Canada’s Blue Sky Policy: a sheep in wolf’s clothing
Canada's "New" (2006) aviation policy contains all the right words for a modern liberal aviation power. It's just that there are some other words that leave the door open to any suggestion or interpretation that happens to be politically convenient at the time.
Canada, like the US, has established high barriers against foreign ownership of national airlines.
Internationally, the guiding force behind Canada's international aviation policy is to protect its major flag carrier, no matter whether the routes affected are operated by it. Protectionism - for example against the Gulf airlines - often provides greater protection for Air Canada's Star Alliance partners' hubs than for the airline itself; it also encourages fifth freedom connections over the US on American carriers.
Canada's two largest airlines Air Canada and WestJet have undergone significant changes during the last couple of years - most notably through the creation of new subsidiaries to broaden their passenger streams. But upstarts hoping to capitalise on the ultra low-cost business model could add a new competitive dimension to the duopoly Air Canada and WestJet have enjoyed for nearly 20 years.
The Canadian market may be ripe for the new breed of ultra LCCs, but current attempts at establishment are proving difficult to finance, given the hold of the two main operators. All of these are issues now confronting Canada's policymakers as its decade old policy looks ripe for reassessment.
Any aviation policy tends inevitably towards motherhood statements. It must account for a range of interests, many of them conflicting. But Canada's Blue Sky policy has a number of giveaway phrases that clearly indicate the underlying bias. First of all the policy is notable for its limited reference to consumer interests; but more indicative of the real direction are key words such as "level playing field" - which has become code for protecting the status quo - and the even more restrictive "…where the introduction of new services would risk destabilising other, established, services that are valued by Canadian communities."
Protecting the status quo is in turn typically shorthand for protecting a national airline. "Destabilising" is in most cases a word synonymous with competition; to avoid "risking" such a thing smacks of substantial regulatory power to repel all would-be boarders.
This protectionist bias is not surprising given the timing of the original policy, developed in the wake of Air Canada's emergence from Canada's equivalent of Chapter 11 bankruptcy. The design was to support a fragile airline, plagued by legacy airlines with extensive influence.
Today's question is whether that justification still prevails and, if not, how to get from here to where it should be. The world has changed in the past decade; Air Canada has, under sometimes inspired leadership, transformed itself into a much less heavyweight - but still legacy - airline.
Its peers in Europe have been forced to undergo a much more rigorous decade of change, arguably establishing them as more able to weather the storms of uncontrolled very LCCs, as well as dealing with long-haul threats from the Gulf carriers and others.
Canada's not so bright Blue Skies
• "Canadian carriers should have the opportunity to compete in international markets on a reasonably level playing field."
• "Canada will proactively pursue opportunities to negotiate more liberalised agreements for international scheduled air transportation that will provide maximum opportunity for passenger and all-cargo services to be added according to market forces."
• "As a primary objective, Canada will seek to negotiate reciprocal "Open Skies"-type agreements, similar to the one negotiated with the U.S. in November 2005, where it is deemed to be in Canada's overall interest."
• "The Blue Sky Policy calls for a proactive approach to the liberalisation of Air Transport Agreements (ATAs). In particular, it seeks to negotiate reciprocal Open Skies-type agreements when it is in Canada's overall interest to do so. It does not advocate a "one-size-fits-all", undifferentiated approach to air transport negotiations, and recognises that, in some instances, it may be justified to exercise caution, for example, in markets where there are concerns about Canadian airlines being able to compete on a level playing field, or where the introduction of new services would risk destabilising other, established, services that are valued by Canadian communities."
There can be little doubt that Air Canada has become a healthy, relatively resilient airline, largely free of its legacy heritage - although there are undertones of resistance to change.
Together with WestJet the two have enjoyed a duopoly in Canada's market for more than a decade. But Air Canada still holds a position of strength, accounting for nearly 51% of domestic seats against WestJet's 31%, and a 34% share of international seats.
Air Canada is now working to leverage the value of its position as Canada's leading airline in long-haul markets, relying on its Star Alliance partnerships and its leading positions at hubs in Toronto, Montreal and Vancouver to flesh out its long-haul network to various destinations; these include the resumption of flights to Delhi and new service to Dubai in 2015.
It has also transitioned flights to LCC subsidiary rouge on some long-haul markets, which has resulted in improved fortunes on those routes due to rouge's lower cost structure.
Since Air Canada - after prolonged debate and occasional confrontation - persuaded unions to accept the new long-haul low-cost subsidiary, launched in mid-2013, Air Canada rouge has progressively shown its effectiveness as a low cost alternative to its parent in lower yielding, predominantly leisure markets. In Dec-2014 for example the airline announced that rouge would expand the group's operations to Mexico and the Caribbean, simultaneously replacing some mainline services in those markets, effective 01-May-2015.
Air Canada rouge now operates a fleet of 20 A319s and eight 767-300ERs, already a formidable force in long-haul leisure service. The venture has been blessed by good fortune as fuel prices slump, as the average age of these aircraft, handed down from the parent, is 17 years (although the fall in the CAD has generally had a negative impact on costs for Canadian companies). Air Canada estimates that unit costs on rouge's A321 narrowbodies are 21% lower than those operated by mainline crews, while the unit cost differential for rouge's 767s is 29%.
Air Canada's trans-Atlantic immunised joint venture with its Star Alliance partners United and Lufthansa is a tool the airline can use to tout a much broader network to customers and combat changing competitive dynamics, including overcapacity in the market that occurred in 2H2014. For the winter 2015 period the entity is cutting its trans-Atlantic capacity by 0.5%.
Even with the adjustments, the Star partners retain a roughly 25% seat share from North America to Europe. The oneworld joint venture among American Airlines, British Airways, Finnair and Iberia represents an approximate 23% share (26% when including US Airways) and the SkyTeam immunised partners Delta, Air France-KLM and Alitalia hold a roughly 23% share.
Being able to market the networks of its Star joint venture partners gives Air Canada leverage in global blanket coverage while allowing it to work with its partners to determine favourable pricing and capacity levels.
While the merits of alliance membership are increasingly debatable in the current global aviation industry, Air Canada has shown it can use its membership to greatly enhance its network scope to offer more depth and breadth than some of its Canadian and North American competitors, for now.
Otherwise only a tiny fraction is dedicated to anywhere other than Western Europe (12% of seats). Even allowing for on-carriage over US points, either sixth freedom on US airlines or connecting to them, this implies a scarcity of simple links with other parts of the world.
Another effect of Canada's protective policy towards Air Canada has been to confine what long-haul services there are to a very limited number of points, mostly Toronto. Cities like Edmonton, Calgary, Winnipeg and even Montreal have at best very limited long-haul service. Vancouver has greater proximity to North Asia and so is more likely to expand, but even there Air Canada tends to overfly en route to Toronto.
It is not just the extent but also the nature of the missing long-haul services that is limiting. Excluding the Gulf airlines' widebody service - as Canada has done - also prevents these cities having one stop worldwide service. Understandably, the attractiveness of this prospect, compared with a Winnipeg traveller having to connect over Toronto (or a US point), is something that a home airline is not likely to admire as much as a consumer or tourism body might.
But then, getting an aviation policy that meets a wider range of needs is inevitably where Canada needs to be headed.
There may soon be added impetus to the calls for change. Previously short-haul-only operator WestJet announced it will add Glasgow to its stop-over service to Dublin for the summer 2015 season.
WestJet had launched seasonal flights from Toronto via St John's to Dublin in 2014, and now is adding Glasgow through a stop-over in Halifax to its trans-Atlantic seasonal roster. The airline is also acquiring four 767-300ERs for new long-haul operations set to debut in late 2015.
Initially WestJet is operating the aircraft on flights from Alberta to Hawaii, but the one-stop trans-Atlantic flights have no doubt given WestJet insight into that particular market, and it is only a matter of time before Air Canada encounters WestJet on direct long-haul flights, something Air Canada has obviously anticipated, evidenced by management's aggressiveness with unions in creating rouge.
But even with the strides Air Canada has made with its unit costs and the operation of rouge, WestJet remains focussed on maintaining its long-held cost advantage over Air Canada. Its unit costs excluding fuel and profit share fell 1.6% for the 9M ending 30-Sep-2014, but WestJet is working off a still lower cost base than its rival.
WestJet opts to leverage its strength as Canada's second largest airline with numerous airline partners. This avoids becoming boxed in an alliance. It has around 11 airline codeshares and nearly 30 interline agreements. Its codeshare partners outside North America include Air France, British Airways, Cathay Pacific, China Eastern, China Southern, Japan Airlines KLM, Korean Air and Qantas. It would presumably be keen to add Gulf airlines to that list if they were to establish a larger range of service.
Once WestJet starts its long-haul international expansion in full force, those partnerships, particularly with Asian airlines, will allow the airline to offer passengers a level of network breadth that may not reach the level of Air Canada, but will certainly create new competitive threats for Canada's largest airlines.
The Canadian international market is on the way to significant change, regardless of policy realignment. But a more accommodating policy could well offer considerably greater promise for Canada's tourism and consumer interests.
In the words of Australia's Productivity Commission in Mar-2015, "Air services arrangements should serve the community, not airlines or the tourism industry."