Discount airlines fight red tape to get off the ground in Canada

Canada's airline industry seems to have a habit of chewing up discount airlines and spitting them out, begging the question: What's getting in between Canadian air travellers and their cheap seats?

Canada's foreign ownership requirements are 'archaic' and only protect established airlines, Enerjet CEO says

Jetlines hopes to start selling tickets this year, if it can secure the funding to get its carrier licence. (CBC)

Canada's airline industry has a history of chewing up discount airlines and spitting them out, which begs the question: What's getting between Canadian air travellers and their cheap seats?

A number of discount airlines have come and gone in Canada, and at least three — Jetlines, Jet Naked and NewLeaf Travel — have been trying to get off the ground for several years.

NewLeaf Travel appeared to have won the race to the skies last week when it started selling tickets for February flights. But the fledgling company cancelled its winter takeoff plans last Tuesday amid a review of its licensing requirements, grounding NewLeaf indefintely. 

The budget airline model — in which companies offer cheap introductory fares and charge extra for things like checked luggage and early boarding — has proven lucrative in other countries. Successful companies include Ireland-based Ryanair, U.S.-based Spirit Airlines, Iceland-based WOW Air and Malaysia-based AirAsia.

So why is it so hard for Canadian companies to follow suit?

It's all about cash on hand

"A large part of it has to do with financing," Barry Prentice, a transportation economist from the University of Manitoba's Asper School of Business, told CBC News. 

"You do have to have a fair amount of capital lined up before you start an airline because, amongst other things, you have to prove to the government that you actually can live up to your obligations or repay people for tickets booked in advance. And that's not a small amount of money."

In order to secure a carrier licence from the Canadian Transportation Agency, a company must show it has enough funding to operate for 90 days without turning a profit

​"It's just a matter of securing funding," said Tim Morgan, CEO of Calgary-based charter airline Enerjet, which plans to launch its own budget airline under the brand Jet Naked.

He hopes to have Jet Naked up and running by the spring, but makes no promises.
Calgary-based charter airline Enerjet is aiming to raise the capital to launch a low-cost airline. (Enerjet)

Jetlines is also aiming to take off later this year. CEO Jim Scott said slumping oil prices have hampered its efforts to secure funds. 

"Initially we went out in 2014, we had good responses. As soon as the oil prices went down, we found the major institutions were in a contraction of investing and that lasted throughout 2015," he said, adding he's more optimistic now that investors are starting to adjust to "the new norm."

And it's got to be Canadian cash

"To tell you the truth, I do have the funding available to me right now. All of it," Morgan said. "Where the problem lies is it's money out of the U.S.A."

Those greenbacks are no good to Morgan. The Canada Transportation Act requires at least 75 per cent of an airline's voting shares be owned and controlled by Canadians.

Ben Cherniavsky, an airline analyst for financial services firm Raymond James, said the foreign ownership requirement is the biggest impediment to starting a new airline in Canada.

"This severely limits the pool of capital for a new venture," he told CBC News in an email. 

Morgan called the regulation "archaic" and said it was designed to protect established airlines rather than Canadian consumers.

"I can tell you this right now, our airline would have been flying a year ago if we could have found our way to make that happen," Morgan said. "All need to do is convince the Canadian government to allow me to bring this money in."

Taking on the big dogs

Canada's established airlines — namely Air Canada and WestJet — are a force to be reckoned with in more ways than one. 

"The two are such juggernauts, it makes things difficult," NewLeaf CEO Jim Young said.

When NewLeaf was planning to fly in February, WestJet responded by undercutting the newcomer on many competing routes.

WestJet dropped fares last week on select routes that would have competed with budget airline NewLeaf, such as this Feb. 26 flight from Kelowna, B.C., to Saskatoon. (Screengrab/CBC)

It's not easy to compete in the long term with companies that operate on such a massive scale and are continually expanding, Prentice said. Both Air Canada and WestJet are adding new destinations this year. 

"You have to be able to get to that critical size to be able to offer that competitive service, and that growth is never easy," Prentice said. 

Taking a shortcut 

NewLeaf tried to circumvent some of these obstacles by operating as an indirect service provider. Rather applying for a carrier licence of its own, it partnered with the already-licensed B.C. charter airline Flair, leasing its planes, crew and maintenance. 

That caused passenger rights advocate Gábor Lukács to sound the alarm bells about what he saw as a direct violation of the Canada Transportation Act, which requires any air service to have its own licence.

Lukacs has filed a court challenge of the CTA proposal that airlines be able to operate with an indirect licence, saying it saying that "allowing an air service to run on a shoestring budget exposes the public to significant risks."

Greyhound Air once attempted a similar business model in Canada, but the CTA would not allow it. In NewLeaf's case, the CTA gave it the green light to sell tickets while the agency conducts consultations into the regulations. 

Gábor Lukács sounded the alarms when he learned NewLeaf was operating without a carrier licence. (CBC)

But NewLeaf announced suddenly this week that it would suspend operations until the review was complete. 

"Our beef is really not with the CTA at all. In fact, we want them to do their work. The challenge is you've got a number of naysayers who are throwing out fear, uncertainty, doubt and every other thing they can throw out to actually try to prevent NewLeaf from flying," Young said. 

Lukács called NewLeaf's announcement "a full victory," telling CBC News: "The rule of law prevails over the narrow and private interests of the owners of NewLeaf."​


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