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

Canada’s cozy airline duopoly is about to face new challengers in the form of newly emerging ULCC’s (ultra low cost carriers) Jet Naked (Enerjet) and Canada Jetlines that want a piece of the Low Price Segment in the $11.2 billion a year domestic and transborder market, and free Canadians from high fares !

Well, it is official, we now know of 2 ULCC (ultra low cost carriers) that plan to enter the Canadian market in the near future, as Calgary based Enerjet, owned by WestJet co-founder Tim Morgan and now operating 3 B737-700’s on charters has announced its intent to enter the Canadian ULCC market with Jet Naked, and seeking is seeking $30-$50 million in private equity through Octagon Capital.

See:  UPDATES to Previous Articles – July 2nd, 2014 (ULCC’s in Canada), and attached to the bottom of this article


Canada Jetlines plans to operate the Airbus A319 (2 to start with) by Spring 2015, which can seat up to 156 passengers but like Spirit Airlines in the US it may limit it to 145 passenger seats (AC rouge A319’s have 142 seats, mainline AC A319’s have 120 seats). Jet Naked will run the B737-700’s which Enerjet has in the maximum 149 seat configuration, presently operates 3 of the aircraft, but tat will expand, as it plans to generate $120 million in revenue (which equates to 4 aircraft) and $750 million (roughly 25 aircraft) by the 3rd year, fast expansion.  The A319 vs B737-700 line up will be interesting, the A320 and B737-800 with their better unit seat costs are what most LCC operators are using, while passenger margins will be tight, the success of these ULCC’s depends on having a total CASM of around $0.1150/ASM (MAX) and ancillary sales, get it right and you should have profit margins of 20+%, get in wrong and you join the long list of Canadian Airlines that have failed.


 This Jet Naked Canada will be the second planned entry, as earlier this year Vancouver based Canada Jetlines announced its plan to enter the ULCC market in Canada starting with 2 A319’s to focus on “under-served routes”, it is seeking $100 million through Salman partners, and word is there are others looking at it, but the market can only sustain 1 to 2 ULCC’s at best.

zip4wj 737

ZIP was formed by Air Canada to contain the growth of WestJet Airlines in 2002 under ex-WestJet President Steve Smith who knew the inside scoop on Westjet’s strategy and growth plans during his 18 month tenure there, before he was removed for bad management ‘chemistry’. ZIP failed to keep WestJet in check and was shut down in 2004 at its peak it operated 12 B737-200’s, all in 4 different bright neon colours. 


Only 18 years after WestJet launched its challenge against Air Canada, it seems the time is right for Canada to have a new low cost champion as WestJet has abandoned the low cost model to pursue a hybrid FSC (full service carrier). The Canadian airline market is littered with airline failures and at a closer look of the 17 biggest airline failures over the past 25 years, the average ‘life expectancy’ of a bankrupt airline in Canada is only 5.6 years for those established before 1990 and for those established after 1990 it was 3.5 years !

It is truly a business that needs to have professional managers and executives who can formulate a sustainable business model and implement it and adapt it as the market changes, it needs true airline managers today that can guide the airline through all the ups and downs and steer the airline with a value proposition that is sustainable for longer than the 3.5 to 5.6 years of the past.

Anyway my RIP list of Canadian airlines:

Tango (01-03), Canada 2000 & 3000 (88 – 01), Jetsgo (2002-2005), Greyhound Air (96-97), Nationair (84-93), Vacationair (88-89), Skyservice (86-10), Roots Air (00-01), Odyssey Int’l (88-90), VistaJet (97-98), Worldways Canada (74-91), Zip (02-04), Zoom (02-08), Harmony Airways (02-07), Holidair (98-99).


Jetsgo was the last LCC (low cost carrier) to start up in Canada in 3 years it grew to 29 aircraft, its slogan caught on “Pay a little. Fly a lot”  it did fly a lot and paid little and when it went bust March 11, 2005 in the middle of the March break it left thousands stranded, $55m in debt, and 1,200 employees out of work, the owner Michel Leblanc started 7 aviation companies, all ended badly. While long haul ZOOM Air flew 3 x B767-300ER’s and 2 x B757-200’s to the UK mostly  and sadly failed in 2008 after 6 years in service. Average life expectancy of Canada’s new airlines formed after 1990 is 3.5 years ! seems few find the sustainable business model needed to stay in business for too long.


The last LCC we had in Canada was Jetsgo, 2002-2005, with the slogan “Pay a little. Fly a lot” which quickly grew to 29 MD-80’s and Fokker F100’s to serve 19 domestic destinations, 10 destinations in the US and 12 scheduled weekend charter destinations in the Caribbean. It  was founded by Michel Leblanc, who knew how to start airlines and either sell them, like Royal Airlines to Canada 3000 for $84 million or shut them down, like Jetsgo and Quebecair.


Enerjet has been around since 2006, and one of its founders is current CEO and ex-WestJet Senior V.P. Tim Morgan, the airline has been looking for investment money for over a year looking at offering scheduled services, after hiring former Spirit Airlines CFO, David Lancelot in April 2013 and bringing in another seasoned airline veteran Curt Berchtold as CFO in July 2013, it was clear to me that Tim Morgan was eyeing the low cost market, and now its official, Jet Naked is getting ready to be Canada’s first new LCC since 2002, just what the price conscious Canadian consumer need and want !


Now back to Jet Naked, I have seen this move coming since Enerjet announced on April 14, 2013 that David Lancelot (Ex-CFO Spirit Airlines – US based ULCC) was joining the company as President and then on July 16, 2013 that Curt Berchtold (ex-CFO Silver Air – US based regional) was joining as CFO. From the beginning these highly experienced airline executives were not coming to Enerjet to run a 3 aircraft B737-700 charter airline, there were big plans long time ago by Enerjet’s owner and CEO Tim Morgan for his airline, now we know what they are.

You can check out my recent articles on ULCC’s (May 29, 2014) and LCC’s (May 20, 2014), while my article on Air Canada’s Transformation (June 22, 2014) will give you an indication of Air Canada’s and WestJet’s economic numbers, which I will summarize here anyway.

Now the Canadian market needs a ULCC we cannot seem to shake the two airline policy. WestJet Airlines started off as a low cost airline when it started with 3 B737-200’s on February 1996 serving Calgary, Edmonton, Kelowna, Vancouver and Winnipeg, now it is serving 31 destinations with its Q400 regional subsidiary adding 4 other cities to the network.

Seems Canada can never support more than 2 airlines, years of competition with Air Canada by CP Air then Canadian Airlines and now WestJet Airlines, and consumers do not have much choice. With average yield at WestJet at $CDN 0.1869/RPM (revenue passenger mile) and at Air Canada $CDN 0.1910/RPM, so the yield is the same +/-, while WestJet has a 3.69 cents per ASM spread advantage against Air Canada ($0.173/ASM versus $0/1361/ASM), so WestJet enjoys a 21.3% unit cost advantage over Air Canada for now.

But, Air Canada does better in RASM (product of load factor and yield) than WestJet, with RASM at $0.1570 vs $0.1525 at WJ (+2.95%).

ac  A319AC 319 mainline

Air Canada’s new low cost leisure airline rouge operates 8 Airbus A319’s and plans to have 30 in service by the end of 2016. The aircraft CASM has been lowered by 21% by increasing the seating from mainline 120 seats to 142 seats (lowers CASM 15.5%) and the rest comes from lower labour rates and better work rules, and while rouge is not flying domestic routes yet, they can be used to counter any ULCC challenge in the future. ULCC start up CanadaJetline plans to start with 2 A319’s, most likely with the maximum 156 seats (30% more seats than AC A319’s and 10% more than rouge), which all adds up to lower unit costs per ASM, though Spirit runs them with 145 seats (2.1% more than rouge and 21% more than mainline Air Canada). Spirit DOC’s for the A319  were $0.079/ASM ($11.45/sm and roughly $5,725 per flight hour, $4,866 per block hour) on 875sm stage length, the A320 with 178 seats would be a better choice, at Spirit its DOC is $0.0590/ASM (25% lower CASM than A319).



As you will read in my June 22nd article on Air Canada’s Transformation, that carrier is looking to bring its CASM down to $0.1500/ASM with new aircraft and its new low cost leisure subsidiary rouge, to better compete with WestJet as its costs rise with the introduction of Q400’s and its own unit costs rising. Air Canada plans to lower its CASM by 15% to better compete with WestJet across the board, as PRASM (passenger revenue per ASM) between the two is very close, with Air Canada having a slight advantage at $0.1533 vs $0.1528 so profitability is constrained by having CASM 27% higher than WestJet.

So let’s take a look at the Canadian domestic market, and analyze what opportunities exist for new LCC in the Canadian market. It is very difficult to get good numbers on the domestic market, neither Air Canada or WestJet release a breakdown of passengers carried.

What is known, is that in 2013, Air Canada carried 35.8 million passengers, and had passenger revenue of $11.021 billion. Air Canada says 38% of its revenue comes from domestic services ($4.18 billion) and it has a 55% domestic market share.

Now WestJet in 2013, carried 18.5 million passengers, with revenue of $3.66 billion and with 55% of its revenue coming from Domestic services ($2.02 billion) where it had a 36% market share.

The two carriers have 91% of the Canadian domestic market which had 36 million passengers last year (32.7 million for AC & WJ) on the 53 million seats offered by all domestic carriers, and based on market shares given, I estimate Air Canada carried around 18 million passengers domestically and generated around $4.18 billion in revenue (+/- $232 per passenger), while WestJet carried 11.7 million passengers domestically and generated $2.02 billion in revenue (+/- $172 per passenger).

So, I can estimate the Canadian domestic market controlled by WJ and AC as 32.7 million passengers generating $6.2 billion in revenue, while the ‘other’ Canadian scheduled carriers carried 3.2 million passengers.

Sadly, Canadian airlines are losing out to US airlines through leakages to US border airports to the tune of 4.8 million passengers per year, or 13,150 on average per day, or 88 narrow body B737’s/A320’s with 150 Canadian passengers on board very single day ! Most leakage is coming from Vancouver to BLI (Bilingham) and SEA (Seattle), then Southern Ontario to DTW (Detroit), Toronto, Niagara, Hamilton to BUF (Buffalo) and Montreal to PBG (Platttsburg) and  BTV (Burlington), its not good and even Plattsburg International Airport markets itself as “Montreal’s U.S. Airport”.

Based on an average round-trip net fare of say $500 (trans-border flight) that is equal to $2.4+ billion gone to US airlines, presently the Canadian trans-border market is worth $5 billion a year (so 1/3 of the Canadian trans-border market is flying from US airports), more on this in a coming article.

Now little is yet known about Jet Naked, other than it wants to be a ULCC (ultra low cost carrier) like Spirit Airlines in the USA and Ryanair in Europe, these are some of the lowest cost airline’s in the world (under 1, 600nm stage lengths). With ULCC’s it all starts with costs and ends with costs, keep cots to a minimum and you can offer low fares, sadly some airline shave offered low fares but were NOT low cost and they went bankrupt (ie. JetsGo in Canada, Skybus in USA, SkyEurope in Europe).

So a LFA (low fare airline) MUST be low cost airline, ideally ULCC (ultra low cost carrier) as these ‘hybrids’ in the US for instance like Virgin America, Soutwest and JetBlue are ‘stuck’ in the middle trying to juggle the leisure low price segment (ancillary unbundled product offering, P2P point to point service, focus is LOW price) with the business value oriented segment (increased schedule quality, airline partnerships, rewards, bundled fares, enhanced distribution).

Jetblue- A320-2Southwest-B737-800Virgin America-A319-5

The 3 ‘hybrid’ LCC in the US market, JetBlue Airways, Southwest Airlines and Virgin America, all three operate aircraft with less than maximum seating and offer in-flight entertainment, premium economy seats, connections and some bundled fares. All 3 under perform against the 2 ULCC’s (Frontier is coming) and they generally under perform against the network FSC’s (full service carrier), being ‘stuck in the middle’ is not good, trying to be everything for everyone, not a low price competitor, not a business class carrier, and most of these ‘hybrids’ are heading towards business cabins, finding their rising CASM makes them un-competitive versus the ULCC’s. The big difference is their changes to partnerships, sales/distribution, fare structure (un-bundling), more than 1 type of aircraft and network. All this applies to WestJet as well.


It is no surprise that the two ULCC in the US market (Spirit and Allegiant) have the highest operating margins (17.0% and 15.5%), net margin (10.7% and 9.3%) and Return on Equity (RoE) (23.0% and 24.4%) versus the ‘hybrids. No surprise Spirit has a very low CASM of $0.0990/ASM, which is -21% less than Southwest, -11% less than Virgin America and -15% less than JetBlue, there is a price for being a hybrid, as WestJet well knows.

In fact, as WestJet Airlines has moved to become a ‘hybrid’ its CASM has from $0.1209 in 2010 to $0.1361 in 2013, up 12.6% in 3 years and its yield in the same period went from $01671/RPM to $0.1869/RPM (+11.8%), these are not numbers of a LCC.

Here are the 2013 numbers of LCC and ULCC :

Jetblue: CASM $0.1171, Yield $0.1387, LF 83.7%, RASM $0.1271, Operating Margin 7.9%

Virgin America: CASM $0.1110, Yield $0.1310, LF 80.2%, RASM $0.1051, Operating Margin 5.7%

Spirit: CASM $0.0.990, Yield $0.0957, LF 86.6%, RASM $0.1319 (inc. ancillary rev), Operating Margin 17.05%

Spirit is a very good role model in North America for any ULCC, its past 12 months ending March 31st its ROIC (return on invested capital) was a very impressive 19.6% showing that if you control your cost structure you can offer what the majority of travelers are looking for, low air fares. But it’s not perfect, and there will be slight alterations to the business model as Frontier Airlines is showing.

Frontier has lowered its base fares 12% and un-bundled its economy fares, charging $20-$50 on each carry on bag plus the minimum $20 for checked bags, and offering ‘stretch’ seats offering 5-7 inches more leg room for $5-$15, but is also offering for a bundled product “Classic Plus” which has a higher base fare, but things that we use to take for granted like 1 checked bag, 1 carry on bag are included as is the ‘stretch’ seat, trying to appeal to those that want their costs bundled, with no surprises, nothing to add and by the way Frontier already has TV on its flights something Spirit says it will never do, never say never ? even Ryanair says it will be more customer ‘friendly’ from now on ?

spirit  2441980ryanair-2457819

The two ‘Kings’ of the ULCC market, US based Spirit Airlines and Irish based Ryanair, they are the benchmark for all LCC, their costs are the lowest in the industry, and they are the drivers of ancillary sales, 40.4% of Spirit revenue and 24.4% of Ryanair’s revenue are non-ticket sales, its a whole new business model, un-bundle the services and sell them separately ‘a la carte’, these are the role models for Jet Naked and Canada Jetline.



So for Jet Naked or Canada Jetline to succeed they will have to have  al low CASM and then a RASM (yield x load factor) that is at least 15% above the CASM. There is a limit to the average load factor, it is hard to get that above 90% on average basis, and both AC and WJ are good at filling there aircraft today with 81% to 83% the norm now, when mid 70’s was the norm up to about 2005.

The best way to compete, really the only way is to have higher productivity than your competition, you mainly achieve that through increasing aircraft utilization, higher seating density per aircraft and more seats sold per flight. Let’s look a Airbus 319 example on a 500 sm route:

Airline A (9.0 hours per day utilization, 120 seats = 2 class, CASM $0.1800, average yield $0.2100/RPM, LF 80%)

Airline X (12.0 hours per day utilization, 156 seats=1 class), CASM $0.1000, average yield $0.1350, LF 85%)

Airline X A319 utilization advantage is 33%, seat advantage 30%, seats sold advantage 38%, so Airline X productivity is 73% more productive in producing ASM’s per aircraft than Airline A, and combined with its ability to sell more seats through higher seating and higher load factor (132.6 seats versus 96), it can generate in this example 139% more RPM’s per aircraft (change in earnings capacity), this is the big advantage on the productivity/revenue side of a LCC.

Economically, Airline A breaks even on the flight (Yield x LF)-CASM = ($0.2100 x 80%) – ($0.1800) = -0.012/ASM loss or $720 loss on a net fare of $105

Airline B ($0.135 x 85%) – ($0.1000) = $0.0147 ASM profit = 14.75% or $1,146 with a fare of $67.50

As an example Spirit Airlines A320’s have 178 seats versus only 150 seats at hybrid JetBlue, and Spirit flies its A320 12.7 hours per day, Jet Blue 11.9 hours, so 19% more seats 6.7% more utilization and you have 27% more productive A320 fleet.

A LCC A320 (178 seats) with an average sector of say 700 sm or 1:30 flight, should do 8 such flights per day, which is 12 hours and 996,800 ASM’s at a LF of 85% that is 847,280 RPM’s which as say a yield of $0.1300/RPM will have RASM of $0.1105 and with CASM of say $0.1000/ASM, in a single day it will generate $110,146 in revenue and accrue $99,680 in costs for a operating profit of $10,466 a 10.4% margin, in a year (of say 340 days of flying) that A320 should generate up to $37.4 m a year in revenue for the airline.

Let’s take a look at a real ULCC airline’s operating statistics, as these have to serve as a benchmark on how to drive profits and growth in this ULCC segment. Spririt Airlines (NK) is knows what is it is doing.

Load Factor: 86.6% (NK)   81.7% (WJ)

NK fills its high density aircraft 4.9 percentage points (p.p.) better than WJ, seems small, but a 1% increase in LF at WJ is equal to $44.8 million in extra revenue (assuming all else, yield, CASM is the same), so 4.9 p.p. increase in LF at WJ would equate to an extra $219.5 million (6% more).

Yield: $US 0.1249/RPM (NK)   $CDN $0.1528/RPM

Looking at the yield at Spirit Airlines is a little complex, they unbundle their pricing, so in 2013 they had revenue of $US 1.654 billion of which $US 986 million was passenger ticket revenue (59.6% of total revenue), and non-ticket revenue was $US 668 million. So while the un-bundled passenger yield is low they make up for it with the ancillary sales.

tango3wardair canada3000Odyssey1


So many Canadian airline failures, average life expectancy was 5.6 years for those that were established before 1990. and for those established after 1990 it was only 3.5 years ! don’t fall in love with the ‘glamour’ of the business, treat it like any other business, ROI targets, RASM>CASM, cashflow, CAPEX, working capital and don’t grow beyond your financial means, use numbers for all decisions, know all your numbers, sustained growth and a sustainable business model is MUST for longevity, no room for seat of the pants management styles today.


Now back to the LCC market, the strategy and value proposition for any LCC will include all of the following characteristics to some degree:

1. Primarily point to point (P2P) operations

2. Serving short/medium haul routes.

3. Serving regional or secondary airports.

4. Focus on price sensitive leisure passengers.

5. One service class.

6. Limited passenger services, charging for any extras.

7. Focus on ancillary revenues

8. Low fares, focus is on low price stimulation of high demand.

9. Different fares dependent on advance purchased tickets being the lowest.

10. Use of internet.

11. One type fleet, today new B737’s and A320’s, in the past used DC-9’s and B737 Classics.

12. Very high aircraft utilization rates per day +11 hours per day.

13. High density seating, maximum seats per aircraft.

14. Simple business model, the more complex the more it costs.

15. Unbundled pricing (everything-almost is extra).

The strength of LCC is in their ability to unlock traffic growth, through low costs which are then passed on as low fares which in turn drive higher passenger demand, this known as price elasticity, a key airline economic principal for any airline or manufacturer. In short, price elasticity is the percentage change in the quantity demanded resulting from a 1% change in price. It is not constant through the entire demand curve, but you can 1) measure it at a specific value (point elasticity) or 2) take the average of elasticity over a range of values (arc elasticity).

Price elasticity  is categorized into 3 groups based on price elasticity (Ep) being >1 which means it is elastic, when a 1% decrease in price results results in a greater than 1% increase in quantity demanded and total revenue increases with price cuts, this is THE fundamental core of LCC’s, lower price by say -40% and you get an increase in demand of 96% (40% x 2.40), when elasticity of demand is 2.40 (which air travel, long run is around). This is how ULCC like Spirit, Allegiant and Ryanair have grown their markets, lower prices significantly and you stimulate ‘new’ demand from price sensitive customers.

In brief, the following is a rough cost saving distribution breakdown of LCC’s CASM vs FSC’s  CASM (will vary by business model chosen, region and strategy):

-High seat density -18%

-Aircraft utilization -4%

-Lower Flight and Cabin crew costs -2%

-Using regional or secondary airports -2%

-Outsourcing maintenance and having a single type fleet -2%

-Minimum station costs and outsourced handling -5%

-No in-flight catering -3%

-No agent or GDS commissions -3%

-Reduced reservation costs with Internet bookings -2%

-Fewer staff and overheads -2%

The above adds up to a possible 43% savings over the FSC, only a guide but shows where LCC have a cost advantage over the FSC.

Let’s look at Canada Jetlines, which believes that the “dive to the middle” by AC and WJ has created an opportunity for a pure ULCC, which I agree. Timing could not be better, as AC is focused on its Transformation, cost cutting, new fleet, low cost leisure airline Rouge and expanding international operations, while WJ needs to put its feed in place with Encore as it eyes wide body long haul operations by 2019 or so.

Canada Jelines plans to take customers from their cars to the skies, and has assembled a very good team to make something happen, from Mr. Jim Young as its President (ex-Frontier CMO), Jim Scott as CEO, David Solloway as CMO, Dave Powell-Williams (VP-Ops) and Dix Lawson.

The market in Canada is dominated by AC and WJ, with 91% though CAPA says 81%, but I go by what AC and WJ say, and we have a situation in Canada where fares are increasing slowly (0.8% 2012 to 2013) and the average fare domestically is around $192 (one way), and the two airlines really do not compete on price, go on ant OTA (online travel agency) and you get prices within 2% of each other on most routes on most days.

Westjet has gone to a 3 tiered bundled offering from low fare bundle (Econo), mid fare bundle (Flex) and high fare bundle (Plus), trying to retain the cost conscious segment with a basic fare A to B with all extras for a fee. Just like Southwest in the US market, WJ will loose out in that segment to the LCC/ULCC competition, as you cannot cover every segment properly.

The Canadian market can be segmented into 3 tiers, which WJ and AC have done, roughly 40% of the domestic market (14 million passengers) is the low price segment, then about 45% (16 million passengers) of the market is the business/leisure segment that is value oriented and then the 15% (5 million passengers) that wants a business cabin.

WestJet covers the 85% of the market, AC is positioned for 100% of the market, but neither of them have the CASM to deal with a ULCC whose costs have to be no more than $0.1100/ASM, must have at least a 19% cost advantage over WJ and 37% on AC, because you know they will fight back hard against any new airline.

AC 320WJ Q400x

Any new Canadian LCC can expect both Air Canada and Westjet to bring it on ! they will defend their market very vigorously, and fares wars, flight schedules will be ‘sandwiched’ they will make sure you bleed cash and not give customers any excuse to fly with the LCC on price or schedule.


They will match or beat any low fare, add frequencies to ‘wing tip’ any LCC departure, add capacity on the competitive routes, and just give customers no reason to fly with the new airline, be it price, schedule to deny the new LCC to make a profit, keep its loads low, yields low, and suck it dry of working capital, that is what any new LCC is up against !

Air Canada has new weapon as well, rouge with its 142 seat A319’s which have 21% lower CASM than mainline AC, and can seat up to 156 in high seat density (Spirt 145 seats). Years ago Air Canada could have crushed WJ with ZIP during it’s expansion phase, it was mismanaged and the rest is history.

Now Jetline estimates its fares will be 20-40% lower than AC and WJ on primary markets and 60% on secondary markets, and its base will be Vancouver, Canada’s second busiest airport with 17.9 million passengers in 2013. I am assuming the A319 will have the max 156 seats and CASM will be $0.1100/ASM. Now I am assuming Canada Jetline is planning on having the full 156 seats (though with those long flights planned it might be only 145 seats), which at a CASM target of $0.1100/ASM, that means $17.16 per sm or around $8,768 per flight hour ($56.20 per seat) and  $7,891 per block hour ($50.58 per seat) roughly.

The planned routes by Canada Jetlines are questionable in some cases, though they will stimulate demand and they will generate ancillary sales like Spirit, though to get to the point where 40% of its revenue will come from ancillary sales will take time. In 2013, Spirit was able to have an average breakeven fare per passenger flight of $53.06 due to ancillary sales, without it, they would have to a breakeven fare per passenger flight like JetBlue ($138.23 or 147% higher), Southwest ($103.96 or 85% higher, and and up United ($243.71 335% higher) it takes time to build that up , even Ryanair after all these years has not surpassed 25% ancillary sales.

But thanks to ancillary sales, the 3 ULCC’s in the US are the only 3 airlines to have lowered their average fare between 2007 and 2010, Spirit $71.03  down 33%, Allegiant $86.89 down 11% and Frontier $140.19 down 2%) so Jetline and  Jet Naked will be able to keep ticket yields low but not too low as they  will have to build up ancillary sales, it does not happen overnight. They also need to explain their model to consumers, one thing Spirit has not done, above the Canada Jetline calculated yields below there will be extra revenue from:

Checked bags, carry on bags, seat assignments, big front seats, hotel, car rental, on board rinks and snacks, etc. how much is anyone’s guess.

Spirit Airlines is the world’s leader in this area with 40.4% of revenue being non-ticket, which allows such low fares, Ryanair in Ireland is at 24.3% and Allegiant in the US at $33.3%, so lots of potential.

In 2013, Spirit Airlines average revenue per passenger was $133.27, of which $79.43 was the ticket price (59.6% of total) and the $53.84 was non-ticket ancillary revenue, which allows the low air fare price, this will be a MUST for any ULCC to be successful.

Vancouver-Prince George (323sm) $72 is $0.2220/RPM yield, market is too small ? vs Air Canada Express.

Vancouver-Winnipeg (1,162 sm) $143 is $0.1230/RPM yield, breakeven is 89% LF ? ancillary sales will bring that B/E down.

Vancouver-Kamloops (159 sm), $61 is $0.3836/RPM yield, too short of a route and thus costly ? vs Air Canada Express and Encore.

Vancouver-Prince Rupert (466 sm), $93 is $0.1995/RPM yield, market small, at CASM of $0.1100 you will need 55% load factor to break-even, 86 passengers per flight ? Bad for Hawkair and vs Air Canada Express.

Vancouver-Regina (829 sm), $107 is $0.1290/RPM yield, good route but B/E is 85%.

Vancouver-Fort McMurray (710 sm), $112 is $0.1577/RPM yield, good route, B/E 69.8%.

Vancouver Fort St. John (493 sm), $90 is $0.1825/RPM yield, small route, B/E 60% or 94 pax.

Vancouver-Edmonton (502 sm), $77 is $0.1533/RPM yield, BIG route, lots of competition from WJ and AC, B/E 72% or 112 passengers.

Vancouver-Orlando (2,618 sm), $267 is $0.1019/RPM yield, LONG route 5:40, red eye only at night, tight margin with this yield if its long and thus CASM will be lower than the $0.1100/ASM average.

Vancouver-Las Vegas (989 sm), $93 is $0.0940/RPM yield, very low yield and 2:10 flight, worried about any yield below $0.1100/RPM, even on long flights where ancillary sales will be good.

Vancouver-Cancun (2,776 sm), $275 is $0.0990/RPM yield, again seems really low and very long flight 5:40, again ancillary sales should be good on long flights.

Some of the above routes are to short and too small for my liking and then some too long and yields too low, but then I am only looking at my numbers and using my LCC experience and airline economics to make assumptions I think are realistic for a new ULCC with A319’s.

The success of LCC’s has not only been profitable but passengers prefer its low fares and fewer restrictions. There is no one strategy which will succeed for all carriers, , they have a variety of tactics which they can choose, and the boundaries today between LCC and some FSC is getting blurred as all airlines now trying to mix and match elements from both business models to give them the best position in the market. The range of tactics available are product, pricing, network, revenue management, marketing/sales and cost control.


Sadly, most airline start-ups do not end well, always sad to see the fleets parked and left to dry, hoping for better days.


The main differences between LCC Business Models is the offering of ‘frills’ and these are basically limited to the following:

1. Seat pitch

2. In-flight entertainment

3. Frequent Flier Program (FFP)

4. Low price

5. Customer focus

6. Connections

7. Premium seating

8. Food and drinks included in prices

We will continue to watch the progress of Canada Jetlines and Jet Naked as they work towards a start-up, as well there are others studying the market, so things will get interesting for sure, but only 1 ULCC can really exist in Canada.

Thank your for reading this article, I try to keep them short, really, just get carried away.




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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