Strategy

Airlines: Defying gravity?

Canadian carriers buck the global trend.

For a guy operating in an industry beset with rising costs, falling profits and outright bankruptcies, Robert Deluce is the very picture of confidence. At a speech in Montreal last week, the founder and CEO of Porter Airlines called Air Canada the “world airline leader in passenger fees,” referred to Jazz as “Air Canada’s lapdog” and criticized large airlines for lacking flexibility — all the while trumpeting the benefits of flying Porter. Famous last words? That’s hard to tell — the Toronto-based airline is a private company. But that doesn’t stop Deluce from mentioning in an interview that Porter obtained a “good level” of profitability that started in June of last year and continues today.

Globally, the airline industry is faltering. Alitalia teeters on bankruptcy, British carrier XL Airways has gone under and, in Canada, regional Zoom Airlines ceased operations. The International Air Transport Association’s recently revised industry outlook predicts a global loss of US$5.2 billion this year. But Deluce’s confidence may not be unwarranted. For one thing, Canadian airlines are in better shape than their peers. “The IATA numbers are distorted by U.S. airlines,” says Jacques Kavafian, an analyst with Research Capital. “It’s only a U.S. problem that’s occurring.”

Kavafian points to Canada’s stronger economy and the fact that there are really only two major airlines competing for customers. That’s not to say there hasn’t been turmoil. Air Canada cut capacity and eliminated 2,000 jobs in June, and like WestJet it has raised fares to deal with higher fuel prices. Even so, WestJet posted record load factors for the month of August; Air Canada boosted its load factor year over year, too. “Canada’s two largest airlines have been able to weather the storm fairly well,” says Cameron Doerksen, an analyst with Versant Partners. “But the key question mark is what the demand for travel is going to look like in coming months, which are seasonally weaker than the summer.”

The other big uncertainty is the price of oil, which has already claimed one victim, Zoom. But Kavafian doesn’t buy the excuse that high fuel prices were the only reason for the airline’s demise. Zoom had a flawed business model and flew to destinations already well served by larger carriers, he says. “All they did was offer lower fares, and of course cheap prices can easily be imitated,” adds Kavafian. Canada’s other smaller players, such as CanJet and Sunwing Airlines, are better positioned than Zoom was, he says.

The same can be said of Porter, which competes on service, not cost. David Newman, an analyst with National Bank Financial, says the convenience of operating from the Toronto City Centre Airport, compared with the chaotic Pearson International, and perks such as free onboard wine, appeal to the airline’s customer base of business travellers. Fuel-efficient Bombardier Q400 turboprop airplanes help, too. Deluce says the aircraft use up to 40% less fuel than similar models. (Even so, Porter added a fuel surcharge in June.) Porter will add eight Q400s to its existing fleet of six over the next year and is looking to add routes to Chicago, Boston and Philadelphia. That’s ambitious, but Newman argues Porter’s business plan is strong. “There’s definitely a niche for a premium, low-cost regional airline,” he says. “I think other destinations they would launch would do quite well.”

Consumers may be able to expect some relief from fuel surcharges now that oil prices are lower. WestJet eliminated its fuel surcharge last week, but Air Canada didn’t go quite as far. The airline announced it will incorporate the charge for North American flights into advertised fares to be more “transparent,” rather than tacking it on afterward. “You can eliminate a fuel surcharge and just put it in your core pricing,” Newman says. “For the airlines, once a certain price is out there, it will be sticky for a while.”