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Canadian ULCCs: Indigo Partners to enter a crowded market

The field of new ULCCs in Canada has officially widened now that Enerjet plans to launch in 2H2019. The company has always been the quietest among ultra low cost hopefuls in the country but now, with a new group of investors that includes Indigo Partners, Enerjet is exuding a high level of confidence about its prospects in the Canadian market. 

Backing from the ULCC specialist Indigo occurs at an interesting time. In the past Indigo has evaluated opportunities in the Canadian market, including an investment in Enerjet, but has opted not to enter Canada's ULCC fray until now. 

Enerjet’s market entry will likely have little impact in 2019 but with the company’s planned debut, all three ULCCs that have been trying to get airborne for years will finally realise their ambitions. Those airlines are joining WestJet’s new ULCC Swoop, which plans to have a fleet of 10 Boeing 737s by YE2019. However, experiences elsewhere suggest Canada’s market is unlikely to support four ultra low cost airlines, in the longer run.

But the benefits to consumers, airports and the economy will in the meantime justify the disruption.

Summary

  • Canada’s aspiring start-up ULCCs now finally seem poised to enter the market in full force. 
  • There’s no shortage of data cited by the country’s fledgling ultra low cost operators to back their assessments that the country is ripe for an injection of ULCC competition. 
  • Even with a forecast of solid population growth, it is doubtful that Canada can support four ULCCs over the long term. 

Enerjet joins Jetlines with plans for a ULCC debut in Canada during 2019 

For several years there have been three aspiring ULCCs in CanadaJetlines, Flair (originally operating as NewLeaf) and Enerjet. Flair was the first to market providing aircraft for NewLeaf; eventually Flair bought NewLeaf, and aims to operate 20 Boeing 737-800s by YE2020.

Flair is transitioning out of older 737-400 Classics. The airline currently operates seven -400s and a single -800. 

Flair airlines fleet summary as of late Dec-2018

Jetlines is aiming for market debut in 1H2019, after missing previous targeted launch dates. It will launch with Airbus A320s and has ambitions to grow solidly in the Canadian and US transborder markets. 

Now Enerjet, which is a charter operator that has been working to transition to a ULCC, has outlined new investors, and aims to launch in 2019. Its CEO Tim Morgan was a founder of WestJet, and held executive positions at the airline.

At one point Enerjet had a working name of Flytoo, but has not yet formally unveiled a brand. Throughout the cycle of aspiring ULCCs outlining their plans for the Canadian market, Enerjet has remained the most silent about its plans, until recently. 

Indigo Partners to bring a hard-nosed competitor into the market

Enerjet has announced backing from a consortium of Canadian investors and the US-based Indigo Partners. The investment by Indigo is an important development. Indigo has launched (and remained as an active investor in) several ULCCs, including Wizz, Volaris and Spirit, and transitioned Frontier to the ULCC model.

More recently, the company has debuted a new ULCC in Chile, JetSMART, and is currently negotiating a 49% share in Iceland's faltering long haul LCC, WOW air, after Icelandair abandoned plans to acquire its rival in the Iceland market. 

Indigo has been evaluating a stake in Enerjet for some time. But in 2017 Indigo Managing Partner Bill Franke stated that Canada’s foreign ownership laws remained arcane: Indigo had drawn that conclusion after an 18-month study of the Canadian market.

Canada’s government had partially relaxed foreign ownership restrictions for the country’s aspiring ULCCs in 2016, lifting foreign ownership limits from 25% to 49%. Eventually the restrictions were lifted for all of Canada’s airlines. However, no foreign entity is allowed to hold more than 25% of voting shares in a Canadian airline, a highly restrictive limit that also applies in the US - and a significant disincentive to investment. 

Despite holding off on making a move in Canada during the recent past, Indigo now believes there are ample ULCC opportunities in Canada. "We believe we can significantly increase the size and competitiveness of Canada's domestic and trans-border aviation market by offering an ultra low-cost alternative to the high cost of air travel”, said Mr Franke. 

Ambitious start-up ULCCs make their case for launching in Canada 

In addition to those three airlines, (former LCC) WestJet launched its new ULCC subsidiary Swoop in Jun-2018. In many ways it was a defensive move to ensure that it could compete effectively with new ultra low cost rivals. 

Previously, WestJet has explained that its internal estimates shows 50% passenger stimulation for Swoop, 25% transborder leakage and 25% existing price sensitive customers.

See related report: Canadian ULCCs: 2020 to be the shakeout year 

Jetlines has concluded that there are close to 70 markets ripe for discounts of up to 40%, and 100 markets for fares that are 30% cheaper (those estimates include Canadian routes and markets in Mexico and the US). The company also believes that Canada can support more than one ULCC, highlighting estimates of Canada’s population growing 5.7% to 8.2% during the next five years. Jetlines has also calculated there is a pool of 17 million customers for Canadian ULCCs to target between 2018 and 2023.

The issue: whether Canada can support four fully fledged ULCC operators 

There’s no lack of ambition or arguments for the ULCC business case in Canada. But it remains to be seen whether the country can support four ULCCs. Even with the country’s promising forecast population growth, its population will still be far below those of the US and Mexico – with populations of approximately 328 million and 130 million, respectively. At the moment, Canada’s population is approximately 37 million. 

Bloomberg has reported that Enerjet aims to launch with just three aircraft, so its impact on the Canadian market will be minimal in 2019. But both Enerjet and Jetlines obviously have ambitions to grow their fleets into the double digits in the near future, joining the 20 aircraft that Flair plans to operate and the 10 jets operated by Swoop

It seems logical that some of the aspiring ULCCs could combine to remain more relevant and competitive in Canada’s market, but for now those airlines believe that they can become formidable competitive forces on their own. 

At some point, there will be a shakeout in the Canadian ULCC market 

It is not surprising that Canada has been the target of so much ULCC activity during the past few years. Air Canada and WestJet dominate the market, representing broadly 85% of Canada’s domestic ASKs. 

But even as ambitions run high, the likelihood of all those ULCCs attaining success is questionable. There’s no doubt that a shakeout is looming in the Canadian ULCC space over the next few years. 

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