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Canadian Operators, Commercial Airliners, Low Cost Airlines, Major Airlines, UPDATES

UPDATES to Previous Block Articles – July 2, 2014 – ULCC hopefulls Jet Naked (Enerjet) and Canada Jetlines

July 2, 2014 – updating information from the July 1st article on the Canada’s new ULCC hopefuls

Having has some time to digest the news, and giving it more thought, I have to think that that Jet Naked (Enerjet) with CEO Tim Morgan (ex-COO at WestJet) has the 1st move advantage here. Enerjet has an AOC and 3 Boeing B737-700’s with 149 seats ready to go and a top notch team in place for over a year, starting with CEO David Lancelot (ex-CFO at Spirit), CFO Curt Berchtold and CCO Cameron Trant (ex-Director-Ancillary Revenue at Spirit).

They have to wait till end of October for the Transat flying agreement to end, and as long as their total unit costs are low ($0.1100/ASM) they should be ready to start, that gives them units costs 37% less than AC and 19% less than WJ. While it probably was never the intent by Air Canada, it’s rouge subsidiary could be used to ‘deal’ with any ULCC as its A319’s (142 seats) have units costs 21% less than mainline AC, I am sure the ULCC are looking at 30-45% advantage but that won’t happen.

The CASM spread between the my proposed ULCC’s CASM of $0.1100 and WJ’s $0.1361 (2013 average) is only 2.61 cents (WJ is 23.7% higher), so the ULCC would have only a 19% unit cost advantage over WJ ! which is less than the CASM Westjet now enjoys over AC ( where there is 3.69 cent spread between AC and WJ (AC is 27.1% higher than WJ-but working to close that gap to less than 6-7% in a few years time).

My concern is the ULCC’s needs to get their CASM even below $0.1100 to be competitive with WJ, as unit costs are not where they should be if you want to offer fares 40%-60% less than AC and WJ.

If they have a CASM of $01100/ASM (either Jet Naked or Canada Jetlines, that means to achieve a 25% operating margin (minimum) they will require operating RASM (LF x yield) of $0.1375 and that means at a 85% load factor a total operating yield of $0.1617/RPM will be needed. Now they will not have 40% of their revenue in ancillary sales, no way, even Ryanair is 24%, but let’s assume they do get 20% in year 1 (that is $0.0323/RPM from ancillary), then the passenger yield will have to be at least $0.1293/RPM to achieve the 25% operating margin.

With WJ average yield running at $0.1528/RPM in 2013 it means the ULCC can only lower its ticket price by 15% to keep within the RASM of $0.1375 (80% ticket + 20% non-ticket), and 15% is not enough! so either you need to lower CASM < $0.1100/ASM or raise share of ancillary sales beyond the assumed 20% of the RASM assumed needed, so if it was say 40% like at Spirit, now you need only a passenger yield of $0.0970/RPM which is now a 36.5% lower yield than WJ’s average of $0.1528, CCO Cameron Trant will have to really work his magic on non-ticket revenue, it is the KEY to the whole ULCC business model !

My worry, ULCC will HAVE TO count on +/-40% non-ticket/ancillary sales to ‘subsidize’ the low passenger yield that will be needed to keep new airfares 35% below competitors, yes I am sure they were hoping for bigger fare reduction 40-55% but the numbers don’t make that work, and be profitable.

Both ULCC’s will be targetting the rprice sensitive customers, who pay their own way and are cost conscious travelers which requires low fares, through high aircraft seating, high aircraft utilization, online sales, extras fees for call center, checked baggage, carry on, food, drink, point to point (P2P).

Domestic market is a captive duopoly and fares per mile are more than double of trans-border fares and why 2/3 of Canadians avoid flying domestically due to high cost.

Jet Naked is looking at $120m in revenue in year 1 (each aircraft is good for generating +$30 million a year in revenue) so 4 aircraft are needed and by 3rd year when $750 million is forecast it will need 25 aircraft. The key is money, as I calculate year 1 costs over $105 million (roughly 14,000 flight hours) and it will take time for the brand to establish itself and load factors and revenue will take time to come up so the planned $30-$50 million it wants to raise will surely need topping up later again.

While Canada Jetlines, also has a good team (CEO Jim Scott, President Dave Solloway, COO Rick Lang, CFO Rick Low) but no AOC, no money, no aircraft and probably not up and flying by end of 2Q/2015, by then, Jet Naked should be up and flying, but we shall see, will investor shave the appetite for  a ULCC ? there have been many airline bankruptcies in Canada, as I have pointed out, but both these ULCC have seasoned executives and should have a better handle on the pulse of the airline at all times.

The two incumbents AC and WJ will respond to defend their duopoly and any new airline in Canada has to plan on the worst possible response and while regulators have to be alert for any violations of competition rules, we Canadians sadly pay to much for airline tickets, mobile phone use, internet, banking fees, etc. because we do not have much competition and the current government is ok with duopolies and oligarchies in most of our industry and does not promote competition and allows Canadians to be ‘milked’ in all areas, Canadians need to wake up and use the next election to make some big changes.

We know from my article where Canada Jetlines wants to fly, and I am sure the top 10 airports in Canada are on Jet Naked’s list, as well as Canadian favorites, Las Vegas, San Francisco, Orlando, Miami, Fort Lauderdale, hmm is that not where Porter Airlines wants to fly from Billy Bishop Airport/downtown Toronto with the Bombardier CS100 ? can’t have everyone flying to the same destination and make money ? good for the consumer but not for the airlines flying those routes as competition heats up, and my RIP list of failed Canadian airlines will grow.


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 30+ 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 (50+ 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 in the business for a better tomorrow. You can reach me with comments or suggestions at: Tomas.Aviation@gmail.com I write a lot of Articles and Posts on LinkedIN: https://www.linkedin.com/in/tomas-chlumecky-3200a021/


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