After one competitor fades, Canada's long-standing airlines behave rationally in the market


CAPA ANALYST PERSPECTIVE - a series where CAPA - Centre for Aviation's analyst team provide their personal views on a hot topic facing aviation around the world.

The demise of Lynx Air in Canada was hardly a shock to those familiar with the country's aviation history, which is rich with low cost airline failures. Lynx was a small-scale operator, with a fleet of nine Boeing 737-8s, when it ceased operations in late Feb-2024.

But the airline's exit could create opportunities for Canada's other airlines - if they behave in a rational manner.

Canada's three largest operators - Air Canada, WestJet and Porter Airlines - have co-existed for quite some time and know the market well. And each airline has a somewhat distinct strategy going forward that has promise in the market.

Lori Ranson, Senior Analyst, Americas at CAPA - Centre for Aviation shares her viewpoint.

It appears that rationality is prevailing in Canada's marketplace, after the exit of Lynx Air

Lynx was a small-scale operator, with a fleet of nine Boeing 737-8s, when it ceased operations in late Feb-2024. It did have 37 of the narrowbodies on order, but those aircraft will no doubt be placed with other airlines quickly, given the current industry supply chain challenges.

See related CAPA - Centre for Aviation report: Lynx Air succumbs to market realities. What next for Canada's crowded airline landscape?

What's now left in Canada are the incumbents - WestJet and Air Canada - each with their own respective strategies, as well as Porter and Air Transat, which are forming a joint venture, and the ultra-low cost operator Flair Airlines, which is pausing its growth in 2024.

At the moment, overall seat deployment by Canada's airlines will remain below 2019 levels through late Aug-2024, and Air Canada's capacity growth for 2024 will remain below pre-crisis levels.

Canada: weekly total system seats from 2019 to late Aug-2024 (projected)

Air Canada is keeping its domestic growth flat this year and is focusing on international growth of 10% - as Asia Pacific markets are still recovering and trans Atlantic demand remains strong.

See related CAPA - Centre for Aviation report: Air Canada's fundamentals remain strong, despite cost creep

WestJet is still in the midst of its strategy to concentrate on its strength in Western Canada and play to its low cost roots. Data from CAPA - Centre for Aviation and OAG show that WestJet's seat deployment should reach 2019 levels at mid-year-2024; however, domestic seats will remain below pre-crisis (pre-pandemic) levels.

Air Transat and Porter Airlines are forming a JV to build a combined competitive network that, at the 10-year deal's full potential, will result in Porter's connecting flights accounting for 15%-18% of Air Transat's passenger traffic.

Although the JV could up the competitive stakes in the US transborder market, Air Canada has its own heft with its partner United Airlines, and WestJet and Delta Air Lines have a strong codesharing relationship.

Canada's largest airlines appear to have manageable aircraft order books

Before Lynx ceased operations, Air Canada stated that it did not expect to grow yields in 2024 beyond the 6% increase it posted in 2023.

But perhaps Lynx's exit could provide some pricing traction for Air Canada and other airlines in the market.

CAPA - Centre for Aviation's Fleet Database shows that projected aircraft deliveries for Canada should not experience a meaningful increase until 2026 when airlines will accept delivery of 69 aircraft, some of which will obviously be pegged as replacement aircraft for older jets.

Those projections could also change - since uncertainty in the overall aviation supply chain could remain a considerable headwind for longer than anyone currently anticipates.

Canada: projected aircraft deliveries as of 25-Mar-2024

Air Transat only has ten aircraft on order at the moment, and it appears that some of its growth with come through the partnership with Porter - if the airline tie-up gains the necessary regulatory approvals.

Porter's seats are up substantially in 2024 versus 2019; the airline continues to add Embraer-195E2s to its fleet, and it exercised options for 25 aircraft after the deal was announced.

Still, even with Porter's growth, Canada's seat capacity is still below pre-pandemic levels through late Aug-2024 (see top chart).

Canada's three largest airlines seem to have plans in place to evolve in the market for the short-to-medium term. Air Canada, WestJet and Porter are all familiar competitors to one another, and have co-existed since Porter debuted in late 2006.

Flair touts its status as Canada's sole ULCC, but faces some challenges of its own

For the moment, the probability that a new operator attempting to fill the void left by Lynx is low. Even with backing from the ULCC investment specialist Indigo Partners, Lynx couldn't make the model work.

But that's not to say whether another entity will emerge in the market at some point in time. Lessons learned in the aviation industry can sometime fade fast, and the idea of a market with few ultra-low cost competitors may become attractive again down the road - despite Canada's high operating costs, a population of roughly 38 million, and three long-time-entrenched competitors.

Now that Lynx has ceased operations, Canada's other ultra-low cost airline is embracing its new stature as the only ULCC in the country.

"Flair Airlines has emerged as the sole ultra-low-cost carrier (ULCC) in Canada. As a disruptor in the industry, Flair understands the responsibility that comes with this position, recognising its crucial role in fostering competition, driving innovation, and benefiting Canadians across the country", the airline recently said.

Canada's lone ULCC has had some challenges during the past couple of years, including the seizure of aircraft in a dust-up with the aircraft leasing management company Airborne and some tax payments to Canada's government - the airline is still in the midst of paying CAD67 million in tax owed to the Canadian government.

Flair will garner a certain level of attention during the short term as market watchers determine whether Canada can sustain a single ULCC.

The news outlet The Globe and Mail has reported that the airline is cutting 600 flights from its schedule. Further, Global News quoted the airline's VP of Revenue Eric Tanner, noting that even with the cuts, Flair's capacity was up 4% year-over-year. He also explained the airline was putting resources toward sun destinations in Mexico and the Caribbean in 2024.

But Air Canada, on an earnings call in Feb-2024, cited some yield pressure in sun destination markets, due to increased capacity.

Canada's long-standing airlines have clear-cut strategies for the future, as questions remain over the ULCC model

Flair's schedule cuts are occurring as Air Canada and WestJet continue to play to their strengths, while Porter forges a new path to attain scale with Air Transat.

Despite uncertainty over the ultra-low cost model, a certain level of rationality is present in Canada's market, and should remain in place as the country's stronger airlines stick with their formulas to either maintain, or achieve, profitability.

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