By Michael Ganley -- It began as a rumour passed between friends and colleagues in Yellowknife in early December: WestJet – the revered WestJet, the great saviour and bringer of low fares – was coming to town. The emails started flying: “Did you hear, WestJet’s going to start flying in, Yellowknife to Edmonton for $149!” People could barely contain their excitement. Middle-class families once again hoped they could afford to “get out” more than once a year.
Sure enough, a few days later, WestJet launched its offensive. On a chilly afternoon at the Yellowknife airport, PR -man Robert Palmer stood in front of an equally chilly crowd – made up mostly of employees of the two “incumbent” airlines, Canadian North and First Air – and promised to bring WestJet’s cheap seats to a new audience. Two people in the crowd applauded; the rest, no doubt concerned about what the news might mean for their employers, stood stone-faced.
The incumbents responded with offensives of their own.
Within a day the two were offering fares on the same route at deep discounts. Advertizing blitzes highlighted the free meals offered by the incumbents. “Other airlines are hungry for your business,” heralded one Canadian North ad. “Don’t they know you get hungry too?” Canadian North and First Air also began to carefully frame the argument as one not just about cheap fares for Yellowknifers heading south, but about a threat to air traffic throughout the two territories they serve. With 75,000 people spread across 3.5 million largely roadless square kilometres, air travel is – despite its cost – not a luxury in the NWT and Nunavut, but a necessity. If one of the incumbents were to fail or cut back its Northern routes, something considerably larger than a cheap flight to Edmonton might be at risk. Northern communities could be left with reduced – or without – air service.
Canadian North and First Air have generally battled hard for Northern market share and there’s no love lost between the two. But when it comes to the threat posed by WestJet and Air Canada (which arrived in Yellowknife two years ago) they’re on the same flight path. Both maintain that their entire networks, most of which serve small communities above the 60th parallel, stand on two crucial routes: Calgary/Edmonton to Yellowknife and Ottawa to Iqaluit.
These are easily the most heavily travelled routes the two fly, and if either becomes unstable, Northern air travel is in jeopardy, says Scott Bateman, president of First Air. “If you allow southern carriers to come in and cherry-pick your trunk line and that route no longer becomes viable, it ends up impacting your ability to give service to the Northern communities,” he says. “It’s a very fragile infrastructure up here to support the level of service that both carriers deliver.”
Canadian North president Tracy Medve says her airline matched or bettered the WestJet price for the summer months, but it’s not a long-term solution. “We put that pricing out there because we knew that this summer we were going to have a whole bunch of empty seats,” she says. “But it’s not sustainable for us.”
Fare wars have proven unsustainable for many Canadian airlines in the past, and the landscape is littered with the carcasses of airlines that have died as a result: Jetsgo, Canada 3000, Royal Airlines and Canadian Airlines, to name just a few. Then there’s Air Canada itself, which came out of bankruptcy protection in September 2004. Many of these bankruptcies have been due, at least in part, to fare wars. While it’s tempting to say, “It’s all business – let the market sort itself out,” the North is a unique case for which the free market, in the past, has not had a solution. Old-timers in Iqaluit remember when Canadian Airlines pulled their Ottawa service years ago because they wanted to use the plane on a more lucrative route, stranding Iqalummiut. Air transportation here is crucial – and tenuous – which is why Northerners who do not want to be subject to the whims of southern companies have, over the years, bought both incumbent airlines.
Canadian North and First Air are both locally owned, Canadian North by the Inuvialuit Development Corp. and Nunasi Corp., and First Air by Nunavik’s Makivik Corp. These Inuit birthright organizations have given their airlines broader mandates than the average, private company. While they strive for profit, they are also charged with providing reliable air transportation to a lot of small, isolated communities, and with developing economic opportunities and providing training and employment for Inuit.
Medve is particularly mad at WestJet because the two airlines had, until just a few weeks before WestJet’s announcement, been working on an interline agreement that would have allowed Canadian North passengers to move seamlessly to a West-Jet flight in Edmonton, without having to pick up their bags and go back through security. Instead, WestJet’s decision to enter the Yellowknife market on its own equipment brings the total number of seats into and out of Yellowknife to around 4,800 per week from May until October. Bateman says that’s way over capacity. “During the best of times – when the economy was booming – with the two incumbents and lately with Air Canada coming in, you probably had 40 per cent over-capacity,” he says. “We’re in a severe economic downturn in our region with the mining and exploration being curtailed and now you have WestJet coming in and adding 1,500 seats per week. I don’t understand the logic behind it.”
But WestJet thinks it knows what it’s doing. Thirteen years ago, the Calgary-based airline began with three jets flying into five Western Canadian cities. It was the little guy with big dreams, known for flying into underserved markets with low prices. Now with 76 aircraft – all of them Boeing 737s – flying to 55 places in Canada, the U.S., Mexico and the Caribbean, it is challenging Air Canada as the country’s dominant airline. WestJet now has 36 per cent of the domestic market, and Air Canada 57 per cent. Nine years ago, those figures were seven per cent and 77 per cent.
But while WestJet now has considerable weight to throw around and isn’t afraid to do so, Palmer says his airline has never forced another carrier out of business. “We may force them to sharpen their pencils and we may force them to offer more value,” he says, “in which case the ultimate beneficiary is the consumer.”
Not everyone agrees. “I would be quite concerned because as you put additional capacity in a situation like that, everybody suffers,” says Joseph D’Cruz, an airline industry analyst at the University of Toronto’s Rotman School of Management. “This is going to hurt the business of the incumbents, and in the long run if one of those incumbents is forced out of business it’s going to hurt the people of the North.”
Airline pricing is an art and a science and, to the average passenger, often seems the work of the devil. Why does it cost so much more to fly from Yellowknife to Norman Wells than it does from Yellowknife to Edmonton, when the former route is a shorter distance? For one thing, Norman Wells, and every other Northern community, has a low volume of travellers.
For another, an airline will look at the “network value” of a passenger, not just their presence on a single leg of a trip. If an airline can keep a passenger all the way from Yellowknife to Moncton (as Air Canada and WestJet can do), then the Yellowknife-to-Edmonton portion of the trip can be offered at a discount so long as the entire trip produces a profit.
Neither Canadian North nor First Air will say that their southern legs subsidize their Northern routes. But they maintain that having a reasonable return from their most heavily travelled routes is important to their overall health. “You cannot say that you’re going to have all this infrastructure in the North, with all the high costs, and not have the ability to have the traffic coming out of the south,” says Medve.
The territorial government is taking a mostly hands-off approach to the situation, arguing that it should not be picking the winners and losers in the private sector. The government does go so far as to insist that its employees fly with one of the incumbents when on government business, but Medve argues that there are a couple of other things the government should be doing to support the Northern carriers.
For instance, she says the government’s Business Incentive Policy, which allows Northern businesses to win a government contract even with a bid 15 to 20 per cent higher than their Southern competitors’, should be tightened. While current rules mandate that employees of the winning bidder must fly on a Northern airline, subcontractors are not under the same restriction. Medve would like to see that loophole closed.
Secondly, she wants the government to pay more attention to the interests of the incumbents when developing airport policies. The government has been considering an extension to the length of the runway in Yellowknife to encourage direct flights from overseas. “We don’t need that extra runway length, thank you very much,” says Medve. “If you want tourists in here, have them come through Calgary and Edmonton and we’ll bring them up. Don’t spend infrastructure dollars expanding a runway so we end up having to pay for guys who can compete with us.”
Of course the people of the North are not homogenous, and neither are their interests. The tourism sector in and around Yellowknife, at least, stands to benefit from the lower fares if more people decide to come for a visit. And not everyone in outlying communities is worried about what might happen to the incumbents. Jim Ulch, owner of the Heritage Hotel in Norman Wells, has been in business in for 26 years, and estimates that he spends more than $60,000 each year with Canadian North for freight alone. “I ship $600 worth of produce and spend $1,000 worth of freight, every week,” he says.
He becomes animated when speaking excitedly about WestJet’s arrival. “When WestJet comes in I will get off Canadian North in Yellowknife and walk over to West-Jet, and once I take that walk, I will never walk back. And so will every one of my employees. For 26 years I didn’t have a choice, now I’m going to change my loyalty to another player.”
But that loyalty may not be reciprocated. If WestJet can’t profit from the Yellowknife market, it’s not going to stick around. “It’s not that we’re flighty,” says Palmer, “but we won’t stick with it for years and lose money just because we have to protect turf. We’ll go into a location, give it a whirl, but after one season if it isn’t working, we’re not going to come back and try it again.”
Bateman says Canadian North and First Air are not the real targets of WestJet’s decision to enter the Yellowknife market. He says it’s a repeat of the old “red versus blue” battles, where Air Canada and Canadian Airlines fought each other so hard both went bankrupt. Canadian North and First Air are just collateral damage as Air Canada and WestJet now compete for the traffic that will connect into their network down south. “But we’re not going to give it to them,” says Bateman. “They’re not going to come in as a low-price carrier and buy that business. That business is very important to both First Air and our competitor, so we will compete on price.”
So, Yellowknifers, enjoy the low fares while you can, and hold on to your hats. “Historically, until the carriers drive each other into the grave, the consumer will benefit,” says Bateman, “but eventually someone is going to go to the grave.”
