National Bank’s Cameron Doerksen and his partner Alex Hutton wrote in a note to clients last week that while the airline industry has been disrupted by the pandemic, it has also “created an opportunity for small airlines. to grow aggressively and for new players to enter the market. ”
“Even though travel demand remains depressed, conditions are arguably favorable for new competitors to emerge,” analysts wrote, highlighting several contributing factors, including availability of aircraft and low rental rates, a plus. large pool of skilled pilots and airports looking to attract new airlines to make up for lost revenue.
“Perhaps more importantly, the pandemic has significantly affected Canada’s major incumbent carriers Air Canada (AC.TO), WestJet, Transat (TRZ.TO) and Sunwing, all of which have taken on more debt to survive the crisis. In addition, all of these carriers have significantly reduced their networks and reduced capacity, which could provide an opening for other smaller airlines to fill the void. “
The Canadian air travel market is currently dominated by Air Canada and WestJet, which control approximately 80 percent of total domestic seating capacity. But, as Doerksen and Hutton noted, there is the potential for “land grabbing” of market share by airlines such as Flair Airlines and Porter Airlines.
Flair has positioned itself as an Ultra Low Cost Carrier (ULCC), a no-frills airline that keeps base fares low while charging for extras including seat selection and carry-on baggage. The Edmonton-based company has grown aggressively in Canada in recent years, increasing the size of its fleet and adding more routes, including to new sun destinations.
“We believe Flair is already having an impact on the prices of routes where it competes directly with Air Canada and WestJet,” the analysts wrote.
“Even taking into account Flair’s unbundled fare structure (carry-on baggage can be an additional charge ranging from $ 19 to $ 39 for example), its all-inclusive fare is generally lower than that of the other two airlines. “
Porter Airlines is also expanding operations, announcing in July that it will purchase 30 Embraer E195-E2 planes with the right to purchase 50 additional jets, an order valued at US $ 5.82 billion. Porter’s expansion includes services from Ottawa, Montreal, Halifax and Toronto Pearson International Airport, the first time the airline will serve Toronto’s largest airport.
But it remains to be seen whether these airlines – and other entrants such as Canada Jetlines, Enerjet and OWG – will be able to challenge Canada’s legacy carriers in the long term. While analysts say the current environment is reminiscent of the market of the early 2000s, when WestJet grew rapidly and other entrants were in the market, they note that the Canadian aviation market today “Will be much more difficult to penetrate”.
“As evidenced by the long list of bankrupt airlines in Canada over the past 20 years (approximately), history suggests that new airlines have a long chance of success,” the analysts wrote.
“Since developing new routes can take several months to become profitable and trying to grab market share from the big incumbent airlines can be costly, any successful new airline in Canada will need to be well capitalized.
The global travel recovery has stalled in recent months, according to the latest statistics from the International Air Transport Association (IATA), an industry group that represents 290 airlines worldwide, including Air Canada and WestJet. IATA says total global air travel demand in August, measured in revenue passenger-kilometers, was down 56% from August 2019, due to a slowdown in domestic travel around the world. International demand has also slowed, falling 69% from August 2019 levels.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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