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Airline Management, Airline Restructuring, Canadian Operators, Low Cost Airlines, Major Airlines, Other Aviation Issues, UPDATES

UPDATE: Canada’s first ULCC (ultra low cost carrier) is Winnipeg based NewLeaf, which will launch services to 7 Canadian destinations on February 12, 2016 with Boeing B737-400’s operated by Kelowna based Flair Airlines. It is not a perfect business model to start with, but given that Naked Jet/Enerjet and Canada Jetline have not been able to get their business plans executed for the past 2 years, it is better than nothing. In fact, this model was used to run Greyhound Air between July 1996 and September 1997, when Kelowna Flightcraft operated 7 x B727-200’s under its AOC for Greyhound Air, and Winnipeg was the hub, so it has been done before, but today the market landscape is different and it just may work. NewLeaf will offer fares as low as $99 one way but also will need to supplement it’s low fares with “non-ticket” revenue from baggage, seat selection, exit row, food and beverage fees, that today at US based ULCC’s make up around 45% of total revenue or 79% of the ticket price (i.e. Spirit Airlines), so expect that on average that $99 one way ticket will become on average a $+145 one way ticket when all is done and paid, still much lower than what Air Canada and WestJet charge today. Some people still think of WestJet Airlines as a low cost airline, but that story is long gone, as WestJet realized it did not have to be a low cost airline, just come close to Air Canada’s fares and the service would win over. Today Air Canada and WestJet Airlines have roughly the same passenger yields ($/RPM) at around $cents 0.192, both have the same average load factor of +/-81%, their PRASM (passenger revenue per available seat mile) are pretty much the same at $0.155, and Air Canada is reducing its units costs while WestJet’s keep going up. It is time for Canadians to have access to LOW airline fares, and have another choice over the duopoly that runs our airline industry, as we are the ONLY country in the developed world today without a low cost airline, and while Air Canada’s ‘rouge’ is a low cost subsidiary (mostly just due to higher seating density on its aircraft) it’s fares are the same as Air Canada’s, as its role is to make more money for Air Canada and not to reduce air fares to Canadians. It is estimated that 4.8 million Canadians fly each year from US airports that are close to our border (e.g. Buffalo, Detroit, Bellingham, etc.) to save on airfare ! This is the Canadian ULCC opportunity and challenge, to get some of those passengers back. With low frequencies and just 7 airports served, NewLeaf will not threaten Air Canada or WestJet but then 20 years ago WestJet started with 3 B737-200’s and 5 destinations and look at its evolution, every company has to start somewhere. Lastly, Iceland based ULCC operator WOW Air is coming to Canada in May, 2016 and is offering great deals to Iceland at $C 99 one way and $C 149 to Europe, it is about time Canadians had low cost options and let’s hope the low cost trend spreads fast and forces the duopoly to stop ‘milking’ Canadian air travelers !

Well, Canada finally has another low cost champion, as NewLeaf Travel Company Inc. (http://www.FlyNewLeaf.ca) announces it will begin operating Boeing B737-400 commercial flights to 7 Canadian cities for as little as $99 one way under the AOC of Flair Airlines of Kelowna, B.C. on Friday, February 12, 2016, only 1 week short of the 20th anniversary of WestJet Airlines first flight on February 19, 1996.

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READ BLOGS of May 20, 2014 and May 29, 2014 on low cost carriers (LCC) and ultra low cost carriers (ULCC) in the USA

READ BLOGS of June 20, 2014, July 1, 2014 and February 17, 2015 on Canada’s ULCC hopefuls Jet Naked and Canada Jetlines

READ BLOG of June 22, 2014 on Air Canada’s ‘rouge’

READ BLOG of May 19, 2015 on the shut down of Canjet and Canada’s low cost carrier hopefuls

 

This outsourcing of flight operations to Flair Airlines is not the ideal situation, but it allows NewLeaf a quick and less expensive way to get airborne, beating out Enerjet’s Jet Naked and Canada Jetlines to be the 1st of the three to actually get off the ground.

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Flair Airlines was set up in January, 2006 by Jim Rogers who was a partner in Kelowna Flightcraft which was set up in 1970 with Barry Lapointe and grew rapidly, unfortunately it lost the valuable Purolator contract in Feberuary, 2014 to Cargojet and is no renamed as KF Aerospace and operates 2 x DC-10-30’s, 11 x B727-200’s, 1 x B737-300F, 5 x CV-580 and 1 x CV-5800.

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It is worth noting that Kelowna Flighcraft Air Charter was involved in a very similar operation from July, 1996 to September, 1997 when Greyhound Air (Above photo) was operating to 7 Canadian cities using Flightcraft’s AOC to operate 7 x B727-200’s, so this NewLeaf business model has been used before without success. In fact it was centered on Winnipeg as a hub between Vancouver, Calgary and Edmonton in the west and Toronto, Ottawa and Hamilton in the east, hmmm very similar to what is being tried 20 years later !

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Flair Airlines runs 5 x B737-400’s on passenger and ACMI charters as well as operating one E175 and one Dornier D328 (Photos above) on behalf of Shell Energy Canada since October, 2013 when it received a 10 year exclusive air charter transportation contract. The B737-400’s that will fly for NewLeaf will be configured with 156Y seats (all economy, maximum seating) and ultimately NewLeaf plans on operating up to 15 aircraft within a few years, with schedule flights down south (e.g. Las Vegas, Florida, etc.) planned for next winter.

In fact, NewLeaf’s CEO Jim Young was President at ULCC start up Canada Jetlines in Vancouver but abandoned ship to go his own way. Mr. Young also is a highly experienced airline executive, especially in sales, Marketing and Distribution and was VP at Frontier for many years, and held positions at Continental, International Hotel Group and Canadian Airlines before that.

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NewLeaf will be based in Winnipeg, and will service 6 other airports, Abbotsford, Halifax, Hamilton, Kelowna, Regina and Saskatoon, and you notice that there is no mention of Calgary, Edmonton, Toronto, Ottawa or Montreal ? that is to avoid direct competition with Air Canada and WestJet in the beginning and targeting price sensitive travelers that without cheap airline tickets, most likely would not have flown, it is all about stimulating the market to get new passengers, that is the story of Ryanair in Europe.

Fares (one way) and initial frequency will be low, typical of the ULCC (ultra low cost carrier model) with fares starting at $C 89.00 (e.g. Abbotsford and Kelowna to Regina and Saskatoon) up to $C 149 for Hamilton to Kelowna, not bad, but will this be profitable ?

Remember that RASM-revenue per available passenger mile (yield x load factor) has to be greater than CASM-cost per available seat mile to make money. Let’s use a real world example :
If I use a low $C 5,750 total operating cost per flight hour for the B737-400, I get a CASK (cost per seat km) of $ cents 8.09/ASK (, and NewLeaf wants to charge $C 99 one way (net I assume) from Hamilton to Halifax (1,314 km) the yield is then $ cents 7.53 per RPK, so breakeven would be a load factor of 107%, and to Kelowna (3,081 km), yield is $ cents 4.83 per RPK, for a breakeven load factor of 167%, which on just ticket revenue does not make sense.

BUT, this is the ULCC model and like Spirit Airlines in the USA (the largest and most successful US based ULCC) the business model is based on ancillary sales, where today the average revenue per passenger (3Q/15) is $US 122.00, but ticket revenue is only 56% of that while the other 44% is non-ticket (the extras, bags, seat selection, food, drink, etc.).

This “a la carte”/ancillary revenue ULCC model is used by Spirit Airlines, Frontier Airlines and Allegiant Air, the only 3 ULCC airlines in the USA and all 3 are very successful in their own right, with Frontier having ‘revamped’ its entire business model only 2 years ago under new private equity owners Indigo Partners LLC which under Managing Director Mr. William A. Franke, has owned several ULCC carriers from Spirit Airlines (USA), Tiger Airways (Singapore) to controlling Volaris Airlines (Mexico) and highly successful Wizz Air (Hungary) and was only a few years ago looking at the Canadian low cost market as well.

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NewLeaf will be making up for the low fares with ancillary (non-ticket) sales, which are $25 for carry-on bag if paid on line, $35 if paid at check in and $80 at the gate. Seat selection will cost $15 to $20 and exit row seats for $25-$35. Then if a boarding card needs to be printed at the airport, that is another $10, then drinks and snacks are ‘extra’, it adds up.

So if I bring a bag and check it in at the airport, and I want a exit row seat, that set you back $70 already (basically an extra 70% on top of your seat ticket), and now the flight is $169 one way to Halifax, still well below what WestJet or Air Canada offer today. As New Leaf will use the ULCC model, be ready to pay extras on those published fares, roughly +44% more at your discretion, but at Spirit Airlines that non-ticket revenue is 79% of ticket revenue, so in this example it would be an extra $78 on average at Spirit Airlines.

IT all comes down to how low NewLeaf can keep its operating costs. In 2015 Spirit Airlines in the US, could run its A319 (145 seats) aircraft at $US 0.068/ASM, which is $US 9.86 per mile, or roughly $4,437 per flight hour ($31 per seat per flight hour) while Allegiant Air was running its 156 seat A319 at $US 0.050/ASM or $US 7.80 per mile, or $3,510 per flight hour ($23 per seat per flight hour). Worth looking at a major airline like Delta, that operates a 160 seat B737-800 at $ 0.082/ASM $13.12 per mile or $5,904 per flight hour ($36 per seat per flight hour).

While it is not apples to apples comparison today because of higher airport fees and taxes in Canada and the exchange rate, NewLeaf should be operating Fair Airlines B737-400’s at around $C 5,265 per flight hour $C 11.70 per mile, or $C 0.075/ASM if it is to be a real “low cost carrier”, so 8.4% less than my figure of $C 5,750 per flight hour.

This current ancillary trend in the airline industry will reach $38 billion in revenue this year, yes billion ! and a recent study concluded that “The travelling public is being nickel-and-dimed to death”, and “what is worst that many fliers don’t learn about the actual cost of their travel until it’s too late”, while airlines stand behind their ancillary revenue fees, “optional services ensure passengers pay only for the services they use”. So remember if the flight is advertised for $99 one way, that is seat only ! so if you have no bags, don’t care where you sit, have your own snack and drink, you will pay $99, but we have gotten used to seat selections, 25 lbs of baggage, free snacks, drinks and entertainment of some sort. This is great for the price conscious traveler but not for the businessman, and that is the ULCC model.

IF I use my previous example, and add the then the yields from above example come up to a RASK (revenue per ASK) that is $ cents 13.40 per RPK to Halifax for a breakeven load factor of 60.1% and to Kelowna the RASK is up to $ cents 8.59 per RPK for a breakeven load factor of 94.1%.

The ULCC model works on the premise of price elasticity of demand which is % change in quantity demand/% change in price (<1 is inelastic, >1 is elastic), so economy class airline tickets are ‘elastic’ meaning that customers are more sensitive to price, so that a 1% decrease in price will be offset by a greater than 1 percent increase in quantity demanded, thus total revenue increases with a price reduction (to a limit). Now, numbers vary, but in North America the short haul/economy elasticity of demand is around -1.50, which means that if airline A reduces its price by 10% it should get a 15% increase in demand, as lower fares get more people interested in flying on their next vacation trip.

Imagine a ULCC that has prices 40% lower than the nearest competitor, this should increase demand by 60%, which means a route that say had an annual demand of 200,000 passengers, might be stimulated to grow to 320,000 passengers per year for instance, and those ‘new’ 120,000 passengers are those that are flying due to low prices, a new market for the ULCC. In fact, on some Ryanair routes in Europe, this elasticity of demand can be as high as -2.50, and many routes have gone from almost nothing to being very large in a matter of years, that has been Ryanair’s success, stimulating new demand.

The ULCC model calls on keeping unit costs very low (CASK) through high utilization, low wages, etc. and the airline has to achieve high load factors, generally + 83% to make money. You do not offer high frequencies as you target discretionary travelers who are flexible with dates and times of departure/arrival, just want to go as cheaply as possible. In Canada, the target markets for NewMaple will be the +4.8 million Canadians that cross the border to fly from US airports to save money, in this case Abbotsford vs Bellingham, Winnipeg vs Grand Forks, Hamilton vs Buffalo.

The low cost airline will not have it easy, the duopoly will fight back, remember only 20 years ago, February 19, 1996 to be exact, WestJet made its 1st flight, then it had only 3 x B737-200’s and serviced 5 cities. Many airlines have failed in Canada with the low cost model (e.g. CanJet, Zoom, JetsGo, Wardair, ZIP, Canada 3000, etc.) but this time it will be different, Canada needs a ULCC, and I like the slow start up that is not taking on Air Canada or WestJet from the get go, but targeting secondary cities with low frequencies and good prices.

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Air Canada has greatly improved its economics in the past few years and today (3Q/15) its CASM (cost per available seat mile) is at $ cents 13.63, yield is at $ cents 19.2 and load factor 81% while WestJet’s CASM is at $ cents 12.83, yield is at $ cents 18.71 and load factor at 80.5%, the two are very close. The success of Air Canada’s rouge low cost operation has really changed the landscape as it has become the vehicle with which to challenge WestJet in Canada with low costs on transborder and domestic routes while also taking on Air Transat on European flights, and even the charter operators like Sun Wings Airlines and WestJet Vacations to the Caribbean.

At the same time, Canadians are being offered great deals to Iceland and Europe, by Iceland’s WOW Air, which is offering $99 one way to Reykjavik and $149 to the European mainland (roughly 70% less than Air Canada) from Montreal as of May 12, 2016 and from Toronto as of May 20, 2016. Both services will be year round and will be offered 4 times per week. WOW Air began in November, 2011 under its CEO Skuli Mogensen who made his money in mobile communications, and today the airline operates 2 x A320-200 (180 seats) and 2 x A321-200 (200 seats) with 3 x A330-200’s on order that will have 342 high density seats like the whole fleet has.

Though attractive, the “nonticket” revenue can be huge, $106 to change a ticket, $82 for seat with extra leg room, and up to $246 to check 3 heavy bags, and then there are the fees for ‘special items’ like golf clubs, skis, musical instruments, up to $76, plus the usual food and drink which is a must on long flights, so you need to be careful and take with you what you really need, and don’t forget your own snacks and drinks.

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The airline launched services Boston and Baltimore this year with San Francisco and Los Angeles planned for next year, also at $99 and $149. The airline takes advantage of its location between Europe and North America, so it can use existing A320’s/A321’s to reach both continents, especially the US west coast. This is the kind of aviation entrepreneurial leadership Canada lacks, we have a stale airline industry, where mediocracy is the new normal in Canadian aviation today, where have our aviation pioneers and entrepreneurs gone ?

In my 20 years overseas, I saw and worked with so many companies that would put most Canadians to shame, Canadian companies are under-performing from what they can do because they have executives/managers with no drive, no vision, lack of ideas, lack of creativity, resistance to change and scared of risk, where executives are picked on experience and not on what they have actually achieved successfully , and everyone holds on to their dear chairs, but little in the way of new thinking comes out, an industry in many ways stuck in the 1990’s, it’s shameful to and pain full to see.

Sadly, rouge’s low costs are not passed on to us consumers, its low costs just make more money for Air Canada, and you see it on destinations where both Air Canada and rouge fly, fares are the same, but comfort on rouge is horrible, tight seat pitch allows more seats per aircraft, and that is about 85% of the savings Air Canada gets from rouge, the rest comes from using lower paid employees than at Air Canada.

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In fact, on the Domestic market Air Canada has 55% of the seat capacity and WestJet has 36% of the seat capacity, in total 91% of the Canadian scheduled domestic market capacity is held by the duopoly, leaving 9% for the likes of First Air, Canadian North, Air North, Calm Air, Pacific Coastal, Pascan, Transwest, West Wind, Bearskin, Perimeter, Porter, Provincial, etc.

Well it will be interesting indeed, wish NewMaple much success, I am sure either CanadaJetline or JetNaked will show up as well in the next few months and it will get interesting again in Canada.

As always, thank you for reading my Blog, I hope that you found it interesting and you learned something from it. Till next time.

Kind regards,

Tomas

 

 

 

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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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