Bright skies ahead in 2015

Canada’s two largest airlines expect to enjoy a strong 2015 amid forecasts for lower jet fuel prices and a stable economy, though questions linger about two potential upstarts.

Air Canada and WestJet Airlines Ltd. are in expansion mode, steadily rebounding after the 2008-09 recession that hammered the global airline sector.

“Air Canada, and indeed the airline industry as a whole with its notorious cyclicality, has faced financial challenges throughout its history. However, in recent years, we have undertaken a very focused, fundamental transformation to make our company sustainably profitable,” Air Canada chief executive officer Calin Rovinescu said during a recent speech in Vancouver.

The country’s largest airline has had its share of rocky times with union relations, but in October, the Air Canada Pilots Association (ACPA) ratified a 10-year collective agreement.

“The agreement with ACPA should offer some comfort that new contracts with other groups are achievable during what should be a much more conventional bargaining process than what occurred during the last set of negotiations,” AltaCorp Capital analyst Chris Murray said in a research note.

In a twist, it is Calgary-based WestJet that is facing some turbulence on the labour front, after 57 per cent of flight attendants who cast ballots in an employees’ association voted against a tentative agreement in late November. Still, WestJet is confident that it will resolve the impasse, like it did when it reached a deal with its pilots in mid-November. WestJet employees are represented by associations and not unions.

Industry analysts expect Air Canada and WestJet to have a profitable 2015, thanks to high load factors, or the proportion of seats filled by paying passengers.

WestJet and Montreal-based Air Canada introduced fees for passengers’ first checked bag in the fall of 2014 on certain domestic flights, helping their finances but irking consumers. Toronto-based Porter Airlines Inc. has had a fee in place since April 2014 for the first checked bag within Canada.

The wildcard will be whether Canada experiences a significant slowdown in its energy-dependent economy; but for now, the expectation is that airline traffic will remain healthy in 2015.

Cheaper fuel prices will also help the airline industry. Analysts forecast jet fuel will cost less than 88 cents a litre in 2015, compared with nearly 95 cents a litre in the first quarter of 2014.

The potential spoiler for Air Canada and WestJet in the second half of 2015 could be two new companies that want to launch discounted flights, possibly by mid-year.

Vancouver-based Canada Jetlines Ltd. and Calgary-based Jet Naked are proposing to find regional niches in Western Canada to fly underserved or neglected routes, while steering clear of going head-to-head against the two largest carriers between major hubs.

Jetlines has had to be nimble as it prepares behind the scenes at a small office at Vancouver International Airport.  Originally, the upstart said former Frontier Airlines chief marketing officer James Young would guide the company as president, but former Canadian Airlines manager David Solloway took on that role instead. Jim Scott is serving as Jetlines’ CEO.

Jetlines has also switched gears for its planned fleet. Instead of launching with two Airbus A319s, it now wants to start with two Boeing 737s.

“Jetlines expects to grow its business significantly within the first 36 months of operations by expanding its fleet to up to 16 Boeing 737 aircraft,” the upstart airline said in a preliminary prospectus in late November.

The goal is to acquire up to seven 737 Classics and nine 737 Next Generation aircraft. Longer term, Jetlines will switch to the 737 MAX, starting gradually in 2021.

In the prospectus, Jetlines discloses its plans to merge with Inovent Capital Inc. and list publicly on the TSX Venture Exchange. Jetlines is seeking to initially raise $50 million in an offering led by AltaCorp and Euro Pacific Canada Inc.

“Jetlines believes that planning for the Boeing 737 MAX today provides Jetlines with immediate start-up assistance and a long-term strategic advantage,” according to the prospectus.

Analysts question whether there is room in Canada for two firms that bill themselves as ultra-low-cost carriers (ULCCs).

Jet Naked, however, points out that WestJet co-founder and Enerjet CEO Tim Morgan is its executive chairman. Jet Naked is aiming to have 24 planes, likely Boeing 737s, roughly three years after launching.

The team behind Enerjet hopes to raise money for a plan to operate a scheduled service. “Since its launch in 2008, Enerjet has grown to become the largest stand-alone charter airline (without a scheduled service or tour business) in Canada operating 737 NG class aircraft,” Enerjet noted in a statement. “Enerjet has learned how to operate a ULCC by way of our carefully managed operating costs over several years and our collective management experience in marketing ancillary services.”

The uncertainty is over whether Jetlines and Jet Naked, in starting off relatively small, will have enough critical mass. Whatever special low fares are introduced, the two existing major carriers will have the clout to match ticket prices and also offer consumer incentives through their frequent flier programs.

Air Canada and WestJet also have the advantage of regional and international traffic, including through code-sharing, to feed into their major hubs in Canada.

Craig Richmond, the chief executive officer of the Vancouver Airport Authority, said he welcomes the financial stability at Air Canada and WestJet.

“It’s really good to have two strong national carriers,” commented Richmond in an interview. “It’s great to see the airlines making money.”

He added that for any fledgling airline in Canada, there will be challenges ahead.

“We’re doing everything that we can as an independent airport authority to help Jetlines out through the formative stages,” said Richmond. “They have a tough fight. Starting up an airline in Canada and making it successful is not easy. There have been a lot of airlines that have tried and failed. Jetlines has a tough road ahead of them, but I wish them all the luck in the world.”

A notable challenge for Jetlines and Jet Naked over the long term will be WestJet’s regional Encore service and Air Canada’s leisure Rouge operation.

While the upstarts will focus initially on domestic flights, they will face hurdles on Canada-U.S. routes because of competition from low-cost carriers such as Southwest Airlines at U.S. border airports. Despite the weaker loonie, Canadians are still expected to flock to cheaper fares to the U.S., Mexico and the Caribbean from U.S. border terminals.

WestJet has been making inroads with Encore ever since that unit began flights in June 2013, when trips on Bombardier Q400 turboprops began to four B.C. cities and Saskatoon. After starting in the West, Encore began offering flights in eastern markets in mid-2014.

Internationally, 2014 was a milestone year for WestJet as it launched service between St. John’s and Dublin. That was the carrier’s first scheduled route across the Atlantic Ocean since being founded in 1996.

WestJet’s network will strengthen with the further rollout of Encore and the main carrier’s announcement of service to Glasgow, WestJet CEO Gregg Saretsky said.

WestJet has relied on the narrow-body Boeing 737 since inception, but it is slated to diversify into the wide-body Boeing 767, with plans to phase in four of the planes by the end of 2015. Flights between Alberta and Hawaii are among the routes being eyed for the 767s.

At Air Canada, the rollout of the Boeing 787 Dreamliner will continue in 2015, replacing its aging Boeing 767s, which are to be redeployed for Rouge.

The airline will convert the Vancouver-Beijing route to 787 service in February 2015, and then follow with the Vancouver-Seoul route in March. Air Canada, which introduced the Dreamliner into its fleet last July, has ordered 15 Boeing 787-8s and 22 of the larger 787-9s. The final deliveries for the Dreamliner aircraft are set for 2019.

“These new aircraft offer the latest in customer comfort and will keep us competitive in the Asian market, where we are up against some of the best airlines in the world,” stated Rovinescu.