development. Most work with airlines is with new start-ups and restructuring of troubled carriers. I sold new business jets, turboprops and helicopters for Cessna, Raytheon, Gulfstream to Eurocopter as an ASR as well as undertaking sales and marketing of commercial aircraft for Boeing, de Havilland, Dornier, Saab and Beechcraft. Brokered everything from LET-410's to B747's and from piston PA31 to G550 business jets. I look beyond the headlines of the aviation news and analyze what the meaning and consequences of the new information really means. There is a story behind each headline that few go beyond. Picked the name Aviation Doctor, as much of my work has been with troubled companies or those that want and need to grow profitably. I fix problems be in the business, and help with restructuring for a better tomorrow. You can reach me with comments or suggestions at: Tomas.Aviation@gmail.com and I comment a lot on Google+, my Facebook and LinkedIN.

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