Canadian airlines: Wild blue wonder

Canadian airlines may still defy gravity.

Talks of a global slowdown have markets on edge, yet one industry typically regarded as a foolproof economic barometer has seen nothing but blue skies. The domestic airline industry is flourishing. For 14 months in a row, WestJet has filled its planes to record levels, and last year Air Canada posted its strongest results in history. Demand is so strong that two new carriers are set to launch this year. All this good news even has analysts scratching their heads. “I’m as surprised as anyone about the resilience and the demand for air travel in Canada,” says Ben Cherniavsky, a Vancouver-based aviation analyst at investment firm Raymond James. It’s either a sign of a higher propensity to travel, he says, or simply an indication that the economy is not doing too badly after all.

The strong Canadian dollar is one factor, since many buy aircraft and fuel in U.S. dollars. “We’ve been able to weather increases in prices, especially on the fuel front, a lot better,” says Sam Barone, president and CEO of the Air Transport Association of Canada. Even though fewer Americans are flying internationally, Canadians have helped maintain a strong cross-border flow. Toronto-based Porter Airlines’ first U.S.-bound flights, to New York, received more bookings in the weeks prior to their late-March launch than all its other routes combined.

But the months to come might not be so rosy. With a potential recession hampering Canada’s largest trading partner, “there are a few clouds on the horizon,” says Barone. New carriers are edging onto the market with caution. Calgary-based Corporate Jet Air’s small-scale launch this spring will feature flights between Toronto and Calgary, testing the air before expanding to other cities. Its focus on speed and convenience for business travellers is not unlike that of Porter, but lavish amenities set Corporate Jet Air apart: planes that used to seat 50 have been transformed into roomy 18-seaters, and an all-inclusive fare features “gourmet” food and drinks, and limo service to and from the airport. “People are becoming more affluent and less patient, and more willing to pay for a premium service,” says Betty Ledgerwood, director of marketing and branding. “We just see that there’s a big niche in the market.”

NewAir and Tours Group, a travel and tour company targeting a third-quarter launch, will focus on serving small Canadian cities that currently enjoy little or no service to holiday destinations. “There’s lots of money being spent in those markets these days,” says NewAir CEO Tim Morgan, a co-founder of and former executive at WestJet. Offering hotel and vacation packages along with flights, NewAir would be entering a market where margins are already being squeezed by competitors such as Air Transat, Sunwing Vacations and Zoom Airlines. But NewAir’s small-market focus, Morgan says, will give it an edge: “It’s a time and convenience factor.”

Neither new carrier will impact incumbents much, says Cherniavsky. But alongside industry-wide capacity growth that’s expected to be the highest in four years, competition could get fierce this year. About $12 billion worth of aircraft is on order across the sector. Capacity is expected to grow by as much as 4% at Air Canada and 16% at WestJet; Porter, too, plans to double its fleet within 12 months. “There’s a risk that the airlines are adding too many seats in the domestic market,” Cherniavsky says, and that threatens to push prices down.

Thanks to expensive fuel and an economic slowdown, profits in the global industry could well fall to US$4.5 billion this year from US$5.6 billion in 2007, according to the International Air Transport Association. Early indications, though, show load factors remaining strong and prices for travel remaining high in Canada. “If the trends continue,” says Cherniavsky, “it could end up being another good year.”