Many things in Canada take time, such as vaccine rollouts and airline bailouts. Air Canada and WestJet probably wish that these didn’t take so long, but there’s another carrier that’s only banking on the vaccine part.
Flair Airlines – the bold, brash, neon-accented upstart – recently announced a summer expansion involving 8 destinations and 13 new Boeing 737 MAX 8 aircraft. Why?
“We’ve taken the view that by the summer, the provincial restrictions within Canada will be relaxed to the point where people will want to travel again.” - Stephen Jones, President and CEO of Flair Airlines
Many are rightfully skeptical. The road (runway?) to airline success in Canada is littered with corporate casualties; Jetsgo, Canjet, and Harmony are just several high profile failures, and they didn’t have to deal with a pandemic. At least not all of them.
Turns out these are pretty expensive to operate ¯_(ツ)_/¯
It’s tempting to dismiss Flair as a bankruptcy waiting to happen, but the more we looked, the more we were convinced. Maybe we drank too much Kool-Aid, but several factors suggest that Flair is on the cusp of accomplishing what few have - operating a viable airline in Canada.
- Sustainable operational structure i.e. low costs, sufficient revenues
- Favourable market environment i.e. market demand, competition
This article will explore each factor and their key drivers, helping to paint a better picture of why Flair Air can win.
Factor 1: Sustainable operational structure
With apologies to the natural environment, “sustainability” in this sense refers to profitability (it should mean both, but I digress). This raises 2 key questions for Flair: 1) Can costs be kept low and 2) Can sufficient revenue be captured, either on volume or ancillary fees?
Flair understands this; they’re doing 2 things to address both questions.
Driver 1.1: True ultra-low-cost-carrier structure
Executed correctly, the ULCC model is arguably the most profitable airline strategy in existence. Allegiant, Frontier, and Spirit - the poster children of ULCCs - consistently posted the highest operating margins amongst airlines in the US from 2011 to 2016. This includes a 3 year stretch (Q4 2011 to Q4 2014) where Spirit’s margins were at least 7 percentage points greater than Delta’s, generally considered the most profitable legacy airline in the US.
Most hated in America, but also the most profitable - Photo by PHLairport
ULCCs are largely successful due to a “maniacal focus on costs”. In the fourth quarter of 2019, before everything blew up, Spirit and Allegiant both posted adjusted CASM-Ex’s (cost per available seat mile, excluding fuel) of 5.67 and 6.50 cents respectively, less than 60% of Delta’s 11.21 cents.
In order to be remotely viable, Flair must achieve a lower CASM than Air Canada and WestJet, and then some. Those airlines posted a Q3 2019 CASM (including fuel) of 14.2 and 13.64 cents (CAD), respectively.
Flair’s operating costs aren’t publicly available, but in 2018 then-CEO Jim Scott claimed to have a CASM of 11 cents. That’s still too high for an airline with considerably lower revenue per passenger than full-service carriers, but it’s a start.
In our opinion, the most encouraging sign for Flair is the fact that a true ULCC has never been attempted before in Canada - and therefore hasn’t failed before in Canada ;)
Meltdowns like Zoom Airlines and Jetsgo were of low-, not ultra-low-cost carriers. Yes, much has been made of Canada’s sparse population, long sector lengths, and exorbitant flying fees, but Flair doesn’t have to reach Spirit-level costs; they just need to maintain a comfortable lead ahead of Air Canada and WestJet.
The ULCC model doesn’t guarantee success, but you can’t dismiss Flair because of it. In fact, their largest threat may be a result of the business model’s attractiveness. WestJet launched their own ULCC in 2018 - Swoop; we’ll discuss them in the next section.
Maybe this business model does have some merits
Driver 1.2: Not an Airline-in-Airline (A-in-A)
The fact that Flair isn’t an A-in-A increases their odds of success.
Unpacking this statement first requires understanding what an A-in-A is, then exploring how that structure hamstrings airline profitability and success - in the traditional sense, at least.
We use A-in-A to refer to carriers that operate as a wholly-owned subsidiary of another airline. The parent airline can have varying degrees of involvement, ranging from close sharing of brand identities - e.g. Continental and Continental Lite - to largely independent operations - e.g. WestJet and Swoop.
A-in-As tend to disrupt both parts of profitability: costs and revenues. Legacy carriers have heavier cost structures, be it with labour or other costs like maintenance and sales. In an extreme example, ULCCs in the US had - on average - 40% the labour costs of network carriers in Q3 2018.
Data from Oliver Wyman's Airline Economic Analysis (2019)
Having a more expensive parent tends to result in costlier children. There isn’t one single explanation for this difference, but let’s use the aforementioned example of labour.
Unions don’t necessarily correlate with unreasonable labour costs - Spirit is unionised, for example - but more expensive rates can easily spill over to subsidiaries. This is strengthened by the perception - and sometimes reality - that A-in-As are simply a method for legacy carriers to pay lower wages, creating conflict between unions and airlines.
Swoop has already experienced the effects of this antagonism; a federal arbitrator ruled in 2018 that the same union would represent both Swoop and WestJet pilots. Tim Perry, now president of ALPA Canada, said then that the union would attempt to bring Swoop wages up to “the industry standard”.
The overhang of an established network carrier can also restrict the freedom of A-in-As to expand or offer certain services, limiting revenue upside. Parent airlines are undoubtedly cognisant of the threat of cannibalisation, with examples such as Buzz (KLM) and Shuttle by United (United) serving as painful warnings. A-in-As may therefore be discouraged from competing with their parents on lucrative mainline routes.
In cases where a subsidiary defies this - such as Swoop operating out of Toronto Pearson - tensions will likely arise with employees at the legacy carrier; WestJet pilots have accused the company of using the pandemic as an excuse to outsource their jobs to Swoop.
However, many A-in-As aren’t supposed to be “successful” in the traditional sense of profitability and survivability. Legacy airlines typically have 3 potential objectives when starting an A-in-A:
- To create a profitable business (and possible spin off)
- To weaken low-cost competition in key markets (e.g. Delta’s Song vs. JetBlue)
- To test low-cost business practices for eventual adoption in mainline operations
These objectives aren’t mutually exclusive, but it’s easy to see how profitability is just one potential goal - and arguably not even the most important one. A 2007 study examined a global sample of A-in-As and found that 77% were explicitly created to counter LCC competition.
Air Canada’s Zip and Tango subsidiaries, both born at the turn of the century and shut down in 2004, provide 2 extremely relevant examples of how A-in-As aren’t always built to win - and outline how Swoop could be on a similar path.
Were all 3 supposed to be real airlines?
Tango was created to fend off Canada 3000 - a pseudo-LCC - and allow AC to experiment with cost-saving measures like fare unbundling, higher capacities, and online ticketing channels. When these concepts were proven, and after AC went through bankruptcy proceedings, the carrier folded Tango’s practices into their mainline operations, including the creation of a new Tango fare class. Then-CEO Robert Milton described it well: “We don’t need Tango anymore”.
Zip’s goals were even less subtle; AC simply needed a better way to fight their price war with WestJet. The legacy carrier was bleeding money trying to match WestJet’s fares, so they created Zip - not to turn a profit, but to lose less money. Keith McArthur, author of Air Monopoly, wrote how “Zip didn’t have to make money to be successful. ... It just had to lose less money than Air Canada did”.
Both Zip and Tango could have been short-term “Trojan Horses”,
“aimed at forcing recalcitrant labour unions to renegotiate pay scales and conditions that, ultimately, is the only way that a legacy carrier can obtain sufficient cost reductions to compete effectively with LCCs.” - Brian Graham & Timothy M. Vowles, professors of Geography and Air Transport
This is all relevant to Flair because:
- They’re not an A-in-A
- Swoop, their primary competitor, could be WestJet’s Trojan Horse (how ironic)
Hopefully the opening sentence of this section now makes more sense: the fact that Flair isn’t an A-in-A increases their odds of success. Flair understands this fully, with CEO Stephen Jones recently saying: how they
“We don’t have the overhead and costs associated with legacy organizations and networks, and this allows our efficiencies to be passed along in our pricing.” - Stephen Jones, President and CEO of Flair Airlines
There’s also a whole other article that could be written about Swoop’s own chances at success, so maybe we’ll do that another day.
Factor 2: Favourable market environment
A profitable business model is just one half of the equation; if nobody wants to fly, or if competitors are willing and able to fight a price war on every single route, then your internal structure doesn’t matter.
Fortunately for Flair, people do want to fly, and the pandemic has benefited leisure travel in more ways than one.
Driver 2.1: Latent demand for cheap air travel in Canada
“There is no low-cost or ultra-low-cost airline in Canada, zero, none. So is the market ready for that? Yeah.” - Bill Franke, co-founder and Managing Partner of Indigo Partners LLC (2016)
Several statistics are often thrown around when discussing this topic; a common one is the 5 million Canadians who reportedly cross the border for cheap flights, flying from airports in places like Buffalo, Plattsburgh (New York), and Bellingham (Washington).
If you're driving to Hamilton, might as well go a bit further to Buffalo
Another estimate by Chris Murray, an analyst at AltaCorp Capital Inc., predicts that 10 million price-sensitive Canadians would fly with low-cost carriers. Some quick math support this:
|0-19 + 40-59
The ULCC percentages were estimates based on each group’s propensity to fly low-cost carriers, factoring in the primary purposes of ULCC travel - visit friends/family, leisure - and external ULCC demographic data.
Murray translates this number into sufficient demand for 50 Boeing 737s, enough to support 2-3 low-cost carriers.
|i.e. people to be moved
|Assume high density 737
|Number of planes
This 78-plane figure assumes that each 737 flies an average of 4 flights per day for a utilisation of 12 hours, just under Spirit’s 12.7 hours and ahead of JetBlue’s 11.8 hours. This 4 flights/day estimate is arguably aggressive; it assumes that each flight takes 2.5 hours to cover an average sector length just under 2000km, with a 30-minute turnaround.
Murray’s prediction for 50 737s therefore seems to be conservative, providing comfortable reassurance that latent demand for low-cost travel does exist in Canada.
Driver 2.2: Pandemic tailwinds
Pent-up travel demand
There is further demand for travel that can be attributed to the pandemic, rather counter-intuitively. Having been confined to our homes for over a year, Canadians with disposable income will likely spend it on travel - and domestically.
Various travel surveys indicate that over 50% of Canadians are either willing or actively planning to travel this year. Around 60% of Canadians would only plan domestic trips, and 60% can be expected to look for bargains. Finally, the recovery of leisure traffic in the US - domestic hotel bookings have tripled since Feb 1st - is a promising sign that the low-cost sector can rebound quickly.
Flair is well-positioned to take advantage of these trends; their summer expansion will bring cheap travel to a total of 18 domestic destinations.
It’s no accident that Flair’s new aircraft orders are all for the Boeing 737 MAX. Yes, they burn 14% less fuel than Flair’s current 737s, but this order was also the first by a North American carrier* since the MAX received reauthorisation to fly. Flair likely received a very favourable rate on the aircraft, especially after the extended grounding.
This does look pretty good :)
For reference, many analysts believe that Europe’s IAG received discounts in excess of 60% for their order of 200 MAXs in mid-2019. Flair likely won’t receive such sweeteners, but a substantial upfront discount can be expected with the added slowdown in demand due to the pandemic.
*Miami-based 777 Partners made the order and will lease 13 MAXs to Flair
Weaker Air Canada / WestJet
Perhaps the best thing to come out of the pandemic for Flair is how Air Canada and WestJet have struggled. This is critical; the 2 incumbents have played a key role in extinguishing many previous upstarts, with Jetsgo and CanJet arguably being the clearest examples.
Jetsgo’s biggest mistake was “trying to fight a price war without a war chest” according to Joseph D'Cruz, an Emeritus Professor at the Rotman School of Management. This was in reference to Jetsgo’s battle against a better capitalised WestJet, a time that pushed the former to even sell $1 seats in desperation.
CanJet focused on Atlantic Canada before realising that the market wasn’t big enough for 3 players. As it pivoted from scheduled service to charter operations, CanJet’s parent company - IMP Group - went down by accusing AC/WJ of collectively adding 10% to the region’s seat capacity. This isn’t verified, but analysts believe that stiff competition played a key role in CanJet’s demise, especially for the smaller market of the Maritimes.
Western Canada = WestJet, Eastern Canada = CanJet? Photo by Barry Shipley
Fortunately for Flair, the pandemic has hammered the incumbents. Air Canada reported a net loss of $1.16 billion in the final quarter of 2020, compared to a net gain of $152 million in the final quarter of 2019, and WestJet announced 415 pilot redundancies just last month. Both carriers are currently operating just 20% of their capacities compared to the first quarter of 2019.
With both airlines entrenched in survival mode, they simply can’t fight a Flair fare war. The pandemic might provide the necessary cloud cover for Flair to begin serving key routes like Vancouver-Toronto, build their ridership, and prove their value proposition to Canadians ahead of a potentially lucrative summer travel season.
By the time WestJet and Air Canada regain their footing, it may be too late to employ traditional predatory tactics against Flair.
Anyone who has the courage to start an airline in Canada should be commended. The added consumer choice beyond Air Canada and WestJet will only be beneficial, and a successful Flair would offer a new price point to flying that can’t currently be found in Canada.
Have they become the villain now?
We wrote this article to explore why Flair Air can win - or, at the very least, why they won’t be dead on arrival. We outlined key factors that collectively differentiate Flair from previous ventures in Canada, hopefully painting a balanced picture of why they might’ve gotten it right this time.
This isn’t to say that success is guaranteed. Any airline that increases their fleet size by a factor of 5 during the worst crisis to ever grip aviation can’t be guaranteed anything. Perhaps Swoop catches up in capacity, or Canada’s geography and regulation prove too restrictive to pull off a true ULCC cost structure.
Either way, Flair has made the strategic decision that now, as a recovery nears, is the time to go big - or go home.